S-1 1 ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on August 26, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

Bazaarvoice, Inc.

 

(Exact name of Registrant as specified in its charter)

 

Delaware   7372   20-2908277

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

3900 N. Capital of Texas Highway, Suite 300

Austin, Texas 78746-3211

(512) 551-6000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Brett A. Hurt

Founder, Chief Executive Officer and President

Bazaarvoice, Inc.

3900 N. Capital of Texas Highway, Suite 300

Austin, Texas 78746-3211

(512) 551-6000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Paul R. Tobias

Derek L. Willis

Wilson Sonsini Goodrich & Rosati,

Professional Corporation

900 S. Capital of Texas Highway

Las Cimas IV, Fifth Floor

Austin, Texas 78746-5546

(512) 338-5400

 

Bryan C. Barksdale

General Counsel and Secretary

Bazaarvoice, Inc.

3900 N. Capital of Texas Highway, Suite 300

Austin, Texas 78746-3211

(512) 551-6000

 

Kenneth R. McVay

Steven L. Baglio

Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP

220 West 42nd Street, 21st Floor

New York, New York 10036

(212) 730-8113

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

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

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

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities
to be Registered
   Proposed Maximum
Aggregate Offering Price(1)
   Amount of
Registration  Fee(2)

Common Stock, par value $0.0001 per share

   $  86,250,000    $  10,013.63

 

 

(1)   Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)   Calculated pursuant to Rule 457(o) under the Securities Act based on an estimate of the proposed maximum offering price.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we and the selling stockholders are not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

 

Dated August 26, 2011

 

             Shares

LOGO

COMMON STOCK

 

 

 

Bazaarvoice, Inc. is offering              shares of its common stock and the selling stockholders are offering              shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $             and $             per share.

 

After this offering, our executive officers, directors and beneficial owners of 5.0% or more of our outstanding shares of common stock will own approximately     % of our common stock. In addition, our executive officers, directors and beneficial owners of 5.0% or more of our outstanding shares of common stock will receive approximately $             of the proceeds from the sale of shares in this offering, assuming an initial public offering price of $            , which is the midpoint of the range set forth above.

 

 

 

We expect to apply to list our common stock on the Nasdaq Global Select Market or the New York Stock Exchange under the symbol “BV.”

 

 

 

Investing in the common stock involves risks. See “Risk Factors” beginning on page 10.

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to
Public

    

Underwriting
Discounts
and
Commissions

    

Proceeds to
Company

    

Proceeds to
Selling
Stockholders

Per Share

     $      $      $      $

Total

     $      $      $      $

 

The selling stockholders have granted the underwriters the right to purchase up to an additional                      shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2011.

 

 

 

MORGAN STANLEY   DEUTSCHE BANK SECURITIES   CREDIT SUISSE

 

 

 

PIPER JAFFRAY   PACIFIC CREST SECURITIES       BMO CAPITAL MARKETS

 

                    , 2011


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You should rely only on the information contained in this prospectus or in any free-writing prospectus we may authorize to be delivered or made available to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus or any free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until                     , 2011 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: We have not, the selling stockholders have not and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and is a brief overview of key aspects of the offering. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth in the sections of this prospectus titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the statements in this prospectus constitute forward-looking statements. See the section of this prospectus titled “Special Note Regarding Forward-Looking Statements and Industry Data” for more information.

 

BAZAARVOICE, INC.

 

Overview

 

We are a leading provider of social commerce solutions that help our clients capture, display and analyze online word of mouth, including consumer-generated ratings and reviews, questions and answers, stories, recommendations, photographs, videos and other content about our clients’ brands, products or services. Bazaarvoice, which literally means “voice of the marketplace,” was founded on the premise that online word of mouth is critical to consumers and businesses because of its influence on purchasing decisions, both online and offline. We enable our clients to place consumers at the center of their business strategies by helping consumers generate and share sentiment, preferences and other content about brands, products or services. Through our technology platform, our clients leverage online word of mouth to increase sales, acquire new customers, improve marketing effectiveness, enhance consumer engagement across channels, increase success of new product launches, improve existing products and services, effectively scale customer support and decrease product returns.

 

Word of mouth influences consumers’ decisions to purchase products and services. Consumers often trust and rely on what other consumers say about a brand, product or service more than traditional advertising, particularly if they consider the content to be authentic and credible. The proliferation of social networks, wikis, blogs and videos has given rise to the social web—a new era of Internet-enabled social interaction. The emergence of consumer interaction through the social web has significantly increased the volume and availability of online word of mouth about products and services. This online social interaction is proving to have a significant and growing influence on both online and offline commerce. The rapid adoption of Internet-enabled mobile devices is further amplifying the impact of online word of mouth by making this content even easier, more convenient and faster to generate and access. As a result, there has been a paradigm shift in marketing as traditional methods are being disrupted and businesses are now seeking solutions that embrace online word of mouth to more effectively engage and influence consumers.

 

Our solutions, provided via a Software-as-a-Service, or SaaS, platform, enable clients to:

 

   

capture and display online word of mouth;

 

   

engage consumers directly by answering product- or service-related questions;

 

   

analyze feedback and uncover critical insights from online word of mouth; and

 

   

distribute content among retail and other brand websites both within and outside our network, which we refer to as syndication.

 

Our business model focuses on maximizing the lifetime value of a client relationship. We make significant investments in acquiring new clients and believe that we will be able to achieve a favorable return on these investments by growing our relationships over time and ensuring that we have a high level of client retention. As of April 30, 2011, we served 587 active clients, including clients in the retail, consumer products, travel and

 

 

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leisure, technology, telecommunications, financial services, healthcare and automotive industries. We define an active client as an organization that has implemented one or more of our solutions and from which we are currently recognizing revenue, and we count organizations that are closely related as one client, even if they have signed separate contractual agreements with us for different brands or different solutions. As of April 30, 2011, we served eight of the ten most valuable U.S. retail brands according to Interbrand’s 2011 Best Retail Brands study published in March 2011, 138 of the 2011 Internet Retailer 500 and 68 of the 2011 Fortune 500 companies, including 24 of the top 100 of the Fortune 500. In April 2011, we served over 7.9 billion impressions, or instances of online word of mouth delivered to end users’ web browsers, and have served over 200 billion total impressions since our inception in May 2005. We sell our solutions through a direct sales team located globally in the markets we serve, including the United States, the United Kingdom, Australia, France, Germany and Sweden.

 

In fiscal years 2009, 2010 and 2011, we generated revenue of $22.5 million, $38.6 million and $64.5 million, respectively. In fiscal years 2009, 2010 and 2011, we generated 15.8%, 25.2% and 24.9% of our revenue, respectively, from outside of the United States.

 

Industry Overview

 

We believe word of mouth influences consumers’ decisions to purchase products or services. Consumers often trust and rely on what others have to say about brands, products or services, particularly if they consider the content authentic and credible. In contrast, consumers often consider what businesses say about their own brands, products and services to be biased and less reliable.

 

Online social interaction via the social web is transforming the Internet and enabling unprecedented sharing of word of mouth among consumers, allowing them to influence the opinions and decisions of others with speed, ease and scale. The increased volume and availability of online word of mouth has created digitally archived and easily searchable databases of word of mouth about brands, products and services. Businesses recognize the importance of these online social interactions and are realizing that they must be actively engaged in the social web to effectively market their products and services.

 

Consumers are turning to online word of mouth to research products and services prior to making purchases, both online and offline. In 2011, Forrester Research, Inc. reported that U.S. web-influenced retail sales exceeded $1 trillion in 2009 and that by 2015 an estimated 52% of total online and offline retail sales will be influenced by Internet content, which includes online ratings and reviews. The rapid adoption of Internet-enabled mobile devices is further amplifying the impact of online word of mouth by making this content even easier, more convenient and faster to generate and access.

 

The combination of the Internet, the social web and the proliferation of online word of mouth has created a marketing paradigm shift by giving consumers a new and easier way to directly connect with one another and with brands. This trend is disrupting traditional marketing methods, creating the need for a technology platform to complement companies’ marketing approaches in the following ways:

 

   

Increasing consumer engagement. Traditional brand marketing methods are generally oriented to raising brand awareness and influencing the consumer purchase decision. However, the advent of the social web has created new opportunities for brands to directly engage consumers through their websites and across social networks, not only pre-purchase and at the point of sale to increase conversion, but also post-purchase to provide brands with valuable insights to improve the consumer experience.

 

   

Enhancing authenticity. Consumers often question the reliability of a brand’s description of its own product. According to a July 2009 report by The Nielsen Company, a leading consumer research firm, when making purchase decisions, consumers often trust recommendations from people they know, as well as reviews posted by unknown consumers online, more than they do advertisements on television,

 

 

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on the radio, in print, or in other traditional media. As a result, brands are striving to create active online communities that foster word of mouth about their products and services.

 

   

Increasing relevance. Most traditional marketing campaigns are designed to appeal to a wide audience and therefore often lack the relevance that both marketers and consumers desire. The emergence of the social web allows brands to reach targeted networks of consumers and helps consumers connect with people similar to them or in similar situations.

 

   

Changing marketing content. Traditional marketing methods depend on internally developed or agency developed creative content for their marketing campaigns. Brands can now easily leverage online word of mouth to utilize as content for their traditional marketing vehicles, such as email campaigns, online banners, mobile applications, print campaigns, in-store signage and even packaging.

 

   

Improving speed and quality of consumer feedback. Traditional market research methods can be time-consuming and costly to implement. As a result, brand marketers are turning to online word of mouth as a timely and cost-effective way to gain insights into consumer behavior and preferences.

 

   

Developing more valuable insights. Traditional marketing methods have limited ability to capture and efficiently derive insights from online word of mouth. Data derived from online word of mouth can provide deeper and different insights into consumer behavior and preferences than are generally possible via traditional marketing and consumer market research methods.

 

Our Market Opportunity

 

We believe that we have captured, and can continue to capture, a portion of the dollars spent on offline and online advertising, e-commerce services and market research.

 

   

According to a 2011 forecast by MAGNAGLOBAL, a division of IPG’s Mediabrands, the worldwide advertising market is estimated to reach $428 billion in 2011. A 2010 MAGNAGLOBAL report projects the market to grow to over $558 billion by 2016.

 

   

The worldwide market for consumer market research was estimated to be $29 billion in 2009, according to a 2010 report by ESOMAR B.V.

 

As online audiences have shifted toward increased social interaction, brands are expanding their advertising spend to target consumers engaged in online social interaction. eMarketer estimated in February 2011 that worldwide advertising spend on social networks will grow from $2.4 billion in 2009 to $8.1 billion in 2012. Given the broad reach of our network and the important impact that our social commerce solutions have on consumer purchasing behavior, we believe that we are competitively positioned to capture a share of the growing social media marketing spend.

 

We estimate there are over 10,000 companies in the sectors we serve worldwide with annual revenue of at least $50 million, many of which can benefit from our platform and solutions. In addition, several of these companies have multiple brands, which we consider incremental additions to our market opportunity.

 

Our Competitive Strengths

 

We believe that the following competitive strengths differentiate us from our competitors and serve as barriers to entry:

 

Market leadership with robust SaaS solutions.

 

We are a leading provider of social commerce solutions and the leading provider of online ratings and reviews. Our technology platform offers a proven and robust feature set to meet our clients’ needs, including

 

 

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Ratings & Reviews, Ask & Answer, Stories, Smart SEO, SocialConnect, SocialAlerts and Social Recommendations. We have been able to scale our platform over time while maintaining an uptime of over 99.9% over the five-year period ended April 30, 2011. We offer our solutions to clients as a SaaS platform, which reduces implementation time and costs and offers low total cost of ownership.

 

Powerful network effects connecting our clients and their consumers.

 

Through our platform, we offer syndication capabilities, enabling brands to distribute ratings and reviews and other online word of mouth among retail and other brand websites within our network, as well as websites outside of our network. Our ability to syndicate content across a wide array of websites attracts brands to our network. The multitude and variety of our clients’ brands attracts retailers to our network because we are able to provide them with access to more online word of mouth than they can collect on their own. Consumers also benefit by having access to a greater volume and variety of online word of mouth when they visit our clients’ websites. As a result, we believe we benefit from powerful network effects that differentiate us from our competitors.

 

Analytics capabilities that leverage structured data across our network.

 

Our platform’s analytics capabilities, which are enhanced by our efforts to structure data, including the structured mapping of products and the attachment of meta-data tags in connection with our content moderation process, allow brands to derive powerful and timely insights about consumer sentiment. Our analytics solutions allow our clients to more easily recognize shifts in consumer sentiment, identify product issues and inform consumer-centric decisions, which can increase sales and consumer satisfaction.

 

Unique content moderation capabilities that preserve authenticity and ensure brand protection.

 

We use trained and experienced professionals to moderate online word of mouth captured by our clients in 27 different languages, 24/7/365. Our content moderators filter irrelevant, obscene or illegal material, as well as to attach pre-defined labels to categorize online word of mouth. We believe content moderation increases brand and consumer trust in reviews, improves client data quality and helps preserve the authenticity of online word of mouth. In parallel, our proprietary technology, workflows and best practices significantly increase the productivity of our content moderators, allowing us to efficiently moderate content while ensuring a high level of quality in a time-efficient manner. We believe the breadth of our content moderation capabilities is unique in our industry and is critical to our clients’ ability to successfully utilize online word of mouth.

 

Differentiated client services capabilities that help our clients achieve measureable results.

 

Our Client Services team enables our clients to leverage our platform to maximize the impact of online word of mouth and consumer engagement to achieve measurable results not only through technical services but by coaching our clients on best practices to drive review volume and to leverage online word of mouth throughout their businesses. We work with our clients to integrate online word of mouth into key business processes, such as business analytics, product design and research and development, marketing, sales and customer service.

 

A corporate culture that drives performance.

 

We regard our culture as a key differentiator and performance driver. Our corporate culture is defined by the following core values: passion, performance, innovation, openness, teamwork, respect and generosity. We believe our culture gives us a competitive advantage in recruiting talent, driving innovation, enhancing productivity and improving client service.

 

 

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Our Growth Strategy

 

The following are key elements of our growth strategy:

 

   

expand our direct sales force globally;

 

   

increase brand penetration and sell new solutions to our existing clients;

 

   

increase the volume and variety of data across our network and help clients derive greater consumer insights;

 

   

further expand internationally and penetrate industry verticals;

 

   

continue to broaden our platform’s capabilities through innovation; and

 

   

pursue selective acquisitions and commercial relationships.

 

Risks Associated with Our Business

 

Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the section of this prospectus titled “Risk Factors,” and include but are not limited to the following:

 

   

we are an early stage company with a limited operating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment;

 

   

we experienced a net loss of $20.1 million during our fiscal year ended April 30, 2011, had an accumulated deficit of $40.8 million at April 30, 2011 and may continue to incur losses for the foreseeable future;

 

   

the market for social commerce solutions is new and unproven and our market may not continue to develop as we expect, which could adversely affect our business;

 

   

the fragmented, rapidly evolving and highly competitive nature of the market for social commerce solutions could adversely affect our ability to compete effectively; and

 

   

our business depends substantially on renewing agreements with existing clients and selling additional solutions to them, which may be affected by our ability to deliver new solutions, reductions in our clients’ spending levels and changes in our clients’ marketing or advertising strategies.

 

Company Information

 

Our principal executive offices are located at 3900 N. Capital of Texas Highway, Suite 300, Austin, Texas 78746-3211, and our telephone number is (512) 551-6000. Our corporate website address is www.bazaarvoice.com. We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it part of this prospectus. We originally incorporated in the State of Delaware in May 2005.

 

In this prospectus, “we,” “us,” “our,” “Company” and “Bazaarvoice” refer to Bazaarvoice, Inc. and its subsidiaries.

 

Bazaarvoice®, Ask & Answer®, BrandAnswers®, BrandVoice® and SocialAlerts™ are trademarks or logos appearing in this prospectus owned by Bazaarvoice, Inc. or one of our subsidiaries. All other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

 

 

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THE OFFERING

 

Common stock offered by Bazaarvoice

  

             shares

Common stock offered by the selling stockholders

  

             shares

Total common stock offered

  

             shares

Total common stock to be outstanding after this offering

  

             shares

Use of proceeds

   We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include the acquisition or license of, or investment in, products, services, technologies or other businesses. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

Risk factors

   See “Risk Factors” for a discussion of factors that you should consider carefully before deciding whether to purchase shares of our common stock.

Proposed listing symbol

   BV

Fiscal year end

   April 30

 

 

 

The number of shares of common stock to be outstanding after this offering is based on 46,414,068 shares outstanding as of April 30, 2011 and excludes:

 

   

11,690,549 shares of common stock issuable upon exercise of options outstanding as of April 30, 2011 at a weighted average exercise price of $3.02 per share;

 

   

             shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan adopted in July 2011, as more fully described in the section of this prospectus titled “Executive Compensation—Stock Incentive Plans;” and

 

   

             shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan adopted in July 2011, as more fully described in the section of this prospectus titled “Executive Compensation—Stock Incentive Plans.”

 

Unless otherwise noted, the information in this prospectus assumes:

 

   

the underwriters will not exercise their option to purchase              additional shares;

 

   

the conversion of all of our outstanding shares of preferred stock into 27,897,031 shares of common stock prior to or upon the closing of this offering; and

 

   

the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, which will occur immediately upon completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables summarize the consolidated financial and operating data for the periods indicated. The summary consolidated statement of operations data for the fiscal years ended April 30, 2009, 2010 and 2011 and the summary consolidated balance sheet data as of April 30, 2010 and 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the summary financial data presented below in conjunction with our consolidated financial statements and related notes and the sections of this prospectus titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year Ended April 30,  
     2009     2010     2011  
     (in thousands, except per share data)  
Consolidated Statements of Operations Data:       

Revenue

   $   22,472      $   38,648      $ 64,482   

Cost of revenue(1)

     8,307        15,191        25,615   
  

 

 

   

 

 

   

 

 

 

Gross profit

     14,165        23,457        38,867   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Sales and marketing(1)

     11,260        17,803        34,568   

Research and development(1)

     3,444        5,828        10,847   

General and administrative(1)

     4,442        7,651        13,156   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,146        31,282        58,571   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (4,981     (7,825     (19,704
  

 

 

   

 

 

   

 

 

 

Total other income, net

     98        56        208   
  

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (4,883     (7,769     (19,496

Income tax expense

     125        205        561   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,008   $ (7,974   $ (20,057

Less accretion of redeemable convertible preferred stock

     (42     (43     (46
  

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

   $ (5,050   $ (8,017   $ (20,103
  

 

 

   

 

 

   

 

 

 

Net loss per share applicable to common stockholders:

      

Basic and diluted

   $ (0.32   $ (0.48   $ (1.13
  

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average number of shares

     15,854        16,637        17,790   
  

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted loss per share (unaudited)(2)

       $ (0.44
      

 

 

 

Pro forma weighted average number of shares (unaudited)(2)

         45,687   
      

 

 

 

Other Financial Data:

      

Adjusted EBITDA(3)

   $ (3,340   $ (4,211   $   (13,317

 

  (1)   Includes stock-based compensation expense as follows (in thousands):

 

     Year Ended April 30,  
     2009      2010      2011  
     (in thousands)  

Cost of revenue

   $ 319       $ 604       $ 978   

Sales and marketing

     469         924         1,122   

Research and development

     258         469         731   

General and administrative

     281         636         1,850   
  

 

 

    

 

 

    

 

 

 
   $   1,327       $   2,633       $   4,681   
  

 

 

    

 

 

    

 

 

 

 

 

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  (2)   Pro forma basic and diluted loss per share has been calculated assuming the conversion of all outstanding shares of our preferred stock into 27,897,031 shares of our common stock as of the first day of the beginning of the period.

