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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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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
001-33707
CONSTANT CONTACT,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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04-3285398
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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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Reservoir Place, 1601 Trapelo Road, Suite 329
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02451
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Waltham, Massachusetts
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(Zip code)
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(Address of principal executive
offices)
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(781) 472-8100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Class
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Name of Exchange on Which Registered
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Common Stock, $.01 par value
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 and
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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 definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
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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
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold on the NASDAQ Global
Market on March 7, 2008 was $249,304,872. The registrant
has provided this information as of March 7, 2008 because
its common equity was not publicly traded as of the last
business day of its most recently completed second fiscal
quarter.
As of March 7, 2008, the registrant had
27,671,636 shares of Common Stock, $0.01 par value per
share, outstanding.
Portions of the registrant’s definitive proxy statement to
be filed with the Securities and Exchange Commission for the
2008 annual stockholders’ meeting to be held on
May 29, 2008 are incorporated by reference into
Items 10, 11, 12, 13 and 14 of Part III of this Annual
Report on
Form 10-K.
CONSTANT
CONTACT, INC.
INDEX
Forward-Looking
Statements
Matters discussed in this Annual Report on
Form 10-K
relating to future events or our future performance, including
any discussion, express or implied, of our anticipated growth,
operating results, future earnings per share, market
opportunity, plans and objectives, are “forward-looking
statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are often identified by
the words “believe”, “positioned”,
“estimate”, “project”, “target”,
“continue”, “intend”, “expect”,
“future”, “anticipates”,
“objectives”, and similar expressions that are not
statements of historical fact. These statements are not
guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to predict. Our
actual results and timing of certain events could differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not
limited to, those set forth under Item 1A —
“Risk Factors” and elsewhere in this Annual Report on
Form 10-K
and in our other public filings with the Securities and Exchange
Commission. It is routine for internal projections and
expectations to change as the year or each quarter in the year
progresses, and therefore it should be clearly understood that
all forward-looking statements and the internal projections,
judgments and beliefs upon which we base our expectations
included in this Annual Report on
Form 10-K
or other periodic reports are made only as of the date made and
may change. While we may elect to update forward-looking
statements at some point in the future, we do not undertake any
obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
References in this Annual Report on
Form 10-K
to “Constant Contact”, the “Company”,
“we” or “us” means Constant Contact, Inc.
and its wholly-owned subsidiary, Constant Contact Securities
Corporation.
PART I
Overview
Constant Contact is a leading provider of on-demand email
marketing and online survey solutions for small organizations,
including small businesses, associations and non-profits. Our
customers use our email marketing product to more effectively
and efficiently create, send and track professional and
affordable permission-based email marketing campaigns. With
these campaigns, our customers can build stronger relationships
with their customers, clients and members, increase sales and
expand membership. Our email marketing product incorporates a
wide range of customizable templates to assist in campaign
creation, user-friendly tools to import and manage contact lists
and intuitive reporting to track campaign effectiveness. As of
December 31, 2007, we had 164,669 email marketing
customers. In June 2007, we introduced an online survey product
that complements our email marketing product and enables small
organizations to easily create and send surveys and effectively
analyze responses. As of December 31, 2007, we had 8,270
survey customers, substantially all of which are also email
marketing customers. We are committed to providing our customers
with a high level of support, which we deliver via phone, chat,
email and our website.
We provide our products on an on-demand basis through a standard
web browser. This model enables us to deploy and maintain a
secure and scalable application that is easy for our customers
to implement at compelling prices. Our email marketing customers
pay a monthly subscription fee that generally ranges between $15
per month and $150 per month based on the size of their contact
lists and, in some cases, volume of mailings. Our survey product
is similarly priced. For the year ended December 31, 2007,
the average monthly amount that we charged a customer for our
email marketing solution alone was approximately $33. In
addition, in 2007, our average monthly total revenue per email
marketing customer, including all sources of revenue, was
$33.63. We believe that the simplicity of on-demand deployment
combined with our affordable subscription fees and functionality
facilitate adoption of our products by our target customers
while generating significant recurring revenue.
Our success is principally driven by our ability to grow our
customer base. Our email marketing customer base has grown
steadily from approximately 25,000 at the end of 2004 to over
164,000 as of December 31, 2007. These customers include
all types of small organizations including retailers,
restaurants, day spas, law firms, consultants, non-profits,
religious organizations, alumni associations and other small
businesses and organizations. Customers in more than 110
countries and territories currently use our email marketing
product. We estimate that approximately two-thirds of our
customers have fewer than ten employees and, in the year ended
December 31, 2007, our top 80 email marketing customers
accounted for approximately 1% of our total email marketing
revenue. Our customers have displayed a high degree of loyalty.
From January 2005 through December 2007, at least 97.4% of our
customers in a given month have continued to utilize our email
marketing product in the following month.
We acquire our customers through a variety of sources including
online advertising, channel partnerships, regional initiatives,
referrals and general brand awareness. Our online advertising
includes search engine marketing and advertising on networks and
other sites. Our channel partnerships are contractual
relationships with over 2,300 active partners, which include
national small business service providers such as Network
Solutions, LLC, American Express Company and Career Builder, LLC
as well as local small business service providers such as web
developers and marketing agencies, who refer customers to us
through links on their websites and outbound promotions to their
customers. Our regional initiatives include local seminars and
local advertising including print, online and radio. Referral
customers come from word-of-mouth from our satisfied, growing
customer base and the inclusion of a link to our website in the
footer of the more than 700 million emails currently sent
by our customers each month. Finally, we believe our general
brand awareness, press and thought leadership initiatives and
visibility drive prospects to us. During 2007, approximately 33%
of our new email marketing customers were generated through our
online marketing efforts and approximately 14% of our new email
marketing customers were generated through our channel partners.
We believe the remaining 53% came from the combination of
regional initiatives, referrals and general brand awareness.
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We were incorporated in Massachusetts in August 1995 under the
name Roving Software Incorporated. We reincorporated in Delaware
in July 2000 and changed our name to Constant Contact, Inc. in
December 2006. Our on-demand product was first offered
commercially in 2000.
Our principal executive offices are located at 1601 Trapelo
Road, Suite 329, Waltham, Massachusetts 02451. Our
telephone number is
(781) 472-8100.
Our website address is www.constantcontact.com. We are
not including the information contained on our website as part
of, or incorporating it by reference into, this Annual Report on
Form 10-K. Through a link on the Investors Relations
section of our website, we make available our filings with the
Securities and Exchange Commission, or SEC, after they are
electronically filed with or furnished to the SEC. All such
filings are available free of charge. These filings are also
available, free of charge, at www.sec.gov.
Industry
Background
Benefits
of Email Marketing
We believe organizations are increasingly turning to email
marketing as a means to communicate with their customers,
clients and members. Key benefits that drive adoption of email
marketing include the following:
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Targeted. Email marketing enables
organizations to tailor messages to specific audiences and
enables recipients to respond through links to websites.
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Timely. The cycle from concept through design
and execution for email marketing is much shorter than direct
mail because there is no need to print and mail. Reducing cycle
time allows organizations to rapidly respond to market
conditions and opportunities.
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Efficient. Email marketing combines low cost
with measurable responses leading to an attractive return on
investment.
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Constant
Contact Market Opportunity
We believe email marketing is an excellent fit for small
organizations. Small businesses and non-profits tend to rely
heavily on repeat sales and referrals to grow their businesses
and expand their membership bases, and email marketing is a cost
effective way to reach these audiences.
Small organizations also represent a large market opportunity.
The U.S. Small Business Administration estimated that there
were 26.8 million small businesses in the United States in
2006, and in 2006 the National Center of Charitable Statistics
estimated that there were approximately 1.5 million
non-profits
in the United States. Other small organizations that use
email marketing include online auction sellers, independent
musicians, community organizations, school districts,
parent/teacher associations and sports leagues. Based on these
estimates, we believe our email marketing product could
potentially address the needs of more than 28 million small
organizations domestically. We believe that all small
organizations could benefit by communicating regularly with
their constituents and, further, that email marketing with our
product is an effective and affordable method to facilitate this
type of communication. As of December 31, 2007, we had
customers in at least 871 of the 1,005
4-digit
standard industrial classification, or SIC, codes, which is a
method the U.S. government uses to classify industries in
the U.S.
At the same time, small organizations have generally been slower
than larger organizations to adopt email marketing as part of
their marketing mix. We believe they face unique challenges when
adopting email marketing including:
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Unfamiliar with Email Marketing. Many small
organizations are not familiar with the benefits of email
marketing and do not understand how to effectively build a
permission-based contact list, develop an effective email
marketing campaign and measure its effectiveness.
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Lack of Technical Expertise. Small
organizations often do not have the technical expertise to
implement email marketing software or to design and execute
effective email marketing campaigns.
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Limited Budgets. Small organizations typically
have small marketing budgets. They generally cannot afford to
hire in-house staff or engage an outside marketing agency to
develop, execute and evaluate an email marketing campaign.
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We also believe most existing alternatives for email marketing
are poorly suited to meet the needs of small organizations. Some
of these existing alternatives include:
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General Email Applications. General email
applications and services such as Microsoft
Outlook®,
America
Online®
or Microsoft
Hotmail®
are generally designed for one-to-one emails. They do not easily
incorporate the formatting, graphics, and links necessary to
produce professional-looking email marketing campaigns. They
also limit the number of recipients per email and do not have
the reporting capabilities to allow users to evaluate the
effectiveness of their email marketing campaigns. Finally, they
do not provide regulatory compliance tools to assist the sender
in complying with anti-spam requirements.
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Enterprise Service Providers. Enterprise
service providers, such as Epsilon Data Management LLC (a
subsidiary of Alliance Data Systems Corporation), ExactTarget,
Inc., Responsys Inc. and Silverpop Systems Inc. focus on large
organizations with sizeable marketing budgets. These providers
offer sophisticated, Internet-based marketing services and tools
with professional and customized execution and reporting at a
price and scale that is far beyond the scope of most small
organizations.
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As a result, we believe there is an opportunity for an email
marketing solution tailored to the needs of small organizations.
These users seek an affordable, easy-to-use email marketing
solution with a professional appearance and reliable performance.
Our
Solution
We provide small organizations with a convenient, effective and
affordable way to communicate with their constituents via email.
Our email marketing solution delivers the following benefits to
small organizations:
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Easy. We enable customers to easily create
great looking email marketing campaigns without prior expertise
in marketing, graphic design or Hyper Text Markup Language, or
HTML. Our product includes over 300 customizable templates
intelligently organized to streamline creation of a
professional-looking message. We also provide customers with
tools that make it easy for them to import, build and manage
contact lists and to monitor delivery and response. We further
enhance our product with unlimited free customer support and
daily webinars covering topics ranging from a general product
tour to email marketing best practices.
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Fast. Because our product is accessed through
the web, customers only need access to a computer and the
Internet to begin using it to create and send their first email
campaign. A customer can typically create and send their first
campaign in less than one hour. Once a customer has loaded their
contact list, created and sent their first campaign, our product
becomes even faster to use as this information is stored and can
be easily accessed for future use.
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Affordable. We offer our email marketing
product on a subscription basis, eliminating the up-front
license fee associated with traditional software. Instead, we
encourage potential customers to try our product without charge
for a 60-day
period. After the free trial, customers can use our product for
a subscription fee of as low as $15 per month with the amount of
the fee increasing based on the number of unique contacts or
email addresses in a customer’s contact list. We provide
discounted pricing for both prepayments and non-profits. For the
year ended December 31, 2007, the average monthly amount
that we charged a customer for our email marketing solution
alone was approximately $33. In addition, in 2007, our average
monthly total revenue per email marketing customer, including
all sources of revenue, was $33.63.
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Effective. Our product provides our customers
with an effective way to reach their customers, clients and
members. According to data measured by ReturnPath, Inc.
approximately 98% of our customers’ emails were delivered
past any spam filters or controls to their target email inboxes
in the United States
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during 2007. We have made significant investments in systems and
processes to reduce the number of our customers’ emails
that are blocked as possible spam. In addition, to help ensure
that customers’ emails are delivered, we have developed
relationships with leading Internet Service Providers, or ISPs.
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Measurable. Our email marketing campaign
reports provide customers with information and data regarding
each campaign. In addition to receiving aggregate data on email
receipt, open rates and click- through rates per campaign, our
customers can identify on an individual basis which contacts
received and opened an email and which links in the email they
clicked on. We also provide comparable metrics for our overall
customer base. This feedback permits customers to alter the
content or timing of their campaigns to capitalize on aspects of
prior campaigns that were positively received by their
constituents.
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Business
Strengths
We believe that the following business strengths differentiate
us from competitors and are key to our success:
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Focus on Small Organizations. We have
maintained a consistent and exclusive focus on small
organizations, which has enabled us to design a full customer
experience tuned to their unique needs. Through the website
experience, product usability, affordable price point and
personal touch of our communications consultants and support
representatives, we work to ensure that small organizations feel
that we are committed to their success.
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Efficient Customer Acquisition Model. We
believe that we have developed an efficient customer acquisition
model that generates an attractive return on our sales and
marketing expenditures. We utilize a variety of marketing
channels to acquire new customers including online advertising,
partner relationships, radio advertising, online and in-person
seminars and brand awareness. In 2007, our cost of email
marketing customer acquisition, which we define as our total
sales and marketing expense divided by the gross number of email
marketing customers added during the year, was approximately
$255 per email marketing customer. For 2007, our average monthly
total revenue per email marketing customer, including all
sources of revenue, was $33.63, implying payback on a revenue
basis in less than one year.
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High Degree of Recurring Revenue. We benefit
from a high level of customer loyalty. From January 2005
through December 2007, at least 97.4% of customers in a given
month have continued to use our email marketing product in the
following month. We believe this represents a high level of
customer retention, particularly given the transient nature of
many small organizations. These customers provide us with a
significant base of recurring revenue and generate new customer
referrals.
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Consistent Commitment to Customer Service. We
seek to provide our customers with a high level of support in
order to encourage trials and ongoing usage of our product. We
conduct online webinars and in-person events to educate
potential customers about the benefits of email marketing. In
addition, our communications consultants seek to contact all new
U.S. and Canadian based trial customers to help them launch
an initial campaign and address any questions or concerns. As a
result, we believe we have a highly satisfied customer base.
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Software-as-a-Service Delivery. We provide our
product on an on-demand basis, meaning that our customers can
access and use our product through a standard web browser. This
enables our customers to rapidly begin using our product with
few up-front costs and limited technical expertise. It also
enables us to serve additional customers with little incremental
expense and to deploy new applications and upgrades quickly and
efficiently to our existing customers.
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Our
Products and Services
Email
Marketing
Our email marketing product allows customers to easily create,
send and track professional-looking email campaigns. Our product
provides customers with the following features:
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Campaign Creation Wizard. This comprehensive,
easy-to-use interface enables our customers to create and edit
email campaigns. Through intuitive controls, customers can
readily change colors, fonts, borders and backgrounds and insert
images and logos to help ensure that their emails appear
polished and professional. The wizard operates on a
“what-you-see-is-what-you-get” basis whereby a
customer can move paragraphs and blocks of content within the
draft email quickly and view the message from the perspective of
intended recipients.
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Professionally Developed Templates. These
pre-designed email message forms help customers quickly create
attractive and professional campaigns. Over 300 templates
provide ideas about the kinds of emails customers can send,
including newsletters, event invitations, business letters,
promotions and announcements, and demonstrate, through the use
of color and format, the creativity and professionalism of a
potential campaign. Our advanced editing functionality enables
customers to easily modify the templates. We also provide
templates designed to appeal to specific vertical markets. For
example, we offer a restaurant template that includes a
pre-formatted menu section.
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Contact List Management. These tools help
customers build and manage their email contact lists. Our
contact list building tools include file and spreadsheet import
functionality as well as software plug-ins to import contact
lists maintained in Microsoft’s
Outlook®
and Outlook
Express®
and Intuit’s
QuickBooks®.
We also provide HTML programming code for a “Join My
Mailing List” box that can be included on the
customer’s web site and used to gather new contacts. Our
list management tools enable a customer to target or segment
contacts for all or specific campaigns and monitor email
addresses to which previous campaigns could not be delivered. In
addition to their constituents’ names and email addresses,
several additional customizable fields are available for the
purposes of personalizing email messages. Unsubscribe requests
are automatically processed to help ensure ongoing compliance
with government regulations and email marketing best practices.
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Email Tracking and Reporting. These features
enable our customers to review and analyze the overall
effectiveness of a campaign by tracking and reporting aggregate
information including how many emails were delivered, how many
were opened, and which links were clicked on. These features
also enable our customers to identify on an individual basis
which contacts received an email, opened an email and clicked on
particular links within the message.
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Email Delivery Management. These tools are
incorporated throughout our product and are designed to maintain
our high deliverability rates. Some of these tools are readily
apparent to our customers, such as in-depth delivery tracking.
Others are delivered through back-office processes, such as a
spam content check and address validation. To further improve
the percentage of emails delivered, we work closely with ISPs on
spam prevention issues. We also include processes and
verifications that greatly increase compliance with anti-spam
standards.
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Image Hosting. We enable customers to store up
to five images for free, view and edit these images and resize
them as necessary for use in their email campaigns. Up to
approximately 1,200 images (25 megabytes) can be stored for
an additional $5.00 per month. By adding images to an email
message, a customer can make the campaign more compelling and
visually appealing.
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Email Archive. We offer our customers the
ability to create a hosted version of current and past email
communications on our system and make them readily available to
their constituents via a link on a customer’s website. The
service, which is available for an additional $5.00 per month,
extends the life of an email communication and provides our
customers an ability to showcase to online visitors the extent
and breadth of their communication efforts.
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Security and Privacy. We protect our
customers’ data at a higher level than we believe many of
our customers do themselves. We do not use our customers’
confidential information, including their contact lists, except
to provide our product, nor do we share, sell or rent this
information. In addition, we require that our customers adopt a
privacy policy to assist them in complying with government
regulations and email marketing best practices.
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Survey
Our online survey product enables our customers to survey their
customers, clients or members and analyze the responses. By
selecting one of our customizable templates and editing or
entering their own questions, our customers can easily create a
professionally formatted survey. Similar to our email marketing
product, our survey product includes a survey creation wizard,
over 40 different preformatted and customizable survey
templates, list management capabilities and live customer
support.
By incorporating a real-time and comprehensive reporting
function, our survey product enables our customers to analyze
overall survey results and specific answers submitted by
individual respondents. Our survey product includes powerful
analytic features that enable our customers to segment results
based on survey responses, easily edit filters for “slice
and dice” analysis and view the results in intuitive,
easy-to-understand graphical and detailed data formats. Results
can be exported to a Microsoft
Excel®
file for additional analysis. Our customers can identify the
respondents associated with filtered results and create a unique
contact list of these respondents who can then be targeted with
a specific message or
follow-up
campaign. In addition, we recently launched a new online polling
feature that enables our customers to create online polls for
use on their websites. Responses can be viewed immediately.
Customer
Support
We provide extensive free customer support to all customers. Our
communication consultants seek to contact U.S. and Canadian
based trial customers by phone to answer any questions and to
help them launch their first campaigns. Additional assistance is
available via phone, chat or email. Our customer support
employees answer approximately 1,500 calls per day with an
average wait time of less than two minutes. Our phone and chat
support team is located at our headquarters in Waltham,
Massachusetts while we outsource a portion of our email support
to a third party based in Bangalore, India. In the second half
of 2008, we plan to open a second sales and support call center
office in the western U.S. We complement our customer
support with free daily product tours offered via our website,
an archive of frequently asked questions, or FAQs, and webinars
that explain the benefits of email marketing and survey.
Our customer service and support group is responsible for
enforcing our permission and prohibited content policies. We
work closely with customers who have higher than average spam
complaint rates or bounced emails, and with customers whose
emails are flagged by our system as possibly including
prohibited content or spam, to assist them in complying with our
policies. If we cannot resolve outstanding concerns, we
terminate our agreement with the customer.
As of December 31, 2007, we had 110 employees working
in customer service and support.
Professional
Services
Although the majority of our customers select the
“do-it-yourself” approach, we also offer professional
services to customers who would like their email campaigns and
surveys prepared for them. Our service offerings range from a
low-cost, getting started service to full-service email and
survey campaign creation.
Pricing
Every customer experience starts with a free
60-day
trial. The only requirement for the free trial is that the trial
customer must enter a valid email address that we verify before
they can send their initial campaign. We do not require credit
card information during the 60-day trial. The trial is a
fully-featured experience that is limited to 100 email
contacts. All of our customer support resources are available
during the free trial period.
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At the conclusion of the
60-day trial
(or earlier if the customer’s contact list exceeds 100
contacts), we ask the customer to provide credit card
information in order to begin billing for their continued use of
our products.
Once the customer’s free trial experience has ended and the
customer becomes a paying customer, we price our email marketing
product based upon the number of unique email addresses in a
customer’s account. Set forth below are the first several
pricing tiers:
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Number of Unique Email Addresses
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Monthly Fixed Pricing
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Up to 500
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$
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15.00
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501-2,500
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$
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30.00
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2,501-5,000
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$
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50.00
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5,001-10,000
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$
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75.00
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10,001-25,000
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$
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150.00
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Customers in these pricing tiers may send an unlimited number of
emails per month. During 2007, approximately 80% of our email
marketing customers were in our two lowest pricing tiers, $15.00
and $30.00 per month. We offer additional pricing tiers for
large list customers. These large list customers are limited as
to the number of emails they can send per month for a fixed
monthly fee, with overage charges assessed on emails exceeding
the monthly limit.
Our survey product is similarly priced based on tiers of unique
email addresses with customers allowed an unlimited number of
surveys per month. However, if a customer receives survey
responses in a given month that exceed the maximum number of
email addresses permitted in their current pricing tier, they
will incur additional charges. In addition, customers may
purchase a bundle of both our email marketing and survey
products at a discount of 50% off the list price of the second
product.
We offer our premium image hosting services for $5.00 per month
for customers with less than 350,000 unique email addresses
and our email archive service for $5.00 per month. We offer
discounted rates to non-profits and for six- and twelve-month
prepayment options.
Customers
We have maintained a consistent and exclusive focus on small
organizations. In this market, as of December 31, 2007, we
served a large and diverse group of over 164,000 email marketing
customers and over 8,000 survey customers, substantially all of
which were also email marketing customers. This customer base is
primarily comprised of business-to-business users,
business-to-consumer users and non-profits and associations. We
serve a wide range of business-to-business customers including
law firms, accountants, marketing and public relations firms,
recruiters and independent consultants. They typically use our
product to illustrate their subject matter knowledge by
communicating their recent activities and to educate their
audiences by sending informational newsletters and announcements
about their company or industry. We also serve a diverse base of
business-to-consumer customers including on- and off-line
retailers, restaurants, realtors, travel and tourism businesses
and day spas. These customers typically use our product to
promote their offerings with the goal of generating regular,
repeat business from their customers and prospects. Finally, we
serve a variety of non-profits and associations, including
religious organizations, charities, trade associations, alumni
associations, and other non-profits. They typically use our
product to maintain regular communications with their members
and inform them about news and events pertaining to their
groups, as well as to drive event attendance, volunteer
participation and fundraising efforts.
We estimate that approximately two-thirds of our customers have
fewer than ten employees. For the year ended December 31,
2007, the average monthly amount that we charged a customer for
our email marketing solution alone was approximately $33. In
addition, in 2007, our average monthly total revenue per email
marketing customer, including email marketing revenue, image
hosting revenue, email archive revenue, survey revenue and
professional services revenue, was $33.63. We have low customer
concentration as our top 80 customers in email marketing revenue
in 2007 accounted for approximately 1% of our total email
marketing revenue.
