ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the following risks and all other information
contained in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which we filed with the SEC on February 26, 2013, including our unaudited condensed consolidated
financial statements and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations, before investing in our common stock. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition
and results of operations could be materially harmed. In that case, the trading price of our common stock could decline, and you may lose some or all of your investment.
Risks Related To the Merger with Vista
The Merger is
subject to a number of conditions beyond our control. Failure to complete the Merger within the expected time frame or at all could adversely affect our future business and financial results and our stock price.
Completion of the Merger is subject to certain conditions, including among other things (i) there having been validly tendered and not
validly withdrawn Shares that represent one more than 50% of the total number of Shares outstanding on a fully diluted basis at the time of the expiration of the Offer and (ii) the receipt of proceeds by Parent under certain financing
agreements, including debt commitment letters from Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Royal Bank of Canada, RBC Capital Markets, Bank of Montreal, and BMO Capital Markets Corp. (collectively, the
Lenders).
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We cannot predict whether and when these conditions will be satisfied. If one or more of these
conditions is not satisfied, and as a result, we do not complete the Merger, or in the event the proposed Merger is not completed or delayed for any other reason, our business may be harmed because:
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managements and our employees attention may be diverted from our day-to-day business because matters related to the proposed Merger may require additional commitments of their time and resources;
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employees may experience uncertainty about their future roles with us, which might adversely affect our ability to retain and hire key personnel and other employees;
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our relationships with customers, partners and suppliers may be harmed as a result of the Merger as well as uncertainties with regard to the combined companys plans with respect to our products, employees and
business;
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we have agreed to restrict certain of our activities pending the consummation of the Merger;
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certain costs related to the proposed Merger, such as legal and accounting fees and reimbursement of certain expenses, are payable by us whether or not the proposed Merger is completed;
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we would not realize any of the anticipated benefits of having completed the proposed Merger; and
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we may be required to pay a termination fee if the Merger Agreement is terminated under certain circumstances which would negatively affect our financial results and liquidity.
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Our stock price may also fluctuate significantly based on announcements by Vista and other third-parties or us regarding the proposed Merger.
Any of these events could harm our results of operations and financial condition and could cause a decline in the price of our common stock, particularly if the Merger does not close.
If the proposed Merger is not completed or we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and
uncertainties.
If the proposed Merger is not completed, the Company Board will review and consider various alternatives available to
us, including, among others, continuing as a public company with no material changes to our business or capital structure, seeking a minority investment from a strategic or financial partner or attempting to implement a sale to either a financial or
strategic buyer. These alternative transactions may involve various additional risks to our business, including, among others, distraction of our management team and associated expenses, our ability to consummate any such alternative transaction,
the valuation assigned to our business in any such alternative transaction, our ability or a potential buyers ability to access capital on acceptable terms or at all and other variables which may adversely affect our operations.
The Merger Agreement contains provisions that could discourage a potential competing acquiror of Active.
The Merger Agreement contains no solicitation provisions that, subject to limited exceptions, restrict our ability to solicit,
initiate, or knowingly encourage, facilitate or induce third-party proposals for the acquisition of our common stock or assets. In addition, Vista has an opportunity to offer to modify the terms of the Merger in response to any competing acquisition
proposals before our Board of Directors may withdraw or qualify its recommendation with respect to the Merger. The Merger Agreement further provides that upon termination of the Merger Agreement under specified circumstances, including certain
terminations in connection with an alternative business combination transaction as permitted by the terms of the Merger Agreement, we may be required to pay Vista a termination fee of $32.0 million.
These provisions could discourage a potential third-party acquiror that might have an interest in acquiring all or a significant portion of us
from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Merger. These provisions might also result in
a potential third-party acquiror proposing to pay a lower price to the shareholders than it might otherwise have proposed to pay because of the added expense of the $32.0 million termination fee that may become payable in certain circumstances.
If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction
with another party on terms comparable to, or better than, the terms of the Merger.
Our executive officers and directors have interests in the Merger
that may be different from, or in addition to, the interests of our stockholders generally.
Our executive officers and members of the
Company Board may be deemed to have interests in the execution and delivery of the Merger Agreement and the Offer and the Merger that may be different from or in addition to those of our stockholders, generally. These interests may create potential
conflicts of interest. The Company Board was aware of these interests and considered them, among other things, in reaching its decision to approve the Merger Agreement. As described in more detail below, these interests include:
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the cancellation of vested and unvested options to purchase shares of common stock of the Company (the Stock Options) outstanding immediately prior to the closing of the Merger and the conversion of such
Stock Options into the right to receive a cash payment equal to (i) the excess, if any, of Vistas offer price over the exercise price per share of such Stock Option, multiplied by (ii) the total number of shares then issuable upon
exercise in full of such Stock Option, without interest and less any required withholding taxes;
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the accelerated vesting of Company unvested (i) time based restricted stock units, (ii) performance based restricted stock units and (iii) market stock units outstanding immediately prior to the closing
of the Merger and the cancelation of such awards in exchange for a cash payment equal to Vistas offer price for each share subject to the award;
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the receipt of certain payments and benefits under certain executive officers employment, retention and change in control agreements upon certain types of terminations of employment that could occur before or
following a change in control transaction; and
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the entitlement to the indemnification and exculpation benefits in favor of directors and officers of the Company.
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These interests may cause our directors and executive officers to view the Merger proposal differently and more favorably than our
shareholders may view it.
Several lawsuits have been filed against the Company, Vista and our directors challenging the proposed Merger, and an
adverse ruling may prevent the proposed Merger from being completed or adversely affect the Companys financial results and liquidity
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The Company, Vista and the members of the Board have been named as defendants in several lawsuits brought by purported stockholders of the
Company challenging the proposed Merger and seeking, among other things, injunctive relief to enjoin the defendants from completing the proposed Merger on the agreed-upon terms.
One of the conditions to the closing of the Merger is that no injunction or other legal restraint or prohibition shall be in effect that
prevents completion of the proposed Merger. Therefore, if a settlement or other resolution is not reached in the lawsuits referenced above and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting
the companys ability to complete the Merger, then such injunctive or other relief may prevent the proposed Merger from becoming effective within the expected timeframe or at all. In addition, an adverse judgment for monetary damages could have
a material adverse effect on the financial results, operations and liquidity of the Company.
Risks Related To Our Business
We have a history of significant net losses, and we may not be able to achieve or maintain consistent profitability on an annual basis.
We have incurred fiscal year net losses since our inception in 1998. Our net losses were approximately $25.0 million for the nine months ended
September 30, 2013, $43.0 million for the year ended December 31, 2012, $15.3 million for the year ended December 31, 2011, and $27.3 million for the year ended December 31, 2010. At September 30, 2013, we had an accumulated
deficit of approximately $343.3 million. We anticipate our operating expenses will continue to increase during the next few years as we complete the transition of our customers to ActiveWorks, make additional acquisitions, increase our sales
and marketing activities, expand outside of North America and enhance our customer service and call center capabilities. If our revenue grows at a slower rate than we anticipate, or if our operating expenses increase unexpectedly, we may not be able
to achieve or maintain consistent profitability.
Our limited operating history, new and unproven business model and rapidly evolving market make it
difficult to evaluate our future prospects and increase the risk that we will not be successful.
