UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the quarterly period ended March 31, 2008
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from _____ to
_____
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Commission
File Number: 1-33472
TECHTARGET,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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04-3483216
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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117
Kendrick Street, Suite 800
Needham,
Massachusetts 02494
(Address
of principal executive offices) (zip code)
(781)
657-1000
(Registrant’s
telephone number, including area code)
(Former
name, former address and formal fiscal year, if changed since last
report): Not applicable
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. þ
Yes o 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.
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Large
Accelerated Filer o
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Accelerated
Filer o
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Non-Accelerated
Filer þ
(Do
not check if a smaller
reporting
company)
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Smaller
Reporting Company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes
þ No
As of
March 31, 2008, there were outstanding 41,245,674 shares of the registrant’s
common stock, par value $0.001.
Item
1. Financial Statements
Consolidated
Balance Sheets
(In
thousands, except share and per share data)
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March
31, 2008
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December
31, 2007
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Assets
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(Unaudited)
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Current
assets:
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Cash
and cash equivalents
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$ |
38,297 |
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$ |
10,693 |
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Short-term
investments
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22,107 |
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51,308 |
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Accounts
receivable, net of allowance for doubtful accounts of $550 and $424 as of
March 31, 2008 (unaudited) and December 31, 2007,
respectively
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17,055 |
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15,198 |
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Prepaid
expenses and other current assets
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4,324 |
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1,962 |
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Deferred
tax assets
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2,802 |
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2,947 |
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Total
current assets
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84,585 |
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82,108 |
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Property
and equipment, net
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4,094 |
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4,401 |
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Long-term
investments
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1,950 |
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- |
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Goodwill
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88,326 |
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88,326 |
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Intangible
assets, net of accumulated amortization
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20,509 |
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21,939 |
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Deferred
tax assets
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3,180 |
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2,910 |
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Other
assets
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199 |
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203 |
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Total
assets
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$ |
202,843 |
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$ |
199,887 |
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Liabilities
and Stockholders' Equity
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Current
liabilities:
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Current
portion of bank term loan payable
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$ |
3,000 |
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$ |
3,000 |
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Accounts
payable
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3,775 |
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2,919 |
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Income
taxes payable
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47 |
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1,031 |
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Accrued
expenses and other current liabilities
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1,740 |
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2,473 |
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Accrued
compensation expenses
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877 |
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2,600 |
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Deferred
revenue
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6,734 |
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3,761 |
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Total
current liabilities
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16,173 |
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15,784 |
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Long-term
liabilities:
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Other
liabilities
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487 |
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455 |
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Bank
term loan payable, net of current portion
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2,250 |
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3,000 |
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Total
liabilities
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18,910 |
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19,239 |
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Commitments
(Note 9)
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- |
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- |
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Stockholders'
equity:
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Preferred
stock, 5,000,000 shares authorized; no shares issued or
outstanding
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- |
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- |
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Common
stock, $0.001 par value per share, 100,000,000 shares authorized,
41,245,674 and 41,081,616 shares issued and outstanding at March 31, 2008
(unaudited) and December 31, 2007, respectively
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41 |
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41 |
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Additional
paid-in capital
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213,233 |
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209,773 |
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Warrants
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4 |
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13 |
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Accumulated
other comprehensive loss
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(156 |
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(102 |
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Accumulated
deficit
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(29,189 |
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(29,077 |
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Total
stockholders' equity
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183,933 |
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180,648 |
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Total
liabilities and stockholders' equity
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$ |
202,843 |
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$ |
199,887 |
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See
accompanying notes.
Consolidated
Statements of Operations
(In
thousands, except share and per share data)
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Three
Months Ended March 31,
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2008
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2007
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(Unaudited)
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Revenues:
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Selling
and marketing (1)
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General
and administrative (1)
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Amortization
of intangible assets
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Interest
income (expense):
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Total
interest income (expense)
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(Loss)
income before (benefit from) provision for income
taxes
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(Benefit
from) provision for income taxes
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Net
loss per common share:
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Weighted
average common shares outstanding:
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(1) Amounts
include stock-based compensation expense as follows:
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General
and administrative
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See
accompanying notes.
Consolidated
Statements of Cash Flows
(In
thousands)
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Three
Months Ended March 31,
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2008
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2007
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(Unaudited)
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Operating
Activities:
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Net
(loss) income
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$ |
(112 |
) |
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$ |
317 |
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Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
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Depreciation
and amortization
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2,204 |
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1,089 |
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Provision
for bad debt
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144 |
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24 |
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Stock-based
compensation expense
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2,253 |
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1,071 |
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Non-cash
interest expense
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- |
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253 |
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Deferred
tax benefit
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(124 |
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232 |
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Excess
tax benefit - stock options
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(278 |
) |
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- |
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Changes
in operating assets and liabilities, net of businesses
acquired:
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Accounts
receivable
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(2,001 |
) |
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1,099 |
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Prepaid
expenses and other current assets
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(2,070 |
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(1,340 |
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Other
assets
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2 |
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(538 |
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Accounts
payable
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858 |
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448 |
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Income
taxes payable
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(983 |
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(1,757 |
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Accrued
expenses and other current liabilities
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(732 |
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(380 |
) |
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Accrued
compensation expenses
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(1,724 |
) |
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(1,399 |
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Deferred
revenue
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2,973 |
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3,129 |
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Other
liabilities
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(22 |
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(35 |
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Net
cash provided by operating activities
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388 |
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2,213 |
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Investing
activities:
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Purchases
of property and equipment, and other assets
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(417 |
) |
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(897 |
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Purchases
of short-term investments
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(30,703 |
) |
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- |
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Proceeds
from sales and maturities of short-term investments
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59,904 |
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- |
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Purchases
of long-term investments
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(1,950 |
) |
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- |
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Acquisition
of assets
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(50 |
) |
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(1,013 |
) |
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Net
cash provided by (used in) investing activities
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26,784 |
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(1,910 |
) |
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Financing
activities:
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Payments
on bank term loan payable
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(750 |
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(750 |
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Excess
tax benefit - stock options
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278 |
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- |
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Proceeds
from exercise of warrants and stock options
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904 |
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121 |
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Net
cash provided by (used in) financing activities
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432 |
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(629 |
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Net
increase (decrease) in cash and cash equivalents
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27,604 |
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(326 |
) |
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Cash
and cash equivalents at beginning of period
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10,693 |
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30,830 |
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Cash
and cash equivalents at end of period
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$ |
38,297 |
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$ |
30,504 |
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Supplemental
disclosure of cash flow information:
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Cash
paid for interest
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$ |
100 |
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$ |
155 |
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Cash
paid for taxes
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$ |
1,094 |
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$ |
2,259 |
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See
accompanying notes.
Notes
to Consolidated Financial Statements
(In
thousands, except share and per share data)
1.
Organization and Operations
TechTarget,
Inc. (the Company) is a leading provider of specialized online content that
brings together buyers and sellers of corporate information technology, or IT,
products. The Company sells customized marketing programs that enable IT vendors
to reach corporate IT decision makers who are actively researching specific IT
purchases.
The
Company’s integrated content platform consists of a network of approximately 50
websites that are complemented with targeted in-person events and two
specialized IT magazines. Throughout all stages of the purchase decision
process, these content offerings meet IT professionals' needs for expert, peer
and IT vendor information, and provide a platform on which IT vendors can launch
targeted marketing campaigns that generate measurable, high return on investment
(ROI). As IT professionals have become increasingly specialized, they have come
to rely on our sector-specific websites for purchasing decision support. The
Company’s content enables IT professionals to navigate the complex and rapidly
changing IT landscape where purchasing decisions can have significant financial
and operational consequences. Based upon the logical clustering of users'
respective job responsibilities and the marketing focus of the products that the
Company’s customers are advertising, content offerings are currently categorized
across eleven distinct media groups: Application Development; Channel; CIO and
IT Management; Data Center; Enterprise Applications; Laptops and Mobile
Technology; Networking; Security; Storage; Vertical Software; and Windows and
Distributed Computing.
2. Summary of Significant Accounting
Policies
The
accompanying consolidated financial statements reflect the application of
certain significant accounting policies as described below and elsewhere in
these notes to the consolidated financial statements
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, which include KnowledgeStorm, Inc.,
Bitpipe, Inc., TechTarget Securities Corporation and TechTarget, Ltd.
KnowledgeStorm, Inc. was acquired by the Company on November 6, 2007 and is a
leading online search resource providing vendor generated content targeted
toward corporate IT professionals. Bitpipe, Inc. is a leading
provider of in-depth IT content including white papers, product literature, and
case studies from IT vendors. TechTarget Securities Corporation is a
Massachusetts Securities Corporation incorporated in 2004. TechTarget, Ltd. is a
subsidiary doing business principally in the United Kingdom. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. All adjustments, which,
in the opinion of management, are considered necessary for a fair presentation
of the results of operations for the periods shown, are of a normal recurring
nature and have been reflected in the consolidated financial statements. The
results of operations for the periods presented are not necessarily indicative
of results to be expected for any other interim periods or for the full year.
The information included in these consolidated financial statements should be
read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in this report and the
consolidated financial statements and accompanying notes included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. accounting
principles generally accepted requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue
Recognition
The
Company generates substantially all of its revenue from the sale of targeted
advertising campaigns that are delivered via its network of websites, events and
print publications. Revenue is recognized in accordance with
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and
Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force (EITF)
Issue No. 00-21, Revenue
Arrangements With Multiple Deliverables. Revenue is recognized
only when the service has been provided and when there is persuasive evidence of
an arrangement, the fee is fixed or determinable and collection of the
receivable is reasonably assured.
Online
media. Revenue for online media offerings is recognized
for specific online media offerings as follows:
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-
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White
Papers. White paper revenue is recognized
ratably over the period in which the white paper is available on the
Company’s websites.
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-
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Webcasts and
Podcasts. Webcast revenue is recognized in the period in
which the webcast occurs. Podcast revenue is recognized in the
period in which it is first posted and becomes available on the Company’s
websites.
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-
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Software Package
Comparisons. Software package comparison revenue is
recognized ratably over the period in which the software information
is available on the Company’s
websites.
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|
-
|
Dedicated E-mails, E-mail
Newsletters. Dedicated e-mail and e-newsletter revenue
is recognized in the period in which the e-mail or e-newsletter is sent to
registered members.
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-
|
List
Rentals. List rental revenue is recognized in the period
in which the e-mails are sent to the list of registered
members.
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|
-
|
Banners. Banner
revenue is recognized in the period in which the banner impressions
occur.
|
The
Company offers customers the ability to purchase integrated ROI program
offerings, which can include any of its online media offerings packaged together
to address the particular customer's specific advertising requirements. As part
of these offerings, the Company will guarantee a minimum number of qualified
sales leads to be delivered over the course of the advertising campaign.
Throughout the advertising campaign, revenue is recognized as individual
offerings are delivered, and the lead guarantee commitments are closely
monitored to assess campaign performance. If the minimum number of qualified
sales leads is not met by the scheduled completion date of the advertising
campaign, the campaign is extended and the Company will extend the period over
which it recognizes revenue. In accordance with EITF Issue No. 00-21,
revenue is deferred for any undelivered offerings equal to a pro-rata amount of
the fair value of the additional media offerings as compared to the total
combined value of the original contract and the fair value of the additional
media offerings. The fair value of the additional media offerings is determined
based on standard rate card pricing for each of the additional media offerings.
The Company estimates the additional media offerings to be delivered during the
extended period based on historical lead generation performance for each of the
offerings. The Company has managed and completed over 1,000 integrated
ROI program offerings since 2004, which it feels provides a reasonable
basis to establish these estimates. During the twelve months ended
March 31, 2008, lead shortfalls for integrated ROI program offerings were
satisfied within an average extended period of 46 days.
As of
March 31, 2008, substantially all of the integrated ROI program offerings
that had a guaranteed minimum number of qualified sales leads had been delivered
within the original contractual term. Standard contractual terms and
conditions for integrated ROI program offerings allow for the Company to extend
advertising campaigns in order to satisfy lead shortfalls. When lead
shortfalls are unable to be satisfied within a mutually agreed-upon
extended period, the Company recognizes revenue equal to, and the customer is
only responsible for paying, a pro rata amount based on the actual number of
leads delivered compared to the number of leads originally guaranteed.
Historically, lead guarantees associated with integrated ROI program
offerings have not required the Company to refund or extend payment terms to
customers, nor have they resulted in deferral of a material amount of revenue
outside of the original contractual term of the advertising
campaign.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
While
each online media offering can be sold separately, most of the Company’s online
media sales involve multiple online offerings. At inception of the
arrangement, the Company evaluates the deliverables to determine whether they
represent separate units of accounting under EITF Issue No.
00-21. Deliverables are deemed to be separate units of accounting if
all of the following criteria are met: the delivered item has value to the
customer on a standalone basis; there is objective and reliable evidence of the
fair value of the item(s); and delivery or performance of the item(s) is
considered probable and substantially in the Company's control. The
Company allocates revenue to each unit of accounting in a transaction based upon
its fair value as determined by vendor objective evidence. Vendor
objective evidence of fair value for all elements of an arrangement is based
upon the normal pricing and discounting practices for those online media
offerings when sold to other similar customers. If vendor objective
evidence of fair value has not been established for all items under the
arrangement, no allocation can be made, and the Company recognizes revenue on
all online media offerings over the term of the arrangement.
Event
sponsorships. Sponsorship revenues from events are recognized
upon completion of the event in the period that the event
occurs. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are recorded as deferred revenue. The
majority of the Company’s events are free to qualified attendees, however
certain of the Company’s events are based on a paid attendee
model. Revenue is recognized for paid attendee events upon completion
of the event and receipt of payment from the attendee. Deferred
revenue relates to collection of the attendance fees in advance of the
event.
Print
publications. Advertising revenues from print publications are
recognized at the time the applicable publication is
distributed. Amounts collected or billed prior to satisfying the
above revenue recognition criteria are recorded as deferred
revenue.
Fair
Value of Financial Instruments
Financial
instruments consist of cash and cash equivalents, short-term and long-term
investments, accounts receivable, accounts payable, a term loan payable and an
interest rate swap. The carrying value of these instruments approximates
their estimated fair values.
Long-lived
Assets
Long-lived
assets consist of property and equipment, goodwill and other intangible
assets. Goodwill and other intangible assets arise from acquisitions
and are recorded in accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and
Other Intangible Assets. In accordance with this statement, a
specifically identified intangible asset must be recorded as a separate asset
from goodwill if either of the following two criteria is met: (1) the intangible
asset acquired arises from contractual or other legal rights; or (2) the
intangible asset is separable. Accordingly, intangible assets consist of
specifically identified intangible assets. Goodwill is the excess of any
purchase price over the estimated fair market value of net tangible assets
acquired not allocated to specific intangible assets.
As
required by SFAS No. 142, goodwill and indefinite-lived intangible assets are
not amortized, but are reviewed annually for impairment or more frequently if
impairment indicators arise. Separable intangible assets that are not deemed to
have an indefinite life are amortized over their estimated useful lives, which
range from one to nine years, using methods of amortization that are
expected to reflect the estimated pattern of economic use, and are reviewed for
impairment when events or changes in circumstances suggest that the assets may
not be recoverable under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The Company performs its annual test of
impairment of goodwill on December 31st of each year, and whenever events or
changes in circumstances suggest that the carrying amount may not be
recoverable. Based on this evaluation, the Company believes that, as
of each of the balance sheet dates presented, none of the Company’s goodwill or
other long-lived assets was impaired.
Internal
Use Software and Website Development Costs
The
Company accounts for website development costs according to the guidance in the
EITF Issue No. 00-2, Accounting for Web Site Development
Costs, which requires that costs incurred during the development of
website applications and infrastructure involving developing software to operate
a website be capitalized. Additionally, all costs relating to
internal use software are accounted for under Statement of Position (SOP) 98-1,
Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use. The
estimated useful life of costs capitalized is evaluated for each specific
project. Capitalized internal use software and website development costs
are reviewed for recoverability whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. An impairment loss shall be recognized only if the carrying
amount of the asset is not recoverable and exceeds its fair value. The
Company capitalized internal-use software and website development costs of $14
and $297 for the three months ended March 31, 2008 and 2007,
respectively.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
which is the asset and liability method for accounting and reporting for income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are
recognized based on temporary differences between the financial reporting and
income tax bases of assets and liabilities using statutory rates. In addition,
SFAS No. 109 requires a valuation allowance against net deferred tax assets
if, based upon available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.
