S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 22, 2010

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Motricity, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3663   20-1059798
(State of incorporation)   (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

601 108th Avenue Northeast

Suite 900

Bellevue, WA 98004

(425) 957-6200

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

 

 

Richard E. Leigh, Jr.

601 108th Avenue Northeast

Suite 900

Bellevue, WA 98004

(425) 957-6200

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

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Mark D. Director

Christian O. Nagler

Kirkland & Ellis LLP

601 Lexington Avenue

New York, New York 10022

(212) 446-4800

(212) 446-4900 (facsimile)

  

William H. Hinman, Jr.

Simpson Thacher & Bartlett LLP

2550 Hanover Street

Palo Alto, California 94304

(650) 251-5000

(650) 251-5002 (facsimile)

 

 

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, 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.

 

Large accelerated filer  ¨

   Accelerated filer  ¨

Non-accelerated filer  x  (Do not check if a smaller reporting company)

   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

Common Stock $0.01 par value per share

  $250,000,000   $17,825
 
 
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

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 preliminary 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 it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 22, 2010

                 Shares

LOGO

Motricity, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Motricity, Inc.

Motricity is offering                  of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional                  shares. Motricity will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We intend to apply for listing of our common stock on the NASDAQ Global Market under the symbol “MOTR”.

See “Risk Factors” beginning on page 12 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total

Initial public offering price

   $                $            

Underwriting discount

   $    $

Proceeds, before expenses, to Motricity

   $    $

Proceeds, before expenses, to the selling stockholders

   $    $

To the extent that the underwriters sell more than                  shares of common stock, the underwriters have the option to purchase up to an additional                  shares from the selling stockholders at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on or about                         .

Joint Bookrunners

 

Goldman, Sachs & Co.   J.P. Morgan

Joint Lead Managers

 

Barclays Capital   Deutsche Bank Securities   RBC Capital Markets

Co-managers

 

Baird   Pacific Crest Securities

Prospectus dated                         .


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page

PROSPECTUS SUMMARY

   1

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

   8

RISK FACTORS

   12

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

   30

USE OF PROCEEDS

   31

DIVIDEND POLICY

   32

CAPITALIZATION

   33

DILUTION

   35

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

   37

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   40

BUSINESS

   72

MANAGEMENT

   86

EXECUTIVE COMPENSATION

   90

PRINCIPAL AND SELLING STOCKHOLDERS

   113

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   115

DESCRIPTION OF CAPITAL STOCK

   119

SHARES ELIGIBLE FOR FUTURE SALE

   125

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS TO NON-UNITED STATES HOLDERS

   128

UNDERWRITING

   131

LEGAL MATTERS

   136

EXPERTS

   136

WHERE YOU CAN FIND MORE INFORMATION

   137

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

Through and including                      (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

This prospectus includes market and industry data and forecasts that we have developed from independent consultant reports, publicly available information, various industry publications and other published industry sources, including the Yankee Group’s “Global Mobile Forecast,” September 2009, and “Content Delivery Platforms: The Multimedia Service Delivery Vehicle,” February 2007. In the fourth quarter of 2009, Yankee Group updated its Content Delivery Platform report and intends to issue the updated report in the first half of 2010. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, neither we nor the underwriters have independently verified the data. In addition, we use the term “wireless carrier” throughout this prospectus for simplicity, and by its use we intend to reference traditional carriers that provide mobile services over their own network as well as non-carrier mobile service providers that provide mobile services over the networks of others, such as TracFone Wireless. We also use the phrase “top five wireless carriers in the U.S.”; that refers to the top five wireless carriers by number of subscribers.

 

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PROSPECTUS SUMMARY

This summary highlights key information contained elsewhere in this prospectus. It does not contain all of the information that you should consider in making your investment decision. For a more complete understanding of us and this offering, you should read and consider the entire prospectus, including the information set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes thereto before deciding whether to invest in our common stock. Except as otherwise required by the context, references to “Company,” “we,” “us” and “our” are to Motricity, Inc. Unless otherwise indicated, we have derived industry data from publicly available sources that we believe are reliable.

Motricity

Overview

We are a leading provider of mobile data solutions that enable wireless carriers to deliver high value mobile data services to their subscribers. We provide a comprehensive suite of hosted, managed service offerings, including mobile web portal, storefront, messaging, and billing support and settlement, which enable wireless carriers to deliver customized, carrier-branded mobile data services. Our mCore service delivery platform provides the tools for mobile subscribers to easily locate and access personally relevant and location-based content and services, engage in social networking and download content and applications. We also leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized mobile data experience and targeted mobile marketing solutions. By enabling wireless carriers to deliver a personalized subscriber experience, we enhance their ability to attract and retain mobile subscribers, increase the average revenue per user for mobile data services, or mobile data ARPU, and reduce network overhead and operating costs. We also facilitate effective monetization for mobile content and application providers by making it easier for them to reach millions of targeted subscribers with customized offerings.

Our mCore platform provides mobile subscribers with access to over 30 million unique pieces of third-party content or applications that we optimize and deliver to over 2,000 different mobile phone models, ranging from entry level feature phones to smartphones. We have access to more than 200 million mobile subscribers through our customers, and we currently provide mobile data services to over 30 million of these subscribers monthly. Our operations are predominantly based in the U.S., with international operations in the United Kingdom, the Netherlands and Singapore. Our customers include the top five wireless carriers in the U.S.: Verizon Wireless, AT&T, Sprint, T-Mobile USA and TracFone Wireless. To date, over $3 billion in revenue has been generated by our customers through the use of our mobile data services platform. For the twelve months ended September 30, 2009, we generated revenue of $117.1 million.

Industry Background

An extensive mobile data services ecosystem has developed, consisting of numerous industry participants including wireless carriers, mobile device manufacturers, operating system developers, and mobile content and application providers. This ecosystem is changing rapidly as new mobile devices and operating systems are introduced into the market, new mobile content and applications are developed, and as mobile subscribers demand an enhanced and personalized subscriber experience. Today’s mobile subscribers expect their mobile device to be able to do more than make phone calls or send a text message—they want to be able to access information, check email, keep up with their social networks, and download the latest content and applications.

 

 

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Wireless carriers operate in a highly competitive market and face growing challenges to attract and retain mobile subscribers and increase total mobile data ARPU. Historically, many wireless carriers provided mobile data services directly to their mobile subscribers through internally developed proprietary solutions. Over time, the wireless ecosystem has become increasingly complex, with evolving technologies and a proliferation of mobile devices running different operating systems. Accordingly, it has become more difficult for wireless carriers to manage the rapid evolution of this wireless data ecosystem on their own. Additionally, the growth dynamics of the mobile data services market has attracted non-carrier participants, including Apple and Google, into the market, threatening carriers ability to monetize their significant marketing and capital investments. These relatively new entrants are offering access to mobile content and applications through their own solutions and are capturing an increasing portion of the market.

The Yankee Group, an independent market research firm, estimates that the number of mobile subscribers in the U.S. will grow from 269 million in 2008 to 301 million in 2012, and worldwide will grow from 3.99 billion in 2008 to 5.13 billion in 2012. The Yankee Group estimates that the proportion of adult U.S. subscribers owning smartphones increased to 14% in 2009 from 11% in 2008 and 8% in 2007. The share of smartphones as a percentage of the overall mobile device market is projected to continue growing. With the advent of the Internet and the evolution of wireless networks and mobile phones, mobile subscribers have increased their demand for mobile content, including information, images, music and video, and for mobile applications, including games and productivity tools. The Yankee Group estimates that the mobile data services market in the U.S. will grow from $35 billion in 2008 to $47 billion in 2012, and worldwide will grow from $174 billion in 2008 to $244 billion in 2012. The mobile data services market predominantly includes data access, content and applications, commerce and messaging services. We believe that the current market for our services is the mobile content delivery platform market, which includes portals and storefronts. Given the complexity of this market, wireless carriers often use third-party content delivery platforms to deliver mobile data services to their subscribers. The Yankee Group estimates that the North American market for mobile content delivery platforms will grow from $443 million in 2008 to $780 million in 2012, which represents a compound annual growth rate of 15% and worldwide will grow from $2.5 billion in 2008 to $3.9 billion in 2012, which represents a compound annual growth rate of 12%. This market is projected to continue to grow as wireless carriers continue to improve the speed and quality, and lower the total cost, of mobile data services, and as mobile phone manufacturers continue to develop and deliver mobile phones with increasing levels of features and functions.

The Motricity Solution

Through our mCore service delivery platform, we provide a comprehensive suite of managed service offerings including mobile web portal, storefront, messaging, and billing support and settlement, which deliver numerous benefits to the following participants in the mobile data ecosystem:

Wireless Carriers.    We use customizable, modular solutions that help wireless carriers rapidly develop, deploy and bill for mobile data services. Our mCore platform allows wireless carriers to deliver a high value, carrier-branded mobile data experience, which provides their mobile subscribers with easy access to desired content and applications. This enhanced subscriber experience enables wireless carriers to more effectively attract and retain mobile subscribers, as well as increase and maintain mobile data ARPU. Our managed services platform reduces wireless carrier network overhead and operating costs, and simplifies the relationships between wireless carriers and content and application providers.

Mobile Content and Application Providers.    We facilitate effective monetization for mobile content and application providers by providing access to millions of mobile subscribers on a targeted

 

 

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and non-targeted basis across carriers. Our mCore platform also facilitates user-friendly uploading of content and applications, ensures efficient billing and settlement, and provides quality assurance for delivery of mobile content and applications.

Mobile Subscribers.    Wireless carriers can select from some or all of our services to construct and deliver a customized, carrier-branded, and highly personalized mobile data experience that allows their mobile subscribers to easily locate and access personally relevant, location-based content and services, engage in social networking, and download, send and receive digital media. In addition, the mCore service delivery platform allows mobile subscribers to manage the content and applications that they use most frequently.

Our Strengths

 

  Ÿ  

Strong Relationships with Wireless Carriers.    We have been an integral partner with our wireless carrier customers, assisting them with key phases of their mobile data services strategies, including design, development, deployment, provisioning, management, billing and customer support.

 

  Ÿ  

Deep Integration within the Mobile Data Ecosystem.    Through our deep integration with our wireless carrier customers’ systems, and our integration with a growing number of content and application providers, we facilitate the delivery of an enhanced mobile data experience to our customers’ mobile subscribers.

 

  Ÿ  

Highly Scalable Platform.    Our mCore service delivery platform has been built using flexible modular architecture that enables wireless carriers to deliver a highly scalable and highly reliable, carrier-branded subscriber experience.

 

  Ÿ  

Comprehensive Expertise in Managed Service Operations.    We develop, implement and operate a very large and complex managed service environment, servicing over 30 million active users monthly across multiple carriers and geographies with a carrier-grade level of quality and reliability.

 

  Ÿ  

Expansive Device Portfolio and Onboarding Process.     We customize, test and maintain highly personalized mobile data experiences for an ever-expanding population of mobile devices ranging from entry level feature phones to smartphones utilizing advanced operating systems such as Symbian, Blackberry, Android, Windows Mobile and webOS.

 

  Ÿ  

Significant Insights into Subscriber Behavior and Effective User Experiences.    Our mCore platform can capture a wide range of subscriber behavior and usage patterns across multiple carriers. We leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized subscriber experience and targeted mobile marketing solutions and services.

 

  Ÿ  

Independence and Neutrality.    We are content, network, operating system and mobile device type independent, which enables our interests to be closely aligned with our wireless carrier customers’ interests.

Our Growth Strategy

 

  Ÿ  

Focus our efforts on expanding the breadth of our solutions with industry leading participants, leveraging our strong relationships with the top five wireless carriers in the U.S.;

 

  Ÿ  

Expand our business into developed and emerging international markets, such as those in Southeast Asia, India and Latin America, by applying our expertise gained from the U.S. market and fully leveraging the capabilities and scale of the mCore platform;

 

 

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  Ÿ  

Advance our technological leadership through the enhancement of the mCore platform, and the introduction of new solutions that increase the total value we provide to our carrier and enterprise customers;

 

  Ÿ  

Leverage our core competencies, technologies, and existing market position to broaden our offerings and customer base and advance into new market segments;

 

  Ÿ  

Gain additional scale and technology through opportunistic acquisitions that expand our total market opportunity, provide complementary technologies and solutions, and aid our international expansion efforts; and

 

  Ÿ  

Enhance our smartphone solutions to fully capitalize on the extensive capabilities of these devices and their significant market adoption.

Risk Factors

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” beginning on page 12. You should consider carefully such risks before deciding to invest in our common stock. These risks include, among others:

 

  Ÿ  

we depend on a limited number of customers for a substantial portion of our revenues, and the loss of a key customer or any significant adverse change in the size or terms of a contract with a key customer could significantly reduce our revenues;

 

  Ÿ  

the mobile data service industry is, and likely will continue to be, characterized by rapid technological changes, which will require us to develop new service enhancements, and could render our existing services obsolete;

 

  Ÿ  

the market in which we operate is highly competitive and many of our competitors have significantly greater resources; and

 

  Ÿ  

open mobile phone operating systems and new business models may reduce the wireless carriers’ influence over access to mobile data services, and may reduce the total size of our market opportunity.

Additional Information

Our company began as Power By Hand LLC, an Oklahoma limited liability company, formed in 2001. In 2003, PBH Holdings LLC, an Oklahoma limited liability company, acquired all of Power By Hand LLC’s membership interests and PBH Holdings, LLC subsequently reincorporated in Delaware in 2003. In 2004, we formed Power By Hand, Inc., a Delaware corporation, which merged with PBH Holdings, LLC, and PinPoint Networks, Inc. that same year, with Power By Hand, Inc. as the surviving entity. In 2004, we changed our name from Power By Hand, Inc. to Motricity, Inc.

On December 28, 2007, we acquired the mobile division of InfoSpace, Inc., which we refer to as InfoSpace Mobile, for a cash purchase price of $135 million and the assumption of certain liabilities. The acquisition was a key element in the broad strategic realignment of our business. We viewed InfoSpace Mobile as a competing provider of mobile content solutions and services for the wireless industry that had strong relationships with several large wireless carriers. Through its mCore platform, InfoSpace Mobile offered many of the same services we provided to our customers through our Fuel platform. InfoSpace Mobile also operated a large development organization, with an emphasis on professional services for their carrier customers. In the acquisition, in addition to acquiring the mCore platform and a number of leased U.S. datacenter facilities, we acquired a 224-person employee base,

 

 

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additional contracts with certain of our new and pre-existing customers, including AT&T and Verizon Wireless, and the Bellevue, Washington office facilities that we now use as our corporate headquarters.

Our corporate headquarters is located at 601 108th Avenue Northeast, Suite 900, Bellevue, Washington 98004. Our telephone number is (425) 957-6200. Our website address is www.motricity.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock. “Motricity” and other trademarks of ours appearing in this prospectus are our property. This prospectus contains additional trade names and trademarks of ours and of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

 

 

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THE OFFERING

 

Common stock offered by us

                 shares

 

Common stock offered by the selling stockholders

                 shares

 

Underwriters’ option to purchase additional shares from the selling stockholders

                 shares

 

Total common stock to be outstanding after this offering

                 shares

 

Use of proceeds

We estimate that we will receive proceeds of approximately $         million from our offering of our common stock, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming the shares are offered at $         per share, which is the midpoint of the estimated offering price range shown on the front cover page of this prospectus. We will use the net proceeds from this offering for working capital, general corporate purposes and for funding capital expenditures and acquisitions. See “Use of Proceeds” for additional details. We will not receive any proceeds from the sale of shares by the selling stockholders.

 

Dividend Policy

We currently do not expect to pay dividends or make any other distribution on our common stock in the foreseeable future. Our ability to pay dividends on our common stock is also limited by the covenants of our credit facility and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy” for additional details.

 

Proposed trading symbol on NASDAQ Global Market

“ MOTR ”

 

Risk Factors

Investment in our common stock involves a high degree of risk. You should read and consider the information set forth under the heading “Risk Factors” beginning on page 12 and all other information included in this prospectus before deciding to invest in our common stock.

Unless we specifically state otherwise, the information in this prospectus:

 

  Ÿ  

reflects a         -for-         reverse split of our common stock that will be effective upon the closing of this offering;

 

  Ÿ  

assumes that our common stock will be sold at $         per share, which is the midpoint of the estimated offering price range shown on the front cover page of this prospectus;

 

  Ÿ  

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

 

 

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  Ÿ  

assumes the conversion of all outstanding mandatorily redeemable preferred stock and preferred stock into                  shares of common stock effective upon the closing of this offering based on an assumed initial public offering price of $         per share, the mid-point of the range set forth on the front cover page of this prospectus;

 

  Ÿ  

excludes                  shares related to unexercised stock options and                  shares of our common stock reserved for future grants under our equity incentive plans;

 

  Ÿ  

excludes                  shares of restricted stock and stock options to be granted to certain officers, directors and employees in connection with this offering; and

 

  Ÿ  

excludes                  warrants to purchase shares of common, preferred and mandatorily redeemable preferred stock.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables summarize the consolidated financial data for our business. You should read these tables along with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We derived the summary consolidated statements of operations data for 2006, 2007 and 2008, set forth below, from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the nine months ended September 30, 2008 and 2009, and the consolidated balance sheet data as of September 30, 2009, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. In light of our acquisition of the mobile division of InfoSpace, or InfoSpace Mobile, on December 28, 2007, our financial statements only reflect the impact of the acquisition from that date, and therefore comparisons with prior periods are not necessarily meaningful. Our historical results do not necessarily indicate results that may be expected for any future period.

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  
     (In thousands)  

Consolidated Statement of Operations Data:

          

Revenues

   $ 21,903      $ 35,171      $ 103,151      $ 74,835      $ 88,744   
                                        

Operating expenses:

          

Direct third-party costs

     2,201        3,709        5,451        3,493        8,148   

Datacenter and network operations, excluding depreciation

     9,561        9,468        33,000        24,039        23,720   

Product development and sustainment, excluding depreciation

     24,617        16,229        52,261        43,784        24,203   

Sales and marketing, excluding depreciation

     8,403        7,119        10,228        7,535        8,505   

General and administrative, excluding depreciation

     11,239        10,334        26,052        19,424        13,948   

Depreciation and amortization(1)

     5,925        10,322        21,559        15,553        10,230   

Restructuring(2)

     1,084        1,283        3,236        2,016        1,957   

Goodwill and long-lived asset impairment charges(3)

     —          26,867        29,130        24,538        5,806   

Abandoned transaction charge(4)

     —          2,600        —          —          —     
                                        

Total operating expenses

     63,030        87,931        180,917        140,382        96,517   
                                        

Operating loss

     (41,127     (52,760     (77,766     (65,547     (7,773

Interest and other (expense) income, net

     (1,110     1,155        2,714        2,786        (1,659

Provision for income taxes

     —          —          1,776        1,332        1,405   
                                        

Net loss from continuing operations

     (42,237     (51,605     (76,828     (64,093     (10,837

Net loss from discontinued operations(5)

     (12,960     (24,928     (1,072     (1,072     —     

Loss from sale of discontinued operations(5)

     —          (1,360     (127     (127     —     
                                        

Net loss

     (55,197     (77,893     (78,027     (65,292     (10,837

Accretion of mandatorily redeemable preferred stock and Series D1 preferred dividends

     (5,942     (8,095     (22,427     (16,819     (17,966
                                        

Net loss attributable to common stockholders

   $ (61,139   $ (85,988   $ (100,454   $ (82,111   $ (28,803
                                        

 

 

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    Years Ended
December 31,
  Nine Months
Ended
September 30,
    2006   2007   2008   2008   2009
    (In thousands, except per share data)

Basic and fully diluted net loss per share attributable to common stockholders(6)

  $(0.71)   $(0.99)   $(1.15)   $(0.94)   $(0.32)

Weighted-average number of shares of common stock used in computing basic net loss per share attributable to common stockholders(6)

  85,896   86,939   87,652   87,447   88,740

Pro forma net loss attributable to holders of common stock (unaudited)(6)

         

Pro forma basic and fully diluted net loss per share (unaudited)(6)

         

Weighted-average number of shares of common stock used in computing pro forma basic and fully diluted net loss per share (unaudited)(6)

         

 

     As of September 30, 2009
     Actual     Pro Forma
As Adjusted(7)
     (In thousands)

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 19,627     

Working capital

     32,947     

Total assets

     177,208     

Total long-term debt and capital lease obligations

     —       

Total mandatorily redeemable preferred stock

     411,581     

Total stockholders’ deficit

     (277,599  

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  
     (In thousands)  

Consolidated Statement of Cash Flows Data:

          

Cash flows from operating activities

   $ (43,209   $ (41,499   $ (28,745   $ (27,741   $ 16,272   

Cash flows from investing activities

     (55,849     (133,507     (14,735     (12,798     516   

Cash flows from financing activities

     83,244        236,275        (9,644     (13,346     (11,534

Investments in property and equipment included within investment activities

   $ (17,328   $ (4,594   $ (8,389   $ (3,752   $ (4,015

 

     Years Ended December 31,     Nine Months Ended
June 30,
     2006     2007     2008     2008     2009
     (In thousands)

Other Financial Data (unaudited):

          

Adjusted EBITDA(8)

   $ (33,897   $ (11,000   $ (21,497   $ (21,615   $ 11,888

 

(1) Depreciation and amortization by function:

 

      Years Ended December 31,    Nine Months Ended
September 30,
     2006    2007    2008    2008    2009
     (In thousands)

Datacenter and network operations

   $ 2,938    $ 7,310    $ 16,824    $ 12,426    $ 6,928

Product development and sustainment

     1,462      1,548      2,237      1,379      1,489

Sales and marketing

     4      307      2,075      1,499      1,516

General and administrative

     1,521      1,157      423      249      297
                                  

Depreciation and amortization

   $ 5,925    $ 10,322    $ 21,559    $ 15,553    $ 10,230
                                  

 

(2) Our restructuring charges relate to costs associated with closing and relocating facilities, relocating certain key employees and severance costs following the acquisition of InfoSpace Mobile. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.

 

 

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(3) The impairments in 2008 and 2009 relate primarily to integration activities following our acquisition of InfoSpace Mobile in December 2007 and to certain non-core operating assets. The 2007 impairments relate to goodwill due primarily to changes in consumer purchase habits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.
(4) In 2007, we issued a warrant to purchase common stock to an existing investor as a fee for providing a financing commitment in connection with a proposed acquisition that was not completed.
(5) In connection with a business strategy reassessment initiated in 2007, we exited the direct to consumer business and a business we refer to as media and entertainment (“media and entertainment”) at various times during 2007 and 2008.
(6) See Note 13 to our consolidated financial statements for the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share attributable to common stockholders.
(7) The Pro Forma As Adjusted column of this consolidated balance sheet data table reflects the conversion of all outstanding shares of mandatorily redeemable preferred stock and preferred stock into shares of common stock upon the closing of this offering, the issuance and sale by us of              shares of common stock in this offering at an initial public offering price of $              per share, and the receipt of proceeds of this offering after deducting estimated underwriting discounts and commissions and other offering expenses payable by us, the reclassification of the mandatorily redeemable preferred stock warrant liability to additional paid-in capital and the recording of stock-based compensation expense due to the vesting of restricted stock triggered by the closing of this offering, as if these events had occurred as of September 30, 2009.
(8) See our discussion of Adjusted EBITDA as a non-GAAP financial measure immediately following these footnotes.

Reconciliation of Adjusted EBITDA to Net Loss From Continuing Operations

We define Adjusted EBITDA as net loss from continuing operations plus interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, restructuring, asset impairments and abandoned transaction charges, and less interest and other income (expense), net. Adjusted EBITDA is not a measure of liquidity calculated in accordance with accounting principles generally accepted in the U.S., referred to herein as GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by GAAP. Our statement of cash flows presents our cash flow activity in accordance with GAAP. Furthermore, Adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.