We launched our application services
in 1999, and we have made a number of changes to our operations, technology platform and online communities since that time. As a result, we have a limited operating history with our current business upon which to predict our future operating
results. In addition, the business of providing cloud computing applications to activity and event organizers and building and supporting online communities for activity and event participants is relatively new and subject to rapid change. You must
consider our business and prospects in light of the risks and difficulties we will continue to encounter as a company with a new and unproven business model and operating in a new and rapidly evolving market. These risks and difficulties include our
ability to, among other things:
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deepen our relationships with our existing customers;
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continue to transition our existing customers to ActiveWorks;
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continue to earn the trust of organizers and participants with respect to the processing, storage and use of their confidential information and personal data in compliance with our own high standards of care and
applicable governmental and other legal obligations related to privacy and data protection;
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develop a scalable, high performance technology infrastructure that can securely, efficiently and reliably handle increased usage globally;
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continue to manage and successfully integrate acquired businesses, applications and technologies;
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successfully compete with other companies that engage in the activity and event registration and management market;
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continue to build and support online communities and applications for activity and event participants;
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successfully introduce and deploy new features and functionality for our technology platform;
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increase revenue from our applications, websites and online communities;
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avoid interruptions or disruptions in our service;
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avoid problems with the functionality of our applications;
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continue to hire, integrate and retain highly skilled team members who embrace our values and culture; and
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successfully expand our business outside of North America.
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We may not be able to address
these risks and difficulties or others that we may encounter, including those described elsewhere in this risk factors section. Our failure to adequately address risks and difficulties as we encounter them could cause our reputation to suffer and
harm our business. We base our current and future expense levels on our managements estimates of the size of our market and the number of potential customers and registrations, operating forecasts and estimates of future revenue. However, our
revenue and operating results are difficult to forecast due to the uncertainty of our market and our ability to increase our customer base and the number of participants who elect to register for activities using our applications. In addition,
certain of our expenses are fixed, and we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in revenue. As a result, we may make errors in predicting our revenue and expenses, which would harm our
business and financial condition.
Our growth rate over the past few years may not be sustainable. If we fail to maintain an adequate growth rate, our
business will be adversely affected and we may not achieve or maintain profitability.
Our revenue has grown rapidly over the past few
years, increasing to $418.9 million in 2012 from $337.4 million in 2011 and $279.6 million in 2010, representing a compound annual growth rate over this period of 22.4%. We may not be able to sustain this level of growth in future periods, and you
should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. Further, a portion of our revenue growth in each year resulted from acquisitions. We may not complete acquisitions in the
future that increase our revenue at the same rate as in prior periods. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete the acquisitions we do
identify. If we are unable to maintain an adequate rate of growth, our business will be adversely affected and we may not achieve or maintain profitability.
If we fail to effectively manage our growth, our business and operating results could be harmed.
The substantial growth in our business over the past few years has placed, and may continue to place, significant demands on our management,
our operating infrastructure and our internal controls and procedures. As our operations grow in size and complexity, we will need to improve and upgrade our operating systems and infrastructure to offer an increasing number of organizers and
participants enhanced applications, features, functionality and support. In addition, we will be required to strengthen our internal controls and our risk management policies and procedures. The expansion of our operating systems and infrastructure
and the strengthening of our controls, policies and procedures will require us to commit substantial financial, operational and technical resources in advance of an increase in the volume of our business, with no assurance that our business will
actually increase. Continued growth could also strain our ability to maintain reliable service levels for organizers and participants, as well as to recruit, train and retain highly skilled personnel. If we fail to effectively manage our growth, our
business and operating results could be harmed.
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Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value, strain our
resources and impair our operating results, financial conditions and prospects.
Acquisitions have been an important part of our growth
to date. We have completed a significant number of acquisitions over the past few years. We may continue to seek to acquire and invest in businesses, applications and technologies that we believe could complement or expand our business, augment our
market coverage, enhance our technology platform, provide us with valuable customer contacts or otherwise offer growth opportunities.
Acquisitions and investments involve numerous risks and difficulties, including:
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difficulties in integrating operations, technologies, accounting functions and personnel;
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difficulties in supporting and transitioning customers of our acquired companies to our technology platform;
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difficulties in maintaining the security and reliability of acquired applications;
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delays in strengthening internal controls and risk management policies and procedures;
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diversion of financial and management resources from existing operations;
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potential loss of key employees;
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inability to generate sufficient revenue to offset acquisition or investment costs;
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assumption of unknown liabilities and claims;
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potential disputes and litigation;
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potential diminishment in the value of any acquired brands; and
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potential write-offs of acquired assets.
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Acquisitions also frequently result in recording of
goodwill and other intangible assets, which are subject to potential impairments in the future that could harm our operating results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders
may be diluted. Such dilution could adversely affect the market price of our stock. Moreover, if we are unable to identify suitable future acquisition candidates, reach agreement with these parties or obtain the financing needed to complete such
acquisitions, we could lose market share to competitors who are able to complete such acquisitions. This loss of market share could negatively impact our business, revenue and future growth. If we fail to achieve the anticipated benefits of any
acquisitions we have completed or may complete in the future, our business, operating results, financial condition and prospects may be impaired.
Any
failure to compete successfully against current or future competitors would materially adversely affect our business and prospects.
The market for technology applications for activity and event organizers is fragmented, competitive and rapidly evolving. Our primary
competition comes from traditional registration processing methods used by activity and event organizers, such as paper-based registrations submitted by mail or in person or reservations submitted by telephone. We also face competition from:
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custom-developed applications created by an organizers technical staff or an outside custom service provider;
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companies that offer generalized functional software that have features and functionality that organizers can use to register participants and manage their activities, such as content or contact management software
programs, e-commerce solutions, enterprise resource planning software and other products having separate software modules; and
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companies that offer organizers integrated hosted software solutions in one or more verticals within the activities and events market.
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Our competitors may announce new products, services or enhancements that better address changing industry standards or the needs of organizers
and participants. In addition, competitors and potential competitors may enter into business combinations or alliances that strengthen their competitive positions. For example, companies who we do not consider to be significant competitors could
acquire one or more of the various companies in our fragmented industry and, over a short period of time, become a significant competitor in the markets we service. If any of these competitors were to aggressively price their competing services in
our market, we may be required to reduce our prices, which could adversely affect our operating results and financial condition. In addition, it may be difficult to displace a competitor once they have established a relationship with an organizer.
We expect to encounter new and evolving competition as the market becomes aware of the advantages of cloud computing applications for
activity and event organizers. For example, social networking companies with a large number of online users could develop competing applications or partner with third parties to do so. Future or existing competitors may introduce different pricing
models, and offer users applications at minimal or no cost. In addition, larger, better capitalized companies with greater operational, strategic, financial, personnel, customer or user bases and other resources than we have could also enter our
market and attempt to compete with us. If we do not successfully compete with existing and future competitors, our business and prospects will be adversely affected.
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Our business may be harmed if we fail to successfully transition certain of our existing customers to
ActiveWorks.
We have made a significant investment in developing ActiveWorks, and a large number of our customers are currently being
served by our ActiveWorks architecture at varying levels of integration. We are in the process of transitioning to ActiveWorks certain customers who continue to use both our internally developed systems and acquired legacy systems. We are developing
the additional features required to complete this transition. As legacy systems are transitioned to ActiveWorks, we will end any further development on those products and retire the applications. In addition, as part of our growth strategy, we
expect to continue to inherit legacy systems through acquisitions. We will evaluate these systems to determine, based on their sophistication and compatibility, whether to integrate them into ActiveWorks or to migrate the customers using them to
ActiveWorks. This process is time consuming and requires the investment of significant technical and human resources. During this process, we will continue to incur the costs and face the risks and difficulties associated with maintaining multiple
legacy systems. During that transition period, we may also experience service interruptions, system failures and security breaches due to the shortcomings of certain of the legacy systems. Further, as we transition legacy systems to ActiveWorks, we
may discontinue certain brands associated with those legacy systems and we may encounter resistance from customers who have affinity for these brands. If we fail to complete the transition to ActiveWorks in a cost-effective and timely manner and
without service interruptions, system failures, security breaches or resistance from customers, our business may be harmed.
If our computer systems
are compromised, we could be subject to fines, damages, litigation and enforcement actions and organizers and participants could curtail or cease using our applications, the occurrence of which would harm our business.
