10-K 1 d270184d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

 

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

FOR THE FISCAL YEAR ENDED December 31, 2011

 

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

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number: 001-35187

 

 

The Active Network, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   33-0884962

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

10182 Telesis Court, Suite 100

San Diego, California 92121

(Address of Principal Executive Offices) (Zip Code)

(858) 964-3800

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share   New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

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

The aggregate market value of the voting common stock held by non-affiliates as of June 30, 2011 (based upon the closing sale price of such shares on the New York Stock Exchange on the last business day of the second quarter) was approximately $542,181,992. The registrant has no non-voting common stock. Shares of common stock held by each executive officer and director and by each entity that owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 7, 2012, the registrant had 57,818,888 shares of Common Stock ($0.001 par value) outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2012 Annual Meeting of Stockholders to be held on May 23, 2012 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.

 

 

 


Table of Contents

The Active Network, Inc.

For the Fiscal Year Ended December 31, 2011

TABLE OF CONTENTS

 

PART I.

     1   

Item 1. Business

     1   

Item 1A. Risk Factors

     11   

Item 1B. Unresolved Staff Comments

     32   

Item 2. Properties

     32   

Item 3. Legal Proceedings

     32   

Item 4. Mine Safety Disclosures

     32   

PART II.

     33   

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     33   

Item 6. Selected Financial Data

     35   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     59   

Item 8. Financial Statements and Supplementary Data

     59   

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     60   

Item 9A. Controls and Procedures

     60   

Item 9B. Other Information

     60   

PART III.

     61   

Item 10. Directors, Executive Officers and Corporate Governance

     61   

Item 11. Executive Compensation

     63   

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     63   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     63   

Item 14. Principal Accounting Fees and Services

     63   

PART IV.

     64   

Item 15. Exhibits, Financial Statement Schedules

     64   

SIGNATURES

  


Table of Contents

FORWARD-LOOKING STATEMENTS

Any statements in this Annual Report on Form 10-K concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition are not historical facts and may be deemed to be forward-looking statements. You can identify these statements by words such as “anticipate,” “assume,” “believe,” “can,” “could,” “due,” “estimate,” “expect,” “intend,” “goal,” “may,” “objective,” “plan,” “potential,” “positioned,” “seek” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report on Form 10-K may turn out to be inaccurate. Factors that may cause such differences include, but are not limited to, the risks described under “Risk Factors,” including:

 

   

our history of significant operating losses;

 

   

our limited operating history, and new and unproven business model;

 

   

our ability to accurately forecast revenue and appropriately plan our expenses;

 

   

our ability to maintain an adequate rate of growth;

 

   

our ability to effectively manage our growth;

 

   

our ability to successfully manage our acquisitions and investments in businesses, applications and technologies;

 

   

our ability to compete successfully against current or future competitors;

 

   

our ability to successfully transition certain of our existing customers to ActiveWorks;

 

   

our ability to process, store and use personal data in a safe and secure manner;

 

   

our ability to comply with data privacy and use laws;

 

   

our ability to maintain our relationships with credit card payment processors and associations;

 

   

our ability to limit interruptions in service and damage to our technology systems;

 

   

our ability to attract and retain qualified employees and key personnel;

 

   

our ability to successfully enter new markets and manage our international expansion;

 

   

our ability to continue to enhance and improve the functionality and features of our ActiveWorks technology platform;

 

   

our ability to react to the impact of worldwide economic conditions, including the resulting effect on organizers and participants;

 

   

our ability to protect our intellectual property, including our proprietary ActiveWorks technology platform;

 

   

our ability to comply with changes in government regulation affecting our business; and

 

   

other risk factors included under “Risk Factors” in this prospectus.

Because the factors referred to above could cause our actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date of this Annual Report on Form 10-K, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after such date to reflect the occurrence of unanticipated events. New factors emerge from time to time, and their emergence is impossible for us to predict. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


Table of Contents

PART I

ITEM 1. BUSINESS

Overview

We are the leading provider of organization-based cloud computing applications serving a wide range of customer groups including business solutions, community activities, outdoors and sports. We provide applications that form an online network connecting a fragmented and diverse group of activity and event organizers with a large base of potential participants. Our proprietary technology platform transforms the way organizers manage their activities and events by automating online registrations and streamlining other critical management functions, while also driving consumer participation to their events.

We power a broad range of activities, such as reserving a campsite or tee time, signing up for a marathon or sports league, purchasing a fishing or hunting license, or participating in a community event or corporate conference. From the introduction of our platform in 1999, we have experienced significant growth and now have over 51,300 customer organizations and drive over 80 million annual consumer registrations. Based on the results of a 2010 online survey we commissioned through Survey.com, we believe the organizations we target produce or organize activities and events for the majority of U.S. households. Our proprietary technology platform, ActiveWorks, provides cloud computing applications that reduce the cost and complexity of managing, organizing and promoting these activities and events.

Our business benefits from a powerful network effect. As more organizations use our platform, we increase the breadth and depth of activities and events offered through our platform. This more comprehensive offering of activities attracts more participants. As we attract more participants, we are able to drive increased demand for our customers’ activities, thus increasing registrations and revenue for both organizers and us. This revenue growth enables us to develop enhanced functionality and services through ActiveWorks and our websites, further increasing participant engagement and attracting new organizers. In this way, we build increasing value for both organizations and participants.

We serve a wide range of customers including community and sports organizations, large corporations, small and medium sized businesses, educational institutions, government agencies, non-profit organizations and other similar entities. We primarily generate revenue from technology fees paid by participants who register for our customers’ activities through our cloud computing applications. During the year ended on December 31, 2011, we generated revenue of $337.4 million, as compared to $279.6 million in the year ended on December 31, 2010, an increase of 21%. In May 2011, we completed an initial public offering (“IPO”) of our common stock in which we sold and issued 12,650,000 shares of common stock, of which 4,427,778 were sold by selling stockholders, at an issue price of $15.00 per share, resulting in proceeds, net of underwriting discounts and offering expenses, of approximately $112.6 million to us.

Industry Overview

Organizations of all sizes need to inform, engage and support their respective participants, which include attendees, members, registrants and other constituents. We believe activity and event registration and administration is a broad and large market with more than 800,000 potential customers in North America within our four primary customer groups of sports, community activities, outdoors and business solutions. According to a 2010 study we commissioned through Survey.com, 73% of the U.S. households surveyed paid to take part in a recreational or community activity last year. Based on the results of this survey and our internal analysis, we believe that our target market encompasses more than 1.8 billion total registrations annually in the United States, representing more than $110 billion in registration spending. We have the opportunity to receive a fraction of each registration fee by providing the applications that our platform offers to help organize and manage activities and events. Furthermore, we believe the market opportunity outside the United States is greater than our domestic market opportunity.

 

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The traditional methods for managing activities and events generally share the following challenges:

Difficulty organizing event information. Historically, activities and events have been organized and registrations tracked by using a combination of paper-based systems, basic desktop applications and spreadsheets. Participants register for events by phone, mail or walk-up registration, which is often costly and inefficient for both organizers and participants. This manual approach to event registration can be haphazard, time-consuming and lack sufficient process controls. Mistakes due to incorrect data entry of participant information often lead to incomplete or lost registration forms. These frequent errors add incremental costs for organizers, delay registration for participants and cause problems on-site at the activity or event.

High fixed cost structure. The profitability of an activity or event is tied directly to the number of participants who register. Similar to airline seats and hotel rooms, unfilled spots in activities and events represent a significant lost opportunity for incremental high margin revenue and can often be the difference between profits or losses.

Lack of ongoing communication post-registration. Traditionally, organizers have maintained limited dialogue with participants after registration. Since organizers lack ongoing support, participants have a difficult time tracking the status of their registration and receiving any updates about the activity or event in a timely manner. Additionally, participants have challenges in finding and reaching each other. Participants have a natural desire to form communities based on shared interests and goals. We believe interaction between participants drives increased engagement and participant satisfaction, resulting in increased retention and incremental revenue for organizers.

Ineffective targeting of event participants. Organizers have difficulty reaching participants due to the lack of effective geo-targeting of traditional marketing methods and disparate online properties for local activities and events. This limited ability to create and maintain ongoing relationships with consumers leads to higher participant acquisition costs and lower recurring, predictable revenue from repeat customers.

Limited resources to automate systems. Building a fully functional management system is a costly endeavor. Most organizers cannot afford to make the investment nor do they have the necessary technical resources to develop applications sufficient to run their businesses effectively. When organizers do attempt to automate registration and administration themselves, building and maintaining an internal system often becomes technologically challenging, time intensive and cost prohibitive.

Our Solution

ActiveWorks, our organization-based cloud computing platform, transforms the way organizers record, track, manage and share information regarding activities and events. We offer applications that allow our customers to reduce cost, attract new participants and focus resources on enhancing the quality of their events. ActiveWorks allows organizers to leverage our large-scale, common infrastructure to manage their activities and events more effectively. Additionally, we have created a number of mobile applications to enhance functionality and access to our solutions.

Our applications provide the following benefits to organizers:

Create operational efficiencies by automating registration and administration. Our applications reduce costs by automating processes such as activity and event registration, facility reservation, roster management, results publishing, membership management and operational reporting. The data generated and managed by our applications is presented in an easy-to-use manner and eliminates a significant amount of manual data entry.

Manage participant and activity information. ActiveWorks centralizes a comprehensive data set of participant information for each customer. We also provide a user-friendly interface to easily track, manage and enhance the ongoing relationship between participants and activity organizers.

 

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Communicate real-time with event participants. We enable organizers to engage participants through websites and email. This empowers our customers to seamlessly and efficiently inform, motivate and support participants, thereby building greater affinity for their organizations. Additionally, the organizer is able to notify participants of future events that may interest the participant, improving future event exposure and participation.

Provide access to efficient marketing channels. Our integrated platform allows organizers to reach a targeted group of new potential participants through a variety of resources to provide greater exposure for their activities and events.

Our applications provide the following benefits to participants:

Foster discovery through our comprehensive directory. Our websites deliver content based on a participant’s interests, while facilitating discovery of new relevant and targeted activities. Our directory provides access to a broad database of events, classes, leagues, tournaments, organizations, facilities as well as a wide range of other activities. Our applications are designed to enable our participants to engage in their favorite activities through seamless, secure, real-time registration.

Support participation. Throughout our offerings, participants can find resources and like-minded individuals to support every step of their journey. We offer free and premium access to training plans, articles, videos, discounts and experts through our websites, mobile applications and other social media channels. Our community members are passionate about their interests and together they provide a real-time support network which encourages and enables participation at every level.

Our Strengths

Our applications are designed to reach many aspects of a consumer’s lifestyle from community activities and sports to business solutions and the outdoors. Given this breadth, we believe the following strengths provide us with a competitive advantage within this large and growing market:

Leader in a large and fragmented market. We believe we have the largest customer base in our industry, including over 51,300 customers and more than 80 million annual registrations. The scale and breadth of our platform enables us to provide the full automation capabilities required to serve a diverse set of activities for numerous organizations. Our offerings result from years of experience and participant feedback and include specialized features and support, which are difficult to replicate. Our large installed base of customers drives awareness of our services and provides us with a significant advantage in marketing our cloud computing applications to new customers.

Proprietary technology platform. Our cloud computing platform allows us to efficiently develop and deliver vertical specialization and feature-rich applications for customers of all sizes. We have made significant investments in our ActiveWorks platform, a secure, reliable and flexible technology infrastructure that can be easily modified to meet the unique needs of organizers and participants. We have approximately 1,100 technology and research and development personnel in the United States, Canada and China working on the development and delivery of our solutions. Our applications are tightly integrated within our organizations’ operations and deliver significant cost savings and operational efficiencies.

Dedicated and highly engaged consumers. We provide relevant and vertical-specific directories, content and tools that engage participants and form enthusiastic and dedicated online communities. These participants generate over 1.1 billion page views annually on our websites.

High degree of predictable and recurring revenue. We have long-term, exclusive contracts with many of our customers. We also have a successful track record of renewing a high percentage of these contracts for multiple successive terms. As a result, a significant percentage of our revenue is predictable and recurring. We believe our high customer retention is due to our ability to both lower costs and drive incremental revenue for our customers, delivering a significant and quantifiable return on investment for our applications.

 

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Powerful network effect. Our highly complementary organization and participant offerings drive multiple revenue opportunities. The continued growth of our customers results in more participants visiting our online communities. This growing audience creates a powerful network effect where our platform becomes increasingly valuable to both our organizers and participants, driving more registrations to our customer’s activities while simultaneously offering participants additional relevant activities from which to choose. In addition, growth in our participant audience attracts incremental customers who view our online resources as an effective medium for marketing their activities and events to a targeted demographic of participants.

Alignment with our customers’ interests. Our business is uniquely aligned with the interests of our customers. Like our customers, the success of our business is directly dependent on maximizing the number of participants who register for activities and events.

Economies of scale. We have achieved a level of scale in our business that provides operational and technological competitive advantages. For example, we are able to leverage our significant investment in cloud infrastructure to provide high levels of service and reliability, while maintaining a low unit cost structure. We also apply our solutions experience accumulated through interactions with tens of thousands of organizations to design and develop features that can easily be configured for multiple types of customers, thus allowing us to spread our development costs across a much wider market opportunity than our competitors.

Growth Strategy

To extend our leadership position in the activities and events market, we intend to:

Grow the number of customers we serve. We will continue to promote the migration of organizations towards online management of activities and events, and in doing so, grow our customer base. In recent years, we increased our sales and marketing personnel and plan to further increase our sales and marketing personnel in the future. We believe the low penetration of cloud computing applications in our markets provides a large potential customer base for our platform.

Increase our online registration conversion rates. We plan to increase participant usage of online registration services by training our customers in the execution of conversion techniques. We have developed and refined these techniques over the past 12 years through our experience working with tens of thousands of organizations. We also plan to continue providing our customers with an array of tools aimed at promoting online registration. Further, we intend to continue expanding our customers’ ability to reach participants online through our websites and by leveraging emerging and alternative online channels, including complementary social media platforms and mobile applications.

Deepen our relationship with existing customers. We are dedicated to developing comprehensive, vertical-specific applications and features that increase the value of our platform to our customers. We proactively review customer needs, usage trends and online penetration to identify opportunities where additional applications, services and targeted marketing programs would assist our customers in meeting their goals. We enable our customers to access a targeted consumer base through our marketing services.

Pursue strategic acquisitions. The competitive landscape in our core markets remains highly fragmented with many sub-scale players focusing on a small fraction of our addressable market. We intend to pursue acquisitions to strengthen our market position, broaden our organization base, enhance our capabilities and add new applications to our platform.

Expand internationally. We intend to commit additional resources to markets outside of North America. Our international sales have increased every year since we began selling our services internationally. We believe this opportunity is larger than our domestic market, and that we are well positioned to take advantage of this opportunity as our model is readily transferable to new markets.

 

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Our Platform

ActiveWorks creates operational efficiencies, delivers business insights and streamlines marketing efforts for our customers. At its core, ActiveWorks is a robust back-office system that pulls together many of our customers’ participant management, operational reporting, volunteer management, service and payment processing functions into one easy-to-use hosted system. ActiveWorks provides a comprehensive view of the business and provides real-time business insights through live reporting and historical comparisons. We believe the efficiencies gained allow our organizers to spend more time focusing on what is most important to their businesses: successful activities and events.

ActiveWorks is designed to support existing marketing tactics and amplify those efforts through our expansive web, mobile and social reach. Our communities offer an attractive audience for client-marketing programs and our range of free and paid promotional services are designed to fit a broad spectrum of our customer population.

We plan to increase our operating expenses in the future as we continue to develop additional functionality and features for our applications, continue to transition 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.

 

Organizer Offerings

Market

 

Register

 

Operate

  Analyze

Email Marketing & Tracking
Event Syndication

Email Advertising

Websites

Social Media

 

Online Registration

Reservations & Ticketing

Payment Processing

Donations & Fundraising

Point of Sale Merchandise

 

Event & Activity Management

Facility & Resource

Management

Operational Reporting

Participant Management

Membership Management

Call Center Services

Volunteer & Staff Management

  Reporting Analytics

Customer Loyalty

Pricing Optimization

Surveys

Our technology applications, media solutions and online communities provide a comprehensive search experience that connects participants with the things they love, want and need to do. Our offerings are designed to reduce the barriers to participation by enabling and supporting a consumer through each stage of The Active Journey: Find & Register, Share & Prepare and Participate & Commemorate. During the first stage, visitors find engaging activities through dynamic, market-specific search interfaces and leverage social components to share their interests and invite friends. Once an individual has committed to participate, that individual can register online through our proprietary, secure payment processing system.