We believe Adjusted EBITDA is used by and is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. We believe that:

 

  Ÿ  

EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired; and

 

  Ÿ  

investors commonly adjust EBITDA to eliminate the effect of restructuring and stock-based compensation expenses, which vary widely from company to company and impair comparability.

We use Adjusted EBITDA:

 

  Ÿ  

as a measure of operating performance to assist in comparing performance from period to period on a consistent basis;

 

 

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  Ÿ  

as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and

 

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in communications with the board of directors, stockholders, analysts and investors concerning our financial performance.

A reconciliation of Adjusted EBITDA to net loss from continuing operations, the most directly comparable GAAP measure, for each of the fiscal periods indicated is as follows:

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  
     (Unaudited, in thousands)  

Net loss from continuing operations

   $ (42,237   $ (51,605   $ (76,828   $ (64,093   $ (10,837

Interest and other (expense) income, net

     1,110        (1,155     (2,714     (2,786     1,659   

Provision for income taxes

     —          —          1,776        1,332        1,405   

Depreciation and amortization

     5,925        10,322        21,559        15,553        10,230   

Restructuring, asset impairments and abandoned transaction charges

     1,084        30,750        32,366        26,554        7,763   

Stock-based compensation

     221        688        2,344        1,825        1,668   
                                        

Adjusted EBITDA

   $ (33,897   $ (11,000   $ (21,497   $ (21,615   $ 11,888   
                                        

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider and evaluate all of the information in this prospectus, including the risks and uncertainties described below, which we believe describe the most significant, but not all, risks of an investment in our common stock, before making a decision to invest in our common stock. The occurrence of any of the following risks and uncertainties could harm our business, financial condition, results of operations or growth prospects. As a result, the trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Business and Operations

We depend on a limited number of customers for a substantial portion of our revenues. The loss of a key customer or any significant adverse change in the size or terms of a contract with a key customer could significantly reduce our revenues.

We depend, and expect to continue to depend, on a limited number of significant worldwide wireless carriers for a substantial portion of our revenues. Currently, the top five wireless carriers in the U.S. use our services. In the event that one or more of these major wireless carriers decides to reduce or stop using our managed and professional services, we could be forced to shift our marketing focus to smaller wireless carriers, which could result in lower revenues than expected and increased business development, marketing and sales expenses. This could cause our business to be less profitable and our results of operations to be adversely affected.

In addition, a change in the timing or size of a purchase by any one of our key customers could result in significant variations in our revenue and operating results. Our operating results for the foreseeable future will continue to depend on our ability to effect sales to a small number of customers. Any revenue growth will depend on our success in selling additional services to our large customers and expanding our customer base to include additional customers that deploy our solutions in large-scale networks serving significant numbers of subscribers.

In 2008, we generated approximately 42% and 12% of our total revenue from contracts with AT&T Mobility LLC, or AT&T, and Verizon Wireless or their affiliates, respectively. For the nine months ended September 30, 2009, we generated approximately 55% and 19% of our total revenue from contracts with AT&T and Verizon Wireless or their affiliates, respectively. No other customer accounted for more than 10% of our revenues in 2008. Our current five largest customers accounted for approximately 67% of our revenues in 2008 and 83% of our revenues for the nine months ended September 30, 2009. Certain of our customer agreements expire in mid to late 2010, including agreements with AT&T and Verizon Wireless. Failure to renew our agreements with AT&T, Verizon Wireless or our other large customers would materially reduce our revenue and have a material adverse effect on our business, operating results and financial condition.

The mobile data services industry is, and likely will continue to be, characterized by rapid technological changes, which will require us to develop new service enhancements, and could render our existing services obsolete.

The market for content and applications for mobile devices is characterized by rapid technological change, with frequent variations in user requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new industry standards and practices. Our success will depend, in part, on our ability to enhance and expand our existing services, develop new technology that addresses the increasingly sophisticated and varied needs of wireless carriers and their subscribers, respond to technological advances and emerging industry standards and practices and license leading technologies that will be useful in our business in a cost-effective

 

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and timely way. We may not be able to successfully use new technologies or adapt our current and planned services to new customer requirements or emerging industry standards. The introduction of new products embodying new technologies or the emergence of new industry standards could render our existing services obsolete, unmarketable or uncompetitive from a pricing standpoint.

The market in which we operate is highly competitive and many of our competitors have significantly greater resources.

The mobile data communications services market is rapidly evolving and intensely competitive. Our competitors include mobile device manufacturers, search engines, portals and directories, and wireless service integrators. Competition in the wireless industry throughout the world continues to increase at a rapid pace as consumers, businesses and governments realize the market potential of wireless communications products and services. In addition, new competitors or alliances among competitors could emerge and rapidly acquire significant market share, to our detriment. There may be additional competitive threats from companies introducing new and disruptive solutions. Some of our competitors may be better positioned than we are. Although we have attained a significant position in the industry, many of our current and potential competitors may have advantages over us, including:

 

  Ÿ  

longer operating histories and market presence;

 

  Ÿ  

greater name recognition;

 

  Ÿ  

access to larger customer bases;

 

  Ÿ  

single source solutions that deliver mobile devices, hardware, services and infrastructure;

 

  Ÿ  

economies of scale and cost structure advantages;

 

  Ÿ  

greater sales and marketing, manufacturing, distribution, technical, financial and other resources; and

 

  Ÿ  

government support.

These competitors also have established or may establish financial or strategic relationships among themselves or with our existing or potential customers or other third parties. In addition, some of our competitors have used and may continue to use aggressive pricing or promotional strategies, have stronger relationships on more favorable terms with wireless carriers and may devote substantially greater resources to system development than we do. These relationships may affect customers’ decisions to purchase services from us.

We also face competition from existing service providers in the international markets in which we already compete or may enter. For example, in India we compete with numerous companies, some of which are solely focused on the local mobile data services market, are directly owned and managed by local citizens. These factors could provide local competitors with advantages over us, particularly if the local government enacts laws or policies that favor local competitors or restrict or disadvantage us because our international operations are part of a U.S.-domiciled company. Other competitors in international markets are subsidiaries of larger companies with established local operations, and with greater experience and resources. In other countries that we may enter, there may be incumbent competitors presently selling data services products. These incumbents may have competitive advantages that could impede our expansion and growth in these countries.

Open mobile phone operating systems and new business models may reduce the wireless carriers’ influence over access to mobile data services, and may reduce the total size of our market opportunity.

We derived 31% of our revenue based on the number of active mobile subscribers who accessed mobile content and applications through our customers’ carrier-branded mobile web portals for the nine

 

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months ended September 30, 2009. However, with the growth of the iPhone and smartphone business models, our customers’ services may be bypassed or become inaccessible. These business models, which exclude carrier participation beyond transport, along with the introduction of more mobile phones with open operating systems that allow mobile subscribers to browse the Internet and, in some cases, download applications from sources other than a carrier’s branded services, create a risk that some carriers will choose to allow this non-branded Internet access without offering a competitive value-added carrier-branded experience as part of their solution set. These so-called “open operating systems” include Symbian, BlackBerry, Android, Windows Mobile and webOS. We believe wireless carriers need to offer branded services that can compete head-to-head with the new business models and open technologies in order to retain mobile subscribers and increase ARPU. Although our solutions are designed to help wireless carriers deliver a high value, competitive mobile data experience, if mobile subscribers do not find these carrier-branded services compelling, there is a risk that mobile subscribers will use open operating systems to bypass carrier-branded services and access the mobile Internet. It is also possible one or more wireless carriers will adopt a non-carrier branded, third-party web portal model. To the extent this occurs, the total available market opportunity for providing our current services and solutions to carriers may be reduced.

Our sales cycle can be long, which may make our revenues and operating results less predictable.

Wireless carriers must typically make substantial investments to deploy our mobile data services solution. As a result, the typical sales cycle for our services is long, averaging nine to twelve months per customer. Many of the potential customers for our services have only recently begun to evaluate the benefits of expanding their offerings of mobile services, and many have only recently designated personnel to evaluate, procure and implement new mobile services. We believe that we may be required to spend a significant amount of time and resources educating potential customers on the use and benefits of our services, and in turn, we expect potential customers to spend a significant amount of time performing internal reviews and obtaining authorization to purchase our services. Furthermore, the emerging and evolving nature of mobile data technological standards and services may lead potential customers to postpone purchasing decisions.

We have a history of net operating losses and may continue to suffer losses in the future.

For the years ended December 31, 2004, 2005, 2006, 2007 and 2008, we had net losses of approximately $10.6 million, $22.5 million, $55.2 million, $77.9 million and $78.0 million, respectively, and an accumulated deficit of approximately $267 million as of December 31, 2008. For the nine months ended September 30, 2009, we had a net loss of approximately $10.8 million. If we cannot become profitable, our financial condition will deteriorate, and we may be unable to achieve our business objectives.

We compete with in-house mobile data solutions similar to those we offer.

The mobile data service industry is evolving rapidly to address changing industry standards and the introduction of new technologies and network elements. Wireless carriers are constantly reassessing their approaches to delivering mobile data to their subscribers, and one or more of our customers could decide to deploy an in-house mobile data delivery service solution that competes with our services. Even if the mobile data delivery services offered by a mobile service provider’s in-house solution were more limited than those provided by our services, a wireless carrier may elect to accept limited functionality or services in lieu of providing a third party access to its network. An increase in the use of in-house solutions by wireless carriers could have an adverse effect on our business, operating results and financial condition.

 

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We have a significant relationship with a development vendor, and changes to that relationship may result in delays or disruptions that could harm our business.

We rely upon development vendors to provide additional capacity for our technical development and quality assurance services. Our primary development vendor is GlobalLogic, Inc., a software research and development company providing software development services primarily from its offices in India and Ukraine. Our current agreement with GlobalLogic terminates on December 29, 2011. GlobalLogic may only terminate this agreement for cause. If GlobalLogic were, for any reason, to cease operations, we might be unable to replace it on a timely basis with a comparably priced provider. We would also have to expend time and resources to train any new development vendor that might replace GlobalLogic. If GlobalLogic were to suffer an interruption in its business, or experience delays, disruptions or quality control problems in its software development operations, or if we had to change development vendors, our ability to provide services to our customers would be delayed and our business, operating results and financial condition would be adversely affected.

Demand for our managed and professional services depends on increases in carrier subscribers’ use of mobile data services and mobile devices to access the mobile Internet and on our customers’ continued investment and improvement in wireless networks.

Our services comprise a mobile data service delivery platform that enables wireless carriers to monitor and charge their subscribers for access to mobile applications, content and programs that are developed by third parties and hosted by us. The revenue derived from carriers based on their mobile subscribers accessing mobile content through their branded mobile web portals accounted for 31% of our revenue for the nine months ended September 30, 2009. Our ability to generate revenues from our services will depend on the extent to which businesses and consumers continue to adopt and use mobile devices to access the mobile Internet and to receive products and services via their mobile devices. While many consumers use mobile devices to communicate, the majority of consumers do not presently use mobile devices to access the mobile Internet or obtain other products or services. Consumers and businesses may not significantly increase their use of mobile data services and mobile devices to access the mobile Internet and to obtain products and services as quickly as our business model contemplates. If consumers do not continue to increase their use of mobile data services, our business, operating results and financial condition will be adversely impacted.

Further, increased demand by consumers for mobile data services delivered over wireless networks will be necessary to justify capital expenditure commitments by wireless carriers to invest in the improvement and expansion of their networks. Demand for mobile data services might not continue to increase if there is limited availability or market acceptance of mobile devices designed for such services; the multimedia content offered through wireless networks does not attract widespread interest; or the quality of service available through wireless networks does not meet consumer expectations. If long-term expectations for mobile data services are not realized or do not support a sustainable business model, wireless carriers may not commit significant capital expenditures to upgrade their networks to provide these services, the demand for our services will decrease, and we may not be able to increase our revenues or become profitable in the future.

If we are unable to protect the confidentiality of our proprietary information, the value of our technology could be adversely affected.

Our business relies upon certain unpatented or unregistered intellectual property rights and proprietary information, including the mCore platform. Consequently, although we take measures to keep our key intellectual property rights and proprietary information confidential, we may not be able to protect our technology from independent invention by third parties. We currently attempt to protect most of our key intellectual property through a combination of trade secret, copyright and other intellectual property laws and by entering into employee, contractor and business partner confidentiality

 

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agreements. Such measures, however, provide only limited protection, and under certain circumstances we may not be able to prevent the disclosure of our intellectual property, or the unauthorized use or reverse engineering or independent development of our technology. This may allow our existing and potential competitors to develop products and services that are competitive with, or superior to, our services.

Further, we intend to expand our international presence by targeting countries with large populations and propensities for adopting new technologies. However, many of these countries’ intellectual property laws are not as stringent as those of the U.S. Effective patent, copyright, trademark and trade secret protections may be unavailable or limited in some foreign countries. As a result, we may not be able to effectively prevent competitors in these countries from using or infringing our intellectual property rights, which would reduce our competitive advantage and ability to compete in these regions or otherwise harm our business. In the future, we may also have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and divert our management’s attention and resources. In addition, such litigation may not be successful.

Consolidation in the telecommunications industry may reduce the number of our customers and negatively impact our financial performance.

The telecommunications industry continues to experience consolidation and an increased formation of alliances among telecommunications service providers and between telecommunications service providers and other entities. Should one of our significant customers consolidate with another company or enter into such an alliance and decide either to use a different mobile data service provider or to manage its transactions internally, it could have a negative material impact on our prospects. These consolidations and alliances may cause us to lose customers or require us to reduce prices as a result of enhanced customer leverage, which would have a material adverse effect on our business. We may not be able to offset the effects of any price reductions. We may not be able to expand our customer base to make up any decreases in revenue if we lose customers or if our transaction volumes decline.

We expect that our revenue will fluctuate, which could cause our stock price to decline.

Our revenue is subject to fluctuations due to the timing of sales of high-dollar professional services projects. Because these projects occur at irregular intervals and the dollar values vary based on customer needs, we may experience quarter-to-quarter fluctuations in revenue. In addition, any significant delays in the deployment of our services, unfavorable sales trends in our existing service categories, or changes in the spending behavior of wireless carriers could adversely affect our revenue growth. If our revenue fluctuates or does not meet the expectations of securities analysts and investors, our stock price would likely decline.

Our customer contracts lack uniformity and often are complex, which subjects us to business and other risks.

Our customers include some of the largest wireless carriers which have substantial purchasing power and negotiating leverage. As a result, we typically negotiate contracts on a customer-by­customer basis and sometimes accept contract terms not favorable to us in order to close a transaction, including indemnity, limitation of liability, refund, penalty or other terms that could expose us to significant financial or operating risk. If we are unable to effectively negotiate, enforce and accurately and timely account and bill for contracts with our key customers, our business and operating results may be adversely affected.

In addition, we have contractual indemnification obligations to our customers, most of which are unlimited in nature. If we are required to fulfill our indemnification obligations relating to third-party

 

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content or operating systems that we provide to our customers, we intend to seek indemnification from our suppliers, vendors, and content providers to the full extent of their responsibility. Even if the agreement with such supplier, vendor or content provider contains an indemnity provision, it may not cover a particular claim or type of claim or may be limited in amount or scope. As a result, we may or may not have sufficient indemnification from third parties to cover fully the amounts or types of claims that might be made against us. Any significant indemnification obligation to our customers could have a material adverse effect on our business, operating results and financial condition.

We provide service level commitments to our customers, which could cause us to incur financial penalties if the stated service levels are not met for a given period and could significantly reduce our revenue.

Our customer agreements provide service level commitments on a monthly basis. Our service level commitment varies by customer. If we are unable to meet the stated service level commitments or suffer extended periods of unavailability and/or degraded performance of our service, we may incur financial penalties. Our revenue could be significantly impacted if we suffer unscheduled downtime that exceeds the allowed downtimes under our agreements with our customers. The failure to meet our contractual level of service availability may require us to credit affected customers for a significant portion of their monthly fees, not just the value for the period of the downtime. As a result, failure to deliver services for a relatively short duration could result in our incurring significant financial penalties. Service level penalties represented 4% of total revenue in 2008 and 1% of total revenue for the nine months ended September 30, 2009. Any system failure, extended service outages, errors, defects or other performance problems with our managed and professional services could harm our reputation and may damage our customers’ businesses.

We use datacenters to deliver our platform and services. Any disruption of service at these facilities could harm our business.

We host our services and serve all of our customers from five datacenter facilities located around the U.S. We operate two datacenter facilities located in Washington State. The other three facilities are operated by third parties in Georgia, Massachusetts and North Carolina. We do not control the operations at the third-party facilities. All of these facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, terrorist attacks, power losses, telecommunications failures and similar events. They also could be subject to break-ins, computer viruses, denial of service attacks, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the third-party facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services. Although we maintain off-site tape backups of our customers’ data, we do not currently operate or maintain a backup datacenter for any of our services, which increases our vulnerability to interruptions or delays in our service. Interruptions in our services might harm our reputation, reduce our revenue, cause us to incur financial penalties, subject us to potential liability and cause customers to terminate their contracts.

Capacity constraints could disrupt access to our services, which could affect our revenue and harm our reputation.

Our service goals of performance, reliability and availability require that we have adequate capacity in our computer systems to cope with the volume of traffic through our mCore service delivery platform. As our operations grow in size and scope, we will need to improve and upgrade our systems and infrastructure to offer our customers and their subscribers enhanced services, capacity, features and functionality. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources before the volume of our business rises, with no assurance that our revenues will grow. If our systems cannot be expanded in a timely manner to cope

 

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with increased traffic we could experience disruptions in service, lower customer and subscriber satisfaction and delays in the introduction of new services. Any of these problems could impair our reputation and cause our revenue to decline.

Our research and development investments may not lead to successful new services or enhancements.

We will continue to invest in research and development for the introduction of new enhancements to existing services designed to improve the capacity, data processing rates and features of our services. We must also continue to develop new features and to improve functionality of our platform based on specific customer requests and anticipated market needs. Research and development in the mobile data services industry, however, is complex, expensive and uncertain. We believe that we must continue to dedicate a significant amount of resources to research and development efforts to maintain our competitive position. If we continue to expend a significant amount of resources on research and development, but our efforts do not lead to the successful introduction of service enhancements that are competitive in the marketplace, there could be a material adverse effect on our business, operating results, financial condition and market share.

Our solutions are complex and may take longer to develop than anticipated, and we may not recognize revenue from new service enhancements until after we have incurred significant development costs.

Most of our services must be tailored to meet customer specifications. In addition, our international customers often require significant customization of our platform to meet local needs. As a result, we often develop new features and enhancements to our existing services. These new features and enhancements often take substantial time to develop because of their complexity and because customer specifications sometimes change during the development cycle. We often do not recognize revenue from new services or enhancements until we have incurred significant development costs. In addition to delayed recognition of revenue from such new services and enhancements, our operating results will suffer if the new services or enhancements fail to meet our customers’ expectations.

We believe our long-term success depends, in part, on our ability to expand the sales of our services to customers located outside of the U.S. As a result, our business is susceptible to risks associated with international sales and operations.

In addition to the U.S., we currently operate in the United Kingdom, the Netherlands and Singapore, and we intend to expand our offering of mobile data services into a number of additional international markets in the near future. As a result, we are subject to the additional risks of conducting business outside the U.S., which may include:

 

  Ÿ  

increased costs associated with localization of our services, including translations into foreign languages and adaptation to local practices and regulatory requirements;

 

  Ÿ  

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

  Ÿ  

difficulties managing and staffing international operations;

 

  Ÿ  

delays resulting from difficulty in obtaining export licenses, tariffs and other trade barriers and restrictions on export or import of technology;

 

  Ÿ  

less stringent intellectual property protections;

 

  Ÿ  

unexpected changes in, or impositions of, legislative, regulatory or tax requirements and burdens of complying with a wide variety of foreign laws and other factors beyond our control;

 

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  Ÿ  

general geopolitical risks in connection with international operations, such as political, social and economic instability;

 

  Ÿ  

compliance with anti-corruption and bribery laws, including the Foreign Corrupt Practices Act of 1977;

 

  Ÿ  

changes in diplomatic, trade or business relationships;

 

  Ÿ  

foreign currency fluctuations that may substantially affect the dollar value of our revenue and costs in foreign markets;

 

  Ÿ  

foreign exchange controls that may prevent or limit our ability to repatriate income earned in foreign markets; and

 

  Ÿ  

increased financial accounting and reporting burdens.

We have limited experience operating in foreign jurisdictions and are rapidly building our international operations. Operating in international markets 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.

Our ability to use net operating and certain built-in losses to reduce future tax payments may be limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of future transactions.

Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in the years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders who directly or indirectly own 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company’s stock immediately before the ownership change. As a result, we may be unable to offset our taxable income with losses, or our tax liability with credits, before such losses and credits expire.

In addition, it is possible that future transactions (including issuances of new shares of our common stock and sales of shares of our common stock) will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our pre-change loss or certain built-in losses prior to such ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 and those attributes already subject to limitations (as a result of our prior ownership changes) may be subject to more stringent limitations.

Competition for our employees is intense and failure to recruit and retain skilled personnel could negatively affect our financial results as well as our ability to maintain relationships with clients and drive future growth.

We provide sophisticated mobile data delivery platforms and services to our customers. To attract and retain customers, we believe we need to demonstrate professional acumen and build trust and strong relationships, and that we must identify, recruit, retain and motivate new hardware and software engineers, programmers, technical support personnel and marketing and sales representatives. Competition is intense for skilled personnel with engineering, product development, technical and marketing and sales experience, and we may not be able to identify individuals that possess the

 

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necessary skills and experience, or we may not be able to employ these individuals on acceptable terms and conditions, or at all. Moreover, competition has been increasing the cost of hiring and retaining skilled professionals, a trend which could adversely affect our operating margins and financial results. Our business and growth may suffer if we are unable to hire and retain skilled personnel.

We rely heavily on our executive officers and other key employees for the success of our business and the loss of our executive team could adversely impact our business.

We believe our success will depend in part upon retaining the services of executive officers and other key employees. Many of our executive officers joined our company within the last two years. If our executive officers or non-executive key employees leave and we cannot replace them with suitable candidates quickly, we could experience difficulty in managing our business properly. This could harm our business prospects, client relationships, employee morale and financial results. We currently maintain a key-person life insurance policy on our chief executive officer.

Our ability to sell our services is highly dependent on the quality of our support and services offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and results of operations.

Our customers depend on our support organization to resolve issues relating to our mCore service delivery platform. We believe that a high level of support is critical for the successful marketing and sale of our services and future enhancements to mCore. Failure to effectively assist our customers in deploying their mobile data portals and storefronts, quickly resolve post-deployment issues, and otherwise provide effective ongoing support would adversely affect our ability to sell our services to existing customers and could harm our reputation among potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. As a result, our failure to maintain high quality support and services could have a material adverse effect on our business, operating results and financial condition.

We rely on the development of content and applications by third parties, and if wireless carriers and their subscribers do not find such content compelling, our sales could decline.

Our business is dependent on the availability of content and applications for mobile devices that wireless carriers and their subscribers find useful and compelling. A significant percentage of our revenue is derived from the sale of applications and content through storefronts and portals we operate for our wireless carrier customers. We also believe that demand for our services will increase as the number of applications and the volume of mobile content increases because our services facilitate the navigation and organization of large numbers of applications and large amounts of content. We do not develop applications or content; rather, we facilitate the sale and consumption of applications and content developed by third parties through our wireless carrier customers. If third-party developers fail to create content and applications that wireless carriers and their subscribers find useful and compelling, our sales would decline, and that would have a significant adverse effect on our business, operating results and financial condition.

Our solutions may contain undetected software errors, which could harm our reputation and adversely affect our business.

Our solutions are highly technical and have contained and may contain undetected errors, defects or security vulnerabilities. Some errors in our solutions may only be discovered after a solution has been deployed and used by our wireless carrier customers. Any errors, defects or security vulnerabilities discovered in our solutions after commercial release could result in loss of revenue or

 

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delay in revenue recognition, loss of customers and increased service cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention away from the business and adversely affect the market’s perception of us and our services. In addition, if our business liability insurance coverage is inadequate or future coverage is unavailable on acceptable terms or at all, our operating results and financial condition could be adversely impacted.