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We measure customer satisfaction on a monthly basis by surveying
our customers. Based on these surveys, we believe that our
overall customer satisfaction is strong. Another indication of
our strong customer satisfaction is our low attrition rate.
Sales and
Marketing
Our sales and marketing efforts are designed to attract
potential customers to our website, to enroll them in a free
trial, to convert them to paying customers and to retain them as
ongoing paying customers. We believe there are significant
opportunities to increase the number of customers who try our
products through additional sales and marketing initiatives. We
employ sophisticated strategies to acquire our customers by
using a variety of sources including online advertising, channel
partnerships, regional initiatives, referrals and general brand
awareness. We also invest in public relations and thought
leadership in an effort to build our overall brand and
visibility. We are constantly seeking new methods to reach and
convert more customers.
Customer
Acquisition Sources
Online Advertising. We advertise online
through
pay-per-click
spending with search engines (including Google and Yahoo!) and
banner advertising with online advertising networks and other
websites likely to be frequented by small organizations. We are
able to identify customers generated through these efforts
because they click on our advertisements before visiting our
site, and we measure effectiveness based on the number of
customers acquired. Approximately 33% of our new email marketing
customers in 2007 were generated from online advertising.
Channel Partners. We have contractual
relationships with over 2,300 active online channel partners who
refer customers to us through links on their websites and
outbound promotions to their customers. These channel partners
include large companies with broad reach including Network
Solutions, LLC, American Express Company and Career Builder,
LLC, smaller companies with narrow reach but high influence,
such as web designers and marketing agencies, and large and
small franchise organizations. Most of our channel partners
either share a percentage of the cash received by us or receive
a one-time referral fee. A website design and hosting company,
Website Pros, Inc., bundles our services and provides them
directly to its customers. This channel partner pays us monthly
royalties, which contributed less than one percent of our total
revenue during 2007. Approximately 14% of our new email
marketing customers in 2007 were generated from our channel
partners.
Offline Advertising. We advertise offline in
print and radio. Our radio advertising is designed to build
awareness of the Constant Contact brand and drive market
awareness. Our print advertising is comprised of advertisements
in national publications such as Entrepreneur as well as
local business publications in our geographically targeted metro
regions. Our geographically targeted offline advertising
supports our local evangelism efforts.
Word-of-Mouth Referrals. We frequently hear
from new customers that they heard about us from a current
customer. We also offer our paying customers a referral
incentive consisting of a $30 credit for them and for the
customer they referred. Even though we offer this incentive, the
majority of referral customers do not use the incentive program.
Footer Click-Throughs. Customers also come to
us by clicking on the Constant Contact link included in the
footer of more than 700 million emails currently sent by
our customers each month.
Sales
Efforts
Communications Consultants. We employed a team
of 37 phone-based sales professionals as of December 31,
2007 who seek to call U.S. and Canadian based trial
customers to assist them in their initial use of Constant
Contact and encourage conversion.
Local Evangelism. As of December 31,
2007, we employed a team of nine regional development directors
who are focused on educating small organizations as to the
benefits of email marketing in their local markets.
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These employees are located across the United States and
typically provide free local seminars to chambers of commerce
and other small business groups about email marketing, survey
and related topics.
Distance Learning. We offer free online
webinars to prospects and customers on a wide variety of topics
designed to educate them about the benefits of email marketing
and survey, teach them how to be great email marketers and guide
them in the use of our products.
Other
Marketing Initiatives
Press Relations and Thought Leadership. We
leverage our broad customer base as a survey panel to assess
small business expectations around major press cycles such as
Valentine’s Day, Mother’s Day and the December holiday
season. We publish the results and seek to get print and radio
coverage of our results. We also publish email marketing best
practices and advice through our Email Marketing
Hints & Tips newsletter and a monthly column in
Entrepreneur.com. These efforts enhance our brand awareness and
industry leadership.
Website Marketing. We continuously measure
both website visitor-to-trial conversion and trial-to-paying
conversion. We test messaging, graphics and layout alternatives
in order to improve website conversion. We also seek to
customize the website with vertical or usage-specific messaging
whenever possible. We carefully analyze trial customer usage to
understand and overcome barriers to conversion.
Vertical Marketing. We specifically develop
marketing programs and target public relations efforts at
vertical markets for certain markets that have demonstrated an
affinity for our products. These programs focus on a number of
different vertical markets and have targeted restaurants, food
service firms, franchises, real estate, religious organizations,
retail and travel and tourism firms. We continue to adjust our
target vertical markets based on our existing customer base,
market opportunity and overall value to our business.
Community. We maintain an online user
community for both trial and paying customers with discussion
boards, a resource center, member spotlights and other features.
As of December 31, 2007, we had in excess of 14,500 members
of the community.
In the years ended December 31, 2007, 2006 and 2005, we
spent $27.4 million, $18.6 million and
$7.5 million, respectively, on sales and marketing. Our
cost of customer acquisition during the years ended
December 31, 2007 and 2006 was approximately $255 and $300,
respectively, per email marketing customer, defined as our total
annual sales and marketing expense divided by the gross number
of email marketing customers added during the year.
Technology
Our on-demand products use a central application and a single
software code base with unique accounts for each customer. As a
result, we are able to spread the cost of providing our products
across our entire customer base. In addition, because we have
one central application, we believe we can scale our business
faster than traditional software vendors. Scalability is
achieved through advanced use of application partitioning to
allow for horizontal scaling across multiple sets of
applications. This enables individual application subsystems to
scale independently as required by volume and usage.
Our system hardware is co-located in two hosting facilities. The
first, located in Somerville, Massachusetts, is owned and
operated by Internap Network Services Corporation under an
agreement that expires in October 2009. The second, which is
expected to become operational during the first quarter of 2008,
is located in Bedford, Massachusetts and is owned and operated
by Sentinel Properties-Bedford, LLC. This agreement expires in
December 2013. Both facilities provide around-the-clock security
personnel, video surveillance and biometric access screening,
and are serviced by onsite electrical generators, fire detection
and suppression systems. Both facilities also have multiple
Tier 1 interconnects to the Internet.
We own all of the hardware deployed in support of our platform.
We continuously monitor the performance and availability of our
products. We have a highly available, scalable infrastructure
that utilizes load-balanced web server pools, redundant
interconnected network switches and firewalls, replicated
databases, and fault-
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tolerant storage devices. Production data is backed up on a
daily basis and stored in multiple locations to ensure
transactional integrity and restoration capability.
Changes to our production environment are tracked and managed
through a formal maintenance request process. Production
baseline changes are handled much the same as software product
releases and are first tested on a quality system, then verified
in the staging environment, and finally deployed to the
production system.
Research
and Development
We have made substantial investments in research and
development, and expect to continue to do so as a part of our
strategy to continually improve the ease of use of our existing
products as well as develop new offerings. As of
December 31, 2007, we had 107 employees working in
engineering and product strategy. Our product management and
strategy team, which directs our research and development
efforts, includes a market analyst, product managers, and
website and user interface designers. This group also performs
competitive and market analysis as well as systematic product
usability testing. Our research and development expense totaled
approximately $10.3 million for 2007, $6.2 million for
2006 and $3.4 million for 2005.
Competition
The market for email marketing vendors is fragmented,
competitive and evolving. We believe the following are the
principal competitive factors in the email marketing market:
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product functionality, performance and reliability;
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integrated solutions;
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customer support and education;
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deliverability rates;
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product scalability;
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ease of use; and
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cost.
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The email marketing market is divided into two
segments — vendors who are focused on the small to
medium size business, or SMB, market and vendors who are focused
on the enterprise market. We primarily compete with vendors
focused on the SMB market. Some of the vendors who are focused
on the SMB market include: Vertical Response, Inc., Broadwick
Corporation (iContact, formerly Intellicontact), CoolerEmail
Inc., Got Corporation (Campaigner), Emma, Inc., Lyris
Technologies, Inc. and Topica Inc. These vendors typically
charge a low monthly entry fee or a low fee per number of emails
sent.
Vendors that are focused on the enterprise market include Acxiom
Digital (a division of Acxiom Corporation), Alterian Inc.,
Epsilon Data Management LLC (a subsidiary of Alliance Data
Systems Corporation), ExactTarget, Inc., Responsys Inc.,
Silverpop Systems Inc. and CheetahMail, Inc. (a subsidiary of
Experian Group Limited). We believe enterprise email marketing
vendors charge their customers $25,000 or more per month and
provide a full-service model, which generally includes an
account executive and creative team who often assist with
content development. While we currently do not generally compete
with vendors focusing on enterprise customers, we may face
competition from them in the future.
We may also face future competition in the email marketing
market from new companies entering our market, which may include
large, established companies, such as Microsoft Corporation,
Google Inc. or Yahoo! Inc. Barriers to entry into our market are
relatively low, which allows new entrants to enter the market
without significant impediments and large, established companies
to develop their own competitive products or acquire or
establish cooperative relationships with our competitors.
In addition, these companies may have significantly greater
financial, technical, marketing and other resources than we do
and may be able to devote greater resources to the development,
promotion, sale and support of their products. These potential
competitors may be in a stronger position to respond quickly to
new
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technologies and may be able to undertake more extensive
marketing campaigns. These competitors may have more extensive
customer bases and broader customer relationships than we do. In
addition, these competitors may have longer operating histories
and greater name recognition than we do. Moreover, if one or
more of our competitors were to merge or partner with another of
our competitors or a new market entrant, the change in
competitive landscape could adversely affect our ability to
compete effectively.
Our survey product competes with similar offerings by Zoomerang
(a division of Market Tools, Inc.) and Surveymonkey.com
Corporation.
Government
Regulation
The Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, or CAN-SPAM Act, establishes requirements
for commercial email and specifies penalties for commercial
email that violates the Act. In addition, the CAN-SPAM Act gives
consumers the right to require emailers to stop sending them
commercial email.
The CAN-SPAM Act, which became effective January 1, 2004,
covers email sent for the primary purpose of advertising or
promoting a commercial product, service, or Internet web site.
The Federal Trade Commission, a federal consumer protection
agency, is primarily responsible for enforcing the CAN-SPAM Act,
and the Department of Justice, other federal agencies, State
Attorneys General, and ISPs also have authority to enforce
certain of its provisions.
The CAN-SPAM Act’s main provisions include:
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prohibiting false or misleading email header information;
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prohibiting the use of deceptive subject lines;
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ensuring that recipients may, for at least 30 days after an
email is sent, opt out of receiving future commercial email
messages from the sender, with the opt-out effective within
10 days of the request;
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requiring that commercial email be identified as a solicitation
or advertisement unless the recipient affirmatively permitted
the message; and
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requiring that the sender include a valid postal address in the
email message.
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The CAN-SPAM Act also prohibits unlawful acquisition of email
addresses, such as through directory harvesting, and
transmission of commercial emails by unauthorized means, such as
through relaying messages with the intent to deceive recipients
as to the origin of such messages.
Violations of the CAN-SPAM Act’s provisions can result in
criminal and civil penalties, including statutory penalties that
can be based in part upon the number of emails sent, with
enhanced penalties for commercial emailers who harvest email
addresses, use dictionary attack patterns to generate email
addresses,
and/or relay
emails through a network without permission.
The CAN-SPAM Act acknowledges that the Internet offers unique
opportunities for the development and growth of frictionless
commerce, and the CAN-SPAM Act was passed, in part, to enhance
the likelihood that wanted commercial email messages would be
received. We believe we are a leader in developing policies and
practices affecting our industry and that our permission-based
email marketing model and our anti-spam policy are compatible
with current CAN-SPAM Act regulatory requirements. We are a
founding member of the Email Sender and Provider Coalition, or
ESPC
(http://www.espcoalition.org),
a cooperative industry organization founded to develop and
implement industry-wide improvements in spam protection and
solutions to prevent inadvertent blocking of legitimate
commercial email. We maintain high standards that apply to all
of our customers, including non-profits and political
organizations, whether or not they are covered by the
CAN-SPAM Act.
The CAN-SPAM Act preempts, or blocks, most state restrictions
specific to email, except for rules against falsity or deception
in commercial email, fraud and computer crime. The scope of
these exceptions, however,
12
is not settled, and some states have adopted email regulations
that, if upheld, could impose liabilities and compliance burdens
in addition to those imposed by the CAN-SPAM Act.
Moreover, some foreign countries, including the countries of the
European Union, have regulated the distribution of commercial
email and the online collection and disclosure of personal
information. Foreign governments may attempt to apply their laws
extraterritorially or through treaties or other arrangements
with U.S. governmental entities.
Our customers may be subject to the requirements of the CAN-SPAM
Act, and/or
other applicable state or foreign laws and regulations affecting
email marketing. If our customers’ email campaigns are
alleged to violate applicable email laws or regulations and we
are deemed to be responsible for such violations, or if we were
deemed to be directly subject to and in violation of these
requirements, we could be exposed to liability.
Our standard terms and conditions require our customers to
comply with laws and regulations applicable to their email
marketing campaigns and to implement any required regulatory
safeguards. We take additional steps to facilitate our
customers’ compliance with the CAN-SPAM Act, including the
following:
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new customers signing up for our services must agree that they
will send email through our service only to persons who have
given their permission;
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when an email contact list is uploaded, the customer must
certify that it has permission to email each of the addressees;
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when an individual indicates that they want to be added to a
mailing list, they may receive a confirmation email and may be
required to confirm their intent to be added to the contact
list, through a process called double opt-in;
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we electronically inspect all of our customers’ email
contact lists to check for spam traps, dictionary attack
patterns and lists that fail to meet our permission
standards; and
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for customers with large email address lists, we conduct list
review interviews to verify that the list is properly acquired
and permission-based and that the proposed messages meet our
content standards. Initial campaigns using such lists are
conducted in stages, so that we can terminate the campaign early
if the list generates an unusually high number of complaints.
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Intellectual
Property
Our intellectual property rights are important to our business.
We rely on a combination of copyright, trade secret, trademark,
patent and other rights in the United States and other
jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our proprietary technology,
processes and other intellectual property. We have filed one
patent application.
Although the protection afforded by copyright, trade secret,
trademark and patent law, written agreements and common law may
provide some advantages, we believe that the following factors
help us to maintain a competitive advantage:
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the technological skills of our research and development
personnel;
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frequent enhancements to our products;
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continued expansion of our proprietary content; and
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high levels of customer service.
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Others may develop products that are similar to our technology.
We enter into confidentiality and other written agreements with
our employees, consultants and partners, and through these and
other written agreements, we attempt to control access to and
distribution of our software, documentation and other
proprietary technology and other information. These
confidentiality and other written agreements, however, offer
only limited protection, and we may not be able to enforce our
rights under such agreements. Despite our efforts to protect our
proprietary rights, third parties may, in an unauthorized
manner, attempt to use, copy or otherwise obtain
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and market or distribute our intellectual property rights or
technology or otherwise develop a product with the same
functionality as our product. Policing unauthorized use of our
products and intellectual property rights is difficult and
nearly impossible on a worldwide basis. Therefore, we cannot be
certain that the steps we have taken or will take in the future
will prevent misappropriations of our technology or intellectual
property rights.
“Constant
Contact®
” is a registered trademark in the United States and in the
European Union. We also hold trademarks and service marks
identifying certain of our products or features of our products.
Employees
As of December 31, 2007, we employed a total of
318 employees. None of our employees is represented by a
labor union. We have not experienced any work stoppages and
believe that our relations with our employees are good.
Facilities
Our corporate headquarters, including our principal
administrative, marketing, technical support and research and
development departments, is located in Waltham, Massachusetts.
We lease approximately 80,000 square feet under an
agreement that expires in September, 2010. As of
December 31, 2007, all of our employees were based in this
location with the exception of 10 employees who worked out
of their homes. If we require additional space, we believe that
we will be able to obtain such space on acceptable, commercially
reasonable terms. In addition, we plan to open a second sales
and support office in the western U.S. in the second half of
2008.
Our business is subject to numerous risks. We caution you
that the following important factors, among others, could cause
our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in
filings with the SEC, press releases, communications with
investors and oral statements. Any or all of our forward-looking
statements in this Annual Report on
Form 10-K
and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many
factors mentioned in the discussion below will be important in
determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary
materially from those anticipated in forward-looking statements.
We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any
further disclosure we make in our reports filed with
the SEC.
RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
If we
are unable to attract new customers and retain existing
customers on a cost-effective basis, our business and results of
operations will be affected adversely.
To succeed, we must continue to attract and retain a large
number of customers on a cost-effective basis, many of whom have
not previously used an email marketing service. We rely on a
variety of methods to attract new customers, such as paying
providers of online services, search engines, directories and
other websites to provide content, advertising banners and other
links that direct customers to our website and including a link
to our website in substantially all of our customers’
emails. In addition, we are committed to providing our customers
with a high level of support. As a result, we believe many of
our new customers are referred to us by existing customers. If
we are unable to use any of our current marketing initiatives or
the cost of such initiatives were to significantly increase or
our efforts to satisfy our existing customers are not
successful, we may not be able to attract new customers or
retain existing customers on a cost-effective basis and, as a
result, our revenue and results of operations would be affected
adversely.
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Our
business is substantially dependent on the market for email
marketing services for small organizations.
We derive, and expect to continue to derive, substantially all
of our revenue from our email marketing product for small
organizations, including small businesses, associations and
non-profits. As a result, widespread acceptance of email
marketing among small organizations is critical to our future
growth and success. The overall market for email marketing and
related services is relatively new and still evolving, and small
organizations have generally been slower than larger
organizations to adopt email marketing as part of their
marketing mix. There is no certainty regarding how or whether
this market will develop, or whether it will experience any
significant contractions. Our ability to attract and retain
customers will depend in part on our ability to make email
marketing convenient, effective and affordable. If small
organizations determine that email marketing does not
sufficiently benefit them, existing customers may cancel their
accounts and new customers may decide not to adopt email
marketing. In addition, many small organizations lack the
technical expertise to effectively send email marketing
campaigns. As technology advances, however, small organizations
may establish the capability to manage their own email marketing
and therefore have no need for our email marketing product. If
the market for email marketing services fails to grow or grows
more slowly than we currently anticipate, demand for our
services may decline and our revenue would suffer.
U.S.
federal legislation entitled Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003 imposes
certain obligations on the senders of commercial emails, which
could minimize the effectiveness of our email marketing product,
and establishes financial penalties for non-compliance, which
could increase the costs of our business.
In December 2003, Congress enacted Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003, or the
CAN-SPAM Act, which establishes certain requirements for
commercial email messages and specifies penalties for the
transmission of commercial email messages that are intended to
deceive the recipient as to source or content. The CAN-SPAM Act,
among other things, obligates the sender of commercial emails to
provide recipients with the ability to opt out of receiving
future emails from the sender. In addition, some states have
passed laws regulating commercial email practices that are
significantly more punitive and difficult to comply with than
the CAN-SPAM Act, particularly Utah and Michigan, which have
enacted do-not-email registries listing minors who do not wish
to receive unsolicited commercial email that markets certain
covered content, such as adult or other harmful products. Some
portions of these state laws may not be preempted by the
CAN-SPAM Act. The ability of our customers’ constituents to
opt out of receiving commercial emails may minimize the
effectiveness of our email marketing product. Moreover,
non-compliance with the CAN-SPAM Act carries significant
financial penalties. If we were found to be in violation of the
CAN-SPAM Act, applicable state laws not preempted by the
CAN-SPAM Act, or foreign laws regulating the distribution of
commercial email, whether as a result of violations by our
customers or if we were deemed to be directly subject to and in
violation of these requirements, we could be required to pay
penalties, which would adversely affect our financial
performance and significantly harm our business. We also may be
required to change one or more aspects of the way we operate our
business, which could impair our ability to attract and retain
customers or increase our operating costs.
If
economic or other factors negatively affect the small business
sector, our customers may become unwilling or unable to maintain
accounts with us, which could cause our revenue to decline and
impair our ability to operate profitably.
Our email marketing and survey products are designed
specifically for small organizations, including small
businesses, associations and non-profits that frequently have
limited budgets and are more likely to be significantly affected
by economic downturns than their larger, more established
counterparts. Small organizations may choose to spend the
limited funds that they have on items other than our products.
Moreover, if small organizations experience economic hardship,
they may be unwilling or unable to expend resources on
marketing, which would negatively affect the overall demand for
our products and could cause our revenue to decline. In
addition, we have limited experience operating our business
during an economic downturn. Accordingly, we do not know if our
current business model will operate as effectively during an
economic downturn.
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Evolving
regulations concerning data privacy may restrict our
customers’ ability to solicit, collect, process and use
data necessary to conduct email marketing campaigns or to send
surveys and analyze the results or may increase their costs,
which could harm our business.
Federal, state and foreign governments have enacted, and may in
the future enact, laws and regulations concerning the
solicitation, collection, processing or use of consumers’
personal information. Such laws and regulations may require
companies to implement privacy and security policies, permit
users to access, correct and delete personal information stored
or maintained by such companies, inform individuals of security
breaches that affect their personal information, and, in some
cases, obtain individuals’ consent to use personal
information for certain purposes. Other proposed legislation
could, if enacted, prohibit the use of certain technologies that
track individuals’ activities on web pages or that record
when individuals click through to an Internet address contained
in an email message. Such laws and regulations could restrict
our customers’ ability to collect and use email addresses,
page viewing data, and personal information, which may reduce
demand for our products.
As
Internet commerce develops, federal, state and foreign
governments may draft and propose new laws to regulate Internet
commerce, which may negatively affect our
business.
As Internet commerce continues to evolve, increasing regulation
by federal, state or foreign governments becomes more likely.
Our business could be negatively impacted by the application of
existing laws and regulations or the enactment of new laws
applicable to email marketing. The cost to comply with such laws
or regulations could be significant and would increase our
operating expenses, and we may be unable to pass along those
costs to our customers in the form of increased subscription
fees. In addition, federal, state and foreign governmental or
regulatory agencies may decide to impose taxes on services
provided over the Internet or via email. Such taxes could
discourage the use of the Internet and email as a means of
commercial marketing, which would adversely affect the viability
of our products.
In the
event we are unable to minimize our loss of existing customers
or to grow our customer base by adding new customers, our
operating results will be adversely affected.
Our growth strategy requires us to minimize the loss of our
existing customers and grow our customer base by adding new
customers. Customers cancel their accounts for many reasons,
including a perception that they do not use our product
effectively, the service is a poor value and they can manage
their email campaigns without our product. In some cases, we
terminate an account because the customer fails to comply with
our standard terms and conditions. We must continually add new
customers to replace customers whose accounts are cancelled or
terminated, which may involve significantly higher marketing
expenditures than we currently anticipate. If too many of our
customers cancel our service, or if we are unable to attract new
customers in numbers sufficient to grow our business, our
operating results would be adversely affected.
As we
expand our customer base through our marketing efforts, our new
customers may use our products differently than our existing
customers and, accordingly, our business model may not be as
efficient at attracting and retaining new
customers.
As we expand our customer base, our new customers may use our
products differently than our existing customers. For example, a
greater percentage of new customers may take advantage of the
free trial period we offer but choose to use another form of
marketing to reach their constituents. If our new customers are
not as loyal as our existing customers, our attrition rate will
increase and our customer referrals will decrease, which would
have an adverse effect on our results of operations. In
addition, as we seek to expand our customer base, we expect to
increase our marketing spend in order to attract new customers,
which will increase our operating costs. There can be no
assurance that these marketing efforts will be successful.
16
The
market in which we participate is competitive and, if we do not
compete effectively, our operating results could be
harmed.