Our computer systems involve the storage and transmission of non-public personal and credit card information provided by our customers and
participants. Despite our security measures, our computer systems are vulnerable to computer viruses, break-ins and other attacks that could lead to the unauthorized access, disclosure and use of non-public personal information, including credit
card data. The techniques used by criminal elements to attack our computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques
proactively or implement adequate preventative measures. In one instance, we became aware of a security breach in one of the legacy computer systems we inherited through one of our acquisitions. This type of breach could potentially result in the
unauthorized acquisition and use of credit card data of a number of participants. We promptly isolated the affected computer system, conducted a forensic analysis of this breach, took steps to clean the affected computer system and implemented a
remediation plan to prevent any further breach. We cooperated with the federal authorities investigating the criminals who perpetrated the attack. We cannot guarantee that we will be able to prevent a breach of our computer systems in the future.
If our 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 may be severely damaged, and we could incur significant liability. There can be
no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot provide assurances that our
existing general liability insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims or that the insurer will not deny
coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations.
The breach of our computer systems may also subject us to fines, damages from claims asserted by payment processors, merchant banks,
organizers and participants, litigation and enforcement actions. In addition, if we experience compromises of our computer systems, payment processors, merchant banks, organizers and participants may lose confidence and cease using our applications,
which would harm our business.
In addition, many jurisdictions have enacted laws requiring companies to notify individuals of data
security breaches involving certain types of personal data, and our agreements with certain partners require us to notify them in the event of a security incident. These mandatory disclosures regarding a security breach could lead to widespread
negative publicity and may cause our customers to lose confidence in the effectiveness of our data security measures.
We are subject to data privacy
laws and regulations as well as contractual privacy obligations, and our failure to comply could subject us to fines and damages and would harm our reputation and business.
We are subject to the data privacy laws and regulations adopted by federal, state and foreign governmental agencies. Data privacy is highly
regulated, and may become the subject of additional regulation in the future. Privacy laws restrict our storage, use, processing, disclosure, transfer and protection of non-public personal information, including credit card data, provided to us by
our customers and participants. In addition, we are subject to the privacy-related obligations in our contracts with our customers and other third parties (including voluntary third-party certification bodies such as TRUSTe). Any failure by us to
comply with applicable privacy laws or regulations, our contractual privacy obligations or our own privacy policies, may result in fines, statutory or contractual damages or litigation or governmental enforcement actions. These proceedings or
violations could force us to spend
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significant amounts in defense or settlement of these proceedings, result in the imposition of monetary liability, distract our management, increase our costs of doing business, and adversely
affect our reputation and the demand for our solutions. Additionally, violations of our legal or contractual privacy obligations could cause organizers and participants to lose trust in us, which would harm our reputation and business.
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The regulatory framework for privacy and data protection issues worldwide is evolving, and as we
expand our operations globally, compliance with regulations that differ from country to country may also impose substantial burdens on our business. In particular, the European Union, or EU, has traditionally taken a broader view as to what is
considered personal information and has imposed greater obligations under data privacy regulations. In addition, individual EU member countries have had discretion with respect to their interpretation and implementation of the regulations, which has
resulted in variation of privacy standards from country to country. Complying with any additional or new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could
compromise our ability to effectively pursue our growth strategy.
We are also subject to the privacy and data protection-related
obligations in our contracts with our customers and other third parties. We may also be contractually liable to indemnify and hold harmless our clients from the costs or consequences of inadvertent or unauthorized disclosure of data that we store or
handle as part of providing our services. Finally, we are also subject to contractual obligations and other legal restrictions with respect to our collection and use of data, and we may be liable to third parties in the event we are deemed to have
wrongfully used or gathered data.
Our technology systems are vulnerable to damage, interruptions or failures, any of which could harm our reputation
and business.
Our technology systems rely on computer hardware and communications systems located either in our facilities or at
third-party facilities, including our main web-hosting facilities in Las Vegas, Nevada, Ashburn, Virginia, Toronto, Ontario, and Kelowna, British Columbia. We do not control the operation of the third-party facilities and must rely on third parties
to provide the physical security, facilities management and communications infrastructure services to ensure the reliable and consistent delivery of our solutions to our customers. Our web-hosting technology systems located at our facilities and at
third-party facilities are vulnerable to damage or interruption from catastrophic occurrences such as earthquakes, floods, fires, power loss, telecommunications failures, terrorist attacks and similar unforeseen events. Despite any precautions we
may take, the occurrence of a natural disaster or other unexpected problems at one of our facilities or the facilities operated by third parties who house our equipment could result in lengthy interruptions in our services.
We are in the process of implementing procedures designed to allow us to move our production operations over to a backup datacenter in the
event of a catastrophe. Although this program is functional, it does not provide a real-time failover in all instances, so if one of our websites shuts down it would remain shut down for a period of time while the transition takes place, and during
that time, the website would not be accessible. In addition, the prolonged interruption of service of one or more of our websites that process transactions could result in potentially significant losses.
We carry business interruption insurance but our coverage may not be sufficient to compensate us for the potentially significant losses that
may result from prolonged interruptions in our services as a result of system failures. We have experienced limited interruptions in the past, including server failures that temporarily slowed down the performance of our websites and mobile
applications, but we may experience more significant interruptions in the future. Interruptions in these systems, whether due to system failures, computer viruses, physical or electronic break-ins or other catastrophic events, could affect the
security or availability of our services on our websites and mobile applications and prevent or inhibit the ability of our customers and event and meeting registrants to access our services. Problems with the reliability or security of our systems
could harm our reputation or result in substantial costs to remedy these problems, including but not limited to costs associated with contractual obligations to compensate customers should an interruption affect their use of our services. Any of
these issues could negatively affect our business, results of operations and financial condition and harm our reputation.
If credit card payment
processors and service providers fail or no longer agree to provide their services, change their services or terms of service or increase processing fees, our customer relationships could be adversely affected and we could lose business and revenue.
We rely on agreements with large payment processing organizations to enable us to provide credit card authorization, data capture,
settlement and merchant accounting services, and access to various reporting tools for the customers we serve. Our credit card processors and service providers could terminate their arrangements with us or fail to perform their services efficiently,
become unwilling or unable to provide payment processing services to us or change the services or terms of service provided to us, each of which would adversely affect our relationships with customers and could cause customers to discontinue using
our applications and adversely affect our operating results. In addition, we cannot guarantee that credit card companies will not increase the transaction fees we incur for each registration we process. Any increase in transaction fees would require
us to increase the prices we charge for our products and services or negatively impact our profitability, either of which could adversely affect our business, financial condition and results of operations. In addition, if credit card payment
processors and service providers fail or no longer agree to provide their services, our customer relationships could be adversely affected and we could lose business and revenue.
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We are subject to the rules and regulations adopted by the card networks, such as Visa, MasterCard and
American Express, and if we fail to adhere to their rules and regulations, we would be in breach of our contractual obligations to payment processors and merchant banks, which could subject us to damages and liability and could eventually prevent us
from processing or accepting credit cards.
The card networks, such as Visa, MasterCard and American Express, have adopted rules and
regulations that apply to all merchants who process and accept credit cards for payment of goods and services. We are obligated to comply with these rules and regulations as part of the contracts we enter into with payment processors and merchant
banks. The rules and regulations adopted by the card networks include the Payment Card Industry Data Security Standards, or the PCI DSS. Under the PCI DSS, we are required to adopt and implement internal controls over the use, storage and security
of card data to help prevent credit card fraud. We assess our compliance with the PCI DSS on a periodic basis, and make necessary improvements to our internal controls. If we fail to comply with the rules and regulations adopted by the card
networks, including the PCI DSS, we would be in breach our contractual obligations to payment processors and merchant banks. Such failure to comply may subject us to fines, penalties, damages and civil liability, and could eventually prevent us from
processing or accepting credit cards and reduce our working capital. Further, there is no guarantee that even if we comply with the rules and regulations adopted by the card networks, we will be able to maintain our compliance. We also cannot
guarantee that such compliance will prevent illegal or improper use of our payments systems or the theft, loss or misuse of the credit card data of customers or participants. Any such event would harm our reputation and business.