In July
2006, the FASB issued Financial Accounting Standards Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes, (FIN 48), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109. FIN 48 prescribes a recognition and measurement method of a
tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosures and transitions. The Company adopted the provisions
of FIN 48 effective January 1, 2007. In accordance with FIN 48, the Company
recognizes any interest and penalties related to unrecognized tax benefits in
income tax expense.
Stock-Based
Compensation
At March
31, 2008, the Company had two stock-based employee compensation plans which are
more fully described in Note 11. Effective January 1, 2006, the
Company adopted SFAS No. 123(R), Share-Based Payment, which
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. SFAS No. 123(R) requires nonpublic
companies that used the minimum value method under SFAS No. 123 for either
recognition or pro forma disclosures to apply SFAS No. 123(R) using the
prospective-transition method. As such, the Company will continue to
apply APB Opinion No. 25 in future periods to equity awards outstanding at
the date of adoption of SFAS No. 123(R) that were measured using the
minimum value method. In accordance with SFAS No. 123(R), the
Company recognizes the compensation cost of employee stock-based awards in the
statement of operations using the straight line method over the vesting period
of the award. Effective with the adoption of SFAS No. 123(R), the Company
has elected to use the Black-Scholes option pricing model to determine the fair
value of stock options granted.
Net
Income (Loss) Per Share
The
Company calculates net income (loss) per share in accordance with SFAS No. 128,
Earnings Per Share (SFAS No. 128). Through May 16, 2007, the Company calculated
net income per share in accordance with SFAS No. 128, as clarified by EITF Issue
No. 03-6, Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share. EITF Issue No. 03-6 clarifies the use of the
"two-class" method of calculating earnings per share as originally prescribed in
SFAS No. 128. Effective for periods beginning after March 31, 2004, EITF Issue
No. 03-6 provides guidance on how to determine whether a security should be
considered a "participating security" for purposes of computing earnings per
share and how earnings should be allocated to a participating security when
using the two-class method for computing basic earnings per share. The Company
determined that its convertible preferred stock represented a participating
security and therefore adopted the provisions of EITF Issue No.
03-6.
Under the
two-class method, basic net income (loss) per share is computed by dividing the
net income (loss) applicable to common stockholders by the weighted-average
number of common shares outstanding for the fiscal period. Diluted net income
(loss) per share is computed using the more dilutive of (a) the two-class method
or (b) the if-converted method. The Company allocates net income first to
preferred stockholders based on dividend rights under the Company's charter and
then to preferred and common stockholders based on ownership interests. Net
losses are not allocated to preferred stockholders.
As of May
16, 2007, the effective date of the Company’s initial public offering, the
Company transitioned from having two classes of equity securities outstanding,
common and preferred stock, to a single class of equity securities outstanding,
common stock, upon automatic conversion of all shares of redeemable convertible
preferred stock into shares of common stock. In calculating diluted
earnings per share for the period January 1, 2007 to May 16, 2007 shares related
to redeemable convertible preferred stock were excluded because they were
anti-dilutive.
Subsequent
to the Company's initial public offering, basic earnings per share is computed
based only on the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common shares outstanding during the period, plus the dilutive effect
of potential future issuances of common stock relating to stock option programs
and other potentially dilutive securities using the treasury stock method. In
calculating diluted earnings per share, the dilutive effect of stock options is
computed using the average market price for the respective period. In addition,
under SFAS No. 123(R), the assumed proceeds under the treasury stock method
include the average unrecognized compensation expense and assumed tax benefit of
stock options that are in-the-money. This results in the “assumed” buyback of
additional shares, thereby reducing the dilutive impact of stock
options.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(“SFAS 141R”), replacing SFAS No. 141, Business Combinations (“SFAS
141”). SFAS 141R retains the fundamental requirements of purchase method
accounting for acquisitions as set forth previously in SFAS 141. However,
this statement defines the acquirer as the entity that obtains control of a
business in the business combination, thus broadening the scope of SFAS 141
which applied only to business combinations in which control was obtained
through transfer of consideration. SFAS 141R also requires several changes
in the way assets and liabilities are recognized and measured in purchase
accounting including expensing acquisition-related costs as incurred,
recognizing assets and liabilities arising from contractual contingencies at the
acquisition date, and capitalizing in-process research and development.
SFAS 141R also requires the acquirer to recognize a gain in earnings for
bargain purchases, or the excess of the fair value of net assets over the
consideration transferred plus any noncontrolling interest in the acquiree, a
departure from the concept of “negative goodwill” previously recognized under
SFAS 141. SFAS 141R is effective for the Company beginning
January 1, 2009, and will apply prospectively to business combinations
completed on or after that date.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS 161”).
SFAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. SFAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company is currently
evaluating the provisions of SFAS 161.
3.
Fair Value Measurements
On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements,
which, among other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each major asset
and liability category measured at fair value on either a recurring or
nonrecurring basis. SFAS No. 157 clarifies that fair value is an
exit price, representing the amount that would either be received to sell an
asset or be paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. As a basis for considering such assumptions, SFAS
No. 157 establishes a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows:
|
·
|
Level 1. Quoted prices
in active markets for identical assets and
liabilities;
|
|
·
|
Level 2. Observable
inputs other than quoted prices in active markets;
and
|
|
·
|
Level 3. Unobservable
inputs.
|
The fair
value hierarchy of the Company’s financial assets and liabilities carried at
fair value and measured on a recurring basis is as follows:
|
|
|
|
|
|
Fair
Value Measurements at Reporting Date Using
|
|
|
|
|
March
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$ |
33,738 |
|
|
$ |
33,738 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Short-term
investments
|
|
|
22,107 |
|
|
|
- |
|
|
|
22,107 |
|
|
|
- |
|
|
Long-term
investments
|
|
|
1,950 |
|
|
|
- |
|
|
|
1,950 |
|
|
|
- |
|
|
Interest rate swap
(2)
|
|
|
156 |
|
|
|
- |
|
|
|
156 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
57,951 |
|
|
$ |
33,738 |
|
|
$ |
24,213 |
|
|
$ |
- |
|
(1)
Included in cash equivalents on the accompanying
consolidated balance sheet.
(2)
Included in other liabilities on the accompanying consolidated
balance sheet.
At March
31, 2008, the Company held $6.2 million in three auction rate securities of
which $4.25 million is classified as short-term investments and $1.95 million is
classified as long-term investments in the accompanying consolidated balance
sheet. Auction rate securities are variable-rate bonds tied to
short-term interest rates with maturities in excess of 90
days. Interest rates on these securities typically reset
through a modified Dutch auction at predetermined short-term intervals, usually
every 1, 7, 28 or 35 days. These auctions have historically provided
a liquid market for these securities. In February and March
2008, our investment in the three auction rate securities of $6.2 million
failed at auction due to sell orders exceeding buy orders.
The
Company considered a number of Level 2 inputs when determining the fair value of
the auction rate securities at March 31, 2008 as follows;
|
·
|
The
fair value assessment performed by the Company’s investment
adviser;
|
|
·
|
Sales
and redemption activity subsequent to March 31,
2008;
|
|
·
|
The
quoted price for the identical securities on or around March 31, 2008;
and
|
|
·
|
The
quoted price for similar securities trading in an active market on or
around March 31, 2008.
|
Based on
the Level 2 inputs noted above, the Company concluded that the par value of the
auction rate securities represents their fair value at March 31,
2008.
Subsequent
to March 31, 2008, the Company has sold over $3 million of the auction rate
securities at par value but continues to hold $3.15 million in two auction rate
securities. The Company believes these securities are not impaired
due to the fair value assessment described above, their AAA rating, the
credit worthiness of the issuers of the underlying securities, and the issuers’
ability to refinance if auctions continue to fail. However, the
Company's ability to liquidate its auction rate securities and fully recover the
carrying value of its auction rate securities in the near term may be limited or
not exist and the Company may in the future be required to record an impairment
charge on these investments. The Company believes it will be able to
liquidate $1.2 million of the remaining investment of $3.15 million in
auction rate securities within the next year and the remaining $1.95 million has
been classified as long-term investments on the Company’s consolidated balance
sheet at March 31, 2008.
4.
Acquisitions
KnowledgeStorm,
Inc.
On
November 6, 2007, the Company acquired KnowledgeStorm, Inc. (KnowledgeStorm),
which was a privately held company based in Alpharetta, Georgia, for $51,730 in
cash and 359,820 shares of unregistered common stock of TechTarget valued at
$6,000, as well as $230 in transaction costs. KnowledgeStorm is a
leading online search resource providing vendor generated content addressing
corporate IT professionals. KnowledgeStorm offers IT marketers products with a
lead generation and branding focus to reach these corporate IT professionals
throughout the purchasing decision process. The acquisition of
KnowledgeStorm strengthens the Company’s competitive position and
increases its scale, customer penetration and product offerings for
advertisers. Once KnowledgeStorm has been fully integrated, the Company
expects that cost savings can be achieved as a result of sales and operating
efficiencies from the combined operations. Additionally, the Company
anticipates that integration of KnowledegeStorm employees into its workforce
will increase its capabilities in support of product development, product
management and search engine optimization and marketing.
The
Company applied the guidance included in EITF Issue No. 98-3, Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or a Business, to
conclude that the acquisition of KnowledgeStorm constituted the acquisition of a
business. In connection with the acquisition, the Company recorded
$45,101 of goodwill and $11,620 of other intangible assets related to
customer relationships, technology, trade name, customer backlog and non-compete
agreements with estimated useful lives ranging from 12 to 108
months. Of the goodwill recorded in conjunction with the acquisition,
none is deductible for income tax purposes.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition.
|
|
|
As
of November 6, 2007
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
|
|
|
|
|
|
|
|
Within
approximately thirty days from the acquisition date, the Company’s management
completed its reorganization plan to consolidate KnowledgeStorm
operations. Liabilities assumed in the acquisition include
approximately $627 of involuntary termination benefits payable to terminated
employees through May 2008, as well as approximately $111 of costs associated
with exiting certain operating leases on office space leased by KnowledgeStorm
under noncancelable leases that expire through December 2008. As of
March 31, 2008 and December 31, 2007, approximately $136 and $616 remained
payable under these obligations, respectively, all of which is expected to be
paid by December 31, 2008.
The
estimated fair value of $11,620 of acquired intangible assets is assigned as
follows:
|
|
Useful
Life
|
|
Estimated
Fair Value
|
|
Customer
relationship intangible asset
|
|
|
|
|
|
Member
database intangible asset
|
|
|
|
|
|
Trade
name intangible asset
|
|
|
|
|
|
Customer
order backlog intangible asset
|
|
|
|
|
|
SEO/SEM
process intangible asset
|
|
|
|
|
|
Non-compete
agreement intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company engaged a third party valuation specialist to assist management in
determining the fair value of the acquired assets of
KnowledgeStorm. To value the customer relationship and backlog
intangible assets, an income approach was used, specifically a variation of the
discounted cash-flow method. The projected net cash flows for KnowledgeStorm
were tax affected using an effective rate of 41% and then discounted using a
discount rate of 20.6%. Additionally, the present value of the sum of
projected tax benefits was added to arrive at the total fair value of the
customer relationship and backlog intangible assets. To value the member
database intangible asset, a replacement cost methodology approach was
used. The replacement cost of the member database was determined by
applying the actual costs incurred to register a new member to the total number
of registered members in the acquired database. Additionally,
opportunity costs and the present value of the sum of projected tax benefits
were added to arrive at the total fair value of the member database intangible
asset. To value the
trade name intangible asset a relief from royalty method was used to estimate
the pre-tax royalty savings to the Company related to the KnowledgeStorm trade
name. The projected net cash flows from the pre-tax royalty savings
were tax affected using an effective rate of 41% and then discounted using a
discount rate of 20.6% to calculate the value of the trade name intangible
asset. To value the Search Engine Optimization (SEO)/ Search Engine
Marketing (SEM) process intangible asset, a comparative business valuation
method was used. Based on an expected life of three years, management
projected net cash flows for the Company with and without the SEO/SEM process in
place. The present value of the sum of the difference between the net
cash flows with and without the SEO/SEM process in place was calculated using a
discount rate of 20.6%. Additionally, the present value of the sum of projected
tax benefits was added to arrive at the total fair value of the SEO/SEM process
intangible asset.
The
following pro forma results of operations for the three months ended March
31, 2007 have been prepared as though the acquisition of KnowledgeStorm had
occurred on January 1, 2007. This pro forma unaudited financial
information is not indicative of the results of operations that may occur in the
future.
|
|
|
Three
Months Ended March 31, 2007
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
22,175 |
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,025 |
) |
|
|
|
|
|
|
|
Net
loss per common share:
|
|
|
|
|
|
Basic
and diluted
|
|
|
(0.43 |
) |
Results
of operations for KnowledgeStorm have been included in the Company’s results of
operations since the acquisition date of November 6, 2007.
TechnologyGuide.com
On April
26, 2007, the Company acquired substantially all of the assets of
TechnologyGuide.com from TechnologyGuide, Inc., which was a privately-held
company based in Cincinnati, OH, for $15,000 in cash, plus $15 in
acquisition related transaction costs. TechnologyGuide.com is a
website business consisting of a portfolio of five websites; Notebookreview.com,
Brighthand.com, TabletPCReview.com, DigitalCameraReview.com and
SpotStop.com. The websites offer independent product reviews, price
comparisons, and forum-based discussions for selected technology
products. The acquisition provides the Company with opportunities for
growth within the laptop/notebook PC and "smart phone" markets in
which it currently does not have a significant presence.
The
Company applied the guidance included in EITF Issue No. 98-3, Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or a Business, to
conclude that the acquisition of TechnologyGuide.com constituted the acquisition
of a business. In connection with this acquisition, the Company
recorded $7,035 of goodwill and $7,980 of intangible assets related to developed
websites, customer relationships, and non-compete agreements with estimated
useful lives ranging from 36 to 72 months.
The
estimated fair value of $7,980 of acquired intangible assets is assigned as
follows:
|
|
|
|
Estimated
Fair
|
|
|
|
Useful
Life
|
|
Value
|
|
Developed
websites intangible asset
|
|
|
|
|
|
Customer
relationship intangible asset
|
|
|
|
|
|
Non-compete
agreements intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
engaged a third party valuation specialist to assist in determining the fair
value of the acquired assets of TechnologyGuide.com. To value the
websites and customer relationship intangible assets, an income approach was
used, specifically a variation of the discounted cash-flow
method. For the websites intangible asset, expenses and income taxes
were deducted from estimated revenues attributable to the existing
websites. For the customer relationship intangible asset, expenses
and income taxes were deducted from estimated revenues attributable to the
existing customers. The projected net cash flows for each were then
tax affected using an effective rate of 41% and then discounted using a discount
rate of 22.3% to determine the value of the intangible assets,
respectively. Additionally, the present value of the sum of projected
tax benefits was added to arrive at the total fair value of the intangible
assets, respectively. To value the non-compete agreements a
comparative business valuation method was used. Based on non-compete terms of
36 months, management projected net cash flows for the Company with and
without the non-compete agreements in place. The present value of the sum of the
difference between the net cash flows with and without the non-compete
agreements in place was calculated, based on a discount rate of
22.3%.
Results
of operations for TechnologyGuide.com have been included in the Company’s
results of operations since the acquisition date of April 26, 2007.
Ajaxian.com
On
February 27, 2007, the Company acquired substantially all of the assets of
Ajaxian, Inc. (Ajaxian) for a purchase price of $1,013 in
cash. Ajaxian is a provider of a website and two events dedicated to
providing information and support for the community of developers for “Ajax”
(Asynchronous JavaScript and XML), a web development technique for creating
interactive web applications.