After a visitor has established their commitment to participate in an activity, our products serve as a resource and tool to help them “Share & Prepare” to ensure they are ready to get the most out of their activity. Through a mix of free and paid offerings, visitors can find articles, videos, experts and discounts on tools and gear. Most importantly, visitors can find a network of active participants looking to support like-minded individuals in their pursuits. Our portfolio of consumer offerings support an individual up through the point of participation. Most importantly, we provide a platform to celebrate their accomplishments and a conduit to commit to the next endeavor.

 

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Participant Offerings

Find & Register

  

Share & Prepare

   Participate &
Commemorate
Featured Listings    Articles    Results
Search    Videos    Photo Sharing
Directory    Tell a Friend    Social Media
Aggregations    Experts    Ambassadors
Best of Active.com    How-To Guides    Free Product Samples
Targeted Recommendations    Social Sharing    Community

Customers

We work with organizations of all sizes. We currently have over 51,300 sports, community activities, outdoors and business solutions customers and we received technology fees from more than 80 million registrations in 2011. Based on the results of an online survey we commissioned through Survey.com, we believe the organizations we target produce or organize activities and events for the majority of U.S. households.

In 2011, none of our customers accounted for more than five percent of our total revenue. Our technology customers can be categorized in the following four groups and can be further broken down into the verticals listed in the table below:

 

Sports

  

Community Activities

  

Outdoors

  

Business Solutions

Endurance Events

  

Parks & Recreation Departments

   State Campgrounds    Conferences

Leagues & Teams

  

Schools & Districts

   National Parks    Conventions

Golf Courses

  

City & County Governments

   Fishing Licenses    Association Gatherings

Clubs

  

Camps & Retreats

   Hunting Permits    Meetings & Seminars

Tournaments

  

Faith-Based Organizations

   Marinas    Trade Shows & Expos
  

Resorts

     

We currently rely on agreements with large payment processing organizations in order to provide certain services to our customers. We do not believe our business is substantially dependent on these organizations because we believe we can replace the services provided by these payment processors with alternate providers.

Sales and Marketing

Our sales and marketing efforts are focused on the following primary goals: increase the number of organization customers, increase revenue from existing accounts and increase consumer traffic to our online properties. We deploy our sales force first by customer group and then by geography.

Increase the number of customers. We have dedicated account executives focused on creating and leveraging strategic relationships to drive sales to large enterprises. Account executives also work directly with prospective customers to increase awareness of the value of our applications and services. A significant amount of our sales are generated through referrals or through our marketing efforts. We employ an inbound sales staff to convert these leads to sales. As our products become more intuitive and thus easy-to-use, more organizations are becoming capable of directly using our services without the need for interactions with our sales personnel. Our strategy is to make this “self set-up” process a larger part of our sales and marketing efforts, particularly with respect to small and medium sized customers.

Increase revenue from existing customers. We have dedicated account management personnel focused on maximizing client retention, online registration penetration and utilization of our applications and services. We

 

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work with our customers to maximize the value of our platform, which includes training in conversion techniques to drive participants to register online for their activities and events.

Increase consumer traffic to our online properties. We use a variety of consumer acquisition strategies to maximize participation in our online communities. These include proprietary customer relationships, strategic partnerships, social media initiatives and email marketing campaigns.

We consider North America our primary market. As part of our growth strategy, we are expanding globally. We focus our global sales effort on winning large, strategic customers to gain exposure in new geographies. We plan to increase our direct sales force and build partnerships to support international expansion and gain local credibility.

Professional Services

We provide consulting and implementation services to certain customers to facilitate the adoption of our cloud computing applications. Consulting services consist primarily of business mapping, project management services and guidance on best practices in using our services. Implementation services include system set-up and configuration, data conversion as well as developing customized training and education programs relating to both the use and administration of our services.

Customer Support

We believe that superior customer support is integral to retaining and expanding our customer base. Our support group handles inquiries from both organizers and participants. We answer email and phone requests regarding activity and event registration and confirmation, payments and event details for our organizations’ registrants. We have invested in an advanced communications system that allows us to manage and track the number of incoming calls and emails, enabling us to accurately forecast our customer support personnel needs.

Our technical support staff trains our customers on effective methods for increasing registrations, and offers training on our application services, including data management and technical support. Our technical support group helps organizers promote their activities and events using online marketing and communication tools. The technical support staff also helps organizers download reports and set up new events in the system as needed. We have a comprehensive technical support program to assist our customers in the use of our applications, and we continue to explore ways to deliver efficient problem resolution and feedback channels.

Additionally, we provide call centers for certain customers such as state hunting and fishing departments who contractually require call centers. We continue to work on maintaining and improving the overall quality and level of customer service and support we provide our customers and participants. As such, we focus on reducing registration and customer support calls by providing self-service features on our website, such as the ability to register for events and report problems. We are exploring new avenues to deliver efficient and intuitive online registrations, problem resolution and feedback channels. As our consumer-facing cloud computing applications become increasingly intuitive, we expect the percentage of registrations conducted online will grow.

Technology

We introduced our first service, a registration system and online community for organizers and participants of running events, in 1999.

Over the last five years, one of our key corporate strategies has been to develop a robust technology platform that augments our initial registration system, moving us into a number of new markets and adding a significant amount of new functionality. In that effort, we are currently devoting significant resources to both

 

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developing our highly scalable and flexible ActiveWorks platform and maintaining a number of vertical-specific legacy systems. As legacy systems are transitioned to ActiveWorks, we will end any further development on those products and retire the applications.

Furthermore, as part of our strategy to strengthen our position as the leading provider of organization-based cloud computing applications, we built our offering on a service-oriented architecture. By implementing this as a Platform as a Service (PaaS), our investment in ActiveWorks allows us to build vertical-specific applications that capitalize on our library of core services. Likewise, ActiveWorks allows us to acquire and integrate high-quality applications directly into our platform. This serves the purpose of creating barriers to entry around our existing customer groups and allows us to scale into new verticals and customers more quickly and at a lower cost.

Because our cloud applications function like traditional Software as a Service (SaaS) platform, we quickly and efficiently deliver high quality and comprehensive solutions via the Internet. As a cloud provider, we do not need to develop our software for different hardware, operating systems or database application platforms, and access to our application services is delivered over the Internet to any connected device. The entire platform is built and developed utilizing industry accepted security guidelines to enable compliance with the industry’s stringent requirements.

We designed our system to be easy-to-use, secure and user-configurable with open standards for fast integration. Our solution is a highly-scalable, multi-tenant, technology-agnostic platform. This enables us to spread the cost of service delivery across a large customer base. Moreover, all of our core development work can be utilized to deliver new functionality for use by our customers as a whole or on an as-desired basis.

We also offer additional capabilities that enable participants to register for activities and events, buy memberships, purchase goods and services, and make donations. This allows organizers to focus fully on the organization of the event. ActiveWorks was designed so that credit card transactions are processed securely through payment card industry compliant architecture with automatic failover through redundant paths, and to separate payment processors that have multiple layers of redundancy for fault tolerance. We believe these layers of redundancy offer high levels of reliability for large-scale online registration.

Our primary production infrastructure is hosted within industry compliant datacenters on the East Coast and West Coast within the United States, as well as facilities in Canada and Europe. These centers are configured to utilize technologies that provide fast delivery of infrastructure services to the platform. All our primary datacenters rank as Tier 3 or higher, and are monitored in real-time by enterprise monitoring tools that are utilized by our 24x7 network operation centers located both within and outside of the United States. These facilities serve as backups for each other and have all the current technology to support near real-time replication, data security, storage and recovery strategies.

Our ongoing research and development efforts are focused on enhancing the features, functionality and security of our existing service offerings. We are also developing new proprietary offerings in an expanding number of verticals and transitioning acquired technology to our platform. We have extensive technology capabilities, with approximately 1,100 technology and research and development personnel located in the United States, Canada and China working on the development and delivery of our services.

Competition

The market for technology applications for activity and event organizers is fragmented and rapidly evolving. As a result of the functionality and features of our technology platform and the breadth of our coverage of activities and events, we do not believe any single company competes with our current applications or business model across our four customer groups. Our primary competition comes from traditional “pen-and-paper” processing methods, which activity and event organizers are accustomed to using, spreadsheet

 

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software, basic desktop applications and registration by phone, mail or walk-up. Additional sources of competition include:

 

   

Applications custom developed for an activity or event by the technical staff of an organizer or by an outside custom service provider;

 

   

Companies that offer generalized business software that has features or functionality that organizers can use to help register participants and/or manage the other important aspects of activities, such as content or contact management software programs, e-commerce solutions, enterprise resource planning software and other services having separate software modules; and

 

   

Companies that offer integrated software applications in one or a limited number of markets within the activities and events industry.

It is often difficult to displace a competitor or a competitive solution once selected and used by an activity or event organizer. We expect to encounter new and evolving competition as the market becomes aware of the advantages of cloud computing applications for the activities and events industry. In addition, we expect our competition will include larger, better capitalized companies with greater operational, strategic, financial, personnel and other resources to be able to enter our markets and attempt to compete with us. Competitors and potential competitors may enter into business combinations or alliances that strengthen their competitive positions.

Intellectual Property

Our intellectual property is important to our business. 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 technological 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 December 31, 2011, we have been granted five 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, because of the relatively high cost we would experience in registering all of our copyrights, we generally rely on common-law copyright laws in the United States and in other jurisdictions to protect our copyrights.

Government Regulation

We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet. Many of these laws and regulations are still evolving and could be interpreted in ways that could impose additional compliance burdens on us or otherwise adversely affect our business.

As a business that deals with transactions involving credit card and other forms of electronic, non-cash payment methods, we are subject to various payment card and banking industry laws and regulations. In addition, in the area of information security and data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.

 

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We are also subject to federal, state and foreign laws regarding privacy and protection of customer and user data. We post on our website our privacy policy and user agreement, which describe our practices concerning the use, transmission and disclosure of user data. Any failure by us to comply with our posted privacy policy or privacy related laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business. In addition, the interpretation of data protection laws, and their application to the Internet is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from state to state, country to country, or region to region, and in a manner that is not consistent with our current data protection practices. Complying with these requirements could cause us to incur additional costs and change our business practices. Further, any failure by us to adequately protect user privacy and data could result in a loss of customer and user confidence in our services, which could adversely affect our business.

In the United States and abroad, laws relating to the liability of providers of online services for activities of their customers, users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the advertisements posted, or the content provided by customers or users. Any court ruling or other governmental action that imposes liability on providers of online services for the activities of their customers, users or other third parties could harm our business.

In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees, or infrastructure.

Our Employees, Values and Company Culture

Many of our employees came to us directly from, and are still active within, the customer verticals we target. They bring us energy, passion and valuable knowledge regarding our customers’ needs. Assembling a talented team to address the challenges of powering the world’s activities and connecting people with the things they love, want and need to do is critical to our success. We believe we have created an industry-leading team, and will continue to hire and retain the best players to accomplish our mission.

As of December 31, 2011, we had 2,669 full-time employees and 248 part-time employees and independent contractors. We typically engage more than 250 temporary employees and independent contractors during the first, second and third fiscal quarters to address seasonal peaks in registrations for our customers’ activities and events. We believe that relations with our employees, temporary employees and independent contractors are good.

Our culture reflects our values, norms and inner workings as a company. It comes to life not only within the walls of our offices but externally through interactions within our communities. Our employees have not only shaped this culture, but helped us to define it. We identify our culture with the following:

Inspired by our Customers. We believe in the value our customers provide to the world. It is truly inspiring to see the impact our customers have on their communities and we want to help them make an even greater difference. This makes our focus on customer improvement a constant.

Fueled by Challenge. We are solutions-oriented and thrive on challenges. We are conditioned to step up to challenges we set.

Champions of Respect. Recognize a job well done. Get involved. Provide constructive feedback. Listen to opposing viewpoints. These are the simple principles that add up to an environment in which respect is key and our employees can thrive.

Focused on Results. We set goals, measure results, and optimize our approach. Responsibility and accountability rule. Working smarter helps us meet our goals to grow and scale, and to do more with less.

 

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Our culture is built upon the foundation of our values and are the principles by which we manage our day-to-day business and facilitate decision making. Our core values are: Commitment, Drive, Openness, Team and Fun. We believe that we are making a difference in the world. We strive to work together and to treat each other with respect. We encourage each other to defend our beliefs. We are dedicated to connecting ourselves and others with the things we love, want and need to do. Our employees created ActiveX, a company-wide program focused on exercise and wellness to further this mission. We sponsor company hackathons and innovation awards. Outsiders tell us there is a refreshing passion that radiates from our employees. As a company, we believe our ultimate advantage is our people.

Corporate Information

We were originally incorporated in California in October 1998 as Racegate.com, Inc. and became a Delaware corporation through a stock exchange agreement in July 1999. In May 2001, we changed our name to The Active Network, Inc. Our principal executive offices are located at 10182 Telesis Court, Suite 100, San Diego, California. Our corporate website address is www.activenetwork.com, and our primary participant website is www.active.com. Information contained on our websites is not a part of this prospectus and the inclusion of our website addresses in this prospectus is an inactive textual reference only.

Available Information

We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC. We make available on our website (www.activenetwork.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. These materials are available free of charge on or through our website via the Investor Relations page at www.activenetwork.com. None of the information contained on our website is part of this report or incorporated in this report by reference.

The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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 Annual Report on Form 10-K, including our consolidated financial statements and the related notes, 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 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 $15.3 million for the year ended December 31, 2011, $27.3 million for the year ended December 31, 2010 and $37.9 million for the year ended December 31, 2009. At December 31, 2011, we had an accumulated deficit of

 

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approximately $275.3 million. We plan to increase our operating expenses in the future as we continue to develop additional functionality and features for our applications, continue to transition 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:

 

   

attract new customers;

 

   

deepen our relationships with our existing customers;

 

   

continue to transition our existing customers to ActiveWorks;

 

   

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;

 

   

develop a scalable, high performance technology infrastructure that can securely, efficiently and reliably handle increased usage globally;

 

   

continue to manage and successfully integrate acquired businesses, applications and technologies;

 

   

successfully compete with other companies that engage in the activity and event registration and management market;

 

   

continue to build and support online communities and applications for activity and event participants;

 

   

successfully introduce and deploy new features and functionality for our technology platform;

 

   

increase revenue from our applications, websites and online communities;

 

   

avoid interruptions or disruptions in our service;

 

   

avoid problems with the functionality of our applications;

 

   

continue to hire, integrate and retain highly skilled team members who embrace our values and culture; and

 

   

successfully expand our business outside of North America.

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 management’s 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

 

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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 $337.4 million in 2011 from $279.6 million in 2010 and $242.9 million in 2009, representing a compound annual growth rate over this period of 17.9%. 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 2011 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.

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 intend to 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:

 

   

difficulties in integrating operations, technologies, accounting functions and personnel;

 

   

difficulties in supporting and transitioning customers of our acquired companies to our technology platform;

 

   

difficulties in maintaining the security and reliability of acquired applications;

 

   

delays in strengthening internal controls and risk management policies and procedures;

 

   

diversion of financial and management resources from existing operations;

 

   

potential loss of key employees;

 

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inability to generate sufficient revenue to offset acquisition or investment costs;

 

   

assumption of unknown liabilities and claims;

 

   

potential disputes and litigation;

 

   

potential diminishment in the value of any acquired brands; and

 

   

potential write-offs of acquired assets.

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:

 

   

custom-developed applications created by an organizer’s technical staff or an outside custom service provider;

 

   

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

 

   

companies that offer organizers integrated hosted software solutions in one or more verticals within the activities and events market.

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. In addition, as part of our growth strategy, we expect to continue to inherit legacy systems. 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. The breach of our computer systems may 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 further 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.

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. 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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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 and Toronto, Ontario. 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.

If credit card payment processors and service providers fail or no longer agree to provide their services 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, each of which would adversely affect our relationships with customers and could cause customers to discontinue using our applications. In addition, we cannot guarantee that credit card companies will not increase the transaction fees we incur for each registration we process. If credit card payment processors and service providers fail or no longer agree to provide their services or increase processing fees, our customer relationships could be adversely affected and we could lose business and revenue.

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

 

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to comply may subject us to fines, penalties, damages and civil liability, and could eventually prevent us from processing or accepting credit cards. 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 organizer’s 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 organizer’s 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 participant’s 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 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

 

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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.