The market for our products is competitive and rapidly changing,
and the barriers to entry are relatively low. With the
introduction of new technologies and the influx of new entrants
to the market, we expect competition to persist and intensify in
the future, which could harm our ability to increase sales and
maintain our prices.
Our principal competitors include providers of email marketing
products for small to medium size businesses such as Vertical
Response, Inc., Broadwick Corporation (iContact, formerly
Intellicontact), CoolerEmail, Inc. Emma, Inc., Got
Corporation (Campaigner), Lyris Technologies, Inc. and Topica
Inc., as well as the in-house information technology
capabilities of prospective customers. Competition could result
in reduced sales, reduced margins or the failure of our email
marketing product to achieve or maintain more widespread market
acceptance, any of which could harm our business. In addition,
there are a number of other vendors that are focused on
providing email marketing products for larger organizations,
including Acxiom Digital (a division of Acxiom Corporation),
Alterian Inc., Epsilon Data Management LLC (a subsidiary of
Alliance Data Systems Corporation), ExactTarget, Inc., Responsys
Inc., Silverpop Systems Inc. and CheetahMail, Inc. (a subsidiary
of Experian Group Limited). While we do not compete currently
with vendors serving larger customers, we may face future
competition from these providers if they determine that our
target market presents an opportunity for them. Finally, in the
future, we may experience competition from Internet Service
Providers, or ISPs, advertising and direct marketing agencies
and other large established businesses, such as Microsoft
Corporation, Google Inc. or Yahoo! Inc., possessing large,
existing customer bases, substantial financial resources and
established distribution channels. If these companies decide to
develop, market or resell competitive email marketing products,
acquire one of our existing competitors or form a strategic
alliance with one of our competitors, our ability to compete
effectively could be significantly compromised and our operating
results could be harmed. In addition, one or more of these ISPs
or other businesses could decide to offer a competitive email
marketing product at no cost or low cost in order to generate
revenue as part of a larger product offering. Our survey product
competes with similar offerings by Zoomerang (a division of
Market Tools, Inc.) and Surveymonkey.com Corporation.
Our current and potential competitors may have significantly
more financial, technical, marketing and other resources than we
do and may be able to devote greater resources to the
development, promotion, sale and support of their products. Our
potential competitors may have more extensive customer bases and
broader customer relationships than we have. In addition, these
companies may have longer operating histories and greater name
recognition than we have. These competitors may be better able
to respond quickly to new technologies and to undertake more
extensive marketing campaigns. If we are unable to compete with
such companies, the demand for our services could substantially
decline.
If the
delivery of our customers’ emails is limited or blocked,
the fees we may be able to charge for our email marketing
product may not be accepted by the market and customers may
cancel their accounts.
ISPs can block emails from reaching their users. Recent releases
of ISP software and the implementation of stringent new policies
by ISPs make it more difficult to deliver our customers’
emails. We continually improve our own technology and work
closely with ISPs to maintain our deliverability rates. If ISPs
materially limit or halt the delivery of our customers’
emails, or if we fail to deliver our customers’ emails in a
manner compatible with ISPs’ email handling or
authentication technologies, then the fees we charge for our
email marketing product may not be accepted by the market, and
customers may cancel their accounts.
The internet protocol addresses associated with our email
marketing product are owned and controlled by Internap Network
Services Corporation, which operates one of our third party
hosting facilities. In connection with the establishment of a
second third party hosting facility, we are currently migrating
to internet protocol addresses owned and controlled by us. If we
experience difficulties with this migration, our deliverability
rates could suffer and it could undermine the effectiveness of
our customers’ email marketing campaigns. This, in turn,
could harm our business and financial performance.
17
Competition
for our employees is intense, and we may not be able to attract
and retain the highly skilled employees whom we need to support
our business.
Competition for highly skilled technical and marketing personnel
is extremely intense, and we continue to face difficulty
identifying and hiring qualified personnel in many areas of our
business. We may not be able to hire and retain such personnel
at compensation levels consistent with our existing compensation
and salary structure. Many of the companies with which we
compete for experienced employees have greater resources than we
have and may be able to offer more attractive terms of
employment. In particular, candidates making employment
decisions, particularly in high-technology industries, often
consider the value of any equity they may receive in connection
with their employment. Any significant volatility in the price
of our stock may adversely affect our ability to attract or
retain highly skilled technical and marketing personnel.
In addition, we invest significant time and expense in training
our employees, which increases their value to competitors who
may seek to recruit them. If we fail to retain our employees, we
could incur significant expenses in hiring and training their
replacements and the quality of our services and our ability to
serve our customers could diminish, resulting in a material
adverse effect on our business.
If we
fail to promote and maintain our brand in a cost-effective
manner, we may lose market share and our revenue may
decrease.
We believe that developing and maintaining awareness of the
Constant Contact brand in a cost-effective manner is critical to
achieving widespread acceptance of our existing and future
products and attracting new customers. Furthermore, we believe
that the importance of brand recognition will increase as
competition in our industry increases. Successful promotion of
our brand will depend largely on the effectiveness of our
marketing efforts and the effectiveness and affordability of our
products for our target customer demographic. Historically, our
efforts to build our brand have involved significant expense,
and it is likely that our future marketing efforts will require
us to incur additional significant expenses. Such brand
promotion activities may not yield increased revenue and, even
if they do, any revenue increases may not offset the expenses we
incur to promote our brand. If we fail to successfully promote
and maintain our brand, or if we incur substantial expenses in
an unsuccessful attempt to promote and maintain our brand, we
may lose our existing customers to our competitors or be unable
to attract new customers, which would cause our revenue to
decrease.
We
depend on search engines to attract a significant percentage of
our customers, and if those search engines change their listings
or our relationship with them deteriorates or terminates, we may
be unable to attract new customers, which would adversely affect
our business and results of operations.
Many of our customers located our website by clicking through on
search results displayed by search engines such as Google and
Yahoo!. Search engines typically provide two types of search
results, algorithmic and purchased listings. Algorithmic
listings cannot be purchased, and instead are determined and
displayed solely by a set of formulas designed by the search
engine. Purchased listings can be purchased by advertisers in
order to attract users to their websites. We rely on both
algorithmic and purchased listings to attract a significant
percentage of the customers we serve to our website. Search
engines revise their algorithms from time to time in an attempt
to optimize their search result listings. If search engines on
which we rely for algorithmic listings modify their algorithms,
this could result in fewer customers clicking through to our
website, requiring us to resort to other costly resources to
replace this traffic, which, in turn, could reduce our operating
and net income or our revenue, harming our business. If one or
more search engines on which we rely for purchased listings
modifies or terminates its relationship with us, our expenses
could rise, or our revenue could decline and our business may
suffer. The cost of purchased search listing advertising is
rapidly increasing as demand for these channels continues to
grow quickly, and further increases could have negative effects
on our financial results.
18
The
success of our business depends on the continued growth and
acceptance of email as a communications tool, and the related
expansion and reliability of the Internet infrastructure. If
consumers do not continue to use email, demand for our email
marketing products may decline.
The future success of our business depends on the continued and
widespread adoption of email as a primary means of
communication. Security problems such as “viruses,”
“worms” and other malicious programs or reliability
issues arising from outages and damage to the Internet
infrastructure could create the perception that email is not a
safe and reliable means of communication, which would discourage
consumers from using email. Consumers’ use of email also
depends on the ability of ISPs to prevent unsolicited bulk
email, or “spam,” from overwhelming consumers’
inboxes. In recent years, ISPs have developed new technologies
to filter unwanted messages before they reach users’
inboxes. In response, spammers have employed more sophisticated
techniques to reach consumers’ inboxes. Although companies
in the anti-spam industry have started to address the techniques
used by spammers, if security problems become widespread or
frequent or if ISPs cannot effectively control spam, the use of
email as a means of communication may decline as consumers find
alternative ways to communicate. Any decrease in the use of
email would reduce demand for our email marketing product and
harm our business.
Various
private spam blacklists have in the past interfered with, and
may in the future interfere with, the effectiveness of our
products and our ability to conduct business.
We depend on email to market to and communicate with our
customers, and our customers rely on email to communicate with
their constituents. Various private entities attempt to regulate
the use of email for commercial solicitation. These entities
often advocate standards of conduct or practice that
significantly exceed current legal requirements and classify
certain email solicitations that comply with current legal
requirements as spam. Some of these entities maintain
“blacklists” of companies and individuals, and the
websites, ISPs and Internet protocol addresses associated with
those entities or individuals, that do not adhere to those
standards of conduct or practices for commercial email
solicitations that the blacklisting entity believes are
appropriate. If a company’s Internet protocol addresses are
listed by a blacklisting entity, emails sent from those
addresses may be blocked if they are sent to any Internet domain
or Internet address that subscribes to the blacklisting
entity’s service or purchases its blacklist.
Some of our Internet protocol addresses currently are listed
with one or more blacklisting entities and, in the future, our
Internet protocol addresses may also be listed with these and
other blacklisting entities. There can be no guarantee that we
will not continue to be blacklisted or that we will be able to
successfully remove ourselves from those lists. Blacklisting of
this type could interfere with our ability to market our
products and services and communicate with our customers and
could undermine the effectiveness of our customers’ email
marketing campaigns, all of which could have a material negative
impact on our business and results of operations.
Any
efforts we may make in the future to promote our services to
market segments other than small organizations or to expand our
product offerings beyond email marketing may not
succeed.
To date, we have largely focused our business on providing our
email marketing product for small organizations, but we may in
the future seek to serve other market segments and expand our
service offerings. During 2007, we introduced our survey
product, which enables customers to create and send online
surveys and analyze responses, and our add-on email archive
service that enables our customers to archive their past email
campaigns. Any efforts to expand beyond the small organization
market or to introduce new products beyond our email marketing
product, including our survey product, may not result in
significant revenue growth, may divert management resources from
our existing operations and require us to commit significant
financial resources to an unproven business, which may harm our
financial performance.
19
Our
customers’ use of our products to transmit negative
messages or website links to harmful applications could damage
our reputation, and we may face liability for unauthorized,
inaccurate or fraudulent information distributed via our
products.
Our customers could use our email marketing product to transmit
negative messages or website links to harmful applications,
reproduce and distribute copyrighted material without
permission, or report inaccurate or fraudulent data. Any such
use of our products could damage our reputation and we could
face claims for damages, copyright or trademark infringement,
defamation, negligence or fraud. Moreover, our customers’
promotion of their products and services through our email
marketing product may not comply with federal, state and foreign
laws. We cannot predict whether our role in facilitating these
activities would expose us to liability under these laws.
Even if claims asserted against us do not result in liability,
we may incur substantial costs in investigating and defending
such claims. If we are found liable for our customers’
activities, we could be required to pay fines or penalties,
redesign business methods or otherwise expend resources to
remedy any damages caused by such actions and to avoid future
liability.
Our existing general liability insurance may not cover all
potential claims to which we are exposed or may not be adequate
to indemnify us for all liabilities that may be imposed. Any
imposition of liability that is not covered by insurance or is
in excess of insurance coverage would increase our operating
losses and reduce our net worth and working capital.
If we
fail to enhance our existing products or develop new features,
our products may become obsolete or less competitive and we
could lose customers.
If we are unable to enhance our existing products or develop new
products that keep pace with rapid technological developments
and meet our customers’ needs, our business will be harmed.
Creating and designing such enhancements and new products entail
significant technical and business risks and require substantial
expenditures and lead-time, and there is no guarantee that such
enhancements and new products will be completed in a timely
fashion or accepted by the market. If we cannot enhance our
existing services or develop new products or if we are not
successful in selling such enhancements and new products to our
customers, we could lose customers or have difficulty attracting
new customers, which would adversely impact our financial
performance.
Our
relationships with our channel partners may be terminated or may
not continue to be beneficial in generating new email marketing
customers, which could adversely affect our ability to increase
our customer base.
We maintain a network of active channel partners, which include
national small business service providers such as Network
Solutions, LLC, American Express Company and Career Builder, LLC
as well as local small business service providers such as web
developers and marketing agencies, who refer customers to us
through links on their websites and outbound promotion to their
customers. If we are unable to maintain our contractual
relationships with existing channel partners or establish new
contractual relationships with potential channel partners, we
may experience delays and increased costs in adding customers,
which could have a material adverse effect on us. The number of
customers we are able to add through these marketing
relationships is dependent on the marketing efforts of our
partners, and a significant decrease in the number of gross
customer additions generated through these relationships could
adversely affect the size of our customer base and revenue.
Our
growth could strain our personnel resources and infrastructure,
and if we are unable to implement appropriate controls and
procedures to manage our growth, we may not be able to
successfully implement our business plan.
We are currently experiencing a period of rapid growth in our
headcount and operations, which has placed, and will continue to
place, to the extent that we are able to sustain such growth, a
significant strain on our management and our administrative,
operational and financial reporting infrastructure.
20
Our success will depend in part on the ability of our senior
management to manage this growth effectively. To do so, we must
continue to hire, train and manage new employees as needed. If
our new hires perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees,
or if we are not successful in retaining our existing employees,
our business may be harmed. To manage the expected growth of our
operations and personnel, we will need to continue to improve
our operational and financial controls and update our reporting
procedures and systems, which may include installing a new
billing system. The expected addition of new employees and the
capital investments that we anticipate will be necessary to
manage our growth will increase our cost base, which will make
it more difficult for us to offset any future revenue shortfalls
by reducing expenses in the short term. If we fail to
successfully manage our growth, we will be unable to execute our
business plan.
If we
fail to retain our key personnel, we may not be able to achieve
our anticipated level of growth and our business could
suffer.
Our future depends, in part, on our ability to attract and
retain key personnel. Our future also depends on the continued
contributions of our executive officers and other key technical
personnel, each of whom would be difficult to replace. In
particular, Gail F. Goodman, our Chairman, President and Chief
Executive Officer, is critical to the management of our business
and operations and the development of our strategic direction.
The loss of the services of Ms. Goodman or other executive
officers or key personnel and the process to replace any of our
key personnel would involve significant time and expense and may
significantly delay or prevent the achievement of our business
objectives.
Any
significant disruption in service on our website or in our
computer systems, or in our customer support services, could
reduce the attractiveness of our products and result in a loss
of customers.
The satisfactory performance, reliability and availability of
our technology and our underlying network infrastructure are
critical to our operations, level of customer service,
reputation and ability to attract new customers and retain
existing customers. Our system hardware is
co-located
in two hosting facilities. The first, located in Somerville,
Massachusetts, is owned and operated by Internap Network
Services Corporation. The second, which is expected to become
operational during the first quarter of 2008, is located in
Bedford, Massachusetts and is owned and operated by Sentinel
Properties-Bedford, LLC. Neither Internap nor Sentinel
guarantees that our customers’ access to our products will
be uninterrupted, error-free or secure. Our operations depend on
Internap’s and Sentinel’s ability to protect their and
our systems in their facilities against damage or interruption
from natural disasters, power or telecommunications failures,
air quality, temperature, humidity and other environmental
concerns, computer viruses or other attempts to harm our
systems, criminal acts and similar events. In the event that our
arrangement with either Internap or Sentinel is terminated, or
there is a lapse of service or damage to the Internap or
Sentinel facilities, we could experience interruptions in our
service as well as delays and additional expense in arranging
new facilities. In addition, our customer support services,
which are currently located only at our headquarters, would
experience interruptions as a result of any disruption of
electrical, phone or any other similar facility support
services. Any interruptions or delays in access to our products
or customer support, whether as a result of Internap, Sentinel
or other third-party error, our own error, natural disasters or
security breaches, whether accidental or willful, could harm our
relationships with customers and our reputation. Also, in the
event of damage or interruption, our insurance policies may not
adequately compensate us for any losses that we may incur. These
factors could damage our brand and reputation, divert our
employees’ attention, reduce our revenue, subject us to
liability and cause customers to cancel their accounts, any of
which could adversely affect our business, financial condition
and results of operations.
Our disaster recovery system located at our headquarters in
Waltham, Massachusetts does not provide real time backup, has
not been tested under actual disaster conditions and may not
have sufficient capacity to recover all data and services in the
event of an outage at the Internap or Sentinel facilities. In
the event of a disaster in which either facility is irreparably
damaged or destroyed, we would experience interruptions in
access to our products. Moreover, our disaster recovery system
is located several miles from the Internap and
21
Sentinel facilities and may be equally or more affected by any
regional disaster affecting the Internap or Sentinel facilities.
Any or all of these events could cause our customers to lose
access to our products.
If the
security of our customers’ confidential information stored
in our systems is breached or otherwise subjected to
unauthorized access, our reputation may be harmed, we may be
exposed to liability and we may lose the ability to offer our
customers a credit card payment option.
Our system stores our customers’ proprietary email
distribution lists, credit card information and other critical
data. Any accidental or willful security breaches or other
unauthorized access could expose us to liability for the loss of
such information, time-consuming and expensive litigation and
other possible liabilities as well as negative publicity. If
security measures are breached because of third-party action,
employee error, malfeasance or otherwise, or if design flaws in
our software are exposed and exploited, and, as a result, a
third party obtains unauthorized access to any of our
customers’ data, our relationships with our customers will
be severely damaged, and we could incur significant liability.
Because techniques used to obtain unauthorized access or to
sabotage systems change frequently and generally are not
recognized until they are launched against a target, we and our
third-party hosting facilities may be unable to anticipate these
techniques or to implement adequate preventative measures. In
addition, many states, including Massachusetts, have enacted
laws requiring companies to notify individuals of data security
breaches involving their personal data. These mandatory
disclosures regarding a security breach often lead to widespread
negative publicity, which may cause our customers to lose
confidence in the effectiveness of our data security measures.
Any security breach, whether actual or perceived, would harm our
reputation, and we could lose customers.
If we fail to maintain our compliance with the data protection
policy documentation standards adopted by the major credit card
issuers, we could lose our ability to offer our customers a
credit card payment option. Any loss of our ability to offer our
customers a credit card payment option would make our products
less attractive to many small organizations by negatively
impacting our customer experience and significantly increasing
our administrative costs related to customer payment processing.
We
rely on third-party computer hardware and software that may be
difficult to replace or that could cause errors or failures of
our service.
We rely on computer hardware purchased and software licensed
from third parties in order to offer our products, including
hardware from such large vendors as International Business
Machines Corporation, Dell Computer Corporation, Sun
Microsystems, Inc. and EMC Corporation. This hardware and
software may not continue to be available on commercially
reasonable terms, or at all. If we lose the right to use any of
this hardware or software or such hardware or software
malfunctions, our customers could experience delays or be unable
to access our services until we can obtain and integrate
equivalent technology or repair the cause of the malfunctioning
hardware or software. Any delays or failures associated with our
services could upset our customers and harm our business.
If we
are unable to protect the confidentiality of our unpatented
proprietary information, processes and know-how and our trade
secrets, the value of our technology and products could be
adversely affected.
We rely upon unpatented proprietary technology, processes and
know-how and trade secrets. Although we try to protect this
information in part by executing confidentiality agreements with
our employees, consultants and third parties, such agreements
may offer only limited protection and may be breached. Any
unauthorized disclosure or dissemination of our proprietary
technology, processes and know-how or our trade secrets, whether
by breach of a confidentiality agreement or otherwise, may cause
irreparable harm to our business, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may
otherwise be independently developed by our competitors or other
third parties. If we are unable to protect the confidentiality
of our proprietary information, processes and know-how or our
trade secrets are disclosed, the value of our technology and
services could be adversely affected, which could negatively
impact our business, financial condition and results of
operations.
22
Our
use of open source software could impose limitations on our
ability to commercialize our products.
We incorporate open source software into our products. Although
we monitor our use of open source software closely, the terms of
many open source licenses to which we are subject have not been
interpreted by United States or foreign courts, and there is a
risk that such licenses could be construed in a manner that
imposes unanticipated conditions or restrictions on our ability
to commercialize our products. In such event, we could be
required to seek licenses from third parties in order to
continue offering our products, to re-engineer our products or
to discontinue sales of our products, or to release our software
code under the terms of an open source license, any of which
could materially adversely affect our business.
Given the nature of open source software, there is also a risk
that third parties may assert copyright and other intellectual
property infringement claims against us based on our use of
certain open source software programs. The risks associated with
intellectual property infringement claims are discussed
immediately below.
If a
third party asserts that we are infringing its intellectual
property, whether successful or not, it could subject us to
costly and time-consuming litigation or require us to obtain
expensive licenses, and our business may be adversely
affected.
The software and Internet industries are characterized by the
existence of a large number of patents, trademarks and
copyrights and by frequent litigation based on allegations of
infringement or other violations of intellectual property
rights. Third parties may assert patent and other intellectual
property infringement claims against us in the form of lawsuits,
letters or other forms of communication. These claims, whether
or not successful, could:
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divert management’s attention;
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result in costly and time-consuming litigation;
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require us to enter into royalty or licensing agreements, which
may not be available on acceptable terms, or at all;
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in the case of open source software-related claims, require us
to release our software code under the terms of an open source
license; or
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require us to redesign our software and services to avoid
infringement.
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As a result, any third-party intellectual property claims
against us could increase our expenses and adversely affect our
business. In addition, many of our agreements with our channel
partners require us to indemnify them for third-party
intellectual property infringement claims, which would increase
the cost to us resulting from an adverse ruling on any such
claim. Even if we have not infringed any third parties’
intellectual property rights, we cannot be sure our legal
defenses will be successful, and even if we are successful in
defending against such claims, our legal defense could require
significant financial resources and management time. Finally, if
a third party successfully asserts a claim that our products
infringe their proprietary rights, royalty or licensing
agreements might not be available on terms we find acceptable or
at all.
Providing
our products to customers outside the United States exposes us
to risks inherent in international business.
Customers in more than 110 countries and territories currently
use our email marketing product, and we expect to expand our
international operations in the future. Accordingly, we are
subject to risks and challenges that we would otherwise not face
if we conducted our business only in the United States. The
risks and challenges associated with providing our products to
customers outside the United States include:
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localization of our products, including translation into foreign
languages and associated expenses;
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laws and business practices favoring local competitors;
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compliance with multiple, conflicting and changing governmental
laws and regulations, including tax, email marketing, privacy
and data protection laws and regulations;
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foreign currency fluctuations;
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different pricing environments;
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difficulties in staffing and maintaining foreign
operations; and
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regional economic and political conditions.
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We
have incurred net losses in the past and expect to incur net
losses in the future.
We have incurred net losses in the past and we expect to incur
net losses in the future. As of December 31, 2007, our
accumulated deficit was $42.8 million. Our recent net
losses were $7.8 million for the year ended
December 31, 2006 and $8.3 million for the year ended
December 31, 2007. Our net losses have increased over
recent periods because we have increased our sales and marketing
expense to promote the Constant Contact brand and encourage new
customers to try our products. We have not been profitable since
our inception, and we may not become profitable. In addition, we
expect our operating expenses to increase in the future as we
expand our operations. If our operating expenses exceed our
expectations, our financial performance could be adversely
affected. If our revenue does not grow to offset these increased
expenses, we may never become profitable. Our recent revenue
growth may not be indicative of our future performance. In
future periods, we may not have any revenue growth, or our
revenue could decline.
We are
incurring significant increased costs as a result of operating
as a public company, and our management has been, and will
continue to be, required to devote substantial time to new
compliance initiatives.
As a public company, we are incurring significantly more legal,
accounting and other expenses than we incurred as a private
company. The Sarbanes-Oxley Act of 2002, and rules subsequently
implemented by the SEC and the Nasdaq Stock Market, require
public companies to meet certain corporate governance standards.