 

  (3)   We define Adjusted EBITDA as net loss adjusted for stock-based compensation expense, adjusted depreciation and amortization (which excludes amortization of capitalized internal-use software development costs), income tax expense and other income, net. Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. generally accepted accounting principles, or GAAP.

 

Adjusted EBITDA should not be considered as an alternative to net loss, operating loss or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reason we consider them appropriate.

 

We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons:

 

   

Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items, such as stock-based compensation expense, adjusted depreciation and amortization, income tax expense and other income, net, that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

 

   

Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance;

 

   

Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

 

   

We anticipate that, after consummating this offering, our investor and analyst presentations will include Adjusted EBITDA as a supplemental measure to evaluate our overall operating performance.

 

We understand that, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:

 

   

Adjusted depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

   

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

 

   

Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income; and

 

 

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Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated, in thousands.

 

     Year Ended April 30,  
     2009     2010     2011  
     (in thousands)  

Net loss

   $ (5,008   $ (7,974   $ (20,057

Stock-based compensation expense

     1,327        2,633        4,681   

Adjusted depreciation and amortization

     314        981        1,706   

Income tax expense

     125        205        561   

Total other (income), net

     (98     (56     (208
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $   (3,340   $   (4,211   $   (13,317
  

 

 

   

 

 

   

 

 

 

 

     April 30,  
     2010     2011  
     (in thousands)  
Selected Consolidated Balance Sheet Data:             

Cash and cash equivalents

   $ 16,036      $ 15,050   

Deferred revenue

     17,104        32,160   

Total current assets

     25,581        31,095   

Total current liabilities

     22,777        38,539   

Total assets

     32,547        37,972   

Total liabilities

     24,943        43,589   

Total non-current liabilities

     2,166        5,050   

Redeemable convertible preferred stock

     23,587        23,633   

Total stockholders’ deficit

     (15,983     (29,250

 

 

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RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information contained in this prospectus before deciding whether to purchase our stock. Our business, prospects, financial condition and operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in the prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding to purchase any shares of our common stock.

 

Risks Related to Our Business

 

We are an early stage company with a limited operating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

 

We began our operations in May 2005. Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries, including challenges in forecasting accuracy, determining appropriate investments of our limited resources, market acceptance for our existing and future solutions, managing client implementations and developing new solutions. Our current operating model may require changes in order for us to achieve profitability and scale our operations efficiently. For example, we may need to enhance our software architecture to allow us to efficiently and cost effectively develop and implement new solutions, make our solutions easy to implement and download, ensure our marketing engine is designed to drive highly qualified leads cost effectively and implement changes in our sales model to improve the predictability of our sales and reduce our sales cycle. If we fail to implement these changes on a timely basis or are unable to implement them due to factors beyond our control, our business may suffer. You should consider our business and prospects in light of the risks and difficulties we face as an early-stage company.

 

We have a history of losses and we may not achieve or sustain profitability in the future.

 

We have incurred significant losses in each fiscal period since our inception in 2005. We experienced a net loss of $20.1 million during fiscal year 2011. At April 30, 2011, we had an accumulated deficit of $40.8 million. The losses and accumulated deficit were due to the substantial investments we made to grow our business and acquire clients. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest to grow our business and acquire clients and develop our platform. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. Many of our efforts to generate revenue from our business are new and unproven, and any failure to increase our revenue could prevent us from attaining or increasing profitability. Furthermore, to the extent we are successful in increasing our client base, we could also incur increased losses because costs associated with entering into client agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the agreement. We cannot be certain that we will be able to attain or increase profitability on a client-by-client basis or on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.

 

We operate in a new and unproven market for social commerce solutions. Our success depends upon the continued development of this market, and if the market does not develop as we expect, our business could be harmed.

 

We are focused on the market for social commerce solutions, which is new and unproven with little market research or data. It is uncertain whether the market in which we operate will continue to develop or if our solutions will achieve and sustain a level of demand and market acceptance sufficient for us to continue to

 

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generate revenue and achieve profitability. Due to our evolving business model, the uncertain size of our market and the unpredictability of future general economic and financial market conditions, we may not be able to forecast our growth rate accurately.

 

In particular, we believe our success will depend to a large extent on the willingness of brands to use online word of mouth in their marketing and advertising materials. Many of our potential clients remain hesitant to embrace our solutions, such as ratings and reviews, since they are uncomfortable displaying negative reviews about products or services offered on their websites. In addition, many brands may continue to devote significant portions of their marketing and advertising budgets to traditional, offline media or other types of online marketing or advertising initiatives that do not use online word of mouth. Some brands may be open to the idea of making online word of mouth available to consumers and yet may be unwilling or unable to implement third-party SaaS solutions similar to ours. We believe that the continued growth and acceptance of our solutions will depend on the perceived authenticity of online word of mouth and effectiveness of using online word of mouth to influence purchase decisions, both online and offline, and better understand consumer preferences regarding products and services. The existence of fraudulent reviews may call into question the authenticity of online word of mouth. We also depend on the continued growth of the social web and adoption of mobile devices, among other factors. If any of these factors are not realized, then the market for social commerce solutions may not develop as we expect, or it may develop more slowly than we expect, either of which would significantly harm our business and operating results.

 

The market in which we participate is fragmented, rapidly evolving and highly competitive, and we may be unable to compete successfully with our current or future competitors.

 

The market for social commerce solutions is highly competitive. The competitive dynamics of our market are unpredictable because it is at an early stage of development, rapidly evolving, fragmented and subject to potential disruption by new technological innovations.

 

Our main competition is from traditional marketing and advertising programs used by businesses that remain hesitant to embrace social commerce solutions such as ratings and reviews. Additionally, some businesses have developed, or may develop in the future, social commerce solutions internally. These businesses may consider their internal solutions adequate, even if our solutions are superior.

 

We have several direct and indirect competitors that provide third-party social commerce solutions, including companies like PowerReviews, Inc. and Revieworld Ltd. Additionally, we face potential competition from participants in adjacent markets that may enter our markets by leveraging related technologies and partnering with other companies.

 

We may also face competition from companies entering our market, including large Internet companies like Google, Inc. and Facebook, Inc., which could expand their platforms or acquire a competitor. While these companies do not currently focus on our market, they have significantly greater financial resources and, in the case of Google, a longer operating history. They may be able to devote greater resources to the development and improvement of their services than we can and, as a result, they may be able to respond more quickly to technological changes and clients’ changing needs. Because our market is changing rapidly, it is possible that new entrants, especially those with substantial resources, more efficient operating models, more rapid product development cycles or lower marketing costs, could introduce new solutions that disrupt the manner in which businesses use online word of mouth and engage with consumers online to address the needs of our clients and potential clients. Our business and operating results could be harmed if any such disruption occurs.

 

We believe we compete primarily on the basis of product breadth and functionality, scope, quality and breadth of client base, amount and quality of content, service, price, reputation and the efficiency of our operating model. Our competitors or potential competitors may adopt certain aspects of our business model, which could reduce our ability to differentiate our solutions. As market dynamics change, or as new and existing competitors introduce more competitive pricing or new or disruptive technologies, or as clients develop internal solutions for their social commerce needs, we may be unable to renew our agreements with existing clients or

 

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attract new clients at the same price or based on the same pricing model as previously used. As a result, it is possible that we may be required to change our pricing model, offer price incentives or reduce our prices in response to competitive pressures, which could harm our revenue, profitability and operating results. Moreover, many software vendors could bundle competitive products or services or offer them at a low price as part of a larger product sale. In addition, some competitors may offer software that addresses one or a limited number of strategic social commerce functions at lower prices or with greater depth than our solutions. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or client requirements. For all of these reasons, we may not be able to compete successfully against our current and future competitors.

 

Our quarterly financial results are subject to fluctuations; as a result, we could fail to meet or exceed expectations of analysts or investors, which could cause our stock price to decline.

 

Our revenue, expenses, operating results and cash flows have fluctuated from quarter to quarter in the past and are likely to continue to do so in the future. These fluctuations are due to, or may in the future result from, many factors, some of which are outside of our control, including:

 

   

the timing differences between when we incur sales commissions, implementation costs and other client acquisition costs associated with new solutions sales and when we generate revenue from these sales, particularly related to larger sales to new clients;

 

   

our ability to sell additional solutions to existing clients and to add new clients, in multiple regions around the world, particularly in the United States and Europe, which has fluctuated and is likely to continue to fluctuate, due to the effectiveness of our sales execution, economic conditions and other factors affecting our sales in each of these regions;

 

   

our ability, and the ability of our clients, to timely implement our solutions;

 

   

the timing and effectiveness of our product development investments and related expenses and delays in generating revenue from these new solutions;

 

   

our ability to adjust our cost structure, particularly our personnel costs, in response to reductions in revenue;

 

   

the cyclical and discretionary nature of marketing spending, especially spending on social commerce solutions;

 

   

the amount and timing of operating expenses and capital expenditures related to the expansion of our operations and infrastructure and client acquisition;

 

   

our failure to achieve the growth rate that was anticipated by us in setting our operating and capital expense budgets;

 

   

active client retention rates, which have ranged on a year-to-year basis from 84.4% to 89.4% for the fiscal years 2009 through 2011;

 

   

the timing and success of new solutions, product and service offerings and pricing policies by us or our competitors or any other changes in the competitive dynamics of our industry;

 

   

the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill or intangible assets from acquired companies;

 

   

unforeseen litigation costs and related settlement costs, particularly those related to intellectual property infringement and our obligation to fulfill related client indemnification obligations;

 

   

changes in currency exchange rates and associated costs of hedging to manage foreign currency fluctuations; and

 

   

the adoption of new laws or regulations, or interpretations of existing laws or regulations, that restrict, or increase the costs of, providing social commerce solutions or using the Internet as a medium for communications and commerce.

 

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We offer our solutions primarily through subscription agreements and generally recognize revenue ratably over the related subscription period, which is typically one year. As a result, revenue attributable to a contract signed in a particular quarter will not be fully and immediately recognized in the quarter that the contract is signed. Because we incur most costs associated with generating client contracts at the time of sale, we may not recognize revenue in the same period that we incur the related costs of sale. Timing differences of this nature could cause our margins and our operating income or losses to fluctuate significantly from quarter to quarter, and such fluctuations may be more pronounced in quarters in which we experience a change in the mix of new clients as a percentage of total clients.

 

Typically, a significant percentage of our bookings occur in the last few weeks of a quarter. Accordingly, a market disruption or other event outside of our control that occurred toward the end of a quarter could have a disproportionate impact on us and could cause us to substantially miss our forecasted results for that quarter.

 

Fluctuations in our quarterly operating results may lead analysts to change their long-term model for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key personnel or cause other unanticipated issues, all of which could cause our stock price to decline. As a result of the potential variations in our quarterly revenue and operating results, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful, and the results of any one quarter should not be relied upon as an indication of future performance.

 

Our business depends substantially on renewing agreements with existing clients and selling additional solutions to them. Any decline in our client renewals or expansions would likely harm our future operating results, especially if we are unable to recognize sufficient revenue to offset related client acquisition costs prior to such termination or cancellation of our client agreements.

 

In order for us to improve our operating results, it is important that our clients renew their agreements with us when the initial term expires and also purchase additional solutions from us. We offer our solutions primarily through subscription agreements and generally recognize revenue ratably over the related subscription period, which is typically one year. Our clients have no renewal obligation after their initial term expires, and we cannot assure you that we will be able to renew agreements with our clients at the same or higher contract value. Moreover, under specific circumstances, our clients may have the right to cancel their agreements with us before they expire, for example, in the event of an uncured breach by us. Our largest 100 active customers during fiscal year 2011 represented 57.3% of our total revenue during that year. If our clients do not renew their agreements, renew on less favorable terms or fail to purchase additional solutions, our revenue may decline, and our operating results would likely be harmed.

 

For fiscal years 2009, 2010 and 2011, our active client retention rates on a year-to-year basis were 84.4.%, 88.2% and 89.4%, respectively. Our retention rates have declined in the past and may decline in the future due to a variety of factors, including:

 

   

the availability, price, performance and functionality of our solutions and competing products and services;

 

   

our ability to demonstrate to new clients the value of our solutions within the initial contract term, particularly if we are unable to introduce planned solutions innovation;

 

   

poor performance or discontinuation of our clients’ brands;

 

   

changes in our clients’ marketing or advertising strategies;

 

   

the timing and quality of ratings and reviews posted to our clients’ websites and the existence of negative reviews;

 

   

reductions in our clients’ spending levels;

 

   

consolidation in our client base;

 

   

the development by our clients of internal solutions for their social commerce needs; and

 

   

the effects of economic downturns and global economic conditions.

 

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We incur most of our client acquisition costs at the time of sale. Depending upon the scope of the client’s needs, these costs can be significant. In certain cases, clients may have the right to terminate or cancel agreements with us if we fail to maintain service level requirements or we are otherwise in breach under the client agreements. If a client does not renew or cancels its agreement with us, we may not recognize sufficient revenue from that client prior to the termination or cancellation to offset the acquisition costs associated with that client. If the cost to acquire clients is greater than the revenue we generate over time from those clients, our business and operating results will be harmed.

 

In addition, our costs associated with maintaining and increasing revenue from existing clients may be lower than costs associated with generating revenue from new clients. Therefore, the loss of recurring revenue or a reduction in the rate of revenue increase from our existing clients, even if offset by an increase in revenue from new clients, could have a material adverse effect on our operating results.

 

Our actual results may differ significantly from any guidance that we may issue in the future and the consensus expectations of research analysts.

 

From time to time, we may release earnings guidance or other forward-looking statements in our earnings releases, earnings conference calls or otherwise regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance will be based on forecasts prepared by our management. The principal reason that we may release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. Guidance is necessarily speculative in nature. The speculative nature of any guidance is further exacerbated by the rapidly evolving nature and uncertain size of the market for social commerce solutions, as well as the unpredictability of future general economic and financial conditions. As a result, some or all of the assumptions of any future guidance that we furnish may not materialize or may vary significantly from actual future results. Any failure to meet guidance or analysts expectations could have a material adverse effect on the trading price or volume of our stock.

 

If we cannot efficiently implement our solutions for clients, we may be delayed in generating revenue.

 

In general, implementation of our solutions may require lengthy and significant work. We generally incur sales and marketing expenses related to the commissions owed to our sales representatives and make upfront investments in technology and personnel to support the engagements before we begin recognizing revenue from client contracts. We do not control our clients’ implementation schedule. As a result, as we have experienced in the past, if our clients do not allocate internal resources necessary to meet their implementation responsibilities or if we face unanticipated implementation difficulties, the implementation may be delayed. Further, in the past, our implementation capacity has at times constrained our ability to successfully and timely implement our solutions for our clients, particularly during periods of high demand. If the client implementation process is not executed successfully or if execution is delayed, whether due to our clients’ or our capacity constraints, we could incur significant costs prior to generating revenue, and our relationships with some of our clients may be adversely affected. In addition, competitors with more efficient operating models with lower implementation costs could penetrate our client relationships.

 

Our management team has a limited history of working together and may not be able to execute our business plan.

 

Our management team has worked together for only a limited period of time and has a limited track record of executing our business plan as a team. Most of our executives, including our Chief Executive Officer, have limited or no experience in managing publicly traded companies or companies of our size. In addition, we have recently filled a number of positions in our senior management and finance and accounting staff. Accordingly, certain key personnel have only recently assumed the duties and responsibilities they are now performing, and it is difficult to predict whether our management team, individually and collectively, will be effective in operating our business.

 

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Our growth could strain our personnel, technology and infrastructure resources, and if we are unable to effectively manage our growth, our operating results may suffer.

 

Since our inception, we have experienced rapid growth, which has increased the complexity of our operations. As our operations have expanded, we have grown from 70 employees at April 30, 2007 to 626 employees at April 30, 2011, consisting of 494 full-time employees and 132 part-time content moderators. We have increased the size of our client base from 32 active clients at April 30, 2007 to 587 active clients at April 30, 2011. The rapid growth and increasing complexity have demanded, and will continue to demand, substantial resources and attention from our management, most of whom have limited experience in managing a business of our size and complexity. We expect to continue to hire more employees in the future as we grow our business. To manage the expected growth of our operations and personnel and to support financial reporting requirements as a public company, we will need to continue to improve our operational, financial, technology and management controls and our reporting systems and procedures. Further, to accommodate our expected growth we must continually improve and maintain our technology, systems and network infrastructure. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. Our inability to expand our personnel and operations in an efficient manner could result in difficulty in acquiring new clients or retaining existing clients, declines in quality or client satisfaction, increases in expenses relative to our revenue and challenges in developing and introducing new solutions, any of which could adversely affect our operating results.

 

Because we recognize revenue for our solutions ratably over the term of our client agreements, decreases in the revenue recognizable under contracts for new active clients will not be fully and immediately reflected in our operating results.

 

We offer our solutions primarily through subscription agreements and generally recognize revenue ratably over the related subscription period, which is typically one year. As a result, some portion of the revenue we report in each quarter is revenue from contracts entered into during prior quarters. Consequently, a decline in the revenue recognizable under contracts for new active clients signed in any quarter or a decline in the growth rate of revenue recognizable under contracts signed in any quarter will not be fully and immediately reflected in the revenue of that quarter and would negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure rapidly, or at all, to take account of this reduced revenue.

 

Our sales cycle can be long and unpredictable and require considerable time and expense, which may cause our operating results to fluctuate.

 

The sales cycle for our solutions, from initial contact with a potential client to contract execution and implementation, varies widely by client and solution. Some of our clients undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle, typically three to 12 months. We have no assurance that the substantial time and money spent on our sales efforts will produce any sales. If sales expected from a specific client for a particular quarter are not realized in that quarter or at all, our results could fall short of public expectations and our business, operating results and financial condition could be adversely affected.

 

The average sales price of our solutions may decrease, which may adversely affect our ability to achieve and maintain profitability.

 

The average sales price of our solutions may decline for a variety of reasons, including competitive pricing pressures in anticipation of the introduction of new solutions or technologies. In addition, because the market for our social commerce solutions is new and unproven and because our business model is evolving, we may not be able to achieve and sustain a level of demand and market acceptance sufficient for us to continue to maintain the current average sales price for our solutions. Furthermore, the composition of our clients may change in a manner that makes it more difficult to maintain such prices. Any failure to maintain our prices could have an adverse effect on our business, results of operations and financial condition.

 

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Our business depends on retaining and attracting qualified management and operating personnel.

 

Our success depends in large part on our ability to retain and attract high-quality management and operating personnel. Our business plan was developed in large part by our executive officers, and its implementation requires their skills and knowledge. We do not maintain key person life insurance policies on any of our employees. We may not be able to offset the impact on our business of the loss of the services of one or more of our executive officers or key employees. Our business also requires skilled technical and sales personnel, who are in high demand and are often subject to competing offers. As we expand into new vertical and geographic markets, we will require personnel with expertise in these new areas. Competition for qualified employees is intense in our industry and particularly in Austin, Texas, where most of our employees are based. The loss of even a few qualified employees, or an inability to retain, attract, relocate and motivate additional highly skilled employees required for the planned expansion of our business, could harm our operating results and impair our ability to grow. To retain and attract key personnel, we use various measures, including an equity incentive program and incentive bonuses for executive officers and other key employees. These measures may not be sufficient to retain and attract the personnel we require to operate our business effectively. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options they are to receive in connection with their employment. Significant volatility in the price of our stock after this offering may, therefore, adversely affect our ability to retain and attract key employees.