The
Company applied the guidance included in EITF Issue No. 98-3 to conclude
that the acquisition of Ajaxian constituted the acquisition of
assets. The Company did not acquire any tangible assets from
Ajaxian. The following table summarizes the estimated fair value of
the intangible assets acquired by the Company at the date of
acquisition:
|
|
Useful
Life
|
|
Estimated
Fair Value
|
|
Customer
relationship intangible asset
|
|
|
|
|
|
Non-compete
agreement intangible asset
|
|
|
|
|
|
Trade
name intangible asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
payments of $150 in May 2008 and $250 in May 2009 are due if certain event
revenue and website traffic milestones are met as defined in the purchase
agreement. Operating expense will be recorded in the period in which
payment of these respective obligations becomes probable under the terms of the
agreement.
5.
Cash, Cash Equivalents and Short-Term Investments
Cash and
cash equivalents consist of highly liquid investments with maturities of three
months or less at date of purchase. Cash equivalents are carried at
cost, which approximates their fair market value. Cash and cash
equivalents consisted of the following:
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
4,559 |
|
|
$ |
6,714 |
|
|
Money
market funds
|
|
|
33,738 |
|
|
|
3,979 |
|
|
Total
cash and cash equivalents
|
|
$ |
38,297 |
|
|
$ |
10,693 |
|
Short-term
investments consist of municipal bonds, auction rate securities and variable
rate demand notes. Auction rate securities are variable-rate bonds
tied to short-term interest rates with maturities in excess of 90
days. Interest rates on these securities typically reset through a
modified Dutch auction at predetermined short-term intervals, usually every 7,
28 or 35 days. Variable rate demand notes are long-term, taxable, or
tax-exempt bonds issued on a variable rate basis that can be tendered by the
Company for purchase at par whenever interest rates reset, usually every 7
days. Despite the long-term nature of the stated contractual
maturities of these variable rate demand notes, the Company has the intent and,
except as discussed below, the ability to quickly liquidate these
securities. Auction rate securities and variable rate demand notes
are recorded at fair market value, which approximates cost because of their
short-term interest rates.
The
Company’s short-term investments are accounted for as available for sale
securities under SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. These investments are recorded
at fair market value, which approximates cost, therefore the Company has no
realized or unrealized gains or losses from these
investments.
Short-term
investments consisted of the following:
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
bonds
|
|
$ |
17,857 |
|
|
$ |
19,808 |
|
|
Auction
rate securities
|
|
|
4,250 |
|
|
|
17,000 |
|
|
Variable
rate demand notes
|
|
|
- |
|
|
|
14,500 |
|
|
Total
short-term investments
|
|
$ |
22,107 |
|
|
$ |
51,308 |
|
As of
March 31, 2008, auction rate securities held by the Company had maturity dates
that range from 2008 to 2034. Municipal bonds have contractual
maturity dates within one year. All income generated from these short-term
investments is recorded as interest income.
6. Intangible
Assets
Intangible
assets subject to amortization as of March 31, 2008 and December 31, 2007
consist of the following:
|
|
|
|
|
|
As
of March 31, 2008
|
|
|
|
|
Estimated
Useful Lives (Years)
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer,
affiliate and advertiser relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
websites, technology and patents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark,
trade name and domain name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
user information database and Internet traffic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007
|
|
|
|
|
Estimated
Useful Lives (Years)
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Customer,
affiliate and advertiser relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
websites, technology and patents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark,
trade name and domain name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary
user information database and Internet traffic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets are amortized over their estimated useful lives, which range
from one to nine years, using methods of amortization that are
expected to reflect the estimated pattern of economic use. The remaining
amortization expense will be recognized over a weighted-average period of
approximately 3.07 years.
Amortization
expense was $1,480 and $759 for the three months ended March 31, 2008 and 2007,
respectively.
The
Company expects amortization expense of intangible assets to be as
follows:
|
|
|
|
|
|
|
|
Amortization
|
|
|
Years
Ending December 31:
|
|
Expense
|
|
2008
(April 1st - December 31st)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
Net Loss Per Common Share
A
reconciliation of the numerator and denominator used in the calculation of basic
and diluted net loss per common share is as follows:
|
|
|
For
the Three Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net (loss) income:
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock dividends
|
|
|
|
|
|
|
|
|
Net
income applicable to preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares of common stock outstanding (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation
of Net Loss Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stockholders
|
|
|
|
|
|
|
|
|
Weighted
average shares of stock outstanding
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
|
|
|
|
|
|
|
|
(1)
|
In
calculating diluted earnings per share, shares related to redeemable
convertible preferred stock and outstanding stock options and warrants
were excluded because they were
anti-dilutive.
|
8. Bank
Term Loan Payable
In
August 2006, the Company entered into a credit agreement (the "Credit
Agreement") with a commercial bank, which included a $10.0 million term
loan (the "Term Loan") and a $20.0 million revolving credit facility (the
"Revolving Credit Facility"). Initial borrowings under the Term Loan were used
to repay the remaining principal and accrued interest balance of the Bank Term
Loan.
The
Revolving Credit Facility matures on August 30, 2011. Unless earlier
payment is required by an event of default, all principal and unpaid interest
will be due and payable on August 30, 2011. At the Company's option, the
Revolving Credit Facility bears interest at either the Prime Rate less 1.00% or
the LIBOR rate plus the applicable LIBOR margin. The Company is also required to
pay an unused line fee on the daily unused amount of its Revolving Credit
Facility at a per annum rate of 0.25%. As of March 31, 2008, unused availability
under the Revolving Credit Facility totaled $20.0 million.
In August
2007, the Company entered into an amendment to the Credit
Agreement. The amendment changed the applicable LIBOR margin from
1.50% to a sliding scale based on the ratio of total funded debt to EBITDA for
the preceding four fiscal quarters. As of March 31, 2008, the
applicable LIBOR margin was 1.25%.
The Term
Loan requires 39 consecutive monthly principal payments of $250, plus interest,
beginning on September 30, 2006 through December 30, 2009. As of March
31, 2008, the outstanding balance due under the Term Loan was $5,250. There was
no accrued interest on the Term Loan at March 31, 2008.
In
September 2006, the Company entered into an interest rate swap agreement
with a commercial bank to mitigate the interest rate fluctuations on the Term
Loan. With this interest rate swap agreement in place, the Company fixed the
annual interest rate at 6.98% for the Term Loan. The interest rate swap
agreement terminates in December 2009. Under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, the interest rate swap agreement is
deemed to be a cash flow hedge and qualifies for special accounting using the
shortcut method. Accordingly, changes in the fair value of the interest rate
swap agreement are recorded in "accumulated other comprehensive loss" on the
consolidated balance sheet. As of March 31, 2008 and December 31, 2007, the fair
value of the cash flow hedge was $156 and $102, respectively, and is recorded in
other liabilities.
Borrowings
under the Credit Agreement are collateralized by a security interest in
substantially all assets of the Company. Covenants governing the Credit
Agreement require the maintenance of certain financial ratios. The Company was
in compliance with all financial covenants as of March 31, 2008.
The
future maturities of the Term Loan agreement at March 31, 2008 are as
follows:
|
Year
Ending December 31,
|
|
As
of March 31, 2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
2008
(April 1st - December 31st)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Commitments
and Contingencies
From time
to time and in the ordinary course of business, the Company may be subject to
various claims, charges, and litigation. At March 31, 2008 and December 31,
2007, the Company did not have any pending claims, charges, or litigation that
it expects would have a material adverse effect on its consolidated financial
position, results of operations, or cash flows.
10.
Comprehensive Income (Loss)
SFAS
No. 130, Reporting
Comprehensive Income, establishes standards for reporting and displaying
comprehensive income (loss) and its components in financial statements.
Comprehensive income (loss) is defined to include all changes in equity during a
period, except those resulting from investments by stockholders and
distributions to stockholders. For the three months ended March 31, 2008 and
2007 comprehensive (loss) income is the sum of net (loss) income and the change
in the fair value of the Company's cash flow hedge, as follows:
|
|
|
For
the Three Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
Change
in fair value of cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive (loss) income
|
|
|
|
|
|
|
|
|
11. Stock-Based
Compensation
Stock
Option Plans
In
September 1999, the Company approved a stock option plan (the 1999 Plan) that
provides for the issuance of up to 12,384,646 shares of common stock
incentives. The 1999 Plan provides for the granting of incentive
stock options (ISOs), nonqualified stock options (NSOs), and stock grants. These
incentives may be offered to the Company’s employees, officers, directors,
consultants, and advisors, as defined. ISOs may be granted at no less
than fair market value on the date of grant, as determined by the Company’s
Board of Directors (the Board) (no less than 110% of fair market value on the
date of grant for 10% or greater stockholders), subject to limitations, as
defined. Each option shall be exercisable at such times and subject to such
terms as determined by the Board, generally four years, and shall expire
within ten years of issuance. No further awards will be made pursuant
to the 1999 Plan, but any outstanding awards under the 1999 Plan will remain in
effect and will continue to be subject to the terms of the 1999
Plan.
In April
2007, the Board approved the 2007 Stock Option and Incentive Plan (the 2007
Plan), which was approved by the stockholders and became effective upon the
consummation of the Company’s IPO in May 2007. The 2007 Plan allows the Company
to grant ISOs, NSOs, stock appreciation rights, deferred stock awards,
restricted stock and other awards. Under the 2007 Plan, stock options may
not be granted at less than fair market value on the date of grant, and options
generally vest over a four year period. Stock options granted under the
2007 Plan expire no later than ten years after the grant date. The Company
originally reserved for issuance an aggregate of 2,911,667 shares of common
stock under the 2007 Plan plus an additional annual increase to be added
automatically on January 1 of each year, beginning on January 1, 2008, equal to
the lesser of (a) 2% of the outstanding number of shares of common stock (on a
fully-diluted basis) on the immediately preceding December 31 and (b) such lower
number of shares as may be determined by our compensation
committee. The number of shares available for issuance under the 2007
Plan is subject to adjustment in the event of a stock split, stock dividend
or other change in capitalization. Generally, shares that are
forfeited or canceled from awards under the 2007 Plan will be available for
future awards. In addition, shares subject to stock options returned
to the 1999 Plan, as a result of their expiration, cancellation or termination,
are automatically made available for issuance under the 2007 Plan. As
of March 31, 2008 a total of 2,501,580 shares were available for grant
under the 2007 Plan.
Accounting
for Stock-Based Compensation
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award. The Company calculated the fair values of the
options granted using the following assumptions:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected
volatility
|
|
|
46 |
% |
|
|
* |
|
|
Expected
term (in years)
|
|
6.25
years
|
|
|
|
* |
|
|
Risk-free
interest rate
|
|
|
3.15 |
% |
|
|
* |
|
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
* |
|
|
Weighted-average
grant date fair value per share
|
|
$ |
6.92 |
|
|
|
* |
|
_______________________
* The
Company did not grant any stock awards during the three months ended March 31,
2007
As there
was no public market for the Company’s common stock prior to the Company's IPO
in May 2007, and limited historical information on the volatility of its common
stock since the date of the Company’s IPO, the Company determined the volatility
for options granted in the three months ended March 31, 2008 based on an
analysis of reported data for a peer group of companies that issued options with
substantially similar terms. The expected volatility of options granted has been
determined using an average of the historical volatility measures of this peer
group of companies for a period equal to the expected term of the
option. The expected term of options has been determined utilizing
the "simplified" method as prescribed by the SEC's Staff Accounting Bulletin
No. 107, Share-Based
Payment. The risk-free interest rate is based on a zero coupon
United States treasury instrument whose term is consistent with the expected
life of the stock options. The Company has not paid and does not anticipate
paying cash dividends on its shares of common stock; therefore, the expected
dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires
companies to utilize an estimated forfeiture rate when calculating the expense
for the period. The Company applied a forfeiture rate of 4.00% based on its
historical forfeiture experience during the previous two years in determining
the expense recorded in the three months ended March 31, 2008 and
2007.
A summary
of the activity under the Company's stock option plan as of March 31, 2008 and
changes during the three month periods then ended is presented
below:
|
Quarter-to-Date
Activity
|
|
Options
Outstanding
|
|
|
Weighted-Average
Exercise Price Per Share
|
|
|
Weighted-Average
Remaining Contractual Term in Years
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
vested or expected to vest at March 31, 2008 (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In
addition to the vested options, the Company expects a portion of the
unvested options to vest at some point in the future. Options expected to
vest is calculated by applying an estimated forfeiture rate to the
unvested options.
|
During
the three months ended March 31, 2008, the total intrinsic value of options
exercised (i.e. the difference between the market price at exercise and the
price paid by the employee to exercise the options) was $1,172 and the
total amount of cash received from exercise of these options
was $904. The total grant-date fair value of stock options
granted after the adoption of SFAS No. 123(R) on January 1, 2006 that vested
during the three months ended March 31, 2008 was $1,193.
During
the three months ended March 31, 2007, the total intrinsic value of options
exercised was $2,463 and the total amount of cash received from exercise of
these options was $121. None of the options granted after the
adoption of SFAS No. 123(R) on January 1, 2006 vested during the three months
ended March 31, 2007.
Unrecognized
stock-based compensation expense of non-vested stock options of $17.1 million is
expected to be recognized using the straight line method over a weighted-average
period of 1.53 years.
Restricted
Stock Awards
Restricted
stock awards are valued at the market price of a share of the Company’s
common stock on the date of grant. A summary of the restricted stock
award activity under the Company's stock option plan for the three months ended
March 31, 2008 is presented below:
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair Value Per Share
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nonvested
outstanding at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
outstanding at March 31, 2008
|
|
|
|
|
|
|
|
|
Unrecognized
stock-based compensation expense of non-vested restricted stock awards of
$8.2 million is expected to be recognized using the straight line method
over a weighted-average period of 1.96 years.
12.
Stockholders’ Equity
Shares
Authorized
In April
2007, the Board of Directors approved an amendment and restatement of the
Company’s Certificate of Incorporation to increase the authorized number of
shares of common stock from 44,344,656 to 100,000,000, to authorize 5,000,000
shares of undesignated preferred stock, par value $0.001 per share, and to
eliminate all reference to the designated Series Preferred Stock.
Stock
Offering
In May
2007, the Company completed its initial public offering (IPO) of 8,855,000
shares of its common stock, of which 7,072,097 shares were sold by the Company
and 1,782,903 shares were sold by certain of the Company’s existing shareholders
at a price to the public of $13.00 per share. The Company
raised a total of $91,937 in gross proceeds from the offering, or $83,161 in net
proceeds after deducting underwriting discounts and commissions of $6,436 and
other offering costs of approximately $2,340. Upon the closing of the offering,
all shares of the Company’s redeemable convertible preferred stock automatically
converted into 24,372,953 shares of common stock.
Reverse
Stock Split
On
April 26, 2007, the Company's board of directors approved a 1-for-4 reverse
stock split of the Company's outstanding common stock. The reverse stock split
became effective immediately and all common share and per share amounts in the
accompanying consolidated financial statements and notes to the consolidated
financial statements have been retroactively adjusted for all periods presented
to give effect to the reverse stock split.
Warrants
In
connection with the Company’s original Bank Term Loan agreement, in July 2001
the Company issued to the lender for the Bank Term Loan (the “Lender”) a fully
exercisable warrant to purchase up to 74,074 shares of series A redeemable
convertible preferred stock at $0.5411 per share. In connection with
an amendment to the Bank Term Loan agreement in April 2002 the Company issued to
the Lender an additional fully exercisable warrant to purchase 55,443
shares of series A redeemable convertible preferred stock at a price of
$0.5411 per share. Upon the closing of the Company’s IPO in May
2007, these warrants outstanding converted into warrants to purchase an
aggregate of 32,378 shares of the Company’s common stock at an exercise price of
$2.1644 per share. In 2007, the Lender exercised their warrants to
purchase 32,378 shares of common stock using the conversion rights in the
warrants. As result of the exercise using the conversion rights, the
Company issued 26,740 shares of common stock to the Lender and cancelled the
5,638 shares received in lieu of payment of the exercise price. In
connection with an acquisition in May 2000, the Company issued to the seller a
warrant to purchase 40,625 shares of common stock at a price of $2.36 per
share. The warrant is exercisable immediately and expires on May 10,
2010. In 2007, the seller exercised warrants to purchase 30,981
shares of common stock using the conversion rights in the
warrants. As result of the exercise using the conversion rights, the
Company issued 26,024 shares of common stock to the seller and cancelled the
4,957 shares received in lieu of payment of the exercise price. In 2008,
the seller exercised additional warrants to purchase 6,625 shares of common
stock using the conversion rights in the warrants. As result of the
exercise using the conversion rights, the Company issued 5,551 shares of common
stock to the seller and cancelled the 1,074 shares received in lieu of payment
of the exercise price. At March 31, 2008 and December 31, 2007, there were
3,019 and 9,644 shares, respectively, of the Company’s common stock reserved for
the exercise of all warrants.