We may engage in acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results or financial condition.

We expect to make selective domestic and international acquisitions of, and investments in, businesses that offer complementary products, services and technologies, augment our market coverage, and/or enhance our technological capabilities. We may also enter into strategic alliances or joint ventures to achieve these goals. We may not be able to identify suitable acquisition, investment, alliance, or joint venture opportunities or consummate any such transactions or relationships on terms and conditions acceptable to us. Such transactions or relationships that we enter into may not be successful. In addition, acquisitions and investments outside of the U.S. involve unique risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

These transactions or any other acquisitions or dispositions involve risks and uncertainties, which may have a material adverse effect on our business. The integration of acquired businesses may not be successful and could result in disruption to other parts of our business. In addition, the integration may require that we incur significant restructuring charges. To integrate acquired businesses, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The difficulties of the integrations may be further complicated by such factors as geographic distances, lack of experience operating in the geographic market or industry sector of the acquired business, delays and challenges associated with integrating the business with our existing businesses, diversion of management’s attention from daily operations of the business, potential loss of key employees and customers of the acquired business, the potential for deficiencies in internal controls at the acquired business, performance problems with the acquired business’ technology, difficulties in entering markets in which we have no or limited direct prior experience, exposure to unanticipated liabilities of the acquired business, insufficient revenues to offset increased expenses associated with the acquisition, and our ability to achieve the growth prospects and synergies expected from any such acquisition. Even when an acquired business has already developed and marketed products and services, there can be no assurance that product or service enhancements will be made in a timely fashion or that all pre-acquisition due diligence will have identified all possible issues that might arise with respect to such acquired assets.

Any acquisition may also cause us to assume liabilities, record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential impairment charges, incur amortization expense related to certain intangible assets, increase our expenses and working capital requirements, and subject us to litigation, which would reduce our return on invested capital. Failure to manage and successfully integrate the acquisitions we make could materially harm our business and operating results.

Any future acquisitions may require additional debt or equity financing, which in the case of debt financing, will increase our leverage and, in the case of equity financing, would be dilutive to our existing stockholders. Any decline in our perceived credit-worthiness associated with an acquisition could adversely affect our ability to borrow and result in more restrictive borrowing terms. As a result of

 

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the foregoing, we also may not be able to complete acquisitions or strategic transactions in the future to the same extent as in the past, or at all. These and other factors could harm our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business, financial condition and results of operations.

If we fail to manage future growth effectively, our business could be harmed.

We have experienced, and expect to continue to experience, rapid growth. Our revenue from continued operations grew from $1.9 million during the year ended December 31, 2004 to $103.2 million during the year ended December 31, 2008. We also increased the number of our full-time employees from 88 at December 31, 2004 to 338 at December 31, 2008. This growth has placed significant demands on our management, operational and financial infrastructure. To manage growth effectively, we must continue to improve and enhance our managerial, operational and financial controls, and train and manage our employees, and expand our employee base. We must also manage new and existing relationships with customers, suppliers, business partners and other third parties. These activities will require significant expenditures and allocation of valuable management resources. If we fail to maintain the efficiency of our organization as we grow, our profit margins may decrease, and we may be unable to achieve our business objectives.

We have recently recognized significant impairment losses related to our goodwill, intangible assets and property and equipment. Additional impairment losses may be recognized which would adversely affect our financial results.

We are required under GAAP to test goodwill for impairment annually and to assess our amortizable intangible assets and long-lived assets, as well as goodwill, for impairment when events or changes in circumstance indicate the carrying value may not be recoverable. Factors which have led to impairments in the past include changes in business strategy, restructuring of the business in connection with acquisitions, actual performance of acquired businesses below our expectations and expiration of customer contracts. Unanticipated events or changes in circumstances could impact our ability to recover the carrying value of some or all of these assets. In addition, we expect to make additional acquisitions in the future which would increase the amount of such assets on our books that would be subject to potential future impairment. In the event any of our current or future assets became impaired, the associated impairment charge could adversely impact our results of operations.

Our business involves the use, transmission and storage of confidential information, and the failure to properly safeguard such information could result in significant reputational harm and monetary damages.

Our business activities involve the use, transmission and storage of confidential information. We believe that we take commercially reasonable steps to protect the security, integrity and confidentiality of the information we collect and store, but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. If such unauthorized disclosure or access does occur, we may be required, under existing and proposed laws, to notify persons whose information was disclosed or accessed. We may also be subject to claims of breach of contract for such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed. The unauthorized disclosure of information may result in the termination of one or more of our commercial relationships and/or a reduction in customer confidence and usage of our services, which would have a material adverse effect on our business, operating results and financial condition.

 

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We may be subject to liability for our use or distribution of information that we receive from third parties.

As part of our business, we obtain content and commercial information from third parties. When we distribute this information, we may be liable for the data contained in that information. There is a risk that we may be subject to claims related to the distribution of such content such as defamation, negligence, intellectual property infringement, violation of privacy or publicity rights and product or service liability, among others. Laws or regulations of certain jurisdictions may also deem some content illegal, which may expose us to additional legal liability. We also gather personal information from subscribers in order to provide personalized services. Gathering and processing this personal information may subject us to legal liability for, among other things, defamation, negligence, invasion of privacy and product or service liability. We are also subject to laws and regulations, both in the U.S. and abroad, regarding the collection and use of subscriber information. If we do not comply with these laws and regulations, we may be exposed to legal liability.

Some of the agreements by which we obtain content do not contain indemnity provisions in our favor. Even if a given contract does contain indemnity provisions, they may not cover a particular claim or type of claim or the party granting indemnity may not have the financial resources to cover the claim. Our insurance coverage may be inadequate to cover fully the amounts or types of claims that might be made. Any liability that we incur as a result of content we receive from third parties could adversely impact our results of operations.

Actual or perceived security vulnerabilities in mobile devices could negatively affect our business.

The security of mobile devices and wireless networks is critical to our business. Individuals or groups may develop and deploy viruses, worms and other malicious software programs that attack mobile devices and wireless networks. Security experts have identified computer worms targeted specifically at mobile devices. Security threats could lead some mobile subscribers to reduce or delay their purchases of mobile content and applications in an attempt to reduce the security threat posed by viruses, worms and other malicious software. Wireless carriers and device manufacturers may also spend more on protecting their wireless networks and mobile devices from attack, which could delay adoption of new mobile devices that tend to include more features and functionalities that facilitate increased use of mobile data services. Actual or perceived security threats, and reactions to such threats, could reduce our revenue or require unplanned expenditures on new security initiatives.

If we fail to maintain proper and effective internal controls or are unable to remediate the deficiencies in our internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ views of us could be harmed.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are in the process of documenting and reviewing our internal controls and procedures. Beginning with fiscal year 2011, we will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which requires annual management assessment of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing this assessment. Our compliance with Section 404 will require that we incur substantial expense and expend significant management time on compliance-related issues. If we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market’s

 

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confidence in our financial statements could decline and the market price of our common stock could be adversely impacted.

With respect to fiscal year 2007, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. The material weakness related to insufficient personnel within our accounting function and inadequate accounting policies and procedures documentation. With respect to fiscal year 2008, we and our independent registered public accounting firm identified a significant deficiency in our internal control over financial reporting related to documentation, recordkeeping and personnel issues. We have since recruited and are continuing to recruit additional finance and accounting personnel and we have improved our accounting policies and procedures documentation to address these observations. Nevertheless, our remediation efforts may prove inadequate and there can be no assurance that additional weaknesses or deficiencies will not be identified. If material weaknesses or deficiencies in our internal control exist and go undetected, our financial statements could contain material misstatements that, when discovered in the future could cause us to fail to meet our future reporting obligations and cause the price of our common stock to decline.

Claims by others that we infringe their intellectual property rights could force us to incur significant costs.

We cannot be certain that our services do not and will not infringe the intellectual property rights of others. Many parties in the telecommunications and software industries have begun to apply for and obtain patent protection for innovative proprietary technologies and business methods. Given that our platform interacts with various participants in the mobile data ecosystem, existing or future patents protecting certain proprietary technology and business methods may preclude us from using such proprietary technology or business methods, or may require us to pay damages for infringement or fees to obtain a license to use the proprietary technology or business methods (which may not be available or, if available, may be on terms that are unacceptable), or both, which would increase our cost of doing business. In addition, litigation concerning intellectual property rights and the infringement of those rights, including patents, trademarks and copyrights, has grown significantly over the last several years and is likely to grow further in the future. If we become the subject of infringement claims, we may be forced into litigation, which will require us to devote significant resources and management time and attention to defend against such infringement claims. If it is determined that our services infringe the intellectual property rights of a third party, we may be required to pay damages or enjoined from using that technology or forced to obtain a license (which may not be available or, if available, may be on terms that are unacceptable) and/or pay royalties to continue using that technology. The assertion of intellectual property infringement claims against our technology could have a material adverse effect on our business, operating results and financial condition.

Government regulation of the mobile industry is evolving, and unfavorable changes or our failure to comply with regulations could harm our business and operating results.

As the mobile industry continues to evolve, we believe greater regulation by federal, state or foreign governments or regulatory authorities becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information, could affect our customers’ ability to use and share data, potentially reducing our ability to utilize this information for the purpose of continued improvement of the overall mobile subscriber experience. In addition, any regulation of the requirement to treat all content and application provider services the same over the mobile Internet, sometimes referred to as net neutrality regulation, could reduce our customers’ ability to make full use of the value of our services. Further, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations to access the Internet may be imposed.

 

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Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the mobile Internet and the viability of mobile data service providers, which could harm our business and operating results. Finally, any further or more restrictive regulation of the ability of wireless carriers to include charges for goods and services in a mobile subscriber’s bill or their ability to offer up these capabilities to third parties, such as ourselves, on a bill-on-behalf-of basis could negatively impact our business.

Our use of open source software could limit our ability to commercialize our services.

We have incorporated open source software into our services. Although we closely monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our services. In that event, we could be required to seek licenses from third parties in order to continue offering our services, to re-engineer our products or to discontinue sales of our services, any of which could materially adversely affect our business.

Our failure to raise additional capital or generate the cash flows necessary to expand our operations and invest in our services could reduce our ability to compete successfully.

In the future, we may require additional amounts of capital to execute our business plan. We may require capital to complete planned upgrades and enhancements to our products and services, increase our investment in capital equipment to support new and existing customers, extend our marketing and sales efforts, expand internationally and make strategic acquisitions if attractive opportunities become available. Our future capital requirements will depend on many factors, including the time and cost of our service enhancements, the rate of mobile data subscriber growth, the acceptance rate of mobile devices as multi-functional computing platforms, the demand for wireless applications, the time and cost of successfully entering into new customer contracts and the amount of investment needed to achieve our sales and marketing objectives.

Based on our current cash balances and projected revenues, and taking into account the additional capital we expect to receive from this offering, we estimate that we will have sufficient capital to execute our near term business plans and maintain positive cash flow. However, this may not be the case. Further, we may not have sufficient capital to take advantage of opportunities for strategic acquisitions of significant complementary or competitive businesses that could enhance our business and operating results. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that further restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios. We may not be able to raise any additional capital that we may require on terms acceptable to us or at all. If we cannot obtain financing on commercially reasonable terms when needed, we may not be able to pursue some elements of our current strategy and business plan, and we may not be able to achieve our financial objectives.

 

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Risks Related to this Offering and Ownership of Our Common Stock

There is no established trading market for our common stock, and the market price of our common stock may be highly volatile or may decline regardless of our operating performance.

There has been no public market for our common stock prior to this offering. If you purchase shares of our common stock in this offering, you will pay a price that was not established in the public trading markets. The initial public offering price for our shares will be determined through negotiations among the underwriters, the selling stockholders and us. This initial public offering price may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell your shares above the initial public offering price, and you may suffer a loss on your investment. In addition, an active trading market for our common stock following this offering may not develop or, if developed, may not be sustained. An inactive market may also impair our ability to raise capital to continue to fund operations by selling stock and may impair our ability to acquire other companies or assets by using our common stock as consideration.

Broad market and industry factors also may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause wide fluctuations in the stock price may include, among other things:

 

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actual or anticipated variations in our financial condition and operating results;

 

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overall conditions or trends in our industry;

 

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addition or loss of significant customers;

 

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competition from existing or new products;

 

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changes in the market valuations of companies perceived by investors to be comparable to us;

 

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announcements by us or our competitors of technological innovations, new services or service enhancements;

 

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announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures or capital commitments;

 

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announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

 

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additions or departures of key personnel;

 

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

 

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sales of our common stock by us or our stockholders, including sales by our directors and officers.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. These fluctuations may be even more pronounced in the trading market for our common stock immediately following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. We may be the target of this type of litigation in the future. Securities litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources, whether or not we are successful in such litigation.

 

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Requirements associated with being a public company will increase our costs, as well as divert company resources and management’s attention, and affect our ability to attract and retain qualified board members and executive officers.

Prior to this offering, we have not been subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, or the other rules and regulations of the SEC or any securities exchange relating to public companies. We will comply with Section 404(a) (management’s report on financial reporting) under the Sarbanes-Oxley Act for the year ending December 31, 2010 and will comply with Section 404(b) (auditor’s attestation) no later than the year ending December 31, 2011. We are working with our legal, independent accounting, and financial advisors to identify those areas in which changes or enhancements should be made to our financial and management control systems to manage our growth and obligations as a public company. Some such areas include corporate governance, corporate control, internal audit, disclosure controls and procedures, and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. However, the expenses that will be required in order to prepare adequately for becoming a public company could be material. Compliance with the various reporting and other requirements applicable to public companies will also require considerable time and attention of management. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the impact that our management’s attention to these matters will have on our business. In addition, the changes we make may not be sufficient to satisfy our obligations as a public company on a timely basis or at all.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees and our executive team.

Our principal stockholders may exert substantial influence over us and may exercise their control in a manner adverse to your interests.

Upon completion of this offering and assuming no exercise of an option to purchase additional shares by the underwriters, funds affiliated with Advanced Equities, Inc., New Enterprise Associates, Inc. and entities beneficially owned by Carl C. Icahn will own             ,             , and              shares, respectively, or approximately         %,         %, and         %, respectively, of our outstanding common stock. Because a limited number of persons may exert substantial influence over us, transactions could be difficult or impossible to complete without the support of those persons. It is possible that these persons will exercise control over us in a manner adverse to your interests. For more information regarding ownership of our outstanding stock by our principal and selling stockholders, see the section of this prospectus entitled “Principal and Selling Stockholders.”

Future sales of our common stock may cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline. These sales might also make it more difficult for us to sell additional equity securities at a time and price that we deem appropriate. Based on                  shares outstanding as of                             , upon completion of this offering, we will have                  shares of common stock outstanding. Of these outstanding shares, all of the shares of our common stock sold in this offering will be freely tradable in the public market, except for any shares held by our affiliates as defined in Rule 144 of the Securities Act.

 

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We, our directors and executive officers and substantially all of our stockholders, including the selling stockholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any shares of our common stock or any securities convertible into, or exercisable or exchangeable for, shares of our common stock for a period of 180 days from the date of this prospectus, which may be extended upon the occurrence of specified events, except with the prior written consent of Goldman, Sachs & Co. and J.P. Morgan Securities Inc. However, Goldman, Sachs & Co. and J.P. Morgan Securities Inc., in their sole discretion, may release any of the securities subject to these lock-up agreements at any time without notice.

After the expiration of the lock-up agreements, up to          restricted securities may be sold into the public market in the future without registration under the Securities Act to the extent permitted under Rule 144. Of these restricted securities,                  shares will be available for sale approximately 180 days after the date of this prospectus subject to volume or other limits under Rule 144. In addition, once the lock-up agreements expire, stockholders holding                  shares of these restricted securities will have registration rights that could allow those holders to sell their shares freely through a future registration statement filed under the Securities Act. See the section of this prospectus entitled “Certain Relationships and Related Party Transactions—Registration Rights Agreement” for more information on these registration rights.

Furthermore,                  shares reserved for issuance pursuant to options or restricted stock that will be outstanding immediately following the closing of this offering and                  shares available for grant under our equity incentive plans following the closing of this offering, if issued or granted, will become eligible for sale in the public market once permitted by provisions of various vesting agreements, lock-up agreements and Rule 144, as applicable. We intend to file a registration statement on Form S-8 under the Securities Act to register approximately          million shares of our common stock for issuance under these equity incentive plans. For additional information, see the section of this prospectus entitled “Shares Eligible for Future Sale.” If these additional shares of common stock are, or if it is perceived that they will be, sold in the public market, the trading price of our common stock could decline.

Our historical financial statements may not be indicative of future performance.

In light of our acquisition of the mobile division of InfoSpace on December 28, 2007, our operating results only reflect the impact of the acquisition from that date, and therefore comparisons with prior periods are difficult. As a result, our limited historical financial performance as owners of the mobile division of InfoSpace may make it difficult for stockholders to evaluate our business and results of operations to date and to assess our future prospects and viability. Furthermore, our brief operating history has resulted in revenue and profitability growth rates that may not be indicative of our future results of operations. As a result, the price of our common stock may be volatile.

In addition, we exited two lines of business in 2007 and 2008, our direct to consumer business, which was sold in two transactions in 2007 and 2008, and a business we refer to as media and entertainment (“media and entertainment”), which was discontinued in 2008. The loss from discontinued operations in the 2008 period includes losses from these discontinued businesses.

As a result of the foregoing factors, our historical results of operations are not necessarily indicative of the operating results to be expected in the future.

 

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If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock, or if our operating results do not meet their expectations, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these reports or analysts. If any of the analysts who cover our company downgrades our stock, or if our operating results do not meet the analysts’ expectations, our stock price could decline. Moreover, if any of these analysts ceases coverage of our company or fails to publish regular reports on our business, we could lose visibility in the financial markets, which in turn could cause our stock price and trading volume to decline.

We currently do not intend to pay dividends on our common stock and, as a result, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We have never declared or paid any dividends on our common stock and currently do not expect to declare or pay dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used in the operation and growth of our business. Any determination to pay dividends in the future will be at the discretion of our board of directors. In addition, our ability to pay dividends on our common stock is currently limited by the covenants of our credit facility and may be further restricted by the terms of any future debt or preferred securities. Accordingly, your only opportunity to achieve a return on your investment in our company may be if the market price of our common stock appreciates and you sell your shares at a profit. The market price for our common stock may never exceed, and may fall below, the price that you pay for such common stock.

You will experience immediate and substantial dilution in the book value of your common stock as a result of this offering.

The initial public offering price of our common stock is considerably more than the pro forma, net tangible book value per share of our outstanding common stock. This reduction in the value of your equity is known as dilution. This dilution occurs in large part because our earlier investors paid substantially less than the initial public offering price when they purchased their shares. Investors purchasing common stock in this offering will incur immediate dilution of $         in pro forma, net tangible book value per share of common stock, based on the assumed initial public offering price of $         per share, which is the midpoint of the price range listed on the front cover page of this prospectus. In addition, following this offering, purchasers in the offering will have contributed         % of the total consideration paid by our stockholders to purchase shares of common stock. The exercise of outstanding options and warrants will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section of this prospectus entitled “Dilution.” In addition, if we raise funds by issuing additional securities, the newly-issued shares will further dilute your percentage ownership of our company.

Our management will have broad discretion over the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on their judgment regarding the application of these proceeds. Our management might not apply our net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds from this offering for working capital and general corporate purposes and for capital expenditures, which may in the future include investments in, or acquisitions of, complementary businesses, services or products. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that do not directly or exclusively relate to historical facts. As a general matter, forward-looking statements reflect our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. We generally identify forward looking statements by terminology such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words, but the absence of these words does not necessarily mean that a statement is not forward-looking. Examples of forward-looking statements include, but are not limited to, statements we make regarding “our expectation that international revenue will increase in absolute dollars and as a percentage of our total revenue” and “our anticipated levels of capital expenditures during the next year.”

Any forward-looking statements contained in this prospectus are based upon our historical performance, current plans, estimates, expectations and other factors we believe are appropriate under the circumstances. The inclusion of this forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements.

The following uncertainties and factors, among others (including the factors described in the section entitled “Risk Factors” in this prospectus), could affect our future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements:

 

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our expectations regarding our revenues, expenses and operations and our ability to sustain profitability;

 

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our anticipated cash needs and our estimates regarding our capital requirements;

 

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our ability to expand our customer base and relationships with wireless carriers and content and application providers;

 

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our ability to expand our service offerings;

 

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our anticipated growth strategies and sources of new revenues;

 

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unanticipated trends and challenges in our business and the markets in which we operate;

 

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our ability to recruit and retain qualified employees and staff our operations appropriately;

 

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our ability to estimate accurately for purposes of preparing our consolidated financial statements;

 

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our international expansion plans;

 

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compliance with governmental regulations; and

 

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our spending of the net proceeds from this offering.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus.

Any forward-looking statement made by us in this prospectus speaks only as of the date on which it is made. Unless required by law, we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission, after the date of this prospectus.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $         million from the sale of                  shares of common stock in this offering at the assumed initial public offering price of $         per share, the midpoint of the range set forth on the front cover page of this prospectus, after deducting underwriting commissions and discounts of $         million and estimated expenses of $         million. We will not receive any proceeds from the sale of shares by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the range set forth on the front cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $        , after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We plan to use the net proceeds of the offering for working capital, general corporate purposes and for funding capital expenditures and acquisitions. We may also use a portion of the net proceeds from the offering to acquire other businesses, products or technologies. We do not, however, have agreements or commitments for any specific acquisitions at this time.

Pending use of the net proceeds from this offering, we intend to invest the remaining net proceeds in short-term, interest-bearing investment grade securities.

 

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DIVIDEND POLICY

We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Our ability to pay cash dividends on our common stock is limited by the covenants of our credit facility and may be further restricted by the terms of any future debt or preferred securities.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2009:

 

  Ÿ  

on an actual basis; and

 

  Ÿ  

on a pro forma, as adjusted, basis to give effect to:

 

  Ÿ  

the sale by us of                  shares of our common stock at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the front cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us;

 

  Ÿ  

the use of the estimated net proceeds therefrom, as described in “Use of Proceeds”;

 

  Ÿ  

the conversion of 297,599,948 shares of our mandatorily redeemable preferred shares to 337,394,261 common shares at fixed conversion rates;

 

  Ÿ  

the conversion of 29,404,456 shares of our mandatorily redeemable preferred shares to                  common shares based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the front cover page of this prospectus;

 

  Ÿ  

the conversion of 34,698,425 shares of our preferred stock to                  common shares based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the front cover page of this prospectus;

 

  Ÿ  

the reclassification of the mandatorily redeemable preferred stock warrant liability to additional paid-in capital; and

 

  Ÿ  

the recording of approximately $12.6 million stock-based compensation expense due to the vesting of restricted stock triggered by the closing of this offering.

You should read the following table in conjunction with our consolidated financial statements and related notes, “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. The information presented in the table below has not been adjusted to reflect the anticipated reverse stock split.

 

     As of September 30,
2009
     (unaudited)
     Actual     Pro Forma,
As Adjusted(1)
     (in millions)

Cash and cash equivalents

   $ 19.6      $             
              

Debt:

    

Current portion of long-term debt

   $ —        $  

Long-term debt, less current portion

     —       
              

Total debt

     —       
              

Mandatorily redeemable preferred stock

     411.6     
              

Stockholders’ deficit

    

Preferred stock, $0.001 par value; 7,613,944 shares authorized, 7,338,769 shares issued and outstanding, actual,              shares authorized,              shares issued and outstanding, pro forma

     17.4     

Common stock, $0.001 par value; 625,000,000 shares authorized, 113,492,955 shares issued and outstanding, actual,              shares authorized,              shares issued and outstanding, pro forma

     0.1     

Additional paid-in capital

     —       

Accumulated deficit

     (295.2  

Accumulated other comprehensive income

     0.1     
              

Total stockholders’ deficit

     (277.6  
              

Total capitalization

   $ 134.0      $  
              

 

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

The outstanding share information set forth above is as of September 30, 2009 and:

 

  Ÿ  

excludes                  shares related to unexercised stock options and shares of our common stock reserved for future grants under our equity incentive plans;

 

  Ÿ  

excludes                  shares of restricted stock or stock options to be granted to certain officers, directors and employees in connection with this offering; and

 

  Ÿ  

excludes                  warrants to purchase shares of common, preferred and mandatorily redeemable preferred stock.