 

If we are unable to maintain or expand our direct sales and marketing capabilities, we may not be able to generate anticipated revenue.

 

We rely primarily on our direct sales force to sell our solutions. Our solutions require a sophisticated sales force. We currently plan to expand our sales team in order to increase revenue from new and existing clients and to further penetrate our existing markets and expand into new markets. Our failure to hire or retain qualified sales personnel may preclude us from expanding our business and generating anticipated revenue. Competition for qualified sales personnel is intense, and there can be no assurance that we will be able to retain our existing sales personnel or attract, integrate or retain sufficient highly qualified sales personnel. Many of the companies with which we compete for experienced personnel have greater resources than we have. If any of our sales representatives were to leave us and join one of our competitors, we may be unable to prevent such sales representatives from helping competitors to solicit business from our existing clients, which could adversely affect our revenue.

 

In addition, new sales hires require training and typically take several months to achieve productivity, if at all. For internal planning purposes, we assume that it will take significant time before a newly hired sales representative is fully trained and productive in selling our solutions. This amount of time may be longer for sales personnel focused on new geographies or new verticals. As a result, the cost of hiring and carrying new representatives cannot be offset by the revenue they produce for a significant period of time. Furthermore, because of the length of our sales training period, we often cannot determine if a sales representative will succeed until after he or she has been employed for several months or longer. If we experience high turnover in our sales force, or if we cannot reliably develop and grow our sales team, our revenue growth may be adversely affected.

 

If we are not able to successfully leverage data we and our clients collect and manage through our solutions, we may not be able to increase our revenue through our analytics and other data solutions.

 

Our ability to grow our revenue through analytics and other data solutions depends on our ability to successfully leverage data that we and our clients collect and manage through the use of our solutions. Our ability to successfully leverage such data, in turn, depends on our ability to collect and obtain rights to utilize such data in our solutions and to maintain and grow our network of clients. We currently employ cookies, which are small files of non-personalized information placed on an Internet user’s computer, on a limited basis, but we may implement them more broadly to collect information related to the user, such as the user’s Internet Protocol, or IP, address, demographic information and history of the user’s interactions with our clients. If we are unable to effectively introduce cookies more broadly, our ability to collect such data could be impaired.

 

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Additionally, our ability to both collect and utilize data may be affected by a number of factors outside of our control, including increased government regulation of the collection of information concerning consumer behavior on the Internet and the increased use of features that allow website visitors to modify their settings to prevent or delete cookies and to sweep all cookies from their computers. Further, we currently do not own the data collected through the use of our solutions but currently license the data from our clients for limited aggregation purposes. If we are not able to obtain sufficient rights to the data, we may not be able to utilize it in our solutions. Finally, in order to obtain the critical mass of data necessary for our analytics and other data solutions to have value for our clients, we will need to maintain and grow our client base. Currently, a substantial amount of the data to which we have access is collected by a small number of our clients. Consequently, the loss of a single client could have a disproportionate impact on the data that is available to us. Any of these limitations on our ability to successfully leverage data could have a material adverse effect on our ability to increase our revenue through analytics and other data solutions and could harm our future operating results.

 

We derive a substantial portion of our revenue from a limited number of our solutions. If we are unable to maintain demand for these solutions or diversify our revenue sources by successfully developing and introducing new or enhanced solutions, we could lose existing clients or fail to attract new clients and our business could be harmed.

 

Historically, a majority of our revenue has been derived from sales of our Ratings & Reviews solution, which is the core element of our technology platform. If we are unable to develop enhanced features for this solution to maintain demand or to diversify our revenue base by increasing demand for our other solutions and successfully developing and introducing new solutions either by internal development or acquisition, our operating results could be negatively impacted. We are currently modifying our software architecture to be able to develop and implement new solutions more efficiently and cost effectively. Improving our architecture and developing and delivering new or upgraded solutions may require us to make substantial investments, and we have no assurance that such new or upgraded architecture solutions will generate sufficient revenue to offset their costs. If we are unable to efficiently develop, license or acquire such new or upgraded solutions on a timely and cost-effective basis, or if such solutions are not effectively brought to market, are not appropriately timed with market opportunity or do not achieve market acceptance, we could lose existing clients or fail to attract new clients, and our business and operating results could be materially adversely affected.

 

In addition, we must continuously modify and enhance our solutions to keep pace with rapid changes in the social web and Internet-related hardware, software communication, browser, database and social commerce technologies. If we are unable to respond in a timely and cost-effective manner to rapid technological developments, our solutions could become less marketable and less competitive or become obsolete, and our operating results could be negatively affected.

 

Our long-term success depends, in part, on our ability to maintain and expand our operations outside of the United States and, as a result, our business is susceptible to risks associated with international operations.

 

As our operations have expanded, we have established and currently maintain offices in the United States, the United Kingdom, Australia, France, Germany and Sweden. We have limited experience in operating in foreign jurisdictions outside the United States and are making significant investments to build our international operations. Managing a global organization is difficult, time-consuming and expensive, and any international expansion efforts that we may undertake may not be successful. In addition, conducting international operations subjects us to risks, including the following:

 

   

the cost and resources required to localize our solutions;

 

   

competition with companies that understand the local market better than we do or who have pre-existing relationships with potential clients in those markets;

 

   

legal uncertainty regarding the application of unique local laws to social commerce solutions or a lack of clear precedent of applicable law;

 

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lack of familiarity with and the burden of complying with a wide variety of other foreign laws, legal standards and foreign regulatory requirements, which are subject to unexpected changes;

 

   

difficulties in managing and staffing international operations;

 

   

fluctuations in currency exchange rates;

 

   

potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;

 

   

increased financial accounting and reporting burdens and complexities and difficulties in implementing and maintaining adequate internal controls;

 

   

political, social and economic instability abroad, terrorist attacks and security concerns in general;

 

   

reduced or varied protection for intellectual property rights in some countries; and

 

   

higher telecommunications and Internet service provider costs.

 

Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

 

Unfavorable conditions in the market for social commerce solutions or the global economy or reductions in marketing spending could limit our ability to grow our business and negatively affect our operating results.

 

Our operating results may vary based on the impact on us or our clients of changes in the market for social commerce solutions or the global economy. In addition, the revenue growth and potential profitability of our business depends on marketing spending by companies in the markets we serve. To the extent that weak economic conditions cause our clients and potential clients to freeze or reduce their marketing budgets, demand for our solutions may be negatively affected. Historically, economic downturns have resulted in overall reductions in marketing spending. If economic conditions deteriorate or do not materially improve, our clients and potential clients may elect to decrease their marketing budgets by deferring or reconsidering product purchases, which would limit our ability to grow our business and negatively affect our operating results.

 

If we are unable to increase our penetration in our principal existing markets and expand into additional vertical markets, we will be unable to grow our business and increase revenue.

 

We currently market our solutions to a variety of industries, including the retail, consumer products, travel and leisure, technology, telecommunications, financial services, healthcare and automotive industries. We believe our future growth depends not only on increasing our penetration into the principal markets in which our solutions are currently used but also on identifying and expanding the number of industries, communities and markets that use or could use our solutions. Efforts to offer our solutions beyond our current markets may divert management resources from existing operations and require us to commit significant financial resources, either of which could significantly impair our operating results. In addition, some markets have unique and complex regulatory requirements that may make it more difficult or costly for us to market, sell or implement our solutions in those markets. Moreover, our solutions may not achieve market acceptance in new markets, and our efforts to expand beyond our existing markets may not generate additional revenue or be profitable. Our inability to further penetrate our existing markets or our inability to identify additional markets and achieve acceptance of our solutions in these additional markets could adversely affect our business, results of operations and financial condition.

 

Our growth depends in part on the success of our development and implementation support relationships with third parties.

 

We currently depend on, and intend to pursue additional relationships with, various third parties related to product development, including technology and service providers and social media platforms. Identifying, negotiating and documenting these relationships requires significant time and resources, as does integrating our

 

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solutions with third-party technologies. In some cases, we do not have formal written agreements with our development partners. Even when we have written agreements, they are typically non-exclusive and do not prohibit our development partners from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their products or services.

 

Specifically, we outsource some of our product development, quality assurance and technology operations to two third-party contractors located in Ukraine and Costa Rica. We also outsource some components of the development and technology operations of our SocialConnect application to a third-party contractor located in the United States. We also rely on a third-party relationship to assist with client implementation support. We believe that supplementing our product development and implementation support activities with our outsourced third-party contractors enhances the efficiency and cost-effectiveness of these activities. If we experience problems with our third-party contractors or the costs charged by our contractors increases, we may not be able to develop new solutions or enhance existing solutions or meet our clients’ implementation support needs in an alternate manner that is equally or more efficient and cost-effective.

 

Additionally, our SocialConnect application integrates certain of our solutions directly with Facebook’s social media platform. We currently rely on Facebook’s cooperation in order to integrate our solutions with Facebook’s platform, and we do not have a formal, written agreement with Facebook. There is no assurance that Facebook will continue to cooperate with us. Changes in Facebook’s technology or terms of use may inhibit or restrict us, from continuing to integrate our solutions with Facebook’s platform. If Facebook does not continue to cooperate with us or if Facebook changes their technology or terms of use in ways that inhibit, restrict or increase the costs of the integration of our solutions with Facebook, our business could be harmed.

 

We anticipate that we will continue to depend on these and other third-party relationships in order to grow our business. If we are unsuccessful in maintaining existing and establishing new relationships with third parties, our ability to efficiently develop and implement new solutions could be impaired, and our competitive position or our operating results could suffer. Even if we are successful, these relationships may not result in increased revenue.

 

We currently rely on a small number of third-party service providers to host and deliver a significant portion of our solutions, and any interruptions or delays in services from these third parties could impair the delivery of our solutions and harm our business.

 

We host our solutions and serve our clients primarily from a third-party data center facility located in Texas. We also utilize third-party services that deploy data centers worldwide. We do not control the operation of any of the third-party data center facilities we use. These facilities may be subject to break-ins, computer viruses, denial-of-service attacks, sabotage, acts of vandalism and other misconduct. They are also vulnerable to damage or interruption from power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes and similar events. As a result, we may in the future experience website disruptions, outages and other performance problems. Despite our efforts, the occurrence of any of these events, a decision by our third-party service providers to close their data center facilities without adequate notice or other unanticipated problems could result in loss of data as well as a significant interruption in the offering of our solutions and harm to our reputation and brand.

 

Additionally, our third-party data center facility agreements are of limited durations, and our third-party data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements with these facilities on commercially reasonable terms, we may experience delays in the provisioning of our solutions until an agreement with another data center facility can be arranged. This shift to alternate data centers could take more than 24 hours depending on the nature of the event, which could cause significant interruptions in service and adversely affect our business and reputation.

 

We also depend on third-party Internet-hosting providers and continuous and uninterrupted access to the Internet through third-party bandwidth providers to operate our business. If we lose the services of one or more

 

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of our Internet-hosting or bandwidth providers for any reason or if their services are disrupted, for example due to viruses or “denial-of-service” or other attacks on their systems, or due to power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes or similar events, we could experience disruption in our ability to offer our solutions or we could be required to retain the services of replacement providers, which could increase our operating costs and harm our business and reputation.

 

Any errors, defects, disruptions or other performance problems with our solutions could harm our reputation and may damage our clients’ businesses. Interruptions in our ability to offer our solutions would likely reduce our revenue, could cause our clients to cease using our solutions and could adversely affect our retention rates. In addition, some of our client agreements require us to issue credits for downtime in excess of certain targets, and in some instances give our clients the ability to terminate the agreements. Our business and results of operations would be harmed if our current and potential clients believe our solutions are unreliable.

 

Unfavorable changes in evolving government regulation and taxation of the Internet and online communications and social commerce solutions could harm our business and results of operations.

 

The future success of our business depends upon the continued use of the Internet as a primary medium for communications and commerce. As the use of the Internet continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy, the solicitation, collection, processing or use of personal or consumer information, truth-in-advertising, consumer protection and the use of the Internet as a commercial medium and the market for social commerce solutions. There is also uncertainty as to how some existing laws governing issues such as sales taxes, libel and personal privacy apply to the Internet. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet. Any new regulations or legislation or new interpretations of existing regulations or legislation restricting Internet commerce or communications or imposing greater fees for Internet use could result in a decline in the use of the Internet as a medium for commerce and communications, diminish the viability of Internet solutions generally, and reduce the demand for our solutions. Additionally, if we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur additional expenses, make it more difficult to conduct our business or require us to alter our business model. Any of these outcomes could have a material adverse effect on our business, financial condition or results of operations.

 

Public scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could require us to incur significant expenses in order to comply with such regulations or deter or prevent us from providing our products and solutions to clients, thereby harming our business.

 

As part of our business, we collect and store personal information. We expect our collection and storage of personal information to increase, primarily in connection with our efforts to expand our analytics and other data solutions. The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. We will also face additional privacy issues as we expand into other international markets, as many nations have privacy protections more stringent than those in the United States. For example, the European Union is in the process of proposing reforms to its existing data protection legal framework, which may result in a greater compliance burden for companies with users in Europe. Various government and consumer agencies have also called for new regulation and changes in industry practices.

 

We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. Increased domestic or

 

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international regulation of data utilization and distribution practices, including self-regulation, could require us to modify our operations and incur significant expense, which could have an adverse effect on our business, financial condition and results of operations. Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current or planned business practices and that require changes to these practices, the design of our solutions or our privacy policy.

 

If our security measures are breached or unauthorized access to consumer data is otherwise obtained, our solutions may be perceived as not being secure, clients may curtail or stop using our solutions, and we may incur significant liabilities.

 

Our operations involve the storage and transmission of confidential information, and security breaches could expose us to a risk of loss of this information, litigation, indemnity obligations to our clients and other liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to client and consumer data, including personally identifiable information regarding consumers, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose potential sales and existing clients.

 

We may be subject to claims that we violated intellectual property rights of others, which are extremely costly to defend and could require us to pay significant damages and limit our ability to operate.

 

Companies in the Internet and technology industries, and other patent, copyright and trademark holders, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on claims of infringement or other violations of intellectual property rights. We have received in the past, and expect to receive in the future, notices that claim we or our clients using our solutions have misappropriated or misused other parties’ intellectual property rights. There may be intellectual property rights held by others, including issued or pending patents, copyrights and trademarks, that cover significant aspects of our technologies, content, branding or business methods. Any intellectual property claim against us or against our clients requiring us to indemnify our clients, regardless of merit, could be time-consuming and expensive to settle or litigate and could divert our management’s attention and other resources. These claims also could subject us to significant liability for damages and could result in our having to stop using technology, content, branding or business methods found to be in violation of another party’s rights. In addition, some of our commercial agreements require us to indemnify the other party for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling in such an action. We might be required or may opt to seek a license for rights to intellectual property held by others, which may not be available on commercially reasonable terms, or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which could require significant effort and expense and make us less competitive. If we cannot license or develop technology, content, branding or business methods for any allegedly infringing aspect of our business, we may be unable to compete effectively. Any of these results could harm our operating results.

 

If we do not adequately protect our intellectual property, our ability to compete could be impaired.

 

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products and services similar to ours and our ability to compete effectively would be impaired. To protect our intellectual property we rely on a combination of copyright, trademark, patent and trade secret laws, contractual provisions and technical measures. These protections may not be adequate to prevent our competitors from copying or reverse-engineering our technology and services to create similar offerings. The scope of patent

 

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protection, if any, we may obtain from our patent applications is difficult to predict and, if issued, our patents may be found invalid, unenforceable or of insufficient scope to prevent competitors from offering similar services. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. To protect our trade secrets and other proprietary information, we require employees, consultants, advisors, subcontractors and collaborators to enter into confidentiality agreements, and we maintain policies and procedures to limit access to our trade secrets and proprietary information. These agreements and the other actions we take may not provide meaningful protection for our trade secrets, know-how or other proprietary information from unauthorized use, misappropriation or disclosure. Existing copyright and patent laws may not provide adequate or meaningful protection in the event competitors independently develop technology, products or services similar to our solutions. Even if such laws provide protection, we may have insufficient resources to take the legal actions necessary to protect our interests.

 

Upon discovery of potential infringement of our intellectual property, we promptly take action we deem appropriate to protect our rights. Even if we do detect violations and decide to enforce our intellectual property rights, litigation may be necessary to enforce our rights, and any enforcement efforts we undertake could be time-consuming and expensive, could divert our management’s attention and may result in a court determining that our intellectual property rights are unenforceable. A failure to protect our intellectual property in a cost-effective and meaningful manner could have a material adverse effect on our ability to compete.

 

As of April 30, 2011, we had no patents issued, five patent applications filed and two provisional patent applications filed. We cannot be certain that any patents will be issued with respect to our current or potential patent applications. Any future patents issued to us may be challenged, invalidated or circumvented, may not provide sufficiently broad protection or may not prove to be enforceable in actions against alleged infringers. Furthermore, effective patent, trademark, copyright and trade secret protection may not be available in every country in which our products are available over the Internet. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain and still evolving.

 

We face potential liability and expenses for legal claims based on online word of mouth that is enabled by our solutions. If we are required to pay damages or expenses in connection with these legal claims, our operating results and business may be harmed.

 

Our solutions enable our clients to collect and display user-generated content, in the form of online word of mouth, on their websites and other third-party websites. We are also involved in the syndication and moderation of such content. Consequently, in connection with the operation of our business, we face potential liability based on a variety of theories, including fraud, defamation, negligence, copyright or trademark infringement or other legal theories based on the nature and syndication or moderation of this information, and under various laws, including the Lanham Act and the Copyright Act. In addition, it is also possible that consumers could make claims against us for losses incurred in reliance upon information enabled by our solutions, syndicated or moderated by us and displayed on our clients’ websites or social networks. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. If we become subject to these or similar types of claims and are not successful in our defense, we may be forced to pay substantial damages. There is no guarantee that we will avoid future liability and potential expenses for legal claims based on the content of the materials that our solutions enable. Should the content enabled by our solutions violate the intellectual property rights of others or otherwise give rise to claims against us, we could be subject to substantial liability, which could have a negative impact on our business, revenue and financial condition.

 

Our use of open source and third-party technology could impose limitations on our ability to commercialize our solutions.

 

We use open source software in our solutions. Although we monitor our use of open source software closely, the terms of many open source licenses have not been interpreted by courts in or outside of the United States, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions

 

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or restrictions on our ability to market our solutions. We also incorporate certain third-party technologies into our solutions and may desire to incorporate additional third-party technologies in the future. Licenses to new third-party technology may not be available to us on commercially reasonable terms, or at all. We could be required to seek licenses from third parties in order to continue offering our solutions, to re-engineer our technology or to discontinue offering our solutions in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

 

Undetected errors or defects in our solutions could result in the loss of revenue, delayed market acceptance of our products or services or claims against us.

 

Our solutions are complex and frequently upgraded and may contain undetected errors, defects, failures or viruses, especially when first introduced or when new versions or enhancements are released. Despite testing, our solutions, or third-party products that we incorporate into our solutions, may contain undetected errors, defects or viruses that could, among other things:

 

   

require us to make extensive changes to our solutions, which would increase our expenses;

 

   

expose us to claims for damages;

 

   

require us to incur additional technical support costs;

 

   

cause negative client or consumer reactions that could reduce future sales;

 

   

generate negative publicity regarding us and our solutions; or

 

   

result in clients electing not to renew their subscriptions for our solutions.

 

Any of these occurrences could have a material adverse effect upon our business, financial condition and results of operations.

 

We might require additional capital to support business growth, and this capital might not be available.