We face potential liability for the fraudulent activities of organizers and their employees, participants and our employees.
We have potential liability for losses caused by the fraudulent activities of our organizers or their employees. An organizer, or one of an
organizers employees, could use a stolen or counterfeit credit card or credit card number to record a false sales transaction, or intentionally fail to deliver merchandise, events, activities or services sold in an otherwise valid transaction.
We may also face potential liability for credit card fraud by participants who register for an activity or complete a transaction through our applications. A participant could use a stolen credit card or a stolen credit card number in a credit
card-not-present transaction, to register for an activity or event or purchase merchandise or services. In a traditional credit card-present transaction, if the merchant uses the credit card, receives authorization for the transaction from the
credit card issuing bank and verifies the signature on the back of the credit card against the paper receipt signed by the individual using the credit card, the credit card issuing bank remains liable for any loss. In a fraudulent credit
card-not-present transaction, we could be liable to the credit card issuing bank for any loss arising from the transaction, even if we receive authorization for the transaction from the same credit card issuing bank. In addition, we face potential
fraud if our employees misappropriate or disclose to others who misappropriate the credit card or other sensitive information of organizers or participants. We have implemented systems and procedures designed to detect and reduce the impact of
organizer, participant and employee fraud, but we cannot guarantee that these measures are or will be effective. It is possible that incidents of fraud could increase in the future, and they may remain undetected for extended periods of time if our
systems and procedures are not effective. Significant or recurring credit card fraud could adversely affect our business, financial condition and operating results.
We may face significant chargeback liability if our customers refuse or cannot reimburse chargebacks resolved in favor of participants who register through
our applications.
We may have potential liability for chargebacks associated with the transactions we process for certain of our
organizer customers. If a billing dispute relating to a transaction is not ultimately resolved in favor of the organizer, the disputed transaction is charged back to our bank and credited to the credit card account of the participant. If we or our
processing banks are unable to collect the chargeback from the organizers account, or if the organizer refuses or is financially unable to reimburse us for the chargeback amount, we bear the risk of loss for the amount of the refund paid to
the participants credit card account. We have in the past experienced chargebacks related to cancelled and fraudulent events and transactions. Significant or recurring chargeback amounts could adversely affect our business, operating results
and financial condition.
Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing, and which
could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the United States and abroad that
are continuously evolving and developing, and that are costly to comply with, can require significant management time and effort and can subject us to claims or other remedies. Existing and future laws and regulations may be adopted, interpreted or
implemented in a manner that is inconsistent with our current business practices or that require changes to such practices, our privacy policy, the features and functionality of our applications or the design of our websites. These regulations and
laws may cover employment, immigration, taxation, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, broadband residential Internet access and the
characteristics and quality of services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet. If we are not able to comply with these laws and
regulations or if we become liable under them, we could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain
practices, which could negatively affect our business, financial condition and results of operations. In addition, the increased attention focused on liability as a result of lawsuits and legislative proposals could harm our reputation or otherwise
harm our business.
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Our quarterly operating results are volatile, subject to seasonal fluctuations and difficult to predict, all
of which may adversely affect our stock price.
Our quarterly operating results have fluctuated in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are outside of our control. For example, we generally experience seasonality due to the greater number of activities and events during the spring and summer months in North
America. Other factors that may contribute to the variability of our quarterly and annual results include:
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our ability to accurately forecast revenue and appropriately plan our operating expenses;
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our ability to attract new, and increase the engagement and penetration of our existing, activity and event organizers;
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our ability to increase the number of participants who register for the activities and events offered by our customers using our applications;
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our ability to control the cost and time required to transition certain customers to ActiveWorks;
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our ability to maintain and effectively manage an adequate rate of growth;
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our ability to successfully enter new markets and manage our planned global expansion;
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our ability to successfully manage and integrate our past and any future acquisitions of businesses, applications or technologies;
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our ability to limit interruptions in service and prevent the compromise of customer or participant data;
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the effects of natural or man-made catastrophic events;
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changes in the laws, regulations and legal standards affecting our business;
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our ability to keep pace with changes in technology and the offerings by our competitors;
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our ability to provide a high-quality participant experience through our applications and online communities;
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our ability to design and implement effective internal controls and processes;
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our ability to attract and retain qualified employees and key personnel;
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our ability to protect our intellectual property, including our technology platform and our key brands;
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our ability to control the costs associated with defending intellectual property infringement and other claims by third parties; and
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the impact of worldwide economic conditions, including the resulting effect on consumer spending.
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As a result, we believe that quarterly comparisons of our operating results are not necessarily meaningful and that you should not rely on the
results of one quarter as an indication of our future performance. In addition, our operating results may continue to vary significantly from one quarter to the next as part of our normal business cycle, which may adversely affect our stock price.
If we do not continue to enhance and improve our existing applications and successfully introduce new applications, our ability to maintain the
pricing of our applications and to attract and retain organizer customers will be harmed.
In the past we have grown our business in
part through improving the functionality and features of our existing applications and introducing new applications to our customers, such as fundraising, real-time event tracking and merchandising for activities and events. If we fail to continue
to offer new applications that increase the number of participants who register online for our customers activities and events, and improve the ability of our customers to manage their activities and events, we may be unable to maintain the
pricing of our applications. We cannot assure you that we will be able to timely and adequately develop additional functions and features or introduce new applications to satisfy the demands of our customers. Further, developing new technologies and
applications entails significant technical and business risks. We cannot assure you that any new functions, features or applications will achieve the level of acceptance required for us to generate sufficient revenue to offset our development costs.
If we do not continue to enhance and improve the functions and features of our existing applications and successfully introduce new applications, our ability to maintain the pricing of our applications and to attract and retain organizer customers
will be harmed.
Defects or disruptions in the rollout of our new products and product enhancements could diminish demand for our service, adversely
affect our reputation and subject us to substantial liability.
Like many internet-based cloud companies, we provide incremental
releases of product updates and functional enhancements. Such new versions may contain undetected errors when first introduced or released. We have, from time to time, found defects in our service, and new errors in our existing service may be
detected in the future. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers or for event registrants. Since our customers use our service for important aspects of their
business, any errors, defects, disruptions in service or other performance problems with our service could hurt our reputation and may damage our customers businesses. If that occurs, our customers may delay or withhold payment to us, elect
not to renew, make service credit claims, warranty claims or other claims against us, and we could lose future
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sales. Further, if we are unable to meet the stated service level commitments we have guaranteed to our customers or suffer extended periods of unavailability for our service, we may be
contractually obligated to provide these customers with credits for future service, and there would be a negative impact on our reputation.
Activity
and event organizers may not widely adopt our applications to manage the important aspects of their activities and events, which would limit our ability to grow our business.
Our ability to grow our business and increase revenue depends on our success in educating activity and event organizers about the potential
benefits of our cloud computing applications. Cloud computing applications for organizing and managing important aspects of activities and events are relatively new, and have not been widely adopted by activity and event organizers. Concerns about
cost, fraud, privacy, security, reliability and other issues may cause activity and event organizers not to adopt our applications. Moreover, activity and event organizers who have already invested substantial resources in other registration and
management systems or methods may be reluctant to adopt a new approach like ours to supplement or replace existing systems or methods. If activity and event organizers do not widely adopt applications such as ours, our ability to grow our business
will be limited.
If we fail to expand our customers use of our applications, our ability to execute our growth strategy and increase our revenue
will be limited.
Many of our organizer customers initially make a purchase of only one or a limited number of our available
applications or use our applications for only one or a limited number of their activities or events. Our ability to grow our business and increase revenue is dependent on our ability to further penetrate our existing customers by selling additional
applications to them, and by increasing the number of activities and events for which they deploy our applications. If we fail to expand the usage of our applications by our existing customers, our ability to execute our growth strategy and increase
our revenue will be limited.