Reserved
Common Stock
As March
31, 2008 the Company has reserved common stock for the following:
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Number
of Shares
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(Unaudited)
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Options
outstanding and available for grant under stock option
plans
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Total
common stock reserved
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13. Income
Taxes
The
Company adopted the provisions of FIN 48, an interpretation of SFAS No.
109, Accounting for
Income Taxes, on January 1, 2007. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109 and prescribes a recognition
threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. At the
adoption date and as of March 31, 2008, the Company had no material unrecognized
tax benefits and no adjustments to liabilities or operations were
required.
The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions. The Company recognizes interest and penalties related to
uncertain tax positions in income tax expense. No interest and penalties have
been recognized by the Company to date.
Tax years
2004 through 2007 are subject to examination by the federal and state taxing
authorities. The Internal Revenue Service is currently performing an audit
of our 2006 tax return. There are no other income tax examinations
currently in process.
The
Company’s effective tax rate was 76% for the three months ended March 31,
2008. The benefit from income taxes for the three months ended March
31, 2008 includes a discrete tax benefit of $129,000 related to disqualifying
dispositions of incentive stock options. The Company’s effective tax
rate excluding the discrete tax benefit of $129,000 was 47% for the three months
ended March 31, 2008.
14. Segment
Information
SFAS
No. 131, Disclosures
about Segments of an Enterprise and Related Information, establishes
standards for reporting information about operating segments in annual financial
statements and requires selected information of these segments be presented in
interim financial reports to stockholders. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker, or
decision making group, in making decisions on how to allocate resources and
assess performance. The Company's chief operating decision making group, as
defined under SFAS No. 131, consists of the Company's chief executive
officer, president and executive vice president. The Company views its
operations and manages its business as one operating segment.
Geographic
Data
Net sales
to unaffiliated customers by geographic area were as follows:
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Three
Months Ended March 31,
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2008
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2007
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(Unaudited)
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The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and accompanying notes included elsewhere in this Quarterly Report on
Form 10-Q. In this discussion and analysis, dollar, share and
per share amounts are not rounded to thousands unless otherwise indicated.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including those discussed below and elsewhere in this Quarterly
Report on Form 10-Q particularly under the heading "Risk Factors."
Overview
Background
We are a
leading provider of specialized online content that brings together buyers and
sellers of corporate IT products. We sell customized marketing programs that
enable IT vendors to reach corporate IT decision makers who are actively
researching specific IT purchases.
Our
integrated content platform consists of a network of websites that we complement
with targeted in-person events and two specialized IT magazines. Throughout all
stages of the purchase decision process, these content offerings meet IT
professionals' needs for expert, peer and IT vendor information, and provide a
platform on which IT vendors can launch targeted marketing campaigns that
generate measurable, high ROI. As IT professionals have become increasingly
specialized, they have come to rely on our sector-specific websites for
purchasing decision support. Our content enables IT professionals to navigate
the complex and rapidly changing IT landscape where purchasing decisions can
have significant financial and operational consequences. Based upon the logical
clustering of our users' respective job responsibilities and the marketing focus
of the products that our customers are advertising, we currently categorize our
content offerings across eleven distinct media groups: Application Development;
Channel; CIO and IT Management; Data Center; Enterprise Applications; Laptops
and Mobile Technology; Networking; Security; Storage; Vertical Software; and
Windows and Distributed Computing.
Sources
of Revenues
We sell
advertising programs to IT vendors targeting a specific audience within a
particular IT sector or sub-sector. We maintain multiple points of contact with
our customers to provide support throughout their organizations and the sales
cycle. As a result, our customers often run multiple advertising programs with
us in order to reach discrete portions of our targeted audience. There are
multiple factors that can impact our customers' advertising objectives and
spending with us, including but not limited to, product launches, increases or
decreases to their advertising budgets, the timing of key industry marketing
events, responses to competitor activities and efforts to address specific
marketing objectives such as creating brand awareness or generating sales leads.
Our services are generally delivered under short-term contracts that run for the
length of a given advertising program, typically 90 days or
less.
We
generate substantially all of our revenues from the sale of targeted advertising
campaigns that we deliver via our network of websites, events and print
publications.
Online. The
majority of our revenue is derived from the delivery of our online offerings
from our media groups. Online revenue represented 79% and 75% of
total revenues for the three months ended March 31, 2008 and 2007, respectively.
We expect the majority of our revenues to be derived through the delivery of
online offerings for the foreseeable future. As a result of our customers'
advertising objectives and preferences, the specific allocation of online
advertising offerings sold and delivered by us, on a period by period basis, can
fluctuate.
Through
our websites we sell a variety of online media offerings to connect IT vendors
to IT professionals. Our lead generation offerings allow IT vendors to capture
qualified sales leads from the distribution and promotion of content to our
audience of IT professionals. Our branding offerings provide IT vendors exposure
to targeted audiences of IT professionals actively researching information
related to their products and services.
Our
branding offerings include banners and e-newsletters. Banner advertising can be
purchased on specific websites within our network. We also offer the ability to
advertise in e-newsletters focused on key site sub-topics across our portfolio
of websites. These offerings give IT vendors the ability to increase their brand
awareness to highly specialized IT sectors.
Our lead
generation offerings include the following:
- White
Papers. White papers are technical documents created by IT
vendors to describe business or technical problems that are addressed by the
vendors' products or services. IT vendors pay us to have their white papers
distributed to our users and receive targeted promotions on our relevant
websites. When viewing white papers, our registered members and visitors supply
their corporate contact and qualification information and agree to receive
further information from the vendor. The corporate contact and other
qualification information for these leads are supplied to the vendor in real
time through our proprietary lead management software.
- Webcasts, Podcasts and
Videocasts. IT vendors pay us to sponsor and host webcasts,
podcasts and Videocasts that bring informational sessions directly to attendees'
desktops and, in the case of podcasts, directly to their mobile devices. As is
the case with white papers, our users supply their corporate contact and
qualification information to the webcast, podcast or videocast sponsor when they
view or download the content. Sponsorship includes access to the registrant
information and visibility before, during and after the event.
- Software Package
Comparisons. Through our 2020software.com website, IT vendors
pay us to post information and specifications about their software packages,
typically organized by application category. Users can request further
information, which may include downloadable trial software from multiple
software providers in sectors such as customer relationship management, or CRM,
accounting, and business analytics. IT vendors, in turn, receive qualified leads
based upon the users who request their information.
- Dedicated
E-mails. IT vendors pay us to further target the promotion of
their white papers, webcasts, podcasts or downloadable trial software by
including their content in our periodic e-mail updates to registered users of
our websites. Users who have voluntarily registered on our websites receive an
e-mail update from us when vendor content directly related to their interests is
listed on our sites.
- List Rentals. We
also offer IT vendors the ability to message relevant registered members on
topics related to their interests. IT vendors can rent our e-mail and postal
lists of registered members using specific criteria such as company size,
geography or job title.
- Contextual
Advertising. Our contextual advertising programs associate IT
vendor white papers, webcasts, podcasts or other content on a particular topic
with our related sector-specific content. IT vendors have the option to purchase
exclusive sponsorship of content related to their product or
category.
Events. Events
revenue represented 17% and 16% of total revenues for the three months ended
March 31, 2008 and 2007, respectively. Most of our media groups operate revenue
generating events. The majority of our events are free to IT professionals and
are sponsored by IT vendors. Attendees are pre-screened based on event-specific
criteria such as sector-specific budget size, company size, or job title. We
offer three types of events: multi-day conferences, single-day seminars and
custom events. Multi-day conferences provide independent expert content for our
attendees and allow vendors to purchase exhibit space and other sponsorship
offerings that enable interaction with the attendees. We also hold single-day
seminars on various topics in major cities. These seminars provide independent
content on key sub-topics in the sectors we serve, are free to qualified
attendees, and offer multiple vendors the ability to interact with specific,
targeted audiences actively focused on buying decisions. Our custom events
differ from our conferences and seminars in that they are exclusively sponsored
by a single IT vendor, and the content is driven primarily by the sole
sponsor.
Print. Print
revenue represented 4% and 9% of total revenues for the three months ended March
31, 2008 and 2007, respectively. As of March 31, 2008, we publish monthly two
controlled-circulation magazines that are free to subscribers and generate
revenue solely based on advertising fees. The highly targeted magazines we
publish are: Storage
magazine (Storage Media Group), which we began publishing in 2002; and
Information Security
magazine (Security Media Group), which we began publishing in
2003. Our magazines provide readers with strategic guidance on
important enterprise-level technology decisions. We expect print revenue to
decrease as a percentage of total revenue in the foreseeable
future.
Cost
of Revenues, Operating Expenses and Other
Expenses
consist of cost of revenues, selling and marketing, product development, general
and administrative, depreciation, and amortization expenses. Personnel-related
costs are a significant component of most of these expense categories. We have
576 employees at March 31, 2008. We expect personnel-related expenses to
continue to increase in absolute dollars, but to decline over time as a
percentage of total revenues due to anticipated economies of scale in our
business support functions.
Cost of Online
Revenue. Cost of online revenue consists primarily of:
salaries and related personnel costs; member acquisition expenses (primarily
keyword purchases from leading Internet search sites); freelance writer
expenses; website hosting costs; vendor expenses associated with the delivery of
webcast, podcast, videocast and list rental offerings; stock-based compensation
expenses; and related overhead.
Cost of Events
Revenue. Cost of events revenue consists primarily of:
facility expenses, including food and beverages for the event attendees;
salaries and related personnel costs; event speaker expenses; stock-based
compensation expenses; and related overhead.
Cost of Print
Revenue. Cost of print revenue consists primarily of: printing
and graphics expenses; mailing costs; salaries and related personnel costs;
freelance writer expenses; subscriber acquisition expenses (primarily
telemarketing); stock-based compensation expenses; and related
overhead.
Selling and
Marketing. Selling and marketing expense consists primarily
of: salaries and related personnel costs; sales commissions; travel, lodging and
other out-of-pocket expenses; stock-based compensation expenses; and related
overhead. Sales commissions are recorded as expense when earned by the
employee.
Product
Development. Product development includes the creation and
maintenance of our network of websites, advertiser offerings and technical
infrastructure. Product development expense consists primarily of salaries and
related personnel costs; stock-based compensation expenses; and related
overhead.
General and
Administrative. General and administrative expense consists
primarily of: salaries and related personnel costs; facilities expenses;
accounting, legal and other professional fees; stock-based compensation
expenses; and related overhead. General and administrative expense may continue
to increase as a percentage of total revenue for the foreseeable future as we
invest in infrastructure to support continued growth and incur additional
expenses related to being a publicly traded company, including increased audit
and legal fees, costs of compliance with securities and other regulations,
investor relations expense, and insurance premiums.
Depreciation. Depreciation
expense consists of the depreciation of our property and equipment. Depreciation
of property and equipment is calculated using the straight-line method over
their estimated useful lives ranging from three to five years.
Amortization of Intangible
Assets. Amortization of intangible assets expense consists of
the amortization of intangible assets recorded in connection with our
acquisitions. Separable intangible assets that are not deemed to have an
indefinite life are amortized over their useful lives using the straight-line
method over periods ranging from one to nine years.
Interest Income (Expense),
Net. Interest income (expense) net consists primarily of
interest income earned on cash and cash equivalent balances less interest
expense incurred on bank term loan balances. We historically have invested our
cash in money market accounts, municipal bonds and auction rate
securities.
Application
of Critical Accounting Policies and Use of Estimates
The
discussion of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates,
judgments and assumptions that affect the reported amount of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue, long-lived assets, the allowance for doubtful accounts,
stock-based compensation, and income taxes. We based our estimates of the
carrying value of certain assets and liabilities on historical experience and on
various other assumptions that we believe to be reasonable. In many cases, we
could reasonably have used different accounting policies and estimates. In some
cases, changes in the accounting estimates are reasonably likely to occur from
period to period. Our actual results may differ from these estimates under
different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments used in the preparation of our consolidated financial statements. See
the notes to our financial statements for information about these critical
accounting policies as well as a description of our other accounting
policies.
Revenue
Recognition
We
generate substantially all of our revenue from the sale of targeted advertising
campaigns that we deliver via our network of websites, events and print
publications. We recognize this revenue in accordance with Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition, and
Financial Accounting Standards Board's, or FASB, Emerging Issues Task Force, or
EITF, Issue No. 00-21, Revenue Arrangement With Multiple
Deliverables. In all cases, we recognize revenue only when the price is
fixed or determinable, persuasive evidence of an arrangement exists, the service
is performed and collectibility of the resulting receivable is reasonably
assured.
Online. We
recognize revenue from our specific online media offerings as
follows:
- White Papers. We
recognize white paper revenue ratably in the period in which the white paper is
available on our websites.
- Webcasts, Podcasts and
Videocasts. We recognize webcast and videocast revenue in the
period in which the webcast occurs. We recognize podcast revenue in the period
in which it is posted and becomes available on our websites.
- Software Package
Comparisons. We recognize software package comparison revenue
ratably over the period in which the software information is available on our
websites.
- Dedicated E-mails and
E-newsletters. We recognize dedicated e-mail and e-newsletter
revenue in the period in which the e-mail or e-newsletter is sent.
- List Rentals. We
recognize list rental revenue in the period in which the e-mails are sent to the
list of registered members.
- Banners. We
recognize banner revenue in the period in which the banner impressions
occur.
We offer
customers the ability to purchase integrated ROI program offerings, which can
include any of our online media offerings packaged together to address the
particular customer's specific advertising requirements. As part of these
offerings, we will guarantee a minimum number of qualified sales leads to be
delivered over the course of the advertising campaign. Throughout the
advertising campaign, revenue is recognized as individual offerings are
delivered, and the lead guarantee commitments are closely monitored to assess
campaign performance. If the minimum number of qualified sales leads is not met
by the scheduled completion date of the advertising campaign, the advertising
campaign is extended, and we will defer recognition of revenue in an amount
equal to the value of the estimated inventory that will be required to fulfill
the guarantee. These estimates are based on our extensive experience in managing
and fulfilling these integrated ROI program offerings. Typically, shortfalls in
fulfilling lead guarantees before the scheduled completion date of an
advertising campaign are satisfied within an average of 46 days of such
scheduled completion date.
As of
March 31, 2008, substantially all of the integrated ROI program offerings that
have guaranteed a minimum number of qualified sales leads have been delivered
within the original contractual term. Integrated ROI program offerings have not
required us to refund or extend payment terms to customers to account for these
guarantees. These integrated ROI program offerings represented approximately 36%
and 33% of our online revenues, and 29% and 24% of our total revenues for the
three months ended March 31, 2008 and 2007, respectively.
Amounts
collected or billed prior to satisfying the above revenue recognition criteria
are recorded as deferred revenue.
While
each of our online media offerings can be sold separately, most of our online
media sales involve multiple online offerings. At inception of the arrangement,
we evaluate the deliverables to determine whether they represent separate units
of accounting under EITF Issue No. 00-21. Deliverables are deemed to be
separate units of accounting if all of the following criteria are met: the
delivered item has value to the customer on a standalone basis; there is
objective and reliable evidence of the fair value of the item(s); and delivery
or performance of the item(s) is considered probable and substantially in our
control. We allocate revenue to each unit of accounting in a transaction based
upon its fair value as determined by vendor objective evidence. Vendor objective
evidence of fair value for all elements of an arrangement is based upon the
normal pricing and discounting practices for those online media offerings when
sold to other similar customers. If vendor objective evidence of fair value has
not been established for all items under the arrangement, no allocation can be
made, and we recognize revenue on all items over the term of the
arrangement.