 

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new solutions or enhance our existing solutions and platform, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock, including shares of common stock sold in this offering. Any debt financing secured by us in the future would likely be senior to our common stock and could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

 

Our loan agreement contains operating and financial covenants that may restrict our business and financing activities.

 

On July 18, 2007, we entered into a loan and security agreement with a financial institution. As of July 31, 2011, we had no borrowings and a $1.8 million letter of credit issued under our loan agreement. Any borrowings, letters of credit and credit card services pursuant to our loan agreement are secured by substantially all of our assets, including our intellectual property. Our loan agreement restricts, among other things, our ability to:

 

   

create, incur or assume guarantees in respect of obligations of other persons and hedging arrangements or make payments with respect to additional indebtedness;

 

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create, incur or assume liens and other encumbrances;

 

   

make or own loans, investments and acquisitions;

 

   

sell, lease, license or otherwise dispose of assets;

 

   

pay dividends or make distributions on, or purchase or redeem, our capital stock;

 

   

consolidate or merge with or into other entities;

 

   

undergo a change in control;

 

   

engage in new or different lines of business; or

 

   

enter into transactions with affiliates.

 

Our loan agreement also contains numerous affirmative covenants, including covenants regarding compliance with applicable laws and regulations, financial and other reporting, payment of taxes and other obligations, maintenance of insurance coverage, maintenance of bank and investment accounts with the financial institution and its affiliates, registration of intellectual property rights, and certain third-party consents and waivers. Furthermore, if we request an optional increase in the revolving line of credit under our loan agreement, our loan agreement requires us to maintain a minimum amount of cash in our accounts with the financial institution at all times. The operating and other restrictions and covenants in our loan agreement, and in any future financing arrangements that we may enter into, may restrict our ability to finance our operations, engage in certain business activities, or expand or fully pursue our business strategies, or otherwise limit our discretion to manage our business. Our ability to comply with these restrictions and covenants may be affected by events beyond our control, and we may not be able to meet those restrictions and covenants. A breach of any of these restrictions and covenants could result in a default under our loan agreement or any future financing arrangements, which could cause any outstanding indebtedness under our loan agreement or under any future financing arrangements to become immediately due and payable, and result in the termination of commitments to extend further credit.

 

If Internet search engines’ methodologies are modified, our Smart SEO capability could be harmed.

 

In connection with search engine optimization, or SEO, capabilities that we provide our clients, including our Smart SEO solution, we depend in part on various Internet search engines, such as Google and Bing, to direct a significant amount of traffic to our clients’ websites. Our ability to influence the number of visitors directed to our clients’ websites through search engines is not entirely within our control. For example, search engines frequently revise their algorithms in an attempt to optimize their search result listings. Recently, Google announced an algorithm change that affected nearly 12% of their U.S. query results. There cannot be any assurance as to whether these or any future changes that may be made by Google or any other search engines might impact our Smart SEO capability in the long term. Changes in the methodologies used by search engines to display results could cause our clients’ websites to receive less favorable placements, which could reduce the number of users who click to visit our clients’ websites from these search engines. Some of our clients’ websites have experienced fluctuations in search result rankings and we anticipate similar fluctuations in the future. Internet search engines could decide that content on our clients’ websites enabled by our solutions, including online word of mouth, is unacceptable or violates their corporate policies. Any reduction in the number of users directed to our clients’ websites could negatively affect our ability to earn revenue through our Smart SEO solution.

 

If we are unable to maintain our corporate culture as we grow, we could lose the passion, performance, innovation, openness, teamwork, respect and generosity that we believe contribute to our success and our business may be harmed.

 

We believe that a critical contributor to our success has been our corporate culture. As we grow and change, we may find it difficult to maintain the values that are fundamental to our corporate culture. Any failure to preserve our culture could negatively affect our ability to recruit and retain personnel and otherwise adversely

 

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affect our future success. We may face pressure to change our culture as we grow, particularly if we experience difficulties in attracting competent personnel who are willing to embrace our culture. However, we have no intention of succumbing to this pressure, which could make it even more difficult to attract necessary personnel.

 

Our revenue may be adversely affected if we are required to charge sales taxes in additional jurisdictions or other taxes for our solutions.

 

We collect or have imposed upon us sales or other taxes related to the solutions we sell in certain states and other jurisdictions. Additional states, countries or other jurisdictions may seek to impose sales or other tax collection obligations on us in the future, or states or jurisdictions in which we already pay tax may increase the amount of taxes we are required to pay. A successful assertion by any state, country or other jurisdiction in which we do business that we should be collecting sales or other taxes on the sale of our products and services could, among other things, create significant administrative burdens for us, result in substantial tax liabilities for past sales, discourage clients from purchasing solutions from us or otherwise substantially harm our business and results of operations.

 

If we undertake business combinations and acquisitions, they may be difficult to integrate, disrupt our business, dilute stockholder value or divert management’s attention.

 

Historically, we have not undertaken any business combinations or acquisitions. However, in the future, we may support our growth through acquisitions of complementary businesses, services or technologies. Future acquisitions involve risks, such as:

 

   

misjudgment with respect to the value, return on investment or strategic fit of any acquired operations or assets;

 

   

challenges associated with integrating acquired technologies, operations and cultures of acquired companies;

 

   

exposure to unforeseen liabilities;

 

   

diversion of management and other resources from day-to-day operations;

 

   

possible loss of key employees, clients, suppliers and partners;

 

   

higher than expected transaction costs;

 

   

potential loss of commercial relationships and customers based on their concerns regarding the acquired business or technologies; and

 

   

additional dilution to our existing stockholders if we use our common stock as consideration for such acquisitions.

 

As a result of these risks, we may not be able to achieve the expected benefits of any acquisition. If we are unsuccessful in completing or integrating acquisitions, we may be required to reevaluate our growth strategy and we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete and integrate the acquisitions.

 

Future business combinations could involve the acquisition of significant intangible assets. We may need to record write-downs from future impairments of identified intangible assets and goodwill. These accounting charges would reduce any future reported earnings or increase a reported loss. In addition, we could use substantial portions of our available cash, including some or substantially all of the proceeds of this offering, to pay the purchase price for acquisitions. Subject to the provisions of our existing indebtedness, it is possible that we could incur additional debt or issue additional equity securities as consideration for these acquisitions, which could cause our stockholders to suffer significant dilution.

 

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We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our operating results.

 

As of April 30, 2011, we had federal net operating loss carryforwards of $29.3 million due to prior period losses, which expire beginning in 2026. We also have federal research tax credit carryforwards of approximately $1.0 million that will begin to expire in 2026. Realization of these net operating loss and research tax credit carryforwards depends on many factors, including our future income. There is a risk that due to regulatory changes or unforeseen reasons our existing carryforwards could expire or otherwise be unavailable to offset future income tax liabilities, which would adversely affect our operating results. In addition, under Section 382/383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax credits, to offset its post-change income may be limited. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable income may be subject to limitations.

 

We are exposed to fluctuations in currency exchange rates.

 

We face exposure to adverse movements in currency exchange rates, which may cause our revenue and operating results to differ materially from expectations. A decline in the U.S. dollar relative to foreign currencies would increase our non-U.S. revenue, when translated into U.S. dollars. Conversely, if the U.S. dollar strengthens relative to foreign currencies, our revenue would be adversely affected. Our operating results could be negatively impacted depending on the amount of expense denominated in foreign currencies. As exchange rates vary, revenue, cost of revenue, operating expenses and other operating results, when translated, may differ materially from expectations. In addition, our revenue and operating results are subject to fluctuation if our mix of U.S. and foreign currency denominated transactions and expenses changes in the future. Even if we were to implement hedging strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.

 

If we experience material weaknesses in the future, as we have in the past, or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately report our financial condition or results of operations which may adversely affect investor confidence in us and, as a result, the value of our common stock.

 

As a result of becoming a public company, we will be required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting beginning with the filing of our Annual Report on Form 10-K for fiscal year 2013. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be prevented or detected on a timely basis.

 

We are in the early stages of further enhancing the computer systems processes and related documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would likely cause the price of our common stock to decline.

 

We have in the past identified a material weakness in our internal control over financial reporting, and although we have remediated the material weakness identified, we cannot assure you that there will not be

 

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material weaknesses in our internal controls in the future. Prior to fiscal year 2010, our independent accounting firm was not registered by the Public Company Accounting Oversight Board, or PCAOB. In fiscal year 2010, we appointed a PCAOB registered independent accounting firm. In connection with our fiscal year 2008 and fiscal year 2009 audits following this appointment, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting. For fiscal year 2008 and fiscal year 2009, we did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements. Specifically, we lacked sufficient finance and accounting staff with adequate depth and skill in the application of generally accepted accounting principles with respect to the accounting for revenue recognition and internal-use software. This control deficiency resulted in material errors, requiring the restatement of our financial results for our fiscal years ended April 30, 2008 and 2009.

 

Since the periods with respect to which this material weakness was identified, we have taken steps to address the material weakness disclosed in the preceding paragraph, including hiring a new chief financial officer, corporate controller and other appropriately qualified accounting personnel, forming an audit committee and implementing additional financial accounting controls and procedures. As a result of these actions, we believe that this material weakness has been remediated and our consolidated financial statements and related notes included elsewhere in this prospectus reflect the correct application of accounting guidance in accordance with GAAP. However, we have not completed the necessary documentation and testing procedures under Section 404 of the Sarbanes-Oxley Act and cannot assure you that we will be able to implement and maintain an effective internal control over financial reporting in the future. Any failure to maintain such controls could severely inhibit our ability to accurately report our financial condition or results of operations.

 

Risks Related to This Offering and Ownership of Our Common Stock

 

Our securities have no prior market, and our common stock could trade at prices below the initial public offering price.

 

There has not been a public trading market for shares of our common stock prior to this offering. Although we will apply to have our common stock quoted on the Nasdaq Global Select Market or the New York Stock Exchange, an active trading market may not develop or be sustained after this offering. The initial public offering price for the shares of common stock sold in this offering will be determined by negotiations between us and representatives of the underwriters. This price may be higher than the trading price of our common stock after this offering. As a result, you could lose all or part of your investment.

 

Our stock price may be volatile, and you may be unable to sell your shares at or above the offering price.

 

The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this prospectus, and other factors beyond our control. Factors affecting the trading price of our common stock will include:

 

   

variations in our operating results and operating results of similar companies;

 

   

changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;

 

   

announcements of technological innovations, new products, services or service enhancements, strategic alliances or agreements by us or by our competitors;

 

   

marketing and advertising initiatives by us or our competitors;

 

   

threatened or actual litigation;

 

   

changes in our management;

 

   

recruitment or departures of key personnel;

 

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conditions in the market for social commerce solutions, the industries in which our clients operate and the economy as a whole;

 

   

the overall performance of the equity markets;

 

   

sales of shares of our common stock by existing stockholders; and

 

   

adoption or modification of regulations, policies, procedures or programs applicable to our business.

 

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations and general economic, political and market conditions, such as recessions, changes in U.S. credit ratings, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock regardless of our actual operating performance. These fluctuations may even be more pronounced in the trading market for our stock shortly following this offering. Each of these factors, among others, could harm the value of your investment in our common stock.

 

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us, regardless of the merits or outcome, could result in substantial costs and divert our management’s attention from other business concerns, which could materially harm our business.

 

If securities analysts do not publish research or publish negative research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities analysts. If no or few securities analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes negative research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our stock or fails to publish reports on us regularly, we could lose visibility in the market for our stock and demand for our stock could decrease, which could cause our stock price or trading volume to decline.

 

The concentration of our capital stock ownership with insiders upon the completion of this offering will likely limit your ability to influence corporate matters.

 

We anticipate that our executive officers, directors, beneficial owners of 5.0% or more of our outstanding shares of common stock and affiliated entities will together beneficially own approximately             % of our common stock outstanding after this offering. As a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change of control would benefit our other stockholders. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders.

 

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Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

 

The price of our common stock could decline if there are substantial sales of our common stock in the public stock market after this offering. After this offering, we will have an aggregate of              outstanding shares of common stock, based on the number of shares outstanding as of April 30, 2011. The shares sold in this offering, including any shares sold pursuant to the underwriters’ option to purchase additional shares, may be resold in the public market immediately following this offering. The remaining              shares, or approximately     % of our outstanding shares after this offering, will be able to be sold in the public market as set forth below:

 

Number of shares and

percentage of total outstanding

  

Date available for sale into public market

            shares, or     %

   Immediately after this offering.

            shares, or     %

   Between 90 and 180 days after the date of this prospectus.

            shares, or     %

   At various times beginning more than 180 days after the date of this prospectus, subject to extension under certain circumstances and subject in some cases to volume and other restrictions of Rule 144 and Rule 701 under the Securities Act of 1933, as amended, or the Securities Act.

 

We and all of our directors and officers, as well the other holders of substantially all shares of our common stock outstanding immediately prior to this offering, have entered into lock-up agreements. The lock-up agreements expire 180 days after the date of this prospectus, in each case subject to a potential extension of up to 34 days under certain circumstances. The underwriters may, in their sole discretion and without notice, release all or any portion of the shares from the restrictions of any lock-up agreements described above. In addition, these lock-up agreements are subject to the exceptions described in the section of this prospectus titled “Underwriters.”

 

After this offering and the expiration of the lock-up period, the holders of an aggregate of              shares of our common stock not sold in this offering will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

 

We also intend to register the issuance of all shares of common stock that we have issued and may issue under our option plans. Once we register the issuance of these shares, they can be freely sold in the public market upon issuance.

 

Also, in the future, we may issue securities in connection with investments and acquisitions. The amount of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding stock. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

 

Because our initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution.

 

The initial public offering price will be substantially higher than the pro forma net tangible book value per share of common stock based on the total tangible assets, which is our total assets, less capitalized internal-use software development costs reduced by the amount of our total liabilities immediately following this offering. Therefore, if you purchase common stock in this offering, you will experience immediate and substantial dilution of approximately $             per share in pro forma net tangible book value, the difference between the price you pay for our common stock and its pro forma net tangible book value per share after completion of this offering. Furthermore, investors purchasing common stock in this offering will own only approximately     % of our shares outstanding, even though they will have contributed     % of the total consideration received by us in connection with our sales of common stock. As of April 30, 2011, options to purchase 11,690,549 shares of our common

 

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stock at a weighted average exercise price of approximately $3.02 per share were outstanding. Since that date we have granted options to purchase an additional              shares of our common stock at a weighted average exercise price of $             per share. After this offering, we will have an aggregate of              shares of common stock authorized but unissued and not reserved for issuance under our stock option plans or otherwise. We intend to continue to actively pursue strategic acquisitions. We may pay for such acquisitions, partly or in full, through the issuance of additional equity. Following the completion of this offering, we may issue              shares of our common stock without any action or approval by our stockholders. Any issuance of shares in connection with our acquisitions, the exercise of stock options or otherwise would dilute the percentage ownership held by the investors who purchase our shares in this offering.

 

Our management has broad discretion in the use of the net proceeds from this offering and may not use the net proceeds effectively.

 

Our management will have broad discretion in the application of the net proceeds from this offering. We cannot specify with certainty the uses to which we will apply the net proceeds we will receive from this offering. The failure by our management to apply these funds effectively could adversely affect our ability to continue to maintain and expand our business.

 

We do not anticipate paying any dividends on our common stock.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash dividends, you could receive a return on your investment in our common stock only if the market price of our common stock has increased when you sell your shares. In addition, the terms of our loan and security agreement currently restrict our ability to pay dividends.

 

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, and greater expenditures may be necessary in the future with the advent of new laws, regulations and stock exchange listing requirements pertaining to public companies. The Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, as well as rules subsequently implemented by the Securities and Exchange Commission, The NASDAQ Stock Market LLC and the New York Stock Exchange, impose various requirements on public companies, including establishing effective internal controls and certain corporate governance practices. Our management and other personnel have begun to devote a substantial amount of time to these compliance initiatives, and additional laws and regulations may divert further management resources. Moreover, if we are not able to comply with the requirements of new compliance initiatives in a timely manner, the market price of our stock could decline, and we could be subject to investigations and other actions by the Securities and Exchange Commission, The NASDAQ Stock Market LLC and the New York Stock Exchange, or other regulatory authorities, which would require additional financial and management resources.

 

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

 

Our amended and restated certificate of incorporation and our amended and restated bylaws, to be effective upon the completion of this offering, will contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

 

   

creating a classified board of directors whose members serve staggered three-year terms;

 

   

not providing for cumulative voting in the election of directors;

 

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authorizing our board of directors to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;

 

   

prohibiting stockholder action by written consent; and

 

   

requiring advance notification of stockholder nominations and proposals.

 

These and other provisions to be included in our amended and restated certificate of incorporation and our amended and restated bylaws, to be effective upon the completion of this offering, and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions. See the sections of this prospectus titled “Description of Capital Stock—Preferred Stock” and “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This prospectus, including the sections of this prospectus titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some cases, use words such as “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

our expectations regarding our revenue, expenses, sales and operations;

 

   

anticipated trends, developments and challenges in our business and the markets in which we operate;

 

   

our ability to compete in our markets and innovation by our competitors;

 

   

our ability to attract and retain clients;

 

   

our ability to anticipate market needs or develop new or enhanced solutions to meet those needs;

 

   

our ability to manage growth;

 

   

our ability to establish and maintain intellectual property rights;

 

   

our ability to manage expansion into international markets and new vertical industries;

 

   

our ability to retain and attract key personnel;

 

   

our expectations regarding the use of proceeds from this offering;

 

   

our ability to successfully identify, manage and integrate potential acquisitions; and

 

   

our anticipated cash needs and our estimates regarding our capital requirements and our need for additional financing.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. A number of important factors could cause actual results to differ materially from the results anticipated by these forward-looking statements, which statements apply only as of the date of this prospectus. These important factors include those that we discuss in the section of this prospectus titled “Risk Factors” and elsewhere. You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

This prospectus contains estimates and other information concerning the industries in which we operate, including market size and growth rates, which are based on publications, surveys and forecasts, including those generated by Cisco Systems, Inc., eMarketer, Inc., ESOMAR B.V., Forrester Research, Inc., Fortune, Interbrand, Internet Retailer, MAGNAGLOBAL, comScore, Inc., Shop.org, PJL Digital (d/b/a Social Shopping Labs), The CMO Club (operated by C Level Club, LLC) and The Nielsen Company, as well as internal research. We commissioned the survey of Chief Marketing Officers conducted by The CMO Club (operated by C Level Club, LLC) referenced on page 73 and contributed to its preparation. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the section of this prospectus titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications, surveys and forecasts.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from our sale of              shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $             million. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $             million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

The principal purposes of this offering are to create a public market for our common stock, obtain additional capital, facilitate our future access to the public equity markets, increase awareness of our company among potential clients and improve our competitive position.

 

We do not have current specific plans for the use of the net proceeds from this offering. However, we generally intend to use the balance of the net proceeds from this offering for working capital and other general corporate purposes. We also may use a portion of the net proceeds to acquire or license, or invest in, products, services, technologies or other businesses. The amount and timing of these expenditures will vary depending on a number of factors, including competitive and technological developments and the rate of growth, if any, of our business.

 

Pending their use, we plan to invest our net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. Our management will have broad discretion in the application of the net proceeds from this offering to us, and investors will be relying on the judgment of our management regarding the application of the proceeds.