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:

 

   

our ability to accurately forecast revenue and appropriately plan our operating expenses;

 

   

our ability to attract new, and increase the engagement and penetration of our existing, activity and event organizers;

 

   

our ability to increase the number of participants who register for the activities and events offered by our customers using our applications;

 

   

our ability to control the cost and time required to transition certain customers to ActiveWorks;

 

   

our ability to maintain and effectively manage an adequate rate of growth;

 

   

our ability to successfully enter new markets and manage our planned global expansion;

 

   

our ability to successfully manage and integrate our past and any future acquisitions of businesses, applications or technologies;

 

   

our ability to limit interruptions in service and prevent the compromise of customer or participant data;

 

   

the effects of natural or man-made catastrophic events;

 

   

changes in the laws, regulations and legal standards affecting our business;

 

   

our ability to keep pace with changes in technology and the offerings by our competitors;

 

   

our ability to provide a high-quality participant experience through our applications and online communities;

 

   

our ability to design and implement effective internal controls and processes;

 

   

our ability to attract and retain qualified employees and key personnel;

 

   

our ability to protect our intellectual property, including our technology platform and our key brands;

 

   

our ability to control the costs associated with defending intellectual property infringement and other claims by third parties; and

 

   

the impact of worldwide economic conditions, including the resulting effect on consumer spending.

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.

 

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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.

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

 

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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.

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:

 

   

many activities and events occur only annually;

 

   

our need to educate potential customers about the uses, benefits, safety and reliability of our applications;

 

   

activity and event organizers have budget cycles which can affect the timing of purchases; and

 

   

some organizers, such as park and recreation department administrators, have lengthy internal approval processes before having the required authority to purchase our applications.

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,

 

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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. 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.

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 December 31, 2011, we operated registration services for fishing and hunting licenses in 25 states or provinces in North America, and provided registration and management services for campgrounds located in 33 states or provinces in North America. 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.

 

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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. 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:

 

   

incurring significant expenses in advance of generating material revenue as we attempt to establish our presence in international markets;

 

   

operating in unfamiliar competitive environments;

 

   

distraction of management and company resources;

 

   

different participant preferences and participation patterns than those in North America;

 

   

varied, unfamiliar and unclear legal and regulatory requirements and restrictions;

 

   

potentially greater susceptibility to fraud and security breaches;

 

   

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;

 

   

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;

 

   

lack of infrastructure to adequately conduct electronic commerce transactions and data storage and management;

 

   

difficulties in staffing and managing foreign operations;

 

   

greater difficulty in accounts receivable collection;

 

   

currency fluctuations or other restrictions on foreign currency; and

 

   

potential adverse tax consequences.

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 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.

 

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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. 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.

 

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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.

Our performance is substantially dependent on the continued services and on the performance of our senior management and other key personnel, particularly David Alberga, our Chairman of the Board and Chief Executive Officer, Matthew Landa, our President and Director, Scott Mendel, our Chief Financial Officer and Darko Dejanovic, our Chief Technology, Product and Innovation Officer. Our performance also depends on our ability to retain and motivate other officers and key employees. We do not have long-term employment agreements with the members of our senior management or other key personnel. In addition, we do not maintain key-man insurance on these individuals. The loss of the services of any member of our senior management or other key employee for any reason would 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. In addition, our initial public offering may have created disparities in wealth among our employees, which could adversely impact relations among employees and our corporate culture in general.

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 December 31, 2011, we have been granted five 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.

 

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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 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. In the past, we received a notice from a third party alleging that our Internet fundraising program and related website operations infringe patents published by such third party. 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 will be obligated to develop and maintain proper and effective internal controls over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”) to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Our first report on compliance with Section 404 is expected to be in connection with our financial statements for the fiscal year ending December 31, 2012. The controls and other procedures are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission or SEC, is disclosed accurately and is recorded, processed, summarized and reported with the time periods specified in SEC rules and forms. We are in the middle of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. Although as

 

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of December 31, 2011, we have no material weaknesses in our internal controls, we have undertaken significant measures to improve the effectiveness of our internal controls in response to material weaknesses we have had in the past which have been remediated. These measures include strengthening our internal staffing and technical expertise in financial accounting and SEC reporting and developing robust review processes and procedures. We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address any other matters we or our independent auditors identify. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline.

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, 2011, we had federal tax net operating loss carry forwards of approximately $146.6 million which will begin to expire between 2019 and 2031 and state tax net operating loss carry forwards of approximately $105.6 million which begin to expire between 2012 and 2031. 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”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Book Manager, and the lenders from time to time a party thereto. We must comply with various covenants under our Credit Agreement that limit our ability to, among other things:

 

   

incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons;

 

   

pay cash dividends or distributions or redeem or repurchase capital stock;

 

   

prepay, redeem or repurchase debt;

 

   

make loans and investments;

 

   

enter into agreements that restrict distributions from our subsidiaries;

 

   

sell assets and capital stock of our subsidiaries;

 

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enter into certain transactions with affiliates; and

 

   

consolidate or merge with or into, or sell substantially all of our assets to, another person.

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.

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.

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.

 

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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. 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:

 

   

fluctuations in our operating results or the operating results of our competitors;

 

   

changes in estimates of our financial results or recommendations by securities analysts;

 

   

changes in the estimates of the future size and growth rate of our markets;

 

   

changes in accounting principles or changes in interpretations of existing principles, which could affect our financial results;

 

   

conditions and trends in the markets we serve;

 

   

changes in general economic, industry and market conditions;

 

   

success of competitive applications and services;

 

   

changes in market valuations or earnings of our competitors;

 

   

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

 

   

announcements of significant new applications, contracts, acquisitions or strategic alliances by us or our competitors;

 

   

changes in legislation or regulatory policies, practices or actions;

 

   

the commencement or outcome of litigation involving our company, our general industry or both;

 

   

recruitment or departure of key personnel;

 

   

changes in our capital structure, such as future issuances of securities or the incurrence of debt;

 

   

actual or expected sales of our common stock by the holders of our common stock; and

 

   

the trading volume of our common stock.

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 management’s 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. Compliance with these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. 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, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future, which will increase our costs and expenses.

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 management’s 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.

 

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As of December 31, 2011, our directors, executive officers and beneficial holders of 10% or more of our outstanding common stock beneficially owned approximately 37% of our outstanding common stock, including restricted stock units awards vested and stock options exercisable within 60 days after December 31, 2011. We are not aware of any stockholder or voting agreements or understandings between or among our directors, officers or current beneficial holders of 10% or more of our outstanding common stock except with respect to an agreement between Scott Schultz, one of our directors, and the United States Tennis Association, pursuant to which the United States Tennis Association receives the pecuniary benefit upon exercise of any options granted to Mr. Schultz. 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. For example, we are currently in the process of registering shares of common stock which we issued as consideration for our acquisition of StarCite. Beginning on the effective date of the registration statement, 1,050,000 shares of common stock will be available for immediate resale in the open market. 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.

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, 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, 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:

 

   

acceptance of, and demand for, our applications;

 

   

the costs of developing new applications or technology;

 

   

the timing of transitioning our customers to ActiveWorks;

 

   

the number and timing of acquisitions and other strategic transactions; and

 

   

the costs associated with the growth of our business.

Our existing sources of cash and cash flows may not be sufficient to fund all of our activities. On December 30, 2011, we used approximately $40 million of cash (including certain deductions and holdbacks) to fund our acquisition of StarCite. While we believe we have sufficient capital available through our credit facility and ongoing revenue to conduct our plan of business for at least the next 12 months, we may need to raise

 

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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:

 

   

dividing our board into three classes, with each class serving a staggered three-year term;

 

   

prohibiting our stockholders from calling a special meeting of stockholders or acting by written consent;

 

   

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;

 

   

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;

 

   

providing that our directors may be removed only for cause;

 

   

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

 

   

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.

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.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our principal executive offices are located at 10182 Telesis Court, Suite 100, San Diego, California. This leased facility is 101,446 square feet and currently houses our headquarters. The lease for our San Diego facility expires on October 31, 2017. Our other material facilities are located in Frostburg, Maryland; Burnaby, Canada; Nashville, Tennessee; Irving, Texas and Philadelphia, Pennsylvania. We undertake development, sales and warehouse activities in these facilities. Our main web-hosting facilities are located in Las Vegas, Nevada, Ashburn, Virginia and Toronto, Ontario. We believe that our facilities are in good operating condition and adequately serve our current business operations. We also anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.

ITEM 3. LEGAL PROCEEDINGS

We are subject to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted. These matters arise in the ordinary course and conduct of our business, and, at times, as a result of our acquisitions. They include, for example, commercial, intellectual property and employment matters. Some are expected to be covered, at least partly, by insurance. We intend to continue to defend ourselves vigorously in such matters. We regularly assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in our financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on our assessment, we currently have accrued an immaterial amount in our financial statements for contingent liabilities associated with these legal actions and claims. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. The amount of ultimate loss may exceed our current accruals, and it is possible that our cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCAHSES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on the NYSE under the symbol “ACTV” since May 25, 2011. Prior to that date, there was no public trading market for our common stock. Our initial public offering (“IPO”) was priced at $15.00 per share on May 24, 2011. The following table sets forth for the periods indicated the high and low prices per share of our common stock as reported on the NYSE:

 

     2011  

Quarter

   Low      High  

Second Quarter (beginning May 25, 2011)

   $ 14.75       $ 19.89   

Third Quarter

   $ 13.02       $ 19.99   

Fourth Quarter

   $ 12.30       $ 16.38   

Registered Shareholders

On March 7, 2012, the closing sales price of our common stock on the NYSE was $15.87 and there were approximately 341 registered holders of record as of that date. This approximate number excludes an indeterminable number of stockholders whose shares are held in street or “nominee” name.

Dividends

We have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain our earnings, if any, and cash to fund working capital and for general corporate purposes and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations and capital requirements.

Performance Graph

The graph set forth below compares the cumulative total stockholder return on our common stock between May 25, 2011 (the date of our IPO) and December 31, 2011, with the cumulative total return of the (i) the NASDAQ Composite Index and (ii) the NASDAQ-100 Technology Sector Index. This graph assumes the investment of $100 on May 25, 2011 in our common stock, the NASDAQ Composite Index and the NASDAQ-100 Technology Sector Index, and assumes the reinvestment of dividends. No cash dividends have been declared or paid on our common stock. The comparisons in the graph below are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.

The following graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing, except to the extent that we specifically incorporate it by reference into such filing.

 

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LOGO

 

    May 25,
2011
    May 31,
2011
    June 30,
2011
    July 31,
2011
    August 31,
2011
    September 31,
2011
    October 31,
2011
    November 30,
2011
    December 31,
2011
 

Active Network Inc.

    100.00        115.41        110.69        114.15        101.76        92.77        84.53        79.75        85.53   

NASDAQ Composite

    100.00        98.59        96.48        95.77        89.60        83.84        93.15        91.11        90.71   

NASDAQ 100 Technology Sector

    100.00        97.87        94.90        97.90        92.66        89.58        100.18        97.63        96.84   

Unregistered Sales of Equity Securities

On December 30, 2011, pursuant to the Agreement and Plan of Merger by and among Active, Active Acquisition Corporation, a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”), StarCite, Inc., a Delaware corporation (“StarCite”), and Internet Capital Group Operations, Inc., a Delaware corporation, in its capacity as the securityholders’ agent, (the “Merger Agreement), Merger Sub merged with and into StarCite, with StarCite continuing as the surviving entity and our wholly-owned subsidiary (the “Merger”). In connection with the Merger, the holders of all outstanding shares of StarCite preferred stock, StarCite common stock and warrants to purchase shares of StarCite preferred stock and common stock (collectively, the “StarCite Security Holders”) received an aggregate of $40.0 million in cash, including an aggregate of approximately $6.6 million used for outstanding debt and transaction expenses of StarCite, and 1,350,000 shares of our common stock, which includes 300,000 shares of common stock placed into an escrow fund to satisfy any indemnification claims made by us pursuant to the terms of our merger agreement with StarCite. The merger consideration is subject to adjustment based on a final determination of working capital and is subject to certain limited holdbacks. The shares of common stock were issued pursuant to Section 4(2) of the Securities Act of 1933, as amended.

In addition, pursuant to the terms of the Merger Agreement, we agreed to file with the SEC a registration statement with respect to the resale by the holders thereof of shares of our common stock issued or issuable by us as consideration in the Merger. In the event that shares of our common stock do not close trading at or above $15.00 per share on the New York Stock Exchange for at least three consecutive days at any time during the sixty day period following effectiveness of the registration statement, we agreed to issue an additional 150,000 shares of our common stock to the StarCite securityholders.

Use of Proceeds from Registered Securities

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-172254) that was declared effective by the Securities and Exchange Commission on May 24, 2011, which registered an aggregate of 12,650,000 shares of our common stock, including 1,650,000 shares that the underwriters had the option to purchase. On May 31, 2011, 8,222,222 shares of common stock were sold on our behalf and 4,427,778 shares of common stock were sold on behalf of the selling stockholders, including 1,650,000 shares sold by the selling stockholders upon exercise in full of the underwriters’ option to purchase

 

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additional shares, at an initial public offering price of $15.00 per share, for an aggregate gross offering price of $123,333,330 to us, and $66,416,670 to the selling stockholders. Merrill Lynch, Pierce, Fenner & Smith and Citigroup Global Markets Inc. served as the managing underwriters of the initial public offering. Following the sale of the shares in connection with the closing of the initial public offering, the offering terminated.

As a result of the offering, we received net proceeds of approximately $112.6 million, after deducting underwriting discounts and commissions of approximately $8.6 million and additional offering-related expenses, net of reimbursements, of approximately $2.1 million. We did not receive any proceeds from the sale of shares by the selling shareholders. No offering expenses were paid directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities, or (iii) any of our affiliates.

There was no material change in the use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b). From the effective date of the registration statement through December 31, 2011, we have used the net proceeds of the offering for repayment of debt, funding for our recent acquisitions and for general corporate purposes, including expenditures for financing our growth, developing additional application services functionality and features, acquiring new customers and funding capital expenditures. We invested the funds received in short-term, interest bearing, investment-grade securities.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data below have been derived from our audited financial statements. The following table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The historical results presented below are not indicative of any future results.

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (In thousands, except per share data)  

Net revenue:

          

Technology revenue

   $ 290,488      $ 237,688      $ 210,483      $ 145,789      $ 78,542   

Marketing services revenue

     46,910        41,912        32,401        27,407        23,335   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     337,390        279,600        242,884        173,196        101,877   

Cost of net revenue

     150,914        121,351        107,188        79,681        41,081   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     186,476        158,249        135,696        93,515       60,796   

Total operating expenses

     203,092        178,764        167,269        137,421        83,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,616 )     (20,515 )     (31,573 )     (43,906 )     (23,026 )

Interest income (expense), net

     (2,771     (5,288     (5,043 )     (3,296 )     630   

Other income (expense), net

     (14     455        (1,196 )     (268 )     234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision (benefit) for income taxes

     (19,401 )     (25,348 )     (35,420 )     (47,470 )     (22,162 )

Provision (benefit) for income taxes

     (4,074     1,924        2,439        1,506        2,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (15,327 )     (27,272 )     (37,859 )     (48,976 )     (24,768

Accretion of redeemable convertible preferred stock

     (11,810 )     (28,157 )     (25,774 )     (15,639 )     (8,532 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (27,137 )   $ (55,429 )   $ (63,633 )   $ (64,615 )   $ (33,300 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders:

          

Basic and diluted

   $ (0.75 )   $ (7.83 )   $ (10.86 )   $ (11.68 )   $ (8.12 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders(1):

          

Basic and diluted

     36,072        7,080        5,862        5,530        4,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended December 31,  
     2011      2010      2009      2008     2007  
     (In thousands)  

Other Financial and Operational Data:

             

Adjusted EBITDA(2)

   $ 36,036       $ 25,120       $ 15,746       $ (2,672   $ (1,965

Organizations

     51.3         47.3         44.9         41.5        35.1   

Registrations

     80,274         70,182         65,461         25,074        12,920   

 

(1) Effective May 25, 2011, all shares of convertible preferred stock and redeemable convertible preferred stock were converted into 8,807,090 and 25,824,801 shares of common stock, respectively, in connection with our IPO. Upon completion of our initial public offering (“IPO”) in May 2011, we amended and restated our certificate of incorporation to authorize 100,000,000 shares of preferred stock.
(2) We define Adjusted EBITDA as net loss, plus: provision (benefit) for income taxes, other income (expense), net, depreciation and amortization, and stock-based compensation. Please see “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (In thousands)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

   $ 108,699      $ 31,441      $ 26,381      $ 33,395      $ 28,166   

Restricted cash

     1,502        5,000        5,000        5,000        —     

Property and equipment, net

     33,830        28,181        26,742        20,093        8,208   

Software development costs, net

     45,093        37,013        27,003        14,890        5,092   

Working deficit

     (43,365     (57,985 )     (38,676 )     (17,376 )     (2,683

Total assets

     599,227        390,548        381,871        325,936        241,041   

Total long-term debt

     5,000        44,403        48,727        54,045        40,857   

Convertible preferred stock

     —          21,187        21,187        21,187        21,187   

Redeemable convertible preferred stock

     —          371,126        343,021        269,534        161,603   

Total stockholders’ equity (deficit)

     346,639        (185,981 )     (141,343 )     (96,622 )     (16,427

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in the table above and within this Annual Report on Form 10-K Adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Annual Report on Form 10-K because we seek to manage our business to an improving level of Adjusted EBITDA as a percentage of revenue, and it is a key basis upon which we assess the performance of our operations and management. We also use Adjusted EBITDA for business planning, evaluation of acquisition opportunities and as a measurement to incentivize and compensate our management. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures for capital equipment, internally developed software costs or certain other contractual commitments;

 

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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may need to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements;

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation to our management team or employees;

 

   

Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results.