Events. We
recognize event sponsorship revenue upon completion of the event in the period
the event occurs. The majority of our events are free to qualified attendees,
however certain events are based on a paid attendee model. We recognize revenue
for paid attendee events upon completion of the event and receipt of payment
from the attendee. Amounts collected or billed prior to satisfying the above
revenue recognition criteria are recorded as deferred revenue.
Print. We
recognize print revenue at the time the applicable magazine is distributed.
Amounts collected or billed prior to satisfying the above revenue recognition
criteria are recorded as deferred revenue.
Long-Lived
Assets
Our
long-lived assets consist of property and equipment, goodwill and other
intangible assets. Goodwill and other intangible assets have arisen principally
from our acquisitions. The amount assigned to intangible assets is subjective
and based on our estimates of the future benefit of the intangible assets using
accepted valuation techniques, such as discounted cash flow and replacement cost
models. Our long-lived assets, other than goodwill, are amortized over their
estimated useful lives, which we determined based on the consideration of
several factors including the period of time the asset is expected to remain in
service. Intangible assets are amortized over their estimated useful lives,
which range from one to nine years, using methods of amortization that
are expected to reflect the estimated pattern of economic use. We evaluate the
carrying value and remaining useful lives of long-lived assets, other than
goodwill, whenever indicators of impairment are present. We evaluate the
carrying value of goodwill annually, and whenever indicators of impairment are
present. We use a discounted cash flow approach to determine the fair value of
goodwill.
Fair
Value of Financial Instruments
Financial
instruments consist of cash and cash equivalents, short-term and long-term
investments, accounts receivable, accounts payable, a term loan payable and an
interest rate swap. The carrying value of these instruments approximates
their estimated fair values.
Allowance
for Doubtful Accounts
We offset
gross trade accounts receivable with an allowance for doubtful accounts. The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We review our allowance for
doubtful accounts on a regular basis, and all past due balances are reviewed
individually for collectibility. Account balances are charged against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. Provisions for allowance for doubtful
accounts are recorded in general and administrative expense. If our historical
collection experience does not reflect our future ability to collect outstanding
accounts receivables, our future provision for doubtful accounts could be
materially affected. To date, we have not incurred any write-offs of accounts
receivable significantly different than the amounts reserved. The
allowance for doubtful accounts was $550,000 and $424,000 at March 31, 2008 and
2007, respectively.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted SFAS No. 123(R), which requires companies to
expense the fair value of employee stock options and other forms of stock-based
compensation. SFAS No. 123(R) requires nonpublic companies that used
the minimum value method under SFAS No. 123 for either recognition or pro
forma disclosures to apply SFAS No. 123(R) using the prospective-transition
method. As such, we will continue to apply APB Opinion No. 25 in future
periods to equity awards outstanding at the date of adoption of SFAS
No. 123(R) that were measured using the minimum value method. In accordance
with SFAS No. 123(R), we will recognize the compensation cost of employee
stock-based awards in the statement of operations using the straight line method
over the vesting period of the award. Effective with the adoption of SFAS
No. 123(R), we have elected to use the Black-Scholes option pricing model
to determine the fair value of stock options granted. We calculated
the fair values of the options granted using the following
assumptions:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Expected
volatility
|
|
|
46 |
% |
|
|
* |
|
|
Expected
term (in years)
|
|
6.25
years
|
|
|
|
* |
|
|
Risk-free
interest rate
|
|
|
3.15 |
% |
|
|
* |
|
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
* |
|
|
Weighted-average
grant date fair value per share
|
|
$ |
6.92 |
|
|
|
* |
|
_______________________
* The
Company did not grant any stock awards during the three months ended March 31,
2007.
As there
was no public market for our common stock prior to our initial public offering
in May 2007, and there has been limited historical information on the volatility
of our common stock since the date of our initial public offering, we determined
the volatility for options granted in the three months ended March 31, 2008 and
2007 based on an analysis of reported data for a peer group of companies that
issued options with substantially similar terms. The expected volatility of
options granted has been determined using an average of the historical
volatility measures of this peer group of companies for a period equal to the
expected life of the option. The expected life of options has been
determined utilizing the "simplified" method as prescribed by the SEC's Staff
Accounting Bulletin No. 107, Share-Based
Payment. The risk-free interest rate is based on a zero coupon
United States treasury instrument whose term is consistent with the expected
life of the stock options. We have not paid and do not anticipate paying cash
dividends on our shares of common stock; therefore, the expected dividend yield
is assumed to be zero. In addition, SFAS No. 123(R) requires companies to
utilize an estimated forfeiture rate when calculating the expense for the
period. We applied a forfeiture rate of 4.00% based on its
historical forfeiture experience during the previous two years in determining
the expense recorded in the three months ended March 31, 2008 and
2007.
Internal
Use Software and Website Development Costs
We
account for internal-use software and website development costs in accordance
with the guidance set forth in Statement of Position, or SOP, 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use, and EITF Issue
No. 00-2, Accounting for
Website Development Costs. We capitalize costs of materials, consultants
and compensation and related expenses of employees who devote time to the
development of internal-use software and website applications and infrastructure
involving developing software to operate our websites. However, we expense as
incurred website development costs for new features and functionalities since it
is not probable that they will result in additional functionality until they are
both developed and tested with confirmation that they are more effective than
the current set of features and functionalities on our websites. Our judgment is
required in determining the point at which various projects enter the states at
which costs may be capitalized, in assessing the ongoing value of the
capitalized costs and in determining the estimated useful lives over which the
costs are amortized, which is generally three years. To the extent that we
change the manner in which we develop and test new features and functionalities
related to our websites, assess the ongoing value of capitalized assets or
determine the estimated useful lives over which the costs are amortized, the
amount of website development costs we capitalize and amortize in future periods
would be impacted. We review capitalized internal use software and website
development costs for recoverability whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. We would recognize an impairment loss only if the carrying
amount of the asset is not recoverable and exceeds its fair value. We
capitalized internal-use software and website development costs of $14 and $297
for the three months ended March 31, 2008 and 2007, respectively.
Income
Taxes
We are
subject to income taxes in both the United States and foreign jurisdictions, and
we use estimates in determining our provision for income taxes. We account for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes,
which is the asset and liability method for accounting and reporting for income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are
recognized based on temporary differences between the financial reporting and
income tax bases of assets and liabilities using statutory rates.
Our
deferred tax assets are comprised primarily of net operating loss, or NOL,
carryforwards. As of December 31, 2007, we had U.S. federal and state net
operating loss (NOL) carryforwards of approximately $18.1 million and $18.2
million, respectively, which may be used to offset future taxable income. The
NOL carryforwards expire through 2027, and are subject to review and possible
adjustment by the Internal Revenue Service. The Internal Revenue Code contains
provisions that limit the NOL and tax credit carryforwards available to be used
in any given year in the event of certain changes in the ownership interests of
significant stockholders. The federal NOL carry forwards of $18.1 million
available at December 31, 2007 were acquired from KnowledgeStorm and are
subject to limitations on their use in future years.
Net
Income (Loss) Per Share
As of May
16, 2007, the effective date of our IPO, we transitioned from having two
classes of equity securities outstanding, common and preferred stock, to a
single class of equity securities outstanding, common stock, upon automatic
conversion of shares of redeemable convertible preferred stock into shares of
common stock. For the period prior to May 16, 2007, we calculated net
income (loss) per share in accordance with SFAS No. 128, as clarified by EITF
Issue No. 03-6. EITF Issue No. 03-6 clarifies the use of the
“two-class” method of calculating earnings per share as originally prescribed in
SFAS No. 128. Under the two-class method, basic net income (loss) per
share is computed by dividing the net income (loss) applicable to common
stockholders by the weighted-average number of common shares outstanding for the
fiscal period. Diluted net income (loss) per share is computed using
the more dilutive of (a) the two-class method, or (b) the if-converted
method. We allocate net income first to preferred stockholders based
on dividend rights under our charter and then to preferred and common
stockholders based on ownership interests. Net losses are not
allocated to preferred stockholders.
For the
period subsequent to May 16, 2007, we have followed SFAS No. 128,
Earnings Per Share,
which requires that basic EPS be calculated by dividing earnings available to
common shareholders for the period by the weighted average number of common
shares outstanding. Diluted EPS is computed using the
weighted-average number of common shares outstanding during the period, plus the
dilutive effect of potential future issuances of common stock relating to stock
option programs and other potentially dilutive securities using the treasury
stock method. In calculating diluted EPS, the dilutive effect of stock options
is computed using the average market price for the respective period. In
addition, under SFAS No. 123(R), the assumed proceeds under the treasury stock
method include the average unrecognized compensation expense and assumed tax
benefit of stock options that are in-the-money. This results in the “assumed”
buyback of additional shares, thereby reducing the dilutive impact of stock
options.
Results
of Operations
The
following table sets forth our results of operations for the periods
indicated:
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Three
Months Ended March 31,
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2008
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2007
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(Unaudited)
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($
in thousands)
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Revenues:
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General
and administrative
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Amortization
of intangible assets
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Interest
income (expense), net
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Income
before (benefit from) provision for income taxes
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(Benefit
from) provision for income taxes
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* Percentage
not meaningful.
Comparison
of Three Months Ended March 31, 2008 and 2007
Revenues
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Three
Months Ended March 31,
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Increase
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Percent
|
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2008
|
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2007
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(Decrease)
|
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Change
|
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(Unaudited)
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($
in thousands)
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Online. The
increase in online revenue was primarily attributable to a $3.4 million
increase in revenue from lead generation offerings due principally to an
increase in white paper and webcast sales volumes as well as revenues from
TechnologyGuide.com, which we acquired in April 2007. The increase
also reflects a $1.2 million increase in branding revenue, primarily due to
increased banner and newsletter sales volume.
Events. The
increase in events revenue was primarily attributable to a $1.0 million increase
in seminar series revenue due to an increase in the number of seminar series
events produced in the first quarter of 2008 as compared to the same period of
2007.
Print. The
decrease in print revenue was attributable to the continued shift of our
customer’s advertising budgets away from print and towards online
offerings. Additionally, we discontinued publishing CIO Decisions magazine in
November 2007.
Cost
of Revenues and Gross Profit
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Three
Months Ended March 31,
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|
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Increase
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Percent
|
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2008
|
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2007
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(Decrease)
|
|
|
Change
|
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(Unaudited)
|
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|
($
in thousands)
|
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Cost
of revenues:
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Cost of Online
Revenue. Approximately $572,000 of the increase in cost of
online revenue is attributable to employee salaries and
benefits. This increase is primarily due to an increase in average
headcount of 24 employees in our online editorial and operations organizations,
as well as increases to employee compensation. In addition,
freelancer expenses increased $127,000 in the first quarter of 2008 as compared
to 2007. We increased headcount and freelancer expenditures to support the
increase in online sales volume and to provide additional editorial
content. The increase in cost of online revenue was also attributable
in part to a $528,000 increase in member acquisition expenses, primarily related
to keyword purchases for 2020software.com. The increase in cost of online
revenue also reflects $356,000 of additional production and hosting costs for
online products due to the increased sales volume of online products in the
first quarter of 2008 as compared to the same period of 2007.
Cost of Events
Revenue. The increase in cost of events revenue was
attributable in part to a $281,000 increase in seminar series and custom event
costs due to an increase in the number of events produced in the first quarter
of 2008 compared to the same period of 2007. The increase also
reflects a $160,000 increase in salaries, bonuses and benefits related to an
increase in average headcount of 12 employees in our events organization, as
well as increases to employee compensation and increased temporary staff costs.
The increase in headcount and temporary staff costs was needed to
support the growth in revenues.
Cost of Print
Revenue. The decrease in cost of print revenue was
attributable to our efforts to reduce production costs for our publications in
response to our customers’ advertising budgets continuing to shift away from
print and towards online offerings. Additionally, we discontinued
publishing CIO
Decisions magazine in November 2007.
Gross Profit. Our
gross profit is equal to the difference between our revenues and our cost of
revenues for the period. The increase in gross profit is primarily attributable
to a $3.5 million increase in online gross profit and a $591,000 increase
in events gross profit. Gross margin for the three months ended March 31, 2008
was 68.4%, as compared to 67.2% for the same period of 2007. The increase was
due primarily to an increase in our gross margin on events revenue as a result
of higher margin seminar series events held in the first quarter of 2008 as
compared to the same period of 2007. We expect our gross profit to fluctuate
from period to period depending on the relative contribution of online, events
and print revenue to our total revenue.
Operating
Expenses and Other
|
|
|
Three
Months Ended March 31,
|
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|
|
|
|
|
|
|
Increase
|
|
|
Percent
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
|
|
($
in thousands)
|
|
|
Operating
expenses:
|
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|
|
|
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General
and administrative
|
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Amortization
of intangible assets
|
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Interest
income (expense), net
|
|
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|
|
|
|
|
|
|
|
|
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|
|
(Benefit
from) provision for income taxes
|
|
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|
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|
* Percentage
not meaningful.
Selling and
Marketing. The increase in selling and marketing expense was
attributable in part to a $1.4 million increase in salaries, commissions,
bonuses and benefits resulting principally from an increase in average headcount
of 55 employees in our sales and marketing organizations, as well as increases
to employee compensation. The increase in headcount was needed to
support the growth in revenues. The increase in selling and
marketing expense also reflects an $856,000 increase in stock-based
compensation.
Product
Development. The increase in product development expense was
attributable to a $1.0 million increase in salaries and benefits resulting
principally from an increase in average headcount of 23 employees in our product
development organization, as well as increases to employee compensation. The
increase in headcount was primarily a result of additional product development
employees acquired in the acquisition of KnowledgeStorm in November
2007.
General and
Administrative. The increase in general and administrative
expense was attributable to a $341,000 increase in facilities expense due to
leasing additional office space in our Needham, MA headquarters beginning in
July 2007, as well as office space acquired with KnowledgeStorm in November
2007. The increase in general and administrative expense was also attributable
to a $230,000 increase in stock-based compensation and an $88,000 increase in
other employee compensation. Additionally, we had $395,000 additional
expense related to audit, legal, insurance and other expenses attributable
primarily to our being a publicly traded company. We also increased
bad debt expense by $119,000 in the first quarter of 2008 commensurate with the
increase in our accounts receivable balance.
Depreciation and Amortization of
Intangible Assets. The increase in depreciation expense was
primarily attributable to depreciation of assets acquired from KnowledgeStorm in
November 2007. The increase in amortization of intangible assets expense was
primarily attributable to amortization of intangible assets related to our
acquisitions of TechnologyGuide.com in May 2007 and KnowledgeStorm in November
2007.
Interest Income (Expense),
Net. The increase in interest income (expense), net reflect an
increase in average cash and short-term investment balances during the first
quarter of 2008 compared to 2007.
Provision for Income
Taxes. Our
effective tax rate was 76% for the three months ended March 31, 2008 and
51% for the three months ended March 31, 2007. The benefit from
income taxes for the three months ended March 31, 2008 includes a discrete tax
benefit of $129,000 related to disqualifying dispositions of incentive stock
options. Our effective tax rate excluding the discrete tax benefit of
$129,000 was 47% for the three months ended March 31, 2008.
Seasonality
The
timing of our revenues is affected by seasonal factors. Our revenues are
seasonal primarily as a result of the annual budget approval process of many of
our customers and the historical decrease in advertising activity in July and
August. Revenues are usually the lowest in the first quarter of each calendar
year, increase during the second quarter, decrease during the third quarter, and
increase again during the fourth quarter. Events revenue may vary depending on
which quarters we produce the event, which may vary when compared to previous
periods. The timing of revenues in relation to our expenses, much of which does
not vary directly with revenue, has an impact on the cost of online revenue,
selling and marketing, product development, and general and administrative
expenses as a percentage of revenue in each calendar quarter during the
year.