 

DIVIDEND POLICY

 

We have never declared or paid dividends on our capital stock. We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings will be used for the operation and growth of our business. Any future determination to declare cash dividends would be subject to the discretion of our board of directors and would depend upon various factors, including our results of operations, financial condition and liquidity requirements, restrictions that may be imposed by applicable law and our contracts and other factors deemed relevant by our board of directors. In addition, the terms of our loan and security agreement currently restrict our ability to pay dividends.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of April 30, 2011 on:

 

   

an actual basis;

 

   

a pro forma basis, assuming the conversion of all of our outstanding shares of preferred stock into 27,897,031 shares of common stock;

 

   

a pro forma as-adjusted basis, assuming (i) the conversion of all of our outstanding shares of preferred stock into 27,897,031 shares of common stock and (ii) reflecting our receipt of the net proceeds from our sale of             shares of common stock by us in this offering assuming an initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us.

 

You should read this table together with the sections of this prospectus titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of April 30, 2011  
     Actual     Pro Forma     Pro  Forma
As
Adjusted(1)
 
     (in thousands, except share data)  
           (unaudited)  

Redeemable convertible preferred stock, $0.0001 par value; 27,897,031 shares authorized, 27,897,031 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

   $ 23,633      $      $   

Stockholders’ equity (deficit):

      

Undesignated preferred stock, $0.0001 par value; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                     

Common stock, $0.0001 par value; 60,500,000 shares authorized, 18,767,037 shares issued and 18,517,037 shares outstanding, actual; 150,000,000 shares authorized, pro forma and pro forma as adjusted; 46,664,068 shares issued and 46,414,068 shares outstanding, pro forma;                     shares issued and outstanding, pro forma as adjusted

     2        5     

Treasury stock, at cost; 250,000 shares outstanding, actual, pro forma and pro forma as adjusted

                

Additional paid-in capital

     11,524        35,154     

Accumulated other comprehensive income

     52        52     

Accumulated deficit

     (40,828     (40,828  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (29,250     (5,617  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (5,617   $ (5,617   $     
  

 

 

   

 

 

   

 

 

 

 

  (1)   Each $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, as applicable, the amount of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

 

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If the underwriters’ option to purchase additional shares were exercised in full, pro forma as adjusted common stock; additional paid-in-capital; stockholders’ equity; total capitalization and shares of common stock issued and outstanding as of April 30, 2011 would be $             million; $             million; $             million; $             million and            , respectively.

 

The number of shares of common stock outstanding set forth in the table is based on 46,414,068 shares outstanding as of April 30, 2011 and excludes:

 

   

11,690,549 shares of common stock issuable upon exercise of options outstanding as of April 30, 2011 at a weighted average exercise price of $3.02 per share;

 

   

             shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan adopted in July 2011, as more fully described in the section of this prospectus titled “Executive Compensation—Stock Incentive Plans;” and

 

   

             shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan adopted in July 2011, as more fully described in the section of this prospectus titled “Executive Compensation—Stock Incentive Plans.”

 

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DILUTION

 

As of April 30, 2011, our net tangible book value, which we have defined as our total tangible assets, less total liabilities, was $(7.5) million, or $(0.40) per share of common stock. We define our total tangible assets as our total assets, less capitalized internal-use software development costs. Pro forma net tangible book value per share represents the amount of our net tangible book value divided by the total number of shares of common stock outstanding, including shares of common stock issued upon the conversion of all outstanding shares of our preferred stock upon the completion of this offering. Dilution in pro forma net tangible book value per share to new investors in this offering represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the sale of the             shares of common stock offered by us in this offering assuming an initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of April 30, 2011 would have been $             million, or $             per share of common stock. This represents an immediate increase in pro forma net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors in our common stock. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $     

Pro forma net tangible book value per share as of April 30, 2011, before giving effect to this offering

   $   (0.16)      

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

     
     

 

 

 

Dilution per share to new investors in this offering

      $                
     

 

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             would increase or decrease, respectively, our pro forma as adjusted net tangible book value per share after this offering by $             per share and the dilution in pro forma as adjusted net tangible book value to new investors by $             per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same. Similarly, each increase or decrease of             shares in the number of common stock offered by us would increase or decrease, respectively, our pro forma as adjusted net tangible book value per share by $             per share and the dilution in pro forma as adjusted net tangible book value to new investors by $             per share, assuming the assumed initial public offering price remains the same.

 

If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $             per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $             per share.

 

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The following table summarizes, on a pro forma as adjusted basis as of April 30, 2011 and after giving effect to this offering, based on an assumed initial public offering price of $             per share, the differences between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid before deducting estimated underwriting discounts and commissions.

 

     Shares Purchased     Total Consideration     Average
Price
Per
Share
 
     Number      Percent     Amount      Percent    
     (in thousands, except share data and percentages)  

Existing stockholders

     46,414,068             $   26,200             $   0.56   

New investors

             $     
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0   $           100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $             million before deducting estimated underwriting discounts and commissions, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase or decrease of              shares in the number of common stock offered by us would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $             million before deducting estimated underwriting discounts and commissions, assuming the assumed initial public offering price remains the same.

 

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to              shares, or     % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to              shares, or     % of the total number of shares outstanding after this offering. If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to              shares, or     % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to              shares, or     % of the total number of shares outstanding after this offering.

 

The number of shares of common stock to be outstanding after this offering is based on 46,414,068 shares outstanding as of April 30, 2011 and excludes:

 

   

11,690,549 shares of common stock issuable upon exercise of options outstanding as of April 30, 2011 at a weighted average exercise price of $3.02 per share;

 

   

             shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan adopted in July 2011, as more fully described in the section of this prospectus titled “Executive Compensation—Stock Incentive Plans;” and

 

   

             shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan adopted in July 2011, as more fully described in the section of this prospectus titled “Executive Compensation—Stock Incentive Plans.”

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

You should read the following selected historical consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included in this prospectus.

 

The consolidated statements of operations data for the fiscal years ended April 30, 2009, 2010, and 2011 and the consolidated balance sheet data as of April 30, 2010 and 2011 are derived from our audited consolidated financial statements included in this prospectus. The consolidated statements of operations data for the fiscal years ended April 30, 2007 and 2008 and the consolidated balance sheet data as of April 30, 2007, 2008 and 2009 are derived from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.

 

     Year Ended April 30,  
     2007     2008     2009     2010     2011  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

  

Revenue

   $ 2,952      $ 10,108      $ 22,472      $ 38,648      $ 64,482   

Cost of revenue(1)

     1,252        4,136        8,307        15,191        25,615   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,700        5,972        14,165        23,457        38,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Sales and marketing(1)

     1,861        5,876        11,260        17,803        34,568   

Research and development(1)

     1,480        1,773        3,444        5,828        10,847   

General and administrative(1)

     875        2,135        4,442        7,651        13,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,216        9,784        19,146        31,282        58,571   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (2,516     (3,812     (4,981     (7,825     (19,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income, net

     112        177        98        56        208   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (2,404     (3,635     (4,883     (7,769     (19,496

Income tax expense

                   125        205        561   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $   (2,404   $   (3,635   $   (5,008   $   (7,974   $   (20,057

Less accretion of redeemable convertible preferred stock

     (31     (34     (42     (43     (46
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss applicable to common stockholders

   $ (2,435   $ (3,669   $ (5,050   $ (8,017   $ (20,103
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share applicable to common stockholders:

          

Basic and diluted

   $ (0.16   $ (0.24   $ (0.32   $ (0.48   $ (1.13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted average number of shares

     15,234        15,540        15,854        16,637        17,790   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma basic and diluted loss per share (unaudited)(2)

           $ (0.44
          

 

 

 

Pro forma weighted average number of shares (unaudited)(2)

             45,687   
          

 

 

 

Other Financial Data:

          

Adjusted EBITDA(3)

   $ (2,456   $ (3,400   $ (3,340   $ (4,211   $ (13,317

 

  (1)   Includes stock-based compensation expense as follows (in thousands):

 

     Year Ended April 30,  
     2007      2008      2009      2010      2011  
     (in thousands)  

Cost of revenue

   $       $ 57       $ 319       $ 604       $ 978   

Sales and marketing

     8         126         469         924         1,122   

Research and development

     4         34         258         469         731   

General and administrative

     2         51         281         636         1,850   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $   14       $   268       $   1,327       $   2,633       $   4,681   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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  (2)   Pro forma basic and diluted loss per share has been calculated assuming the conversion of all outstanding shares of our preferred stock into 27,897,031 shares of our common stock as of the first day of the beginning of the period.

 

  (3)   We define Adjusted EBITDA as net loss adjusted for stock-based compensation expense, adjusted depreciation and amortization (which excludes amortization of capitalized internal-use software development costs), income tax expense and other income, net. Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. generally accepted accounting principles, or GAAP.

 

Adjusted EBITDA should not be considered as an alternative to net loss, operating loss or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate Adjusted EBITDA in the same manner. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reason we consider them appropriate.

 

We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons:

 

   

Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items, such as stock-based compensation expense, adjusted depreciation and amortization, income tax expense and other income, net, that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

 

   

Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance;

 

   

Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

 

   

We anticipate that, after consummating this offering, our investor and analyst presentations will include Adjusted EBITDA as a supplemental measure to evaluate our overall operating performance.

 

We understand that, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:

 

   

Adjusted depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

   

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

 

   

Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income; and

 

   

Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

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The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated, in thousands.

 

     Year Ended April 30,  
     2007     2008     2009     2010     2011  
     (in thousands)  

Net loss

   $   (2,404   $   (3,635   $ (5,008   $ (7,974   $   (20,057

Stock-based compensation expense

     14        268        1,327        2,633        4,681   

Adjusted depreciation and amortization

     46        144        314        981        1,706   

Income tax expense

                   125        205        561   

Total other (income), net

     (112     (177     (98     (56     (208
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (2,456   $ (3,400   $ (3,340   $ (4,211   $ (13,317
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     April 30,  
   2007     2008     2009     2010     2011  
     (in thousands)  

Selected Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 2,226      $ 7,419      $ 6,388      $ 16,036      $ 15,050   

Deferred revenue

     1,866        3,631        8,277        17,104        32,160   

Total current assets

     3,448        9,808        19,390        25,581        31,095   

Total current liabilities

     1,970        5,022        10,452        22,777        38,539   

Total assets

     3,663        10,731        20,892        32,547        37,972   

Total liabilities

     2,292        5,439        11,275        24,943        43,589   

Total non-current liabilities

     322        417        823        2,166        5,050   

Redeemable convertible preferred stock

     5,246        12,533        20,486        23,587        23,633   

Total stockholders’ deficit

     (3,875     (7,241     (10,870     (15,983     (29,250

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the sections of this prospectus titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements and Industry Data.” All references herein to a fiscal year refer to the 12 months ended April 30 of such year, and references to the first, second, third and fourth fiscal quarters refer to the three months ended July 31, October 31, January 31 and April 30, respectively.

 

Overview

 

We are a leading provider of social commerce solutions that help our clients capture, display and analyze online word of mouth, including consumer-generated ratings and reviews, questions and answers, stories, recommendations, photographs, videos and other content about our clients’ brands, products or services. Bazaarvoice, which literally means “voice of the marketplace,” was founded on the premise that online word of mouth is critical to consumers and businesses because of its influence on purchasing decisions, both online and offline. We enable our clients to place consumers at the center of their business strategies by helping consumers generate and share sentiment, preferences and other content about brands, products or services. Through our technology platform, our clients leverage online word of mouth to increase sales, acquire new customers, improve marketing effectiveness, enhance consumer engagement across channels, increase success of new product launches, improve existing products and services, effectively scale customer support and decrease product returns.

 

We deliver our solutions entirely through a Software-as-a-Service, or SaaS, architecture that can be configured to meet each client’s specific needs. We sell our solutions through a direct sales team with our primary sales operations in Austin, Texas and London, United Kingdom. We also have direct sales teams in Australia, France, Germany, and Sweden. We offer our solutions primarily through subscription agreements and generally recognize revenue ratably over the related subscription period, which is typically one year.

 

Since inception, we have experienced rapid revenue growth, driven primarily by the number of active clients, which we define as clients that have implemented our solutions and from which we are currently recognizing revenue. In order to take advantage of our significant growth opportunity and to provide high levels of client service, we have also substantially expanded our number of full-time employees. We believe our growth is further illustrated by impressions served, which we define as single instances of online word of mouth delivered to an end user’s web browser. While this metric does not drive our pricing, it measures the reach of our network to a consumer audience. The following table summarizes these measures of our growth over fiscal years 2009, 2010 and 2011:

 

     Year Ended April 30,  
     2009      2010      2011  

Growth Trends:

        

Revenue (in thousands)

   $ 22,472       $ 38,648       $ 64,482   

Number of active clients (period end)

     229         377         587   

Full-time employees (period end)

     172         324         494   

Impressions served (in thousands)

     35,693,819         63,249,918         92,341,249   

 

Our growth has been driven by our ability to provide effective solutions that help our clients achieve measurable results from online word of mouth. Our platform, which we launched in October 2005, provides a turnkey Ratings & Reviews solution, which was initially targeted for online retailers, enabling them to collect and display consumer reviews on their retail websites.

 

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Since the launch of our platform, we have expanded the features and functionality of our platform and solutions, enabling us to increase revenue from existing clients while attracting significant numbers of new clients in online retail and other industries, including manufacturing clients that sell their products and services through our online retail clients. Significant additions to our platform include our Ask & Answer solution released in May 2007, our Stories solution released in July 2008, our amplification suite released in January 2010 that incorporates the BrandVoice and BrandAnswers network amplification features and our SocialConnect product suite released in June 2010 that provides a platform for our clients to connect with consumers across social networks. Ratings & Reviews, the core solution in our platform, is used by virtually all of our clients. We are the leading provider of customer reviews and forums to 27.6% of the 2011 Internet Retailer 500, more than every other vendor of a similar service, as of May 2011. Historically, a majority of our revenue has been derived from sales of our Ratings & Reviews solution. We now have active clients in a variety of industries, including the retail, consumer products, travel and leisure, technology, telecommunications, financial services, healthcare and automotive industries. As of April 30, 2011, we had 587 active clients and 494 full-time employees servicing those clients.

 

A key element of our growth strategy is the continuous enhancement and expansion of our social commerce platform by developing and implementing new solutions, enhancing our software architecture to efficiently and cost-effectively develop and implement new solutions, adding new features and functionality and expanding the potential applications of our existing solutions. Through consistent innovation, we have increased both the number of active clients and the revenue we generate from our active clients over time. We plan to continue to enhance our software architecture and enhance and expand our solutions through increased investments in research and development and by pursuing strategic acquisitions of complementary businesses and technologies that will enable us to continue to drive growth in the future.

 

For fiscal years 2009, 2010 and 2011, our net loss was $(5.0) million, $(8.0) million and $(20.1) million, respectively, our Adjusted EBITDA was $(3.3) million, $(4.2) million and $(13.3) million, respectively, and our cash flow from operations was $0.2 million, $5.2 million and $(0.6) million, respectively, which was largely driven by the growth in deferred revenue during this same period.

 

For further discussion regarding Adjusted EBITDA, see footnote (3) on page 39 to the table in the section of this prospectus titled “Selected Consolidated Financial and Other Data.”

 

We have been capital efficient despite incurring accumulated net losses of $40.8 million through April 30, 2011. Since our inception in May 2005, we have raised $23.6 million in funding through private placements of our preferred stock, the most recent of which was a $3.0 million private placement in February 2010, and $2.6 million in proceeds from the exercise of common stock options through April 30, 2011. Through April 30, 2011, we had consumed only $11.1 million of total capital raised since inception, ending our fiscal year 2011 with cash and cash equivalents of $15.1 million and no outstanding indebtedness.

 

Business Model

 

Our business model focuses on maximizing the lifetime value of a client relationship. We make significant investments in acquiring new clients and believe that we will be able to achieve a favorable return on these investments by growing our relationships over time and ensuring that we have a high level of client retention. To provide an understanding of our client economics, we are providing an analysis of the clients we acquired in fiscal year 2008, which we will refer to as the 2008 Cohort. We selected the 2008 Cohort as a representative set of clients for this analysis because 2008 is the first year since our inception with a material number of clients and revenue. The 2008 Cohort is comprised of 124 clients acquired during fiscal year 2008 and represented 26.9% of our total company revenue for the most recent fiscal year ended April 30, 2011. For the month of April 2011, which was the last month of our most recent fiscal year, 93 of the 124 clients initially acquired in fiscal year 2008 were active clients, representing a 75.0% retention rate for the 2008 Cohort.

 

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In connection with the acquisition of new clients, we incur and recognize significant upfront costs. These costs include sales and marketing costs associated with generating client agreements, such as sales commission expenses that are recognized fully in the period in which we execute a client contract. However, we recognize revenue ratably over the entire term of those contracts, which commences only when the client is able to begin using our solution. Although we expect each client to be profitable for us over the duration of our relationship, the costs we incur with respect to any client relationship may exceed revenue in earlier periods because we recognize those costs in advance of the recognition of revenue. As a result, an increase in the mix of new clients as a percentage of total clients will initially have a negative impact on our operating results. On the other hand, we expect that a decrease in the mix of new clients as a percentage of total clients will initially have a positive impact on our operating results. Additionally, many clients pay in advance of the recognition of revenue and, as a result, our cash flow from these clients may exceed the amount of revenue recognized for those clients in earlier periods of our relationship.

 

In fiscal year 2008, we recognized $10.1 million in revenue, of which $2.3 million related to the 2008 Cohort. During this same period, we incurred total sales and marketing costs of $5.9 million, of which we attributed $5.0 million to the 2008 Cohort using the estimates and assumptions described below. During fiscal year 2008, we collected $4.1 million in cash with respect to the 2008 Cohort.

 

In fiscal year 2011, we recognized $64.5 million in revenue, of which $17.4 million related to the 2008 Cohort. During this same period, we incurred total sales and marketing costs of $34.6 million, of which we attributed $3.9 million to the 2008 Cohort using the estimates and assumptions described below. During fiscal year 2011, we collected $18.1 million in cash with respect to the 2008 Cohort.

 

For purposes of this analysis, to attribute sales and marketing costs to the 2008 Cohort, we first excluded stock-based compensation, depreciation and amortization of $0.1 million and $1.5 million in 2008 and 2011, respectively. We then assumed that all marketing costs we incurred in fiscal year 2008, but no marketing costs we incurred in fiscal year 2011, were attributable to the 2008 Cohort, as we generally consider the marketing costs we incur in any fiscal year to be a cost of acquiring our new clients in that fiscal year. We then attributed to the 2008 Cohort a percentage of our sales costs in each fiscal year that was equal to the percentage of the total annualized contract value we sold to the 2008 Cohort in that fiscal year. We believe the estimates and assumptions we used to attribute these costs are reasonable, but the attributed costs could have varied significantly from the amounts disclosed above had we used different estimates and assumptions.

 

For purposes of this analysis, we have also measured our performance with respect to the 2008 Cohort based on the multiple of revenue recognized relative to the sales and marketing costs we incurred over the life of our client relationships from fiscal year 2008 through fiscal year 2011. For our 2008 Cohort, from fiscal year 2008 through fiscal year 2011, we have recognized $44.4 million in revenue and have attributed $13.2 million in sales and marketing costs based on the above estimates and assumptions, which equates to a multiple of 3.4.

 

We cannot assure you that we will experience similar financial outcomes from clients added in other years or in future periods. You should not rely on the allocated expenses or relationship of revenue to sales and marketing as being indicative of our current or future performance. Because we are still in the early stages of our development, we do not yet have enough operating history to measure the lifetime of our client relationships. Therefore, we cannot predict the average lifetime of a client relationship for the 2008 Cohort or for clients acquired in other fiscal years. We also cannot predict whether revenue for the 2008 Cohort will continue to grow at the rate of growth experienced through the end of fiscal year 2011 or whether the growth rate of other cohorts will be similar to that of the 2008 Cohort. Moreover, we cannot assure you that we will experience similar results in terms of the relationship between revenue and costs for clients acquired in other years or in future periods. We may not achieve profitability even if our revenue exceeds costs from our clients over time. We encourage you to read our consolidated financial statements that are included in this prospectus.