The following table presents a reconciliation of Adjusted EBITDA for each of the periods indicated:

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (In thousands)  

Reconciliation of Adjusted EBITDA to Net Loss:

          

Net loss

   $ (15,327   $ (27,272 )   $ (37,859 )   $ (48,976 )   $ (24,768

Interest expense (income), net

     2,771        5,288        5,043        3,296        (630

Provision (benefit) for income taxes

     (4,074     1,924        2,439        1,506        2,606   

Depreciation and amortization

     44,857        40,287        36,079        26,697        13,088   

Stock-based compensation

     7,795        5,348        11,240        14,537        7,973   

Other expense (income), net

     14        (455 )     (1,196 )     268        (234
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 36,036      $ 25,120      $ 15,746      $ (2,672 )   $ (1,965
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with the “Selected Financial Data” and our consolidated financial statements and the related notes thereto that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion and analysis includes forward looking information that involves risks, uncertainties and assumptions. Actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors, including those discussed under “Risk Factors” elsewhere in this Annual Report.

Overview

We are the leading provider of organization-based cloud computing applications serving a wide range of customer groups including business solutions, community activities, outdoors and sports. We provide applications that form an online network connecting a fragmented and diverse group of activity and event organizers with a large base of potential participants. Our proprietary technology platform transforms the way organizers manage their activities and events by automating online registrations and streamlining other critical management functions, while also driving consumer participation to their events.

We power a broad range of activities, such as reserving a campsite or tee time, signing up for a marathon or sports league, purchasing a fishing or hunting license, or participating in a community event or corporate

 

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conference. From the introduction of our platform in 1999, we have experienced significant growth and in 2011, we had over 51,300 customer organizations that drove over 80 million annual consumer registrations. Based on the results of a 2010 online survey we commissioned through Survey.com, we believe the organizations we target produce or organize activities and events for the majority of U.S. households. Our proprietary technology platform, ActiveWorks, provides cloud computing applications that reduce the cost and complexity of managing, organizing and promoting these activities and events.

Our business benefits from a powerful network effect. As more organizations use our platform, we increase the breadth and depth of activities and events offered through our platform. This more comprehensive offering of activities attracts more participants. As we attract more participants, we are able to drive increased demand for our customers’ activities, thus increasing registrations and revenue for both organizers and us. This revenue growth enables us to develop enhanced functionality and services through ActiveWorks and our websites, further increasing participant engagement and attracting new organizers. In this way, we build increasing value for both organizations and participants.

We serve a wide range of customers including community and sports organizations, large corporations, small and medium-sized businesses, educational institutions, federal and state government agencies, non-profit organizations and other similar entities. We primarily generate revenue from technology fees paid by participants who register for our customers’ activities through our cloud computing applications. During the year ended December 31, 2011, we generated revenue of $337.4 million, as compared to $279.6 million in the year ended December 31, 2010 and $242.9 million in the year ended December 31, 2009, an increase of 21% and 15%, respectively.

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. In addition, as part of our growth strategy, we expect to continue to make acquisitions and, thereby, acquire additional legacy systems. 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 these systems to ActiveWorks. This process is time consuming and requires the investment of significant technical and human resources. During this process, we expect to continue to incur costs associated with maintaining multiple legacy systems.

In addition, our long-term strategic plan involves expanding our applications into new business areas within the activity and event registration and management market. A lack of market acceptance of such efforts or our inability to generate satisfactory revenue to offset the development costs could have a material adverse effect on our results of operations and future growth prospects. As we establish and expand our operational capabilities internationally, we will incur additional operating expenses and capital-related costs.

In May 2011, we completed an initial public offering (“IPO”) of our common stock in which we sold and issued 12,650,000 shares of common stock, of which 4,427,778 were sold by selling stockholders, at an issue price of $15.00 per share, resulting in proceeds, net of underwriting discounts and offering expenses, of approximately $112.6 million to us.

Business Model

Technology Revenue. Our technology revenue was 86% of our total revenue for the year ended December 31, 2011. Our technology fee is a percentage of the total registration amount that is paid by a participant at the time of sign up. We refer to the sum of these technology fees during a given period as net registration revenue, since they are the direct result of participant registrations. Net registration revenue was 79% of our technology revenue for the year ended December 31, 2011. During the year ended December 31, 2011, we processed over 80 million consumer registrations. Participants typically use a credit card to register for an activity either online or offline, and in the case of some of our large contracts, by using a call center. Upon

 

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registration, the consumer is charged for the total event registration fee, including the technology fee, and the funds are remitted to bank accounts that we control. We record revenue for our technology fee and we remit the remaining funds to the organizer. The organizer has the option of absorbing our technology fee and presenting a total event registration fee to the participant, or adding the technology fee as a separate line item in the event registration fee. Pricing for our cloud offerings is based on a portion of the total dollars processed for a registration and typically has a fixed and variable component. A number of our offerings also include a fee for setup, support or hosting. Our technology platform serves the entire spectrum of organizations, from large to small. Our standard contract for our registration customers is three years.

Licensed software, maintenance, hosting and implementation revenue was 21% of our technology revenue for the year ended December 31, 2011. In previous acquisitions, we acquired licensed software products which includes licensed software, maintenance and services. As the market has become more receptive, we have begun transitioning these customers to our solutions. We anticipate that our licensed software, maintenance and services revenue will continue to decline as a percentage of our overall business. In the future, we anticipate sales in our technology segment will be primarily driven by technology fees from our cloud offerings.

Marketing Services Revenue. Our marketing services revenue was 14% of our total revenue for the year ended December 31, 2011. The marketing services segment works to provide the organizations within our technology segment and their participants with marketing solutions, online communities, membership programs and hosted websites. We group these sales as online services, field marketing and commerce. Online services include online advertising, email marketing and targeted newsletter promotions. We provide field marketing services including event promotions and sponsorships. Our commerce revenue consists of membership programs, training programs and websites. Contracts within our marketing services segment vary in length but are generally less than one year. We obtain customers through direct sales, inside sales and self-setup.

Research and Development Expense. Our research and development expenses are primarily the costs for employees engaged in the development and ongoing maintenance of our offerings and services. Primarily as a result of our acquisitions, we currently maintain numerous solutions that allow us to service customers of various types and sizes. In 2007, we began to develop ActiveWorks while continuing to maintain our existing products. As a result, we have incurred an increase in our research and development expense as well as capitalized software. We review spending on our research and development projects monthly and group the expenses in categories attributable to surviving products, end-of-life products and capitalized software. We expect that as development work is completed on our surviving products we will see a reduction in the research and development expenses attributable to our end-of-life products as well as the related spending associated with capitalized software for new products. For the year ended December 31, 2011, we capitalized $18.7 million of software development.

Key Factors that Affect Our Business

Macroeconomic Environment. We experienced a slowdown in our business starting in the second half of 2008 due to the global economic downturn. We believe the decline in business and consumer spending coupled with government budget cuts drove a reduction in our growth rate. We reacted to this slowdown in early 2009 by reducing our sales headcount which affected our customer acquisition growth rate. In 2011, we returned to strong customer acquisition growth rates which we experienced prior to the economic downturn.

Acquisitions. As a part of our ongoing growth strategy, we have completed a number of acquisitions in recent years. Our growth has been significantly affected by these acquisitions. In general, we pursue acquisitions for several reasons, such as acquiring a key technology or feature set, gaining access to a new customer group or acquiring domain expertise.

In February 2011, we acquired Fellowship Technologies, Inc. (“Fellowship”), a provider of web based software to religious institutions. The acquisition enables us to strengthen our position as a technology leader and

 

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broaden our customer base in the faith space. The purchase consideration was approximately 1,125,000 shares of our common stock valued at approximately $8.9 million.

In October 2011, we acquired ServiceU, a provider of web-based solutions for giving, event registration, ticketing, calendaring and resource management in exchange for $11.1 million in cash. The acquisition enables us to strengthen our position as a technology leader and broaden our customer base in the faith space.

In November 2011, we acquired RTP, LLC, a provider of integrated resort software and solutions in exchange for $21.5 million in cash. The acquisition enables us to broaden our existing product capabilities and our customer base in the resorts space.

In December 2011, we acquired StarCite, Inc., a provider of a technology platform that delivers content and services for meetings and event planning to corporations, hotels, venues and meetings suppliers for consideration of $56.5 million in cash and shares of our common stock. Total consideration comprised $38.1 million in cash, 1,350,000 shares of common stock with a fair value of approximately $18.4 million and 150,000 shares of contingently issuable common stock with a fair value of approximately $1.1 million to be issued in the event that shares of our common stock do not close trading at or above $15.00 per share on the New York Stock Exchange for at least three consecutive days at any time during the sixty day period following the effective date of a registration statement filed to register the shares issued or issuable, as consideration in the merger. The acquisition enables us to provide an integrated solution for the events space and broaden its customer base.

During the year ended December 31, 2011, we acquired operations from two other businesses including a provider of web-based church management solutions and a provider of online registration for endurance events, in exchange for $4.6 million in cash. These acquisitions enable us to strengthen our position as a technology leader and broaden our customer base in the faith and endurance spaces.

Seasonality. Our total revenue experiences seasonality with the three months ended June 30 and the three months ended September 30 having the highest revenue. This seasonality is mainly due to trends in net registration revenue, as many of our larger customers experience peak business activity during the warmer months of the year.

Key Business Metrics

Net Registration Revenue. We calculate our net registration revenue by summing the technology fees generated by our registrations in a given period.

Registrations. We define a registration as when a participant registers one or more people for an event being held by an organization who is using our technology to register that participant. We determine that a registration has taken place when a participant registers one or more people for an activity or an event being held by one of our customers.

 

     Year Ended December 31,      %
Change
 
     2011      2010      2009      2010 to
2011
    2009 to
2010
 
     (In thousands, except per registration data)               

Net registration revenue

   $ 228,453       $ 197,575       $ 174,015         16     14

Registrations

     80,274         70,182         65,461         14     7

Net registration revenue per registration

   $ 2.85       $ 2.82       $ 2.66         1     6

Net Registration Revenue and Registrations

2010 compared to 2011. Registrations increased 10.1 million or 14%. The growth was due to additional registrations from new large state customers in our outdoors customer group and growth from sales to new

 

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organizations mainly in our communities and business solutions customer groups. The average revenue per registration increased 1%, mainly as a result of the registrations growth in our outdoors, communities and business solutions customer groups.

2009 compared to 2010. Registrations increased 4.7 million or 7%, which was primarily driven from sales to new organizations. The average revenue per registration increased 6% to $2.82, predominantly as post-recession recovery in the business solutions customer group led to higher registration revenue.

Basis of Presentation

General

The consolidated financial statements include the accounts of The Active Network, Inc. and its wholly-owned subsidiaries. All intercompany balances have been eliminated.

Acquisitions that have been accounted for as purchase transactions are included in the consolidated results from their date of purchase.

Revenue

We report our revenue in two segments:

 

   

Technology

 

   

Marketing services

The technology revenue segment is primarily composed of net registration revenue, which is made up of the technology fee we charge a participant when they register for one of our organization’s events. The technology fee is recognized as revenue net of the organization registration fee which is collected on behalf of our customer and then remitted back to the organization typically on a two week basis. Net registration revenue is recognized when services are provided, net of estimated rebates and other chargebacks. Technology revenue also includes software licensing, installation, training, maintenance and hosting subscriptions.

The marketing services revenue segment includes online services, field marketing services and membership programs. Registrations lead participants to our network of websites and create opportunities for us to sell our online commerce and other marketing services to participants. Our network of websites enables like-minded consumers to engage in our online communities.

Costs and Expenses

Cost of Revenue. Our cost of revenue consists of credit card processing fees for registrations, payroll and related costs including allocated facilities costs, stock-based compensation for employees associated with registration, subscription or software implementation, customer support and onsite event support including travel costs. Costs also include expenses related to our call center operations, amortization of capitalized software development costs and certain acquired intangibles including acquired technology, customer supply costs, inventory costs and internet hosting costs.

Sales and Marketing. Our sales and marketing costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for our sales and marketing employees. Costs also include expenses for travel, trade shows and other promotional and marketing activities including direct and online marketing.

Research and Development. Our research and development costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for employees and contractors engaged in the development and ongoing maintenance of our products and services.

 

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General and Administrative. Our general and administrative costs are primarily salaries, benefits, incentive compensation, stock-based compensation and allocated facilities costs for employees engaged in support activities including executive, finance, accounting, human resources, legal and internal information technology support. Also included are professional fees and contractor costs for legal and accounting services. Software expenses and travel costs for support employees, taxes, fees and licenses are also included.

Amortization of Intangibles. Intangible assets with finite lives are amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the asset over their estimated useful lives. This includes assets recorded in conjunction with certain acquisitions.

Other Income (Expense), Net. Other income (expense), net consists primarily of the interest income earned on our cash and cash equivalents, interest paid on our debt, foreign exchange gains and losses and other one-time gains and losses.

Provision (benefit) for Income Taxes. Provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions.

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed within this Annual Report on Form 10-K adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the payment of bonuses to our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

For additional information on the limitations of adjusted EBITDA, see “Adjusted EBITDA” in Item 6 “Selected Financial Data” for more information.

 

     Year Ended December 31,  
     2011     2010     2009     2008     2007  
     (In thousands)  

Reconciliation of Adjusted EBITDA to Net Loss:

          

Net loss

   $ (15,327   $ (27,272 )   $ (37,859 )   $ (48,976 )   $ (24,768

Interest expense (income), net

     2,771        5,288        5,043        3,296        (630

Provision (benefit) for income taxes

     (4,074     1,924        2,439        1,506        2,606   

Depreciation and amortization

     44,857        40,287        36,079        26,697        13,088   

Stock-based compensation

     7,795        5,348        11,240        14,537        7,973   

Other expense (income), net

     14        (455 )     (1,196 )     268        (234
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 36,036      $ 25,120      $ 15,746      $ (2,672 )   $ (1,965
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that can have a significant

 

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impact on the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. We base our estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On a regular basis we evaluate our estimates, assumptions and judgments and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of our Board of Directors. We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts, returns and discounts, software development costs, stock-based compensation, business combinations, impairment of goodwill, intangible assets and long-lived assets, and accounting for income taxes have the greatest potential impact on our Consolidated Financial Statements, so we consider these to be our critical accounting policies.

We discuss below the critical accounting estimates associated with these policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results. For further information on our significant accounting policies, see Note 2 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

Revenue Recognition

We recognize technology revenue primarily from registration fees and related hosting and implementation services. We also record revenue for marketing services. We recognize revenue when a signed contract or other persuasive evidence of an arrangement exists, the services have been rendered, the fee is fixed or determinable, and collection of the resulting receivable is probable. Our arrangements do not contain general rights of return.

We assess whether the fee is fixed or determinable and collection is probable at the time of the transaction. In determining whether the fee is fixed or determinable, we compare the payment terms of the transaction to our standard payment terms and whether payment is free of contingencies or significant uncertainties. If a significant portion of the fee is considered to have extended payment terms or the fee is subject to adjustment, we account for the fee as not being fixed or determinable and recognize revenue as the payments become due. We assess whether collection is probable based on a number of factors, including the customer’s past transaction history and credit-worthiness. We do not request collateral from our customers. If we determine that collection of a fee is not probable, we defer the fee and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.

Registration revenue is recognized when received, net of registration fees paid to event organizers, where we are acting as an agent of event organizers. Net registration revenue comprised 67%, 71% and 72% of total net revenue for the years ended December 31, 2011, 2010 and 2009, respectively. In certain circumstances, we pre-purchase registrations from event organizers and bear the risk and rewards of ownership. Registration revenue associated with these transactions is recognized on a gross basis, as we are the primary obligor and bear inventory and credit risk. Cash collected in advance of the event is recorded as deferred revenue until the event occurs. Revenue recognized on a gross basis comprised 0.7%, 0% and 0% for each of the three years ended December 31, 2011, 2010 and 2009, respectively.