Many individuals are using devices other than personal computers to access the Internet. If users of these devices do not
widely adopt solutions we develop for these devices, our business could be adversely affected.
The number of people who access the
Internet through devices other than personal computers, including mobile telephones, personal digital assistants, smart phones and handheld tablets or computers, has increased dramatically in the past few years and is projected to continue to
increase. If we are unable to develop mobile solutions to meet the needs of our users, our business could suffer. Additionally, as new devices and new platforms are continually being released, it is difficult to predict the problems we may encounter
in developing versions of our solutions for use on these alternative devices, and we may need to devote significant resources to the creation, support, and maintenance of such devices.
If we are unable to increase the percentage of participants who register through our websites, our ability to grow our business will be impaired.
In addition to expanding and increasing penetration within our organizer customer base, the growth of our business depends on our ability to
increase the percentage of participants who elect to register for activities and events through our websites. Our ability to increase the percentage of participants who register through our websites depends on our ability to make our online
registration and reservation processes simple, efficient, secure and cost-effective, as well as on our ability to develop applications, such as our online communities, activity and event information and searchable database of events, that encourage
participants to use our websites. Our ability to increase participant use of our websites also depends on the ability and willingness of our organizer customers to increase the awareness of our websites to their participants. We cannot control the
level of effort that organizers expend or the extent to which any of them will be successful in increasing awareness of our websites among their participants. We may not be able to prevent organizers from devoting greater resources to support other
registration methods developed by them or other third parties. If we are unable to increase the percentage of participants who register for activities and events through our websites, our ability to grow our business will be impaired.
We may not be successful in expanding into new business areas within the activity and event registration and management market, which could harm our
business and future prospects.
Our long-term strategic plan involves expanding our applications into new business areas within the
activity and event registration and management market. We cannot assure you that our efforts to expand our business in this manner will succeed. We also cannot assure you that we will develop any new applications required to successfully compete in
these new business areas in a cost-effective or timely manner. The lack of market acceptance of such efforts or our inability to generate satisfactory revenue to offset the development costs could harm our business and limit our future prospects.
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The sales cycle for certain of our applications can be long, and we may not recognize revenue until completion
of the entire sale, which makes it difficult for us to forecast our operating results.
It can take us between three and nine months to
complete a sale to an activity or event organizer, and at times it may take up to one year or longer. The period between our initial contact with a potential customer and the completion of a sale may be relatively long due to several factors,
including:
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many activities and events occur only annually;
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our need to educate potential customers about the uses, benefits, safety and reliability of our applications;
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activity and event organizers have budget cycles which can affect the timing of purchases; and
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some organizers, such as park and recreation department administrators, have lengthy internal approval processes before having the required authority to purchase our applications.
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In addition, our customers may demand customization of the applications we provide them. As a result, these sales opportunities may require us
to devote greater sales and technical resources, increasing the cost and time required to complete sales. As a result, it is difficult to predict when particular sales will occur or be completed, which adversely impacts our ability to accurately
forecast our operating results.
Negative factors affecting the activities and events market have an adverse effect on our business and revenue.
We primarily generate revenue from the registration and reservation fees paid by the participants in the activities and events offered
by our organizer customers. As a result, our business is directly affected by factors affecting the activities and events market, including global, national or local consumer trends, adverse weather, security concerns or environmental disasters. Our
performance is also subject to economic conditions and their impact on levels of consumer spending, which may remain depressed, or be subject to further deterioration, for the foreseeable future. Some of the factors that have had and may continue to
have an adverse impact on discretionary consumer spending include general economic conditions, unemployment, consumer debt, reductions in net worth, disruptions in the residential real estate or mortgage markets, higher taxation, energy prices or
interest rates and decreases in consumer confidence and other macroeconomic factors. Because spending for activities is generally considered to be discretionary, declines in consumer spending may have a more negative effect on our business than on
those businesses that sell products or services considered to be necessities. Unfavorable changes in the above factors or in other business and economic conditions affecting our activity and event customers and their participants could cause
organizers to cancel activities, result in fewer participants using our applications to register for activities, lower our profit margins, cause our activity and event customers to terminate their relationship with us or default on their payment
obligations to us, any of which would have a material adverse effect on our financial condition and operating results.
If our customers do not renew
their agreements for our applications, our business and operating results will suffer.
We currently generate a majority of our revenue
from customers who have entered into contracts with us with terms ranging from three to seven years. However, we have a number of customers with contract terms under three years. Our customers are not obligated to renew their contracts with us. Even
if our customers perceive our applications to be of value, budgetary, economic or other competitive pressures may prevent some customers from renewing their contracts. If we are not successful in continuing to renew or extend the terms of our
contracts with our existing customers, our business and operating results will suffer.
Our ability to grow our business will be impaired if we do not
provide high quality customer support in a timely and cost-effective manner.
Our ability to maintain and increase our customer base
and the number of participants who use our applications depends significantly on our ability to provide high quality levels of service and support. Complaints or negative publicity about our service or support could severely diminish confidence in
or use of our applications. We spend significant time and resources to hire, train and retain our service and support personnel. In addition, we are required to hire temporary employees each year to provide customer service and support during peak
registration seasons. These temporary employees require training and education and take time to reach full productivity. The market for our applications is still evolving, and competitive dynamics may cause pricing levels to change as the market
matures and as existing and new market participants introduce new types of solutions. As a result, we may be forced to reduce the prices we charge for our solutions and may be unable to renew existing customer agreements or enter into new customer
agreements at the same prices and upon the same terms that we have historically. If we are not successful in timely hiring, training and retaining our service and support personnel or otherwise fail to provide high quality service and support to
organizers and participants, our ability to grow our business will be impaired.
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Our ability to improve our operating margins may be limited by the requirements imposed by our government
agency customers.
We acquired the state hunting and fishing business of Automated License Systems and Central Trust Bank in October
2008 and the campground registration business of ReserveAmerica in January 2009. As of September 30, 2013, we had approximately 55 state or provincial customers in North America that are utilizing our technology for registration and management
services related to hunting, fishing, and campgrounds. Our government agency customers often require us to customize our applications and provide additional services to their participants to qualify for these contracts. For example, we are typically
required to maintain call centers for these customers to allow participants to register telephonically and receive telephonic customer service and support. We continue to focus on ways to encourage participants to use the self-service features
available through our websites, however, each year we are required to hire temporary employees and independent contractors to staff our call centers during peak registration periods. A number of our state customers require us to maintain a physical
call center located in their particular state. Additionally, our state customers typically require us to provide third-party audits of our operations. These additional requirements are costly to comply with and add to the complexity of our business.
If we are unable to properly manage and control the cost of the additional services required by our government agency customers, our operating margins will suffer and our business and results would be harmed.
We may be unsuccessful in expanding our operations outside of North America, which could negatively impact our growth strategy, revenue and future growth.
Our headquarters are located in the United States. To date, we have operated primarily in North America. We do however maintain
offices and have personnel in international offices around the world, and in particular, have a significant number of research and development employees in China. Continued expansion outside of North America is an important aspect of our future
growth strategy. Our ability to expand outside of North America involves various risks and difficulties, including:
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incurring significant expenses in advance of generating material revenue as we attempt to establish our presence in international markets;
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operating in unfamiliar competitive environments;
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distraction of management and company resources;
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different participant preferences and participation patterns than those in North America;
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varied, unfamiliar and unclear legal and regulatory requirements and restrictions;
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potentially greater susceptibility to fraud and security breaches;
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pricing controls, legal, political or systemic restrictions on the ability of U.S. companies to compete with foreign competitors or otherwise do business in foreign countries;
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less extensive adoption of the Internet as a commerce medium or information source and increased restrictions on privacy or the use of customer and participant data;
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lack of infrastructure to adequately conduct electronic commerce transactions and data storage and management;
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difficulties in staffing and managing foreign operations;
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greater difficulty in accounts receivable collection;
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currency fluctuations or other restrictions on foreign currency;
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potential adverse tax consequences; and
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uncertain political and economic climates in foreign countries.