 

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Key Business Metrics

 

In addition to macroeconomic trends affecting the demand for our solutions, management regularly reviews a number of key financial and operating metrics to evaluate our business, determine the allocation of our resources, make decisions regarding corporate strategies and evaluate forward-looking projections and trends affecting our business.

 

     Year Ended April 30,  
   2009     2010     2011  
     (in thousands, except number of clients and client retention)  

Revenue

   $   22,472      $   38,648      $   64,482   

Cash flow from operations

   $ 173      $ 5,166      $ (647

Number of active clients (period end)

     229        377        587   

Revenue per active client(1)

   $ 130.7      $ 131.6      $ 135.3   

Active client retention rate

     84.4     88.2     89.4

Revenue per employee(2)

   $ 158.4      $ 167.5      $ 151.9   

 

  (1)   Calculated based on the average number of active clients for the period on a monthly basis.
  (2)   Calculated based on the average number of employees (excluding content moderators) for the period on a quarterly basis.

 

Revenue

 

Revenue consists primarily of fees from the sale of subscriptions to our hosted social commerce solutions, and we generally recognize revenue ratably over the related subscription period, which is typically one year. We regularly review our revenue and revenue growth rate to measure our success. We believe that trends in revenue are important to understanding the overall health of our marketplace, and we use these trends in order to formulate financial projections and make strategic business decisions.

 

Cash Flow from Operations

 

Cash flow from operations is the cash that we generate through the normal course of business and is measured prior to the impact of investing or financing activities. Due to the fact that we incur a significant amount of upfront costs associated with the acquisition of new clients with revenue recognized over an extended period, we consider cash flows from operations to be a key measure of our true operating performance.

 

Number of Active Clients

 

We define an active client as an organization that has implemented one or more of our solutions and from which we are currently recognizing revenue, and we count organizations that are closely related as one client, even if they have signed separate contractual agreements with us for different brands or different solutions. We believe that our ability to increase our client base is a leading indicator of our ability to grow revenue. For more information about our clients, see the section of this prospectus titled “Business—Clients.”

 

Revenue per Active Client

 

Revenue per active client is calculated as revenue recognized during the period divided by the average number of active clients for the period. One of our key goals is to provide exceptional client service to drive client lifetime value. Our experience indicates that the better client service we provide, the more likely we are to increase our revenue per active client and retain clients. In addition, we seek to increase revenue per active client by selling our solutions to new brands within existing clients or selling additional solutions to existing clients. Indeed, many of our clients have multiple brands that have deployed our solutions. Increasing revenue per active client coupled with high client retention maximizes lifetime client value and, by extension, the value of our

 

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business. In the future, we may choose to enter new market segments, such as the small and medium size business segment, and our revenue per client may decline as a result. However, we would expect to develop solutions and operating models that are appropriately matched to the revenue for those new segments.

 

Active Client Retention Rate

 

Active client retention rate is calculated based on the number of active clients at period end that were also active clients at the start of the period divided by the number of active clients at the start of the period. As mentioned above, we believe that our ability to retain our clients and expand their use of our solutions over time is a leading indicator of the stability of our revenue base and the long-term value of our client relationships.

 

Revenue per Employee

 

Revenue per employee is calculated as revenue recognized during the period divided by the average number of full time employees for the period, excluding content moderators. We believe revenue per employee is a leading indicator of our productivity and operating leverage, and we monitor revenue per employee as an indicator of our profitability because a significant portion of our cost of revenue and operating expenses are driven by our number of employees. The growth of our business is dependent on our ability to hire the talented people we require to effectively capitalize on our market opportunity and scale with rapid growth while maintaining a high level of client service. As a result, we expect revenue per employee to decrease in periods of investment when we add employees in advance of anticipated growth, particularly in periods when we are developing new markets or solutions. Our objective is to balance our investments in growth with return on investment over time and to consistently build operating leverage through productivity gains, thus increasing revenue per employee over time.

 

Key Components of Our Consolidated Statements of Operations

 

Revenue

 

We generate revenue principally from fixed commitment subscription contracts under which we provide clients with various services, including access to our hosted software platform. We sell these services under contractual agreements that are generally one year in length. Clients typically commit to fixed rate fees for the service term, payable in advance. Revenue from these agreements is recognized ratably over the period of service and any revenue that does not meet recognition criteria is recorded as deferred revenue on our balance sheet. We invoice clients on varying billing cycles, including annually, quarterly and monthly; therefore, our deferred revenue balance does not represent the total contract value of our non-cancelable subscription agreements. Fees payable under these agreements are due in full and non-refundable regardless of the actual use of the service and contain no general rights of return. We have a growing, diverse, global and balanced client base, and no single client accounted for more than 10.0% of our revenue in fiscal year 2011.

 

Cost of Revenue

 

Cost of revenue consists primarily of personnel costs and related expenses associated with employees and contractors who provide our subscription services. This includes the costs of our implementation team, which were $1.4 million, $4.3 million and $9.3 million in fiscal years 2009, 2010 and 2011, respectively, along with our content moderation teams and other support services provided as part of the fixed commitment subscription contracts. Cost of revenue also includes professional fees, including third-party implementation support, travel-related expenses and an allocation of general overhead costs, including depreciation, facility and office-related expenses. Personnel costs include salaries, benefits, bonuses and stock-based compensation. We generally increase our capacity, particularly in the areas of implementation and support, ahead of the growth in revenue we

 

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expect those investments to drive, which can result in lower margins in the given investment period. For example, as a direct result of such investments in fiscal year 2010 and fiscal year 2011, we have seen gross profit percentages reduce from 63.0% in fiscal year 2009 to 60.3% in fiscal year 2011.

 

Cost of revenue also includes hosting costs and the amortization of capitalized development costs incurred in connection with our hosted software platform. The amortization associated with capitalized internal-use software development costs was $0.2 million, $0.4 million and $0.6 million for fiscal years 2009, 2010 and 2011, respectively, and has not been material to our cost of revenue. The balance of capitalized internal-use software development costs as of April 30, 2010 and 2011 was $1.6 million and $2.7 million, respectively. We allocate general overhead expenses to all departments based on the number of employees in each department, which we consider to be a fair and representative means of allocation. As such, general overhead expenses, including depreciation and facilities costs, are reflected in our cost of revenue.

 

We intend to continue to invest additional resources in our client services teams and in the capacity of our hosting service infrastructure and, as we continue to invest in technology innovation through our research and development organization, we may also see an increase in the amortization expense associated with the capitalization of development costs incurred in connection with enhancing our software architecture and adding new features and functionality to our platform. The level and timing of investment in these areas could affect our cost of revenue, both in terms of absolute dollars and as a percentage of revenue in the future.

 

Operating Expenses

 

We classify our operating expenses into three categories: sales and marketing; research and development; and general and administrative. In each category, our operating expenses consist primarily of personnel costs, marketing program expenses, professional fees and travel-related expenses, as applicable. In addition, we allocate general overhead expenses to all departments based on the number of employees in each department, which we consider to be a fair and representative means of allocation and, as such, general overhead expenses, including depreciation and facilities costs, are reflected in each of our operating expense categories. Operating expenses grew from $19.1 million in fiscal year 2009 to $58.6 million in fiscal year 2011 due primarily to the increase in our number of full-time employees from 172 at April 30, 2009 to 494 at April 30, 2011.

 

Sales and marketing. Sales and marketing expenses consist primarily of personnel costs for our sales, marketing and business development employees and executives, including salaries, benefits, stock-based compensation expense, bonuses and commissions earned by our sales personnel. Also included are non-personnel costs such as professional fees, an allocation of our general overhead expenses and the costs of our marketing and brand awareness programs. Our marketing programs include our Social Commerce Summits in the United States and Europe, regional user groups, corporate communications, public relations and other brand building and product marketing expenses. We expense sales commissions when a client contract is executed because we believe our obligation to pay a sales commission arises at that time. We plan to continue investing in sales and marketing by increasing the number of direct sales personnel, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events, which we believe will enable us to add new clients and increase penetration within our existing client base. We expect that, in the future, sales and marketing expenses will increase and continue to be our largest operating cost.

 

Research and development. Research and development expenses consist primarily of personnel costs for our product development employees and executives, including salaries, benefits, stock-based compensation expense and bonuses. Also included are non-personnel costs such as professional fees payable to third-party development resources and an allocation of our general overhead expenses. The majority of our research and development efforts are focused on enhancing our software architecture and adding new features and functionality to our platform to address social and business trends as they evolve, and we anticipate increasing this focus on innovation through technology. We therefore expect that, in the future, research and development expenses will increase, as will the amount of development expenses capitalized in connection with our internal-use hosted software platform.

 

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General and administrative. General and administrative expenses consist primarily of personnel costs, including salaries, benefits, stock-based compensation expense and bonuses for our administrative, legal, human resources, finance, accounting and information technology employees and executives. Also included are non-personnel costs, such as travel-related expenses, professional fees and other corporate expenses, along with an allocation of our general overhead expenses. We expect to incur incremental costs associated with supporting the growth of our business, both in terms of size and geographical diversity, and to meet the increased compliance requirements associated with our transition to and operation as a public company. Those costs include increases in our accounting and legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act. As a result, we expect our general and administrative expenses to increase in absolute dollars in future periods but to decrease as a percentage of revenue over time.

 

Other Income (Expense)

 

Other income (expense) consists primarily of interest income and foreign exchange gains and losses. Interest income represents interest received on our cash and investments. We expect interest income to increase in periods subsequent to the completion of this offering as we anticipate an increase in our cash and cash equivalents balance from the proceeds. Foreign exchange gains and losses arise from revaluations of foreign currency denominated monetary assets and liabilities.

 

Income Tax Expense

 

As a result of our current net operating loss position in the United States, income tax expense consists primarily of corporate income taxes resulting from profits generated in foreign jurisdictions by wholly-owned subsidiaries, along with state income taxes payable in the United States. We expect our income tax expense to increase in the future, as our profits increase both in the United States and in foreign jurisdictions.

 

Results of Operations

 

The following tables set forth our results of operations for the specified periods. The period-to-period comparisons of results are not necessarily indicative of results for future periods.

 

     Year Ended April 30,  
     2009     2010     2011  
     (in thousands)  

Consolidated Statements of Operations Data:

  

Revenue

   $   22,472      $   38,648      $     64,482   

Cost of revenue(1)

     8,307        15,191        25,615   
  

 

 

   

 

 

   

 

 

 

Gross profit

     14,165        23,457        38,867   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Sales and marketing(1)

     11,260        17,803        34,568   

Research and development(1)

     3,444        5,828        10,847   

General and administrative(1)

     4,442        7,651        13,156   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,146        31,282        58,571   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (4,981     (7,825     (19,704

Total other income, net

     98        56        208   
  

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (4,883     (7,769     (19,496

Income tax expense

     125        205        561   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,008   $ (7,974   $ (20,057
  

 

 

   

 

 

   

 

 

 

Other Financial Data:

      

Adjusted EBITDA(2)

   $ (3,340   $ (4,211   $ (13,317
  

 

 

   

 

 

   

 

 

 

 

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  (1)   Includes stock-based compensation expense as follows:

 

Cost of revenue

   $ 319       $ 604       $ 978   

Sales and marketing

     469         924         1,122   

Research and development

     258         469         731   

General and administrative

     281         636         1,850   
  

 

 

    

 

 

    

 

 

 
   $   1,327       $   2,633       $   4,681   
  

 

 

    

 

 

    

 

 

 
  (2)   We define Adjusted EBITDA as net loss adjusted for stock-based compensation expense, adjusted depreciation and amortization (which excludes amortization of capitalized development costs), income tax expense and other income, net. See footnote (3) on page 39 to the table in the section of this prospectus titled “Selected Consolidated Financial and Other Data” for a reconciliation of net income to Adjusted EBITDA.

 

     Year Ended April 30,  
         2009             2010             2011      

Consolidated Statements of Operations Data:

      

Revenue

     100.0     100.0     100.0

Cost of revenue(1)

     37.0        39.3        39.7   
  

 

 

   

 

 

   

 

 

 

Gross profit

     63.0        60.7        60.3   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Sales and marketing(1)

     50.1        46.1        53.6   

Research and development(1)

     15.3        15.1        16.8   

General and administrative(1)

     19.8        19.8        20.4   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     85.2        80.9        90.8   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (22.2     (20.2     (30.6

Total other income, net

     0.4        0.1        0.3   
  

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (21.7     (20.1     (30.2

Income tax expense

     0.6        0.5        0.9   
  

 

 

   

 

 

   

 

 

 

Net loss

     (22.3 )%      (20.6 )%      (31.1 )% 
  

 

 

   

 

 

   

 

 

 

Other Financial Data:

      

Adjusted EBITDA(2)

     (14.9 )%      (10.9 )%      (20.7 )% 
  

 

 

   

 

 

   

 

 

 

 

  (1)   Includes stock-based compensation expense as follows:

 

Cost of revenue

     1.4     1.6      1.5

Sales and marketing

     2.1        2.4         1.7   

Research and development

     1.1        1.2         1.1   

General and administrative

     1.3        1.6         2.9   
  

 

 

   

 

 

    

 

 

 
     5.9     6.8      7.3
  

 

 

   

 

 

    

 

 

 

 

  (2)   We define Adjusted EBITDA as net loss adjusted for stock-based compensation expense, adjusted depreciation and amortization (which excludes amortization of capitalized development costs), income tax expense and other income, net. See footnote (3) on page 39 to the table in the section of this prospectus titled “Selected Consolidated Financial and Other Data” for a reconciliation of net income to Adjusted EBITDA.

 

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Comparison of Our Fiscal Years Ended April 30, 2010 and 2011

 

Revenue

 

     Year Ended April 30,  
     

    2010    

         2011          % Change  
     (dollars in thousands)  

Revenue

   $   38,648       $   64,482         66.8

 

Our revenue increased by $25.8 million, or 66.8%, in fiscal year 2011 compared to fiscal year 2010. Of this increase, $11.3 million was generated from a 66.3% increase in the number of clients utilizing our platform as we continued to increase the market penetration of our solutions during the period. $14.5 million of the increase was generated from existing clients, primarily from a combination of strong client retention, which was 89.4% from 2010 to 2011, and, in the majority of cases, this resulted in a full year of revenue from clients who became active only part way through the previous year, and from increasing revenue per active client (in thousands), from $131.6 to $135.3, over the same period.

 

Cost of Revenue and Gross Profit Percentage

 

     Year Ended April 30,  
     2010     2011     % Change  
     (dollars in thousands)  

Cost of revenue

   $   15,191      $   25,615        68.6

Gross profit

     23,457        38,867        65.7   

Gross profit percentage

     60.7     60.3  

 

Cost of revenue increased $10.4 million, or 68.6%, in fiscal year 2011 compared to fiscal year 2010. This increase was primarily due to an increase in personnel-related expenses of $6.2 million as we increased the size of our client services team. We also experienced increases of $1.0 million in facility and office-related costs, $0.8 million in hosting costs, $0.7 million in travel-related expenses, $0.7 million of depreciation and amortization expense and $0.6 million in professional fees in fiscal year 2011 compared to fiscal year 2010, primarily as a result of the overall increase in the size of the support operations.

 

Operating Expenses

 

     Year Ended April 30,  
     2010     2011    

 

 
     Amount      % of
Revenue
    Amount      % of
Revenue
    % Change  
     (dollars in thousands)  

Sales and marketing

   $ 17,803         46.1   $ 34,568         53.6     94.2

Research and development

     5,828         15.1        10,847         16.8        86.1   

General and administrative

     7,651         19.8        13,156         20.4        72.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total operating expenses

   $   31,282         80.9   $   58,571         90.8     87.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

Sales and marketing. Sales and marketing expenses increased $16.8 million, or 94.2%, in fiscal year 2011 compared to fiscal year 2010. This increase was primarily due to an increase in personnel-related expenses of $13.0 million, as we expanded our direct sales organization. We also experienced increases of $1.2 million in marketing expenses, $0.8 million in travel and entertainment, $0.7 million in facility and office-related costs, $0.4 million in professional fees and $0.3 million in bad debt expense in fiscal year 2011 compared to fiscal year 2010.

 

Research and development. Research and development expenses increased $5.0 million, or 86.1%, in fiscal year 2011 compared to fiscal year 2010. This increase was due primarily to an increase in personnel-related expenses of $4.8 million as we continued to expand our research and development team.

 

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General and administrative. General and administrative expenses increased $5.5 million, or 72.0%, in fiscal year 2011 compared to fiscal year 2010. This increase was due primarily to an increase in personnel related expenses of $4.4 million, as we continued to hire talented personnel who possess the necessary skills and training required to support the growth of our business and our plans to operate as a public company. The remaining increase was driven primarily by professional fees, particularly in the area of recruiting.

 

Other Income, Net

 

     Year Ended April 30,  
     2010     2011    

 

 
     Amount      % of
Revenue
    Amount      % of
Revenue
    % Change  
     (dollars in thousands)  

Interest income

   $ 53         0.1   $ 19         0.0     (64.2 )% 

Other income (expense)

     3         0.0        189         0.3          
  

 

 

    

 

 

   

 

 

    

 

 

   

Total other income, net

   $   56         0.1   $   208         0.3     271.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

Interest income, which is not material to our operations, decreased by a nominal amount in fiscal year 2011 compared to fiscal year 2010 as a result of lower short-term interest rates. Other income increased by $0.2 million in fiscal year 2011 as a result of foreign exchange gains from our foreign currency denominated monetary assets, primarily accounts receivable held in the United States.

 

Income Tax Expense

 

     Year Ended April 30,  
     2010     2011    

 

 
     Amount      % of
Revenue
    Amount      % of
Revenue
    % Change  
     (dollars in thousands)  

Income tax expense

   $   205         0.5   $   561         0.9     173.7

 

Income tax expense in fiscal year 2011 increased by $0.4 million compared to fiscal year 2010 as a result of increased profits generated in foreign jurisdictions by our wholly owned subsidiaries. We expect our income tax expense to increase in the future as our profits increase and we utilize our federal net operating losses in the United States.

 

Comparison of Our Fiscal Years Ended April 30, 2009 and 2010

 

Revenue

 

      Year Ended April 30,  
          2009              2010          % Change  
     (dollars in thousands)  

Revenue

   $   22,472       $   38,648         72.0

 

Revenue increased $16.2 million, or 72.0%, in fiscal year 2010 compared to fiscal year 2009. Of this increase, $7.3 million was generated from a 76.4% increase in the number of clients utilizing our platform as we increased the market penetration of our solutions during the period. Of the increase, $8.9 million was primarily generated from existing clients as a result of strong client retention, which was 88.2% from 2009 to 2010, and in the majority of cases, this resulted in a full year of revenue from clients who became active only part way through the previous year.

 

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Cost of Revenue and Gross Profit Percentage

 

     Year Ended April 30,  
     2009     2010     % Change  
     (dollars in thousands)  

Cost of revenue

   $ 8,307      $   15,191        82.9

Gross profit

     14,165        23,457        65.6

Gross profit percentage

     63.0     60.7  

 

Cost of revenue increased $6.9 million, or 82.9%, in fiscal year 2010 compared to fiscal year 2009. This increase was due primarily to an increase in personnel-related expenses of $4.6 million. We also experienced increases of $1.2 million in professional fees, a majority of which was attributable to outsourced third-party implementation support, $0.4 million in facility- and office-related costs and $0.3 million in hosting services in fiscal year 2011 compared to fiscal year 2010.