Our management and other personnel are devoting a substantial
amount of time to these compliance initiatives. Moreover, these
rules and regulations have increased our legal and financial
compliance costs and have made some activities more
time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In
particular, for the year ending December 31, 2008, we must
perform system and process evaluation and testing of our
internal control 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 testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to
be material weaknesses. In order to comply with
Section 404, we may incur substantial accounting expense,
expend significant management time on compliance-related issues,
and hire additional accounting and financial staff 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 identify
deficiencies in our internal control over financial reporting
that are deemed to be material weaknesses, the market price of
our stock would likely decline and we could be subject to
sanctions or investigations by the Nasdaq Stock Market, the SEC
or other regulatory authorities, which would require additional
financial and management resources.
Our
ability to use net operating loss carryforwards in the United
States may be limited.
As of December 31, 2007, we had net operating loss
carryforwards of $38 million for U.S. federal tax
purposes and $25 million for state tax purposes. These loss
carryforwards expire between 2008 and 2027. To the extent
available, we intend to use these net operating loss
carryforwards to reduce the corporate income tax liability
associated with our operations. Section 382 of the Internal
Revenue Code generally imposes an annual limitation on the
amount of net operating loss carryforwards that may be used to
offset taxable income
24
when a corporation has undergone significant changes in stock
ownership. While we do not believe that our initial public
offering and prior financings have resulted in ownership changes
that would limit our ability to utilize net operating loss
carryforwards, any subsequent ownership changes could result in
such a limitation. To the extent our use of net operating loss
carryforwards is significantly limited, our income could be
subject to corporate income tax earlier than it would if we were
able to use net operating loss carryforwards, which could have a
negative effect on our financial results.
Our
quarterly results may fluctuate and if we fail to meet the
expectations of analysts or investors, our stock price could
decline substantially.
Our quarterly operating results may fluctuate, and if we fail to
meet or exceed the expectations of securities analysts or
investors, the trading price of our common stock could decline.
Some of the important factors that could cause our revenue and
operating results to fluctuate from quarter to quarter include:
|
|
|
|
•
|
our ability to retain existing customers, attract new customers
and satisfy our customers’ requirements;
|
|
|
•
|
changes in our pricing policies;
|
|
|
•
|
our ability to expand our business;
|
|
|
•
|
the effectiveness of our personnel;
|
|
|
•
|
new product and service introductions;
|
|
|
•
|
technical difficulties or interruptions in our services;
|
|
|
•
|
general economic conditions;
|
|
|
•
|
the timing of additional investments in our hardware and
software systems;
|
|
|
•
|
regulatory compliance costs;
|
|
|
•
|
costs associated with future acquisitions of technologies and
businesses; and
|
|
|
•
|
extraordinary expenses such as litigation or other
dispute-related settlement payments.
|
Some of these factors are not within our control, and the
occurrence of one or more of them may cause our operating
results to vary widely. As such, we believe that
quarter-to-quarter comparisons of our revenue and operating
results may not be meaningful and should not be relied upon as
an indication of future performance.
We may
need additional capital in the future, which may not be
available to us on favorable terms, or at all, and may dilute
your ownership of our common stock.
We have historically relied on outside financing and cash from
operations to fund our operations, capital expenditures and
expansion. We may require additional capital from equity or debt
financing in the future to:
|
|
|
|
•
|
fund our operations;
|
|
|
•
|
respond to competitive pressures;
|
|
|
•
|
take advantage of strategic opportunities, including more rapid
expansion of our business or the acquisition of complementary
products, technologies or businesses; and
|
|
|
•
|
develop new products or enhancements to existing products.
|
We may not be able to secure timely additional financing on
favorable terms, or at all. The terms of any additional
financing may place limits on our financial and operating
flexibility. If we raise additional funds through issuances of
equity, convertible debt securities or other securities
convertible into equity, our existing stockholders could suffer
significant dilution in their percentage ownership of our
company, and any new securities we issue could have rights,
preferences and privileges senior to those of our common stock.
If we are unable to obtain adequate financing or financing on
terms satisfactory to us, if and when we require it, our ability
to grow or support our business and to respond to business
challenges could be significantly limited.
25
We may
engage in future acquisitions that could disrupt our business,
dilute stockholder value and harm our business, operating
results or financial condition.
We have, from time to time, evaluated acquisition opportunities
and may pursue acquisition opportunities in the future. We have
not made any acquisitions to date and, therefore, our ability as
an organization to make and integrate acquisitions is unproven.
Moreover, acquisitions involve numerous risks, including:
|
|
|
|
•
|
an inability to locate a suitable acquisition candidate or
technology or acquire a desirable candidate or technology on
favorable terms;
|
|
|
•
|
difficulties in integrating personnel and operations from the
acquired business or acquired technology with our existing
technology and products and in retaining and motivating key
personnel from the business;
|
|
|
•
|
disruptions in our ongoing operations and the diversion of our
management’s attention from their day-to-day
responsibilities associated with operating our business;
|
|
|
•
|
increases in our expenses that adversely impact our business,
operating results and financial condition;
|
|
|
•
|
potential write-offs of acquired assets and increased
amortization expense related to identifiable assets
acquired; and
|
|
|
•
|
potentially dilutive issuances of equity securities or the
incurrence of debt.
|
If we do complete an acquisition, we may not ultimately
strengthen our competitive position or achieve our goals, or
such an acquisition may be viewed negatively by our customers,
stockholders or the financial markets.
RISKS
RELATED TO THE OWNERSHIP OF OUR COMMON STOCK
The
market price of our common stock has been and may continue to be
volatile.
Prior to the completion of our initial public offering in
October 2007, there was no public market for shares of our
common stock. The trading price of our common stock has been and
may continue to be highly volatile and could be subject to wide
fluctuations in response to various factors. Some of the factors
that may cause the market price of our common stock to fluctuate
include:
|
|
|
|
•
|
fluctuations in our quarterly financial results or the quarterly
financial results of companies perceived to be similar to us;
|
|
|
•
|
changes in estimates of our financial results or recommendations
by securities analysts;
|
|
|
•
|
failure of any of our products to achieve or maintain market
acceptance;
|
|
|
•
|
changes in market valuations of similar companies;
|
|
|
•
|
success of competitive products;
|
|
|
•
|
changes in our capital structure, such as future issuances of
securities or the incurrence of additional debt;
|
|
|
•
|
announcements by us or our competitors of significant products,
contracts, acquisitions or strategic alliances;
|
|
|
•
|
regulatory developments in the United States, foreign countries
or both;
|
|
|
•
|
litigation involving our company, our general industry or both;
|
|
|
•
|
additions or departures of key personnel;
|
|
|
•
|
investors’ general perception of us; and
|
|
|
•
|
changes in general economic, industry and market conditions.
|
26
In addition, if the market for technology stocks or the stock
market in general experiences a loss of investor confidence, the
trading price of our common stock could decline for reasons
unrelated to our business, financial condition or results of
operations. If any of the foregoing occurs, it could cause our
stock price to fall and may expose us to class action lawsuits
that, even if unsuccessful, could be costly to defend and a
distraction to management.
If
securities or industry analysts do not continue to publish
research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could
decline.
The trading market for our common stock depends in part on the
research and reports that securities or industry analysts
publish about us or our business. We do not control these
analysts. If one or more of the analysts who covers us
downgrades our stock or publishes inaccurate or unfavorable
research about our business, our stock price would likely
decline. If one or more of these analysts ceases coverage of our
company or fails to publish reports on us regularly, demand for
our stock could decrease, which could cause our stock price and
trading volume to decline.
Future
sales of shares by certain of our stockholders could cause our
stock price to decline.
If certain of our stockholders who held shares prior to our
initial public offering sell, or indicate their intention to
sell, substantial amounts of our common stock in the public
market after certain contractual
lock-up
agreements (as described below) expire, and other restrictions
on resale lapse, the trading price of our common stock could
decline. As of March 7, 2008, we had 27,671,636 shares
of common stock outstanding. Of these shares, approximately
19.2 million shares of common stock are subject to a
180-day
contractual
lock-up with
the underwriters of our initial public offering. The
lock-up
agreements expire on March 30, 2008, subject to extension
in certain circumstances. Oppenheimer & Co., Inc., a
successor to CIBC World Markets Corp., and Thomas Weisel
Partners LLC, acting as representatives of the underwriters, may
permit our officers, directors and other stockholders who are
subject to the contractual
lock-up to
sell shares prior to the expiration of the
lock-up
agreements.
If we announce earnings results or other material news or a
material event occurs during the last 17 days of the
180-day
contractual
lock-up
period, or if prior to the expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, the
180-day
lock-up
period will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or event.
Some of our existing stockholders have demand and incidental
registration rights to require us to register with the SEC
approximately 65% of our shares of outstanding common stock
subject to certain conditions. If we register these shares of
common stock, the stockholders would be able to sell those
shares freely in the public market.
Insiders
have substantial control over us and will be able to influence
corporate matters.
As of the date of this Annual Report on
Form 10-K,
our directors and executive officers and their affiliates will
beneficially own, in the aggregate, approximately 28% of our
outstanding common stock. As a result, these stockholders are
able to exercise significant influence over all matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions,
such as a merger or other sale of our company or its assets.
This concentration of ownership could limit the ability of other
investors to influence corporate matters and may have the effect
of delaying or preventing a third party from acquiring control
over us.
Anti-takeover
provisions in our charter documents and Delaware law could
discourage, delay or prevent a change of control of our company
and may affect the trading price of our common
stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change of control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our
27
restated certificate of incorporation and second amended and
restated bylaws may discourage, delay or prevent a change in our
management or control over us that stockholders may consider
favorable. Among other things, our restated certificate of
incorporation and second amended and restated bylaws:
|
|
|
|
•
|
authorize the issuance of “blank check” preferred
stock that could be issued by our board of directors to thwart a
takeover attempt;
|
|
|
•
|
establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election;
|
|
|
•
|
require that directors only be removed from office for cause and
only upon a supermajority stockholder vote;
|
|
|
•
|
provide that vacancies on our board of directors, including
newly created directorships, may be filled only by a majority
vote of directors then in office;
|
|
|
•
|
limit who may call special meetings of stockholders;
|
|
|
•
|
prohibit stockholder action by written consent, requiring all
actions to be taken at a meeting of the stockholders; and
|
|
|
•
|
require supermajority stockholder voting to effect certain
amendments to our restated certificate of incorporation and
second amended and restated bylaws.
|
We do
not currently intend to pay dividends on our common stock and,
consequently, the ability to achieve a return on an investment
in our common stock will depend on appreciation in the price of
our common stock.
We do not expect to pay cash dividends on our common stock. Any
future dividend payments are within the absolute discretion of
our board of directors and will depend on, among other things,
our results of operations, working capital requirements, capital
expenditure requirements, financial condition, contractual
restrictions, business opportunities, anticipated cash needs,
provisions of applicable law and other factors that our board of
directors may deem relevant. We may not generate sufficient cash
from operations in the future to pay dividends on our common
stock.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We have entered into a lease agreement for approximately
80,000 square feet of office space in Waltham,
Massachusetts, which serves as our corporate headquarters. This
lease expires in September 2010. The functions performed at our
headquarters principally relate to administrative matters,
marketing, technical support and research and development.
We serve our customers from two third-party hosting facilities.
One of our facilities is located in Somerville, Massachusetts,
and is owned and operated by Internap Network Services
Corporation under an agreement that expires in October 2009. The
other facility, which will become operational during the first
quarter of 2008, is located in Bedford, Massachusetts, and is
owned and operated by Sentinel Properties-Bedford, LLC under an
agreement that expires in December 2013.
We believe that the total space available to us in the
facilities under our current lease and co-location arrangements
or obtainable by us on commercially reasonable terms, will meet
our needs for the foreseeable future.
28
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are not currently subject to any legal proceedings. From time
to time, we have been party to litigation matters arising in
connection with the normal course of our business, none of which
has or is expected to have a material adverse effect on us.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 2007.
|
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock began trading under the symbol “CTCT”
on the NASDAQ Global Market on October 3, 2007. The
following table sets forth, for the periods indicated, the high
and low sale price per share of our common shares on the NASDAQ
Global Market:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007:
|
|
|
|
|
|
|
|
|
Fourth Quarter (from October 3, 2007)
|
|
$
|
30.76
|
|
|
$
|
15.45
|
|
2008:
|
|
|
|
|
|
|
|
|
First Quarter (through March 7, 2008)
|
|
$
|
25.24
|
|
|
$
|
15.00
|
|
As of March 7, 2008, there were 127 holders of record
of our common shares.
We have never paid or declared any cash dividends on our common
stock and do not anticipate paying any cash dividends in the
foreseeable future. We currently intend to retain all future
earnings, if any, for use in the operation of our business. We
did not repurchase any equity securities in the year ended
December 31, 2007.
Recent
Sales of Unregistered Securities
On April 21, 2007, a holder of a warrant to purchase shares
of our common stock exercised its warrant for 29,380 shares
for an aggregate purchase price of $40,454. No underwriters were
involved in the foregoing sale of securities and such securities
were sold in reliance on the exemption from the registration
requirements of the Securities Act, as set forth in
Section 4(2) under the Securities Act of 1933, as amended,
and Rule 506 of Regulation D promulgated thereunder
relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was
required.
On September 18, 2007, a holder of a warrant to purchase
shares of our common stock exercised its warrant for
96,324 shares for an aggregate purchase price of $116,094.
No underwriters were involved in the foregoing sale of
securities and such securities were sold in reliance on the
exemption from the registration requirements of the Securities
Act, as set forth in Section 4(2) under the Securities Act
and Rule 506 of Regulation D promulgated thereunder
relative to sales by an issuer not involving any public
offering, to the extent an exemption from such registration was
required.
During 2007, we granted stock options to purchase an aggregate
of 466,896 shares of our common stock with exercise prices
ranging from $3.05 to $9.60 per share to employees and directors
pursuant to our 1999 Stock Option/Stock Issuance Plan. During
2007, an aggregate of 199,824 shares of our common stock
were issued upon the exercise of stock options for an aggregate
consideration of $70,892. The issuances of stock options and the
shares of common stock issued upon the exercise of the options
were issued pursuant to written compensatory plans or
arrangements with our employees, directors and consultants, in
reliance on the exemption provided by Section 3(b) of the
Securities Act and Rule 701 promulgated thereunder. All
recipients
29
either received adequate information about us or had access,
through employment or other relationships, to such information.
On October 9, 2007, we completed our initial public
offering, in which 7,705,000 shares of common stock were
sold at a price of $16.00 per share. We sold
6,199,845 shares of our common stock in the offering and
the selling stockholders sold 1,505,155 of the shares of common
stock in the offering. The offer and sale of all of the shares
in the initial public offering were registered under the
Securities Act pursuant to a registration statement on
Form S-1
(File
No. 333-144381),
which was declared effective by the SEC on October 2, 2007.
The offering commenced as of October 3, 2007 and did not
terminate before all of the securities registered in the
registration statement were sold. CIBC World Markets Corp.,
Thomas Weisel Partners LLC, William Blair & Company,
L.L.C., Cowen and Company, LLC and Needham & Company,
LLC acted as representatives of the underwriters. We raised
approximately $90.4 million in net proceeds after deducting
underwriting discounts and commissions and other offering costs.
None of the underwriting discounts and commissions or offering
costs were incurred or paid to directors or officers of ours or
their associates or to persons owning 10 percent or more of
our common stock or to any affiliates of ours. From the
effective date of the registration statement through
December 31, 2007, we used $2.6 million of the net
proceeds to repay our outstanding principal and interest under
our term loan facility with Silicon Valley Bank. We intend to
use the remaining net proceeds for general corporate purposes,
including financing our growth, developing new products,
acquiring new customers, funding capital expenditures and,
potentially, the acquisition of, or investment in, businesses,
technologies, products or assets that complement our business.
Pending these uses, we have invested the funds in a registered
money market account and in short-term investment grade and
U.S. government securities. There has been no material
change in the planned use of proceeds from our initial public
offering as described in our final prospectus filed with the SEC
pursuant to Rule 424(b).
Information regarding our equity compensation plans and the
securities authorized for issuance thereunder is set forth
herein under Part III, Item 12 below.
30
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected statements of operations data for the years ended
December 31, 2007 and 2006 and the balance sheet data as of
December 31, 2007 and 2006 have been derived from our
audited consolidated financial statements, which have been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, and are included elsewhere in this
Annual Report on Form 10-K. The selected statement of operations
data for the year ended December 31, 2005 has been derived
from our audited financial statements, which have been audited
by Vitale, Caturano & Company, Ltd., an independent
registered public accounting firm, and are included elsewhere in
this Annual Report on Form 10-K. The selected statements of
operations data for the years ended December 31, 2004 and
2003 and the balance sheet data as of December 31, 2005,
2004 and 2003 have been derived from our audited financial
statements, which have been audited by Vitale,
Caturano & Company, Ltd. and are not included in this
Annual Report on Form 10-K. The selected financial data set
forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our financial
statements and related notes included elsewhere in this Annual
Report on
Form 10-K.
The historical results are not necessarily indicative of the
results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
50,495
|
|
|
$
|
27,552
|
|
|
$
|
14,658
|
|
|
$
|
8,071
|
|
|
$
|
4,465
|
|
Cost of revenue(1)
|
|
|
13,031
|
|
|
|
7,801
|
|
|
|
3,747
|
|
|
|
2,211
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,464
|
|
|
|
19,751
|
|
|
|
10,911
|
|
|
|
5,860
|
|
|
|
2,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,341
|
|
|
|
6,172
|
|
|
|
3,355
|
|
|
|
2,140
|
|
|
|
1,653
|
|
Sales and marketing
|
|
|
27,376
|
|
|
|
18,592
|
|
|
|
7,460
|
|
|
|
3,385
|
|
|
|
2,549
|
|
General and administrative
|
|
|
5,445
|
|
|
|
2,623
|
|
|
|
1,326
|
|
|
|
856
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
43,162
|
|
|
|
27,387
|
|
|
|
12,141
|
|
|
|
6,381
|
|
|
|
4,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,698
|
)
|
|
|
(7,636
|
)
|
|
|
(1,230
|
)
|
|
|
(521
|
)
|
|
|
(2,276
|
)
|
Interest and other income (expense), net
|
|
|
(2,556
|
)
|
|
|
(203
|
)
|
|
|
(24
|
)
|
|
|
(34
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,254
|
)
|
|
|
(7,839
|
)
|
|
|
(1,254
|
)
|
|
|
(555
|
)
|
|
|
(2,315
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
(816
|
)
|
|
|
(3,788
|
)
|
|
|
(5,743
|
)
|
|
|
(3,701
|
)
|
|
|
(2,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(9,070
|
)
|
|
$
|
(11,627
|
)
|
|
$
|
(6,997
|
)
|
|
$
|
(4,256
|
)
|
|
$
|
(4,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(3.38
|
)
|
|
$
|
(2.49
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(5.75
|
)
|
Weighted average shares outstanding used in computing per share
amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
9,366
|
|
|
|
3,438
|
|
|
|
2,813
|
|
|
|
974
|
|
|
|
832
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period number of customers(2)
|
|
|
164,669
|
|
|
|
89,323
|
|
|
|
47,730
|
|
|
|
25,229
|
|
|
|
14,431
|
|
|
|
|
(1) |
|
Amounts include stock-based compensation expense, as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cost of revenue
|
|
$
|
81
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Research and development
|
|
|
170
|
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Sales and marketing
|
|
|
133
|
|
|
|
19
|
|
|
|
—
|
|
|
|
6
|
|
|
|
6
|
|
General and administrative
|
|
|
261
|
|
|
|
12
|
|
|
|
17
|
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
645
|
|
|
$
|
83
|
|
|
$
|
17
|
|
|
$
|
23
|
|
|
$
|
23
|
|
|
|
|
(2) |
|
We define our end of period number of customers as email
marketing customers that we billed directly during the last
month of the period. |
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term marketable securities
|
|
$
|
101,535
|
|
|
$
|
12,790
|
|
|
$
|
2,784
|
|
|
$
|
2,115
|
|
|
$
|
2,114
|
|
Total assets
|
|
|
111,845
|
|
|
|
18,481
|
|
|
|
5,545
|
|
|
|
3,222
|
|
|
|
3,236
|
|
Deferred revenue
|
|
|
10,354
|
|
|
|
5,476
|
|
|
|
2,827
|
|
|
|
1,270
|
|
|
|
615
|
|
Redeemable convertible preferred stock warrant
|
|
|
—
|
|
|
|
628
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Notes payable and capital lease obligation
|
|
|
—
|
|
|
|
702
|
|
|
|
1,326
|
|
|
|
844
|
|
|
|
612
|
|
Redeemable convertible preferred stock
|
|
|
—
|
|
|
|
35,322
|
|
|
|
16,657
|
|
|
|
10,914
|
|
|
|
7,213
|
|
Total stockholders’ equity (deficit)
|
|
|
94,354
|
|
|
|
(28,629
|
)
|
|
|
(17,237
|
)
|
|
|
(10,287
|
)
|
|
|
(6,129
|
)
|
|
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion and analysis of our
financial condition and results of operations together with our
consolidated financial statements and the related notes and
other financial information included elsewhere in this Annual
Report on Form 10-K. Some of the information contained in this
discussion and analysis or set forth elsewhere in this Annual
Report on Form 10-K including information with respect to our
plans and strategy for our business and related financing,
includes forward-looking statements that involve risks and
uncertainties. You should review the “Risk Factors”
section of this Annual Report on Form 10-K for a discussion of
important factors that could cause actual results to differ
materially from the results described in or implied by the
forward-looking statements contained in the following discussion
and analysis.
Overview
Constant Contact is a leading provider of on-demand email
marketing and online survey solutions for small organizations,
including small businesses, associations and non-profits. Our
customers use our email marketing product to more effectively
and efficiently create, send and track professional and
affordable permission-based email marketing campaigns. With
these campaigns, our customers can build stronger relationships
with their customers, clients and members, increase sales and
expand membership. Our email marketing product incorporates a
wide range of customizable templates to assist in campaign
creation, user-friendly tools to import and manage contact lists
and intuitive reporting to track campaign effectiveness. As of
December 31, 2007, we had 164,669 email marketing
customers. In June 2007, we introduced an online survey product
that complements our email marketing product and enables small
organizations to easily create and send surveys and effectively
analyze responses. As of December 31, 2007, we had 8,270
survey customers, substantially all of which are also email
marketing customers. We are committed to providing our customers
with a high level of support, which we deliver via phone, chat,
email and our website.
We provide our products on an on-demand basis through a standard
web browser. This model enables us to deploy and maintain a
secure and scalable application that is easy for our customers
to implement at compelling prices. Our email marketing customers
pay a monthly subscription fee that generally ranges between $15
per month and $150 per month based on the size of their contact
lists and, in some cases, volume of mailings. Our survey product
is similarly priced. For the year ended December 31, 2007,
the average monthly amount that we charged a customer for our
email marketing solution alone was approximately $33. In
addition, in 2007, our average monthly total revenue per email
marketing customer, including all sources of revenue, was
$33.63. We believe that the simplicity of on-demand deployment
combined with our affordable subscription fees and functionality
facilitate adoption of our products by our target customers
while generating significant recurring revenue. From January
2005 through December 2007, at least 97.4% of our customers in a
given month have continued to utilize our email marketing
product in the following month.