The
majority of our expenses are personnel-related and include salaries, stock-based
compensation, benefits and incentive-based compensation plan expenses. As a
result, we have not experienced significant seasonal fluctuations in the timing
of our expenses period to period.
Liquidity
and Capital Resources
Resources
Since
2003, we have funded our operations principally with cash flows generated by
operations. In May 2007, we completed our initial public offering of
8.9 million shares of our common stock, of which 7.1 million shares were sold by
us and 1.8 million shares were sold by stockholder of ours, all at a price
to the public of $13.00 per share. We raised a total of $91.9
million in gross proceeds from the offering, or $83.2 million in net proceeds
after deducting underwriting discounts and commissions of $6.4 million and other
offering costs of approximately $2.3 million. We have used a portion
of these proceeds to repay $12.0 million that we had borrowed against our
revolving credit facility in conjunction with the acquisition of
TechnologyGuide.com in April 2007 and to pay to the selling stockholders of
KnowledgeStorm, Inc. approximately $52 million in cash as partial consideration
in that acquisition. We believe that our existing cash and cash
equivalents, our cash flow from operating activities and available bank
borrowings will be sufficient to meet our anticipated cash needs for at least
the next twelve months. Our future working capital requirements will
depend on many factors, including the operations of our existing business, our
potential strategic expansion internationally, future acquisitions we might
undertake, and the expansion into complementary businesses. To the
extent that our cash and cash equivalents and cash flow from operating
activities are insufficient to fund our future activities, we may need to raise
additional funds through bank credit arrangements or public or private equity or
debt financings. We also may need to raise additional funds in the
event we determine in the future to effect one or more additional acquisitions
of businesses. In the event additional funding is required, we may
not be able to obtain bank credit arrangements or effect an equity or debt
financing on terms acceptable to us or at all.
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
|
|
|
|
|
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|
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|
Cash,
Cash Equivalents and Short-Term Investments
Our cash,
cash equivalents and short-term investments at March 31, 2008 were held for
working capital purposes and were invested primarily in municipal bonds, money
market accounts and auction rate securities. We do not enter into
investments for trading or speculative purposes.
Accounts
Receivable, Net
Our
accounts receivable balance fluctuates from period to period, which affects our
cash flow from operating activities. The fluctuations vary depending on the
timing of our service delivery and billing activity, cash collections, and
changes to our allowance for doubtful accounts. We use days' sales outstanding,
or DSO, calculated on a monthly basis, as a measurement of the quality and
status of our receivables. We define DSO as average accounts receivable divided
by total revenue for the applicable period, multiplied by the number of days in
the applicable period. DSO was 64 days at March 31, 2008 and 55
days December 31, 2007.
Operating
Activities
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
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|
|
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|
|
Net
cash used in investing activities (1)
|
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|
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|
|
Net
cash provided by (used in) financing activities
|
|
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|
|
(1) Cash
used in investing activities shown net of short-term investment activity of
$27.3 million for the three months ended March 31, 2008.
Cash
provided by operating activities primarily consists of net income adjusted for
certain non-cash items including depreciation and amortization, the provision
for bad debt, stock-based compensation, deferred income taxes, and the effect of
changes in working capital and other activities. Cash provided by
operating activities in the three months ended March 31, 2008 was $388,000 and
consisted of $112,000 of net loss, $2.2 million of depreciation and amortization
and $2.3 million of stock-based compensation, offset by $4.0 million used in
working capital and other activities.
Cash
provided by operating activities in the three months ended March 31, 2007 was
$2.2 million and consisted of $317,000 of net income, $1.1 million of
depreciation and amortization and $1.1 million of stock-based compensation,
partly offset by $773,000 used in working capital and other
activities.
Investing
Activities
Cash used
in investing activities primarily consists of purchases of property and
equipment and acquisitions of businesses. Cash used in investing
activities in the three months ended March 31, 2008, net of short-term
investment activity, was $467,000 and consisted of $418,000 for the purchase of
property and equipment and $50,000 for the purchase of certain website domain
names. Cash used in investing activities in the three months ended
March 31, 2007 was $1.9 million and consisted of $1.0 million for the
acquisition of Ajaxian in February 2007 and $897,000 for the purchase of
property and equipment.
Equity
Financing Activities
We
received proceeds from the exercise of common stock options and warrants in the
amounts of $904,000 and $121,000 in the three months ended March 31, 2008 and
2007, respectively.
Term
Loan and Credit Facility Borrowings
On
August 30, 2006, we entered into a credit agreement with Citizens Bank of
Massachusetts, which included a $10.0 million term loan and a
$20.0 million revolving credit facility. As of March 31, 2008,
outstanding borrowings under the credit agreements were
$5.3 million.
We
borrowed $12.0 million against our revolving credit facility in
conjunction with the acquisition of TechnologyGuide.com in April
2007. The entire outstanding balance of $12.0 million was repaid
in May 2007 with proceeds from our initial public offering. As of
March 31, 2008, unused availability under our revolving credit facility totaled
$20.0 million. Our revolving credit facility matures on August 30,
2011. Unless earlier payment is required by an event of default, all principal
and any unpaid interest will be due and payable on August 30, 2011. At our
option, the revolving credit facility bears interest at either the lender's
prime rate less 1.00% or the London Interbank Offered Rate, or LIBOR, plus the
applicable LIBOR margin. We are also required to pay an unused line
fee on the daily unused amount of our revolving credit facility at a per annum
rate of 0.25%. As of March 31, 2008, unused availability under our
revolving credit facility totaled $20.0 million.
In
August 2007, we entered into an amendment to the Credit
Agreement. The amendment changes the applicable LIBOR margin from
1.50% to a sliding scale based on the ratio of total funded debt to EBITDA for
the preceding four fiscal quarters. As of March 31, 2008, the
applicable LIBOR margin was 1.25%.
Our term
loan requires the payment of 39 consecutive monthly installments of $250,000
each, plus interest, the first such installment was due on September 30,
2006, with a final payment of the entire unpaid principal balance due on
December 30, 2009. In September 2006, we entered into an interest rate
swap agreement to mitigate interest rate fluctuation, and fix the interest rate
on the term loan at 6.98%.
Borrowings
under our credit agreements are collateralized by an interest in and lien on all
of our assets and certain other guarantees and pledges. Our credit agreements
contain certain affirmative and negative covenants, which require, among other
things, that we meet certain financial ratio covenants and limit certain capital
expenditures. We were in compliance with all covenants under the credit
agreements as of March 31, 2008.
Capital
Expenditures
We have
made capital expenditures primarily for computer equipment and related software
needed to host our websites, internal-use software development costs, as well as
for leasehold improvements and other general purposes to support our
growth. Our capital expenditures totaled $418,000 and $897,000 for
the three months ended March 31, 2008 and 2007, respectively. We
expect to spend approximately $2.4 million in capital expenditures in the
remaining nine months of 2008, primarily for website development costs, computer
equipment and related software, and internal-use software development costs. We
are not currently party to any purchase contracts related to future capital
expenditures.
Contractual
Obligations and Commitments
As of
March 31, 2008, our principal commitments consist of obligations under leases
for office space and principal and interest payments due under our bank term
loan. The offices are leased under noncancelable operating lease agreements that
expire through January 2013. The following table sets forth our commitments to
settle contractual obligations in cash as of March 31, 2008:
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Payments
Due By Period
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Total
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Less
than 1 Year
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1
- 3 Years
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3
- 5 Years
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More
than 5 Years
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(Unaudited)
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($
in thousands)
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(1)
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Operating
lease obligations are net of minimum sublease payments of $38,000 due
under various sublease agreements that expire through July
2008.
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Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
See Note
2 of “Notes to Consolidated Financial Statements” for recent accounting
pronouncements that could have an effect on us.
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 a result of fluctuations in foreign exchange rates and interest
rates. We do not hold or issue financial instruments for trading
purposes.
Auction
Rate Securities Market Risk
At March
31, 2008, we held $6.2 million in three auction rate securities of which $4.25
million is classified as short-term investments and $1.95 million is classified
as long-term investments in the accompanying consolidated balance
sheet. Auction rate securities are variable-rate bonds tied to
short-term interest rates with maturities in excess of 90
days. Interest rates on these securities typically reset
through a modified Dutch auction at predetermined short-term intervals, usually
every 7, 28 or 35 days. These auctions have historically provided a
liquid market for these securities. In February and March
2008, our investment in the three auction rate securities of $6.2 million
failed at auction due to sell orders exceeding buy orders.
Subsequent
to March 31, 2008, we sold over $3 million of the auction rate securities at par
value but continue to hold $3.15 million in two auction rate
securities. We do not believe these securities are impaired due to
the fair value assessment described in Note 3 to the consolidated financial
statements, their AAA rating, the credit worthiness of the issuers of the
underlying securities, and the issuers’ ability to refinance if auctions
continue to fail. However, our ability to liquidate our auction rate
securities and fully recover the carrying value of our auction rate securities
in the near term may be limited or not exist and we may in the future be
required to record an impairment charge on these investments. We
believe we will be able to liquidate $1.2 million of the
remaining investment of $3.15 million in auction rate securities within the
next year and $1.95 million has been classified as long-term investments on our
consolidated balance sheet at March 31, 2008.
Foreign
Currency Exchange Risk
Our
subsidiary, TechTarget Limited, was established in July 2006 and is located
in London, England. As of March 31, 2008, substantially all of our international
customer agreements have been denominated in U.S. dollars, and aggregate foreign
currency payments made by us through this subsidiary have been less than
$100,000 during the three months ended March 31, 2008. We currently believe our
exposure to foreign currency exchange rate fluctuations is financially
immaterial and therefore have not entered into foreign currency hedging
transactions. We continue to review this issue and may consider hedging certain
foreign exchange risks through the use of currency futures or options in the
future.
Interest
Rate Risk
At March
31, 2008, we had cash, cash equivalents and short-term investments totaling
$60.4 million. These amounts were invested primarily in money market accounts,
auction rate securities and municipal bonds. The cash, cash
equivalents and short-term investments were held for working capital
purposes. We do not enter into investments for trading or speculative
purposes. 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.
At March 31, 2008, we had
a long-term
investment
totaling $1.95 million invested in an auction rate
security. The interest rate resets
through a modified Dutch auction every 35 days. If the auction
fails, the penalty
rate of interest defaults to 175% of the current LIBOR. Because the
interest rate resets every 35 days, we believe that we do not have any material
exposure to changes in the fair value of our auction rate security as a result
of changes in interest rates.
Our
exposure to market risk also relates to the amount of interest expense we must
pay under our revolving credit facility. The advances under this
credit facility bear a variable rate of interest determined as a function of the
lender's prime rate or LIBOR. At March 31, 2008, there were no
amounts outstanding under our revolving credit facility.
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of March 31, 2008. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as of March 31,
2008, our disclosure controls and procedures were (1) designed to ensure that
material information relating to us is made known to our chief executive officer
and chief financial officer by others within our company, particularly during
the period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms.
Based on
the evaluation of our disclosure controls and procedures as of December 31,
2007, our chief executive officer and chief financial officer concluded that, as
of such date, our disclosure controls and procedures were not
effective. Our management concluded that we had material weaknesses
in our internal control over financial reporting relating to (1) inadequate
review of stock option agreements and option tracking data to determine the
income tax classification of the award as either an “incentive stock option” or
“non-qualified stock option” and (2) ineffective monitoring controls over our
income tax provision calculation due to lack of segregation of
duties. We received a letter from Ernst & Young LLP, our
registered public accounting firm, confirming that they also believed that these
matters constituted material weaknesses in our internal control over financial
reporting. We have taken the following steps to remediate these
material weaknesses:
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·
|
We
engaged a third party to administer our stock incentive plans and classify
stock options as “incentive stock options” or “non-qualified stock
options”; and
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·
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We
engaged a third party to review our internal income tax provision
calculation on a quarterly basis beginning with the quarter ending March
31, 2008.
|
We
believe that the actions taken to date have adequately addressed the material
weaknesses.
Except as
described above, no other change in our internal control over financial
reporting occurred during the fiscal quarter ended March 31, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
We are
not currently a party to any material litigation, and we are not aware of any
pending or threatened litigation against us that could have a material adverse
effect on our business, operating results or financial condition.
In addition to the other information
set forth in this Quarterly Report on Form 10-Q, you should carefully consider
the factors discussed under the heading, “Risk Factors” in our Annual Report
filed on Form10-K for the year ended December 31,
2007. These are
risks and uncertainties that could cause actual results to differ materially
from the results contemplated by the forward-looking statements contained in
this Quarterly Report on Form 10-Q. Because of these factors, as well
as other variables affecting our operating results, past financial performance
should not be considered as a reliable indicator of future performance and
investors should not use historical trends to anticipate results or trends in
future periods. These risks are not the only ones facing us.
Risks
Relating to Our Business
Because
we depend on our ability to generate revenues from the sale of advertising,
fluctuations in advertising spending could have an adverse effect on our
operating results.
The
primary source of our revenues is the sale of advertising to our customers. Our
advertising revenues accounted for approximately 98% of our total revenues for
the three month period ended March 31, 2008. We believe that advertising
spending on the Internet, as in traditional media, fluctuates significantly as a
result of a variety of factors, many of which are outside of our control. These
factors include:
|
· variations
in expenditures by advertisers due to budgetary
constraints;
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· the
cancellation or delay of projects by advertisers;
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· the
cyclical and discretionary nature of advertising spending;
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· general
economic conditions, as well as economic conditions specific to the
Internet and online and offline media industry; and
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· the
occurrence of extraordinary events, such as natural disasters,
international or domestic terrorist attacks or armed
conflict.
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|
Because
all of our customers are in the IT industry, our revenues are subject to
characteristics of the IT industry that can affect advertising spending by IT
vendors.
The IT
industry is characterized by, among other things, volatile quarterly results,
uneven sales patterns, short product life cycles, rapid technological
developments and frequent new product introductions and enhancements. As a
result, our customers’ advertising budgets, which are often viewed as
discretionary expenditures, may increase or decrease significantly over a short
period of time. In addition, the advertising budgets of our customers may
fluctuate as a result of:
|
· weakness
in corporate IT spending resulting in a decline in IT advertising
spending;
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· increased
concentration in the IT industry as a result of consolidations, leading to
a decrease in the number of current and prospective customers, as well as
an overall reduction in advertising;
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· spending
by combined entities following such consolidations;
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· the
timing of advertising campaigns around new product introductions and
initiatives; and
|
|
· economic
conditions specific to the IT
industry.
|
Our
quarterly operating results are subject to significant fluctuations, and these
fluctuations may adversely affect the trading price of our common
stock.
We have
experienced and expect to experience significant fluctuations in our quarterly
revenues and operating results. Our quarterly revenues and operating results may
fluctuate significantly from quarter to quarter due to a number of factors, many
of which are outside of our control. In addition to the factors described
elsewhere in this ‘‘Risk Factors’’ section, these factors include:
|
· the
spending priorities and advertising budget cycles of specific
advertisers;
|
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· the
addition or loss of advertisers;
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· the
addition of new sites and services by us or our competitors;
and
|
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· seasonal
fluctuations in advertising
spending.
|
Due to
such risks, you should not rely on quarter-to-quarter comparisons of our results
of operations as an indicator of our future results. Due to the foregoing
factors, it is also possible that our results of operations in one or more
quarters may fall below the expectations of investors and/or securities
analysts. In such an event, the trading price of our common stock is likely to
decline.
Our
revenues are primarily derived from short-term contracts that may not be
renewed.
The
primary source of our revenues is the sale of advertising to our customers, and
we expect that this will continue to be the case for the foreseeable future. Our
advertising contracts are almost exclusively short-term, typically 90 days or
less, and are subject to termination without substantial penalty by the customer
at any time, generally with minimal notice requirements of 30 days or less. We
cannot assure you that our current customers will fulfill their obligations
under their existing contracts, continue to participate in our existing programs
beyond the terms of their existing contracts or enter into any additional
contracts for new programs that we offer. If a significant number of advertisers
or a few large advertisers decided not to continue advertising on our websites
or in our print magazines, or conducting or sponsoring events, we could
experience a rapid decline in our revenues over a relatively short period of
time.