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Operating in international
markets including China also requires significant management attention and financial resources and subjects us to economic, political and operational risks that are different from those in the United States. As a result of these obstacles, we may
find it difficult to expand outside of North America or we may be unsuccessful in our attempt to do so, which would negatively impact our growth strategy, revenue and future growth.
We may not timely and effectively scale and adapt our existing technology and network infrastructure to ensure that our websites are accessible with little
or no perceptible load times.
A key element in our continued growth is the ability of organizers and participants to access our
websites at all times with little or no perceptible load times. This has become increasingly difficult to achieve as our applications have become more complex and our user traffic has increased. Strains on the capacity of our technology
infrastructure caused by growth in the numbers of organizers and participants accessing our websites, new applications and features and overall engagement on our websites, especially at the opening of the registration period for a popular activity,
have in the past resulted, and may in the future result in, slower load times or system failures. We have experienced website disruptions, outages and other performance problems due to a variety of factors, including maintaining multiple legacy
systems, infrastructure changes, power failure, telecommunication outages, human or software errors and capacity constraints caused by overwhelming numbers of users accessing our websites simultaneously. If our websites are not
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available when users attempt to access them or do not function as expected, our customers may select another option to organize and manage their activities and events and participants may select
alternative means of researching and registering for activities and events, each of which would negatively impact our business.
We expect
to continue to make significant investments to upgrade our technology and network infrastructure to handle increased usage and to enable the timely and effective release of new applications. These upgrades and expansions are complex and in the past
have resulted, and in the future could result, in website outages or inefficiencies or operational failures. To the extent that we do not effectively address infrastructure challenges, upgrade our systems as needed and continually develop our
technology and network architecture, our business and operating results may be harmed.
If Internet search engines methodologies are modified or
our search result page rankings decline for other reasons, participant engagement in our websites and online communities could decline.
We depend in part on various Internet search engines to direct a significant amount of traffic to our websites. Our ability to maintain the
number of potential participants directed to our websites is not entirely within our control. Our competitors search engine optimization, or SEO, efforts may result in their websites receiving a higher search result page ranking than ours, or
Internet search engines could revise their methodologies in an attempt to improve search results, which could adversely affect placement of our search result page rankings. If search engine companies revise their search algorithms in ways that are
detrimental to new participant growth on our websites or in ways that make it more difficult for organizers or participants to use our websites, or if competitors SEO efforts are more successful than ours, the overall growth in the numbers of
organizers and participants using our websites could slow, participant engagement could decrease, and we could lose existing participants and become less attractive to existing and prospective organizer customers. Our websites have experienced
fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of participants directed to our website would harm our business and operating results.
Our ability to establish, maintain and strengthen our brands in the activities and events market is critical to our growth strategy.
Promoting and maintaining our brands is critical to our efforts to attract and retain our organizer customers and to increase the number of
participants who use our applications. We also believe brand recognition is critical to allow us to effectively compete against the growing number of Internet sites and relatively low initial barriers to entry in certain of our markets. Maintaining,
protecting and enhancing our brands is also critical to expanding our base of organizers, end users, advertisers, and other strategic partners, and increasing their engagement with our websites, and will depend largely on our ability to be a
technology leader and continue to provide high-quality applications, which we may not do successfully. If we are unable to establish and maintain our brands, including THE ACTIVE NETWORK, ACTIVE, ACTIVE.COM, ACTIVENET, ACTIVEWORKS, REGONLINE,
RESERVEAMERICA and STARCITE, as leaders for online registration and management applications in the activities and events market, our business and prospects would be materially and adversely affected.
We may experience difficulty in developing marketing services that are attractive to advertisers and promoters.
The market for marketing services such as ours is relatively new and rapidly evolving. We cannot be certain this market will continue to grow.
Our marketing services customers may determine that it is in their best interest to spend their marketing budgets through other forms of promotional or advertising activities. As a result, if we fail to develop compelling marketing services for
advertisers and promoters, our ability to sustain and grow our marketing services business would be adversely affected.
If we fail to maintain and
grow our user base of participants and the data we gain access to from such participants, potential advertisers may not utilize our marketing services, which may result in reduced revenue.
We use a wide range of data to expand, refine and target our marketing services on behalf of our customers. We gain access to most of this data
from participants as they opt-in to receive special offers and other direct marketing opportunities from our marketing services customers and us and the registration process for activities and events using our application services. If we
are unable to maintain and grow our user base of participants and the data we gain access to from such participants, potential advertisers may not utilize our marketing services and we may lose significant marketing services revenue.
Federal, state and foreign laws impose certain obligations on the senders of commercial emails, which could minimize the effectiveness of our ability to
market to prospective customers and impose financial penalties for noncompliance.
The U.S.s CAN-SPAM Act establishes certain
requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of
commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to
comply with than the CAN-SPAM Act. The ability of recipients of emails from our customers using our applications to opt out of receiving commercial emails may minimize the effectiveness of our solutions for our customers. In addition,
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noncompliance with the CAN-SPAM Act carries significant litigation, regulatory investigation and related risks. If we were found to be in violation of the CAN-SPAM Act or similar state or
international 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 incur penalties, and significant
litigation and investigation-related expenses, and any inquiries might impact the deliverability of our commercial email regardless of outcome. This would adversely affect our operating results and financial condition and significantly harm our
business, and our reputation would suffer. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or could increase our operating costs.
We might not be able to attract and retain employees, which could impede our ability to grow and successfully generate our business.
Any failure to attract and retain qualified, experienced employees could adversely affect our ability to grow our business. To execute our
continuing growth plans, we need to increase the size and maintain the quality of our staff of direct sales and business development representatives and technology development staff. To be successful, we must attract and retain highly qualified
sales and other personnel with specialized skill sets focused on the activities and events industry. Competition for qualified and experienced sales and other personnel can be intense, and we might not be successful in attracting and retaining such
individuals. We have from time to time experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining a sufficient number of highly skilled employees with appropriate qualifications for our business.
Our business and prospects could be harmed if we lose members of our senior management team.
On April 30, 2013, we announced that our Board of Directors appointed Jon Belmonte as our Interim Chief Executive Officer, and initiated
an executive search process to identify a permanent Chief Executive Officer. Our business and prospects depends on our ability to identify and retain a permanent Chief Executive Officer who can assist us in improving our operations and executing on
our business plan. Our performance also depends on our ability to retain and motivate our existing executive officers and key employees, including Mr. Belmonte, Darko Dejanovic, our President, and Scott Mendel, our Chief Financial Officer. We
do not have long-term employment agreements with any of our executive officers or other key personnel. In addition, we do not maintain key-man insurance on these individuals. The failure to identify and retain a permanent Chief Executive Officer or
the loss of the services of any of our executive officers or other key employee for any reason could harm our business.
If we cannot maintain our
corporate culture as we grow and evolve, we could lose the innovation, creativity and teamwork that this culture has fostered.
We
believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity and teamwork. Maintaining this corporate culture will become increasingly difficult as we grow and implement the more
complex organizational management structures necessary to support our growth and to comply with the requirements imposed on public companies. Failure to maintain and further develop our culture could negatively impact our future success.
If the protection of our technology platform, domain name, trademarks and other proprietary rights is inadequate, our business would be harmed.