On January 1, 2011, we adopted the new accounting standard for multiple deliverable revenue arrangements which provides guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated. This guidance requires an entity to allocate revenue in an arrangement using the “best estimate of selling price” (“BESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) of selling price based on historical stand-alone sales or third-party evidence (“TPE”) of selling price. Due to the unique nature of some of our multiple deliverable revenue arrangements, we may not be able to establish selling prices based on historical stand-alone sales using VSOE or TPE, therefore, we may use our best estimate to establish selling prices for these arrangements under the new accounting standard. We establish our best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as customer base, size of transaction, available media inventory,

 

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pricing strategies and market conditions. We believe the use of the BESP allows revenue recognition in a manner consistent with the underlying economics of the transaction. The adoption of this amended standard did not have a significant impact on our revenue recognition for multiple deliverable revenue arrangements.

Many customers who use our hosting services or license our software also enter into separate professional services and training arrangements with us. In addition, certain of our hosting agreements include up-front payments for implementation of hosting services. In determining whether professional services and implementation revenue should be accounted for separately, we evaluate (among other factors): the nature of the deliverables; whether they are ready for their intended use by the customer upon receipt; the nature of the implementation services; the availability of services from other vendors; whether the timing of payments for license revenue is coincident with performance of services and whether milestones or acceptance criteria exist that affect the realizability of the hosting or software license fee. For up-front fees and other revenue received for implementation services associated with hosting arrangements, we defer the related revenue and record revenue over the term of the hosting contract since the implementation and hosting do not have stand-alone value. For license and professional services that qualify for separate accounting, such as arrangements that involve off-the-shelf software, the services do not include significant alterations to the features and functionality of the software, the services are primarily comprised of implementation services and fair value exists for the undelivered elements, software revenue is generally recognized when the software is delivered and service revenue is recognized when the services are performed.

For license and professional service arrangements that do not qualify for separate accounting, such as arrangements that involve significant modification or customization of the software, arrangements that include milestones or customer specific acceptance criteria, or where payment for the software license is tied to the performance of professional services, software license revenue is generally recognized together with the professional services revenue when services have been rendered. A majority of such arrangements are recognized together with the professional services. Penalties from customers related to power outages or other technical disruptions are recognized in the period in which such amounts are incurred based on the Company’s estimated liability and are recorded as a reduction of revenue or an increase to cost of revenue. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss is recognized currently.

Maintenance revenue consists of fees for providing software updates on a when-and-if available basis and technical support to software products (“post contract customer support” or “PCS”). Maintenance revenue is recognized ratably over the terms of the agreement.

Marketing services revenue consists of online and integrated field marketing campaigns and membership programs. Our online marketing services include online advertising, e-mail marketing and targeted newsletter promotions. Banner, button and e-mail advertisements are impression-based, with the revenue based on the number of times the advertisement is displayed or delivered over the contract period. Impression-based contract revenue is primarily recognized as the impression is displayed on our web site or delivered by e-mail to the intended addressee. Our field marketing services include event promotions, sponsorships and sample placements and are defined contractually with individual customers. Field marketing revenue is recognized over the term of the contract or when revenue is earned based on the performance of services associated with a series of events. Revenue from membership programs is recognized over the term of the membership period.

Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we make different judgments or utilize different estimates for any period, material differences in the amount and timing of revenue recognized could result.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is based on our review of credit profiles of our customers, contractual terms and conditions, current economic trends and historical payment. We reassess the allowances for

 

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doubtful accounts on a monthly basis. Historically, our actual losses and credits have been consistent with these provisions. However, unexpected events or significant future changes in trends could result in a material impact to our future statements of operations and of cash flows. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue or bad debt expense recognized could result. Our allowance for doubtful accounts as a percentage of net revenue was 0.5% and 0.8% in fiscal years 2011 and 2010.

Software Development Costs

We capitalize costs related to software acquired, developed or modified solely to meet our internal use, with no substantive plans to market such software at the time of development, in accordance with authoritative guidance for internal-use software. Such costs are capitalized during the application development stage once preliminary planning activities have been successfully completed and management approves continuation of the project. We amortize these costs on a straight-line basis over the estimated useful life of the related asset, generally over two to five years. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded as research and development on our consolidated statements of operations. Costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over the estimated useful lives of the enhancements.

Business Combinations

We determine the estimated fair value of acquired companies’ tangible and intangible assets, liabilities assumed and in-process research and development at the acquisition date. The process of determining fair value requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, support obligations assumed, estimated restructuring liabilities and pre-acquisition contingencies.

Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. The estimation of fair value requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date including:

 

   

estimated fair values of intangible assets acquired from the acquiree;

 

   

estimated fair values of software license updates and product support obligations assumed from the acquiree;

 

   

estimated income tax assets and liabilities assumed from the acquiree;

 

   

estimated value of restructuring liabilities to reorganize the acquiree’s pre-acquisition operations;

 

   

estimated fair values of stock awards assumed from the acquiree that are included in the purchase price; and

 

   

estimated fair value of pre-acquisition contingencies assumed from the acquiree.

Impairment of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets

Our goodwill and intangible assets result from our corporate acquisition transactions. Goodwill and intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable. We do not carry any intangible assets with indefinite useful lives other than goodwill. We evaluate our recorded goodwill balances for potential impairment annually by comparing the fair value of each reporting unit to its carrying value, including recorded goodwill. Our annual testing date is October 1. Goodwill impairment testing is a two-step process. For the first step, we screen for impairment, and if any possible impairment exists, we undertake a second step of measuring

 

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such impairment by performing discounted cash flow analyses. These analyses are based on cash flow assumptions that are consistent with the plans and estimates being used to manage our business. In the first step, we compare the carrying amount of our reporting units to the “fair value” of the reporting units. An excess carrying value over fair value would indicate that goodwill may be impaired. If we determined that goodwill may be impaired, then we would complete the second step of the test and compare the “implied fair value” of the goodwill to the carrying amount of goodwill. We periodically re-evaluate our business and have determined that we continue to operate in two segments, which we consider our reporting units. If our assumptions change in the future, we may be required to record impairment charges to reduce the carrying value of our goodwill. Changes in the valuation of goodwill could materially impact our operating results and financial position.

We evaluate the recoverability of our long-lived assets including amortizable intangible and tangible assets in accordance with authoritative guidance. When events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, we recognize such impairment in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Our acquired intangible assets with definite useful lives are amortized using a combination of straight-line and accelerated methods based on the expected cash flows from the assets, and periodically tested for impairment.

As of December 31, 2011, we had $243.3 million of goodwill, $33.8 million of net property and equipment and $90.3 million of acquired net intangible assets. If our estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the carrying value of these assets. Changes in the valuation of long-lived assets could materially impact our operating results and financial position.

The results of step one of the Company’s annual goodwill impairment test for October 1, 2011 are as follows (in thousands):

 

     October 1, 2011  
     Technology      Media &
Marketing
 

Fair value of invested capital

   $ 601,000       $ 155,000   

Carrying value of invested capital

     335,790         23,797   
  

 

 

    

 

 

 

Excess of fair value over carrying value

   $ 265,210       $ 131,203   
  

 

 

    

 

 

 

We have not recorded any impairment losses in each of the three years ended December 31, 2011.

Income Taxes

We recognize tax benefits for tax positions that are more likely than not to be sustained based solely upon the technical merits positions as of the as of the reporting date. We then measure the benefit to be recognized using a cumulative probability approach and recognize the largest amount of benefit that is more likely than not to be sustained. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure under the most recent tax laws. It also involves us making estimates and judgments in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. These temporary differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets.

We assess the likelihood that we will be able to recover our deferred tax assets and the need for a valuation allowance. We consider all available evidence, both positive and negative, including historical levels of income,

 

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expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies. We will increase our provision for income tax by creating a valuation allowance if we are not able to determine that recovery of our deferred tax assets is more likely than not. Based on the available evidence as of December 31, 2011, we were not able to conclude that realization of our domestic deferred tax assets is more likely than not and we recorded a valuation allowance of $73.8 million.

We conduct business globally, and as a result, are subject to taxation in the United States and various state jurisdictions and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities in many of the jurisdictions in which the Company operates. Effectively, all of our historical tax filings are subject to examination by the Internal Revenue Service and various state and foreign jurisdictions due to the generation of net operating loss carryforwards.

Certain of our subsidiaries are currently under tax audit. It is possible that within the next twelve months, ongoing tax examinations in the U.S and in foreign jurisdictions may be resolved, that new tax exams may commence and that other issues may be effectively settled. However, we are unable to make a reasonably reliable estimate as to when or if cash settlements with taxing authorities may occur. Although audit outcomes and the timing of audit payments are subject to uncertainty, we do not anticipate that the resolution of these tax matters or any events related thereto will result in a material adverse change to our consolidated financial position, results of operations or cash flows.

Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Prior to our IPO, the board of directors determined the value of the underlying stock by considering a number of factors, including historical and projected financial results, the risks we faced at the time, the preferences of our preferred stock and the lack of liquidity of our common stock. After the IPO, the fair value of common stock was determined using the quoted closing market price of the Company’s common stock on the date of grant.

Under our Employee Stock Purchase Plan (the “ESPP”), eligible officers and employees may purchase a limited amount of common stock at a discount to the market price in accordance with the terms of the plan as described in Note 16 of our consolidated financial statements.

We may also grant restricted stock awards that contain certain performance conditions. We recognize compensation cost for awards with performance conditions when the performance conditions have been determined and based upon the probability of that performance condition being met, net of an estimate for pre-vesting forfeitures.

We utilize the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value of our share-based awards. The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the option’s expected term and the price volatility of the underlying stock.

Expected Term

As we have limited historical option exercise data, we estimated our expected term based on the average expected term of similar publicly-traded entities.

Volatility

As we do not have a trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily

 

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price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the technology industry similar in size, stage of life cycle and financial leverage. We did not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity was relatively low. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

Risk-free Rate

The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities comparable to the expected term of the options for each option group.

Dividend Yield

We have never declared or paid any cash dividends and do not anticipate paying cash dividends in the foreseeable future. Therefore, the assumed dividend yield is expected to be zero.

The following table presents the assumptions used to estimate the fair value of options granted during the periods presented:

 

     Year Ended December 31,  
     2011     2010     2009  

Volatility

     48.5-51.5     49.7-51.8     52.1-53.8

Expected dividend yield

     —          —          —     

Risk-free rate

     0.8-2.2     1.3-2.2     1.4-2.1

Expected term (in years)

     4.9        4.7        4.5   

The following table sets forth the total stock-based compensation expense included in the related financial statement line items:

 

     Year Ended December 31,  
     2011      2010      2009  
            (In thousands)         

Cost of net revenue

   $ 168       $ 111       $ 128   

Sales and marketing

     1,413         562         765   

Research and development

     915         244         597   

General and administrative

     5,299         4,431         9,750   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 7,795       $ 5,348       $ 11,240   
  

 

 

    

 

 

    

 

 

 

 

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Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

     Year Ended December 31,  
     2011     2010     2009  
           (In thousands)        

Net revenue:

      

Technology revenue

   $ 290,480      $ 237,688      $ 210,483   

Marketing services revenue

     46,910        41,912        32,401   

Total net revenue

     337,390        279,600        242,884   

Cost of net revenue:

      

Cost of technology revenue

     144,962        115,148      $ 103,130   

Cost of marketing services revenue

     5,952        6,203        4,058   
  

 

 

   

 

 

   

 

 

 

Cost of net revenue

     150,914        121,351        107,188   
  

 

 

   

 

 

   

 

 

 

Gross profit

     186,476        158,249        135,696   

Operating expenses:

      

Sales and marketing

     70,251        59,106        50,556   

Research and development

     66,753        61,107        58,767   

General and administrative

     51,126        42,404        39,455   

Amortization of intangibles

     14,962        16,147        18,491   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     203,092        178,764        167,269   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,616     (20,515     (31,573

Interest income

     119        150        194   

Interest expense

     (2,890     (5,438     (5,237

Other income (expense), net

     (14     455        1,196   
  

 

 

   

 

 

   

 

 

 

Loss before provision (benefit) for income taxes

     (19,401     (25,348     (35,420

Provision (benefit) for income taxes

     (4,074     1,924        2,439   
  

 

 

   

 

 

   

 

 

 

Net loss

     (15,327     (27,272     (37,859

Accretion of redeemable convertible preferred stock (1)

     (11,810 )     (28,157     (25,774
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (27,137   $ (55,429   $ (63,633
  

 

 

   

 

 

   

 

 

 

 

(1) Effective May 25, 2011, all shares of convertible preferred stock and redeemable convertible preferred stock were converted into 8,807,090 and 25,824,801 shares of common stock, respectively, in connection with our IPO. Upon completion of our IPO in May 2011, we amended and restated our certificate of incorporation to authorize 100,000,000 shares of preferred stock

 

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     Year Ended December 31,  
     2011     2010     2009  
     (As of percentage of net revenue)  

Net revenue

     100     100     100

Cost of net revenue

     45        43        44   

Gross profit

     55        57        56   

Operating expenses:

      

Sales and marketing

     21        21        21   

Research and development

     20        22        24   

General and administrative

     15        15        16   

Amortization of intangibles

     4        6        8   

Total operating expenses

     60        64        69   

Loss from operations

     (5     (7     (13

Interest income

                     

Interest expense

     (1     (2     (2

Other income (expense), net

                     

Loss before provision (benefit) for income taxes

     (6     (9     (15

Provision (benefit) for income taxes

     (1     1        1   

Net loss

     (5 )%      (10 %)      (16 %) 

Years ended December 31, 2011, 2010 and 2009

Net Revenue

 

     Year Ended December 31,      %
Change
 
     2011      2010      2009      2010 to
2011
    2009 to
2010
 
     (In thousands)               

Net revenue:

             

Technology revenue

   $ 290,480       $ 237,688       $ 210,483         22     13

Marketing services revenue

     46,910         41,912         32,401         12     29
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net revenue

   $ 337,390       $ 279,600       $ 242,884         21     15
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

2011 compared to 2010. Total net revenue increased $57.8 million, or 21% from 2010 to 2011 as discussed below.

Technology revenue. Net registration revenue increased $30.9 million, or 16%, driven by registrations growth in our business solutions and communities customer groups and additional revenue from new large state customers in our outdoors customer group. Software revenue increased $21.9 million or 55% as a result of revenue from acquisitions in our faith customer group and also due to growth in hosting and implementation revenue in our business solutions and communities customer groups. In total, technology revenue increased $52.8 million or 22%.

Marketing services revenue. Revenue increased $5.0 million, or 12%, mainly as a result of growth in membership programs, online advertising and promotions.

2010 compared to 2009. Total net revenue increased $36.7 million, or 15% from 2009 to 2010.

Technology revenue. Net registration revenue increased $23.6 million, or 14%. The increase was primarily due to a 7% growth in registrations and a 6% growth in revenue per registration. Overall growth was negatively impacted by the oil spill in the Gulf of Mexico in April 2010 and the continued economic downturn. We have a

 

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number of large organizations that operate in the Gulf of Mexico and consumer registrations were down in the region as a result of the oil spill. Software revenue increased $3.6 million, or 10%, as a result of higher maintenance and implementation revenue. In total, technology revenue increased $27.2 million, or 13%.

Marketing services revenue. Revenue increased $9.5 million, or 29%, as a result of higher adoption rates within our commerce programs, and growth in online media and promotions.

Costs and Expenses

Employee related expenses. Headcount and its related expenses make up a significant portion of our total expenses. We define employee related expenses as salaries, fringe benefits, facilities costs, employee travel, commissions, bonuses and other employee expenses.

Cost of Net Revenue

 

     Year Ended December 31,      %
Change
 
     2011      2010      2009      2010 to
2011
    2009 to
2010
 
     (Dollars in thousands)               

Cost of net revenue

   $ 150,914       $ 121,351       $  107,188         24     13

Headcount (at period end)

     1,258         1,122         1,147         12     (2 )% 

2011 compared to 2010. Cost of net revenue increased $29.6 million, or 24% from 2010 to 2011. Headcount increased 12% due to the addition of information technology and implementation support employees to support the revenue growth, leading to higher employee related costs of $7.3 million or 15%. Call center headcount and costs remained flat in 2011 compared to 2010 due to efficiencies in our call center operations. Credit card fees increased $6.2 million or 18% resulting from the increase in net registration revenue. Depreciation for fixed assets and amortization of intangibles and software that was capitalized in earlier periods increased $8.3 million. 2011 included an expense of $0.8 million to record a contingency related to a state contract implementation. Software and hardware maintenance expenses increased $1.7 million primarily related to investments in new software products and maintenance agreements to support our data centers and infrastructure growth for new products, and other cost of net revenue increased $5.2 million or 25% to support the revenue growth.

2010 compared to 2009. Cost of net revenue increased $14.2 million, or 13% from 2009 to 2010. The increase was primarily due to an increase of $5.7 million in credit card fees directly attributable to the increase in net registration revenue, $1.7 million in higher web hosting expenses given the higher registration volume and $5.4 million of higher depreciation on the software that was capitalized in earlier periods.