 

Operating Expenses

 

     Year Ended April 30,  
     2009     2010    

 

 
     Amount      % of
Revenue
    Amount      % of
Revenue
    % Change  
     (dollars in thousands)  

Sales and marketing

   $   11,260         50.1   $   17,803         46.1     58.1

Research and development

     3,444         15.3        5,828         15.1        69.2   

General and administrative

     4,442         19.8        7,651         19.8        72.2   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total Operating Expenses

   $ 19,146         85.2   $ 31,282         80.9     63.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

Sales and marketing. Sales and marketing expenses increased $6.5 million, or 58.1%, in fiscal year 2010 compared to fiscal year 2009. This increase was due primarily to an increase in personnel-related expenses of $4.6 million as we grew our sales organization. We also experienced increases of $0.7 million in travel-related expenses, $0.7 million in professional fees and $0.4 million in marketing expenses in fiscal year 2010 compared to fiscal year 2009.

 

Research and development. Research and development expenses increased $2.4 million, or 69.2%, in fiscal year 2010 compared to fiscal year 2009. This increase was due primarily to an increase in personnel-related expenses of $2.0 million as we expanded our research and development team to facilitate the growth of our business through innovation in technology.

 

General and administrative. General and administrative expenses increased $3.2 million, or 72.2%, in fiscal year 2010 compared to fiscal year 2009. This increase was due primarily to an increase in personnel-related expenses of $1.5 million as we hired personnel to keep pace with the growth of our business. We also experienced increases of $0.9 million in depreciation and amortization and $0.7 million in additional professional fees.

 

Other Income, Net

 

     Year Ended April 30,  
     2009     2010    

 

 
     Amount     % of
Revenue
    Amount      % of
Revenue
    % Change  
     (dollars in thousands)  

Interest income

   $   190        0.8   $   53         0.1     (72.1 )% 

Other income (expense)

     (92     (0.4     3         0.0        (103.3
  

 

 

   

 

 

   

 

 

    

 

 

   

Total other income, net

   $ 98        0.4   $ 56         0.1     (42.9 )% 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

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Other income, net decreased by a nominal amount in fiscal year 2010 as compared to fiscal year 2009 as a result of a decrease in interest income of $0.1 million due to lower short-term interest rates offset by foreign exchange gains of $0.1 million from foreign currency denominated monetary assets, which are primarily accounts receivable held in the United States.

 

Income Tax Expense

 

     Year Ended April 30,  
     2009     2010    

 

 
     Amount      % of
Revenue
    Amount      % of
Revenue
    % Change  
     (dollars in thousands)  

Income tax expense

   $   125         0.6   $   205         0.5     64.0

 

Income tax expense increased $0.1 million from fiscal year 2009 to fiscal year 2010, primarily as a result of an increase in profits generated in foreign jurisdictions by our wholly owned subsidiaries.

 

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Quarterly Results of Operations Data

 

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters beginning May 1, 2009 and ending April 30, 2011, as well as the percentage of our revenue that each line item represented. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of our management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period. Percent of revenue figures are rounded and therefore may not subtotal exactly.

 

    Three Months Ended  
    July 31,
2009
    October 31,
2009
    January 31,
2010
    April 30,
2010
    July 31,
2010
    October 31,
2010
    January 31,
2011
    April 30,
2011
 
    (in thousands, except client and employee data)  

Revenue

  $ 7,427      $ 9,495      $   10,324      $   11,402      $   12,952      $   14,943      $   17,306      $   19,281   

Cost of revenue

    2,891        3,394        3,909        4,997        5,232        6,064        7,027        7,292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    4,536        6,101        6,415        6,405        7,720        8,879        10,279        11,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

               

Sales and marketing

    3,371        4,027        4,557        5,848        7,797        8,063        8,592        10,116   

Research and development

    1,012        1,408        1,591        1,817        2,406        2,641        2,801        2,999   

General and administrative

    1,444        2,094        1,694        2,418        2,944        3,333        3,280        3,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    5,827        7,529        7,842        10,083        13,147        14,037        14,673        16,714   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (1,291     (1,428     (1,427     (3,678     (5,427     (5,158     (4,394     (4,725

Total other income (expense), net

    61        63        (82     14        (55     107        (50     206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (1,230     (1,365     (1,509     (3,664     (5,482     (5,051     (4,444     (4,519

Income tax expense

    33        36        40        97        136        136        149        140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $   (1,263   $   (1,401   $ (1,549   $ (3,761   $ (5,618   $ (5,187   $ (4,593   $ (4,659
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Reconciliation of net loss to Adjusted EBITDA:                

Stock-based compensation expense

    550        609        651        823        1,065        1,085        1,253        1,278   

Adjusted depreciation and amortization

    107        365        245        264        387        423        446        450   

Income tax expense

    33        36        40        96        136        136        149        140   

Total other (income) expense, net

    (61     (63     82        (14     55        (107     50        (206
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

  $ (634   $ (454   $ (531   $ (2,592   $ (3,975   $ (3,650   $ (2,695   $ (2,997
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Active clients (at period end)

    259        298        334        377        432        493        532        587   

Full-time employees (at period end):

    185        225        265        324        381        441        467        494   

 

  (1)   See footnote (3) on page 39 to the table in the section of this prospectus titled “Selected Consolidated Financial and Other Data” for further discussion regarding Adjusted EBITDA.

 

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    Three Months Ended  
    July 31,
2009
    October 31,
2009
    January 31,
2010
    April 30,
2010
    July 31,
2010
    October 31,
2010
    January 31,
2011
    April 30,
2011
 
    (as a percent of revenue)  

Revenue

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of revenue

    38.9        35.7        37.9        43.8        40.4        40.6        40.6        37.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    61.1        64.3        62.1        56.2        59.6        59.4        59.4        62.2   

Operating expenses:

               

Sales and marketing

    45.4        42.4        44.1        51.3        60.2        54.0        49.6        52.5   

Research and development

    13.6        14.8        15.4        15.9        18.6        17.7        16.2        15.6   

General and administrative

    19.4        22.1        16.4        21.2        22.7        22.3        19.0        18.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    78.5        79.3        76.0        88.4        101.5        93.9        84.8        86.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (17.4     (15.0     (13.8     (32.3     (41.9     (34.5     (25.4     (24.5

Total other income (expense), net

    0.8        0.7        (0.8     0.1        (0.4     0.7        (0.3     1.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

    (16.6     (14.4     (14.6     (32.1     (42.3     (33.8     (25.7     (23.4

Income tax expense

    0.4        0.4        0.4        0.9        1.1        0.9        0.9        0.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (17.0 )%      (14.8 )%      (15.0 )%      (33.0 )%      (43.4 )%      (34.7 )%      (26.5 )%      (24.2 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Reconciliation of net loss to Adjusted EBITDA:                

Stock-based compensation expense

    7.4        6.4        6.3        7.2        8.2        7.3        7.2        6.6   

Adjusted depreciation and amortization

    1.4        3.8        2.4        2.3        3.0        2.8        2.6        2.3   

Income tax expense

    0.4        0.4        0.4        0.9        1.1        0.9        0.9        0.7   

Total other (income) expense, net

    (0.8     (0.7     0.8        (0.1     0.4        (0.7     0.3        (1.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

    (8.5 )%      (4.8 )%      (5.1 )%      (22.7 )%      (30.7 )%      (24.4 )%      (15.6 )%      (15.5 )% 

 

  (1)   See footnote (3) on page 39 to the table in the section of this prospectus titled “Selected Consolidated Financial and Other Data” for further discussion regarding Adjusted EBITDA.

 

Revenue increased sequentially in each of the quarters presented, primarily due to the addition of new clients along with subscription renewals and the purchase of additional solutions by existing clients. The number of our active clients increased from 229 at April 30, 2009 to 587 at April 30, 2011. In 2010 and 2011 we significantly increased the pace of our hiring to facilitate our client growth, increasing our full-time employees by 88.4% in fiscal year 2010 and 52.5% in fiscal year 2011 to 324 and 494, respectively. We increased full-time employees in all functions across the periods presented. Because we generally increase our capacity, particularly in the areas of implementation and support, ahead of the growth in revenue, we expect those investments to drive, our gross profit percentage has fluctuated on a quarterly basis as a result.

 

Total operating expenses have increased in each of the quarters presented due, primarily, to increased personnel related expenses associated with the additional employees in our sales and marketing, research and development and general and administrative organizations to support the growth of our business. Our sales and marketing expenses often fluctuate period to period as a percentage of revenue because of the variability in sales and related commissions, which is expensed in the period the client agreement is signed, and because we hire sales personnel in advance of anticipated growth. In addition, we have historically held our annual Social Commerce Summits in the United States and Europe in the quarters ended April 30 and October 31, respectively, and expensed the costs associated with those events in the period held. Research and development expenses have increased sequentially during the periods presented as a result of increased personnel costs associated with our continued investments in innovation. General and administrative expenses have also increased steadily during the periods presented with the exception of the quarter ended October 31, 2009, when we incurred some one-time costs associated with the move to a new corporate headquarters facility.

 

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Our quarterly operating results are likely to fluctuate. Some of the important factors that could cause our quarterly revenue and operating results to fluctuate include:

 

   

the timing and success of new solutions, product or service offerings and pricing policies by us or our competitors or any other change in the competitive dynamics of our industry;

 

   

our ability to sell additional solutions to existing clients and to add new clients;

 

   

our ability, and the ability of our clients, to implement our solutions in a timely manner;

 

   

the timing and effectiveness of our product development investments and delays in generating revenue from these solutions;

 

   

our ability to adjust our cost structure in response to reductions in revenue;

 

   

the cyclicality and discretionary nature of marketing spending, especially spending on social commerce solutions;

 

   

the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure and client acquisition;

 

   

our failure to achieve the growth rate that was anticipated by us in setting our operating and capital expense budget;

 

   

active client retention rates;

 

   

the timing differences between client acquisition costs and the revenue we recognize on sales of solutions to new clients;

 

   

the timing of expenses related to the development or acquisition of technologies or businesses and potential future charges for impairment of goodwill or intangible assets from acquired companies;

 

   

a change in the mix of new clients as a percentage of total customers; and

 

   

general economic, industry and market conditions.

 

The occurrence of one or more of these factors might cause our operating results to vary widely. As such, we believe that our quarterly results of operations, including the levels of our revenue and expenses, may vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance.

 

Liquidity and Capital Resources

 

As of April 30, 2011, we had an accumulated deficit of $40.8 million. Since inception in May 2005, we have raised $23.6 million in funding through private placements of our preferred stock and $2.6 million in proceeds from the exercise of options to purchase common stock. In connection with our most recent private placement in February 2010, we raised $3.0 million. Through April 30, 2011, we had used only $11.1 million of capital since inception, ending fiscal year 2011 with cash and cash equivalents of $15.1 million and no outstanding indebtedness. We believe that our existing cash and cash equivalents balance, together with cash generated from operations and the net proceeds from this offering, will be sufficient to meet our working capital requirements for at least the next 12 months.

 

We anticipate making significant investments in growth and initiatives designed to improve our operating efficiency for the foreseeable future, which may impact our ability to generate positive cash flow from operating activities in the near-term, and we therefore intend to ensure that we continue to have a loan facility at our disposal in order to be able to capitalize on growth opportunities as they arise. Our future capital requirements will depend on many factors, including our rate of client and revenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and the timing of introductions of new features and enhancements to our social commerce platform. To the extent that existing cash and short-term investments along with future cash flow from operations are insufficient to fund our future

 

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activities, we may need to raise additional funds through public or private equity or debt financing. We may also seek to invest in or acquire complementary businesses, applications or technologies, any of which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

 

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended April 30,  
     2009     2010      2011  
     (in thousands)  

Net cash provided by (used in) operating activities

   $ 173      $   5,166       $ (647

Net cash (used in) provided by investing activities

     (9,200     1,076         (2,282

Net cash provided by financing activities

     8,024        3,397         2,068   

 

Net Cash Provided by (Used in) Operating Activities

 

Cash provided by (used in) operating activities is primarily influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business, the increase in the number of clients using our platform and the amount and timing of client payments. Cash provided by operating activities has typically been generated from changes in our operating assets and liabilities, particularly in the area of deferred revenue, which have offset net losses, adjusted for non-cash expense items such as depreciation, amortization and stock-based compensation.

 

For fiscal year 2011, operating activities used $0.6 million of cash after changes in our operating assets and liabilities offset a net loss of $20.1 million, which included non-cash depreciation and amortization of $2.3 million, non-cash stock-based compensation of $4.7 million and non-cash bad debt expense of $0.5 million. Accounts payable and accrued liabilities increased $3.8 million and deferred revenue increased $15.0 million, partially offsetting an increase in accounts receivable of $5.0 million and an increase of $2.0 million in prepaid expenses and other assets. The increase in our deferred revenue and accounts receivable was primarily due to our growth in fiscal year 2011 and the increase in accounts payable and accrued liabilities reflects both a general increase in the size of our operation and also an improvement in vendor payment terms as we continue to improve the management of our working capital.

 

For fiscal year 2010, operating activities provided $5.2 million of cash after changes in our operating assets and liabilities offset a net loss in fiscal year 2010 of $8.0 million, which included non-cash depreciation and amortization of $1.4 million and non-cash stock-based compensation of $2.6 million. Accounts payable and accrued liabilities increased $4.8 million and deferred revenue increased $8.8 million, partially offsetting an increase in accounts receivable of $4.0 million and an increase of $0.6 million in prepaid expenses and other assets. The increase in our deferred revenue and accounts receivable was due to our growth in fiscal year 2010, and the increase in accounts payable and accrued liabilities reflects a general increase in the size of our operation.

 

For fiscal year 2009, operating activities provided $0.2 million of cash after changes in our operating assets and liabilities offset a net loss in fiscal year 2009 of $5.0 million, which included non-cash depreciation and amortization of $0.5 million and non-cash stock-based compensation of $1.3 million. Accounts payable and accrued liabilities increased $1.2 million and deferred revenue increased $4.6 million, partially offsetting an increase in accounts receivable of $2.6 million and an increase of $0.1 million in prepaid expenses and other assets. The increase in our deferred revenue and accounts receivable was due to our growth in fiscal year 2009, and the increase in accrued liabilities reflects the growth in our business activities.

 

Net Cash (Used in) Provided by Investing Activities

 

Our primary investing activities have consisted of purchases of property and equipment, including technology hardware and software to support our growth as well as costs capitalized in connection with the development of our internal-use hosted software platform. Purchases of property and equipment may vary from

 

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period to period due to the timing of the expansion of our operations and the development cycles of our internal-use hosted software platform. We expect to continue to invest in property and equipment and developing our software platform for the foreseeable future.

 

In fiscal year 2009, we invested $8.0 million in short-term certificates of deposit in order to obtain interest rate returns on our surplus cash. These investments matured in fiscal year 2010 and were not subsequently reinvested in fiscal year 2010 due to a deterioration in the short-term interest rates available.

 

Net Cash Provided by Financing Activities

 

Our financing activities have consisted primarily of net proceeds from the issuance of common and preferred stock and proceeds from the exercises of options to purchase common stock.

 

In fiscal year 2011, we received $2.1 million from the exercise of options to purchase common stock.

 

In fiscal year 2010, we issued Series E redeemable convertible preferred stock to raise $3.0 million and received $0.4 million from the exercise of options to purchase common stock.

 

In fiscal year 2009, we issued Series D redeemable convertible preferred stock to raise $7.9 million and received $0.1 million from the exercise of options to purchase common stock.

 

Contractual Obligations and Commitments

 

We have no purchase obligations or capital lease obligations. We have operating lease obligations related to our office leases, the largest of which is for our headquarters in Austin, Texas.

 

The following table summarizes our outstanding contractual obligations as of April 30, 2011:

 

     Payments Due by Period (in thousands)  
     Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 

Operating lease obligations

   $   4,827       $   2,616       $   1,664       $   547       $   —   

 

On July 18, 2007, we entered into a loan and security agreement, or the Loan Agreement, with a financial institution under which we secured a revolving line of credit with a borrowing capacity of up to $2.0 million. On November 30, 2008, we entered into an amendment to the Loan Agreement, increasing the borrowing capacity of the revolving line of credit to $7.0 million. On July 20, 2009, we entered into a second amendment that created a letter of credit subfacility, allowing us to have issued a standby letter of credit of $0.9 million as collateral for our office lease space in Austin, Texas, and on January 22, 2010, we entered into a third amendment, increasing the letter of credit sublimit to $1.0 million to increase the face amount of the letter of credit in connection with our expanded office lease space in Austin, Texas. On September 27, 2010, we entered into a fourth amendment to the Loan Agreement increasing the borrowing capacity of the revolving line of credit to $10.0 million with an option to increase the line to $15.0 million. The revolving line of credit expires on November 30, 2012.

 

Borrowings under the revolving line of credit are collateralized by substantially all of our assets. The Loan Agreement contains certain financial and nonfinancial covenants. As of the date of this prospectus, we are in compliance with the terms of these covenants, and there are no loans outstanding under our line of credit.

 

On November 4, 2008, we entered into a pledge and security agreement with a financial institution for a standby letter of credit for credit card services from a separate financial institution for an amount not to exceed $0.1 million. We pledged a security interest in our money market account, in which the balance must equal at least the credit extended. On March 17, 2010, the standby letter of credit for credit card services was increased to

 

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$0.3 million. On May 18, 2011, the standby letter of credit for credit card services was increased to $0.5 million. This letter of credit expires annually and the pledged security interest is recorded as short-term restricted cash in our financial statements.

 

Off-Balance Sheet Arrangements

 

During fiscal years 2009, 2010 and 2011, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Critical Accounting Policies and Estimates

 

We prepare our consolidated financial statements in accordance with GAAP and include the accounts of Bazaarvoice, Inc. and its wholly owned subsidiaries. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. To the extent there are material differences between these estimates and our actual results, our consolidated financial statements will be affected.

 

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in this prospectus, and we believe that the accounting policies discussed below involve the greatest degree of complexity and exercise of judgment by our management. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations and, accordingly, we believe the policies described below are the most critical for understanding and evaluating our financial condition and results of operations.

 

Revenue Recognition

 

We generate revenue principally from the sale of subscriptions to our hosted social commerce platform and sell our application services pursuant to service agreements that are generally one year in length. Our client does not have the right to take possession of the software supporting the application service at any time, nor do the arrangements contain general rights of return. We recognize revenue when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery of the service has occurred, the fee is fixed or determinable, and collection is reasonably assured. We account for these arrangements by recognizing the arrangement consideration for the application service ratably over the term of the related agreement, commencing upon the later of the agreement start date or when all revenue recognition criteria have been met.

 

Deferred revenue consists of subscription fees paid in advance of revenue recognition and is recognized as revenue recognition criteria are met. We invoice clients in a variety of installments and, consequently, the deferred revenue balance does not represent the total contract value of its non-cancelable subscription agreements. Deferred revenue that will be recognized during the succeeding 12 month period is recorded as current deferred revenue and the remaining portion is recorded as non-current deferred revenue.

 

Stock-Based Compensation

 

We measure and recognize expense for stock-based compensation based on the grant date fair value of the award and generally recognize the expense, net of estimated forfeitures, on a straight-line basis over the requisite service period.