Our commercial success is dependent in part on obtaining, maintaining and enforcing our intellectual property rights. We rely on a combination
of trade secret, trademark, copyright, trade dress, domain name and patent laws in the United States and in the other jurisdictions in which we operate, together with confidentiality agreements and technical measures, to
protect our intellectual property. We pursue the registration of our trademarks, service marks and domain names in the United States. Our registered trademarks in the United States include THE ACTIVE NETWORK, ACTIVE, ACTIVE.COM,
ACTIVENET, ACTIVEWORKS, REGONLINE, RESERVEAMERICA and STARCITE. As of September 30, 2013, we have been granted six patents by the United States Patent and Trademark Office and have six patent applications pending in the
United States. Our issued patents begin to expire in February 2019. We rely more heavily on trade secret protection than patents to protect our proprietary technology. To protect our trade secrets, we control access to our proprietary systems
and technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties. In addition, due to the relatively high cost associated with registering
all of our copyrights, we generally rely on common-law copyright laws to protect these rights.
The steps we have taken and take in
the future to protect our proprietary rights may be inadequate. For example, confidentiality agreements with our employees, licenses, independent contractors and other advisors may not effectively prevent disclosure of confidential information and
may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, third parties may independently discover trade secrets and proprietary information, and in such cases, we may not be able to
successfully assert trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. If we are unable to obtain, maintain and enforce intellectual
property protection covering our technology platform, brands and domain names, others may be able to make, use or sell products that are substantially similar to ours without incurring the sizeable development costs that we have incurred, which
would adversely affect our ability to compete.
In addition, the domain names for the websites that we maintain are important to our
business. The regulation of domain names in the United States and in foreign countries is unclear and subject to change. Governing bodies may establish additional top-level
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domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we cannot assure you that we will be able to acquire or maintain relevant
domain names. The relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is also unclear. As a result, we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our domain names, and trademarks and other proprietary rights. Any such inability could have a material adverse effect on our business, results of operations, financial condition and
prospects.
Intellectual property claims against us could be costly and could hurt our business, operating results, financial condition and prospects.
We cannot predict whether third parties will assert claims of infringement or other intellectual property claims against us. If we are
forced to defend against third party claims, whether they are with or without merit or are determined in our favor, we could face expensive and time consuming litigation, which could distract our technical and management personnel. For example, we
have faced and currently face infringement threats from non-practicing organizations (sometimes referred to as patent trolls) filing lawsuits for patent infringement. In the future, we may receive other notices from, or have lawsuits
filed against us by, third parties alleging infringement. If an infringement claim is determined against us, we may be required, or deem it advisable, to develop non-infringing intellectual property or enter into costly royalty or licensing
agreements. Such royalty or licensing agreements, if required, may be unavailable on terms that are acceptable to us, or at all. If a third party successfully asserts an infringement claim against us and we are required to pay monetary damages or
royalties or we are unable to develop suitable non-infringing alternatives or license the infringed or similar intellectual property on reasonable terms and on a timely basis, it could significantly harm our business. In addition, third parties may
seek to invalidate our intellectual property.
As a result of becoming a public company, we are obligated to develop and maintain proper and effective
internal controls over financial reporting.
We maintain a documented system of internal controls, which is reviewed and monitored by
the Audit Committee and tested by the Companys internal audit department. The internal audit department reports the results of testing to the Audit Committee who in turn report the results to the Board of Directors. We believe we have a
well-designed system to maintain adequate internal controls over the business; however, we cannot be certain that our controls will be adequate in the future or that adequate controls will be effective in preventing or detecting all error and all
fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. The design of any system of control is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Our reserves for state sales taxes may not be sufficient.
Certain states in which we operate impose sales, purchase and use taxes on transactions completed through our applications. At this time, many
of our systems do not automatically capture the sales, purchase and use taxes we are required to remit to these states.
As a result, we
are required to analyze our transactions, and reserve an appropriate amount for the payment of state sales, purchase and use taxes. We regularly review the procedures we use to calculate our sales tax obligations as well as our sales tax reserves,
and make adjustments when appropriate. Although we believe that our sales tax reserves are adequate, we may not be fully reserved and it is possible that we may be obligated to pay amounts in excess of our reserves.
We may not be able to realize the tax benefits associated with the net operating losses we have recorded to date.
As of December 31, 2012, we had federal tax net operating loss carry forwards of approximately $182 million which will begin to expire in
2019 and continue to expire through 2032 and state tax net operating loss carry forwards of approximately $142 million which began to expire between 2013 and 2032 and foreign NOL carryforwards of approximately $11 million as of December 31,
2012 which expire between 2029 and 2032. If we do not maintain sufficient profitability prior to the expiration of these net operating loss carry forwards, then we will not be able to fully use such tax attributes to our benefit. Additional
limitations on the annual use of these net operating loss carry forwards may also apply due to subsequent issuances of our stock.
Covenants in our
Credit Agreement may restrict our operations, and if we do not effectively manage our business to comply with these covenants, our financial condition and liquidity could be adversely affected.
In December 2011, we entered into a Credit Agreement (the Credit Agreement), which was subsequently amended in July 2012, with Bank
of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPFS) and J.P Morgan Securities LLC (upon the amendment of the Credit Agreement), as Joint Lead
Arrangers, MLPFS as Sole Book Manager, and the lenders from time to time party thereto. We must comply with various covenants under our Credit Agreement that limit our ability to, among other things:
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incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;
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pay cash dividends or distributions or redeem or repurchase capital stock;
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prepay, redeem or repurchase debt;
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make loans and investments;
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enter into agreements that restrict distributions from our subsidiaries;
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sell assets and capital stock of our subsidiaries;
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enter into certain transactions with affiliates; and
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consolidate or merge with or into, or sell substantially all of our assets to, another person.
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In addition, under our Credit Agreement, we are required to maintain specified financial ratios. Our ability to meet these financial covenants
can be affected by events beyond our control, and we may be unable to meet these tests. In addition, our failure to maintain effective internal controls to measure compliance with these financial covenants could affect our ability to take corrective
actions on a timely basis, and could result in us being in breach of this covenant. Our Credit Agreement provides that our breach or failure to satisfy certain covenants constitute an event of default. Upon the occurrence of an event of default, the
lenders could elect to terminate any commitment under our Credit Agreement and declare all amounts outstanding to be immediately due and payable. If we are unable to repay those amounts, our financial condition could be adversely affected. In
addition, termination of our Credit Agreement could also adversely impact our liquidity.
Our cash, cash equivalents and short-term investments are
subject to a risk of loss based upon the solvency of the financial institutions in which they are maintained.
We maintain the majority
of our cash and cash equivalents in accounts with major financial institutions within the United States, in the form of demand deposits and money market accounts. Our deposits in these institutions may generally exceed the amounts of insurance
provided, or deposits may not at all be covered by insurance. If any of these institutions become insolvent, it could substantially harm our financial condition and we may lose some, or all, of such deposits.
If our goodwill, amortizable intangible assets or property, plant and equipment become impaired, we may be required to record a significant charge to
earnings.
We review our goodwill, intangible and long-lived assets for impairment annually in the fourth quarter or whenever events or
changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant negative industry or economic trends, a decline in the market price of our common stock, reduced estimates of future cash flows or
disruptions to our business could indicate that goodwill, intangible or long-lived assets might be impaired. If, in any period, our stock price decreases to the point where our market capitalization is less than our book value, this could also
indicate a potential impairment and we may be required to record an impairment charge in that period. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely
on projections of future operating performance. Changes in the our estimates, such as forecasted cash flows and discount rates, would affect the estimated fair value of the reporting units which could result in a material goodwill impairment charge,
particularly in the technology reporting unit, as the fair value of the Companys technology reporting exceeded its respective carrying value by a narrower margin than the marketing reporting unit. We operate in highly competitive environments
and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in impairment to our goodwill, intangibles or long-lived assets, we would be required to record a non-cash
charge to earnings in our financial statements during a period in which such impairment is determined to exist. Any of these factors could have a negative impact on our operating results.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly
change our reported or expected financial results.
Generally accepted accounting principles and related accounting pronouncements,
implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to, revenue recognition, allowances for doubtful accounts, software development costs, stock-based
compensation, business combinations, impairment of goodwill, intangible assets and long-lived assets, and accounting for income taxes are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes in
these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported or expected financial performance.