Our success is principally driven by our ability to grow our
customer base. Our email marketing customer base has steadily
increased from approximately 25,000 at the end of 2004 to over
164,000 as of December 31,
32
2007. We measure our customer base as the number of email
marketing customers that we bill directly in the last month of a
period. These customers include all types of small organizations
including retailers, restaurants, day spas, law firms,
consultants, non-profits, religious organizations, alumni
associations and other small businesses and organizations. We
add these customers through a variety of sources including
online marketing through search engines and advertising on
networks and other sites, offline marketing through radio
advertising, local seminars and other marketing efforts,
contractual relationships with over 2,300 active channel
partners, referrals from our growing customer base, general
brand awareness and the inclusion of a link to our website in
the footer of more than 700 million emails currently sent
by our customers each month. In 2007, our cost of customer
acquisition, which we define as our total sales and marketing
expense divided by the gross number of email marketing customers
added during the year, was approximately $255 per email
marketing customer, implying payback on a revenue basis in less
than a year. This implied payback is calculated by dividing the
acquisition cost per email marketing customer by the average
monthly total revenue per email marketing customer, which
implies an eight month payback period.
Our on-demand product was first offered commercially in 2000.
In 2007, our revenue was $50.5 million and our net loss was
$8.3 million.
On October 9, 2007, we completed our initial public
offering, in which we sold and issued 6,199,845 shares of
common stock at a price of $16.00 per share. We raised
approximately $90.4 million in net proceeds after deducting
underwriting discounts and commissions and other offering costs.
Sources
of Revenue
We derive our revenue principally from subscription fees from
our email marketing customers. Our revenue is driven primarily
by the number of paying customers and the subscription fees for
our products and is not concentrated within any one customer or
group of customers. In 2007, our top 80 email marketing
customers accounted for approximately 1% of our total email
marketing revenue. We do not require our customers to commit to
a contractual term; however, our customers are required to
prepay for subscriptions on a monthly, semi-annual, or annual
basis by providing a credit card or check form of payment. Fees
are recorded initially as deferred revenue and then recognized
as earned revenue on a daily basis over the prepaid subscription
period.
We also generate a small amount of revenue from professional
services which primarily consist of the creation of customized
templates for our customers. Revenue generated from professional
services accounted for less than 2% of gross revenue for each of
the years ended December 31, 2007, 2006 and 2005.
Cost of
Revenue and Operating Expenses
We allocate certain overhead expenses, such as rent, utilities,
office supplies and depreciation of general office assets to
cost of revenue and operating expense categories based on
headcount. As a result, an overhead expense allocation is
reflected in cost of revenue and each operating expense category.
Cost of Revenue. Cost of revenue consists
primarily of wages and benefits for software operations and
customer support personnel, credit card processing fees, and
depreciation, maintenance and hosting of our software
applications underlying our product offerings. We allocate a
portion of customer support costs relating to assisting trial
customers to sales and marketing expense.
The expenses related to our hosted software applications are
affected by the number of customers who subscribe to our
products and the complexity and redundancy of our software
applications and hosting infrastructure. We expect cost of
revenue to increase moderately as a percentage of revenue in
2008 as we expand our operations to include a second sales and
support office and a second third party hosting facility. Over
the longer term, we anticipate that these expenses will increase
in absolute dollars as we expect to continue to increase our
number of customers over time.
Research and Development. Research and
development expenses consist primarily of wages and benefits for
product strategy and development personnel. We have focused our
research and development efforts on both improving ease of use
and functionality of our existing products as well as developing
new offerings. We
33
primarily expense research and development costs. The small
percentage of direct development costs related to software
enhancements which add functionality are capitalized and
depreciated as a component of cost of revenue. We expect that on
an annual basis research and development expenses will increase
in absolute dollars, but decrease as a percentage of revenue, as
we continue to enhance and expand our product offerings.
Sales and Marketing. Sales and marketing
expenses consist primarily of advertising and promotional costs,
wages and benefits for sales and marketing personnel, partner
referral fees, and the portion of customer support costs that
relate to assisting trial customers. Advertising costs consist
primarily of
pay-per-click
payments to search engines, other online and offline advertising
media, including radio and print advertisements, as well as the
costs to create and produce these advertisements. Advertising
costs are expensed as incurred. Promotional costs consist
primarily of public relations, memberships, and event costs. Our
advertising and promotional expenditures have historically been
highest in the fourth quarter of each year as this reflects a
period of increased sales and marketing activity for many small
organizations. In order to continue to grow our business and
brand and category awareness, we expect that we will continue to
commit substantial resources to our sales and marketing efforts.
As a result, we expect that on an annual basis sales and
marketing expenses will increase in absolute dollars, but
decrease as a percentage of revenue, as we continue to grow.
General and Administrative. General and
administrative expenses consist primarily of wages and benefits
for administrative, human resources, internal information
technology support, finance and accounting personnel,
professional fees, other taxes and other corporate expenses. We
expect that general and administrative expenses will increase as
we continue to add personnel in connection with the anticipated
growth of our business and incur costs related to operating as a
public company. Therefore, we expect that our general and
administrative expenses will increase in absolute dollars as we
continue to grow and operate as a public company.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of our financial statements and related
disclosures requires us to make estimates, assumptions and
judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses, and related
disclosures. We believe that the estimates, assumptions and
judgments involved in the accounting policies described below
have the greatest potential impact on our financial statements
and, therefore, consider these to be our critical accounting
policies. Accordingly, we evaluate our estimates and assumptions
on an ongoing basis. Our actual results may differ from these
estimates under different assumptions and conditions. See
Note 2 to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for information
about these critical accounting policies, as well as a
description of our other significant accounting policies.
Revenue Recognition. We provide access to our
products through subscription arrangements whereby a customer is
charged a fee to access our products. Subscription arrangements
include use of our software and access to our customer and
support services, such as telephone support. We follow the
guidance of the SEC Staff Accounting Bulletin, or SAB,
No. 104, Revenue Recognition in Financial
Statements, and Emerging Issues Task Force, or EITF, Issue
No. 00-03,
Application of AICPA Statement of Position
97-2 to
Arrangements that Include the Right to Use Software Stored on
Another Entity’s Hardware, which applies when customers
do not have the right to take possession of the software and use
it on another entity’s hardware. When there is evidence of
an arrangement, the fee is fixed or determinable and
collectibility is deemed probable, we recognize revenue on a
daily basis over the subscription period as the services are
delivered.
We also offer professional services to our customers primarily
for the design of custom email templates and training.
Professional services revenue is accounted for separately from
subscription revenue based on the guidance of EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, as those services have value on a standalone
basis and do not involve a significant degree of risk or unique
acceptance criteria and as the fair value of our subscription
services is evidenced by their availability on a standalone
basis. Professional services revenue is recognized as the
services are performed.
Income Taxes. Income taxes are provided for
tax effects of transactions reported in the financial statements
and consist of income taxes currently due plus deferred income
taxes related to timing differences between the
34
basis of certain assets and liabilities for financial statements
and income tax reporting. Deferred taxes are determined based on
the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse. A
valuation allowance for the net deferred tax assets is provided
if, based upon the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
Software and Website Development Costs. We
follow the guidance of the American Institute of Certified
Public Accountants Statement of Position
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and EITF Issue No. 00-02,
Accounting for Web Site Development costs in accounting
for the development costs of our on-demand products and website
development costs whereby costs to develop functionality are
capitalized. The costs incurred in the preliminary stages of
development are expensed as incurred. Once an application has
reached the development stage, internal and external costs, if
direct and incremental, are capitalized until the software is
substantially complete and ready for its intended use. Costs
associated with the development of internal use software
capitalized during the years ended December 31, 2007 and
2006 were $382,000 and $516,000, respectively. Development costs
eligible for capitalization for the year ended December 31,
2005 were not material.
Redeemable Convertible Preferred Stock
Warrant. We account for freestanding warrants and
other similar instruments related to shares that are redeemable
in accordance with Statement of Financial Accounting Standards,
or SFAS, No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. Under SFAS No. 150, the freestanding
warrant that was related to our redeemable convertible preferred
stock was classified as a liability on the balance sheet. The
warrant was subject to re-measurement at each balance sheet date
prior to its exercise in October 2007. The change in fair value
(as determined using the Black-Scholes option-pricing model) was
recognized as a component of other income (expense), net.
Stock-Based Compensation. Effective
January 1, 2006, we adopted SFAS No. 123R, or
SFAS 123R, Share-Based Payment, a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation, and related interpretations. SFAS 123R
supersedes Accounting Principles Board, or APB, Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations. SFAS 123R requires all
share-based compensation to employees, including grants of
employee stock options, to be valued at fair value on the date
of grant, and to be expensed over the applicable service period.
We adopted this statement using the “Prospective”
transition method which does not result in restatement of our
previously issued financial statements and requires only new
awards or awards that are modified, repurchased or canceled
after the effective date to be accounted for under the
provisions of SFAS 123R. Prior to January 1, 2006, we
accounted for stock-based compensation arrangements according to
the provisions of APB 25 and related interpretations. Pursuant
to the income tax provisions included in SFAS 123R, we have
elected the “short cut method” of computing the
hypothetical pool of additional paid-in capital that is
available to absorb future tax benefit shortfalls.
Determining the appropriate fair value model and calculating the
fair value of stock-based payment awards require the use of
highly subjective estimates and assumptions, including the
estimated fair value of common stock, expected life of the
stock-based payment awards and stock price volatility.
Commencing in the fourth quarter of 2007, we used the quoted
market price of our common stock to establish fair value of the
common stock underlying the options. Because there was no public
market for the our common stock prior to our initial public
offering, our board of directors determined the fair value of
common stock taking into account our most recently available
valuation of common stock. For the year ended December 31,
2005 the fair value of common stock was estimated on an annual
basis by considering a number of objective and subjective
factors, including peer group trading multiples, the amount of
preferred stock liquidation preferences, the illiquid nature of
common stock and the size of the Company and its lack of
historical profitability. Commencing in 2006, we began the
process of quarterly contemporaneous common stock valuations. In
the first quarter of 2006, the fair value of common stock was
estimated using the guideline public company method. The
valuation considered numerous factors, including peer group
trading multiples, the amount of preferred stock liquidation
preferences, the illiquid nature of our common stock, our small
size, lack of historical profitability, short-term cash
requirements and the redemption rights of preferred
stockholders. Beginning in the second quarter of 2006, our
quarterly common stock valuations were prepared using the
probability-weighted expected
35
return method. Under this methodology, the fair market value of
common stock was estimated based upon an analysis of future
values for the Company assuming various outcomes. The share
value was based on the probability-weighted present value of
expected future investment returns considering each of the
possible outcomes available to the Company as well as the rights
of each share class.
During 2007 and 2006, we used the Black-Scholes option-pricing
model to value our option grants and determine the related
compensation expense. The assumptions used in calculating the
fair value in 2007 were a weighted average risk free interest
rate of 4.23%, expected term of 6.1 years, weighted average
expected volatility of 62.1% and no expected dividends. The
assumptions used in calculating the fair value in 2006 were a
weighted average risk free interest rate of 4.82%, expected term
of 6.1 years, expected volatility of 64.9% and no expected
dividends. These assumptions represent management’s best
estimates, but the estimates involve inherent uncertainties and
the application of management judgment. As a result, if factors
change and we use significantly different assumptions or
estimates, our stock-based compensation could be materially
different. We have historically been a private company and lack
company-specific historical and implied volatility information.
Therefore, we estimate our expected volatility based on the
historical volatility of our publicly traded peer companies and
expect to continue to do so until such time as we have adequate
historical data regarding the volatility of our traded stock
price. The expected term of options has been determined
utilizing the “simplified” method as prescribed by
SAB No. 107, Share-Based Payment. The risk-free
interest rate used for each grant is based on a
U.S. Treasury instrument with a term similar to the
expected term of the option. SFAS 123R requires that we
recognize compensation expense for only the portion of options
that are expected to vest. We have estimated expected
forfeitures of stock options with the adoption of SFAS 123R
to be zero. In developing a forfeiture rate estimate, we have
considered our historical experience and determined our
forfeitures to be de minimis. If there are forfeitures of
unvested options, additional adjustments to compensation expense
may be required in future periods. We have unrecognized
compensation expense associated with outstanding stock options
at December 31, 2007 of $7.2 million which is expected
to be recognized over a weighted-average period of
3.57 years.
Results
of Operations
The following table sets forth selected statements of operations
data for each of the periods indicated as a percentage of total
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
26
|
|
|
|
28
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
74
|
|
|
|
72
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20
|
|
|
|
22
|
|
|
|
23
|
|
Sales and marketing
|
|
|
54
|
|
|
|
67
|
|
|
|
51
|
|
General and administrative
|
|
|
11
|
|
|
|
10
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
85
|
|
|
|
99
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11
|
)
|
|
|
(27
|
)
|
|
|
(9
|
)
|
Interest and other income (expense), net
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(16
|
)%
|
|
|
(28
|
)%
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended December 31, 2007 and 2006
Revenue. Revenue for 2007 was
$50.5 million, an increase of $22.9 million, or 83%
over revenue of $27.6 million for 2006. The increase in
revenue resulted primarily from an 86% increase in the number of
average monthly email marketing customers, offset by a slight
decrease in average revenue per customer.
36
Average monthly email marketing customers increased to 125,130
in 2007 from 67,336 in 2006, while average revenue per customer
in 2007 decreased to $33.63 from $34.10 in 2006. We expect our
average revenue per customer to increase in 2008 as we generate
additional revenue from our email marketing customers for
add-ons to the email marketing product and from our survey
product.
Cost of Revenue. Cost of revenue for 2007 was
$13.0 million, an increase of $5.2 million, or 67%,
over cost of revenue of $7.8 million for 2006. As a
percentage of revenue, cost of revenue decreased to 26% in 2007
from 28% in 2006. The increase in absolute dollars primarily
resulted from an 86% increase in the number of average monthly
email marketing customers which resulted in increased hosting
and operations expense and customer support costs. Of the
increase in cost of revenue, $3.1 million resulted from
increased personnel costs attributable to additional employees
in our customer support and operations groups to support
customer growth and to increase the quality and range of support
options available to customers. Additionally, $1.2 million
resulted from increased depreciation, hosting and maintenance
costs due to scaling and adding capacity to our hosting
infrastructure, and $700,000 related to increased credit card
fees due to a higher volume of billing transactions. We expect
cost of revenue to increase modestly as a percentage of revenue
in 2008 as we expand our operations to include a second sales
and support office and a second third party hosting facility.
Research and Development Expenses. Research
and development expenses for 2007 were $10.3 million, an
increase of $4.1 million, or 68%, over research and
development expenses of $6.2 million for 2006. The increase
was primarily due to additional personnel related costs of
$3.5 million as we increased the number of research and
development employees to further enhance our products.
Additional consulting and contractor fees of $100,000 also
contributed to the increase due to the use of these resources to
supplement our own personnel. We expect research and development
expenses to increase in absolute dollars but decrease as a
percentage of revenue.
Sales and Marketing Expenses. Sales and
marketing expenses for 2007 were $27.4 million, an increase
of $8.8 million, or 47%, over sales and marketing expenses
of $18.6 million for 2006. The increase was primarily due
to increased advertising and promotional expenditures of
$4.3 million as we expanded our multi-channel marketing
strategy in order to increase awareness of our brand and
products and to add new customers. Additional personnel related
costs of $2.7 million also contributed to the increase as
we added employees to accommodate the growth in sales leads and
to staff our expanded marketing efforts. We also paid $600,000
in increased partner fees as our partners generated increased
referral customers. We expect sales and marketing expenses to
increase in absolute dollars but decrease as a percentage of
revenue.
General and Administrative Expenses. General
and administrative expenses for 2007 were $5.4 million, an
increase of $2.8 million, or 108%, over general and
administrative expenses of $2.6 million for 2006. The
increase was due primarily to additional personnel related costs
of $1.2 million because we increased the number of general
and administrative employees to support our overall growth, as
well as a one-time payment of $225,000 to close out an
obligation related to a 1999 stock placement agreement. We also
incurred increased insurance and professional fees to support
the reporting and regulatory requirements of a public company.
Interest and Other Income (Expense),
Net. Interest and other income (expense), net for
2007 was $(2.6) million, an increase of $2.4 million
from interest and other income (expense), net of $(203,000) for
2006. The increase was due to a $3.3 million increase in
the expense related to the change in the fair value of the
redeemable convertible preferred stock warrant primarily offset
by a $1.0 million increase in interest income from
investments in marketable securities and cash equivalents. We
accounted for an outstanding redeemable convertible preferred
stock warrant as a liability held at fair market with changes in
value recorded as a component of other expense. In October 2007,
the preferred stock warrant was exercised and converted into
common stock at which time we recorded the final charge relating
to the change in fair value of the warrant. The increase in
interest income was primarily due to an increase in the balance
of investments and cash equivalents as a result of our initial
public offering, which was completed in the fourth quarter of
2007.
37
Comparison
of Years Ended December 31, 2006 and 2005
Revenue. Revenue for 2006 was
$27.6 million, an increase of $12.9 million, or 88%,
over revenue of $14.7 million for 2005. The increase in
revenue resulted primarily from a 93% increase in the number of
average monthly email marketing customers partially offset by a
slight decrease in average revenue per customer. Average monthly
email marketing customers in 2006 increased to 67,336 from
34,909 for 2005, while average revenue per customer for 2006
decreased to $34.10 from $34.99 in 2005.
Cost of Revenue. Cost of revenue in 2006 was
$7.8 million, an increase of $4.1 million, or 108%,
over cost of revenue of $3.7 million in 2005. As a
percentage of total revenue, cost of revenue increased slightly
to 28% from 26% in 2005. The increase primarily resulted from a
93% increase in the number of average monthly email marketing
customers which resulted in increased hosting and operations
expense and customer support costs. Of the increase in cost of
revenue, $2.0 million related to increased personnel costs
attributable to additional employees in our customer support and
operations groups required to support customer growth and to
increase the quality and range of support options available to
customers. Additionally, $1.0 million resulted from
increased depreciation, hosting and maintenance costs as we
scaled and added capacity to our hosting infrastructure and
$559,000 related to increased credit card fees due to a higher
volume of billing transactions.
Research and Development Expenses. Research
and development expenses in 2006 were $6.2 million, an
increase of $2.8 million, or 84%, over research and
development expenses of $3.4 million in 2005. The increase
was primarily due to additional personnel related costs of
$2.2 million as we increased the number of research and
development employees to further enhance our products.
Sales and Marketing Expenses. Sales and
marketing expenses in 2006 were $18.6 million, an increase
of $11.1 million, or 149%, over sales and marketing
expenses of $7.5 million in 2005. The increase was
primarily due to increased advertising and promotional
expenditures of $7.6 million as we expanded our
multi-channel marketing strategy in order to increase awareness
of our brand and products and to add new customers. Additional
personnel related costs of $2.2 million also contributed to
the increase as we added personnel to accommodate the growth in
sales leads and to staff our expanded marketing efforts.
General and Administrative Expenses. General
and administrative expenses in 2006 were $2.6 million, an
increase of $1.3 million, or 98%, over general and
administrative expenses of $1.3 million in 2005. The
increase was primarily due to additional personnel related costs
of $811,000 as we increased the number of general and
administrative employees to support our overall growth and an
increase in legal, audit, accounting and insurance costs of
$261,000, which reflected the increased scale and complexity of
our professional service needs.
Interest and Other Income (Expense),
Net. Interest and other income (expense), net in
2006 was $(203,000), an increase of $179,000 from interest and
other income (expense), net of $(24,000) in 2005. The increase
was due to a $588,000 increase in other expense related to the
change in value of the redeemable convertible preferred stock
warrant primarily offset by a $432,000 increase in interest
income from investments in marketable securities and cash
equivalents. Interest income increased primarily due to an
increase in investments and cash equivalents as a result of an
equity funding that took place during the year.
Liquidity
and Capital Resources
At December 31, 2007, our principal sources of liquidity
were cash and cash equivalents and marketable securities of
$102 million.
Since our inception we have financed our operations primarily
through the sale of redeemable convertible preferred stock,
issuance of convertible promissory notes, borrowings under
credit facilities and, to a lesser extent, cash flow from
operations. On October 9, 2007, we completed our initial
public offering, in which we issued and sold
6,199,845 shares of common stock at a price of $16.00 per
share. We raised approximately $90.4 million in net
proceeds after deducting underwriting discounts and commissions
and other offering costs. Additionally, we used
$2.6 million of proceeds to repay our outstanding principal
and interest under our term loan facility. In the future, we
anticipate that our primary sources of liquidity will be cash
generated from our operating activities.
38
Our operating activities provided cash of $4.3 million in
2007, used cash of $748,000 in 2006 and provided cash of
$2.4 million in 2005. Net cash inflows for the year ended
December 31, 2007 resulted primarily from our operating
losses offset by non-cash charges for depreciation and
amortization, changes in fair value of the preferred stock
warrant and
stock-based
compensation charges as well as changes in our working capital
accounts. Net cash outflows in 2006 resulted primarily from
operating losses partially offset by changes in our working
capital accounts and non-cash charges for depreciation and
amortization, changes in fair value of the warrant for
redeemable convertible preferred stock and
stock-based
compensation charges. Net cash inflows during 2005 resulted
primarily from operating losses offset by increases in current
liability accounts and non-cash charges for depreciation and
amortization. Operating losses were primarily due to increased
sales and marketing efforts and additional employees company
wide for each of the three years in the period ended
December 31, 2007.
Changes in current assets consisted primarily of the increase in
prepaid expenses and other current assets. Prepaid expenses and
other current assets increased $1.3 million in 2007
primarily due to an increase in prepaid software and maintenance
contracts as well as increased volume of business. Prepaid
expenses and other current assets increased $255,000 in 2006
primarily due to increased volume of business. Other assets
increased in 2007 due to the prepayment of a multi-year software
agreement.
The increases in current liability accounts consisted primarily
of the following:
Changes in deferred revenue were as follows:
|
|
|
|
•
|
during 2007, deferred revenue increased $4.9 million from
$5.5 million to $10.4 million;
|
|
|
•
|
during 2006, deferred revenue increased $2.7 million from
$2.8 million to $5.5 million; and
|
|
|
•
|
during 2005, deferred revenue increased $1.5 million from
$1.3 million to $2.8 million.
|
The increases in deferred revenue were due to continued growth
in unearned prepaid subscriptions. The growth in subscriptions
was primarily due to new customer growth.
Changes in accrued expenses and other current liabilities were
as follows:
|
|
|
|
•
|
during 2007, accrued expenses increased $900,000 from
$2.4 million to $3.3 million primarily due to
increased employee related costs as a result of personnel
additions;
|
|
|
•
|
during 2006, accrued expenses increased $1.9 million from
$494,000 to $2.4 million primarily due to increased
marketing efforts during the year, increased employee related
costs as a result of personnel additions and increased costs
directly attributable to revenue growth partially offset by the
receipt of invoices and timing of payments; and
|
|
|
•
|
during 2005, accrued expenses increased $188,000 from $306,000
to $494,000.
|
Changes in accounts payable were as follows:
|
|
|
|
•
|
during 2007, accounts payable increased $1.3 from
$2.6 million to $3.9 million;
|
|
|
•
|
during 2006, accounts payable increased $1.1 million from
$1.5 million to $2.6 million; and
|
|
|
•
|
during 2005, accounts payable increased $1.3 million from
$176,000 to $1.5 million.
|
The changes in accounts payable were due to increased expense
levels, net of the impact of the timing of payments to vendors.
The following non-cash charges are added back as adjustments to
reconcile net loss to net cash used in or provided by operating
activities:
|
|
|
|
•
|
change in fair value of warrant of $3.9 million and
$588,000 for the years ended December 31, 2007 and 2006,
respectively;
|
|
|
•
|
depreciation and amortization expense of $2.6 million,
$1.5 million and $591,000 for the years ended
December 31, 2007, 2006 and 2005, respectively; and
|
39
|
|
|
|
•
|
stock-based compensation expense of $645,000, $83,000 and
$17,000 for the years ended December 31, 2007, 2006 and
2005, respectively.
|
The change in fair value of the warrant to purchase
Series B redeemable convertible preferred stock was due to
the increase in the value of the underlying common stock into
which this warrant was ultimately convertible. The warrant was
subject to re-measurement at each balance sheet date and changes
in fair value recognized as a component of other expense until
the warrant was exercised in October 2007.