If
we are unable to deliver content and services that attract and retain users, our
ability to attract advertisers may be affected, which could in turn have an
adverse affect on our revenues.
Our
future success depends on our ability to deliver original and compelling content
and services to attract and retain users. Our user base is comprised of
corporate IT professionals who demand specialized websites, print publications
and events tailored to the sectors of the IT products for which they are
responsible and that they purchase. Our content and services may not be
attractive to a sufficient number of users to attract advertisers and generate
revenues consistent with our estimates. We also may not develop new content or
services in a timely or cost-effective manner. Our ability to develop and
produce this specialized content successfully is subject to numerous
uncertainties, including our ability to:
|
· anticipate
and respond successfully to rapidly changing IT developments and
preferences to ensure that our content remains timely and interesting to
our users;
|
|
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· attract
and retain qualified editors, writers and technical
personnel;
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· fund
new development for our programs and other offerings;
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· successfully
expand our content offerings into new platform and delivery mechanisms;
and
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· promote
and strengthen the brands of our websites and our
name.
|
If we are
not successful in maintaining and growing our user base, our ability to retain
and attract advertisers may be affected, which could in turn have an adverse
affect on our revenues.
Our
inability to sustain our historical advertising rates could adversely affect our
operating results.
The
market for advertising has fluctuated over the past few years. If we are unable
to maintain historical pricing levels for advertising on our websites and in our
print publications and for sponsorships at our events, our revenues could be
adversely affected.
Competition
for advertisers is intense, and we may not compete successfully which could
result in a material reduction in our market share, the number of our
advertisers and our revenues.
We
compete for potential advertisers with a number of different types of offerings
and companies, including: broad-based media outlets, such as television,
newspapers and business periodicals that are designed to reach a wide audience;
general purpose portals and search engines; and offline and online offerings of
media companies that produce content specifically for IT professionals,
including International Data Group, United Business Media and Ziff Davis
Enterprise. Advertisers may choose our competitors over us not only because they
prefer our competitors’ online, events and print offerings to ours, but also
because advertisers prefer to utilize other forms of advertising offered by our
competitors that are not offered by us. Although less than 5% of our revenues
for the three-month period ended March 31, 2008 were derived from advertisers
located outside of North America, as we continue to expand internationally, we
expect to compete with many of the competitors mentioned above, as well as with
established media companies based in particular countries or geographical
regions. Many of these foreign-based media companies will be larger than we are
and will have established relationships with local advertisers. Many of our
current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we have. As a result, we could lose market
share to our competitors in one or more of our businesses and our revenues could
decline.
We
depend upon Internet search engines to attract a significant portion of the
users who visit our websites, and if we were listed less prominently in search
result listings, our business and operating results would be
harmed.
We derive
a significant portion of our website traffic from users who search for IT
purchasing content through Internet search engines, such as Google, MSN and
Yahoo! A critical factor in attracting users to our websites is whether we are
prominently displayed in response to an Internet search relating to IT content.
Search result listings are determined and displayed in accordance with a set of
formulas or algorithms developed by the particular Internet search engine. The
algorithms determine the order of the listing of results in response to the
user’s Internet search. From time to time, search engines revise these
algorithms. In some instances, these modifications may cause our websites to be
listed less prominently in unpaid search results, which will result in decreased
traffic from search engine users to our websites. Our websites may also become
listed less prominently in unpaid search results for other reasons, such as
search engine technical difficulties, search engine technical changes and
changes we make to our websites. In addition, search engines have deemed the
practices of some companies to be inconsistent with search engine guidelines and
have decided not to list their websites in search result listings at all. If we
are listed less prominently or not at all in search result listings for any
reason, the traffic to our websites likely will decline, which could harm our
operating results. If we decide to attempt to replace this traffic, we may be
required to increase our marketing expenditures, which also could harm our
operating results.
We
may not innovate at a successful pace, which could harm our operating
results.
Our
industry is rapidly adopting new technologies and standards to create and
satisfy the demands of users and advertisers. It is critical that we continue to
innovate by anticipating and adapting to these changes to ensure that our
content-delivery platforms and services remain effective and interesting to our
users, advertisers and partners. In addition, we may discover that we must make
significant expenditures to achieve these goals. If we fail to accomplish these
goals, we may lose users and the advertisers that seek to reach those users,
which could harm our operating results.
We
may be unable to continue to build awareness of our brands, which could
negatively impact our business and cause our revenues to decline.
Building
and maintaining recognition of our brands is critical to attracting and
expanding our online user base, attendance at our events and our offline
readership. We intend to continue to build existing brands and introduce new
brands that will resonate with our targeted audiences, but we may not be
successful. In order to promote these brands, in response to competitive
pressures or otherwise, we may find it necessary to increase our marketing
budget, hire additional marketing and public relations personnel or otherwise
increase our financial commitment to creating and maintaining brand loyalty
among our clients. If we fail to promote and maintain our brands effectively, or
incur excessive expenses attempting to promote and maintain our brands, our
business and financial results may suffer.
Given
the tenure and experience of our Chief Executive Officer and President, and
their guiding roles in developing our business and growth strategy since our
inception, our growth may be inhibited or our operations may be impaired if we
were to lose the services of either of them.
Our
growth and success depends to a significant extent on our ability to retain Greg
Strakosch, our Chief Executive Officer, and Don Hawk, our President, both of
whom were founders of our company and have developed, engineered and stewarded
the growth and operation of our business since its inception. The loss of the
services of either of these persons could inhibit our growth or impair our
operations and cause our stock price to decline.
We
may not be able to attract, hire and retain qualified personnel
cost-effectively, which could impact the quality of our content and services and
the effectiveness and efficiency of our management, resulting in increased costs
and losses in revenues.
Our
success depends on our ability to attract, hire and retain at commercially
reasonable rates qualified technical editorial, sales and marketing, customer
support, financial and accounting, legal and other managerial personnel. The
competition for personnel in the industries in which we operate is intense. Our
personnel may terminate their employment at any time for any reason. Loss of
personnel may also result in increased costs for replacement hiring and
training. If we fail to attract and hire new personnel or retain and motivate
our current personnel, we may not be able to operate our businesses effectively
or efficiently, serve our customers properly or maintain the quality of our
content and services. In particular, our success depends in significant part on
maintaining and growing an effective sales force. This dependence involves a
number of challenges, including:
|
· the
need to hire, integrate, motivate and retain additional sales and sales
support personnel;
|
|
· the
need to train new sales personnel, many of whom lack sales experience when
they are hired; and
|
|
· competition
from other companies in hiring and retaining sales
personnel.
|
We
may fail to identify or successfully acquire and integrate businesses, products
and technologies that would otherwise enhance our product offerings to our
customers and users, and as a result our revenues may decline or fail to
grow.
We have
acquired, and in the future may acquire or invest in, complementary businesses,
products or technologies. Acquisitions and investments involve numerous risks
including:
|
· difficulty
in assimilating the operations and personnel of acquired
businesses;
|
|
|
· potential
disruption of our ongoing businesses and distraction of our management and
the management of acquired companies;
|
|
|
· difficulty
in incorporating acquired technology and rights into our offerings and
services;
|
|
· unanticipated
expenses related to technology and other integration;
|
|
· potential
failure to achieve additional sales and enhance our customer bases through
cross marketing of the combined company’s products to new and existing
customers;
|
|
|
· potential
litigation resulting from our business combinations or acquisition
activities; and
|
|
|
· potential
unknown liabilities associated with the acquired
businesses.
|
Our
inability to integrate any acquired business successfully, or the failure to
achieve any expected synergies, could result in increased expenses and a
reduction in expected revenues or revenue growth. As a result, our stock price
could fluctuate or decline. In addition, we cannot assure you that we will be
successful in expanding into complementary sectors in the future, which could
harm our business, operating results and financial condition.
The
costs associated with potential acquisitions or strategic partnerships could
dilute your investment or adversely affect our results of
operations.
In order
to finance acquisitions, investments or strategic partnerships, we may use
equity securities, debt, cash, or a combination of the foregoing. Any issuance
of equity securities or securities convertible into equity may result in
substantial dilution to our existing stockholders, reduce the market price of
our common stock, or both. Any debt financing is likely to have financial and
other covenants that could have an adverse impact on our business if we do not
achieve our projected results. In addition, the related increases in expenses
could adversely affect our results of operations.
We
have limited protection of our intellectual property and could be subject to
infringement claims that may result in costly litigation, the payment of damages
or the need to revise the way we conduct our business.
Our
success and ability to compete are dependent in part on the strength of our
proprietary rights, on the goodwill associated with our trademarks, trade names
and service marks, and on our ability to use U.S. and foreign laws to protect
them. Our intellectual property includes, among other things, our original
content, our editorial features, logos, brands, domain names, the technology
that we use to deliver our products and services, the various databases of
information that we maintain and make available by license, and the appearance
of our websites. We claim common law protection on certain names and marks that
we have used in connection with our business activities. Although we have
applied for and obtained registration of many of our marks in countries outside
of the United States where we do business, we have not been able to obtain
registration of all of our key marks in such jurisdictions, in some cases due to
prior registration or use by third parties employing similar marks. In addition
to U.S. and foreign laws, we rely on confidentiality agreements with our
employees and third parties and protective contractual provisions to safeguard
our intellectual property. Policing our intellectual property rights worldwide
is a difficult task, and we may not be able to identify infringing
users. We cannot be certain that third party licensees of our content
will always take actions to protect the value of our proprietary rights and
reputation. Intellectual property laws and our agreements may not be sufficient
to prevent others from copying or otherwise obtaining and using our content or
technologies. In addition, others may develop non-infringing technologies that
are similar or superior to ours. In seeking to protect our marks, copyrights,
domain names and other proprietary rights, or in defending ourselves against
claims of infringement that may be with or without merit, we could face costly
litigation and the diversion of our management’s attention and resources. These
claims could result in the need to develop alternative trademarks, content or
technology or to enter into costly royalty or licensing agreements, which could
have a material adverse effect on our business, results of operations and
financial condition. We may not have, in all cases, conducted formal evaluations
to confirm that our technology and products do not or will not infringe upon the
intellectual property rights of third parties. As a result, we cannot be certain
that our technology, offerings, services or online content do not or will not
infringe upon the intellectual property rights of third parties. If we were
found to have infringed on a third party’s intellectual property rights, the
value of our brands and our business reputation could be impaired, and our
business could suffer.
Our
business could be harmed if we are unable to correspond with existing and
potential users by e-mail.
We use
e-mail as a significant means of communicating with our existing users. The laws
and regulations governing the use of e-mail for marketing purposes continue to
evolve, and the growth and development of the market for commerce over the
Internet may lead to the adoption of additional legislation and/or changes to
existing laws. If new laws or regulations are adopted, or existing laws and
regulations are interpreted and/or amended or modified, to impose additional
restrictions on our ability to send e-mail to our users or potential users, we
may not be able to communicate with them in a cost-effective manner. In addition
to legal restrictions on the use of e-mail, Internet service providers and
others typically attempt to block the transmission of unsolicited e-mail,
commonly known as ‘‘spam.’’ If an Internet service provider or software program
identifies e-mail from us as ‘‘spam,’’ we could be placed on a restricted list
that would block our e-mail to users or potential users who maintain e-mail
accounts with these Internet service providers or who use these software
programs. If we are unable to communicate by e-mail with our users and potential
users as a result of legislation, blockage or otherwise, our business, operating
results and financial condition could be harmed.
Changes
in laws and standards relating to data collection and use practices and the
privacy of Internet users and other individuals could impair our efforts to
maintain and grow our audience and thereby decrease our advertising
revenue.
We
collect information from our users who register for services or respond to
surveys. Subject to each user’s permission (or right to decline, which we refer
to as an ‘‘opt-out’’), we may use this information to inform our users of
products and services that may be of interest to them. We may also share this
information with our advertising clients for registered members who have elected
to receive additional promotional materials and have granted us permission to
share their information with third parties. The U.S. federal and various state
governments have adopted or proposed limitations on the collection, distribution
and use of personal information of Internet users. Several foreign
jurisdictions, including the European Union and Canada, have adopted legislation
(including directives or regulations) that may limit our collection and use of
information from Internet users in these jurisdictions. In addition, growing
public concern about privacy, data security and the collection, distribution and
use of personal information has led to self-regulation of these practices by the
Internet advertising and direct marketing industry, and to increased federal and
state regulation. Because many of the proposed laws or regulations are in their
early stages, we cannot yet determine the impact these regulations may have on
our business over time. Although, to date, our efforts to comply with applicable
federal and state laws and regulations have not hurt our business, additional,
more burdensome laws or regulations, including consumer privacy and data
security laws, could be enacted or applied to us or our customers. Such laws or
regulations could impair our ability to collect user information that helps us
to provide more targeted advertising to our users, thereby impairing our ability
to maintain and grow our audience and maximize advertising revenue from our
advertising clients.
There
are a number of risks associated with expansion of our business internationally
that could adversely affect our business.
We have
over 15 license and other arrangements in various countries and maintain a
direct presence in the United Kingdom. In addition to facing many of the same
challenges we face domestically, there are additional risks and costs inherent
in expanding our business in international markets, including:
|
· limitations
on our activities in foreign countries where we have granted rights to
existing business partners;
|
|
· the
adaptation of our websites and advertising programs to meet local needs
and to comply with local legal regulatory requirements;
|
|
· varied,
unfamiliar and unclear legal and regulatory restrictions, as well as
unforeseen changes in, legal and regulatory
requirements;
|
|
· more
restrictive data protection regulation, which may vary by
country;
|
|
· difficulties
in staffing and managing multinational operations;
|
|
|
· difficulties
in finding appropriate foreign licensees or joint venture
partners;
|
|
|
· distance,
language and cultural differences in doing business with foreign
entities;
|
|
|
· foreign
political and economic uncertainty;
|
|
|
· less
extensive adoption of the Internet as an information source and increased
restriction on the content of websites;
|
|
|
· currency
exchange-rate fluctuations; and
|
|
|
· potential
adverse tax requirements.
|
|
As a
result, we may face difficulties and unforeseen expenses in expanding our
business internationally and even if we attempt to do so, we may be
unsuccessful, which could harm our business, operating results and financial
condition.
Changes
in regulations could adversely affect our business and results of
operations.
It is
possible that new laws and regulations or new interpretations of existing laws
and regulations in the United States and elsewhere will be adopted covering
issues affecting our business, including:
|
· privacy,
data security and use of personally identifiable
information;
|
|
· copyrights,
trademarks and domain names; and
|
|
· marketing
practices, such as e-mail or direct
marketing.
|
Increased
government regulation, or the application of existing laws to online activities,
could:
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· decrease
the growth rate of the Internet;
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· reduce
our revenues;
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· increase
our operating expenses; or
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· expose
us to significant liabilities.
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Furthermore,
the relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is still evolving. Therefore, we might
be unable to prevent third parties from acquiring domain names that infringe or
otherwise decrease the value of our trademarks and other proprietary rights. Any
impairment in the value of these important assets could cause our stock price to
decline. We cannot be sure what effect any future material noncompliance by us
with these laws and regulations or any material changes in these laws and
regulations could have on our business, operating results and financial
condition.
As
a creator and a distributor of content over the Internet, we face potential
liability for legal claims based on the nature and content of the materials that
we create or distribute.
Due to
the nature of content published on our online network, including content placed
on our online network by third parties, and as a creator and distributor of
original content and research, we face potential liability based on a variety of
theories, including defamation, negligence, copyright or trademark infringement,
or other legal theories based on the nature, creation or distribution of this
information. Such claims may also include, among others, claims that by
providing hypertext links to websites operated by third parties, we are liable
for wrongful actions by those third parties through these websites. Similar
claims have been brought, and sometimes successfully asserted, against online
services. It is also possible that our users could make claims against us for
losses incurred in reliance on information provided on our networks. In
addition, we could be exposed to liability in connection with material posted to
our Internet sites by third parties. For example, many of our sites offer users
an opportunity to post unmoderated comments and opinions. Some of this
user-generated content may infringe on third party intellectual property rights
or privacy rights or may otherwise be subject to challenge under copyright laws.