 

Because our stock is not publicly traded, we must estimate the fair value of our common stock for purposes of determining the fair value of our option awards, as discussed in “—Valuations of Common Stock” below. Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes

 

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option pricing model to determine the fair value of our stock option awards. The determination of the grant date fair value of our stock option awards using an option pricing model is affected by the estimated fair value per share of the common stock underlying those options as well as assumptions regarding a number of other complex and subjective variables. These variables include our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

 

   

Expected Volatility. Because we do not have a trading history for our common stock, we have estimated the expected stock price volatility for our common stock by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of public companies in the technology industry, primarily in the subscription software business. 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 Interest Rate. The risk-free interest rate assumption used is based on observed market interest rates appropriate for the term of employee options.

 

   

Expected Term. We estimated the expected term for a “plain vanilla” option using the simplified method allowed under current guidance, which uses the midpoint between the graded vesting period and the contractual termination date since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

 

   

Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

 

We used the following assumptions in our application of the Black-Scholes option pricing model for fiscal years 2009, 2010 and 2011:

 

     Year Ended April 30,
     2009   2010   2011

Expected volatility

   61% - 66%   62% - 68%   58% - 62%

Risk-free interest rate

   2.20% - 3.65%   2.00% - 2.95%   1.75% - 2.75%

Expected term (in years)

   5.00 - 6.25   5.00 - 6.25   6.00 - 6.25

Dividend yield

   0%   0%   0%

 

Future expense amounts for any particular period could be affected by changes in our assumptions or changes in market conditions.

 

We recorded stock-based compensation expense of $1.3 million, $2.6 million and $4.7 million for fiscal years 2009, 2010 and 2011, respectively.

 

Costs for equity instruments issued in exchange for the receipt of goods or services from non-employees are measured at the fair market value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of the date on which there first exists a firm commitment for performance by the provider of goods or services or on the date performance is complete, using the Black-Scholes option pricing model.

 

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Valuations of Common Stock

 

During fiscal years 2011 and 2012, we granted options to purchase shares of common stock with exercise prices as follows:

 

     Options
Granted
     Exercise Price
Per Share
     Common
Stock

Fair
Value
     Aggregate
Grant Date

Fair Value
 
           

May 20, 2010

     1,049,574       $ 4.20       $ 4.20       $ 2,620,727   

July 8, 2010

     112,700         4.85         4.85         273,962   

August 11, 2010

     245,727         4.86         4.86         681,137   

September 16, 2010

     1,169,617         4.86         4.86         3,278,885   

November 16, 2010

     945,283         4.86         4.86         2,628,289   

December 14, 2010

     29,700         4.86         4.86         84,075   

February 10, 2011

     126,550         5.35         5.35         385,514   

April 19, 2011

     547,900         6.28         6.28         1,943,675   

May 24, 2011

     508,939         6.58         6.58         1,856,905   

August 1, 2011

     904,008         8.58         8.58         4,249,651   

August 16, 2011

     166,400         8.58         8.58         772,845   

 

Our board of directors determined the fair value of the common stock underlying our stock options and intended that all options granted be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. Determining the fair value of our stock required our board of directors to make complex and subjective judgments. We considered a combination of valuation methodologies, including income, market and transaction approaches. The most significant factors considered by our board of directors when determining the fair value of our common stock were as follows:

 

   

our historical and future operating performance;

 

   

our financial condition at the grant date;

 

   

the liquidation rights and other preferences of our preferred stock;

 

   

any recent privately negotiated sales of our securities to independent third parties;

 

   

the probability, value and dates of future valuations, including in connection with an initial public offering;

 

   

the market performance of comparable publicly traded companies;

 

   

the transaction economics of comparable publicly traded companies sold or merged;

 

   

the business risks inherent in our business and in technology companies generally; and

 

   

current market conditions.

 

We have regularly conducted contemporaneous valuations to assist us in the determination of the fair value of our common stock for each stock option grant and other stock-based awards. From March 31, 2010 to March 31, 2011, these valuations were prepared on a calendar quarter basis. In April 2011, our board of directors determined that we should embark upon a process to identify and evaluate underwriters for a possible initial public offering and concluded that, as a result, we should obtain contemporaneous valuations on a more frequent basis to ensure any stock-based award would reflect the most accurate and up-to-date factors, particularly pertaining to performance of our public company comparables. As part of this more frequent valuation initiative, we conducted a valuation at the end of April 2011, which was used for our May 2011 option grants, and then began obtaining valuations immediately prior to each option grant date thereafter. During the periods presented, our board of directors was regularly apprised that each valuation was being conducted and considered the relevant objective and subjective factors deemed important. The deemed fair value per share of common stock underlying our stock option grants and other stock-based awards was determined by our board of directors with input from management at each grant date.

 

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Significant Factors, Assumptions and Methodologies Used in Determining Fair Value of Common Stock

 

For the periods presented, valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. As of January 15, 2010, due to the increased likelihood of an eventual initial public offering, we began using the Probability Weighted Expected Return Method, or the PWERM, to prepare our contemporaneous valuation of the fair value of the common stock in connection with stock-based awards.

 

Using the PWERM, the value of our common stock is estimated based upon an analysis of varying values for our common stock assuming the following possible future events for our company:

 

   

initial public offering;

 

   

sale or merger;

 

   

continuing as a private company; or

 

   

bankruptcy or liquidation.

 

For these possible events, a range of equity values is estimated based on a number of factors, which include market and income valuation approaches that factor in revenue multiples based on the performance of our public company comparables, along with estimates by, and expectations of, our board of directors and management. For each equity value scenario, we determined the appropriate aggregate value to be allocated to holders of our shares of common stock based on the rights and preferences of each class and series of our stock at that time. Next, we estimated the timing of possible future event dates and applied a discount rate, based on our estimated weighted average cost of capital, to the future equity values in the initial public offering and sale or merger scenarios to account for the time-value of money. We then multiplied the discounted value of common stock under each scenario by an estimated probability for each of the possible events, resulting in a probability-weighted value per share of common stock. Finally, we applied a discount for lack of marketability to the weighted value per share to determine a value per common share. As noted, application of this approach involves the use of estimates, judgment and assumptions, such as future cash flows and selection of comparable companies. Changes in our assumptions or the interrelationship of those assumptions impacted the valuations as of each valuation date.

 

Since January 15, 2010, upon adoption of the PWERM, we assigned a substantially higher probability to the initial public offering scenario at each valuation date than the other scenarios, assuming a 65.0% probability beginning January 15, 2010 and increasing to 85.0% in July 2011. We have assumed a higher probability of an initial public offering because of our belief that consummating an initial public offering will increase awareness of our company among potential clients and improve our competitive position, thereby facilitating growth.

 

When considering comparable public companies for the purposes of valuing our common stock, from December 31, 2009 through April 30, 2011, we utilized essentially the same comparable company set, adjusted to remove companies sold or merged during the periods. This set was primarily composed of technology companies that operated a subscription-based business. We believed these companies had cost structures generally similar to our own and we therefore believed these companies were comparable to us for the purposes of valuing our common stock. We evaluated our set of comparable companies as of each valuation date, particularly with respect to valuation in the initial public offering scenario. All the material factors considered as of each option grant date are explained below.

 

In July 2011, we established an enhanced comparable company set for the purposes of determining fair value for the initial public offering scenario in the PWERM, which had been identified as part of the process to select underwriters in connection with a potential public offering and based on subsequent discussions with investment analysts. The enhanced comparable company set differed from the previous set in that we added

 

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a group of subscription software companies, many of whom we believe are also leaders in the industry sectors they serve. Based on discussions with these potential underwriters and analysts, we expect investors to value us similarly to the enhanced comparable company set because we share these high growth and leadership characteristics and therefore we believe that, as we near an initial public offering, these companies provide a better indication of how our company will be valued for purposes of the initial public offering scenario.

 

While our board of directors considers all relevant data, the key drivers to our valuation over recent years have been recent privately negotiated sales of our securities, the current public market revenue multiples of our comparable company set and the probability and timing of an initial public offering. As we approached our initial public offering, we increased the probability associated with an initial public offering scenario and decreased our expected initial public offering timing, each of which significantly increased the impact of the initial public offering on our valuation using the PWERM. This change in our probability and timing, driven in large part by the decision to select and appoint a syndicate of underwriters, coupled with changes in the trading multiples of our comparable company set, contributed to the substantial increase in our assumed initial public offering valuation and the resulting increase in our common stock fair value in August 2011 relative to April 2011, as quantified below.

 

A discussion of the determination of the fair value of our common stock on our option grant dates from May 1, 2010 to August 16, 2011 is provided below:

 

May 20, 2010. Our board of directors granted options to purchase 1,049,574 shares of common stock with an exercise price per share of $4.20 on May 20, 2010. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered an independent valuation report for our common stock as of March 31, 2010. The independent valuation report reflected a fair value for our common stock of $4.20 per share as of March 31, 2010. In granting options at $4.20 per share on May 20, 2010, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $401.0 million on a fully diluted basis as of March 31, 2010, which was determined using the PWERM;

 

   

a discount rate of 27.6%, based on our estimated weighted average cost of capital;

 

   

a lack of marketability discount of 22.9%;

 

   

liquidity event scenario probabilities of 65.0% for an initial public offering, 30.0% for a sale or merger and 2.5% for continuing as a private company and 2.5% for a dissolution, as we felt the latter two scenarios were unlikely at this point. Our board of directors determined that stock market conditions in general, and the market for initial public offerings in particular, were such that there was only a 65.0% probability that we would be able to successfully complete an initial public offering and that the offering would take place in fiscal year 2011;

 

   

increased exit value multiples of our comparable company set since the previous valuation;

 

   

the price per share at which certain stockholders recently sold shares of our capital stock in private transactions; and

 

   

management’s expectation that we would achieve forecasted revenue for the quarter ended July 31, 2010.

 

Based on these factors, our board of directors concluded that it was appropriate to increase the fair value of our common stock from $4.13 per share at March 16, 2010 to $4.20 per share at May 20, 2010, an increase of 1.7%.

 

July 8, 2010. Our board of directors granted options to purchase 112,700 shares of common stock with an exercise price per share of $4.85 on July 8, 2010. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered an

 

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independent valuation report for our common stock as of March 31, 2010. In granting options at $4.85 per share on July 8, 2010, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $401.0 million as of March 31, 2010, which was determined using the PWERM;

 

   

a discount rate of 27.6%, based on our estimated weighted average cost of capital;

 

   

a lack of marketability discount of 22.9%;

 

   

liquidity event scenario probabilities of 65.0% for an initial public offering, 30.0% for a sale or merger, 2.5% for continuing as a private company and 2.5% for a dissolution, as we felt the latter two scenarios were unlikely at this point. Our board of directors determined that stock market conditions in general, and the market for initial public offerings in particular, were such that there was only a 65.0% probability that we would be able to successfully complete an initial public offering and that the offering would take place in fiscal year 2011;

 

   

increased exit value multiples of our comparable company set since the previous valuation;

 

   

recent third-party, arm’s length transactions in which certain of our stockholders sold shares of our capital stock at a purchase price per share of $4.85; and

 

   

management’s expectation that we would achieve forecasted revenue for the quarter ended July 31, 2010.

 

Based on these factors, our board of directors concluded that it was appropriate to increase the fair value of our common stock from $4.20 per share at May 20, 2010 to $4.85 per share at July 8, 2010, an increase of 15.5%.

 

August 11, 2010. Our board of directors granted options to purchase 245,727 shares of common stock with an exercise price per share of $4.86 on August 11, 2010. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered an independent valuation report for our common stock as of June 30, 2010 delivered to us on August 10, 2010, which reflected a fair value for our common stock of $4.86 per share as of June 30, 2010. In granting options at $4.86 per share on August 11, 2010, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $421.5 million as of June 30, 2010, which was determined using the PWERM;

 

   

a discount rate of 26.0%, based on our estimated weighted average cost of capital;

 

   

a lack of marketability discount of 20.9%;

 

   

liquidity event scenario probabilities of 72.5% for an initial public offering, 22.5% for a sale or merger, 2.5% for continuing as a private company and 2.5% for a dissolution, as we felt the latter two scenarios were unlikely at this point. Our board of directors determined that, based on the expectation of continued high future revenue growth and increased market penetration, along with strong competitive and strategic positions, an initial public offering would be a more probable outcome. Our board of directors therefore reduced the probability of a sale or merger from 30% to 22.5% and increased the probability for an initial public offering from 65% to 72.5%. Our board of directors settled on these probabilities because, despite our own growth, stock market conditions in general, and the market for initial public offerings in particular, were such that there continued to be some level of uncertainty as to whether we would be able to consummate an initial public offering in fiscal year 2011;

 

   

decreased exit value multiples of our comparable company set since the previous valuation;

 

   

the price per share at which certain of our stockholders recently sold shares of our capital stock in private transactions; and

 

   

management’s expectation that we would achieve forecasted revenue for the quarter ended October 31, 2010.

 

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Based on these factors, our board of directors concluded that it was appropriate to increase the fair value of our common stock from $4.85 per share at July 8, 2010 to $4.86 per share at August 11, 2010, an increase of 0.2%.

 

September 16, 2010. Our board of directors granted options to purchase 1,169,617 shares of common stock with an exercise price per share of $4.86 on September 16, 2010. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered an independent valuation report for our common stock as of June 30, 2010 delivered to us on August 10, 2010, which reflected a fair value for our common stock of $4.86 per share as of June 30, 2010. In granting options at $4.86 per share on September 16, 2010, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $421.5 million as of June 30, 2010, which was determined using the PWERM;

 

   

a discount rate of 26.0%, based on our estimated weighted average cost of capital;

 

   

a lack of marketability discount of 20.9%;

 

   

liquidity event scenario probabilities of 72.5% for an initial public offering, 22.5% for a sale or merger, 2.5% for continuing as a private company and 2.5% for a dissolution, as we felt the latter two scenarios were unlikely at this point. Our board of directors determined that stock market conditions in general, and the market for initial public offerings in particular, were such that there was only a 72.5% probability that we would be able to successfully complete an initial public offering and that the offering would take place in fiscal year 2012. They also determined that the probability of a sale or merger remained consistent at 22.5%;

 

   

decreased exit value multiples of our comparable company set since the previous valuation;

 

   

the price per share at which certain of our stockholders recently sold shares of our capital stock in private transactions; and

 

   

management’s expectation that we would achieve forecasted revenue for the quarter ended October 31, 2010.

 

Based on these factors, our board of directors concluded that it was appropriate to maintain the fair value of our common stock at $4.86 per share at September 16, 2010.

 

November 16, 2010. Our board of directors granted options to purchase 945,283 shares of common stock with an exercise price per share of $4.86 on November 16, 2010. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered an independent valuation report for our common stock as of September 30, 2010. The final report, which was delivered to us on November 11, 2010, reflected a fair value for our common stock of $4.85 per share as of September 30, 2010. In granting options at $4.86 per share on November 16, 2010, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $419.9 million as of the September 30, 2010, which was determined using the PWERM;

 

   

a discount rate of 27.0%, based on our estimated weighted average cost of capital;

 

   

a lack of marketability discount of 20.9%;

 

   

liquidity event scenario probabilities of 72.5% for an initial public offering, 22.5% for a sale or merger, 2.5% for continuing as a private company and 2.5% for a dissolution, as we felt the latter two scenarios were unlikely at this point. Our board of directors determined that stock market conditions in general, and the market for initial public offerings in particular, were such that there was only a 72.5% probability that we would be able to successfully complete an initial public offering and that the offering would take place in fiscal year 2012. They also determined that the probability of a sale or merger remained consistent at 22.5%;

 

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relatively flat exit value multiples of our comparable company set since the previous valuation;

 

   

the price per share at which certain of our stockholders recently sold shares of our capital stock in private transactions; and

 

   

management’s expectation that we would achieve forecasted revenue for the quarter ended January 31, 2010.

 

Based on these factors, our board of directors concluded that it was appropriate to maintain the fair value of our common stock at $4.86 per share at November 16, 2010.

 

December 14, 2010. Our board of directors granted options to purchase 29,700 shares of common stock with an exercise price per share of $4.86 on December 14, 2010. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered an independent valuation report for our common stock as of September 30, 2010 delivered to us on November 11, 2010, which reflected a fair value for our common stock of $4.85 per share as of September 30, 2010. In granting options at $4.86 per share on December 14, 2010, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $419.9 million as of September 30, 2010, which was determined using the PWERM;

 

   

a discount rate of 27.0%, based on our estimated weighted average cost of capital;

 

   

a lack of marketability discount of 20.9%;

 

   

liquidity event scenario probabilities of 72.5% for an initial public offering, 22.5% for a sale or merger, 2.5% for continuing as a private company and 2.5% for a dissolution, as we felt the latter two scenarios were unlikely at this point. Our board of directors determined that stock market conditions in general, and the market for initial public offerings in particular, were such that there was only a 72.5% probability that we would be able to successfully complete an initial public offering and that the offering would take place in the fiscal year 2012. They also determined that the probability of a sale or merger remained consistent at 22.5%;

 

   

relatively flat exit value multiples of our comparable company set since the previous valuation;

 

   

the price per share at which certain of our stockholders recently sold shares of our capital stock in private transactions; and

 

   

management’s expectation that we would achieve forecasted revenue for the quarter ended January 31, 2010.

 

Based on these factors, our board of directors concluded that it was appropriate to maintain the fair value of our common stock at $4.86 per share at December 14, 2010.

 

February 10, 2011. Our board of directors granted options to purchase 126,550 shares of common stock with an exercise price per share of $5.35 on February 10, 2011. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered a draft of an independent valuation report for our common stock as of December 31, 2010. The final report, which was delivered to us on March 8, 2011, reflected a fair value for our common stock of $5.35 per share as of December 31, 2010. In granting options at $5.35 per share on February 10, 2011, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $446.9 million as of December 31, 2010, which was determined using the PWERM;

 

   

a discount rate of 27.9%, based on our estimated weighted average cost of capital;

 

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a lack of marketability discount of 18.9%;

 

   

liquidity event scenario probabilities of 70.0% for an initial public offering, 25.0% for a sale or merger, 2.5% for continuing as a private company and 2.5% for a dissolution, as we felt the latter two scenarios were unlikely at this point. The liquidity event scenarios moved by 2.5% in favor of a sale or merger during this valuation period based on increased sector activity noted by the board, including the acquisition of one of our comparable public companies. This had the effect of increasing our valuation as the exit value multiple in an acquisition scenario was slightly higher than an initial public offering scenario during this period. Our board of directors determined that stock market conditions in general, and the market for initial public offerings in particular, were such that there was a 70.0% probability that we would be able to successfully complete an initial public offering and that the offering would take place in fiscal year 2012;

 

   

relatively flat exit value multiples of our comparable company set since the previous valuation;

 

   

the price per share at which certain of our stockholders recently sold shares of our capital stock in private transactions; and

 

   

management’s expectation that we would achieve forecasted revenue for the quarter ended April 30, 2011.

 

Based on these factors, our board of directors concluded that it was appropriate to increase the fair value of our common stock from $4.86 per share at December 14, 2010 to $5.35 per share at February 10, 2011, an increase of 10.1%.

 

April 19, 2011. Our board of directors granted options to purchase 547,900 shares of common stock with an exercise price per share of $6.28 on April 19, 2011. In estimating the fair value of our common stock to set the exercise price of such options as of the date of grant, our board of directors reviewed and considered a draft of an independent valuation report for our common stock as of March 31, 2011. The final report, which was delivered to us on April 28, 2011, reflected a fair value for our common stock of $6.28 per share as of March 31, 2011. In granting options at $6.28 per share on April 19, 2011, the primary valuation factors considered by our board of directors were:

 

   

an enterprise value of $490.2 million as of March 31, 2011, which was determined using the PWERM;

 

   

a discount rate of 28.9%, based on our estimated weighted average cost of capital;