Sales and Marketing

 

     Year Ended December 31,      % Change  
     2011      2010      2009      2010 to
2011
    2009 to
2010
 
     (Dollars in thousands)               

Sales and marketing

   $ 70,251       $ 59,106       $ 50,556         19 %     17 %

Headcount (at period end)

     540         435         405         24 %     7 %

2010 compared to 2011. Sales and marketing expense increased $11.1 million, or 19% from 2010 to 2011. The increase was primarily due to higher employee related costs of $8.9 million as a result of a 24% increase in headcount as we invested in our sales and marketing staff for future business growth. Marketing expenses also increased $1.8 million as we increased our marketing and trade show spending mainly due to large trade shows in the first six months of the year.

 

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2009 compared to 2010. Sales and marketing expense increased $8.6 million, or 17% from 2009 to 2010. The increase was primarily due to a $6.9 million increase in employee related costs, which resulted from a 7% increase in headcount as we reinvested in our sales staff to facilitate future business growth. The remaining increases included $0.8 million for additional marketing, $0.6 million for contractors and $0.7 million for higher depreciation.

Research and Development

 

     Year Ended December 31,      % Change  
     2011      2010      2009      2010 to
2011
    2009 to
2010
 
     (Dollars in thousands)               

Research and development

   $ 66,753       $ 61,107       $ 58,767         9 %     4 %

Headcount (at period end)

     982         856         819         15 %     5 %

2010 compared to 2011. Research and development expense increased $5.6 million, or 9% from 2010 to 2011. Employee related costs increased $10.2 million or 16% resulting from a 15% increase in headcount to support our continued development of ActiveWorks and implementations for new large state customers. The increase in employee related costs was offset by additional capitalized software of $3.0 million, a decline in contractor expenses of $1.3 million and lower depreciation of $1.2 million.

2009 compared to 2010. Research and development expense increased $2.3 million, or 4% from 2009 to 2010. The increase was primarily due to a $4.6 million increase in employee related costs which resulted from a 5% increase in headcount made for continued development of ActiveWorks and to implement new large state customers. The increase in employee related costs was offset by $1.1 million in additional capitalized software and a $0.6 million decline in expenses for contractors.

General and Administrative

 

     Year Ended December 31,      % Change  
     2011      2010      2009      2010 to
2011
    2009 to
2010
 
     (Dollars in thousands)               

General and administrative

   $ 51,126       $ 42,404       $ 39,455         21 %     7 %

Headcount (at period end)

     282         223         171         26 %     30 %

2010 compared to 2011. Our general and administrative expenses increased $8.7 million, or 21%, from 2010 to 2011. Employee related expenses increased $5.4 million as a result of $1.9 million in severance payments in 2011 related to the acquisition of StarCite, higher costs resulting from a 26% increase in headcount to allow us to support the business, offset by a change in our annual incentive plan accrual. Software expenses increased $1.2 million primarily related to our increased investment in Oracle licenses to support our growth, stock based compensation expense increased $0.9 million, and other expenses primarily related to higher costs associated with operating as a public company increased $1.3 million or 12%.

2009 compared to 2010. Our general and administrative expenses increased $2.9 million, or 7%, from 2009 to 2010. The increase was due to $4.1 million of additional employee related costs to support the growing business, a $1.3 million increase in contractor fees as we work to build out, automate and streamline internal processes, a $2.8 million of other additional costs to support the business, and was offset by a $5.3 million decrease in stock-based compensation expenses.

 

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Amortization of Intangibles

 

     Year Ended December 31,      % Change  
     2011      2010      2009      2010 to
2011
    2009 to
2010
 
     (In thousands)               

Amortization of intangibles

   $ 14,962       $ 16,147       $ 18,491         (7 %)      (13 %)

2010 compared to 2011. Amortization of intangibles decreased $1.2 million, or 7%, from 2010 to 2011.

Intangibles are amortized over their expected life. Amortization expense on acquisitions completed prior to 2010 decreased as useful lives on certain intangibles were met. This was slightly offset by higher amortization expense on acquisitions completed since 2010.

2009 compared to 2010. Amortization of intangibles decreased $2.3 million, or 13%, from 2009 to 2010. Intangibles are amortized over their expected life. Amortization expense on acquisitions completed prior 2009 decreased as useful lives on certain intangibles were met. This was slightly offset by higher amortization expense on acquisitions completed since 2009.

Interest and Other Income (Expense), Net

 

     Year Ended December 31,     % Change  
     2011     2010     2009     2010 to
2011
    2009 to
2010
 
     (In thousands)              

Interest income

   $ 119      $ 150      $ 194        (21 %)      (23 %)

Interest expense

     (2,890 )     (5,438 )     (5,237 )     (47 %)      4 %

Other income (expense), net

     (14     455        1,196        (103 %)      (62 %)

Interest and other income (expense), net

   $ (2,785   $ (4,833 )   $ (3,847 )     (42 %)      26 %

2010 compared to 2011. Interest income for the year ended December 31, 2011 was $0.1 million compared to $0.2 million for the year ended December 31, 2010, a decrease of less than $0.1 million. The decrease was due to our transition to bank Earnings Credit Rate, which offsets bank fees with interest income resulting in lower interest income.

Interest expense decreased 47% to $2.9 million due to a lower average debt balance. Our average debt balance was lower in 2011 because, subsequent to our public offering in May 2011, we paid all of our outstanding debt at that time in full, and the remaining interest expense is related to capital lease obligations.

Other income (expense), net was $14,000 expense in 2011 and approximately $0.5 million income in 2010. The amounts in both periods are mainly related to gains or losses on foreign exchange.

2009 compared to 2010. Interest income for the year ended December 31, 2010 was $0.2 million compared to $0.2 million for the year ended December 31, 2009, a decrease of less than $0.1 million. The decrease was due to a lower average cash balance. Interest expense for the year ended December 31, 2010 was $5.4 million compared to $5.2 million for the year ended December 31, 2009, an increase of $0.2 million. The increase was due to higher interest rates in 2010. Other income, net for the year ended December 31, 2010 was $0.5 million compared to $1.2 million for the year ended December 31, 2009, a decrease of $0.7 million. The decrease was primarily due to an acquisition gain.

 

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Income Taxes

 

     Year Ended December 31,      % Change  
     2011     2010      2009      2010 to
2011
    2009 to
2010
 
     (In thousands)               

Provision (benefit) for income taxes

   $ (4,074   $ 1,924       $ 2,439         312 %     (21 %)

2010 compared to 2011. Income taxes for the year ended December 31, 2011 resulted in a benefit of $4.1 million compared to an expense of $1.9 million for the year ended December 31, 2010. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary difference become deductible. During the fourth quarter of 2011, we concluded as a result of a plan to amalgamate our Canadian subsidiaries that it was more likely than not that we would realize deferred tax assets of approximately $2.6 million associated with one of our Canadian subsidiaries that was previously offset by a valuation allowance. In addition, during the fourth quarter of 2011, we realized $3.9 million of tax benefit from the reduction in our domestic valuation allowance as a result of net deferred tax liabilities assumed in connection with the acquisition of ServiceU.

The effective tax rate of 21.0% for the year ended December 31, 2011 differs from the statutory rate primarily due to state taxes, foreign taxes, nondeductible stock option expenses, the increase in the deferred tax liability from the amortization of tax deductible goodwill, and the change in the valuation allowance, as described above.

2009 compared to 2010. Income taxes for the year ended December 31, 2010 were $1.9 million compared to $2.4 million for the year ended December 31, 2009. The overall provision in 2009 and 2010 is primarily the result of an increase in our deferred tax liabilities from the amortization of tax deductible goodwill. Included in income tax expense for the year ended December 31, 2010 is an $892,000 tax benefit related to the correction of an error to the tax treatment of deferred tax liabilities for the year ending December 31, 2009.

Liquidity and Capital Resources

Condensed Consolidated Statements of Cash Flows Data:

 

     Year Ended
December 31,
 
     2011     2010     2009  
     (In thousands)  

Purchases of property and equipment

   $ (12,514   $ (14,767   $ (10,449

Software development costs

     (18,651     (15,651     (14,561

Depreciation and amortization

     44,857        40,287        36,079   

Change in operating assets and liabilities, net

     31,785        20,222        15,640   

Repayment of long-term obligations

     (41,628     (8,035     (16,772

Net proceeds from initial public offering

     112,566        —          —     

Net cash provided by operating activities

     65,703        42,095        28,524   

Net cash used in investing activities

     (66,934     (32,725     (25,968

Net cash provided by (used in) financing activities

     78,530        (4,349     (8,514

As of December 31, 2011, we had cash and cash equivalents of $108.7 million and restricted cash of $1.5 million. We did not have any short-term or long-term investments. Cash and cash equivalents consist of cash and non-interest bearing accounts. Restricted cash consists of cash restricted from withdrawal and held by banks as collateral for letters of credit.

 

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We believe that our existing cash and cash equivalents together with cash flows from our operating activities and cash available under our credit facility will be sufficient to fund our operations for at least the next 12 months.

On December 16, 2011, we entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Book Manager, and the lenders from time to time a party thereto. The Credit Agreement provides for a five-year, senior secured revolving credit facility in an initial aggregate principal amount of $50.0 million. The credit facility includes a $15.0 million sublimit for the issuance of standby letters of credit and a $5.0 million sublimit for swing line loans, which will be available on a same-day basis. As of December 31, 2011, we had $5.0 million outstanding under the swing line loan facility, which was repaid in full on January 3, 2012. On January 3, 2012, we borrowed $10.0 million under the credit facility.

Operating Activities

In 2011, net cash provided by operating activities was $65.7 million, resulting from a net loss of $15.3 million and adjusted for $49.2 million in non-cash charges and a $31.8 million net change in assets and liabilities. The non-cash charges included $44.9 million of depreciation and amortization, $7.8 million of stock-based compensation, $1.5 million of other non-cash charges, offset by a $5.0 million reduction in the deferred tax liability. Net change in assets and liabilities generated operating cash as follows, mainly due to increased volume; $31.7 million from the increase in registration fees payable, $6.4 million from the increase in deferred revenue, a $4.2 million reduction in restricted cash related to the termination of a Loan and Security Agreement with Square 1 Bank and a $2.5 million net change in other assets and liabilities offset by a $13.0 million increase in accounts receivable.

Net cash provided by operating activities for the year ended December 31, 2010 was $42.1 million, resulting from a net loss of $27.3 million and adjusted for $47.9 million in non-cash charges and a $21.5 million net change in assets and liabilities. The non-cash charges included $40.3 million of depreciation and amortization, $5.3 million of stock-based compensation, and $2.3 million of other non-cash charges. Net change in assets and liabilities generated operating cash as follows: $10.5 million from the increase in registration fees payable, $8.8 million from the increase in deferred revenue, $5.5 million from the increase in accrued expenses, $4.7 million increase in other items, offset by an $8.0 million increase in accounts receivable due to seasonality. Cash generated by the increase in registration fees payable and deferred revenue resulted from growth in the business. Registration fees payable represents the dollars processed by us on an organization’s behalf and this balance increased on a year-over-year basis due to the increase in registration fees.

In 2009, net cash provided by operating activities was $28.5 million, resulting from a net loss of $37.9 million and adjusted for $48.2 million in non-cash charges and an $18.1 million net change in assets and liabilities. The non-cash charges included $36.1 million of depreciation and amortization, $11.2 million of stock-based compensation, $0.9 million of accretion of debt discount and a gain on bargain purchase, and allowance for doubtful accounts. Net change in assets and liabilities generated operating cash as follows: $5.5 million given the decrease in accounts receivable, $7.2 million from the increase in registration fees payable, $2.5 million from the increase in deferred tax liability and $4.4 million from the increase in deferred revenue. Changes in other balance sheet accounts accounted for the remaining decrease of $1.5 million.

Investing Activities

In 2011, net cash used in investing activities was $66.9 million, including $35.1 million for acquisitions, $18.7 million of capitalized software development costs, capital expenditures of $12.5 million, and $0.6 million in payment of contingent consideration related to an acquisition.

Net cash used in investing activities for the year ended December 31, 2010, was $32.7 million, resulting primarily from $15.7 million for capitalized software development costs, cash used of $14.8 million in capital

 

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expenditures and $2.2 million in payment of contingent consideration related to the Automated License Systems acquisition.

In 2009, net cash used in investing activities was $26.0 million, $14.6 million for capitalized software development costs, cash used of $10.4 million in capital expenditures and $1.8 million in payment of contingent consideration offset by cash received from acquisition, net of cash acquired of $0.8 million. Capitalized software is primarily related to ActiveWorks and large contracts that require upfront development costs. Capital expenditures included costs to build out our datacenters. We also continued to invest in technology hardware to support our growth, software to support website functionality development, website operations and our corporate infrastructure.

Financing Activities

In 2011, net cash provided by financing activities was $78.5 million, primarily due to $112.6 million in net proceeds from our initial public offering in May 2011, $5.2 million in proceeds from the exercise of stock options and warrants, offset by $39.2 million net reduction in debt and capital lease obligations.

Net cash used in financing activities for the year ended December 31, 2010 was $4.3 million, resulting primarily from $8.0 million repayment of long-term obligations and $1.9 million repayment of capital lease obligations less $3.0 million proceeds from debt and $2.6 million cash received from the exercise of stock options.

In 2009, net cash used in financing activities was $8.5 million, resulting primarily from $16.7 million repayment of long-term obligations and $0.6 million repayment of capital lease obligations offset by the $8.3 million in debt proceeds and $0.5 million cash received from the exercise of stock options and common stock warrants.

Letters of Credit

At December 31, 2011 and 2010, the Company had $1.5 million and $5.0 million, respectively, of cash restricted from withdrawal and held by banks as collateral for letters of credit.

2008 Loan and Security Agreement

In October 2008, the Company entered into a Loan and Security Agreement (“LSA”) with Square 1 Bank (“Square 1”) which allowed the Company to borrow up to $5.0 million under a term loan and up to $7.0 million under a line of credit (“Line”). For borrowings under the term loan, the Company was required to make interest-only payments on a monthly basis for the first six months, after which borrowings were repayable over 30 months. The interest rate for the term loan was prime plus 1% and was due to mature in October 2011. For borrowings under the LSA, the Company was required to maintain a cash balance of $5.0 million in an account with Square 1 which was presented as restricted cash on the Company’s consolidated balance sheets at December 31, 2010. Under the terms of the Line, borrowings cannot exceed 80% of the Company’s eligible accounts receivable and carry an interest rate of prime plus 1% and was to mature on July 2010. The loan was collateralized by substantially all of the Company’s assets, excluding certain client cash and intellectual property, and was subject to certain covenants which, if not met, could constitute an event of default. These covenants included maintaining the required quick ratio and the non-occurrence of a material adverse change in the business, operations or conditions of the Company. As of December 31, 2010, the Company was in compliance with all specified financial covenants.

In April 2010, the LSA was amended to allow the Company to grant to Central Bank a junior lien on an asset and to revise the earnout payment schedule.

 

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In May 2010, the LSA was amended to adjust the quick ratio to be at least 1:1.

In July 2010, the LSA was amended to change the interest rate for advances under the Line to the greater of (i) prime plus 1% or (ii) 5% and further extended the maturity date to July 2011. The amendment also changed the amount the Company is allowed to borrow under the Line to $12.0 million less borrowings outstanding under the term loan.

In May 2011, the Company fully repaid $4.7 million of the outstanding principal of the term loan under the LSA. The early repayment of the debt did not result in any gain or loss on extinguishment.

In August 2011, the LSA was amended to extend the maturity date to August 2012.

In December 2011, in connection with the 2011 Credit Agreement, the LSA was terminated. In connection with termination of the LSA, the Company reduced its restricted cash balance to $0.8 million.

As of December 31, 2011 and 2010, outstanding borrowings from Square 1 were $0 and $1.7 million, respectively, under the term loan and $0 and $7.3 million, respectively under the Line.

2011 Credit Agreement

In December 2011, the Company entered into a five-year, senior secured revolving credit facility, with certain institutional lenders, for an initial aggregate principal amount of $50 million (the “Credit Facility”). The Credit Facility has a maturity date of December 16, 2016, but the outstanding amounts may be prepaid at any time without penalty or premium (except for certain customary break funding payments in connection with LIBOR loans) and is available to fund acquisitions and ongoing operations.

The Credit Facility also includes an “accordion” feature which allows the Company, subject to certain terms and conditions, to increase the lending commitments by up to $25 million.

Any advance under the Credit Facility will accrue interest at rates per annum that are equal to, based on certain conditions, either (a) 1.5% above the applicable LIBOR rate, or (b) 0.5% above (i) the greatest of (x) the prime rate, (y) the federal funds effective rate plus 0.5% or (z) a daily rate equal to one-month LIBOR plus 1.00%. The unused portion of the Credit Facility will also be subject to an unused fee that will be calculated at a per annum rate of 0.25%. The interest rate under the Credit Facility was 3.75% as of December 31, 2011.