The increase in depreciation and amortization expense was due to
increased purchases of property and equipment required to
support the continued growth of the business.
The increase in
stock-based
compensation expense was due to the adoption of SFAS 123R
in January 2006 and an increase in the value of the common stock
into which these options were exercisable.
As of December 31, 2007, we had federal and state net
operating loss carry-forwards of $38 million and
$25 million, respectively, which may be available to offset
potential payments of future federal and state income tax
liabilities which expire at various dates through 2027 for
federal income tax purposes and through 2012 for state income
tax purposes.
Net cash used in investing activities was $6.0 million,
$7.7 million and $2.2 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Net cash
used in investing activities during the years ended
December 31, 2007 and 2006 consisted primarily of net cash
paid to purchase marketable securities and property and
equipment, partially offset by maturities of marketable
securities in 2007. Net cash used in investing activities during
the year ended December 31, 2005 consisted primarily of
cash paid for the purchase of property and equipment. Property
and equipment purchases consist of infrastructure for our
products, capitalization of certain software development costs,
computer equipment for our employees and equipment and leasehold
improvements primarily related to additional office space.
Net cash provided by financing activities was $90.0 million
for 2007. Net cash provided by financing activities was
$14.4 million and $512,000 for the years ended
December 31, 2006 and 2005, respectively. Net cash provided
by financing activities for 2007 consisted primarily of cash
proceeds from our initial public offering in which we raised
approximately $90.4 million after deducting underwriting
discounts and commissions and other offering costs. We also
received proceeds of $2.8 million from additional
borrowings under the term loan facility and repaid $900,000 of
borrowings during the first nine months of 2007. After our
initial public offering, we used proceeds of $2.6 million
to repay the remaining outstanding borrowings. Additional cash
was provided by exercises of outstanding options and warrants in
2007. Net cash provided by financing activities for the year
ended December 31, 2006 consisted primarily of proceeds
from the issuance of our Series C redeemable convertible
preferred stock and, to a lesser extent, proceeds from the
exercise of stock options and warrants, partially offset by
repayment of outstanding borrowings under the term loan
facility. Net cash provided by financing activities for the year
ended December 31, 2005 consisted primarily of new
borrowings under the term loan facility partially offset by
repayment of the borrowings and other capital lease obligations.
Our future capital requirements may vary materially from those
now planned and will depend on many factors, including, but not
limited to, development of new products, market acceptance of
our products, the levels of advertising and promotion required
to launch additional products and improve our competitive
position in the marketplace, the expansion of our sales, support
and marketing organizations, the establishment of additional
offices in the United States and worldwide and the building of
infrastructure necessary to support our growth, the response of
competitors to our products and our relationships with suppliers
and clients. Since the introduction of our on-demand email
marketing product in 2000, we have experienced increases in our
expenditures consistent with the growth in our operations and
personnel, and we anticipate that our expenditures will continue
to increase in the future.
We plan to open a second third-party hosting facility that is
expected to become operational in the first quarter of 2008 to
provide redundancy and increased scaleability for our product
infrastructure. We have made capital expenditures in 2007 and
plan to make additional capital expenditures in 2008 for capital
equipment to be used in this facility. We also plan to open a
second sales and support office in the second half of 2008. We
anticipate making capital commitments in 2008 and 2009
associated with the build-out and outfitting of this office.
40
Additionally we anticipate continuing investments in property
and equipment to support the growth in our business. We believe
that our current cash, cash equivalents and marketable
securities and operating cash flows will be sufficient to meet
our working capital and capital expenditure requirements for at
least the next twelve months. Thereafter, we may need to raise
additional funds through public or private financings or
borrowings to develop or enhance products, to fund expansion, to
respond to competitive pressures or to acquire complementary
products, businesses or technologies. If required, additional
financing may not be available on terms that are favorable to
us, if at all. If we raise additional funds through the issuance
of equity or convertible debt securities, the percentage
ownership of our stockholders will be reduced and these
securities might have rights, preferences and privileges senior
to those of our current stockholders. No assurance can be given
that additional financing will be available or that, if
available, such financing can be obtained on terms favorable to
our stockholders and us.
During the last three years, inflation and changing prices have
not had a material effect on our business and we do not expect
that inflation or changing prices will materially affect our
business in the foreseeable future.
Off-Balance
Sheet Arrangements
We do not engage in any off-balance sheet financing activities.
We do not have any interest in entities referred to as variable
interest entities, which include special purpose entities and
other structured finance entities.
New
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS 141(R) expands the
definition of a business combination and requires acquisitions
to be accounted for at fair value. These fair value provisions
will be applied to contingent consideration, in-process research
and development and acquisition contingencies. Purchase
accounting adjustments will be reflected during the period in
which an acquisition was originally recorded. Additionally, the
new standard requires transaction costs and restructuring
charges to be expensed. The guidance of SFAS 141(R) shall
be applied to the first reporting period beginning after
December 15, 2008. The adoption of SFAS 141(R) is not
expected to have a material impact on our financial position,
results of operations, or cash flows.
On February 15, 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB
Statement No. 115 (“SFAS 159”), which
permits companies to choose to measure many financial
instruments and certain other items at fair value. The objective
of SFAS 159 is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. Management is
currently evaluating the effect that SFAS 159 may have on
our financial statements taken as a whole.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (“SFAS 157”),
which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. This
statement does not require any new fair value measurements;
rather, it applies under other accounting pronouncements that
require or permit fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. In February 2008, the FASB issued FSP
No. 157-2,
Effective Date of FASB Statement No. 157 which
permits delayed application of SFAS 157 for nonfinancial
assets and nonfinancial liabilities to fiscal years beginning
after November 15, 2008, and interim periods within those
fiscal years. Management is currently evaluating the effect that
SFAS 157 may have on our financial statements taken as a
whole.
41
Contractual
Obligations
The following table summarizes our contractual obligations at
December 31, 2007 and the effect such obligations are
expected to have on our liquidity and cash flow in future
periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
6,024
|
|
|
$
|
2,041
|
|
|
$
|
3,983
|
|
|
|
—
|
|
|
|
—
|
|
Contractual commitments
|
|
|
9,302
|
|
|
|
1,756
|
|
|
|
3,490
|
|
|
$
|
3,282
|
|
|
$
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,326
|
|
|
$
|
3,797
|
|
|
$
|
7,473
|
|
|
$
|
3,282
|
|
|
$
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign Currency Exchange Risk. We bill our
customers in U.S. dollars and receive payment predominantly
in U.S. dollars. Accordingly, our results of operations and
cash flows are not subject to fluctuations due to changes in
foreign currency exchange rates.
Interest Rate Sensitivity. Interest income and
expense are sensitive to changes in the general level of
U.S. interest rates. However, based on the nature and
current level of our marketable securities, which are primarily
short-term investment grade and government securities, as well
as our cash and cash equivalents which are primarily held in a
money market account, we believe that there is no material risk
of exposure.
42
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Constant
Contact, Inc.
Index to
Consolidated Financial Statements
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
44
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
43
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Constant Contact, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of changes in
redeemable convertible preferred stock and stockholder’s
equity (deficit) and comprehensive loss and of cash flows
present fairly, in all material respects, the financial position
of Constant Contact, Inc. and its subsidiary (the
“Company”) at December 31, 2007 and 2006 and the
results of their operations and their cash flows for each of the
two years in the period ended December 31, 2007 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for stock-based compensation in 2006.
/s/ PricewaterhouseCoopers
LLP
Boston, Massachusetts
March 14, 2008
44
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Constant Contact, Inc.
We have audited the accompanying statements of operations, of
changes in redeemable convertible preferred stock and
stockholders’ equity (deficit) and comprehensive loss, and
of cash flows of Constant Contact, Inc. (the Company) for the
year ended December 31, 2005. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
controls over financial reporting. Our audit included
consideration of internal controls over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal controls
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of Constant Contact, Inc. for the year
ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Vitale,
Caturano and Company, Ltd.
VITALE, CATURANO & COMPANY, LTD.
Boston, Massachusetts
March 10, 2006 (except with respect to the
Series C financing and common stock split discussed in
Note 5,
as to which the dates are May 12, 2006 and
September 6, 2007, respectively)
45
Constant
Contact, Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
97,051
|
|
|
$
|
8,786
|
|
Short-term marketable securities
|
|
|
4,484
|
|
|
|
4,004
|
|
Accounts receivable, net of allowance for doubtful accounts of
$11 and $3 as of December 31, 2007 and 2006, respectively
|
|
|
62
|
|
|
|
41
|
|
Prepaid expenses and other current assets
|
|
|
1,701
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
103,298
|
|
|
|
13,242
|
|
Property and equipment, net
|
|
|
7,986
|
|
|
|
4,957
|
|
Restricted cash
|
|
|
308
|
|
|
|
266
|
|
Other assets
|
|
|
253
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
111,845
|
|
|
$
|
18,481
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY (DEFICIT)
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,858
|
|
|
$
|
2,576
|
|
Accrued expenses
|
|
|
3,279
|
|
|
|
2,406
|
|
Deferred revenue
|
|
|
10,354
|
|
|
|
5,476
|
|
Redeemable convertible preferred stock warrant
|
|
|
—
|
|
|
|
628
|
|
Current portion of notes payable
|
|
|
—
|
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,491
|
|
|
|
11,535
|
|
Notes payable, net of current portion
|
|
|
—
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,491
|
|
|
|
11,788
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
Series A redeemable convertible preferred stock,
$0.01 par value; 0 shares authorized and outstanding
at December 31, 2007; 1,026,680 shares authorized and
outstanding at December 31, 2006
|
|
|
—
|
|
|
|
14,049
|
|
Series B redeemable convertible preferred stock,
$0.01 par value; 0 shares authorized and outstanding
at December 31, 2007; 9,761,666 shares authorized and
9,641,666 shares outstanding at December 31, 2006
|
|
|
—
|
|
|
|
6,376
|
|
Series C redeemable convertible preferred stock,
$0.01 par value; 0 shares authorized and outstanding
at December 31, 2007; 2,521,432 shares authorized and
outstanding at December 31, 2006
|
|
|
—
|
|
|
|
14,897
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
—
|
|
|
|
35,322
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred stock; $0.01 par value; 5,000,000 and
0 shares authorized at December 31, 2007 and 2006,
respectively; no shares issued or outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock; $0.01 par value; 100,000,000 and
20,000,000 shares authorized at December 31, 2007 and
2006, respectively; 27,617,014 and 3,788,944 shares issued
and outstanding as of December 31, 2007 and 2006,
respectively
|
|
|
276
|
|
|
|
38
|
|
Additional paid-in capital
|
|
|
136,832
|
|
|
|
5,835
|
|
Accumulated other comprehensive income
|
|
|
2
|
|
|
|
—
|
|
Accumulated deficit
|
|
|
(42,756
|
)
|
|
|
(34,502
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity (deficit)
|
|
|
94,354
|
|
|
|
(28,629
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders’ equity (deficit)
|
|
$
|
111,845
|
|
|
$
|
18,481
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
Constant
Contact, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
50,495
|
|
|
$
|
27,552
|
|
|
$
|
14,658
|
|
Cost of revenue
|
|
|
13,031
|
|
|
|
7,801
|
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,464
|
|
|
|
19,751
|
|
|
|
10,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,341
|
|
|
|
6,172
|
|
|
|
3,355
|
|
Sales and marketing
|
|
|
27,376
|
|
|
|
18,592
|
|
|
|
7,460
|
|
General and administrative
|
|
|
5,445
|
|
|
|
2,623
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
43,162
|
|
|
|
27,387
|
|
|
|
12,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,698
|
)
|
|
|
(7,636
|
)
|
|
|
(1,230
|
)
|
Interest income
|
|
|
1,543
|
|
|
|
479
|
|
|
|
47
|
|
Interest expense
|
|
|
(188
|
)
|
|
|
(94
|
)
|
|
|
(71
|
)
|
Other expense, net
|
|
|
(3,911
|
)
|
|
|
(588
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(8,254
|
)
|
|
|
(7,839
|
)
|
|
|
(1,254
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
(816
|
)
|
|
|
(3,788
|
)
|
|
|
(5,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(9,070
|
)
|
|
$
|
(11,627
|
)
|
|
$
|
(6,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per share: basic
and diluted
|
|
$
|
(0.97
|
)
|
|
$
|
(3.38
|
)
|
|
$
|
(2.49
|
)
|
Weighted average shares outstanding used in computing per share
amounts: basic and diluted
|
|
|
9,366
|
|
|
|
3,438
|
|
|
|
2,813
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
Constant
Contact, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Redeemable
|
|
|
Redeemable
|
|
|
Total Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Stockholders’
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
|
(In thousands, except share data)
|
|
Balance at December 31, 2004
|
|
|
1,026,680
|
|
|
$
|
6,304
|
|
|
|
9,641,666
|
|
|
$
|
4,610
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
10,668,346
|
|
|
$
|
10,914
|
|
|
|
|
2,799,649
|
|
|
$
|
28
|
|
|
$
|
15,111
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
(25,409
|
)
|
|
$
|
(10,287
|
)
|
|
|
|
|
Issuance of common stock in connection with stock option
exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
473,170
|
|
|
|
5
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
192,010
|
|
|
|
2
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Amortization of deferred compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
Accretion of Series A and B redeemable convertible
preferred stock to redemption value
|
|
|
|
|
|
|
4,531
|
|
|
|
|
|
|
|
1,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,743
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,743
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,254
|
)
|
|
|
(1,254
|
)
|
|
$
|
(1,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,026,680
|
|
|
|
10,835
|
|
|
|
9,641,666
|
|
|
|
5,822
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,668,346
|
|
|
|
16,657
|
|
|
|
|
3,464,829
|
|
|
|
35
|
|
|
|
9,391
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26,663
|
)
|
|
|
(17,237
|
)
|
|
|
|
|
Issuance of common stock in connection with stock option
exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
192,076
|
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Issuance of common stock in connection with warrant exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
132,039
|
|
|
|
1
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
Reclassification of redeemable convertible preferred stock
warrant to liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
Issuance of Series C redeemable convertible preferred
stock, net of issuance costs of $123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,521,432
|
|
|
|
14,877
|
|
|
|
2,521,432
|
|
|
|
14,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series A, B and C redeemable convertible
preferred stock to redemption value
|
|
|
|
|
|
|
3,214
|
|
|
|
|
|
|
|
554
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
3,788
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,788
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,839
|
)
|
|
|
(7,839
|
)
|
|
$
|
(7,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,026,680
|
|
|
|
14,049
|
|
|
|
9,641,666
|
|
|
|
6,376
|
|
|
|
2,521,432
|
|
|
|
14,897
|
|
|
|
13,189,778
|
|
|
|
35,322
|
|
|
|
|
3,788,944
|
|
|
|
38
|
|
|
|
5,835
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(34,502
|
)
|
|
|
(28,629
|
)
|
|
|
|
|
Issuance of common stock in connection with stock option
exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
199,824
|
|
|
|
2
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
Issuance of common stock in connection with warrant exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
125,704
|
|
|
|
1
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
Issuance of common stock in connection with initial public
offering, net of issuance costs of $1,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
6,199,845
|
|
|
|
62
|
|
|
|
90,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,436
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
Accretion of Series A, B and C redeemable convertible
preferred stock to redemption value
|
|
|
|
|
|
|
718
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
|
(816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(816
|
)
|
|
|
|
|
Issuance of redeemable convertible preferred stock in connection
with warrant exercise
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Conversion of redeemable convertible preferred stock to common
stock upon close of initial public offering
|
|
|
(1,026,680
|
)
|
|
|
(14,767
|
)
|
|
|
(9,761,666
|
)
|
|
|
(11,055
|
)
|
|
|
(2,521,432
|
)
|
|
|
(14,921
|
)
|
|
|
(13,309,778
|
)
|
|
|
(40,743
|
)
|
|
|
|
17,302,697
|
|
|
|
173
|
|
|
|
40,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,743
|
|
|
|
|
|
Unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
$
|
2
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,254
|
)
|
|
|
(8,254
|
)
|
|
|
(8,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
27,617,014
|
|
|
$
|
276
|
|
|
$
|
136,832
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
(42,756
|
)
|
|
$
|
94,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
Constant
Contact, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,254
|
)
|
|
$
|
(7,839
|
)
|
|
$
|
(1,254
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,631
|
|
|
|
1,536
|
|
|
|
591
|
|
Accretion of discount on investments
|
|
|
(151
|
)
|
|
|
(10
|
)
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
645
|
|
|
|
83
|
|
|
|
17
|
|
Changes in fair value of redeemable convertible preferred stock
warrant
|
|
|
3,918
|
|
|
|
588
|
|
|
|
—
|
|
Provision for bad debts
|
|
|
8
|
|
|
|
5
|
|
|
|
21
|
|
Gain on sale of equipment
|
|
|
(6
|
)
|
|
|
—
|
|
|
|
—
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(29
|
)
|
|
|
1
|
|
|
|
(31
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,290
|
)
|
|
|
(255
|
)
|
|
|
(26
|
)
|
Other assets
|
|
|
(237
|
)
|
|
|
(16
|
)
|
|
|
—
|
|
Accounts payable
|
|
|
1,282
|
|
|
|
1,098
|
|
|
|
1,304
|
|
Accrued expenses
|
|
|
873
|
|
|
|
1,412
|
|
|
|
187
|
|
Deferred revenue
|
|
|
4,878
|
|
|
|
2,649
|
|
|
|
1,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
4,268
|
|
|
|
(748
|
)
|
|
|
2,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term marketable securities
|
|
|
(9,327
|
)
|
|
|
(3,994
|
)
|
|
|
—
|
|
Proceeds from maturities of short-term marketable securities
|
|
|
9,000
|
|
|
|
—
|
|
|
|
—
|
|
Net increase in restricted cash
|
|
|
(42
|
)
|
|
|
—
|
|
|
|
(112
|
)
|
Proceeds from sale of equipment
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(5,666
|
)
|
|
|
(3,701
|
)
|
|
|
(2,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,023
|
)
|
|
|
(7,695
|
)
|
|
|
(2,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
2,788
|
|
|
|
—
|
|
|
|
1,007
|
|
Repayments of notes payable
|
|
|
(3,490
|
)
|
|
|
(614
|
)
|
|
|
(506
|
)
|
Repayments of capital lease obligations
|
|
|
—
|
|
|
|
(10
|
)
|
|
|
(19
|
)
|
Proceeds from issuance of Series C redeemable convertible
preferred stock, net of issuance costs of $123
|
|
|
—
|
|
|
|
14,877
|
|
|
|
—
|
|
Proceeds from issuance of common stock pursuant to exercise of
stock options and warrants
|
|
|
227
|
|
|
|
192
|
|
|
|
18
|
|
Proceeds from issuance of preferred stock pursuant to exercise
of a warrant
|
|
|
59
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds from sale of restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
12
|
|
Proceeds from issuance of common stock in connection with
initial public offering, net of issuance costs of $1,804
|
|
|
90,436
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
90,020
|
|
|
|
14,445
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
88,265
|
|
|
|
6,002
|
|
|
|
669
|
|
Cash and cash equivalents, beginning of year
|
|
|
8,786
|
|
|
|
2,784
|
|
|
|
2,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
97,051
|
|
|
$
|
8,786
|
|
|
$
|
2,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
194
|
|
|
$
|
97
|
|
|
$
|
65
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment included in accrued expenses
|
|
|
—
|
|
|
|
500
|
|
|
|
—
|
|
Conversion of redeemable convertible preferred stock to common
stock
|
|
|
40,743
|
|
|
|
—
|
|
|
|
—
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
Constant
Contact, Inc.
(in thousands, except share and per share amounts)
|
|
1.
|
Nature of
the Business
|
Constant Contact, Inc. (the “Company”) was
incorporated as a Massachusetts corporation on August 25,
1995. The Company reincorporated in the State of Delaware in
2000. The Company is a leading provider of on-demand email
marketing and online survey products to small organizations,
including small businesses, associations and nonprofits located
primarily in the U.S. The Company’s email marketing
product allows customers to create, send and track email
marketing campaigns. The Company’s online survey product
enables customers to survey their customers, clients or members
and analyze the responses. These products are designed and
priced for small organizations and are marketed directly by the
Company and through a wide variety of channel partners. The
Company was originally incorporated under the name Roving
Software Incorporated and subsequently began doing business
under the trade name Constant Contact in 2004. In 2006, the
Company changed its name to Constant Contact, Inc.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The accompanying consolidated financial statements include those
of the Company and its subsidiary, Constant Contact Securities
Corporation, after elimination of all intercompany accounts and
transactions. The accompanying consolidated financial statements
have been prepared in conformity with accounting principles
generally accepted in the United States of America.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. On an ongoing basis, management evaluates
these estimates and judgments, including those related to
revenue recognition, stock-based compensation and income taxes.
The Company bases these estimates on historical and anticipated
results and trends and on various other assumptions that the
Company believes are reasonable under the circumstances,
including assumptions as to future events. These estimates form
the basis for making judgments about the carrying values of
assets and liabilities and recorded revenue and expenses that
are not readily apparent from other sources. Actual results
could differ from these estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less at the time of
acquisition to be cash equivalents. Cash equivalents are stated
at cost, which approximates fair value.
Marketable
Securities
The Company follows the guidance provided in Statement of
Financial Accounting Standards (“SFAS”) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, in determining the classification of and
accounting for its marketable securities. The Company’s
marketable securities are classified as available-for-sale and
are carried at fair value with the unrealized gains and losses,
net of tax, reported as a component of accumulated other
comprehensive income in stockholders’ equity. Realized
gains and losses and declines in value judged to be other than
temporary are included as a component of interest income based
on the specific identification method. Fair value is determined
based on quoted market prices.
At December 31, 2007, marketable securities consisted of
commercial paper and corporate notes and obligations with an
aggregate fair value of $4,484 and $2 of net unrealized gains.
All marketable securities
50
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
had remaining maturities of less than one year as of
December 31, 2007. At December 31, 2006, marketable
securities consisted of corporate notes and obligations with an
aggregate fair value of $4,004, and $0 unrealized gains or
losses.
Accounts
Receivable
Management reviews accounts receivable on a periodic basis to
determine if any receivables will potentially be uncollectible.
The Company reserves for receivables that are determined to be
uncollectible, if any, in its allowance for doubtful accounts.
After the Company has exhausted all collection efforts, the
outstanding receivable is written off against the allowance.
Concentration
of Credit Risk and Significant Customers
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and short-term marketable securities. At
December 31, 2007 and 2006, the Company had substantially
all cash balances at certain financial institutions in excess of
federally insured limits. The Company maintains its cash
balances and custody of its marketable securities with
accredited financial institutions.
For the years ended December 31, 2007, 2006 and 2005, there
were no customers that accounted for more than 10% of total
revenue.
Property
and Equipment
Property and equipment are recorded at cost and depreciated
using the straight-line method over the estimated useful life of
the assets or, where applicable and if shorter, over the lease
term. Upon retirement or sale, the cost of assets disposed of
and the related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is credited or charged
to other income. Repairs and maintenance costs are expensed as
incurred.