 

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DILUTION

If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of                      was approximately $         million, or $         per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets, less our total liabilities, divided by the number of shares of common stock outstanding as of                     , after giving effect to the exercise of all manditorily redeemable preferred stock warrants and the conversion of all outstanding shares of our mandatorily redeemable preferred stock and preferred stock immediately prior to the closing of this offering.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to our sale of shares of common stock in this offering at the initial public offering price of $         per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and after giving effect to estimates of certain expenses that we expect to be reimbursed, our pro forma as adjusted net tangible book value as of                      would have been $         million, or $         per share. This represents an immediate increase in net tangible book value of $         per share to existing stockholders and an immediate dilution in net tangible book value of $         per share to investors purchasing common stock in this offering, as illustrated by the following table:

 

Initial public offering price per share

   $             

Pro forma net tangible book value per share prior to this offering as of                     

   $  

Increase in net tangible book value per share attributable to stockholders purchasing shares in this offering

  
      

Pro forma net tangible book value per share after this offering

  
      

Dilution in net tangible book value per share to new stockholders

   $  
      

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover page of this prospectus, would increase (decrease) our pro forma net tangible book value by $         million, our pro forma net tangible book value per share after this offering by $         per share, and the dilution to new investors in this offering by $         per share, assuming the number of shares of common stock offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.

 

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The following table summarizes, on the same pro forma basis as of                      the differences between the existing stockholders and the new stockholders in this offering with respect to the number of shares purchased from us, the total consideration paid, and the average price per share paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The calculations, with respect to shares purchased by new investors in this offering, reflect an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover page of this prospectus.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
      Number    Percentage     Amount    Percentage    

Existing stockholders

             $                        $             

New investors

            
                          

Total

      100.0   $                 100.0  
                          

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover page of this prospectus, would increase (decrease) total consideration paid by new investors in this offering and by all investors by $         million and would increase (decrease) the percentage of shares purchased and percentage of total consideration paid by new investors         % and         %, respectively, before deducting the estimated underwriting discounts and commissions and offering expenses payable by us in connection with this offering.

If the underwriters’ option to purchase additional shares is exercised in full, the percentage of our shares held by existing equity owners would decrease to approximately         % and the percentage of our shares held by new stockholders would increase to approximately         %.

The outstanding share information set forth above is as of                      and:

 

  Ÿ  

excludes                  shares related to unexercised stock options and shares of our common stock reserved for future grants under our equity incentive plans;

 

  Ÿ  

excludes                  shares of restricted stock or stock options to be granted to certain officers, directors and employees in connection with this offering; and

 

  Ÿ  

excludes                  warrants to purchase shares of common, preferred and mandatorily redeemable preferred stock.

To the extent any outstanding options are exercised, new investors will experience further dilution.

If all stock options and warrants with exercise prices less than the initial public offering price are exercised, the number of shares held by existing stockholders will increase to                  shares of our common stock, or         % of the total number of shares of our common stock outstanding after this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The selected historical consolidated financial data set forth below as of December 31, 2007 and 2008 and for the years ended December 31, 2006, 2007 and 2008 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected historical financial data as of December 31, 2004, 2005 and 2006 and for the years ended December 31, 2004 and 2005 have been derived from our unaudited consolidated financial statements not included in this prospectus. In light of our acquisition of the mobile division of InfoSpace on December 28, 2007, our financial statements only reflect the impact of that acquisition since that date, and therefore comparisons with prior periods are difficult.

The selected consolidated financial data as of and for the nine months ended September 30, 2008 and 2009 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the operating results to be expected for the full fiscal year.

The unaudited information was prepared on a basis consistent with that used in preparing our audited consolidated financial statements and includes all adjustments, consisting of normal recurring adjustments, which are necessary for a fair presentation of our financial position, results of operations and cash flows for the unaudited periods.

The following selected consolidated financial data is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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    Years Ended December 31,     Nine Months Ended
September 30,
 
    2004     2005     2006     2007     2008     2008     2009  
    (Unaudited)     (Unaudited)                       (Unaudited)  
    (In thousands, except per share data)  

Consolidated Statement of Operations Data:

             

Revenues

  $ 1,871      $ 17,875      $ 21,903      $ 35,171      $ 103,151      $ 74,835      $ 88,744   

Operating expenses:

             

Direct third-party costs

    25        3,797        2,201        3,709        5,451        3,493        8,148   

Datacenter and network operations (1)

    —          2,625        9,561        9,468        33,000        24,039        23,720   

Product development and sustainment (1)

    —          8,190        24,617        16,229        52,261        43,784        24,203   

Sales and marketing (1)

    21        8,717        8,403        7,119        10,228        7,535        8,505   

General and administrative (1)

    10,087        9,632        11,239        10,334        26,052        19,424        13,948   

Depreciation and amortization (1)

    392        2,997        5,925        10,322        21,559        15,553        10,230   

Restructuring (2)

    —          180        1,084        1,283        3,236        2,016        1,957   

Goodwill and long-lived asset impairment charges (3)

    —          —          —          26,867        29,130        24,538        5,806   

Abandoned transaction charge (4)

    —          —          —          2,600        —          —          —     
                                                       

Total operating expenses

    10,525        36,138        63,030        87,931        180,917        140,382        96,517   
                                                       

Operating Loss

    (8,654     (18,263     (41,127     (52,760     (77,766     (65,547     (7,773

Interest and other (expense) income, net

    (643     124        (1,110     1,155        2,714        2,786        (1,659
                                                       

Loss from continuing operations, before income tax

    (9,297     (18,139     (42,237     (51,605     (75,052     (62,761     (9,432

Provision for income taxes

    —          —          —          —          1,776        1,332        1,405   
                                                       

Net loss from continuing operations

    (9,297     (18,139     (42,237     (51,605     (76,828     (64,093     (10,837

Cumulative effect of accounting change

    —          (235     —          —          —          —          —     

Net loss from discontinued operations (5)

    (1,262     (4,081     (12,960     (24,928     (1,072     (1,072     —     

Loss from sale of discontinued operations (5)

    —          —          —          (1,360     (127     (127     —     
                                                       

Net loss

    (10,559     (22,455     (55,197     (77,893     (78,027     (65,292     (10,837

Accretion of mandatorily redeemable preferred stock and Series D1 preferred dividends

    (1,597     (2,784     (5,942     (8,095     (22,427     (16,819     (17,966
                                                       

Net loss attributable to common stockholders

  $ (12,156   $ (25,239   $ (61,139   $ (85,988   $ (100,454   $ (82,111   $ (28,803
                                                       

Basic and fully diluted net loss per share

  $ (0.18   $ (0.30   $ (0.71   $ (0.99   $ (1.15   $ (0.94   $ (0.32
                                                       

Weighted average number of shares of common stock used in computing basic net loss per share (6)

    65,783        83,740        85,896        86,939        87,652        87,447        88,740   

Pro forma net loss attributable to holders of common stock (unaudited) (6)

             

Pro forma basic net loss per share (unaudited) (6)

             

Weighted average number of shares of common stock used in computing pro forma basic and fully diluted net loss per share (unaudited) (6)

             
Consolidated Balance Sheet Data:               (Unaudited)                          

Cash and cash equivalents

  $ 15,099      $ 21,958      $ 6,143      $ 67,418      $ 14,299      $ 13,568      $ 19,627   

Working capital

    10,071        17,688        5,769        74,478        30,698        37,295        32,947   

Total assets

    31,765        68,611        114,599        289,391        195,447        202,932        177,208   

Total long-term debt and capital lease obligations, less current portion

    2,055        4,031        5,344        16,295        3,234        4,086        —     

Total mandatorily redeemable preferred stock

    46,753        77,450        164,037        372,406        394,135        388,704        411,581   

Total stockholders’ deficit

    (24,312     (30,084     (88,142     (152,510     (249,867     (232,053     (277,599

 

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(1) Depreciation and amortization is not included in each respective operating expense category. The allocation by function is as follows:

 

      Years Ended December 31,    Nine Months
Ended
September 30,
     2004    2005    2006    2007    2008    2008    2009
     (Unaudited)    (Unaudited)         (Unaudited)
              

(In thousands)

    

Datacenter and network operations

   $  —      $ 487    $ 2,938    $ 7,310    $ 16,824    $ 12,426    $ 6,928

Product development and sustainment

     —        —        1,462      1,548      2,237      1,379      1,489

Sales and marketing

     —        —        4      307      2,075      1,499      1,516

General and administrative

     392      2,510      1,521      1,157      423      249      297
                                                

Depreciation and amortization

   $ 392    $ 2,997    $ 5,925    $ 10,322    $ 21,559    $ 15,553    $ 10,230
                                                

 

(2) Our restructuring charges relate to costs associated with closing and relocating facilities, relocating certain key employees and severance costs following the acquisition of InfoSpace Mobile. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.
(3) The impairments in 2008 and 2009 relate primarily to integration activities following our acquisition of InfoSpace Mobile in December 2007 and to certain non-core operating assets. The 2007 impairments relate to goodwill due primarily to changes in consumer purchase habits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further details.
(4) In 2007, we issued a warrant to purchase common stock to an existing investor as a fee for providing a financing commitment in connection with a proposed acquisition that was not completed.
(5) In connection with a business strategy reassessment initiated in 2007, we exited the direct to consumer and media and entertainment businesses at various times during 2007 and 2008.
(6) See Note 13 to our consolidated financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share attributable to common stockholders.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and opinions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

We are a leading provider of mobile data solutions and services that enable wireless carriers to deliver high value mobile data services to their subscribers. We provide a comprehensive suite of hosted, managed service offerings, including mobile web portal, storefront, messaging, and billing support and settlement, which enable wireless carriers to deliver customized, carrier-branded mobile data services to their wireless subscribers. Our mCore service delivery platform provides the tools for mobile subscribers to easily locate and access personally relevant and location-based content and services, engage in social networking and download content and applications. We also leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized subscriber experience and targeted mobile marketing solutions. Our mCore platform provides mobile subscribers with access to over 30 million unique pieces of third-party content or applications that we optimize for delivery to over 2,000 different mobile phone models, ranging from entry level feature phones to smartphones. To date, over $3 billion in revenue has been generated by our customers through the use of our mobile data services platform. We have access to over 200 million mobile subscribers through our U.S. wireless carrier customers, and we currently provide mobile data services to over 30 million of these subscribers monthly.

The majority of our revenue consists of managed services revenue, charged on a monthly basis to our wireless carrier and other customers under contracts with initial terms ranging from one to three years in duration. Managed services revenue consists of fees we charge to manage, host and support our solutions and to provide other related services to our customers, and includes both fixed fees and variable, activity-based charges. In addition, we charge professional service fees to customize, implement, and enhance our solutions. Our wireless carrier customers include the five largest providers in the U.S., by number of subscribers. Revenue from the five largest wireless carriers accounted for 83% of our total revenue for the nine months ended September 30, 2009, with AT&T and Verizon Wireless accounting for 55% and 19% of total revenue, respectively. In addition to wireless carriers, our customers include some of the leading content and application providers in the U.S. We generated approximately 95% of our total revenue in the U.S. during the nine months ended September 30, 2009. As we pursue expansion opportunities with international wireless carriers, we expect international revenue to increase in absolute dollars and as a percentage of our total revenue.

We expect our growth to be heavily dependent upon our ability to maintain strong relationships with the top five U.S. wireless carriers, as well as our ability to develop new relationships with wireless carriers in developed and emerging markets, such as Southeast Asia, India and Latin America. In addition, we expect our growth to depend upon the increased adoption of our mCore service delivery platform by our customers and an increase in the activity conducted on our platform by our customers’ subscribers. Our ability to achieve and sustain profitability will be affected as we incur additional expenses to expand our sales, marketing, development and general and administrative capabilities. As we establish and expand our operational capabilities internationally, we will incur additional operating expenses and capital-related costs.

 

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We were founded in 2001 with a mission to develop a mobile data services business, and our strategy has evolved as the mobile data services industry has developed and expanded. We focused originally on Palm-based technology and related solutions which dominated the mobile data services market before wireless data services based on cellular telephony technology were developed and widely deployed by the wireless carriers. As the wireless data services market has developed we expanded the scope and nature of our data services to support wireless carriers and their subscribers. Since 2003, we have completed eight acquisitions as part of the process of developing and expanding our mobile services business. These included initial acquisitions of companies primarily engaged in the Palm-based data services market and subsequent acquisitions of companies engaged in the wireless data services market, as the wireless carriers and handset manufacturers came to dominate the mobile data services market. In December 2007, in our largest acquisition to date, we acquired the assets of the mobile division of InfoSpace, Inc., which we refer to as InfoSpace Mobile, a competing provider of mobile content solutions and services for the wireless industry. Due to the rapidly evolving nature of the mobile data services market and changes in our business strategy over time, in each of the last several years we have recognized impairment charges related to both acquired and internally developed assets. In addition, we have exited our direct to consumer and media and entertainment businesses, which are currently reflected as discontinued operations in our consolidated financial statements. These discontinued businesses include our original mobile data services business and several of our earlier acquisitions. As a consequence of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of revenue and operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

The InfoSpace Mobile Acquisition and Business Strategy Realignment

In December 2007, we acquired InfoSpace Mobile for a cash purchase price of $135 million and the assumption of certain liabilities. The acquisition was a key element in the broad strategic realignment of our business. We viewed InfoSpace Mobile as a competing provider of mobile content solutions and services for the wireless industry that had strong relationships with several large wireless carriers. Through its mCore platform, InfoSpace Mobile offered many of the same services we provided to our customers through our then existing platform, called Fuel. InfoSpace Mobile also operated a large development organization, with an emphasis on professional services work. In the acquisition, in addition to acquiring the mCore platform and a number of leased U.S. datacenter facilities, we acquired a 224-person employee base, additional contracts with certain of our new and pre-existing customers, including AT&T and Verizon Wireless, and the Bellevue, Washington office facilities that we now use as our corporate headquarters. We financed the acquisition through the issuance of $177.3 million of Series I mandatorily redeemable preferred stock and warrants.

Since completing the InfoSpace Mobile acquisition, we have significantly restructured our business. Due to the similar capabilities and features of the mCore and Fuel platforms, we conducted an evaluation of the mCore and Fuel platforms and concluded that it would be inefficient to continue managing and developing two incompatible technologies. As a result, we elected to phase out our legacy Fuel platform and began migrating our customers to an enhanced version of the acquired mCore platform. In 2008, we moved our headquarters from Durham, North Carolina to Bellevue, Washington. In mid-2008, we adopted several business initiatives to increase the operating efficiencies of the combined business, including eliminating redundant positions and functions, outsourcing a portion of our development activities to India and consolidating our network operations into five datacenters. In addition, we have more recently begun to move our business focus toward the sale of comprehensive managed services solutions, utilizing our more standardized architecture, and to de-emphasize the more highly customized, professional services intensive approach. We believe that this evolution of our business strategy will accelerate innovation in our service offerings for the benefit of our wireless carrier customers and their subscribers while reducing costs to the carriers.

 

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Prior to the InfoSpace Mobile acquisition, we provided mobile data services to wireless carriers and content and application providers using our proprietary Fuel platform. In addition, we operated two other lines of business, direct to consumer and media and entertainment. In 2007 and 2008, in connection with this business strategy realignment, we sold our direct to consumer business and discontinued our media and entertainment business. We then heightened our focus on our existing managed services model predominately for the wireless carriers. As part of our plan to pursue this more focused business strategy, our board of directors and our chief executive officer recruited additional senior management executives with substantial experience working with large carriers and managing significantly larger business organizations. In the first half of 2009, we completed the migration of all of our customers from the Fuel platform to mCore, except for AT&T’s storefront. We expect AT&T to fully migrate to the mCore platform in 2010.

Primarily due to the InfoSpace Mobile acquisition, our total revenue increased to $103.2 million for the year ended December 31, 2008 compared to $35.2 million for the year ended December 31, 2007.

Key Components of Our Results of Operations

Sources of revenue

Our revenue is earned predominantly under contracts ranging from one to three years in duration with our wireless carrier and other customers. Under the typical contract, we provide one or more of our managed services, for which we charge fixed, periodic or variable, activity-based fees (or a combination of both), and often also charge professional service fees to implement the specific mCore solutions required by the customer. We typically charge fixed monthly managed service fees to host the solutions and provide other support and services as required by the customer. Managed service fees vary by contract based on a number of factors including the scope of the solutions deployed, IT processing and bandwidth capacity requirements and the nature and scope of any other support or services required by the customer. Surcharges are typically included for excessive IT capacity requirements based on customer usage. Professional service fees primarily relate to work required for the initial customization and implementation of our mCore solutions for customers, as well as for customer-specified enhancements, extensions or other customization of the solutions following initial implementation. Professional services are typically provided on a fixed fee basis, depending on the scope and complexity of the individual project. Professional services fees from time to time may include charges for computer hardware and third-party software related to implementing our solutions.

Most of our customer contracts include a variable fee based on one of several measures, including the number of wireless subscribers who use our mCore solutions each month, the aggregate dollar volume or number of transactions processed, or specified rates for individual transactions processed, depending on the specific type of service involved. We typically receive a monthly subscription fee from our wireless carrier customers for each active portal user, where active usage is defined as utilizing the service at least one to three times per calendar month depending on the customer contract. We also receive from our wireless carrier customers a portion of the gross dollars generated by all transactions conducted through our digital storefronts, ranging from approximately 3% to 15%. In addition, from our content and application provider customers, we typically receive either a share of gross dollars generated for each premium message, or a fee for each standard message, delivered through the mCore platform. Individual carrier and content provider contracts often contain monthly minimum charges for usage-based fees or transaction-based charges for all or a portion of the contract term, based on various factors including the size of the customer’s subscriber base and the expected rate of subscriber usage of our services.

Due to the nature of the services we provide, our customer contracts contain monthly service level requirements that typically require us to pay financial penalties if we fail to meet the required

 

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service levels. We recognize these penalties, when incurred, as a reduction in revenue. Typical service level requirements address down time or slow response of our services that impact mobile subscribers and response time in addressing customer requests. Potential penalties vary by contract and range from near zero to as much as 100% of monthly recurring revenue, depending on the severity and duration of the service issue. Service level penalties represented 4% of total reported revenue in 2008 (during integration of the InfoSpace Mobile acquisition) and 1% of total reported revenue for the nine months ended September 30, 2009.

Operating expenses

We classify our operating expenses into six categories: direct third-party, datacenter and network operations, product development and sustainment, sales and marketing, general and administrative and depreciation and amortization. Our operating expenses consist primarily of personnel costs, which include salaries, bonuses, commissions, payroll taxes, employee benefit costs and stock-based compensation expense. Other operating expenses include datacenter and office facility expenses, computer hardware, software and related maintenance and support expenses, bandwidth costs, and marketing and promotion, legal, audit, tax consulting and other professional service fees. We charge stock-based compensation expense resulting from the amortization of the fair value of stock option grants to each option holder’s functional area. We allocate certain facility-related and other common expenses such as rent, office and IT desktop support to functional areas based on headcount.

Direct Third-Party Expenses.    Our direct third-party expenses consist of the costs of certain content that we contract for directly on behalf of our wireless carrier customers, as well as certain computer hardware and software that we acquire on behalf of one major carrier customer. We expect these costs to increase as a percentage of revenue as we directly contract for additional content for our carrier customers and to the extent licensing costs for customer-specific, third-party software increase.

Datacenter and Network Operations.    Datacenter and network operations expenses consist primarily of personnel and outsourcing costs for operating our datacenters, which host our mCore solutions on behalf of our customers. Additional expenses include facility rents, power, bandwidth capacity and software maintenance and support. We have been consolidating our datacenters since the InfoSpace Mobile acquisition, which has reduced datacenter and network operations costs. We expect, however, to expand our datacenter and our network capabilities in order to support the expected growth in mobile data usage by mobile subscribers. We expect our datacenter and network operations expenses to increase in absolute dollars but to decrease as a percentage of revenue over time.

Product Development and Sustainment.    Product development expenses primarily consist of personnel costs and costs from our development vendors. Our product development efforts include improving and extending the functionality and performance of our service delivery platform, developing new solutions, customizing and implementing our solution set for our customers and providing other service and support functions for our solutions. Product development costs related to software used solely on an internal basis to provide our services, which we refer to as internal use software, are capitalized and amortized over the expected asset life. We expect that product development expenses will increase in absolute dollars as we continue to enhance and expand our suite of solutions and services, but will decline as a percentage of revenue over time.

Sales and Marketing.    Sales and marketing expenses primarily consist of personnel costs for our sales and marketing staff, commissions earned by our sales personnel and the cost of marketing programs. In order to continue to grow our business and awareness of our services, we expect that we will commit additional resources to our sales and marketing efforts. We expect that sales and marketing expenses will increase in absolute dollars and as a percentage of revenue over time as we work to expand our U.S. and international customer bases.

 

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General and Administrative.    General and administrative expenses, referred to herein as G&A, primarily consist of personnel costs for our executive, finance, legal, human resources and administrative personnel, as well as legal, accounting and other professional fees and facilities-related expenses. We expect our G&A expenses to increase in absolute dollars, but decrease as a percentage of revenue over time.

Depreciation and Amortization.    Depreciation and amortization expenses consist primarily of depreciation on computer hardware and leasehold improvements in our datacenters, depreciation of capitalized software development costs, and amortization of purchased intangibles. We expect that depreciation and amortization expenses will increase in absolute dollars as we continue to expand our datacenters and our suite of solutions, but decline as a percentage of revenue over time.

Other income (expense), net

Other income and other expenses, net consists of interest we earn on our cash and cash equivalents, interest expense we incur as a result of our borrowings, if any, and non-operating income and expenses. It also includes income or expense relating to changes in the fair value of our outstanding warrants to purchase mandatorily redeemable preferred shares.

Income tax provision

Income tax expenses for 2008 and 2009 to date primarily consist of a deferred U.S. tax provision for the difference between book and tax treatment of goodwill associated with the acquisition of the InfoSpace Mobile assets. Due to our history of operating losses, we have accumulated substantial net operating and capital losses, which constitute the majority of our deferred tax assets. Because of our history of operating losses, we maintain full valuation allowances against these deferred tax assets and consequently are not recognizing any tax benefit related to our current pre-tax losses. If we achieve sustained profitability, subject to certain provisions of the U.S. federal tax laws that may limit our use of these accumulated losses, we will evaluate whether we should eliminate or reduce the valuation allowances which would result in immediate recognition of a tax benefit and we would begin recording income tax provisions based on our earnings and applicable statutory tax rates going forward. Due to our large net operating loss carryforwards, we do not expect to pay U.S. federal income taxes in the next several years.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

The following critical accounting policies are those accounting policies that, in our view, are most important in the portrayal of our financial condition and results of operations. Our critical accounting policies and estimates include those involved in recognition of revenue, business combinations, software development costs, valuation of goodwill, valuation of long-lived and intangible assets, provision for income taxes, accounting for stock-based compensation and discontinued operations. Note 2 to our financial statements included elsewhere in this prospectus provides additional information about these critical accounting policies, as well as our other significant accounting policies.

 

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Revenue recognition

We derive our revenues from contracts that include individual or varying combinations of our managed services and often include professional service fees to customize and implement the specific software platform solutions required by individual customers. We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability of the fee is reasonably assured. The timing of revenue recognition in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations.