Such claims, whether brought in the United States or abroad, could divert
management time and attention away from our business and result in significant
cost to investigate and defend, regardless of the merit of these claims. In
addition, if we become subject to these types of claims and are not successful
in our defense, we may be forced to pay substantial damages. Our insurance may
not adequately protect us against these claims. The filing of these claims may
also damage our reputation as a high quality provider of unbiased, timely
analysis and result in client cancellations or overall decreased demand for our
products and services.
We
may be liable if third parties or our employees misappropriate our users’
confidential business information.
We
currently retain confidential information relating to our users in secure
database servers. Although we observe security measures throughout our
operations, we cannot assure you that we will be able to prevent individuals
from gaining unauthorized access to these database servers. Any unauthorized
access to our servers, or abuse by our employees, could result in the theft of
confidential user information. If confidential information is compromised, we
could lose customers or become subject to liability or litigation and our
reputation could be harmed, any of which could materially and adversely affect
our business and results of operations.
Our
business, which is dependent on centrally located communications and computer
hardware systems, is vulnerable to natural disasters, telecommunication and
systems failures, terrorism and other problems, which could reduce traffic on
our networks or websites and result in decreased capacity for advertising
space.
Our
operations are dependent on our communications systems and computer hardware,
all of which are located in data centers operated by Verizon, Inc. These systems
could be damaged by fire, floods, earthquakes, power loss, telecommunication
failures and similar events. Our insurance policies have limited coverage levels
for loss or damages in these events and may not adequately compensate us for any
losses that may occur. In addition, terrorist acts or acts of war may cause harm
to our employees or damage our facilities, our clients, our clients’ customers
and vendors, or cause us to postpone or cancel, or result in dramatically
reduced attendance at, our events, which could adversely impact our revenues,
costs and expenses and financial position. We are predominantly uninsured for
losses and interruptions to our systems or cancellations of events caused by
terrorist acts and acts of war.
Our
systems may be subject to slower response times and system disruptions that
could adversely affect our revenues.
Our
ability to attract and maintain relationships with users, advertisers and
strategic partners will depend on the satisfactory performance, reliability and
availability of our Internet infrastructure. Our Internet advertising revenues
relate directly to the number of advertisements and other marketing
opportunities delivered to our users. System interruptions or delays that result
in the unavailability of Internet sites or slower response times for users would
reduce the number of advertising impressions and leads delivered. This could
reduce our revenues as the attractiveness of our sites to users and advertisers
decreases. Our insurance policies provide only limited coverage for service
interruptions and may not adequately compensate us for any losses that may occur
due to any failures or interruptions in our systems. Further, we do not have
multiple site capacity for all of our services in the event of any such
occurrence.
We may
experience service disruptions for the following reasons:
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· occasional
scheduled maintenance;
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· equipment
failure;
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· volumes
of visits to our websites that exceed our infrastructure’s capacity;
and
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· natural
disasters, telecommunications failures, power failures, other system
failures, maintenance, viruses, hacking or other events.
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In
addition, our networks and websites must accommodate a high volume of traffic
and deliver frequently updated information. They have experienced in the past,
and may experience in the future, slower response times or decreased traffic for
a variety of reasons. There have been instances where our online networks as a
whole, or our websites individually, have been inaccessible. Also, slower
response times, which have occurred more frequently, can result from general
Internet problems, routing and equipment problems involving third party Internet
access providers, problems with third party advertising servers, increased
traffic to our servers, viruses and other security breaches, many of which
problems are out of our control. In addition, our users depend on Internet
service providers and online service providers for access to our online networks
or websites. Those providers have experienced outages and delays in the past,
and may experience outages or delays in the future. Moreover, our Internet
infrastructure might not be able to support continued growth of our online
networks or websites. Any of these problems could result in less traffic to our
networks or websites or harm the perception of our networks or websites as
reliable sources of information. Less traffic on our networks and websites or
periodic interruptions in service could have the effect of reducing demand for
advertising on our networks or websites, thereby reducing our advertising
revenues.
Our
networks may be vulnerable to unauthorized persons accessing our systems,
viruses and other disruptions, which could result in the theft of our
proprietary information and/or disrupt our Internet operations making our
websites less attractive and reliable for our users and
advertisers.
Internet
usage could decline if any well-publicized compromise of security occurs.
‘‘Hacking’’ involves efforts to gain unauthorized access to information or
systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. Hackers, if successful, could
misappropriate proprietary information or cause disruptions in our service. We
may be required to expend capital and other resources to protect our websites
against hackers. Our online networks could also be affected by computer viruses
or other similar disruptive problems, and we could inadvertently transmit
viruses across our networks to our users or other third parties. Any of these
occurrences could harm our business or give rise to a cause of action against
us. Providing unimpeded access to our online networks is critical to servicing
our customers and providing superior customer service. Our inability to provide
continuous access to our online networks could cause some of our customers to
discontinue purchasing advertising programs and services and/or prevent or deter
our users from accessing our networks. Our activities and the activities of
third party contractors involve the storage and transmission of proprietary and
personal information. Accordingly, security breaches could expose us to a risk
of loss or litigation and possible liability. We cannot assure that contractual
provisions attempting to limit our liability in these areas will be successful
or enforceable, or that other parties will accept such contractual provisions as
part of our agreements.
We
will continue to incur significant costs as a result of operating as a public
company, and our management will be required to devote substantial time to new
compliance initiatives.
We
will continue to incur significant legal, accounting and other expenses that we
did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as
new rules subsequently implemented by the SEC and the Nasdaq Stock Market, or
Nasdaq, has imposed various new requirements on public companies, including
requiring changes in corporate governance practices. Our management and other
personnel will need to continue to devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations will increase our
legal and financial compliance costs and will make some activities more
time-consuming and costly. For example, we expect these new rules and
regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage. In addition,
the Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure controls and
procedures. In particular, commencing in fiscal 2006, we began system and
process evaluation and testing of our internal controls over financial reporting
to allow management and our independent registered public accounting firm to
report on the effectiveness of our internal controls over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. Our preparation for
compliance with Section 404 requires that we continue to incur substantial
accounting expense and expend significant management efforts. We currently do
not have an internal audit group, and have engaged outside accounting and
advisory services with appropriate public company experience and technical
accounting knowledge. Moreover, if we are not able to comply with the
requirements of Section 404 in a timely manner, or if we or our independent
registered public accounting firm identifies deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, the
market price of our stock could decline and we could be subject to sanctions or
investigations by Nasdaq, the SEC or other regulatory authorities, which would
require additional financial and management resources.
If
we fail to maintain proper and effective disclosure controls and procedures and
internal controls over financial reporting, our ability to produce accurate
financial statements could be impaired, which could adversely affect our
operating results, our ability to operate our business and investors’ views of
us.
Ensuring
that we have adequate disclosure controls and procedures, including internal
financial and accounting controls and procedures, in place to help ensure that
we can produce accurate financial statements on a timely basis is a costly and
time-consuming effort that needs to be re-evaluated frequently. We are in the
process of documenting, reviewing and, if appropriate, improving our internal
controls and procedures in connection with the requirements of Section 404 of
the Sarbanes-Oxley Act. Both we and our independent auditors will be testing our
internal controls in connection with the Section 404 requirements and, as part
of that documentation and testing, identifying areas for further attention and
improvement. Implementing any appropriate changes to our internal controls may
entail substantial costs in order to modify our existing accounting systems,
take a significant period of time to complete and distract our officers,
directors and employees from the operation of our business. These changes may
not, however, be effective in maintaining the adequacy of our internal controls,
and any failure to maintain that adequacy, or consequent inability to produce
accurate financial statements on a timely basis, could increase our operating
costs and could materially impair our ability to operate our business. In
addition, investors’ perceptions that our internal controls are inadequate or
that we are unable to produce accurate financial statements may seriously affect
our stock price.
Our
ability to raise capital in the future may be limited.
Our
business and operations may consume resources faster than we anticipate. In the
future, we may need to raise additional funds to expand our sales and marketing
and product development efforts or to make acquisitions. Additional financing
may not be available on favorable terms, if at all. If adequate funds are not
available on acceptable terms, we may be unable to fund the expansion of our
sales and marketing and research and development efforts or take advantage of
acquisition or other opportunities, which could seriously harm our business and
operating results. If we incur debt, the debt holders would have rights senior
to common stockholders to make claims on our assets and the terms of any debt
could restrict our operations, including our ability to pay dividends on our
common stock. Furthermore, if we issue additional equity securities,
stockholders will experience dilution, and the new equity securities could have
rights senior to those of our common stock. Because our decision to issue
securities in any future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, our stockholders bear the risk of our
future securities offerings reducing the market price of our common stock and
diluting their interest.
The
impairment of a significant amount of goodwill and intangible assets on our
balance sheet could result in a decrease in earnings and, as a result, our stock
price could decline.
In the
course of our operating history, we have acquired assets and businesses. Some of
our acquisitions have resulted in the recording of a significant amount of
goodwill and/or intangible assets on our financial statements. We had
approximately $108.8 million of goodwill and net intangible assets as of March
31, 2008. The goodwill and/or intangible assets were recorded because the fair
value of the net tangible assets acquired was less than the purchase price. We
may not realize the full value of the goodwill and/or intangible assets. As
such, we evaluate goodwill and other intangible assets with indefinite useful
lives for impairment on an annual basis or more frequently if events or
circumstances suggest that the asset may be impaired. We evaluate other
intangible assets subject to amortization whenever events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable. If goodwill or other intangible assets are determined to be
impaired, we will write off the unrecoverable portion as a charge to our
earnings. If we acquire new assets and businesses in the future, as we intend to
do, we may record additional goodwill and/or intangible assets. The possible
write-off of the goodwill and/or intangible assets could negatively impact our
future earnings and, as a result, the market price of our common stock could
decline.
We
will record substantial expenses related to our issuance of stock-based
compensation which may have a material negative impact on our operating results
for the foreseeable future.
Effective
January 1, 2006, we adopted the Statement of Financial Accounting Standards, or
SFAS, No. 123(R), Accounting
for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock- Based
Compensation—Transition and Disclosure for stock-based employee
compensation. Our stock-based compensation expenses are expected to be
significant in future periods, which will have an adverse impact on our
operating income and net income. SFAS No. 123(R) requires the use of highly
subjective assumptions, including the option’s expected life and the price
volatility of the underlying stock. Changes in the subjective input assumptions
can materially affect the amount of our stock-based compensation expense. In
addition, an increase in the competitiveness of the market for qualified
employees could result in an increased use of stock-based compensation awards,
which in turn would result in increased stock-based compensation expense in
future periods.
The
trading value of our common stock may be volatile and decline
substantially.
The
trading price of our common stock is likely to be volatile and could be subject
to wide fluctuations in response to various factors, some of which are beyond
our control. In addition to the factors discussed in this ‘‘Risk Factors’’
section and elsewhere in this prospectus, these factors include:
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· our
operating performance and the operating performance of similar
companies;
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· the
overall performance of the equity markets;
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· announcements
by us or our competitors of acquisitions, business plans or commercial
relationships;
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· threatened
or actual litigation;
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· changes
in laws or regulations relating to the provision of Internet
content;
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· any
major change in our board of directors or management;
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· publication
of research reports about us, our competitors or our industry, or positive
or negative recommendations or withdrawal of research coverage by
securities analysts;
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· our
sale of common stock or other securities in the future;
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· large
volumes of sales of our shares of common stock by existing stockholders;
and
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· general
political and economic conditions.
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In
addition, the stock market in general, and historically the market for
Internet-related companies in particular, has experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of those companies. Securities class action litigation has
often been instituted against companies following periods of volatility in the
overall market and in the market price of a company’s securities. This
litigation, if instituted against us, could result in substantial costs, divert
our management’s attention and resources and harm our business, operating
results and financial condition.
Provisions
of our certificate of incorporation, bylaws and Delaware law could deter
takeover attempts.
Various
provisions in our certificate of incorporation and bylaws could delay, prevent
or make more difficult a merger, tender offer, proxy contest or change of
control. Our stockholders might view any transaction of this type as being in
their best interest since the transaction could result in a higher stock price
than the then-current market price for our common stock. Among other things, our
certificate of incorporation and bylaws:
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· authorize
our board of directors to issue preferred stock with the terms of each
series to be fixed by our board of directors, which could be used to
institute a ‘‘poison pill’’ that would work to dilute the share ownership
of a potential hostile acquirer, effectively preventing acquisitions that
have not been approved by our board;
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· divide
our board of directors into three classes so that only approximately
one-third of the total number of directors is elected each
year;
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· permit
directors to be removed only for cause;
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· prohibit
action by less than unanimous written consent of our stockholders;
and
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· specify
advance notice requirements for stockholder proposals and director
nominations. In addition, with some exceptions, the Delaware General
Corporation Law restricts or delays mergers and other business
combinations between us and any stockholder that acquires 15% or more of
our voting stock.
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Future
sales of shares of our common stock by existing stockholders could depress the
market price of our common stock.
If our
existing stockholders sell, or indicate an intent to sell, substantial amounts
of our common stock in the public market, the trading price of our common stock
could decline significantly. A large portion of our outstanding shares of common
stock are held by our officers, directors and affiliates. Our
directors, executive officers and their affiliated entities beneficially own
approximately 29 million shares of our common stock, which
represents 71% of our shares outstanding as of March 31, 2008. If these
additional shares are sold, or if it is perceived that they will be sold, in the
public market, the trading price of our common stock could decline
substantially.
A
limited number of stockholders will have the ability to influence the outcome of
director elections and other matters requiring stockholder
approval.
Our
directors, executive officers and their affiliated entities beneficially own
approximately 71% of our outstanding common stock. These stockholders, if they
act together, could exert substantial influence over matters requiring approval
by our stockholders, including the election of directors, the amendment of our
certificate of incorporation and bylaws and the approval of mergers or other
business combination transactions. This concentration of ownership may
discourage, delay or prevent a change in control of our company, which could
deprive our stockholders of an opportunity to receive a premium for their stock
as part of a sale of our company and might reduce our stock price. These actions
may be taken even if they are opposed by other stockholders.
(a) Sales
of Unregistered Securities
None.
(b) Use
of Proceeds from Public Offering of Common Stock
In May
2007, we completed our initial public offering (IPO) pursuant to a registration
statement on Form S-1 (File No. 333-140503) that was declared
effective by the SEC on May 16, 2007. Under the registration
statement, we registered the offering and sale of an aggregate of
7,700,000 shares of our common stock, $0.001 par value, of which
6,427,152 shares were sold by the Company and 1,272,848 were sold by certain
selling stockholders. All of the shares of common stock issued
pursuant to the registration statement, including the shares sold by the selling
stockholders, were sold at a price to the public of $13.00 per
share.
As a
result of the IPO, we raised a total of $83.2 million in net proceeds after
deducting underwriting discounts and commissions of approximately $6.4 million
and offering expenses of approximately $2.3 million. In May 2007 we
repaid $12.0 million that we had borrowed against our revolving credit facility
in conjunction with the acquisition of TechnologyGuide.com in April
2007. In November 2007 we acquired KnowledgeStorm, Inc. for
approximately $58 million, consisting of approximately $52 million in cash and
359,820 shares of unregistered common stock of TechTarget valued at that time at
$6.0 million.
We have
applied the remaining net proceeds from the IPO to our working capital for
general corporate purposes. We have no current agreements or
commitments with respect to any material acquisitions. We have
invested the remaining net proceeds in cash, cash equivalents and short-term
investments, in accordance with our investment policy. None of the
remaining net proceeds were paid, directly or indirectly, to directors,
officers, persons owning ten percent or more of our equity securities, or any of
our other affiliates.
None.
None.
None.
(a)
Exhibits
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.
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TECHTARGET,
INC
(Registrant)
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Date:
May 15, 2008
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By:
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/s/
GREG STRAKOSCH
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Greg
Strakosch, Chief
Executive Officer
(Principal
Executive Officer)
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Date:
May 15, 2008
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By:
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/s/
ERIC SOCKOL
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Eric
Sockol, Chief
Financial Officer and Treasurer
(Principal
Accounting and Financial Officer)
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