Under the Credit Facility, the Company is required to comply with certain financial covenants and ratios, including a quarterly consolidated leverage ratio of consolidated funded indebtedness to EBITDA of not more than 2.5 to 1.0 and a quarterly consolidated fixed charge coverage ratio of not less than 1.5 to 1.0. Substantially all of the Company’s tangible and intangible assets are considered collateral security under the Secured Credit Facility. As of December 31, 2011, the Company was in compliance with all specified financial covenants.

Payment of the amounts owed under the Credit Facility may be accelerated, and the lenders’ commitments under the Credit Agreement may be terminated, upon an “event of default,” as defined in the Credit Agreement, such as failure to pay amounts owed when due, breach of a covenant, material inaccuracy of a representation or occurrence of bankruptcy, subject in some cases to cure periods.

The Company had $5 million outstanding, under the swing line loan facility at December 31, 2011. There was $39.8 million available under the Credit Facility as of December 31, 2011.

There was $34.8 million available under the Credit Facility as of January 3, 2012.

 

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Commitments and Contingencies

We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, contractual cancellation provisions, fluctuating interest rates and other factors may result in actual payments differing from the estimates. Although certain payments occur on a fixed schedule (see “Indebtedness”), we cannot provide certainty regarding the timing and amounts of all these payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the table in order to assist in the review of this information within the context of our consolidated financial position and results of operations. The following table summarizes our fixed contractual obligations and commitments (in thousands), as of December 31, 2011:

 

     Contractual Obligations  
     Total      Less than
1 Year
     1-3
Years
     3-5
Years
     More than
5 Years
 
     (in thousands)  

Long-term Debt Obligations

   $ 5,000       $ 5,000       $ —         $ —         $ —     

Operating Lease Obligations

     51,277         12,705         17,102         13,076         8,394   

Capital Leases

     5,350         3,635         1,694         21         —     

Purchase Obligations

     2,045         545         1,000         500         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 63,672       $ 21,885       $ 19,796       $ 13,597       $ 8,394   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our consolidated balance sheets at December 31, 2011 included a $0.3 million liability for uncertain tax positions, all of which may result in cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of cash settlement with the taxing authorities.

Guarantee Arrangement

The Company enters into arrangements with third-party customers to guarantee performance by the Company. The Company may provide a corporate guarantee, irrevocable letter of credit, surety bond or any other form of guarantee acceptable to the third-party customer. As of December 31, 2011, the Company had guarantees of $14.2 million.

Leases

We lease our facilities and certain fixed assets under non-cancelable operating and capital leases. Rent expense under operating lease agreements was $11.4 million, $9.6 million and $9.4 million for the years ended 2011, 2010 and 2009, respectively.

Sales and Use Tax

We believe that we may have established sales and use tax nexus in a number of states where we have not previously paid applicable sales and use taxes. We performed an analysis of our potential liability in states where we have not previously remitted these taxes. Based on the results of the analysis, we established a reserve for estimated claims from states where sales and use tax had not been remitted. The reserve was $4.3 million and $3.4 million as of the year ended December 31, 2011 and 2010, respectively. In the future we plan on collecting and remitting sales and use taxes for sales as required by applicable state laws.

Off Balance Sheet Arrangements

As of December 31, 2011, we did not have any off balance sheet arrangements.

 

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Recently Issued Accounting Standards

See Note 2 to our Consolidated Financial Statements in Part II, Item 8 of this report for a description of recent accounting pronouncements, including our expected dates of adoption and the estimated effects on our results of operations and financial condition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate fluctuations, foreign exchange risk and inflation.

Interest Rate Fluctuations

Our investments include cash and cash equivalents, which consists of cash and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be materially affected to any degree by a sudden change in market interest rates.

On December 16, 2011, we entered into a new Credit Facility that bears interest at floating rates based upon either (a) 1.5% above the applicable LIBOR rate, or (b) 0.5% above (i) the greatest of (x) the prime rate, (y) the federal funds effective rate plus 0.5% or (z) a daily rate equal to one-month LIBOR plus 1.00%. Our exposure to market risk for changes in interest rates relates primarily to the floating interest rate. Accordingly, interest rate increases would increase our interest expense on outstanding Credit Facility balances. As of December 30, 2011, $5.0 million was drawn under the Credit Facility, which was repaid on January 2, 2012, limiting our interest rate exposure during 2011. Based on a sensitivity analysis, an increase of 1% in the floating interest rate would increase our borrowing costs by less than $0.1 million for each $1.0 million of borrowings under the Credit Facility, assuming such borrowings were outstanding for the entire year, or a maximum of $0.8 million if we utilized our entire line of credit.

Foreign Currency Exchange Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, principally the Canadian dollar and the British pound sterling. We do not believe movements in the foreign currencies in which we transact will significantly affect future net earnings. Foreign currency risk can be quantified by estimating the change in cash flows resulting from a hypothetical 1% adverse change in foreign exchange rates. We believe such a change would not have a material impact on our results of operations.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Index to the Consolidated Financial Statements that appears on page F-1 of this Annual Report on Form 10-K. The Report of Independent Registered Public Accounting Firm from Ernst & Young LLP, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to the Consolidated Financial Statements, which appear beginning on page F-2 of this Annual Report on Form 10-K, are incorporated by reference into this Item 8.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, the design of a control system must reflect that there are resource constraints, thus, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the probability of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Management’s Report on Internal Control Over Financial Reporting

The SEC, as required by Section 404 of the Sarbanes-Oxley Act, adopted rules requiring every company that files reports with the SEC to include a management report on such company’s internal control over financial reporting in its annual report. In addition, our independent registered public accounting firm must attest to our internal control over financial reporting. This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. Management will be required to provide an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2012. We believe we will have adequate resources and expertise, both internal and external, in place to meet this requirement. However, there is no guarantee that our efforts will result in management’s ability to conclude, or our independent registered public accounting firm to attest, that our internal control over financial reporting is effective as of December 31, 2012.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item relating to our directors and the committees of our Board of Directors is incorporated by reference from the sections entitled “Proposal One: Election of Directors,” “Director Compensation,” and “Corporate Governance” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

The information required by this item relating to Section 16 reporting compliance is incorporated by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

The information required by this item relating to our code of ethics is incorporated by reference from the section entitled “Corporate Governance—Code of Conduct” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

Executive Officers

The following table sets forth information regarding our executive officers as of the date of this Annual Report on Form 10-K:

 

Name

   Age     

Position(s)

Executive Officers

     

David Alberga

     49       Chief Executive Officer and Chairman of the Board

Matthew Landa

     47       President and Director

Scott Mendel

     45       Chief Financial Officer

Darko Dejanovic

     41       Chief Technology, Product and Innovation Officer

Kourosh Vossoughi

     43      

Chief Legal Officer, General Counsel, SVP, Business Development and Secretary

Sheryl Roland

     56       Executive Vice President, Human Resources

Kevin Biggs

     53       Executive Vice President, Global Technology Sales

David Alberga has served as our Chairman of the Board since February 2011 and as a member of our Board of Directors and our Chief Executive Officer since December 1999. From December 1999 to February 2002, Mr. Alberga also served as our President. From January 1996 to November 1999, Mr. Alberga served in various positions at TicketMaster Online-CitySearch, a portal and transaction company. Mr. Alberga initially served as general manager of established markets for CitySearch City Guides, a leading integrated local search, directory and media company, and was promoted to executive vice president and subsequently to chief operating officer of the company’s City Guides business. Mr. Alberga has also held positions with Linear Technology, an analog semiconductor manufacturer, The Boston Consulting Group, a global management consulting company, and Procter & Gamble, a global consumer products company. Mr. Alberga earned a B.S. from the United States Military Academy at West Point and both an M.B.A. and an M.A. from Stanford University.

 

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Matthew Landa has been our President since February 2002 and has served on our Board of Directors since November 2005. From March 2000 to February 2002, Mr. Landa was our Chief Commerce Officer. From June 1999 to March 2000, Mr. Landa was president of ACT Manufacturing, a Nasdaq Stock Market listed company providing value-added electronics manufacturing services for original equipment manufacturers in the networking and telecommunications, computer, industrial and medical equipment markets. From 1995 to 1999, Mr. Landa was the president and chief executive officer of CMC Industries, a Nasdaq Stock Market listed company providing electronics manufacturing services. ACT Manufacturing acquired CMC Industries in 1999. Mr. Landa also previously worked at Monitor Company, a global strategy consulting firm. Mr. Landa earned an A.B. from Dartmouth College and an M.B.A. from Stanford University.

Scott Mendel has been our Chief Financial Officer since March 2010. Prior to joining us, Mr. Mendel held finance positions at General Electric, a diversified technology, media and financial services company, for over 20 years, including chief financial officer from March 2003 to March 2010 for General Electric’s Healthcare IT division, a leading provider of medical technologies and services. Mr. Mendel earned a B.S. in finance from Indiana University and an M.B.A. from Northwestern University, Kellogg School of Management.

Darko Dejanovic has been our Chief Technology, Product and Innovation Officer since August 2011. Prior to joining us, Mr. Dejanovic served for four years as the EVP, global CIO and head of product at Monster Worldwide, where he was responsible for global IT strategy, operations and development, product innovation and design, as well as consumer advertising businesses. Previously he held CTO roles for more than a decade at the Tribune Company and its subsidiary, Tribune Publishing Company. Earlier in his career, Mr. Dejanovic held various senior technology roles in the U.S. and Europe. He holds an MBA from Northwestern University and a B.S. in Computer Science from Florida Metropolitan University.

Kourosh Vossoughi has been our Chief Legal Officer and General Counsel since March 2000. Mr. Vossoughi has also served as our Senior Vice President, Business Development since March 2000 and our Secretary since May 2001. From 1998 to 2000, Mr. Vossoughi was an associate at the law firm of Brobeck, Phleger and Harrison. From 1996 until 1998, Mr. Vossoughi was an associate at the law firm of Luce, Forward, Hamilton & Scripps. Mr. Vossoughi earned a J.D. from the University of San Diego School of Law and a B.A. from the University of California, Berkeley.

Sheryl Roland has been our Executive Vice President, Human Resources since February 2011. From March 2008 to January 2011, Ms. Roland served as our Senior Vice President, Human Resources. From April 2000 to February 2008, Ms. Roland held management positions at Visual Sciences (formerly WebSideStory), a provider of real-time analytics applications, including senior vice president, administration from December 2006 to February 2008, and vice president, human resources of WebSideStory from April 2000 until December 2006. From February 1997 to March 2000, Ms. Roland served as vice president, human resources at ENCAD, Inc., a provider of digital image printing technology. From 1992 to 1996, Ms. Roland was vice president, human resources at The Upper Deck Co., a manufacturer of sports trading cards and memorabilia. Ms. Roland earned a B.S. in psychology from University of California, Los Angeles and an M.S. in counseling psychology from San Jose State University.

Kevin Biggs has been our Executive Vice President, Global Technology Sales since January 2012. Prior to that time, he served as Senior Vice President, Worldwide Field Operations of Blue Coat Systems, Inc., a provider of SaaS security systems, from June 2010 to August 2011. From January 2007 to June 2010, he served as Senior Vice President, Worldwide Sales of Blue Coat Systems. Mr. Biggs joined Blue Coat Systems from International Business Machines, Inc. (“IBM”), a manufacturer of computers and related products, where he held the position of Vice President of New Customer Acquisition from February 2004 to December 2006. Prior to that time, Mr. Biggs served as IBM’s Vice President of Worldwide Sales, IBM Data Management Division, from August 2002 to February 2004; as IBM’s Vice President of Software Sales, IBM Americas West, from April 2002 to August 2002; and as IBM’s Vice President of Software, IBM Latin America, from September 1998 to April 2002. Prior to these executive roles, Mr. Biggs held a number of sales management positions at IBM since joining IBM in 1980. Mr. Biggs holds a B.A. in both Economics and Mathematics from Drury University.

 

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ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the sections entitled “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Report” and “Corporate Governance—Compensation Committee Interlocks and Insider Participation” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item regarding security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled “Stock Ownership of Principal Stockholders and Management,” and “Equity Compensation Plan Information,” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item regarding certain relationships and related party transactions is incorporated by reference from the sections entitled “Director Compensation,” “Compensation Discussion and Analysis,” “Executive Compensation,” and “Certain Relationships and Related Party Transactions” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

The information required by this item regarding director independence is incorporated by reference from the section entitled “Corporate Governance” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated by reference from the section entitled “Independent Registered Public Accountants” to be contained in our Proxy Statement for the 2012 Annual Meeting of Stockholders and to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2011.

 

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Annual Report on Form 10-K:

1. Financial Statements. Please see the accompanying Index to the Consolidated Financial Statements, which appears on page F-1 of this Annual Report on Form 10-K. The Report of Independent Registered Public Accounting Firm, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements listed in the Index to the Consolidated Financial Statements, which appear beginning on page F-2 of this Annual Report on Form 10-K, are incorporated by reference into Item 8 above.

2. Financial Statement Schedules. Financial Statement Schedules have been omitted because the information required to be set forth therein is either not applicable or is included in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements.

3. Exhibits. See Item 15(b) below. Each management contract and compensatory plan or arrangement required to be filed has been identified.

(b) Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Annual Report on Form 10-K.

(c) Financial Statement Schedules. Reference is made to Item 15(a)(2) above.

 

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THE ACTIVE NETWORK, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Operations

     F-4   

Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss

     F-5   

Consolidated Statements of Cash Flows

     F-6   

Notes to Consolidated Financial Statements

     F-7   

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders’

The Active Network, Inc.

We have audited the accompanying consolidated balance sheets of The Active Network, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Active Network, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011 in conformity with U.S. generally accepted accounting principles.

 

     

/s/ Ernst & Young LLP

San Diego, California      
March 16, 2012      

 

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Table of Contents

THE ACTIVE NETWORK, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

     December 31,  
     2011     2010  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 108,699      $ 31,441   

Restricted cash

     1,502        5,000   

Accounts receivable, net

     66,469        34,096   

Inventories

     1,662        —     

Prepaid expenses and other current assets

     6,179        4,181   
  

 

 

   

 

 

 

Total current assets

     184,511        74,718   

Property and equipment, net

     33,830        28,181   

Software development costs, net

     45,093        37,013   

Goodwill

     243,320        207,113   

Intangible assets, net

     90,340        41,208   

Deposits and other assets

     2,133        2,315   
  

 

 

   

 

 

 

Total assets

   $ 599,227      $ 390,548   
  

 

 

   

 

 

 

Liabilities, preferred stock and stockholders’ equity (deficit)

    

Current liabilities:

    

Accounts payable

   $ 8,516      $ 5,372   

Registration fees payable

     72,405        40,667   

Accrued expenses

     41,106        32,172   

Deferred revenue

     54,919        34,013   

Current portion of debt

     5,000        16,866   

Capital lease obligations, current portion

     3,317        1,983   

Other current liabilities

     42,613        1,630   
  

 

 

   

 

 

 

Total current liabilities

     227,876        132,703   

Debt, net of current portion

     —          27,537   

Capital lease obligations, net of current portion

     1,652        1,663   

Other long-term liabilities

     6,147        4,353   

Deferred tax liability

     16,913        17,960   
  

 

 

   

 

 

 

Total liabilities

     252,588        184,216   

Commitments and contingencies (Note 12)

    

Convertible preferred stock, $0.001 par value—authorized, 0 and 146,856 shares; issued and outstanding, 0 and 131,372 shares at December 31, 2011 and 2010, respectively (aggregate liquidation preference $24,183 at December 31, 2010)

     —          21,187   

Redeemable convertible preferred stock, $0.001 par value—authorized, 0 and 73,249 shares; issued and outstanding, 0 and 71,751 shares at December 31, 2011 and 2010, respectively (aggregate liquidation preference $372,496 at December 31, 2010)

     —          371,126   
  

 

 

   

 

 

 

Total preferred stock

     —          392,313   

Stockholders’ equity (deficit):

    

Preferred stock, $0.001 par value—authorized, 100,000 and 0 shares; no shares issued and outstanding at December 31, 2011 and 2010, respectively

     —          —     

Common stock, $0.001 par value—authorized, 1,000,000 and 65,000 shares ; issued, 58,219 and 9,755 shares; outstanding, 56,443 and 7,980 shares at December 31, 2011 and 2010, respectively

     58        9   

Treasury stock (at cost, 1,776 shares at December 31, 2011 and 2010, respectively)

     (11,959     (11,959

Additional paid-in capital

     625,875        65,224   

Accumulated other comprehensive income

     7,923        8,866   

Accumulated deficit

     (275,258     (248,121
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     346,639        (185,981
  

 

 

   

 

 

 

Total liabilities, preferred stock and stockholders’ equity (deficit)