Our carrier customer contracts typically consist of professional service fees, a fixed monthly managed service fee to host the software platform solution, and a variable monthly subscription fee based on one of three measures: the number of wireless subscribers using our software solutions each month, the aggregate dollar volume or number of transactions processed, or specified rates for individual transactions processed. Certain arrangements also include minimum monthly fee provisions, monthly fees for providing additional managed services required by the customer and/or service level requirements related to the hosted solutions which often entail financial penalties for non-compliance. Professional service fees typically include both initial fees to customize and implement the specific software solution and fees to enhance the functionality of the software solution, which may occur any time during the contractual term of the arrangement. Under most of our contracts, the customer does not have the right to take possession of the software. Accordingly, the professional service fees associated with the arrangement do not constitute a separate earnings process and consequently are deferred and recognized over the longer of the contractual term of the arrangement or the estimated period the customer is expected to benefit from the software platform or enhancement. In determining the expected benefit period, we assess factors such as the historical trends, data used to establish pricing in the arrangement, discussions with customers in negotiating the arrangement and the period over which the customer could be expected to recover and earn a reasonable return on the professional service fees. At September 30, 2009, our balance sheet reflected deferred revenue of $14.7 million, which consists primarily of such professional service fees. We recognize the related hosting and other managed service fees and the variable, activity-based fees as revenue on a monthly basis when they are earned.

Under certain arrangements, the customer has the right to take possession of the software and it is feasible for the customer, without significant penalty, to either self-host the software on its own hardware or contract with another entity for hosting service. Such multiple-element arrangements are analyzed to separate the software and non-software elements and to assess if fair value is determinable for each non-contingent element on a stand-alone basis. The fixed monthly managed service fee to host the software platform solution is considered a non-software component for which we establish fair value through substantive renewal rates included in the contract. We recognize the managed service fee on a monthly basis as earned. The variable monthly subscription fee is considered a contingent fee and is recognized when the contingency is resolved and the related fee is earned each month. We use the residual method to establish the fair value of the professional service fees and recognize the professional service fees under these arrangements when the associated milestones have been achieved and accepted by the customer.

We provide premium messaging services to subscribers of wireless carriers on behalf of third-party vendors and earn a fixed percentage of the related revenue. We bill the carriers for transactions conducted by their subscribers and provide settlement services for the third-party vendors based on payments received from the carriers. We have determined it is appropriate to record our net share of the billings to carriers as service revenue rather than the gross billing amount. The primary considerations for this determination are:

 

  Ÿ  

the third-party vendor sells its content or service directly to the wireless carriers’ subscribers and is considered the primary obligor;

 

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  Ÿ  

the carriers have a contractual relationship with their subscribers and are directly responsible for billing and collecting premium messaging fees from their subscribers and resolving billing disputes;

 

  Ÿ  

the carriers establish gross pricing for the transactions;

 

  Ÿ  

the wireless carriers generally pay us a fixed percentage of premium messaging revenues actually collected from their subscribers; and

 

  Ÿ  

we have limited risks, including no inventory risk and limited credit risk, because the carriers generally bear the risk of collecting fees from their subscribers and we are obligated to remit to the third-party vendor only their share of the funds we actually receive from the carrier.

Business combinations

We have completed eight business combinations since 2003. The purchase price of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with any amount in excess of such allocations designated as goodwill. We make significant judgments and assumptions in determining the fair value of acquired assets and assumed liabilities, especially with respect to acquired intangibles. Using different assumptions in determining fair value could materially impact the purchase price allocation and our financial position and results of operations.

Several methods are commonly used to determine fair value. For intangible assets, we typically use the “income method.” This method starts with our forecast of all expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method and other methods include:

 

  Ÿ  

the amount and timing of projected future cash flows;

 

  Ÿ  

the discount rate selected to measure the risks inherent in the future cash flows;

 

  Ÿ  

the acquired company’s competitive position; and

 

  Ÿ  

the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry.

Software development costs

We account for our mCore solutions as internal use software. We capitalize the cost to develop the software once the preliminary development efforts have been completed successfully, management has authorized and committed to project funding, and it is probable that the project will be completed and the software will be used as intended. Costs incurred prior to meeting these criteria are expensed as incurred. Once the solution is placed in service, such costs are amortized on a straight-line basis over the estimated useful life of the solution, generally three years. Costs incurred for enhancements that are expected to result in additional features or functionality or that extend the life of the underlying solution are capitalized and expensed over the remaining estimated useful life of the enhancements.

Valuation of goodwill

Our business acquisitions typically result in the recording of goodwill, and we periodically assess whether the recorded value of goodwill has become impaired. We test for potential impairment annually, in the fourth quarter of each year, and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Testing for impairment of goodwill

 

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involves estimating the fair value of the associated reporting unit and comparing it to its carrying value. If the estimated fair value is lower than the carrying value, then a more detailed assessment is performed comparing the fair value of the reporting unit to the fair value of the assets and liabilities plus the goodwill carrying value of the reporting unit. If the fair value of the reporting unit is less than the fair value of its assets and liabilities plus goodwill, then an impairment charge is recognized to reduce the carrying value of goodwill by the difference.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. We use valuation techniques consistent with the market approach and income approach to measure fair value for purposes of impairment testing. An estimate of fair value can be affected by many assumptions, requiring that management make significant judgments in arriving at these estimates, including the expected operational performance of our businesses in the future, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use to estimate future cash flows—including sales volumes, pricing, market penetration, competition, technological obsolescence and discount rates—are consistent with our internal planning. Significant changes in these estimates or their related assumptions in the future could result in an impairment charge related to our goodwill.

The $74.7 million of recorded goodwill at December 31, 2008, and September 30, 2009 relates entirely to our acquisition of InfoSpace Mobile. In conjunction with our strategy reassessment in 2007 to focus primarily on the mobile network operator business and prior impairment or disposition of goodwill in our other reporting units, we have combined the reporting unit for our 2006 U.S. messaging acquisition, GoldPocket Wireless, Inc., which we refer to as GPW, with our mobile network operator reporting unit resulting in one enterprise level reporting unit for purposes of our annual impairment test in the fourth quarter of 2008 and going forward. Our impairment test in the fourth quarter of 2008 indicated we had significant excess of fair value over the net book value of our Company such that a 50% decrease in our projected net cash flow or a doubling of the discount rate would not have resulted in impairment of our goodwill.

In 2007 and 2008, we fully impaired $33.7 million of goodwill associated with acquisitions completed prior to our acquisition of InfoSpace Mobile. In the third quarter of 2008, it became apparent that revenue from GPW would not achieve expectations, which resulted in a goodwill impairment charge of $6.8 million. During 2007, we recorded a $26.9 million impairment charge related to goodwill associated with our mobile network operator reporting unit, which represents our primary operations, and our GPW reporting unit. The annual impairment test performed on the mobile network operator reporting unit, prior to inclusion of the InfoSpace Mobile assets and operations, indicated that changes in consumer purchasing habits were resulting in lower revenues and net cash flows than originally expected, requiring a goodwill impairment of $12.1 million. The annual impairment test performed on the GPW reporting unit indicated that unanticipated competitive dynamics in the marketplace were resulting in lower revenues and net cash flows than originally expected, requiring a goodwill impairment of $14.8 million.

Valuation of long-lived and intangible assets

We periodically evaluate events or changes in circumstances that indicate the carrying amount of our long-lived and intangible assets may not be recoverable or that the useful lives of the assets may no longer be appropriate. Factors which could trigger an impairment review or a change in the remaining useful life of our long-lived and intangible assets include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an

 

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undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, based on an income and/or cost approach, and an impairment charge is recorded for the excess of carrying value over fair value.

The process of assessing potential impairment of our long-lived and intangible assets is highly subjective and requires significant judgment. An estimate of future undiscounted cash flow can be affected by many assumptions, requiring that management make significant judgments in arriving at these estimates. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use to estimate future cash flows including sales volumes, pricing, market penetration, competition and technological obsolescence are consistent with our internal planning. Significant future changes in these estimates or their related assumptions could result in an impairment charge related to individual or groups of these assets.

Our intangible assets, other than goodwill, of $11.0 million at September 30, 2009, relate entirely to customer relationships associated with our acquisition of InfoSpace Mobile. We are amortizing the recorded value of this intangible asset over its estimated useful life of approximately eight years utilizing a variable methodology.

During the nine months ended September 30, 2009, we recognized impairment charges of $5.8 million related primarily to our GPW long-lived and intangible assets. In June 2009, we received notification that our future revenue stream associated with a significant customer obtained as part of the GPW acquisition would likely be eliminated. We performed an impairment analysis, which resulted in impairment charges of $1.9 million and $3.3 million associated with the GPW customer list and GPW capitalized software, respectively.

During the year ended December 31, 2008, we recorded long-lived and intangible asset impairment charges of $22.3 million including $17.7 million recorded during the nine months ended September 30, 2008. These impairment charges included $8.4 million related to software assets acquired in the InfoSpace Mobile acquisition based on information received indicating it was likely that two significant customers would no longer be utilizing our search and storefront solutions. Of this amount, $3.8 million was recognized in third quarter and $4.6 million was recognized in the fourth quarter. We also recognized impairments of $12.7 million related to restructuring of the business following the InfoSpace Mobile acquisition. The $12.7 million included $8.2 million to impair computer software, furniture and fixtures and leasehold improvements associated with moving our headquarters to Bellevue, Washington and the planned consolidation and shutdown of certain datacenter facilities. The other restructuring-related impairment of $4.5 million was associated with the planned early shutdown of and migration of customers from the Fuel software solution platform to the mCore platform. We had redundant software solution platforms as a result of the InfoSpace Mobile acquisition and, based on specific migration plans developed in cooperation with our customers during the third quarter, it was determined the Fuel platform would not generate sufficient revenues to recover the remaining carrying value of the software platform. As a result, we impaired the remaining software carrying value. The remaining $1.2 million impairment related to the remaining customer relationship intangible from our 2005 M7 Networks, Inc. acquisition, as we no longer had customers utilizing that technology.

Income taxes

We are subject to federal and various state income taxes in the U.S., and to a lesser extent, income-based taxes in various foreign jurisdictions, including, but not limited to, the Netherlands, the United Kingdom, Canada and Singapore, and we use estimates in determining our provision for these income taxes and the recognition of deferred tax assets. Deferred tax assets, related valuation

 

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allowances, current tax liabilities and deferred tax liabilities are determined separately by tax jurisdiction. In making these determinations, we estimate tax assets, related valuation allowances, current tax liabilities and deferred tax liabilities, and we assess temporary differences resulting from differing treatment of items for tax and accounting purposes. We recognize only tax positions that are “more likely than not” to be sustained based solely on their technical merits. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business.

At December 31, 2008, our gross deferred tax assets consisted primarily of domestic net operating losses and book to tax differences in fixed assets, as well as research and development credit carryforwards. As of December 31, 2008, we had U.S. federal and state net operating loss carryforwards of approximately $208 million and $72 million, respectively, which begin to expire at varying dates starting in 2019 for U.S. federal income tax purposes and in the current year for state income tax purposes. Because of our history of generating operating losses, we maintain full valuation allowances against these deferred tax assets and consequently do not recognize tax benefits for our current operating losses. If we achieve sustained profitability, we will assess the likelihood that the deferred tax assets will be realized through the ability to utilize them to offset our expected future tax obligations, subject to certain provisions of the U.S. federal tax laws that may limit our use of these accumulated losses. If we determine it is likely that all or a portion of the deferred tax assets will be realized, we will eliminate or reduce the corresponding valuation allowances which would result in immediate recognition of an associated tax benefit. Going forward, we will reassess the need for any remaining valuation allowances or the necessity to recognize additional valuation allowances in the future based on our then current and expected future financial performance. In the event we do eliminate all or a portion of the valuation allowances in the future, we will begin recording income tax provisions based on our earnings and applicable statutory tax rates from that time forward.

As a result of the InfoSpace Mobile asset acquisition at the end of 2007, we record a U.S. tax provision each subsequent period for the difference between book and tax treatment of goodwill associated with the acquisition. The tax amortization of the goodwill results in a deferred tax liability which does not provide a source of income for purposes of evaluating the realizability of the deferred tax assets. This results in recognition of income tax each period through 2022 corresponding to the tax amortization period of the goodwill. This provision has no cash tax implications absent liquidation of our Company and would otherwise only be adjusted or reversed to the extent our book goodwill balance would be impaired in the future.

Stock-based compensation

Prior to January 1, 2006, we accounted for share-based awards, including stock options, to employees using the intrinsic value method. Under the intrinsic value method, compensation expense was measured on the date of award as the difference, if any, between the deemed fair value of our common stock and the option exercise price, multiplied by the number of options granted. The option exercise prices and fair value of our common stock are determined by our board of directors based on a review of various objective and subjective factors. No compensation expense was recorded for stock options issued to employees prior to January 1, 2006 because all options were granted in fixed amounts and with fixed exercise prices at least equal to the fair value of our common stock at the date of grant.

Effective January 1, 2006, we changed our accounting treatment to recognize compensation expense based on the fair value of all share-based awards granted, modified, repurchased or cancelled on or after that date. This compensation expense is recognized on a straight-line basis over the requisite service period for all time-based vesting awards. We continue to account for share-based awards granted prior to January 1, 2006 under the intrinsic value method.

 

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For share-based awards subsequent to January 1, 2006, we estimate the fair value of such awards, including stock options, using the Black-Scholes option-pricing model. Determining the fair value of share-based awards requires the use of subjective assumptions, including the expected term of the award and expected stock price volatility. The assumptions used in calculating the fair value of share-based awards granted since January 1, 2008, are set forth below:

 

     2008    2009

Expected life of options granted

   5 years    5 years

Expected volatility

   58%    58%

Range of risk-free interest rates

   2.8% - 3.3%    1.7% - 1.9%

Expected dividend yield

   0%    0%

The assumptions used in determining the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties. As a result, if factors change, and we use different assumptions, our share-based compensation could be materially different in the future. The risk-free interest rate used for each grant is based on a U.S. Treasury instrument with a term similar to the expected term of the share-based award. The expected term of options has been estimated utilizing the vesting period of the option, the contractual life of the option and our option exercise history. Because there was no public market for our common stock prior to this offering, we lacked company-specific historical and implied volatility information. Therefore, in estimating our expected stock volatility, we have taken into account volatility information of publicly-traded peer companies, and we expect to continue to use this methodology until such time as we have adequate historical data regarding the volatility of our publicly-traded stock price. Also, we recognize compensation expense for only the portion of options that are expected to vest. Accordingly, we estimated future forfeitures of stock options based on our historical forfeiture rate, taking into account unusual events such as employee attrition due to the relocation of our headquarters to Bellevue, Washington. If our actual forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be required in future periods.

All our employee stock options were granted at exercise prices equal to the fair value of common stock as of the grant date, except for the December 11, 2009 grant with an exercise price of $1.00, as described further below. As of September 30, 2009, we had $3.6 million of unrecognized compensation expense related to unvested employee stock options, which will be recognized over a weighted-average period of 2.4 years.

The following table summarizes by grant date the number of stock options granted from January 1, 2008 through December 15, 2009, and the per share exercise price of each option grant:

 

Date of Grant

   Number    Exercise Price

January 1, 2008

   5,552,103    $ 0.80

February 7, 2008

   1,655,559      0.80

February 5, 2009

   1,758,752      0.81

May 4, 2009

   433,000      0.81

December 11, 2009

   224,500      1.00

December 11, 2009

   237,000      1.31

December 14, 2009

   299,000      1.31

The fair value of our common stock, for the purpose of determining the grant prices of our common stock option grants, was estimated by our board of directors, with input from management and in certain cases, an independent valuation firm. Our board of directors exercised judgment in determining the estimated fair value of our common stock on the date of grant based on various factors, including:

 

  Ÿ  

the prices for our mandatorily redeemable preferred stock sold to outside investors in arm’s-length transactions;

 

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  Ÿ  

the rights, preferences and privileges of our mandatorily redeemable preferred stock relative to those of our common stock;

 

  Ÿ  

our operating and financial performance;

 

  Ÿ  

the hiring of key personnel;

 

  Ÿ  

our stage of development and revenue growth;

 

  Ÿ  

the lack of an active public market for our common and preferred stock;

 

  Ÿ  

industry information such as market growth and volume;

 

  Ÿ  

the execution of strategic and customer agreements;

 

  Ÿ  

the risks inherent in the development and expansion of our service offerings;

 

  Ÿ  

the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature of and history of our business; and

 

  Ÿ  

the acquisitions of companies that we have completed.

We believe consideration of these factors by our board of directors was a reasonable approach to estimating the fair value of our common stock for those periods. Estimation of the fair value of our common stock requires complex and subjective judgments, however, and there is inherent uncertainty in our estimate of fair value.

The fair value of our common stock as of the January 1, 2008 and February 7, 2008 grant dates was estimated by the board of directors to be $0.80 per share. Due to the proximity of the acquisition of InfoSpace Mobile in December 2007 to these grants, the issuance of the Series I mandatorily redeemable preferred stock to a subset of existing and new investors to fund the acquisition was considered the most objective approach to estimating the fair value of our common stock for purposes of these grants. We sold 190.8 million shares of Series I mandatorily redeemable preferred stock at a price of $0.9694 per share. Each share is convertible into one share of common stock and has a liquidation preference equal to the $0.9694 issue price plus cumulative unpaid dividends of $0.038776 per annum, whether declared or not. Based on the pre-money valuation associated with the Series I preferred stock issuance of $295 million, which was negotiated between the board and investors participating in the Series I financing round, and the Series I proceeds of $185 million, we estimated the fair value of the common stock to be $0.80 by deducting the liquidation preferences of Series A, B, C, D and E as of such date from the post-money valuation of $480 million and divided by the number of fully diluted shares outstanding as of such date.

In early 2008, following the closing of the acquisition of InfoSpace Mobile in December 2007, we finalized our plans to integrate the business and initiated implementation of the plans, including relocating our headquarters to Bellevue, Washington. Significant progress was also made during that period toward the eventual disposition of the discontinued business lines. We updated our financial forecasts as of April 2008 based on the progress made in the integration process, the additional knowledge of the InfoSpace Mobile business gained and initiatives undertaken to increase revenues and reduce operating expenses of the combined business.

We engaged an independent third-party valuation firm to assist the board of directors in performing a contemporaneous valuation of our common stock as of April 30, 2008, for stock option grants. The valuation firm calculated enterprise value by using an asset-based approach, a market-based approach, determined primarily by the recent issuance of the Series I mandatorily redeemable preferred stock, and an income-based approach. After considering these methods, the valuation firm relied primarily on the income-based approach utilizing the discounted cash flow method to determine

 

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enterprise value. The discounted cash flow analysis incorporated three different scenarios based on different exit or terminal values, each incorporating three different market condition assumptions which were probability weighted. Assumptions utilized in each discounted cash flow scenario were:

 

  Ÿ  

our expected revenue, operating performance, cash flow for the current and future years, determined as of the valuation date based on our estimates;

 

  Ÿ  

a discount rate, which is applied to discretely forecasted future cash flows in order to calculate the present value of those cash flows; and

 

  Ÿ  

a terminal value multiple, which is applied to our last year of discretely forecasted operating results to calculate the residual value of our future cash flows.

The enterprise value was then allocated to our shares of mandatorily redeemable preferred stock, preferred stock, warrants to purchase shares of mandatorily redeemable preferred stock and common stock, and common stock, using option pricing theory. This methodology treats the various components of our capital structure as a series of call options on the proceeds expected from a future liquidity event. These call options are then valued using the Black-Scholes option pricing model. This model estimates the fair value of each individual security based on the enterprise value of the Company and assumptions based on the securities’ rights and preferences. The option pricing method also requires assumptions regarding the anticipated timing of a potential liquidity event, such as an initial public offering, and the estimated volatility of our equity securities. For this purpose, an initial public offering was assumed to occur in three to five years and estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies. The value of each of the call options is deducted from the enterprise value with the remainder being the value attributed to the common stock. A discount for lack of marketability of 20% was applied to arrive at the fair value of our common stock. On the basis of this analysis the board of directors estimated the fair value of our common stock to be $0.81 per share as of April 30, 2008, which was substantially unchanged from the $0.80 valuation as of the closing of the InfoSpace Mobile acquisition.

Over the remainder of 2008 and the early part of 2009, we completed much of the post-acquisition integration of InfoSpace Mobile and other restructuring of our business. Financial results were better than expected over this period but economic conditions continued to deteriorate which reduced our confidence in our longer-term forecasts and expectations regarding the timing and potential for a public stock offering. For common stock valuation purposes, the impact of the improved short-term operating performance was assumed to be offset by the greater uncertainty regarding future prospects. On this basis, the board of directors estimated that the fair value of our common stock continued to be $0.81 per share on February 5, 2009 and May 4, 2009.

In the second quarter of 2009, we experienced improvements in our operating performance and in the economic outlook, including in the capital markets, which led our board of directors to perform another valuation of our common stock, in part based on an updated valuation by a third-party valuation firm. Greater than expected operating efficiencies achieved recently, higher projections of future growth with greater confidence and giving greater weight to a public stock offering in a two-year time frame resulted in an increase in value to $1.00 per share as of June 30, 2009. Our compensation committee approved stock option grants, primarily for new employees, on August 5, 2009 subject to completion of this valuation. Prior to completion of the valuation for June 30, 2009, the board of directors determined the need to perform another common stock valuation as of September 30, 2009, based on events during the third quarter. Our operating performance continued to improve during the third quarter and discussions occurred with several investment banks regarding a potential initial public offering of our common stock in 2010. Based primarily on greater weight placed on a near-term public stock offering and a reduction in the discount for the lack of marketability from 20% used in earlier valuations to 5%, the common stock was valued at $1.31 per share as of September 30, 2009. Since the valuations as of June

 

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30, 2009 and September 30, 2009 were both finalized by the board of directors on December 11, 2009, the options approved on August 5, 2009, were granted at the $1.00 price, but due to the increase in fair value of our common stock to $1.31, will be treated as “in the money” grants on December 11, 2009.

Restricted stock is granted to certain employees as part of their total compensation package. All grants of restricted stock prior to October 25, 2006 are fully vested except for 367,641 shares which vest in April 2010. All restricted shares granted on or after October 25, 2006 are subject to a double trigger vesting requirement consisting of time-based vesting and occurrence of a qualified sale or qualified public offering which would include the offering contemplated by this prospectus. These employees are not required to be employed as of the occurrence of a qualified event to receive shares for which the time-based vesting has occurred based on the period of their employment. If no qualified event occurs within ten years, the stock is forfeited. Under these terms, vesting of the shares is not probable until a qualified event is probable; therefore, no compensation expense has been recognized related to the grant of these shares of restricted stock. Upon closing of a qualified sale or qualified public offering, those shares subject to the double trigger for which time-based vesting has occurred will become vested and we will immediately recognize compensation expense for those shares. Had a qualified event occurred on September 30, 2009, the compensation expense recognized immediately would have been $12.6 million and additional compensation expense of approximately $14.1 million will be recognized over a weighted-average period of 3.2 years.

Discontinued operations

In connection with our business strategy reassessment initiated in 2007, we exited two lines of business in 2007 and 2008, the results of which are reflected in our operating results as discontinued operations. The discontinued lines of business were direct to consumer, which was sold in two transactions in 2007 and 2008, and media and entertainment, which was discontinued in 2008. We have reclassified all of the revenues and associated operating expenses which would no longer be incurred upon disposition of the business to discontinued operations for all periods presented. Any gains and losses from the sale of the businesses are also reported in discontinued operations.

 

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Results of Operations

The following tables set forth components of our results of operations, including both continuing and discontinued operations, for the periods indicated.