Estimated useful lives of assets are as follows:
|
|
|
Computer equipment
|
|
3 years
|
Software
|
|
3 years
|
Furniture and fixtures
|
|
5 years
|
Leasehold improvements
|
|
Shorter of life of lease or
estimated useful life
|
Long-Lived
Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
reviews the carrying values of its long-lived assets for
possible impairment whenever events or changes in circumstance
indicate that the related carrying amount may not be
recoverable. Undiscounted cash flows are compared to the
carrying value and when required, impairment losses on assets to
be held and used are recognized based on the excess of the
asset’s carrying amount over the fair value of the asset.
Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
Revenue
Recognition
The Company provides access to its products through
month-to-month subscription arrangements whereby the customer is
charged a fee. Subscription arrangements include access to use
the Company’s software via the internet and support
services such as telephone support. The Company follows the
guidance of Securities and
51
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
Exchange Commission Staff Accounting Bulletin (“SAB”)
No. 104, Revenue Recognition in Financial
Statements, and Emerging Issues Task Force
(“EITF”) Issue
No. 00-03,
Application of AICPA Statement of Position
97-2 to
Arrangements that include the Right to Use Software Stored on
Another Entity’s Hardware, which applies when customers
do not have the right to take possession of the software and use
it on another entity’s hardware. When there is evidence of
an arrangement, the fee is fixed or determinable and
collectibility is deemed probable, the Company recognizes
revenue on a daily basis over the subscription term as the
services are delivered.
The Company also offers professional services to its customers
primarily for the design of custom email templates and training.
Professional services revenue is accounted for separate from
subscription revenue based on the guidance of EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, as those services have value on a standalone
basis and do not involve a significant degree of risk or unique
acceptance criteria and as the fair value of the Company’s
subscription services is evidenced by their availability on a
standalone basis. Professional services revenue is recognized as
the services are performed.
Deferred
Revenue
Deferred revenue primarily consists of payments received in
advance of revenue recognition of the Company’s on-demand
products described above and is recognized as the revenue
recognition criteria are met. The Company’s customers pay
for services in advance on a monthly, semiannual or annual basis.
Software
and WebSite Development Costs
The Company follows the guidance of Statement of Position
(“SOP”)
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use and EITF Issue No.
00-02,
Accounting for Web Site Development Costs, in accounting
for the development costs of its on-demand products and website
development costs. The costs incurred in the preliminary stages
of development are expensed as incurred. Once an application has
reached the development stage, internal and external costs, if
direct and incremental, are capitalized until the software is
substantially complete and ready for its intended use.
Redeemable
Convertible Preferred Stock Warrant (including Change in
Accounting Principle)
On June 29, 2005, the Financial Accounting Standards Board
(“FASB”) issued Staff Position
150-5,
Issuer’s Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares that are Redeemable
(“FSP 150-5”).
FSP 150-5
affirms that warrants of this type are subject to the
requirements in SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity (“SFAS 150”),
regardless of the redemption price or the timing of the
redemption feature. Therefore, under SFAS 150, the
freestanding warrants to purchase the Company’s redeemable
convertible preferred stock were liabilities that were to be
recorded at fair value. The Company adopted
FSP 150-5
as of July 1, 2005. The effect of this adoption on the
financial statements between the date of adoption and
January 1, 2006 was immaterial. The warrant was subject to
remeasurement at each balance sheet date prior to exercise of
the warrant and the change in fair value (determined using the
Black-Scholes option pricing model) was recognized as other
expense.
Comprehensive
Loss
Comprehensive loss includes net loss, as well as other changes
in stockholders’ equity that result from transactions and
economic events other than those with stockholders. The
Company’s only element of other comprehensive income is
unrealized gains and losses on available-for-sale securities.
The Company had gross unrealized gains and losses of $3 and
($1), respectively, as of December 31, 2007 and no
unrealized gains or
52
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
losses as of December 31, 2006. There were no realized
gains or losses recorded to net loss for the years ended
December 31, 2007, 2006 and 2005.
Fair
Value of Financial Instruments
The carrying value of the Company’s financial instruments,
including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their fair
value because of their short-term nature.
Segment
Data
The Company manages its operations as a single segment for
purposes of assessing performance and making operating
decisions. Revenue is generated predominately in the
U.S. and all significant assets are held in the U.S.
Net
Loss Attributable to Common Stockholders Per Share
Basic and diluted net loss attributable to common stockholders
per share is computed by dividing net loss attributable to
common stockholders by the weighted average number of
nonrestricted common shares outstanding for the period.
The following common stock equivalents were excluded from the
computation of diluted net loss per share attributable to common
stockholders because they had an antidilutive impact:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Options to purchase common stock
|
|
|
2,200,622
|
|
|
|
1,702,007
|
|
|
|
1,217,766
|
|
Warrants to purchase common or redeemable convertible preferred
stock
|
|
|
520
|
|
|
|
282,223
|
|
|
|
414,262
|
|
Restricted shares
|
|
|
96,006
|
|
|
|
144,008
|
|
|
|
192,010
|
|
Redeemable convertible preferred stock
|
|
|
—
|
|
|
|
17,146,675
|
|
|
|
13,868,824
|
|
Total options, warrants, restricted shares and redeemable
convertible preferred stock exercisable or convertible into
common stock
|
|
|
2,297,148
|
|
|
|
19,274,913
|
|
|
|
15,692,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
Expense
The Company expenses advertising as incurred. Advertising
expense was $13,052, $9,778 and $2,618 during the years ended
December 31, 2007, 2006 and 2005, respectively.
Accounting
for Stock-Based Compensation (including Change in Accounting
Principle)
Effective January 1, 2006, the Company adopted
SFAS No. 123(R), Share-Based Payment
(“SFAS 123R”), a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS 123”), and related
interpretations. SFAS 123R supersedes Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”), and related
interpretations. SFAS 123R requires all share-based
compensation to employees, including grants of employee stock
options, to be valued at fair value on the date of grant, and to
be expensed over the applicable service period. The Company
adopted the prospective transition method which does not result
in restatement of previously issued financial statements and
requires only new awards or awards that are modified,
repurchased or canceled after the effective date to be accounted
for under the provisions of SFAS 123R. Prior to
January 1, 2006, the Company accounted for stock-based
compensation
53
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
arrangements according to the provisions of APB 25 and related
interpretations. Pursuant to the income tax provisions included
in SFAS 123R, the Company has elected the “short-cut
method” of computing its hypothetical pool of additional
paid-in capital that is available to absorb future tax benefit
shortfalls.
Income
Taxes (including Change in Accounting Principle)
Income taxes are provided for tax effects of transactions
reported in the financial statements and consist of income taxes
currently due plus deferred income taxes related to timing
differences between the basis of certain assets and liabilities
for financial and income tax reporting. Deferred taxes are
determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted
tax rates in effect in the years in which the differences are
expected to reverse. A valuation allowance is provided if, based
upon the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be
realized.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109 (“FIN 48”).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in
accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 prescribes a two-step process to
determine the amount of tax benefit to be recognized. First, the
tax position must be evaluated to determine the likelihood that
it will be sustained upon external examination. If the tax
position is deemed “more-likely-than-not” to be
sustained, the tax position is then assessed to determine the
amount of benefit to recognize in the financial statements. The
amount of the benefit that may be recognized is the largest
amount that has a greater than 50% likelihood of being realized
upon ultimate settlement. The Company adopted FIN 48 on
January 1, 2007 and the adoption did not have an effect on
its results of operations and financial position.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS 141(R) expands the
definition of a business combination and requires acquisitions
to be accounted for at fair value. These fair value provisions
will be applied to contingent consideration, in-process research
and development and acquisition contingencies. Purchase
accounting adjustments will be reflected during the period in
which an acquisition was originally recorded. Additionally, the
new standard requires transaction costs and restructuring
charges to be expensed. The guidance of SFAS 141(R) ahall
be applied to the first reporting period beginning after
December 15, 2008. The adoption of SFAS 141(R) is not
expected to have a material impact on the Company’s
financial position, results of operations, or cash flows.
On February 15, 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB
Statement No. 115 (“SFAS 159”), which
permits companies to choose to measure many financial
instruments and certain other items at fair value. The objective
of SFAS 159 is to improve financial reporting by providing
companies with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. Management is
currently evaluating the effect that SFAS 159 may have on
the Company’s financial statements taken as a whole.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (“SFAS 157”), which defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. This statement does not require
any new fair value measurements; rather, it applies under other
accounting pronouncements that require or permit fair value
measurements. The provisions of SFAS 157 are effective for
fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. In February 2008, the FASB
issued FSP No. 157-2, Effective
54
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
Date of FASB Statement No. 157, which permits delayed
application of SFAS 157 for nonfinancial assets and nonfinancial
liabilities to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. Management is
currently evaluating the effect that SFAS 157 may have on the
Company’s financial statements taken as a whole.
|
|
3.
|
Property
and Equipment
|
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer equipment
|
|
$
|
8,100
|
|
|
$
|
5,137
|
|
Software
|
|
|
3,821
|
|
|
|
2,754
|
|
Furniture and fixtures
|
|
|
1,308
|
|
|
|
1,015
|
|
Leasehold improvements
|
|
|
929
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
14,158
|
|
|
|
9,066
|
|
Less: Accumulated depreciation and amortization
|
|
|
6,172
|
|
|
|
4,109
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
7,986
|
|
|
$
|
4,957
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $2,631, $1,536 and
$591 for the years ended December 31, 2007, 2006 and 2005,
respectively. During 2007, the Company retired and sold assets
that had a gross book value of $574 and a net book value of $6,
for proceeds of $12. The resulting gain of $6 was recorded to
other income.
The Company capitalized costs associated with the development of
internal use software of $382 and $516 and recorded related
amortization expense of $157 and $0 during the years ended
December 31, 2007 and 2006, respectively. The remaining net
book value of capitalized software costs was $741 and $516 as of
December 31, 2007 and 2006, respectively.
In February 2003, the Company entered into a Loan and Security
Agreement (the “Agreement”) with a financial
institution, which provided for a $350 term loan for the
acquisition of property and equipment. From the period of August
2003 through September 2005, the Company amended the Agreement
five times in order to increase the amount available to borrow
to $2,175 and to add and amend various terms and covenants. In
March 2007, the Company amended the agreement a sixth time to
establish an additional borrowing availability of $5,000, which
amount could be drawn down through December 31, 2007, as
well as to amend and add various terms and covenants. Advances
under the Agreement were payable in thirty to thirty-six monthly
installments. The interest rate was variable based on prime plus
2%. Borrowings were collateralized by substantially all of the
assets of the Company. In October 2007, the Company used
approximately $2,600 of proceeds from its initial public
offering to repay all outstanding debt under the term loan
facility (Note 5). No amounts remained outstanding or
available for borrowing under the term loan at December 31,
2007.
In connection with entering into the Agreement in 2003, the
Company issued a warrant to purchase 520 shares of the
Company’s common stock at an exercise price of $0.38 per
share. The warrant was due to expire in November 2007. The value
of the warrant, estimated using the Black-Scholes pricing model,
was not material. In connection with the Loan Modification
Agreement in March 2007, the Company agreed to extend the term
of the warrant for a period of seven years from the date of the
modification. The Company estimated the incremental fair value
related to the modification of the warrant using the
Black-Scholes pricing model and determined it to be immaterial.
This warrant remained outstanding at December 31, 2007.
55
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
|
|
5.
|
Redeemable
Convertible Preferred Stock and Stockholders’ Equity
(Deficit)
|
Initial
Public Offering
On October 9, 2007, the Company closed its initial public
offering of 7,705,000 shares of common stock at an offering
price of $16.00 per share, of which 6,199,845 shares were
sold by the Company and 1,505,155 shares were sold by
selling stockholders, raising proceeds to the Company of
$90,436, net of underwriting discounts and offering costs. At
the close of the initial public offering, the Company’s
outstanding shares of redeemable convertible preferred stock
were automatically converted into common stock and the
Company’s charter was amended and restated to provide for
100,000,000 shares of common stock, par value $0.01 per
share, and 5,000,000 shares of preferred stock, par value
$0.01 per share, all of which preferred stock is undesignated.
Redeemable
Convertible Preferred Stock
During 2002, the Company authorized 1,026,680 shares and
9,761,666 shares of Series A redeemable convertible
preferred stock (“Series A”) and Series B
redeemable convertible preferred stock
(“Series B”), respectively. Also during 2002, the
Company issued 1,026,680 and 9,641,666 shares of
Series A and Series B, respectively.
During 2006, the Company authorized 2,521,432 shares of
Series C redeemable convertible preferred stock
(“Series C”). In May and July 2006, the Company
issued 2,357,130 and 164,302 shares, respectively, of
Series C for an aggregate purchase price of $15,000 or
$5.949 per share.
The holders of the redeemable convertible preferred stock that
was authorized and outstanding prior to the Company’s
initial public offering had the following rights:
Voting
The holders of the preferred stock were entitled to vote,
together with the holders of common stock, on all matters
submitted to stockholders for a vote. Each preferred stockholder
was entitled to the number of votes equal to the number of
shares of common stock into which each preferred share was
convertible at the time of such vote. The holders of
Series B and Series C were entitled to other specific
voting rights with respect to the election of directors, as
defined.
Dividends
The holders of Series B shares were entitled to receive
cumulative dividends at the rate of 10% per annum through
May 12, 2006, payable in preference and priority to any
payment of any dividend on common stock, Series A or
Series C shares. No dividends accrued after May 12,
2006. No dividends were to be made with respect to the common
stock unless the holders of Series B and Series C
first received, or simultaneously received, a dividend in an
amount equivalent to that of common stock on an as converted
basis. The holders of Series A shares were not entitled to
receive dividends.
Liquidation
Preference
In the event of any liquidation, dissolution or
winding-up
of the affairs of the Company, the holders of Series C were
entitled to receive an amount, to be paid first out of the
assets of the Company available for distribution to holders of
all classes of capital stock, equal to $11.898 per share
(subject to adjustment), plus any declared but unpaid dividends,
in the case of a specified liquidation event (defined as an
event in which the proceeds legally available for distribution
to the stockholders have value equal to or less than $100,000),
or $5.949 per share (subject to adjustment) plus any declared
but unpaid dividends in the case of other than a specified
liquidation event. If the assets of the Company were
insufficient to pay the full amount entitled to the holders
56
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
of Series C, then the entire assets of the Company were to
be distributed ratably among the holders of Series C.
After such payments had been made in full to the holders of
Series C, the holders of Series B were entitled to
receive an amount equal to $0.50 per share (subject to
adjustment), plus any accrued but unpaid dividends. If the
assets of the Company were insufficient to pay the full amount
entitled to the holders of Series B, then the remaining
assets of the Company were to be distributed ratably among the
holders of Series B.
After such payments were made in full to the holders of
Series C and Series B, the holders of Series A
were entitled to receive an amount equal to approximately $17.00
per share (subject to adjustment). If the assets of the Company
were insufficient to pay the full amount entitled to the holders
of Series A, then the remaining assets available for such
distribution were to be distributed ratably among the holders of
Series A.
Upon completion of the distribution as described above, all of
the remaining proceeds available for distribution to
stockholders were to be distributed among the holders of
Series B and Series C and Common stock pro rata based
on number of shares of Common stock held by each (assuming full
conversion of all such preferred stock) provided that holders of
Series C would receive no further distribution if such
holders were entitled to a distribution equal to twice the
original price as stated above.
Conversion
Each share of preferred stock, at the option of the holder, was
convertible into the number of fully paid shares of common stock
as determined by dividing the respective preferred stock issue
price by the conversion price in effect at the time. The initial
conversion prices of Series A, B and C shares were $17.00,
$0.50 and $5.949, respectively, subject to adjustment in
accordance with the antidilution provisions contained in the
Company’s Certificate of Incorporation, as amended. After
giving effect to the stock split the conversion ratio of all
outstanding preferred stock was 1.3 shares of common stock
for each share of preferred stock. Conversion was automatic
immediately upon the closing of the first underwritten public
offering in which the aggregate proceeds raised exceed $25,000
and pursuant to which the initial price to the public was at
least $9.152 per share (after giving effect to the stock split).
At the close of the initial public offering, the Company’s
outstanding shares of redeemable convertible preferred stock
were automatically converted into 17,146,697 shares of
common stock and a warrant to purchase redeemable convertible
preferred stock was exercised and converted to
156,000 shares of common stock.
Redemption
The holders of at least a majority of the voting power of the
then outstanding Series B and Series C shares (voting
together as a single class), by written request at any time
after May 12, 2010 (the “Redemption Date”),
could have required the Company to redeem the preferred stock by
paying in cash a sum equal to 100% of the original purchase
price of the Series A, Series B and Series C
preferred stock plus accrued but unpaid dividends on
Series B and declared but unpaid dividends on
Series C, in three (3) annual installments. If the
Company did not have sufficient funds legally available to
redeem all shares of preferred stock to be redeemed at the
Redemption Date, then the Company was to redeem first the
maximum possible shares of Series C ratably among the
holders of Series C. Only after all Series C shares
that were to be redeemed at the Redemption Date were
redeemed, the Company was to redeem the maximum number of
Series B shares ratably among the holders of Series B.
Only after all Series C and B shares that were to be
redeemed at the Redemption Date were redeemed, the Company
was to redeem the maximum number of Series A shares ratably
among the holders of Series A. The Company recorded
dividends and accretion through a charge to
57
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
stockholders’ equity (deficit) of $816, $3,788 and $5,743
in 2007, 2006 and 2005, respectively, in connection with the
redemption rights.
Warrants
In connection with certain equity financings, the Company
granted warrants to purchase 257,743 shares of common stock
at exercise prices ranging from $1.21-$1.38 per share. The
common stock warrants were to expire on varying dates through
October 2008, or the effective date of a merger or consolidation
of the Company with another entity or the sale of all or
substantially all of the Company’s assets. Warrants to
purchase 132,039 shares of common stock were exercised
during 2006 and warrants to purchase 125,704 shares of
common stock were outstanding at December 31, 2006. The
remaining warrants for the purchase of 125,704 shares of
common stock were exercised during the year ended
December 31, 2007.
In connection with the Series B financing, the Company
granted to a consultant a warrant to purchase
120,000 shares of Series B at a price of $0.50 per
share. The warrant was due to expire on the earliest to occur of
November 27, 2007, or immediately prior to the closing of a
merger, sale of assets, or consolidation of the Company by
another entity, or immediately prior to the closing date of an
initial public offering of the Company’s common stock. The
Company accounted for the Series B warrant in accordance
with the guidance in
FSP 150-5.
The guidance provides that warrants for shares that are
redeemable are within the scope of SFAS 150 and should be
accounted for as a liability and reported at fair value each
reporting period until exercised. At December 31, 2006, the
Company used the Black-Scholes option-pricing model to estimate
the fair value of the Series B warrant to be $628. During
2007, 2006 and 2005, the Company recorded a charge to other
expense of $3,918, $588 and $0, respectively, relating to the
changes in carrying value of the Series B warrant. As of
the close of the Company’s initial public offering, the
warrant was exercised for 120,000 shares of redeemable
convertible preferred stock which automatically converted into
156,000 shares of common stock.
Common
Stock
In August 2007, the pricing committee of the Company’s
board of directors, pursuant to delegated authority, approved a
1.3-for-1 stock split of the Company’s common stock, which
became effective in September 2007. All references to share and
per share amounts have been adjusted retroactively to reflect
the stock split.
Each share of common stock is entitled to one vote. The holders
of common stock are also entitled to receive dividends whenever
funds are legally available and when declared by the board of
directors, subject to the prior rights of holders of all classes
of preferred stock outstanding.
In 1999, the Company’s Board of Directors adopted the 1999
Stock Option/Stock Issuance Plan (the “Plan”).
The Plan provided for the granting of incentive and nonqualified
stock options with a maximum term of ten years, restricted stock
and other equity awards to employees, officers, directors,
consultants and advisors of the Company. Provisions such as
vesting, repurchase and exercise conditions and limitations were
determined by the Board of Directors on the grant date. The
maximum number of shares of common stock that could be issued
pursuant to the 1999 Stock Plan was 5,604,353. In conjunction
with the adoption of the 2007 Stock Incentive Plan, the board of
directors voted that no further stock options or other
equity-based awards shall be granted under the 1999 plan.
In 2007, the 2007 Stock Incentive Plan (“2007 Plan”),
was adopted by the board of directors and approved by its
stockholders. The 2007 Plan permits the Company to make grants
of incentive stock options, non-statutory stock options,
restricted stock, restricted stock units, stock appreciation
rights and other stock-based awards.
58
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
These awards may be granted to the Company’s employees,
officers, directors, consultants, and advisors. The Company
reserved 1,500,000 shares of its common stock for the
issuance under the 2007 Plan. Additionally, per the terms of the
2007 Plan, 700,000 shares of common stock previously
reserved for issuance under the 1999 plan were added to the
number of shares available for issuance under the 2007 Plan. The
2007 Plan also contains an evergreen provision that allows for
an annual increase in the number of shares available for
issuance on the first day of each year beginning in 2008 and
ending on the second day of 2017. The increase is based on a
formula and cannot exceed 700,000 shares of common stock
per year. As of December 31, 2007, 1,807,450 shares of
common stock were available for issuance under the 2007 Plan.
Prior to January 1, 2006, the Company accounted for its
stock-based compensation plans under the intrinsic value
recognition and measurement provisions of APB 25 and related
interpretations, and adopted the disclosure-only provisions of
SFAS 123, as amended by SFAS No. 148.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS 123R. SFAS 123R
requires nonpublic companies that used the minimum value method
in SFAS 123 for either recognition or pro forma disclosures
to apply SFAS 123R using the prospective transition method.
Under the prospective transition method, compensation cost
recognized in the years ended December 31, 2007 and 2006
included the pro rata compensation cost for all share-based
payments granted on or subsequent to January 1, 2006, based
on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. The Company recognizes the
compensation cost of employee stock-based awards in the
statement of operations using the straight-line method over the
requisite service period of the award. The Company will continue
to apply APB 25 in future periods to equity awards outstanding
at the date of SFAS 123R’s adoption that were measured
using the minimum value method. In accordance with the
requirements of SFAS 123R, the Company does not present pro
forma disclosures for periods prior to the adoption of
SFAS 123R, as the estimated fair value of the
Company’s stock options granted through December 31,
2005 was determined using the minimum value method.
Stock
Options
During the years ended December 31, 2007, 2006 and 2005,
the Company granted 860,296, 749,277 and 737,091 stock options,
respectively, to certain employees and directors. The vesting of
these awards is time-based and the restrictions typically lapse
25% after one year and quarterly thereafter for the next
36 months.
Stock options have historically been granted with exercise
prices equal to the estimated fair value of the Company’s
common stock on the date of grant. Commencing in the fourth
quarter 2007, the Company based fair value on the quoted market
price of the Company’s common stock. Because there was no
public market for the Company’s common stock prior to the
initial public offering (Note 5), the Company’s board
of directors determined the fair value of common stock taking
into account the Company’s most recently available
valuation of common stock.
For the year ended December 31, 2005, the fair value of
common stock was estimated by the Company on an annual basis.
The fair value was estimated by considering a number of
objective and subjective factors, including peer group trading
multiples, the amount of preferred stock liquidation
preferences, the illiquid nature of common stock and the size of
the Company and its lack of historical profitability.
Commencing in 2006, the Company began the process of quarterly
contemporaneous common stock valuations. In the first quarter of
2006, the fair value of common stock was estimated using the
guideline public company method. The valuation considered
numerous factors, including peer group trading multiples, the
amount of preferred stock liquidation preferences, the illiquid
nature of the Company’s common stock, the Company’s
small size, lack of historical profitability, short-term cash
requirements and the redemption rights of preferred stockholders.