   $ 599,227      $ 390,548   
  

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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THE ACTIVE NETWORK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

     Year Ended
December 31,
 
     2011     2010     2009  

Net Revenue:

      

Technology revenue

   $ 290,480      $ 237,688      $ 210,483   

Marketing services revenue

     46,910        41,912        32,401   
  

 

 

   

 

 

   

 

 

 

Total net revenue

     337,390        279,600        242,884   

Cost of net revenue:

      

Cost of technology revenue

     144,962        115,148        103,130   

Cost of marketing services revenue

     5,952        6,203        4,058   
  

 

 

   

 

 

   

 

 

 

Total cost of net revenue

     150,914        121,351        107,188   
  

 

 

   

 

 

   

 

 

 

Gross profit

     186,476        158,249        135,696   

Operating expenses:

      

Sales and marketing

     70,251        59,106        50,556   

Research and development

     66,753        61,107        58,767   

General and administrative

     51,126        42,404        39,455   

Amortization of intangibles

     14,962        16,147        18,491   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     203,092        178,764        167,269   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,616     (20,515     (31,573

Interest income

     119        150        194   

Interest expense

     (2,890     (5,438     (5,237

Other income (expense), net

     (14     455        1,196   
  

 

 

   

 

 

   

 

 

 

Loss before provision (benefit) for income taxes

     (19,401     (25,348     (35,420

Provision (benefit) for income taxes

     (4,074     1,924        2,439   
  

 

 

   

 

 

   

 

 

 

Net loss

     (15,327     (27,272     (37,859

Accretion of redeemable convertible preferred stock

     (11,810     (28,157     (25,774

Net loss attributable to common stockholders

   $ (27,137   $ (55,429   $ (63,633
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders:

      

Basic and diluted

   $ (0.75   $ (7.83   $ (10.86
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders:

      

Basic and diluted

     36,072        7,080        5,862   
  

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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THE ACTIVE NETWORK, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

(In thousands, except share data)

 

    Common Stock     Treasury Stock     Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’
Equity
(Deficit)
 
    Shares     Amount     Shares     Amount          

Balance at December 31, 2008

    7,663,158      $ 7        (1,775,640   $ (11,959   $ 44,529      $ (140   $ (129,059   $ (96,622

Exercise of stock options and warrants

    270,963        —          —          —          516        —          —          516   

Stock-based compensation

    —          —          —          —          11,240        —          —          11,240   

Issuance of common shares for acquisitions

    192,500        —          —          —          421        —          —          421   

Accretion of redeemable convertible preferred stock to redemption value

    —          —          —          —          —          —          (25,774     (25,774

Comprehensive loss:

               

Foreign currency translation

    —          —          —          —          —          6,735        —          6,735   

Net loss

    —          —          —          —          —          —          (37,859     (37,859
               

 

 

 

Total comprehensive loss

                  (31,124
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

    8,126,621      $ 7        (1,775,640   $ (11,959   $ 56,706      $ 6,595      $ (192,692   $ (141,343

Exercise of stock options and warrants

    1,338,105        2            1,466        —          —          1,468   

Stock-based compensation

    —          —          —          —          5,348        —          —          5,348   

Issuance of common shares for acquisitions

    290,628        —          —          —          1,070        —          —          1,070   

Issuance of warrants

    —          —          —          —          634        —          —          634   

Accretion of redeemable convertible preferred stock to redemption value

    —          —          —          —          —          —          (28,157     (28,157

Comprehensive loss:

               

Foreign currency translation

    —          —          —          —          —          2,271        —          2,271   

Net loss

    —          —          —          —          —          —          (27,272     (27,272
               

 

 

 

Total comprehensive loss

                  (25,001
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

    9,755,354      $ 9        (1,775,640   $ (11,959   $ 65,224      $ 8,866      $ (248,121   $ (185,981

Exercise of stock options and warrants

    2,846,730        3        —          —          4,865        —          —          4,868   

Issuance of employee stock purchase plan shares

    50,576        —              631        —          —          631   

Stock-based compensation

    —          —          —          —          7,795        —          —          7,795   

Issuance of common shares for acquisitions

    2,500,000        3        —          —          27,223        —          —          27,226   

Repurchase of common stock and stock options

    (6,773     —          —          —          (13     —          —          (13

Conversion of preferred stock to common stock in connection with initial public offering

    34,631,891        35        —          —          404,088        —          —          404,123   

Issuance of common stock in connection with initial public offering

    8,222,222        8        —          —          112,558        —          —          112,566   

Issuance of common stock in connection with conversion of debt

    218,989        —          —          —          3,504        —          —          3,504   

Accretion of redeemable convertible preferred stock to redemption value

    —          —          —          —          —          —          (11,810     (11,810

Comprehensive loss:

               

Foreign currency translation

    —          —          —          —          —          (943     —          (943

Net loss

    —          —          —          —          —          —          (15,327     (15,327
               

 

 

 

Total comprehensive loss

                  (16,270
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    58,218,989      $ 58        (1,775,640   $ (11,959   $ 625,875      $ 7,923      $ (275,258   $ 346,639   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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THE ACTIVE NETWORK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended December 31,  
     2011     2010     2009  

Operating activities

      

Net loss

   $ (15,327   $ (27,272   $ (37,859

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

      

Depreciation and amortization

     44,857        40,287        36,079   

Gain on bargain purchase in business combination

     —          (21     (599

Loss on extinguishment of debt

     538        —          —     

Loss on disposition of assets

     —          46        —     

Allowance for doubtful accounts

     880        1,191        (56

Stock-based compensation expense

     7,795        5,348        11,240   

Deferred tax liability

     (5,016     1,239        2,497   

Accretion of discount on debt

     191        1,055        1,582   

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

      

Restricted cash

     4,190        —          —     

Accounts receivable

     (12,962     (8,028     5,458   

Inventories

     (1,662     —          —     

Prepaid expenses and other assets

     1,071        (262     (1,446

Accounts payable

     267        2,945        (1,079

Registration fees payable

     31,738        10,509        7,153   

Accrued expenses

     1,166        5,486        2,439   

Income taxes receivable/payable

     (622     —          (383

Deferred revenue

     6,400        8,800        4,384   

Deferred rent

     2,199        772        (886
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     65,703        42,095        28,524   

Investing activities

      

Purchases of property and equipment

     (12,514     (14,767     (10,449

Software development costs

     (18,651     (15,651     (14,561

Cash (paid) received for acquisitions, net of cash acquired

     (35,144     (125     867   

Payment of contingent consideration

     (625     (2,182     (1,825
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (66,934     (32,725     (25,968

Financing activities

      

Proceeds from exercise of stock options, common stock warrants and employee stock purchase plan

     5,200        2,584        516   

Payments on capital lease obligations

     (2,595     (1,898     (593

Repayment of long-term obligations

     (41,628     (8,035     (16,772

Proceeds from debt

     5,000        3,000        8,335   

Repurchase of unvested common stock

     (13     —          —     

Net proceeds from initial public offering

     112,566        —          —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     78,530        (4,349     (8,514

Effect of exchange rates on cash

     (41     39        (1,056
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     77,258        5,060        (7,014

Cash and cash equivalents at beginning of period

     31,441        26,381        33,395   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 108,699      $ 31,441      $ 26,381   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Cash paid during the year for interest

   $ 2,252      $ 3,425      $ 3,220   
  

 

 

   

 

 

   

 

 

 

Cash paid during the year for taxes

   $ 1,533      $ 727      $ 220   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of noncash financing and investing activities

      

Fixed asset purchases included in accounts payable

   $ 3,362      $ 2,006      $ 1,889   
  

 

 

   

 

 

   

 

 

 

Acquisition of equipment and software under capital leases

   $ 3,437      $ —        $ 4,265  
  

 

 

   

 

 

   

 

 

 

Issuance of warrants

   $ —        $ 634      $ —     
  

 

 

   

 

 

   

 

 

 

Conversion of preferred stock

   $ 404,123      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Conversion of debt

   $ 3,504      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Consideration payable in connection with acquisition

   $ 40,046      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

The accompanying Notes are an integral part of these Consolidated Financial Statements.

 

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The Active Network, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business

The Active Network, Inc., a Delaware corporation, and its subsidiaries (“Active” or the “Company”), provide organization-based cloud computing applications that form an online network connecting a fragmented and diverse group of activity and event organizers with a large base of potential participants. The Company’s technology platform transforms the way organizers manage their activities and events by automating online registrations and streamlining other critical management functions, while driving consumer participation to their activities and events.

Initial Public Offering

In May 2011, the Company completed an initial public offering (“IPO”) of its common stock in which it sold and issued 12,650,000 shares of common stock, of which 4,427,778 were sold by its selling shareholders, at an issue price of $15.00 per share, resulting in proceeds, net of underwriting discounts and offering expenses, of approximately $112.6 million to the Company. As a result of the IPO, all shares of the Company’s convertible preferred stock and redeemable convertible preferred stock converted into 34,631,891 shares of common stock and certain warrants to purchase common stock were net exercised into 420,365 shares of common stock.

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Active and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes technology revenue primarily from registration fees and related hosting and implementation services. The Company also records revenue for marketing services. The Company recognizes revenue when a signed contract or other persuasive evidence of an arrangement exists, the services have been rendered, the fee is fixed or determinable, and collection of the resulting receivable is probable. The Company’s arrangements do not contain general rights of return.

The Company assesses whether the fee is fixed or determinable, and collection is probable, at the time of the transaction. In determining whether the fee is fixed or determinable, the Company compares the payment terms of the transaction to its standard payment terms and whether payment is free of contingencies or significant uncertainties. If a significant portion of the fee is considered to have extended payment terms or the fee is subject to adjustment, the Company accounts for the fee as not being fixed or determinable and recognizes revenue as the payments become due. The Company assesses whether collection is probable based on a number of factors, including the customer’s past transaction history and credit-worthiness. The Company does not request collateral from its customers. If the Company determines that collection of a fee is not probable, the Company defers the fee and recognizes revenue at the time collection becomes probable, which is generally upon receipt of cash.

 

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The Company generally recognizes registration revenue when received, net of registration fees paid to event organizers, where the Company is acting as an agent of event organizers. Net registration revenue comprised 67%, 71% and 72% of total net revenue for fiscal years 2011, 2010 and 2009, respectively. In certain circumstances, the Company pre-purchases registrations from event organizers and bears the risks and rewards of ownership. Registration revenue associated with these transactions is recognized on a gross basis, as the Company is the primary obligor and bears inventory and credit risk. Cash collected in advance of the event is recorded as deferred revenue until the event occurs. Revenue recognized on a gross basis comprised 0.7%, 0% and 0% of total net revenue for fiscal years 2011, 2010 and 2009, respectively.

On January 1, 2011, the Company adopted the new accounting standard for multiple deliverable revenue arrangements which provides guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated. This guidance requires an entity to allocate revenue in an arrangement using the “best estimate of selling price” (“BESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) of selling price based on historical stand-alone sales or third-party evidence (“TPE”) of selling price. Due to the unique nature of some of the Company’s multiple deliverable revenue arrangements, the Company may not be able to establish selling prices based on historical stand-alone sales using VSOE or TPE, therefore, the Company may use its best estimate to establish selling prices for these arrangements under the new accounting standard. The Company establishes its best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as customer base, size of transaction, available media inventory, pricing strategies and market conditions. The Company believes the use of the BESP allows revenue recognition in a manner consistent with the underlying economics of the transaction. The adoption of this amended standard did not have a significant impact on the Company’s revenue recognition for multiple deliverable revenue arrangements.

Many customers who use the Company’s hosting services or license its software also enter into separate professional services and training arrangements with the Company. In addition, certain of the Company’s hosting agreements include up-front payments for implementation of hosting services. In determining whether professional services and implementation revenue should be accounted for separately, the Company evaluates (among other factors): the nature of the deliverables; whether they are ready for their intended use by the customer upon receipt; the nature of the implementation services; the availability of services from other vendors; whether the timing of payments for license revenue is coincident with performance of services and whether milestones or acceptance criteria exist that affect the realizability of the hosting or software license fee. For up-front fees and other revenues received for implementation services associated with hosting arrangements, the Company defers the related revenue and records revenue over the term of the hosting contract since the implementation and hosting do not have stand-alone value. For license and professional services that qualify for separate accounting, such as arrangements that involve off-the-shelf software, the services do not include significant alterations to the features and functionality of the software, the services are primarily comprised of implementation services and fair value exists for the undelivered elements, software revenue is generally recognized when the software is delivered and service revenue is recognized when the services are performed.

For license and professional service arrangements that do not qualify for separate accounting, such as arrangements that involve significant modification or customization of the software, arrangements that include milestones or customer specific acceptance criteria, or where payment for the software license is tied to the performance of professional services, software license revenue is generally recognized together with the professional services revenue when services have been rendered. A majority of such arrangements are recognized together with the professional services. Penalties from customers related to power outages or other technical disruptions are recognized in the period in which such amounts are incurred based on the Company’s estimated liability and are recorded as a reduction of revenue or an increase to cost of revenue. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entire anticipated loss is recognized currently.

 

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Maintenance revenue consists of fees for providing software updates on a when-and-if available basis and technical support to software products (“post contract customer support” or “PCS”). Maintenance revenue is recognized ratably over the terms of the agreement.

Marketing service revenue consists of online and integrated field marketing campaigns and membership programs. The Company’s online marketing services include online advertising, e-mail marketing and targeted newsletter promotions. Banner, button and e-mail advertisements are impression-based, with the revenue based on the number of times the advertisement is displayed or delivered over the contract period. Impression-based contract revenue is primarily recognized as the impression is displayed on the Company’s web site or delivered by e-mail to the intended addressee. The Company’s field marketing services include event promotions, sponsorships and sample placements and are defined contractually with individual customers. Field marketing revenue is recognized over the term of the contract or when revenue is earned based on the performance of services associated with a series of events. Revenue from membership programs is recognized over the term of the membership period.

Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If the Company makes different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result.

Fair Value of Financial Instruments

Carrying amounts of the Company’s financial instruments including accounts receivable, inventories, prepaid expenses and other current assets, accounts payable, registration fees payable and accrued liabilities approximate fair value due to their short maturities. Carrying amounts of the Company’s acquisition-related notes payable, term loans and line of credit approximate fair value as the interest rates on these instruments are primarily based on market rates of interest. The fair value of acquisition-related contingent consideration issued is detailed further in Note 3. The fair values of the Company’s cash equivalents are detailed further in Note 4.

Concentration of Credit Risk

The Company’s cash, cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are deposited with financial institutions that management believes are creditworthy. As of December 31, 2011 and 2010, substantially all of the Company’s cash has been deposited in non-interest bearing accounts. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based on various factors, including the Company’s review of credit profiles of its customers, contractual terms and conditions, current economic trends and historical payment experience (Note 5).

Cash and Cash Equivalents

The Company considers all highly liquid investment securities with remaining maturities at the date of purchase of three months or less to be cash equivalents. Management determines the appropriate classification of marketable securities at the time of purchase and evaluates such designation as of each balance sheet date.

Restricted Cash

At December 31, 2011 and 2010, the Company had $1.5 million and $5.0 million, respectively, of cash restricted from withdrawal and held by banks as collateral for letters of credit.

 

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Table of Contents

Accounts Receivable

Accounts receivable includes trade accounts receivables from the Company’s customers and credit and debit card receivables due from third party financial institutions attributable to the Company’s registration receivable process.

Inventories

Inventories are stated at the lower of cost or market on a first in, first out (“FIFO”) basis. Inventories are comprised of purchases of registrations from event organizers for customer activities and events that are intended to be sold directly to end-user participants. The Company reviews its inventory for estimated excess inventory based on estimated future usage and sales. Inventory reserves are established based upon such judgments for any inventories that are identified as having a net realizable value less than their cost, which is further reduced by related selling expenses. Whenever inventory is written down, a new cost basis is established and the inventory is not subsequently written up if conditions improve.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally two to five years.

Significant improvements which substantially extend the useful lives of assets are capitalized. Amortization of leasehold improvements is computed using the shorter of the estimated useful lives or the terms of their respective leases, generally one to nine years. Expenditures for maintenance and repairs are charged to expense as incurred.

Assets held under capital leases are recorded at the net present value of the minimum lease payments of the leased asset at the inception of the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease and is included in depreciation expense.

Capitalized Software Development Costs

Costs to develop internal use software are capitalized provided these costs are expected to be recoverable, and are amortized on a product-by-product basis using the straight-line method over the estimated economic life of the application, which is generally two to five years, beginning when the asset is substantially ready for use. Costs incurred during the preliminary development stage, as well as maintenance and training costs are expensed as incurred. The Company capitalized software development costs of $18.7 million, $15.7 million, and $14.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. Amortization of internal software development costs is reflected in cost of revenue.