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  
     (Dollars in thousands)  

Revenues

   $ 21,903      $ 35,171      $ 103,151      $ 74,835      $ 88,744   

Operating expenses

          

Direct third-party costs

     2,201        3,709        5,451        3,493        8,148   

Datacenter and network operations, excluding depreciation

     9,561        9,468        33,000        24,039        23,720   

Product development and sustainment, excluding depreciation

     24,617        16,229        52,261        43,784        24,203   

Sales and marketing, excluding depreciation

     8,403        7,119        10,228        7,535        8,505   

General and administrative, excluding depreciation

     11,239        10,334        26,052        19,424        13,948   

Depreciation and amortization

     5,925        10,322        21,559        15,553        10,230   

Restructuring

     1,084        1,283        3,236        2,016        1,957   

Goodwill and long-lived asset impairment charges

     —          26,867        29,130        24,538        5,806   

Abandoned transaction charge

     —          2,600        —          —          —     
                                        

Total operating expenses

     63,030        87,931        180,917        140,382        96,517   
                                        

Operating loss

     (41,127     (52,760     (77,766     (65,547     (7,773
                                        

Other income (expense), net

          

Other income (expense)

     (2,206     79        1,892        2,053        (1,667

Interest and investment income, net

     1,740        2,157        1,315        1,225        229   

Interest expense

     (644     (1,081     (493     (492     (221
                                        

Other income (expense), net

     (1,110     1,155        2,714        2,786        (1,659
                                        

Pre-tax loss from continuing operations

     (42,237     (51,605     (75,052     (62,761     (9,432

Provision for income taxes

     —          —          1,776        1,332        1,405   
                                        

Loss from continuing operations

     (42,237     (51,605     (76,828     (64,093     (10,837

Loss from discontinued operations

     (12,960     (24,928     (1,072     (1,072     —     

Loss from sale of discontinued operations

     —          (1,360     (127     (127     —     
                                        

Net loss

   $ (55,197   $ (77,893   $ (78,027   $ (65,292   $ (10,837
                                        

Depreciation and amortization by function:

 

     Years Ended December 31,    Nine Months Ended
September 30,
     2006    2007    2008    2008    2009
     (Dollars in thousands)

Datacenter and network operations

   $ 2,938    $ 7,310    $ 16,824    $ 12,426    $ 6,928

Product development and sustainment

     1,462      1,548      2,237      1,379      1,489

Sales and marketing

     4      307      2,075      1,499      1,516

General and administrative

     1,521      1,157      423      249      297
                                  

Total depreciation and amortization

   $ 5,925    $ 10,322    $ 21,559    $ 15,553    $ 10,230
                                  

 

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     Years Ended December 31,     Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  

As a Percentage of Total Revenues from Continuing Operations

          

Total revenues

   100   100   100   100   100

Operating expenses:

          

Direct third-party costs

   10      11      5      5      9   

Datacenter and network operations, excluding depreciation

   44      27      32      32      27   

Product development and sustainment, excluding depreciation

   113      46      51      59      27   

Sales and marketing, excluding depreciation

   38      20      10      10      10   

General and administrative, excluding depreciation

   51      29      25      26      16   

Depreciation and amortization

   27      30      21      21      11   

Other charges

   5      87      31      35      9   
                              

Total operating expenses

   288      250      175      188      109   
                              

Operating loss

   (188   (150   (75   (88   (9
                              

Other income (expense), net

   (5   3      3      4      (2
                              

Pre-tax loss from continuing operations

   (193   (147   (72   (84   (11

Provision for income taxes

   0      0      2      2      1   
                              

Loss from continuing operations

   (193 )%    (147 )%    (74 )%    (86 )%    (12 )% 
                              

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Revenues

 

     Nine Months Ended
September 30,
   Change  
     2008    2009    $     %  
     (Dollars in thousands)  

Managed services

   $ 65,101    $ 61,180    $ (3,921   (6.0 )% 

Professional services

     9,734      27,564      17,830      183.2   
                        

Total revenues

   $ 74,835    $ 88,744    $ 13,909      18.6
                        

Our total revenues increased $13.9 million, or 18.6%, for the nine months ended September 30, 2009 compared to the corresponding 2008 period. Managed services revenue accounted for 68.9% and 87.0% of our revenue for the nine month periods ended September 30, 2009 and 2008, respectively, while professional services accounted for 31.1% and 13.0%, respectively. The increase in revenues was due to the $17.8 million increase in professional services revenue, partially offset by the $3.9 million reduction in managed services revenue. The increase in professional services revenue was primarily due to a large portal customization and implementation project, which included $4.0 million of associated computer hardware and third-party software costs, completed during 2009 for which we recognized the revenue based on completion milestones. The reduction in managed services revenue is primarily due to expiration of several small storefront contracts and lower storefront-related revenues from two large customers. We generated 95% of our revenue in the U.S. for the nine months ended September 30, 2009.

 

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Revenue from our five largest customers, which represent the five largest wireless carriers in the U.S., represented 83% of our total revenue for the nine months ended September 30, 2009, with AT&T and Verizon Wireless accounting for 55% and 19% of total revenue, respectively. For the nine months ended September 30, 2008, revenue from our five largest customers represented 67% of our total revenue, with AT&T and Verizon Wireless accounting for 37% and 12% of total revenue, respectively. No other customers accounted for more than 10% of our revenue during these periods.

Operating expenses

 

     Nine Months Ended
September 30,
   Change  
     2008    2009    $     %  
     (Dollars in thousands)  

Direct third-party costs

   $ 3,493    $ 8,148    $ 4,655      133.3

Datacenter and network operations, excluding depreciation

     24,039      23,720      (319   (1.3

Product development and sustainment, excluding depreciation

     43,784      24,203      (19,581   (44.7

Sales and marketing, excluding depreciation

     7,535      8,505      970      12.9   

General and administrative, excluding depreciation

     19,424      13,948      (5,476   (28.2

Depreciation and amortization

     15,553      10,230      (5,323   (34.2

Restructuring

     2,016      1,957      (59   (2.9

Goodwill and long-lived asset impairment charges

     24,538      5,806      (18,732   (76.3
                        

Total operating expenses

   $ 140,382    $ 96,517    $ (43,865   (31.2 )% 
                        

Our operating expenses were $96.5 million for the nine months ended September 30, 2009 compared to $140.4 million for the nine months ended September 30, 2008. The decrease of $43.9 million, or 31.2%, is primarily attributable to the $19.6 million decrease in product development expense, the $5.5 million decrease in general and administrative expense, the $5.3 million decrease in depreciation and amortization expense, and significantly lower goodwill and long-lived asset impairment charges for the nine months ended September 30, 2009 compared to the prior year period. Excluding the impact of restructuring and goodwill and long-lived asset impairment charges, operating expenses decreased $25.1 million during the nine-month period of 2009, even though direct third-party costs increased $4.7 million. The reduction is primarily driven by operating efficiencies as a result of the integration and restructuring activities we initiated in 2008 after the acquisition of InfoSpace Mobile. These activities included the relocation of our corporate headquarters to Bellevue, Washington, the cost efficiencies from outsourcing a portion of our development activities and consolidation of our datacenters.

Direct third-party costs

Direct third-party costs increased $4.7 million, or 133.3%, for the nine months ended September 30, 2009 compared to the corresponding 2008 period. The increase is primarily due to the cost of computer hardware and third-party software purchased on behalf of a major customer as part of a large custom portal development and implementation project.

Datacenter and network operations, excluding depreciation

Datacenter and network operations expense, excluding depreciation, decreased $0.3 million, or 1.3%, for the nine months ended September 30, 2009 compared to the corresponding 2008 period. The decrease is primarily due to lower labor related costs, as we have consolidated datacenter operations since completing the InfoSpace Mobile acquisition in December 2007.

 

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Product development and sustainment, excluding depreciation

Product development and sustainment expense, excluding depreciation, decreased $19.6 million, or 44.7%, for the nine months ended September 30, 2009 compared to the corresponding 2008 period. The decrease is primarily due to lower labor-related costs as a result of operating efficiencies realized from the integration and restructuring activities we initiated in 2008. Further expense reductions were driven by the cost efficiencies from outsourcing a portion of our development activities to India.

Sales and marketing, excluding depreciation

Sales and marketing expense, excluding depreciation, increased $1.0 million, or 12.9%, for the nine months ended September 30, 2009 compared to the corresponding 2008 period. The increase is due to increases in our sales and marketing headcount as we grow the business.

General and administrative, excluding depreciation

General and administrative expense, excluding depreciation, decreased $5.5 million, or 28.2%, for the nine months ended September 30, 2009 compared to the corresponding 2008 period. The decrease is primarily due to lower labor-related costs as a result of operating efficiencies realized from the integration and restructuring activities we initiated in 2008.

Depreciation and amortization

Depreciation and amortization expense decreased $5.3 million, or 34.2%, for the nine months ended September 30, 2009 compared to the corresponding 2008 period. The decrease is primarily due to lower depreciation expense as a result of consolidating datacenters, impairing the remaining value of certain datacenter assets determined to be no longer recoverable and impairing certain capitalized software development costs.

Restructuring

During the nine months ended September 30, 2009, we incurred restructuring charges to close our office in the United Kingdom, move our remaining employees in Durham, North Carolina from our former headquarters facility to a smaller facility and assign the lease for our former headquarters facility to a third party.

During the nine months ended September 30, 2008, we incurred restructuring charges related to relocating our headquarters and certain key personnel to Bellevue, Washington and eliminating redundant functions and positions as a result of the InfoSpace Mobile acquisition.

Goodwill and long-lived asset impairment charges

The $5.8 million of impairments in the 2009 period relate primarily to writing off the remaining asset balances of $1.9 million and $3.6 million associated with the GPW customer list and capitalized software, respectively.

The $24.5 million of impairments in the 2008 period consisted of:

 

  Ÿ  

$6.8 million to impair the remaining GPW goodwill;

 

  Ÿ  

$3.8 million related to software assets from the InfoSpace Mobile acquisition based on the likelihood that two significant customers would no longer be utilizing our storefront solution;

 

  Ÿ  

$12.7 million related to restructuring of the business following the InfoSpace Mobile acquisition, including $8.2 million to impair computer software, furniture and fixtures and leasehold

 

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improvements associated with moving our headquarters to Bellevue, Washington and the planned shutdown of certain datacenter facilities, as well as $4.5 million for the planned shutdown of the Fuel software solution platform; and

 

  Ÿ  

$1.2 million to impair the remaining customer relationship intangible from our 2005 M7 Networks, Inc. acquisition.

Other income (expense), net

 

     Nine Months Ended
September 30,
    Change  
     2008     2009    
     (Dollars in thousands)  

Other income (expense)

   $ 2,053      $ (1,667   $ (3,720

Interest and investment income, net

     1,225        229        (996

Interest expense

     (492     (221     271   
                        

Total other income (expense), net

   $ 2,786      $ (1,659   $ (4,445
                        

Other income of $2.1 million for the nine months ended September 30, 2008 is primarily the result of billings to InfoSpace, Inc. (during an agreed transition period) for use of shared facilities acquired as part of the InfoSpace Mobile acquisition at the end of 2007. The higher net interest and investment income in the 2008 period reflect primarily the higher cash and investment balances during the 2008 period relative to 2009. Our interest expense decreased to $0.2 million for the nine months ended September 30, 2009 compared to $0.5 million for the nine months ended September 30, 2008, due to the repayment of our remaining outstanding debt in April 2009.

Provision for income taxes

 

     Nine Months Ended
September 30,
   Change  
     2008    2009    $    %  
     (Dollars in thousands)  

Provision for income taxes

   $ 1,332    $ 1,405    $ 73    5.5

Income tax expense for the nine months ended September 30, 2009 and 2008 primarily consists of a U.S. tax provision for the difference between book and tax treatment of goodwill associated with the acquisition of InfoSpace Mobile. We maintain a full valuation allowance against our net deferred tax assets which precludes us from recognizing a tax benefit for our current operating losses. Our lack of profitability historically is a key factor in concluding that there is insufficient evidence of our future ability to realize any future benefits from our deferred tax assets.

Discontinued operations

 

     Nine Months Ended
September 30,
   Change
         2008             2009       
     (Dollars in thousands)

Loss from discontinued operations

   $ (1,072   $ —      $ 1,072

Loss from sale of discontinued operations

   $ (127   $ —      $ 127

The loss from discontinued operations in the 2008 period consists of losses from the portion of the direct to consumer business line sold in 2008 and the media and entertainment business discontinued in 2008.

 

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Net loss

 

     Nine Months Ended
September 30,
    Change
     2008     2009    
     (Dollars in thousands)

Net loss

   $ (65,292   $ (10,837   $ 54,455

The major factors leading to the $54.5 million decrease in net loss to $10.8 million were:

 

  Ÿ  

A $13.9 million increase in revenue resulting from increased professional services fees, partially offset by reduced managed services revenue;

 

  Ÿ  

A $43.9 million reduction in total operating expenses due primarily to a $18.7 million reduction in impairment charges and other expense reductions associated with the outsourcing of certain development activities to India and the completion by late 2008 of many major elements to integrate the InfoSpace Mobile acquisition, including elimination of most redundant functions and staffing, relocation of our headquarters to Bellevue, Washington, and consolidation of certain datacenters; and

 

  Ÿ  

A $1.2 million reduction in losses from discontinued operations and related losses upon disposition.

These improvements in operating results were partially offset by a $4.4 million reduction in other income (expense) due primarily to the absence of fees in 2009 that were charged to InfoSpace, Inc. in 2008 (during an agreed transition period) for InfoSpace’s use of certain facilities that we acquired in the InfoSpace Mobile acquisition at the end of 2007.

Year ended December 31, 2008 compared to the year ended December 31, 2007

Revenues

 

     Year Ended December 31,    Change  
           2007                2008          $    %  
     (Dollars in thousands)  

Managed services

   $ 31,772    $ 85,677    $ 53,905    169.7

Professional services

     3,399      17,474      14,075    414.1   
                       

Total revenues

   $ 35,171    $ 103,151    $ 67,980    193.3
                       

Our total revenues were $103.2 million for the year ended December 31, 2008 compared to $35.2 million for the year ended December 31, 2007, an increase of $68.0 million, or 193.3%. This increase was primarily attributable to the acquisition of InfoSpace Mobile at the end of 2007. InfoSpace Mobile generated approximately $55 million of revenue in 2007, prior to our acquisition of the business. The organic growth of Motricity revenue was approximately 13% from 2007 to 2008, and the growth rate from the acquired InfoSpace Mobile business was slightly higher at 15%. In both instances, we believe this growth represents additional revenues from existing customers. The structure of the customer arrangements under the InfoSpace Mobile business model resulted in a higher percentage of revenue from professional services relative to Motricity, which is reflected in the high growth in professional services revenue in our 2008 results.

 

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Operating expenses

 

     Year Ended December 31,    Change  
     2007    2008    $      %  
     (Dollars in thousands)  

Direct third-party costs

   $ 3,709    $ 5,451    $ 1,742       47.0

Datacenter and network operations, excluding depreciation

     9,468      33,000      23,532       248.5   

Product development and sustainment, excluding depreciation

     16,229      52,261      36,032       222.0   

Sales and marketing, excluding depreciation

     7,119      10,228      3,109       43.7   

General and administrative, excluding depreciation

     10,334      26,052      15,718       152.1   

Depreciation and amortization

     10,322      21,559      11,237       108.9   

Restructuring

     1,283      3,236      1,953       152.2   

Goodwill and long-lived asset impairment charges

     26,867      29,130      2,263       8.4   

Abandoned transaction charge

     2,600      —        (2,600    —     
                         

Total operating expenses

   $ 87,931    $ 180,917    $ 92,986       105.7
                         

Our operating expenses were $180.9 million for the year ended December 31, 2008 compared to $87.9 million for the year ended December 31, 2007, an increase of $93.0 million, or 105.7%. In 2008, operating expenses were significantly higher relative to 2007 as a result of our acquisition of InfoSpace Mobile. We operated for much of 2008 with duplicate work forces and facilities in North Carolina and Washington while we executed acquisition integration activities and relocated our headquarters to Bellevue. As a percentage of revenue, our total operating expenses decreased to 175% for the year ended December 31, 2008 compared to 250% for 2007, primarily as a result of the significant revenue increase, proportionately lower asset impairment charges and decreases in other operating expenses in the second half of 2008 as initial integration activities were completed.

Direct third-party costs

Direct third-party costs of $5.5 million for the year ended December 31, 2008 represents an increase of $1.7 million, or 47.0%, compared to 2007. Direct third-party costs as a percentage of revenue decreased to 5.3% for the year ended December 31, 2008 compared to 10.5% in 2007, reflecting better leverage on content-related expenses in 2008 primarily as a result of the significant increase in revenue.

Datacenter and network operations, excluding depreciation

Datacenter and network operations expense, excluding depreciation, increased $23.5 million, or 248.5%, for the year ended December 31, 2008 compared to the corresponding 2007 period. The increase is primarily due to the acquisition of InfoSpace Mobile, which had multiple, large datacenters with higher operating expenses. We operated for most of 2008 with duplicate infrastructure and also incurred additional operating expenses in connection with integrating the acquired infrastructure.

Product development and sustainment, excluding depreciation

Product development and sustainment expense, excluding depreciation, increased $36.0 million, or 222.0%, for the year ended December 31, 2008 compared to 2007. The increase is primarily due to the acquisition of InfoSpace Mobile at the end of 2007. InfoSpace Mobile operated with a substantially larger development organization, in part due to greater emphasis on professional services work, and relied more heavily on the use of higher cost contract labor. In addition, we operated for most of 2008

 

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with duplicate resources to support and integrate the two different software infrastructures, mCore and Fuel, which are based on different technologies.

Sales and marketing, excluding depreciation

Sales and marketing expense, excluding depreciation, increased $3.1 million, or 43.7%, for the year ended December 31, 2008 compared to 2007. The increase is primarily due to the acquisition of InfoSpace Mobile. Sales and marketing expense as a percentage of revenue decreased to 9.9% for the year ended December 31, 2008 compared to 20.2% in 2007. The reduction in expenses as a percentage of revenue reflects our decision to reduce marketing and certain sales activities while we revamped our service offerings during the process of integrating the InfoSpace Mobile acquisition, including the mCore and Fuel solution and service platforms. During this integration process we enhanced and extended the capabilities of the mCore platform to provide a more comprehensive and robust offering, and thereafter began to market and sell services utilizing that platform more aggressively.

General and administrative, excluding depreciation

G&A expense, excluding depreciation, increased $15.7 million, or 152.1%, for the year ended December 31, 2008 compared to 2007. The increase was primarily due to the acquisition of InfoSpace Mobile, as we were operating with duplicate infrastructure and conducting acquisition integration activities for much of the year. G&A expense as a percentage of revenue decreased to 25.3% for the year ended December 31, 2008 compared to 29.4% in 2007, due mainly to elimination of redundant functions and staffing in the second half of 2008.

Depreciation and amortization

Depreciation and amortization expense increased from $10.3 million in 2007 to $21.6 million in 2008, or 108.9%, due to the InfoSpace Mobile acquisition at the end of 2007. A total of $58.4 million of property and equipment and amortizable intangible assets was recorded as part of the purchase price allocation for the acquisition. This increased the balance of our depreciable and amortizable assets by 193%, which resulted in the higher depreciation expense in 2008.

Restructuring

During the year ended December 31, 2008, we incurred restructuring charges related to relocating our headquarters and certain key personnel to Bellevue, Washington, and eliminating redundant functions and positions following completion of the InfoSpace Mobile acquisition.

In the first half of 2007, we closed our San Diego and Los Angeles, California offices and relocated employees to our corporate headquarters (then located in Durham, North Carolina).

Goodwill and long-lived asset impairment charges

The $29.1 million of impairment charges in the 2008 period consisted of:

 

  Ÿ  

$6.8 million to impair the remaining GPW goodwill;

 

  Ÿ  

$8.4 million related to software assets from the InfoSpace Mobile acquisition based on the likelihood that two significant customers would no longer be utilizing our search and storefront solutions;

 

  Ÿ  

$12.7 million related to restructuring of the business following the InfoSpace Mobile acquisition including $8.2 million to impair computer software, furniture and fixtures, leasehold improvements and other assets associated with moving our headquarters to Bellevue,

 

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Washington, the planned shutdown of certain datacenter facilities, as well as $4.5 million for the planned shutdown of the Fuel software solution platform; and

 

  Ÿ  

$1.2 million to impair the remaining customer relationship intangible from our 2005 acquisition of M7 Networks, Inc.

In 2007, we recorded asset impairment charges of $26.9 million to write off the goodwill associated with our mobile network operator reporting unit, which represents our primary operations, and a large portion of the goodwill associated with the GPW reporting unit. The annual impairment test performed on the mobile network operator reporting unit indicated that changes in consumer purchasing habits were producing lower revenues and margins than originally forecasted, resulting in a goodwill impairment of $12.1 million. In addition, the annual impairment test performed on the GPW reporting unit indicated that unanticipated competitive dynamics in the messaging marketplace generated lower revenues and cash flows than were originally projected, resulting in a goodwill impairment of $14.8 million.

Abandoned transaction charge

In 2007, we issued a warrant to purchase common shares to an existing investor as consideration for a financing commitment in connection with a proposed acquisition that was not completed. The expense of $2.6 million represents the fair value of the warrant upon issuance.

Other income (expense), net

 

     Year Ended December 31,         
         2007             2008          Change  
     (Dollars in thousands)  

Other income

   $ 79      $ 1,892       $ 1,813   

Interest and investment income, net

     2,157        1,315         (842

Interest expense

     (1,081     (493      588   
                         

Total other income (expense), net

   $ 1,155      $ 2,714       $ 1,559   
                         

Other income of $1.9 million for 2008 is primarily the result of billings to InfoSpace, Inc. (during an agreed transition period) for use of facilities that we acquired as part of the InfoSpace Mobile acquisition at the end of 2007. Our interest and investment income, net of interest expense, was $0.8 million for the year ended December 31, 2008 compared to $1.1 million for the year ended December 31, 2007 due to higher average cash and investment balances during 2007 and lower average debt balances during 2008.

Income tax provision

 

     Year Ended December 31,     
         2007            2008        Change
     (Dollars in thousands)

Income tax provision

   $ —      $ 1,776    $ 1,776

The income tax provision for the year ended December 31, 2008 primarily consists of a deferred U.S. tax provision for the difference between book and tax treatment of goodwill associated with the acquisition of the InfoSpace Mobile assets. We maintain a full valuation allowance against our net deferred tax assets which precludes us from recognizing a tax benefit for our current operating losses. Our lack of profitability historically is a key factor in concluding there is insufficient evidence of our future ability to realize any future benefits from our deferred tax assets.

 

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Discontinued operations

 

     Year Ended December 31,      Change
           2007                 2008           
     (Dollars in thousands)

Loss from discontinued operations

   $ (24,928   $ (1,072    $ 23,856

Loss from sale of discontinued operations

     (1,360     (127      1,233

The loss from discontinued operations in both periods consists primarily of losses from the direct to consumer business line sold in two transactions in 2007 and 2008 and the media and entertainment business discontinued in 2008. The substantially higher losses in 2007 resulted primarily from high marketing and operating expenses related to the media and entertainment business, which were largely mitigated late in 2007 in conjunction with the decision to wind down the business. Results for 2007 also include a goodwill impairment of $2.9 million related to the direct to consumer business.

Net loss

 

     Year Ended December 31,     Change  
           2007                 2008          
     (Dollars in thousands)  

Net loss

   $ (77,893   $ (78,027   $ (134

The net losses for both periods were consistent, although different factors contributed to the losses in each year as follows:

 

  Ÿ  

The InfoSpace Mobile acquisition, combined with revenue growth from both former InfoSpace Mobile and Motricity customer accounts resulted in 2008 revenue growth of $68.0 million, or nearly 193%, compared to 2007. The growth in revenue was more than offset by the additional cost structure acquired as part of InfoSpace Mobile.

 

  Ÿ  

A $93.0 million (105.7%) increase in operating expenses from 2007 to 2008 primarily reflects the significant cost structure acquired in the InfoSpace Mobile acquisition. The operating expenses that experienced the most significant increases in 2008 included datacenter and network operations, which was up 248.5%, product development and sustainment, which was up 222.0%, G&A, which was up 152.1%, and depreciation and amortization, which was up 108.9%.