59
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
Beginning in the second quarter of 2006, the quarterly common
stock valuations were prepared using the probability-weighted
expected return method. Under this methodology, the fair market
value of common stock was estimated based upon an analysis of
future values for the Company assuming various outcomes. The
share value was based on the probability-weighted present value
of expected future investment returns considering each of the
possible outcomes available to the Company as well as the rights
of each share class.
The fair value of each stock option grant was estimated on the
date of grant using the Black-Scholes option-pricing model. The
expected term assumption is based on the simplified method for
estimating expected term for awards that qualify as
“plain-vanilla” options under SAB 107, Share
Based Payment. Expected volatility is based on historical
volatility of the publicly traded stock of a peer group of
companies analyzed by the Company. The risk-free interest rate
is determined by reference to U.S. Treasury yields at or
near the time of grant for time periods similar to the expected
term of the award. The relevant data used to determine the value
of the stock option grants is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average risk-free interest rate
|
|
|
4.23
|
%
|
|
|
4.82
|
%
|
Expected term (in years)
|
|
|
6.1
|
|
|
|
6.1
|
|
Weighted average expected volatility
|
|
|
62.1
|
%
|
|
|
64.9
|
%
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
1,036,305
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
737,091
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(473,170
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(82,460
|
)
|
|
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,217,766
|
|
|
|
0.79
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
749,277
|
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(192,076
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(72,960
|
)
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,702,007
|
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
860,296
|
|
|
|
13.36
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(199,824
|
)
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(161,857
|
)
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
2,200,622
|
|
|
|
6.32
|
|
|
|
8.33
|
|
|
$
|
33,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
573,178
|
|
|
$
|
2.00
|
|
|
|
6.90
|
|
|
$
|
11,177
|
|
The aggregate intrinsic value was calculated based on the
positive difference between the estimated fair value of the
Company’s common stock on December 31, 2007 of $21.50
per share and the exercise price of the options.
60
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
The weighted average grant-date fair value of grants of stock
options was $8.06 and $1.50 per share for the years ended
December 31, 2007 and 2006, respectively.
The total intrinsic value of stock options exercised was $978,
$430 and $11 for the years ended December 31, 2007, 2006
and 2005, respectively.
Compensation cost of $645, $83 and $17 was recognized for
employee stock-based compensation for the years ended
December 31, 2007, 2006 and 2005, respectively.
Under the provisions of SFAS 123R, the Company recognized
stock-based compensation expense on all employee awards in the
following categories:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of revenue
|
|
$
|
81
|
|
|
$
|
25
|
|
Research and development
|
|
|
170
|
|
|
|
27
|
|
Sales and marketing
|
|
|
133
|
|
|
|
19
|
|
General and administrative
|
|
|
261
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
645
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
No stock-based compensation expense was capitalized during the
years ended December 31, 2007, 2006 or 2005. The
unrecognized compensation expense associated with outstanding
stock options at December 31, 2007 was $7,225 which is
expected to be recognized over a weighted-average period of
3.57 years as of December 31, 2007.
Stock
Purchase Plan
The Company’s 2007 employee stock purchase plan (the
“Purchase Plan”) was adopted by the board of directors
and approved by its stockholders in September 2007 and became
effective upon the completion of the initial public offering.
The Purchase Plan will be administered by the board of directors
or by a committee appointed by the board of directors. All
employees, including directors who are employees and all
employees of participating subsidiaries, who have been employed
for at least three months prior to enrolling in the purchase
plan, who are employees on the first day of the purchase plan
period, and whose customary employment is for more than
30 hours a week and more than five months in any calendar
year, will be eligible to participate in the Purchase Plan. The
Company will make one or more offerings to employees to purchase
stock under the Purchase Plan. Offerings will begin on each of
January 1 and July 1 at which date a six-month purchase plan
period will commence and payroll deductions will be made and
held for the purchase of the common stock at the end of such
Purchase Plan period. The first offering commencement date will
begin on January 1, 2008. The Company reserved a total of
350,000 shares of common stock for issuance to
participating employees under the Purchase Plan.
Restricted
Stock
During the year ended December 31, 2005, the Company sold
192,010 shares of restricted stock to a certain employee.
The vesting of this award is time-based and restrictions lapse
over four years. The Company did not record compensation expense
as the shares were sold at fair value. At December 31, 2007
and 2006, 96,006 and 144,008 shares, respectively remained
unvested. No shares have been forfeited.
61
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
As a result of losses incurred, the Company did not provide for
any income taxes in the years ended December 31, 2007, 2006
and 2005. A reconciliation of the Company’s effective tax
rate to the statutory federal income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory rate
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
|
|
(34
|
%)
|
Increase in valuation allowance
|
|
|
44
|
|
|
|
40
|
|
|
|
55
|
|
State taxes, net of federal benefit
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Impact of permanent differences
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Expiration of state net operation losses
|
|
|
5
|
|
|
|
5
|
|
|
|
—
|
|
Tax credits
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
(14
|
)
|
Other
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has deferred tax assets related to temporary
differences and operating loss carryforwards as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
14,002
|
|
|
$
|
10,778
|
|
Capitalized research and development
|
|
|
22
|
|
|
|
41
|
|
Research and development credit carryforwards
|
|
|
1,952
|
|
|
|
1,584
|
|
Accrued expenses
|
|
|
307
|
|
|
|
176
|
|
Redeemable convertible preferred stock warrant
|
|
|
288
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
16,571
|
|
|
|
12,816
|
|
Deferred tax asset valuation allowance
|
|
|
(16,299
|
)
|
|
|
(12,688
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
272
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(272
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(272
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The Company has provided a valuation allowance for the full
amount of its net deferred tax assets because at
December 31, 2007 and 2006 it is not more likely than not
that any future benefit from deductible temporary differences
and net operating loss and tax credit carryforwards would be
realized. The change in valuation allowance for the year ended
December 31, 2007 of $3,611 is attributable primarily to
the increase in the net operating loss and research and
development credit carryforwards.
At December 31, 2007, the Company has federal and state net
operating loss carryforwards of approximately $38,243 and
$24,862 respectively, which expire at varying dates through 2027
for federal income tax purposes and through 2012 for state
income tax purposes. At December 31, 2007, $1,396 of
federal and state net
62
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
operating loss carryforwards relate to deductions for stock
option compensation for which the associated tax benefit will be
credited to additional paid-in capital when realized. This
amount is tracked separately and not included in the
Company’s deferred tax assets.
At December 31, 2007, the Company had federal and state
research and development credit carryforwards of $1,188 and
$1,156 respectively, which will expire at varying dates through
2027 for federal income tax purposes and through 2022 for state
income tax purposes.
Adoption
of FIN 48
In June 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109
(“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a two-step process to determine the
amount of tax benefit to be recognized. First, the tax position
must be evaluated to determine the likelihood that it will be
sustained upon external examination. If the tax position is
deemed “more-likely-than-not” to be sustained, the tax
position is then assessed to determine the amount of benefit to
recognize in the financial statements. The amount of the benefit
that may be recognized is the largest amount that has a greater
than 50% likelihood of being realized upon ultimate settlement.
The Company adopted FIN 48 on January 1, 2007 and its
adoption did not have an effect on its results of operations and
financial condition.
The total amount of unrecognized tax benefits was $303 as of
January 1, 2007 and December 31, 2007, all of which,
if recognized, would affect the effective tax rate prior to the
adjustment for the Company’s valuation allowance. As a
result of the implementation of FIN 48, the Company did not
recognize an increase in tax liability for the unrecognized tax
benefits because the Company has significant deferred tax assets
comprised primarily of net operating loss carryforwards which
would mitigate the effect of any unrecognized tax benefits.
There were no increases or decreases to the amount of
unrecognized tax benefits during 2007. Additionally, it is not
possible to estimate the potential net increase or decrease to
the Company’s unrecognized tax benefits during the next
twelve months.
The Company’s policy is to record estimated interest and
penalties related to the underpayment of income taxes as a
component of its income tax provision. As of January 1,
2007 and December 31, 2007, the Company had no accrued
interest or tax penalties recorded. The Company’s income
tax return reporting periods since December 31, 2003 are
open to income tax audit examination by the federal and state
tax authorities. In addition, because the Company has net
operating loss carryforwards, the Internal Revenue Service is
permitted to audit earlier years and propose adjustments up to
the amount of net operating loss generated in those years.
The Company has performed an analysis of its changes in
ownership under Internal Revenue Code Section 382 and has
determined that any ownership changes which have occurred do not
result in a permanent limitation of the Company’s federal
and state net operating losses.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Payroll and payroll related
|
|
$
|
1,114
|
|
|
$
|
694
|
|
Licensed software and maintenance
|
|
|
638
|
|
|
|
562
|
|
Marketing programs
|
|
|
344
|
|
|
|
509
|
|
Other accrued expenses
|
|
|
1,183
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,279
|
|
|
$
|
2,406
|
|
|
|
|
|
|
|
|
|
|
63
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
The Company has a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. This plan
covers substantially all employees who meet minimum age and
service requirements and allows participants to defer a portion
of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the
Board of Directors. There were no contributions made to the plan
by the Company during the years ended December 31, 2007,
2006 and 2005.
|
|
10.
|
Commitments
and Contingencies
|
Capital
Leases
The Company leased equipment under capital leases that expired
in 2006 (Note 3). Amortization of assets under capital
leases was $0 and $19 for the years ended December 31, 2006
and 2005, respectively.
Operating
Leases
The Company leased its office space under a noncancelable
operating lease expiring in July 2005. In June 2005, the Company
and the landlord entered into the First Amendment to the
original lease agreement which effectively terminated the
original lease related to the existing office space and entered
into a new lease agreement for new office space with a lease
term of five years from the commencement of the First Amendment
in October 2005. In July 2006, the Company subleased an adjacent
office space within the same building. Simultaneous with the
execution of the sublease, the Company entered into the Second
Amendment of its primary office lease to incorporate the
additional space, upon the expiration of the sublease, into the
primary office lease for the period from May 1, 2008 to
September 2010. In 2007, the Company entered into the third and
fourth amendments of its office lease in order to expand its
existing premises. The modified lease arrangement required a $92
increase in the security deposit. To satisfy the increased
security deposit requirement, the Company increased the letter
of credit issued for the benefit of the holder of the lease and
the related restricted cash arrangement securing the letter of
credit. The modified lease arrangement includes certain lease
incentives, payment escalations and rent holidays, the net
effect of which has been deferred and is being amortized as an
adjustment to rent expense over the term of the lease. Total
rent expense under operating leases was $1,091, $745 and $351
for the years ended December 31, 2007, 2006 and 2005,
respectively.
As of December 31, 2007, future minimum lease payments
under noncancelable operating leases are as follows:
|
|
|
|
|
2008
|
|
$
|
2,041
|
|
2009
|
|
|
2,264
|
|
2010
|
|
|
1,719
|
|
|
|
|
|
|
|
|
$
|
6,024
|
|
|
|
|
|
|
Hosting
Services
The Company has an agreement with a vendor to provide
specialized space and related services from which the Company
hosts its software application. The agreement includes payment
commitments that expire at various dates through October 2009.
As of December 31, 2007, the agreement requires future
minimum payments of $986 and $367 in 2008 and 2009, respectively.
In 2007, the Company entered into an agreement and first
amendment to the agreement with a different vendor to provide
space and related services in a second co-location hosting
facility. As of December 31, 2007, the amended agreement
requires future minimum payments of $770, $1,542, $1,581,
$1,621, $1,661 and $774 in 2008, 2009, 2010, 2011, 2012 and
2013, respectively.
64
Constant
Contact, Inc.
Notes to
Consolidated Financial
Statements — (Continued)
(in thousands, except share and per share amounts)
Letters
of Credit
As of December 31, 2007 and 2006, the Company maintained a
letter of credit totaling $308 and $216, respectively, for the
benefit of the holder of the Company’s facilities lease.
The holder can draw against the letter of credit in the event of
default by the Company. The Company was required to maintain a
cash balance of at least $308 as of December 31, 2007 to
secure the letter of credit and $266 as of December 31,
2006 to secure the letter of credit and as collateral on
customer credit card deposits. These amounts were classified as
restricted cash in the balance sheet at December 31, 2007
and 2006.
Indemnification
Obligations
The Company enters into standard indemnification agreements with
the Company’s channel partners and certain other third
parties in the ordinary course of business. Pursuant to these
agreements, the Company indemnifies and agrees to reimburse the
indemnified party for losses incurred by the indemnified party
in connection with certain intellectual property infringement
claims by any third party with respect to the Company’s
business and technology. Based on historical information and
information known as of December 31, 2007, the Company does
not expect it will incur any significant liabilities under these
indemnification agreements.
An executive of the Company served as a director of a channel
partner and vendor to the Company from December 2003 through May
2007. In the years ended December 31, 2007, 2006 and 2005,
the Company’s aggregate payments to this channel partner
and vendor for customer referrals and template design services
were $36, $164 and $107, respectively.
One of the Company’s directors is a general partner of a
venture capital firm that owns, through affiliated investment
entities, approximately 7% of the outstanding common stock of
one of the Company’s vendors. Another of the general
partners of that venture capital firm was a former member of the
board of directors of that same vendor. In the years ended
December 31, 2007, 2006 and 2005, the Company’s
aggregate payments to this vendor were $508, $253 and $33,
respectively.
|
|
12.
|
Quarterly
Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,867
|
|
|
$
|
13,517
|
|
|
$
|
11,398
|
|
|
$
|
9,713
|
|
|
$
|
8,484
|
|
|
$
|
7,239
|
|
|
$
|
6,400
|
|
|
$
|
5,429
|
|
Gross Profit
|
|
|
12,096
|
|
|
|
10,094
|
|
|
|
8,292
|
|
|
|
6,982
|
|
|
|
6,075
|
|
|
|
5,201
|
|
|
|
4,589
|
|
|
|
3,886
|
|
Loss from operations
|
|
|
(54
|
)
|
|
|
(781
|
)
|
|
|
(2,473
|
)
|
|
|
(2,390
|
)
|
|
|
(3,548
|
)
|
|
|
(1,626
|
)
|
|
|
(1,655
|
)
|
|
|
(807
|
)
|
Net loss
|
|
|
(1,069
|
)
|
|
|
(1,691
|
)
|
|
|
(2,813
|
)
|
|
|
(2,681
|
)
|
|
|
(3,550
|
)
|
|
|
(1,521
|
)
|
|
|
(1,811
|
)
|
|
|
(957
|
)
|
Net loss attributable to common stockholders
|
|
|
(1,096
|
)
|
|
|
(1,962
|
)
|
|
|
(3,078
|
)
|
|
|
(2,934
|
)
|
|
|
(3,809
|
)
|
|
|
(1,780
|
)
|
|
|
(2,945
|
)
|
|
|
(3,093
|
)
|
Basic and diluted net loss attributable to common stockholders
per share:
|
|
$
|
(0.04
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(0.94
|
)
|
65
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
On or about September 20, 2006, we dismissed Vitale,
Caturano & Company, Ltd., or Vitale, as our
independent registered public accounting firm. Our audit
committee participated in and approved the decision to change
our independent registered public accounting firm. The reports
of Vitale on the financial statements for the year ended
December 31, 2005 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle. During the
year ended December 31, 2005 and through September 20,
2006, there were no disagreements with Vitale on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements
if not resolved to the satisfaction of Vitale would have caused
them to make reference thereto in their reports on the financial
statements for such years. We requested that Vitale furnish us
with a letter addressed to the SEC stating whether or not it
agrees with the above statements. A copy of such letter, dated
July 6, 2007, was filed as an exhibit to our Registration
Statement on
Form S-1.
We engaged PricewaterhouseCoopers LLP as our new independent
registered public accounting firm as of December 26, 2006.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures and Changes in Internal Control Over
Financial Reporting
Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures as of
December 31, 2007. The term “disclosure controls and
procedures,” as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the
“Exchange Act”, means controls and other procedures of
a company that are designed to ensure that information required
to be disclosed by a company in the reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the
company’s management, including its principal executive and
principal financial officers, as appropriate to allow timely
decisions regarding required disclosure. Management recognizes
that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2007, our chief
executive officer and chief financial officer concluded that, as
of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
No change in the Company’s internal control over financial
reporting (as defined in Rules 13a-15(f) and
15d-15(f)
under the Exchange Act) occurred during the quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
This Annual Report on
Form 10-K
does not include a report of management’s assessment
regarding internal control over financial reporting or an
attestation report of the company’s registered public
accounting firm due to a transition period established by rules
of the SEC for newly public companies.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
66
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Incorporated by reference from the information in our proxy
statement for the 2008 Annual Meeting of Stockholders, which we
will file with the Securities and Exchange Commission within
120 days of December 31, 2007.
We have adopted a code of ethics, called the Code of Business
Conduct and Ethics, that applies to our officers, including our
principal executive, financial and accounting officers, and our
directors and employees. We have posted the Code of Business
Conduct and Ethics on our website at www.constantcontact.com
under the “Investor Relations — Corporate
Governance” section of the webpage. We intend to make all
required disclosures concerning any amendments to, or waivers
from, the Code of Business Conduct and Ethics on our website.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Incorporated by reference from the information in our proxy
statement for the 2008 Annual Meeting of Stockholders, which we
will file with the Securities and Exchange Commission within
120 days of December 31, 2007.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Incorporated by reference from the information in our proxy
statement for the 2008 Annual Meeting of Stockholders, which we
will file with the Securities and Exchange Commission within
120 days of December 31, 2007.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Incorporated by reference from the information in our proxy
statement for the 2008 Annual Meeting of Stockholders, which we
will file with the Securities and Exchange Commission within
120 days of December 31, 2007.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Incorporated by reference from the information in our proxy
statement for the 2008 Annual Meeting of Stockholders, which we
will file with the Securities and Exchange Commission within
120 days of December 31, 2007.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) Financial Statements
For a list of the consolidated financial information included
herein, see Index to the Consolidated Financial Statements on
page 43 of this Annual Report on
Form 10-K.
(b) Exhibits
See Exhibit Index incorporated into this item by reference.
(c) Financial Statement Schedules
No financial statement schedules have been submitted because
they are not required or are not applicable or because the
information required is included in the consolidated financial
statements or the notes thereto.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONSTANT CONTACT, INC.
Gail F. Goodman
President and Chief Executive Officer
Date: March 14, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Gail
F. Goodman
Gail
F. Goodman
|
|
President and Chief Executive Officer
|
|
March 14, 2008
|
|
|
|
|
|
/s/ Thomas
Anderson
Thomas
Anderson
|
|
Director
|
|
March 8, 2008
|
|
|
|
|
|
/s/ Robert
P. Badavas
Robert
P. Badavas
|
|
Director
|
|
March 9, 2008
|
|
|
|
|
|
/s/ John
Campbell
John
Campbell
|
|
Director
|
|
March 9, 2008
|
|
|
|
|
|
/s/ Michael
T. Fitzgerald
Michael
T. Fitzgerald
|
|
Director
|
|
March 9, 2008
|
|
|
|
|
|
/s/ Patrick
Gallagher
Patrick
Gallagher
|
|
Director
|
|
March 9, 2008
|
|
|
|
|
|
/s/ William
S. Kaiser
William
S. Kaiser
|
|
Director
|
|
March 7, 2008
|
|
|
|
|
|
/s/ Steven
R. Wasserman
Steven
R. Wasserman
|
|
Vice President and Chief Financial Officer
|
|
March 14, 2008
|
68
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1(1)
|
|
Restated Certificate of Incorporation of the Company.
|
|
3
|
.2(1)
|
|
Second Amended and Restated Bylaws of the Company.
|
|
4
|
.1(1)
|
|
Specimen Certificate evidencing shares of common stock.
|
|
10
|
.1 (2)#
|
|
1999 Stock Option/Stock Issuance Plan, as amended.
|
|
10
|
.2 (2)#
|
|
Form of Non-Qualified Stock Option Agreement with Executive
Officers under the 1999 Stock Option/Stock Issuance Plan.
|
|
10
|
.3 (2)#
|
|
Form of Non-Qualified Stock Option Agreement under the 1999
Stock Option/Stock Issuance Plan.
|
|
10
|
.4 (2) #
|
|
Restricted Stock Agreement, dated December 12, 2005,
between the Company and Steven R. Wasserman.
|
|
10
|
.5 (1)#
|
|
2007 Stock Incentive Plan.
|
|
10
|
.6 (1)#
|
|
Forms of Incentive Stock Option Agreement under the 2007 Stock
Incentive Plan.
|
|
10
|
.7 (1)#
|
|
Forms of Non-Qualified Stock Option Agreement under the 2007
Stock Incentive Plan.
|
|
10
|
.8 (1)#
|
|
2007 Employee Stock Purchase Plan.
|
|
10
|
.9 (2)#
|
|
Letter Agreement, dated April 14, 1999, between the Company
and Gail F. Goodman.
|
|
10
|
.10 (2)#
|
|
Letter Agreement, dated December 1, 2005, between the
Company and Steven R. Wasserman.
|
|
10
|
.11 (2)#
|
|
2007 Executive Team Bonus Plan.
|
|
10
|
.12 (1)#
|
|
Form of Director and Executive Officer Indemnification Agreement.
|
|
10
|
.13(2)
|
|
Amended and Restated Investors’ Rights Agreement, dated as
of August 9, 2001, among the Company and the investors
listed therein.
|
|
10
|
.14(2)
|
|
Amended and Restated Preferred Investors’ Rights Agreement,
dated as of May 12, 2006, among the Company and the parties
listed therein.
|
|
10
|
.15(2)
|
|
Lease Agreement, dated as of July 9, 2002, as amended,
between the Company and Boston Properties Limited Partnership.
|
|
10
|
.16(3)
|
|
Fourth Amendment to Lease, dated as of November 26, 2007,
between the Company and Boston Properties Limited Partnership.
|
|
10
|
.17(1)
|
|
Loan and Security Agreement, dated February 27, 2003, as
amended, between the Company and Silicon Valley Bank.
|
|
10
|
.18(4)
|
|
Form of Indemnification Agreement between the Company and
certain entities that sold stock in the Company’s initial
public offering.
|
|
10
|
.19*#
|
|
2008 Executive Incentive Plan.
|
|
10
|
.20*
|
|
Master-Services Agreement dated July 19, 2007 by and
between the Company and Sentinel
Properties-Bedford,
LLC, as amended.
|
|
21
|
.1*
|
|
Subsidiaries of the Company.
|
|
23
|
.1*
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
23
|
.2*
|
|
Consent of Vitale, Caturano & Company, Ltd.
|
|
31
|
.1*
|
|
Certification by Chief Executive Officer..
|
|
31
|
.2*
|
|
Certification by Chief Financial Officer.
|
|
32*
|
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the
Sarbanes-Oxley
Act of 2002, by Chief Executive Officer and Chief Financial
Officer.
|
|
|
|
* |
|
Filed herewith. |
|
# |
|
Management contract or compensatory plan required to be filed as
an exhibit pursuant to Item 15(b) of this Annual Report on
Form 10-K. |
|
(1) |
|
Incorporated by reference to the Company’s Registration
Statement on
Form S-1,
as amended, filed with the Commission on September 4, 2007. |
|
(2) |
|
Incorporated by reference to the Company’s Registration
Statement on
Form S-1,
filed with the Commission on July 6, 2007. |
|
(3) |
|
Incorporated by reference to the Company’s Current Report
on
Form 8-K
filed with the Commission on November 28, 2007. |
|
(4) |
|
Incorporated by reference to the Company’s Registration
Statement on
Form S-1,
as amended, filed with the Commission on September 12, 2007. |