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We are currently in the process of transitioning certain of our customers who are using the legacy systems we
inherited in our acquisitions to ActiveWorks. Until we complete this transition, we may not be able to compare our key business metrics on a period-to-period basis in a manner consistent with the rest of our business, and as a result, our ability to
manage our business could be adversely affected.
We manage our business based in part on key business metrics regarding the total
number of customer organizations we serve and the total number of registrations we process during a specific financial period. We are currently in the process of transitioning our customers who are currently using the legacy systems we inherited in
our acquisitions to ActiveWorks. Until we complete this transition, participants for certain activities and events will continue registering through these legacy systems. Certain of these legacy systems do not track customers and registrations in a
manner consistent with the rest of our business. As a result, we need to use manual processes to accumulate these metrics, which could lead to errors. If we are unable to accurately compare our key business metrics on a period-to-period basis, our
ability to manage our business could be adversely affected.
If the estimates and assumptions we use to determine the size of our target market,
customer groups or the verticals within customer groups are inaccurate, our future growth rate may be limited and our business would be harmed.
We calculate the size of our target market, customers groups and verticals within customer groups, based on data published by third parties and
on assumptions that we have made based on that data. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe our market size information is generally reliable, such
information is inherently imprecise. In addition, our projections, assumptions and estimates of future opportunities within our target market are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including
those described in this risk factors section. If third-party data proves to be inaccurate or we make errors in our assumptions based on that data, our future growth rate may be limited. In addition, these inaccuracies or errors may cause us to
misallocate capital and other business resources, which could harm our business. For example, in the third quarter of 2011, we identified previously unreported registration data during the first and second quarters of 2011. As a result, we
underreported the number of registrations for these prior periods. We identified that the underreporting resulted primarily from the prior lack of the reporting systems of two new state customers. The underreporting had no impact on our
prior financial statements, nor do we believe the underreporting had a material adverse effect on our business.
Risks Relating To Ownership Of Our
Common Stock
Our stock price may be volatile.
The market price of our common stock may be subject to significant fluctuations. Factors that could affect our stock price include the
following:
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fluctuations in our operating results or the operating results of our competitors;
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changes in estimates of our financial results or recommendations by securities analysts;
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changes in the estimates of the future size and growth rate of our markets;
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changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results;
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conditions and trends in the markets we serve;
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changes in general economic, industry and market conditions;
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success of competitive applications and services;
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changes in market valuations or earnings of our competitors;
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changes in our pricing policies or the pricing policies of our competitors;
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announcements of significant new applications, contracts, acquisitions or strategic alliances by us or our competitors;
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changes in legislation or regulatory policies, practices or actions;
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the commencement or outcome of litigation involving our company, our general industry or both;
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recruitment or departure of key personnel;
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changes in our capital structure, such as future issuances of securities or the incurrence of debt;
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actual or expected sales of our common stock by the holders of our common stock; and
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the trading volume of our common stock.
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In addition, the U.S. and worldwide stock markets in
general have experienced significant price and trading volume fluctuations, and the market prices of technology and Internet companies have generally been extremely volatile and have experienced sharp share price and trading volume changes. These
broad market fluctuations may adversely affect the trading price of our common stock.
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The requirements of being a public company may strain our resources, divert managements attention and
affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. The Exchange Act
requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures
and internal controls over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal controls over financial reporting to meet this standard, significant resources and management
oversight may be required. As a result, managements attention may be diverted from other business concerns, which could harm our business and operating results.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for
public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a
result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of managements time and
attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice,
regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Any new rules and regulations may
increase the cost for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract
and retain qualified executive officers and members of our board of directors, particularly to serve on our Board committees.
As a result
of our public disclosure requirements, our business and financial condition has become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our
business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and
harm our business and operating results.
We do not expect to declare any dividends on our common stock in the foreseeable future.
We currently intend to invest our future earnings, if any, to fund the development and growth of our business. The payment of dividends will be
at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, future prospects, restrictions imposed by applicable law, any limitations on payments of dividends present in any
debt agreements we may enter into and other factors our Board of Directors may deem relevant. Consequently, stockholders may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any
future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
Our directors, executive officers and
significant stockholders hold a substantial portion of our stock, which may lead to conflicts of interest with other stockholders over corporate transactions and other corporate matters.
As of September 30, 2013, our directors, executive officers and beneficial holders of 10% or more of our outstanding common stock
beneficially owned approximately 24% of our outstanding common stock, including restricted stock units awards vested and stock options exercisable within 60 days after September 30, 2013. We are not aware of any stockholder or voting agreements
or understandings between or among our current directors, officers or beneficial holders of 10% or more of our outstanding common stock. However, these stockholders, acting together, would be able to influence significantly all matters requiring
stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations. This control could delay, deter or prevent a third party from acquiring or merging with us, which could
adversely affect the market price of our common stock.
A large number of shares eligible for public sale or subject to rights requiring us to register
them for public sale could depress the market price of our common stock.
The market price of our common stock could decline as a
result of sales of a large number of shares of our common stock in the market in the future, and the perception that these sales could occur may also depress the market price of our common stock. From time to time, we may raise additional capital
through issuances of equity or convertible debt securities, or issue additional equity for future acquisitions and may be required to register these securities with the SEC. Sales of our common stock pursuant to registration rights could cause our
stock price to fall and make it more difficult for you to sell shares of our common stock.
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If securities or industry analysts do not publish or cease publishing research or reports about us, our
business or our market, or if they change their recommendations regarding our stock adversely or publish negative reports about our company or business, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about
us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, publish negative reports about our company or business, or provide more favorable relative
recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which
in turn could cause our stock price or trading volume to decline.
Our future capital needs are uncertain, and we may need to raise additional funds in
the future, which may not be available on acceptable terms or at all.
Our capital requirements will depend on many factors, including:
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acceptance of, and demand for, our applications;
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the costs of developing new applications or technology;
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the timing of transitioning our customers to ActiveWorks;
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the number and timing of acquisitions and other strategic transactions; and
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the costs associated with the growth of our business.
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Our existing sources of cash and cash
flows may not be sufficient to fund all of our activities. While we believe we have sufficient capital available through our credit facility and cash flow from operations to conduct our plan of business for at least the next 12 months, we may need
to raise additional funds following such time, and such funds may not be available on reasonable terms, or at all. Further, if we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization. If we
cannot raise funds on acceptable terms, we may not be able to develop or enhance our applications, execute our business plan, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements.
If we issue additional shares of common stock to raise capital or for future acquisition purposes, it may have a dilutive effect on your investment.
If we raise additional capital through further issuances of equity or convertible debt securities, or issue additional equity for
future acquisitions, our existing stockholders could suffer significant dilution in their percentage ownership of us. Moreover, any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common
stock.
A further tightening of the credit markets may have an adverse effect on our ability to obtain short-term debt financing.
The recent deterioration of the global economy threatens to cause further tightening of the credit markets, more stringent lending standards
and terms and higher volatility in interest rates. Persistence of these conditions could have a material adverse effect on our access to short-term debt and the terms and cost of that debt. As a result, we may not be able to secure additional
financing in a timely manner, or at all, to meet our future capital needs which may have an adverse effect on our business, operating results and financial condition.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders
to replace or remove our current directors and management team and limit the market price of our common stock.
Our amended and
restated certificate of incorporation and amended and restated bylaws contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of
our common stock and the voting and other rights of the holders of our common stock. These provisions include:
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dividing our board into three classes, with each class serving a staggered three-year term;
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prohibiting our stockholders from calling a special meeting of stockholders or acting by written consent;
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permitting our board to issue additional shares of our preferred stock, with such rights, preferences and privileges as they may designate, including the right to approve an acquisition or other changes in control;
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establishing an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
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providing that our directors may be removed only for cause;
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providing that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
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requiring the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
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Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential
acquirers to negotiate with our board, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management.