 

  Ÿ  

In 2007, the net loss included losses from discontinued operations and related sales of $26.3 million compared to losses of $1.2 million in 2008.

Year ended December 31, 2007 compared to the year ended December 31, 2006

Revenues

 

     Year Ended December 31,    Change  
           2006                2007          $    %  
     (Dollars in thousands)  

Managed services

   $ 21,017    $ 31,772    $ 10,755    51.2

Professional services

     886      3,399      2,513    283.6   
                       

Total revenues

   $ 21,903    $ 35,171    $ 13,268    60.6
                       

Our total revenues of $35.2 million for the year ended December 31, 2007 represent an increase of $13.3 million, or 60.6%, compared to revenues of $21.9 million for 2006. This increase was primarily attributable to new customers and higher managed services revenue from the AT&T storefront.

 

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Operating expenses

 

     Year Ended December 31,    Change  
           2006                2007          $     %  
     (Dollars in thousands)  

Direct third-party costs

   $ 2,201    $ 3,709    $ 1,508      68.5

Datacenter and network operations, excluding depreciation

     9,561      9,468      (93   (1.0

Product development and sustainment, excluding depreciation

     24,617      16,229      (8,388   (34.1

Sales and marketing, excluding depreciation

     8,403      7,119      (1,284   (15.3

General and administrative, excluding depreciation

     11,239      10,334      (905   (8.1

Depreciation and amortization

     5,925      10,322      4,397      74.2   

Restructuring

     1,084      1,283      199      18.4   

Goodwill and long-lived asset impairment charges

     —        26,867      26,867      —     

Abandoned transaction charge

     —        2,600      2,600      —     
                        

Total operating expenses

   $ 63,030    $ 87,931    $ 24,901      39.5
                        

Our operating expenses were $87.9 million for the year ended December 31, 2007 compared to $63.0 million for the year ended December 31, 2006 an increase of $24.9 million, or 39.5%. The increase is attributable to the goodwill and long-lived asset impairment and abandoned transaction charge which totaled $29.5 million in 2007. Excluding the impairment and abandoned transaction charge, operating expenses decreased in 2007 due primarily to lower product development and sustainment expenses in 2007.

Direct third-party costs

Direct third-party costs of $3.7 million for the year ended December 31, 2007 represents an increase of $1.5 million, or 68.5%, compared to 2006. The increase in 2007 is due to the higher cost of content associated with growth in our customer base. Direct third-party costs as a percentage of revenue increased slightly to 10.5% for the year ended December 31, 2007 compared to 10.0% in 2006.

Datacenter and network operations, excluding depreciation

Datacenter and network operations expense, excluding depreciation, decreased $0.1 million, or 1.0%, for the year ended December 31, 2007 compared to the corresponding 2006 period. The decrease is primarily due to technology and operating efficiencies, which more than offset additional capacity requirements resulting from growth in customer business.

Product development and sustainment, excluding depreciation

Product development and sustainment expense, excluding depreciation, decreased $8.4 million, or 34.1%, for the year ended December 31, 2007 compared to the corresponding 2006 period. The decrease is primarily due to higher expenses incurred in 2006 to set-up additional customers utilizing the Fuel platform.

Sales and marketing, excluding depreciation

Sales and marketing expense, excluding depreciation, decreased $1.3 million, or 15.3%, for the year ended December 31, 2007, compared to the corresponding 2006 period. The decrease is primarily due to a reduction in international sales and marketing costs associated with termination of international expansion plans initiated in 2005.

 

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General and administrative, excluding depreciation

G&A expense, excluding depreciation, decreased $0.9 million, or 8.1% for the year ended December 31, 2007 compared to the corresponding 2006 period. The decrease is primarily due to a workforce reduction that occurred in the last quarter of 2006 and the first quarter of 2007.

Depreciation and amortization

Depreciation and amortization expense increased from $5.9 million in 2006 to $10.3 million in 2007, or 74.2%, due mainly to growth in property and equipment related to additional investment in the Fuel platform and furniture and fixtures for a new headquarters facility in Durham, North Carolina that we occupied beginning October 2006.

Restructuring

In the first quarter of 2007, we closed our San Diego and Los Angeles, California offices, and relocated employees to our corporate headquarters (then located in Durham, North Carolina).

Goodwill and long-lived asset impairment charges

In 2007, we recorded goodwill and long-lived asset impairment charges of $26.9 million to write-off the goodwill associated with our mobile network operator and GPW reporting units. The annual impairment test performed on the mobile network operator reporting unit indicated that changes in consumer purchasing habits produced lower revenues and margins than originally forecasted, resulting in a goodwill impairment of $12.1 million. In addition, the annual impairment test performed on the GPW reporting unit indicated that unanticipated competitive dynamics in the messaging marketplace generated lower revenues and cash flow than were originally projected, resulting in the goodwill impairment of $14.8 million.

Abandoned transaction charge

In 2007, we issued to an existing investor a warrant to purchase common shares as consideration for a financial commitment in connection with a proposed acquisition that was not completed. The expense of $2.6 million represents the fair value of the warrant upon issuance.

Other income (expense), net

 

     Year Ended December 31,         
           2006                 2007            Change  
     (Dollars in thousands)  

Other income (expense)

   $ (2,206   $ 79       $ 2,285   

Interest and investment income, net

     1,740        2,157         417   

Interest expense

     (644     (1,081      (437
                         

Total other income (expense), net

   $ (1,110   $ 1,155       $ 2,265   
                         

During the year ended December 31, 2006, we incurred other expense of $2.2 million primarily as a result of the expiration of an unexercised option to purchase a business. Our interest and investment income, net of interest expense, of $1.1 million for the year ended December 31, 2007 was essentially unchanged from the 2006 period.

 

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Income tax provision

The income tax provision for the years ended December 31, 2007 and 2006 was zero, as we maintain a full valuation allowance against our net deferred tax assets which precludes us from recognizing a tax benefit for our current operating losses. Our lack of profitability historically is a key factor in concluding that there is insufficient evidence of our future ability to realize any future benefits from our deferred tax assets.

Discontinued operations

 

     Year Ended December 31,     Change  
           2006                 2007           $  
     (Dollars in thousands)  

Loss from discontinued operations

   $ (12,960   $ (24,928   $ (11,968

Loss from sale of discontinued operations

   $ —        $ (1,360   $ (1,360

The loss from discontinued operations in both years consists primarily of losses from the direct to consumer business line sold in two transactions in 2007 and in 2008 and the media and entertainment business discontinued in 2008. The substantially higher losses in 2007 resulted primarily from high marketing and operating expenses related to the media and entertainment business. In late 2007, we made the decision to wind down the business. Results for 2007 also include a goodwill impairment of $2.9 million related the direct to consumer business.

Net loss

 

     Year Ended December 31,        
           2006                 2007           Change  
     (Dollars in thousands)  

Net loss

   $ (55,197   $ (77,893   $ (22,696

Our net loss in 2007 was $77.9 million, an increase of $22.7 million from 2006. The higher loss in 2007 was primarily due to increased operating expenses and losses from discontinued operations and losses upon dispositions in 2007, partially offset by increased revenues. Operating expenses in 2007 included $26.9 million of goodwill and long-lived asset impairments and an abandoned transaction charge of $2.6 million. In addition, losses from discontinued operations and related loss upon dispositions were $26.3 million compared to losses from discontinued operations in 2006 of $13.0 million. These increases were partially offset by a $13.3 million increase in revenues and a net $4.6 million decrease in all the other operating expense categories in 2007.

Liquidity and Capital Resources

General

We have financed our operations primarily through issuances of mandatorily redeemable preferred stock, borrowings under our revolving credit facilities, and more recently, from cash provided by operating activities. We intend to use the net proceeds from this offering for working capital and general corporate purposes, including funding capital expenditures and additional acquisitions. As of the date of this prospectus, we do not have any agreements or understandings in place with respect to any additional acquisitions, although we are continually exploring potential acquisition opportunities.

Our principal sources of liquidity as of September 30, 2009 consisted of cash of $19.6 million and $14.4 million of availability under our $25.0 million revolving credit facility.

 

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Our principal needs for liquidity have been to fund operating losses, working capital requirements, capital expenditures, acquisitions and for debt service. We expect that working capital requirements, capital expenditures and acquisitions will continue to be our principal needs for liquidity over the near term. Working capital requirements are expected to increase as a result of our growth, both organically and through future acquisitions. The main portion of our capital expenditures has been, and is expected to continue to be, for datacenter facilities and equipment and product development. We believe that our cash flow from operations, available cash and cash equivalents (including the net proceeds from this offering) and available borrowings under our revolving credit facility will be sufficient to meet our liquidity needs for at least the next 12 months, although such sources of liquidity may not be sufficient to fund any significant acquisitions we might decide to pursue. Our existing revolving credit facility matures in April 2011. We anticipate that to the extent we require additional liquidity, we will seek to increase borrowing availability under our existing credit facility, pursue a new, expanded bank borrowing facility, explore additional debt or equity financing options or pursue a combination of some or all of these alternatives.

The credit markets have experienced extreme volatility and disruption that reached unprecedented levels during late 2008 and through much of 2009. The market for new debt financing (including bank borrowing) was extremely limited, and in some cases debt financing was available only on very expensive terms or not at all. While market conditions have improved recently, the credit markets—and the capital markets generally, including the equity markets—remain volatile and capital availability remains relatively limited. Accordingly, if we require additional debt or equity financing, we may not be able to obtain it on terms we consider favorable to us or at all. In addition, our liquidity and our ability to meet our obligations and fund our capital requirements depends upon the future financial performance of our business, which is subject to general economic, financial and other factors that are beyond our control. While the severe recession that negatively affected the global economy beginning in 2008 may be coming to an end, general economic conditions and the prospects for renewed economic growth throughout the world remain uncertain. Accordingly, we cannot assure you that our business will generate sufficient cash flow from operations, that future borrowings will be available under our credit facilities or otherwise, or that additional sources of liquidity will be available in amounts sufficient to meet our future liquidity needs.

Although we have no specific current plans to do so, if we decide to pursue one or more significant strategic acquisitions, we would likely need to incur additional debt or sell additional equity to finance such transactions.

Cash Flows

As of September 30, 2009 and as of December 31, 2008, 2007 and 2006, we had cash and cash equivalents of $19.6 million, $14.3 million, $67.4 million and $6.1 million, respectively.

Operating Activities

For the first nine months of fiscal 2009, operating activities provided $16.3 million in cash as a result of a net loss of $10.8 million, less non-cash items including depreciation and amortization amounts of $10.2 million, goodwill and long-lived asset impairment charges of $5.8 million, non-cash lease expense of $3.9 million and stock-based compensation expense of $1.7 million. Working capital sources of cash were primarily related to a $4.2 million decrease in accounts receivable due to strong collection efforts and the timing of collections surrounding our professional service projects and a $5.4 million increase in deferred revenue attributable primarily to increased billing for our professional services. These sources of cash were partially offset by an $8.5 million decrease in accounts payable due primarily to lower operating expenses.

 

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For the first nine months of fiscal 2008, operating activities used $27.7 million in cash as a result of a net loss of $65.3 million, less non-cash items including depreciation and amortization of $15.6 million, goodwill and long-lived asset impairment charges of $24.5 million and stock-based compensation expense of $1.8 million. Working capital sources of cash were primarily related to a $1.4 million decrease in accounts receivable, a $3.2 million decrease in prepaid expenses and other assets due to the consolidation of resources from the InfoSpace Mobile acquisition and a $3.4 million increase in deferred revenue, attributable to increased billings for professional services. These sources of cash were partially offset by a $13.9 million decrease in accounts payable due to the InfoSpace Mobile acquisition from 2007 that increased accounts payable at December 31, 2007.

In fiscal 2008, operating activities used $28.7 million in cash as a result of a net loss of $78.0 million, less non-cash items including depreciation and amortization of $21.6 million, goodwill and long-lived asset impairment charges of $29.1 million and stock-based compensation expense of $2.3 million. Working capital sources of cash were primarily related to a $2.0 million decrease in accounts receivable and an increase of $7.1 million in deferred revenue, attributable to increased professional services billings. These sources of cash were offset primarily by a $16.8 million decrease in accounts payable due primarily to payments of liabilities assumed as part of the InfoSpace Mobile acquisition in December 2007.

In fiscal 2007, operating activities used $41.5 million in cash as a result of a net loss of $77.9 million, less non-cash items including depreciation and amortization of $10.9 million, goodwill and long-lived asset impairment charges of $29.7 million and an abandoned transaction charge of $2.6 million. Working capital sources of cash were related to a $2.7 million decrease in prepaid expenses and other assets and an increase in deferred revenue of $0.8 million. These sources of cash were primarily offset by an $11.9 million increase in accounts receivable due to accounts receivable balances from the InfoSpace Mobile acquisition.

In fiscal 2006, operating activities used $43.2 million in cash as a result of a net loss of $55.2 million, less non-cash items including depreciation and amortization of $6.8 million. Working capital sources of cash were primarily related to a $1.1 million increase in prepaid expenses and other assets and a $7.0 million increase of accounts payable. These sources of cash were offset by an increase in accounts receivable of $4.7 million.

Investing Activities

Investing activities have involved primarily purchases of businesses and capital expenditures. For the years ended December 31, 2007 and 2008, we had acquisition costs of $137.0 million (incurred to acquire InfoSpace Mobile) and $1.1 million, respectively. We incurred no acquisition costs during the nine months ended September 30, 2009. For the nine months ended September 30, 2009, our capital expenditures totaled $4.0 million. Our capital expenditures are typically for routine purchases of computer equipment to maintain and upgrade our technology infrastructure and for development of software to provide services to our customers. We anticipate future capital expenditures for maintenance, support and enhancements of existing technology and continued investments in new technologies. Our software development investments consist primarily of development, testing and deployment of new applications and new functionality to existing applications. We expect our capital expenditures over the next year to increase to approximately $20.3 million due primarily to increased software development activity. Although we have financed some of these purchases in the past, we anticipate funding future capital expenditures with cash flows from operations.

Financing Activities

Until recently, financing activities have provided us with funding for all of our liquidity needs, including operating losses, capital expenditures and acquisitions. In 2007, we financed the acquisition

 

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of InfoSpace Mobile and subsequent operating needs of the business with proceeds from the issuance of Series I mandatorily redeemable preferred stock, net of issuance costs, totaling $221.7 million.

Due to recent improvements in the operating performance of our business and the absence of any additional acquisitions, we repaid our outstanding debt in April 2009 and have not needed to borrow additional amounts under our credit facility or obtain other financing to fund operations and capital expenditures. However, we have used the revolving credit facility in the past to fund a portion of our operating needs and may need to do so again in the future. Our cash flows from operations fluctuate from period to period due to various factors, known and unforeseen. These factors may include changes in working capital from inconsistent timing of cash receipts and payments for items such as accounts payable, incentive compensation, changes in deferred revenue, interest payments and other various items. In addition, significant acquisitions and organic growth impact net cash flows from operations due to growth in revenue and associated working capital requirements.

Credit Facility

We are party to a credit facility with Silicon Valley Bank pursuant to which we can borrow up to $25 million in secured loans. The availability under the credit facility is subject to a borrowing base calculated based on qualifying accounts receivable. The interest rate on any borrowings is based on the lender’s prime rate plus a range of between 50 to 150 basis points depending on our trailing EBITDA. The minimum interest rate is 5.50%. The credit facility restricts, among other things, our ability to incur indebtedness, create or permit liens on our assets, declare or pay dividends and certain other restricted payments, consolidate, merge or recapitalize, acquire or sell assets, make certain investments, loans or other advances, and enter into transactions with affiliates. The credit facility requires us to maintain a “tangible net worth” of $15 million. The credit facility terminates in April 2011. As of September 30, 2009, there were no outstanding amounts under the credit facility and we had borrowing capability of up to approximately $14 million.

Contractual Obligations and Other Commitments

As of December 31, 2008, our contractual obligations and other commitments were as follows:

 

     Payments due by Period
     Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years
     (Dollars in thousands)

Operating lease obligations(1)

   $ 17,198    $ 5,390    $ 9,710    $ 2,098    $ —  

Commitments to network service providers(2)

   $ 12,208    $ 6,008    $ 6,200    $ —      $ —  
                                  

Total

   $ 29,406    $ 11,398    $ 15,910    $ 2,098    $  
                                  

 

(1) Includes operating lease commitments for facilities and equipment that we have entered into with third parties. Also includes the payments associated with the lease of our former corporate headquarters in Durham, North Carolina that was assigned to a third party effective May 1, 2009. As a result of the assignment, we are required to pay 23 months of rent on behalf of the assignee and make a $0.3 million payment at the end of that period to subsidize future operating expenses. As of December 31, 2008, we had placed in escrow $0.95 million as security for our original lease, and that sum was returned to us upon assignment of the lease. As of September 30, 2009, we have placed in escrow $1.4 million as security for the last 10 payments to be made under the assignment of the lease.
(2) We have entered into several agreements with third-party network service providers.

 

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Off-Balance Sheet Arrangements

We have no off-balance sheet financing arrangements or other financing activities with special-purpose entities other than our operating leases.

Qualitative and Quantitative Disclosures about Market Risk

Interest Rate Risk

At September 30, 2009, we had cash and cash equivalents of $19.6 million. These amounts are held primarily in cash and money market funds. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates.

We are exposed to interest rate risk to the extent we incur borrowings under our credit facility. Any borrowings under our revolving credit facility will bear interest at floating rates based on the lender’s prime rate plus a range of between 50 to 150 basis points depending on our trailing EBITDA, with a minimum interest rate of 5.50%. For variable rate debt, interest rate changes generally do not affect the fair value of the debt instrument, but do impact future earnings and cash flows, assuming other factors are held constant. We do not expect to incur significant borrowings under our credit facility in 2010, and therefore we do not believe that a 10% increase in interest rates would have a significant impact on our operating results, future earnings, or liquidity.

Effects of Inflation

Inflation generally affects us by increasing costs of labor, supplies and equipment. We do not believe that inflation has had any material effect on our business, financial condition or results of operations in the last three fiscal years. Although we do not expect that inflation or changing prices will materially affect our business in the foreseeable future, if our costs were to become subject to significant inflationary pressures, we might not be able to offset these higher costs fully through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.

Recent Accounting Pronouncements

Fair Value

In August 2009, the FASB issued guidance on measuring liabilities at fair value, which provides clarification that in circumstances where a quoted market price in an active market for an identical liability is not available, a reporting entity must measure fair value of the liability using one of the following techniques: the quoted price of the identical liability when traded as an asset; quoted prices for similar liabilities or similar liabilities which trade as assets; or another valuation technique, such as a present value technique or the amount that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability that is consistent with the provisions of authoritative guidance. This statement becomes effective for the first reporting period, including interim periods, beginning after issuance. We will adopt this statement beginning in the fourth quarter of fiscal 2009 but do not expect it to have a material impact on our financial statements.

Revenue Recognition

In September 2009, the FASB ratified a consensus which will significantly affect the revenue recognition accounting policies for transactions that involve multiple deliverables. This consensus

 

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requires companies to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable, even though those deliverables are not sold separately either by the company itself or other vendors. This consensus eliminates the requirement that all undelivered elements have objective and reliable evidence of fair value before a company can recognize the portion of the overall arrangement fee that is attributable to items that already have been delivered. In the absence of vendor-specific objective evidence and third-party evidence for one or more elements in a multiple-element arrangement, companies will estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element, whether delivered or undelivered, based on their relative selling prices, regardless of whether those estimated selling prices are evidenced by vendor-specific objective evidence, third-party evidence of fair value, or are based on the company’s judgment.

This consensus will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. However, early adoption is permitted. If a company elects early adoption and the period of adoption is not the beginning of its fiscal year, the requirements must be applied retrospectively to the beginning of the fiscal year. Retrospective application to prior years is permitted, but not required. In the initial year of application, companies are required to make qualitative and quantitative disclosures about the impact of the changes. In many circumstances, the new guidance under this consensus will require significant changes to a company’s revenue recognition policies and procedures, including system modifications. We are currently evaluating the potential impact of this consensus on our financial position and results of operations, but do not expect it to have a material impact on our consolidated financial statements.

 

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BUSINESS

Overview

We are a leading provider of mobile data solutions that enable wireless carriers to deliver high value mobile data services to their subscribers. We provide a comprehensive suite of hosted, managed service offerings, including mobile web portal, storefront, messaging, and billing support and settlement, which enable wireless carriers to deliver customized, carrier-branded mobile data services. Our mCore service delivery platform provides the tools for mobile subscribers to easily locate and access personally relevant and location-based content and services, engage in social networking and download content and applications. We also leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized mobile data experience and targeted mobile marketing solutions. Our mCore platform provides mobile subscribers with access to over 30 million unique pieces of third-party content or applications, that we optimize and deliver to over 2,000 different mobile phone models, ranging from entry level feature phones to smartphones. We have access to over 200 million mobile subscribers through our wireless carrier customers, and we currently provide mobile data services to over 30 million of these subscribers on a monthly basis.

Our mCore service delivery platform simplifies the relationships between wireless carriers and mobile content and application providers, and provides significant benefits to the participants in the mobile data ecosystem. By enabling wireless carriers to deliver a personalized subscriber experience, we enhance their ability to attract and retain mobile subscribers and increase the average revenue per user for mobile data services, or mobile data ARPU. Additionally, through our managed service approach, we help carriers reduce operating costs. We facilitate effective monetization by mobile content and application providers by making it easier for them to reach millions of targeted and non-targeted subscribers with customized offerings. Finally, mCore provides the highest levels of quality assurance for the delivery, as well as the efficient billing and settlement, of mobile content and applications.

Our operations are predominantly based in the U.S., with international operations in the United Kingdom, the Netherlands and Singapore. Our customers include the top five wireless carriers in the U.S. market: Verizon Wireless, AT&T, Sprint, T-Mobile USA and TracFone Wireless. To date, over $3 billion in revenue has been generated by our customers through the use of our mobile data services platform. For the twelve months ended September 30, 2009, we generated revenue of $117.1 million.

Industry Background

The Market for Mobile Data Services

The number of mobile subscribers has grown rapidly over the past 10 years. The Yankee Group, an independent market research firm, estimates that the number of mobile subscribers in the U.S. will grow from 269 million in 2008 to 301 million in 2012, and worldwide will grow from 3.99 billion in 2008 to 5.13 billion in 2012. Emerging markets, such as those in Southeast Asia, India and Latin America, are experiencing the most rapid growth in mobile subscribers. Early mobile subscribers used mobile phones primarily for voice services, as mobile data services were not available on the initial wireless networks. The Yankee Group estimates that the proportion of adult U.S. subscribers owning smartphones increased to 14% in 2009 from 11% in 2008 and 8% in 2007. The share of smartphones as a percentage of the overall mobile device market is projected to continue growing. With the advent of the Internet and the evolution of wireless networks and mobile phones, mobile subscribers have increased their demand for mobile content, including information, images, music and video, and for mobile applications, including games and productivity tools.

 

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The Yankee Group estimates that the mobile data services market in the U.S. will grow from $35 billion in 2008 to $47 billion in 2012, and worldwide will grow from $174 billion in 2008 to $244 billion in 2012. The mobile data services market predominantly includes data access, content and applications, commerce and messaging services. We believe the current market for our services is the mobile content delivery platform market, which includes portals and storefronts. Given the complexity of this market, wireless carriers often use third-party content delivery platforms to deliver mobile data services to their subscribers. The Yankee Group estimates that the North American market for mobile content delivery platforms will grow from $443 million in 2008 to $780 million in 2012, which represents a compound annual growth rate of 15%, and worldwide will grow from $2.5 billion in 2008 to $3.9 billion in 2012 which represents a compound annual growth rate of 12%. This market is projected to continue to grow as wireless carriers continue to improve the speed and quality, and lower the total cost, of mobile data services, and as mobile phone manufacturers continue to develop and deliver mobile phones with increasing levels of features and functions, addressing mobile subscriber demand. Additionally, as mobile subscribers become more aware of the ever-increasing amount of available mobile content and applications, their use of mobile data services is projected to grow for the foreseeable future.

Wireless Carrier Dynamics

Wireless carriers operate in a highly competitive market and face growing challenges to attract and retain subscribers and expand total ARPU. As the demand for mobile data services continues to grow, the following industry dynamics affect wireless carriers:

Mobile Voice ARPU Declining.    As the market for mobile voice services has matured and become more commoditized, competition among wireless carriers to acquire and retain subscribers has intensified, placing greater downward pressure on voice services revenue. The Yankee Group estimates that monthly mobile voice ARPU in the U.S. will decline from $42.12 in 2008 to $37.42 in 2012, and worldwide will decline from $15.39 in 2008 to $12.30 in 2012.

Mobile Data ARPU Increasing.    The rising capabilities of data-enabled mobile devices combined with the increasing capacity and speed of wireless networks has resulted in significant growth in the demand for mobile data services. Mobile data ARPU has been increasing, which we believe is due to wireless carriers aggressively marketing new mobile data services and pricing plans to attract and retain mobile subscribers. The Yankee Group estimates that the monthly mobile data ARPU in the U.S. will increase from $11.03 in 2008 to $13.10 in 2012, and worldwide will grow from $3.93 in 2008 to $4.05 in 2012. As wireless carriers continue to spend billions of dollars upgrading their wireless networks to handle the accelerated growth in data traffic, they are expected to continue to focus on growing mobile data revenue.

Competition Increasing.    The growth dynamics of the mobile data services market and mobile devices and their operating systems have attracted non-carrier participants into the market, including Apple and Google. These relatively new entrants are offering access to mobile content and applications through their own solutions and are capturing a greater portion of value being created in the mobile data market. We believe that, as Apple, Google and other participants continue to focus on this market opportunity, and as open standards continue to proliferate, wireless carriers will experience stronger competitive pressure to design, develop and deploy leading-edge mobile data service solutions that will enable them to compete in an increasingly open marketplace.

Mobile Subscriber Loyalty Being Challenged.    Retaining mobile subscribers has become more difficult given the wider adoption of number portability, in which subscribers are able to retain their phone numbers even if they change wireless carriers, and the accelerated adoption of prepaid mobile service plans, particularly in international markets. The difficulty in retaining subscribers grows as new competitive mobile devices and platforms are introduced into the market and as new entrants take

 

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more aggressive approaches toward acquiring new customers. Additional threats arise as Internet incumbents like Google and Yahoo! enter the mobile market and offer mobile subscribers alternative means to access and consume mobile data services.

Mobile Data Ecosystem Complexity Increasing.    A complex mobile data ecosystem has developed as a result of the large and growing mobile data services market opportunity, and the diversification of industry participants involved, including wireless carriers, mobile device manufacturers, operating system developers, and mobile content and application providers. This ecosystem will continue to change rapidly as new mobile devices and operating systems are introduced into the market, new mobile content and applications are developed, and as mobile subscribers continue to make greater demands for an enhanced and personalized subscriber experience.

Challenges of Internally Developed Solutions Increasing.    Historically, many wireless carriers provided mobile data services directly to their mobile subscribers through internally developed proprietary solutions. These solutions predominantly consisted of point solutions for specific needs. As the mobile data ecosystem becomes more complex, wireless carriers are challenged to manage the ever-changing dynamics in the mobile data services market. Wireless carriers have to spend significant time, capital and other resources to develop, implement, maintain and upgrade their internal solutions. As wireless carriers are increasingly required to focus their efforts on wireless network deployment and subscriber acquisition, they have faced greater challenges in delivering the type of high value subscriber experience required to compete and fully capitalize on opportunities within the mobile data services market.

Smartphone Market Share Increasing. With the launch of the newest versions of the iPhone, Android and Blackberry, smartphones are becoming an increased percentage of phones serviced by the wireless carriers. The Yankee Group estimates that the proportion of adult U.S. subscribers owning smartphones increased to 14% in 2009 from 11% in 2008 and 8% in 2007. The share of smartphones as a percentage of the overall mobile device market is projected to continue growing. We believe that these smartphone users tend to use more data services and have more full featured web browsers. As the percentage of smartphones increases further, wireless carriers will need to understand how to extend their mobile data services to allow for application and content delivery to these new phones.

Mobile Content and Application Provider Dynamics

Mobile content and application providers operate in a highly fragmented market and face increasing challenges to cost-effectively reach the broadest base of mobile subscribers and monetize their offerings. As the demand for mobile data services grow, the following industry dynamics affect mobile content and application providers:

Limited Reach and Distribution.    The mobile content and application provider community consists of hundreds of thousands of participants, most of whom, we believe, do not have the experience, scale or resources necessary to effectively and affordably access mobile subscribers.

Limited Infrastructure.    Most mobile content and application providers do not have the necessary infrastructure to effectively monetize their mobile offerings. They generally have limited capabilities with respect to delivery, quality assurance, purchase confirmation, billing and settlement. In addition, given the wide variety of mobile devices in the market, with different screen sizes and resolution, mobile content and applications must be adapted to each possible configuration in order to enhance the subscriber experience. Content and application providers continue to face challenges each year with non-delivered content and applications, poor customer service and mobile phone or wireless network compatibility issues.

 

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Mobile Subscriber Dynamics

As the mobile phone increasingly becomes an indispensable part of their everyday lives, mobile subscribers are demanding an enhanced, personalized subscriber experience, with easy access to content and applications on a real-time basis. As the demand for mobile data services grow, the following industry dynamics affect mobile subscribers:

Increasing Mobile Device Capabilities and Aggressive Pricing Plans.    Mobile subscribers are rapidly upgrading their mobile devices, and often select devices with the latest features and capabilities. In addition, through increased competition in the mobile data market, mobile subscribers have access to attractively priced mobile service plans and promotions.

Growth of Wireless in Emerging International Markets.    In emerging international markets, mobile devices and mobile data services are becoming more affordable to consumers. Consumers in emerging markets are more often using mobile devices as their primary means to access the Internet and mobile content and applications. As wireless networks continue to penetrate these emerging markets, mobile subscribers and the demand for mobile data services are expected to continue to grow.

Access to the Increasing Variety of Mobile Data Services.    Currently, mobile subscribers often have difficulty locating, connecting to, downloading and using the ever-increasing variety of mobile data services available on their mobile devices, such as checking email, keeping up with social networks, and downloading the latest content and applications. In addition, poorly designed user interfaces and content and applications that are not optimized for mobile devices often inhibit the mobile subscriber experience.

Enhanced Personalization and Customization.    Mobile subscribers are demanding a more personalized experience with mobile data services, including real-time access to personally relevant and location-based content and services and social networking. As the mobile phone becomes increasingly integrated into their everyday lives, mobile subscribers are demanding the ability to customize their mobile data experience to meet their preferences.

Demand for Content Delivery Platforms

Given the complexity of the mobile data ecosystem, with evolving technologies and a proliferation of mobile devices and operating systems, the current landscape in the mobile data services market has become increasingly challenging for wireless carriers to manage effectively on their own. We believe that, by partnering with a content platform provider, wireless carriers are able to more effectively leverage their brands to provide an enhanced subscriber experience with mobile data services, enabling them to attract and retain subscribers and increase mobile data ARPU. In addition, wireless carriers are seeking to utilize subscriber usage data to provide a more relevant, timely and personalized user experience that is secure, private, and customized for targeted offerings. By partnering with a content delivery platform provider, wireless carriers are able to optimize their mobile data services strategy, and to focus on their core competencies.

The Motricity Solution

We have designed and developed the mCore service delivery platform to deliver numerous benefits, including the following:

Wireless Carriers.    We use customizable, modular solutions that enable wireless carriers to rapidly develop, deploy, and deliver mobile data services. Wireless carriers are able to deliver a high value, carrier-branded mobile data experience, which provides their mobile subscribers with easy

 

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access to desired content and applications. We believe that this enhanced subscriber experience enables wireless carriers to attract and retain mobile subscribers and increase mobile data ARPU. At the same time, our platform can reduce wireless carrier network overhead and operating costs and simplify the relationships between wireless carriers and content and application providers.

Mobile Content and Application Providers.    We enable mobile content and application providers to reach millions of mobile subscribers across carriers, and thereby more effectively monetize their mobile offerings. We believe mCore also facilitates efficient billing and settlement, and provides quality assurance for delivery of mobile content and applications.

Mobile Subscribers.    We enable wireless carriers to deliver a high value, highly personalized mobile data experience to their subscribers, with simple, real-time access to relevant and desired mobile content and applications. Our mCore platform provides the tools for mobile subscribers to easily locate and access personally relevant and location-based content and services, engage in social networking, and download, send and receive digital media. In addition, mCore allows mobile subscribers to manage the content and applications that they use most frequently.

Our Strengths

Strong Relationships with Wireless Carriers.    We have well-established relationships with the top wireless carriers in the U.S. market, including Verizon Wireless, AT&T, Sprint, T-Mobile USA and TracFone Wireless. We believe that we have been an integral partner with our wireless carrier customers and have assisted them with all phases of their mobile data services strategies, including design, development, deployment, provisioning, management, billing and customer support.

Deep Integration within the Mobile Data Ecosystem.    Our mCore service delivery platform is deeply integrated into our wireless carrier customers’ systems, with the result that we can more effectively deliver an enhanced mobile data experience to their subscribers. We connect directly into our wireless carrier customers’ wireless network infrastructure as well as their provisioning and billing systems and their customer care systems. We also provide various interfaces to enable our wireless carrier customers to directly manage the content and presentation of their mobile data service experience. In addition, as our platform becomes more deeply integrated with an increasing number of content and application providers, we provide carriers with greater access to content and application providers.

Highly Scalable Platform.    Our mCore service delivery platform has been built using a flexible modular architecture that enables wireless carriers to deliver a highly scalable and highly reliable, carrier-branded experience.

Comprehensive Expertise in Managed Service Operations.    We develop, implement and operate a very large and complex managed service environment, serving over 30 million monthly active users across multiple carriers and geographies with a carrier-grade level of quality and reliability. We deliver these services to the world’s leading carriers, application and content providers ranging in complexity from roll-out and testing of minor customizations to major new strategic initiatives involving numerous third parties and onboarding of content and roll-out of a continually expanding set of devices. Our managed service environment consists of thousands of servers across multiple data centers and is capable and contracted to deliver highly reliable service delivery reaching up to 99.999% availability.

Expansive Device Portfolio and Onboarding Process.    We customize, test and maintain highly personalized mobile data experiences for an ever expanding population of mobile devices ranging from entry level feature phones to smartphones that utilize advanced operating systems such as Symbian, Blackberry, Android, Windows Mobile and webOS. Our onboarding process includes device profiling,

 

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testing and performance management across each carrier customers’ handset portfolio. We support mobile devices from over 12 manufacturers as well as a wide range of run time environments and network protocols.

Significant Insights into Subscriber Behavior and Effective User Experiences.    Our mCore platform can capture a wide range of subscriber behavior and usage patterns across multiple carriers. We are also a recognized leader in the design and development of user interfaces intended to enhance the mobile subscriber experience. We leverage our data-rich insights into subscriber behavior and our user interface expertise to provide a highly personalized subscriber experience and targeted mobile marketing solutions. Our solutions currently enable the delivery of mobile data services to over 30 million mobile subscribers monthly, which gives us exposure to one of the largest mobile subscriber communities in the world.

Independence and Neutrality.    We are content, network, operating system and mobile device type independent, with a sole focus on effectively and efficiently delivering the most relevant content and applications to mobile subscribers in real-time. Our independent position enables our interests to be closely aligned with our wireless carrier partners, thereby fostering cooperation among the constituencies that comprise the mobile ecosystem for the benefit of mobile subscribers and their mobile data experiences. We leverage our design, deployment, provisioning, management, and customer support strategies across all participants in the mobile data ecosystem, thereby optimizing our mobile data solutions and services for the benefit of our customers and their subscribers.

Our Growth Strategy

Expand Our Strong Relationships with Our Wireless Carrier Customers.    We intend to continue to expand our relationships with industry-leading participants, particularly the top five wireless carriers in the U.S.

Expand International Presence.    We intend to expand our business in developed and emerging international markets, such as those in Southeast Asia, India and Latin America. We intend to apply our expertise gained from the U.S. market and fully leverage the capabilities and scale of the mCore platform to enable the rapid deployment of advanced mobile data services in these new markets in a cost-effective and efficient manner.

Maintain and Extend Our Technological Leadership.    We believe that we are a market leader in mobile data services and solutions in terms of technological capabilities, market share and range of service offerings, and we intend to expand on this position. We intend to continue to enhance the mCore platform, and introduce new solutions that increase the total value we provide to our carrier and enterprise customers.

Advance Into New Market Segments.    We intend to leverage our core competencies, technologies, and existing market position to broaden our offerings and customer base and advance into new market segments. We intend to leverage our data-rich insights into subscriber behavior and our user interface expertise to expand our offerings of highly targeted mobile marketing solutions.

Gain Additional Scale and Technology Through Opportunistic Acquisitions.    We have historically acquired various businesses and technologies to grow our revenue and service capabilities. We expect to continue targeting acquisition candidates in the mobile data services market that have revenue expansion opportunities or complementary technology and solutions. We also expect to evaluate acquisition candidates that will enable us to expand our business and to enter markets adjacent to our core business or into new geographic markets.

 

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Enhance Smartphone Solutions.    We intend to extend further our support for new versions of smartphones and extend our support for data-rich applications which have higher rates of data consumption on these mobile devices. In addition, we will continue to leverage our subscriber behavior insights and user interface expertise to offer more personalized and richer experiences to smartphones. We expect to fully capitalize on the extensive capabilities of smartphones and their significant market adoption.

Our Solutions and Services

We design, develop, implement and support a comprehensive suite of hosted mobile data solutions, which we offer on a hosted, managed service basis. Our solutions include the following:

mCore Portal.    mCore Portal is a carrier-branded mobile destination accessible through over 2,000 different mobile phone models, ranging from entry level feature phones to smartphones. mCore Portal provides an easy to reach entry point to the mobile Internet and gives wireless carriers an ongoing, high-value position in the evolving mobile data value chain.

mCore Storefront.    mCore Storefront enables secure mobile content and application merchandising and purchasing through carrier-branded digital storefronts. These digital storefronts can be accessible through web-based, wireless application protocol (WAP) and short message service (SMS) technologies. mCore Storefront serves as the primary conduit between our wireless carrier customers and their mobile subscribers for content and application discovery, purchase and delivery.

mCore Search.    mCore Search, which we bundle with our other solutions, is a customizable search technology for the mobile Internet. A single search box enables mobile subscribers to search for any information, content or application on the Internet. Through deep integration with the wireless carrier’s advertising platform, mCore Search provides the ability for carriers to serve targeted, relevant and contextual ads.

mCore Managed Web.    mCore Managed Web provides mobile subscribers with an optimized, powerful and easy-to-use mobile web browsing experience.

mCore Gateway.    mCore Gateway provides companies that are seeking to leverage mobile capabilities for direct customer contact with real-time, push-based access to mobile subscribers with SMS or multimedia messaging service (MMS) alerts. mCore Gateway allows these enterprise customers to reach over 200 million mobile subscribers in the U.S. and Europe and provides functionality to distribute millions of messages with a high degree of reliability and speed. mCore Gateway also provides a means to charge for the delivery of digital products through wireless carrier billing facilities.

Our professional services include the following:

Solution Consulting.    Our solution professionals actively engage with customers to define mobile trends, analyze effectiveness of existing solutions and recommend programs and solutions to enhance the mobile data subscriber experience. Our solution professionals have the experience and understanding of the mobile data ecosystem to enable our customers to optimize their mobile data strategies.

Mobile Design.    Our mobile design professionals enable wireless carriers to create unique, integrated mobile experiences for their mobile subscribers. We employ functional and technical design techniques across a number of design elements including subscriber experience, wireless network and mobile device features, system integration and processes. We have a comprehensive library of proven designs and tools that help us leverage our skill set across the mobile data ecosystem.

 

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Solution Implementation.    Our implementation professionals provide expertise in every phase of the implementation process, including customization, configuration, integration, system launch and ongoing enhancement and maintenance.

Operational Management and Customer Support.    Once mCore is deployed, we provide support services to wireless carriers to maintain and monitor their service deployment, including content and technology management, the introduction of new phones and system billing and settlement. We also provide customer support to wireless carriers and their ecosystem of partners to resolve issues directly relating to the performance of the mCore platform.

Sales and Marketing

We market and sell our mobile web portal, storefront, and other managed web solutions to wireless carriers through our sales organization. Additionally, we sell our messaging gateway and billing services to the top mobile aggregators and enterprise customers through our sales organization. As of November 30, 2009 our sales and marketing organization consisted of 43 employees located predominantly in the U.S., with additional staff located in the United Kingdom, the Netherlands and Singapore.

Sales.    A senior vice president for global sales centrally manages our sales organization. Within this organization, we have teams focused on selling to wireless carriers, mobile aggregators and enterprise customers. Employees in our sales support and sales engineering group are engaged during the design and implementation process to offer insight into customer requirements, technical solutions and cost evaluation. Our sales organization has been predominantly focused on selling to the top wireless carriers in the U.S. We are now expanding our focus to Southeast Asia, India, Latin America, and other emerging markets.

Marketing and Product Management.    Our marketing and product management organizations focus on defining our product requirements, educating wireless carriers, media and industry analysts on our managed services approach, building brand awareness and supporting the efforts of the sales organization. We market our solutions through industry events, public relations efforts, sales materials and our Internet site. Additionally, we work directly with wireless carriers to help them better target and promote our joint offerings. We leverage our data-rich insights into subscriber behavior and our user interface expertise to help drive subscriber adoption and usage. We believe the combination of these efforts creates awareness of our business, solutions and managed services approach, as well as helps drive our overall business growth.

 

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Platform and Architecture

The mCore service delivery platform enables wireless carriers to design, configure, customize, and implement mobile data services. mCore is designed to bring together the three primary participants in the mobile data services ecosystem: wireless carriers, mobile content and application providers and mobile subscribers. By bringing these participants together, mCore facilitates the distribution and use of mobile content and applications, electronic commerce, and other mobile data marketing services. The mCore platform and its position in the mobile data services ecosystem are demonstrated below in Figure 1.

LOGO

Figure 1: mCore Service Delivery Platform in the Mobile Ecosystem

Key features and benefits of the mCore service delivery platform are as follows:

Tight integration with Carriers’ Systems.    mCore is able to be integrated with our customers’ systems, including provisioning, billing and settlement, customer care and product analytics, and messaging. This integration provides a more customized and seamless user experience, enabling wireless carriers to offer one-click billing for digital products, as well as location-based services that can create a more compelling user experience.

Modular Architecture.    mCore is comprised of several mobile technology components that are modular in nature and provide the flexibility to integrate with our customers’ systems, or third-party mobile content and application providers, on an as-needed basis. This modular architecture, commonly referred to in the industry as Service-Oriented Architecture, enables us to insert, replace, or remove functionalities in targeted areas without impacting our customers’ systems. Additional resources can be added with little to no interruption of service to our customers and their subscribers. In addition, this modular architecture allows mCore to be adopted from the smallest of deployments to the largest, with customizable features and functions depending on the carriers’ requirements and specifications.

 

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Cost-Efficiency.    mCore is a centralized, hosted solution through which we can deliver a broad range of mobile data services, on a managed service basis, at a total cost that we believe is lower than most internally developed solutions. By leveraging our solutions across the mobile data ecosystem and its participants, we are able to derive economies of scale that enable us to share the cost savings with our constituencies.

Reliability.    mCore is hosted at our carrier-grade hosting facilities in separate geo-redundant datacenters. Our datacenters are highly reliable, using resilient and redundant network devices, servers, storage, HVACs, and power equipment as well as best-of-class service monitoring and management to deliver our services.

Adaptability.    mCore separates core functionalities from customer-specific customization and integration through the use of adapters. These adapters are developed for each deployment to enable us to integrate our platform into the wireless carrier’s system, including authentication, billing, ringback tones and message service center. This design feature enables us to develop and deploy our product roadmap in parallel with deployment activities, which helps us achieve our time-to-market goals.

Flexible and Scalable Architecture.    mCore was designed to deliver the highest quality, carrier-grade service to some of the largest carriers in the world. Today, mCore supports over 30 million mobile subscribers monthly through its distributed architecture, hosts over 30 million unique pieces of mobile content or applications and provides the capability to reach over 200 million subscribers. mCore is designed to scale easily for mobile subscribers’ increased data consumption, expanding subscriber bases through the addition of individual service elements, such as servers and databases. mCore has also been designed with the flexibility and modularity to deliver a wide range of content, including text, graphics, audio and video to a wide range of mobile devices.

Design-Time and Run-Time Environment.    mCore provides a design-time and run-time environment for the delivery of mobile data services. The design-time environment consists of management tools with workflow capabilities for service design and deployment, while the run-time environment is the live, in-production experience with which subscribers interact. The design-time environment enables our customers to design the layout of pages, provision new text and images and merchandise content that are subsequently published to the run-time environment. The design-time environment provides us and our customers with the ability to implement changes in the user experience without requiring a new code deployment, which decreases development time and breakage risk.

Mobile Device and Operating System Independent.    mCore is mobile device and operating system independent and is able to deliver mobile data services to over 2,000 different mobile phone models, ranging from entry level feature phones to smartphones, and most mobile operating systems. As mobile device and operating system capabilities become increasingly more varied, we believe mCore’s independent approach will enable wireless carriers to deliver an enhanced user experience to their subscribers without having to specifically develop products for each device and operating system.

Data-Rich Insights into Subscriber Behavior.    mCore can store a comprehensive record of mobile subscriber activities, transactions and interactions. We and our customers are able to directly access this data or obtain custom analysis and reporting regarding subscriber behavior.

Security Compliance.    All security policies, processes and controls are aligned with the ISO 27001 Information Security Management standard as validated by an annual third party audit. Additionally, specific key operational processes—incident management, change management, release management, and service monitoring and control—were designed with support from third party subject matter experts to align with ITIL, the Industry standard framework for IT service management and

 

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support. A third-party audit has established that we are in compliance with the ISO 27001 Information Security Management standard. Through this compliance, we have a comprehensive Information Security Management System in place that consists of an enterprise-wide security steering committee, adherence to statutory, legislative, and contractual security requirements, and an information security risk management program.

Post-Deployment Capabilities.    mCore provides monitoring, reporting and ongoing insights into the overall health of the system for our customers as well as the entities that interact with it, including mobile subscribers. Monitors provide both “warning” and “error” states, enabling our customers to react to anomalies prior to an actual error condition. mCore also includes customer care tools which enable a wireless carrier’s customer care representatives to view their mobile subscribers’ interactions with the system, and to troubleshoot and service subscriber inquiries in real time.

Customers and Vendors

Customers

As of September 30, 2009, our customers included seven carriers and over 190 content and application providers worldwide. As discussed below, we have strong, established and strategic relationships with a number of industry-leading wireless carriers. In addition to those relationships, we have agreements to provide messaging services, such as standard text messaging programs and premium (paid) content delivery, to a wide array of entertainment, marketing and other customers.

Wireless carriers.    We have customer agreements with the top five major wireless carriers in the U.S. and numerous other wireless carriers in the U.S. and internationally. We provide various services, including portal, storefront and/or messaging services for these carriers; some carriers use all of our services. In addition, we have agreements with most U.S. wireless carriers for connectivity to our enterprise gateway. Our agreements vary as to the services we provide to each carrier and in how we charge for those services. Some of our agreements contain per subscriber fees for portal services and revenue sharing arrangements for storefront services. Some of our agreements also contain service-level agreements under which we commit to certain availability and performance metrics and are subject to financial penalties if we fail to perform.

AT&T Mobility.    Our largest customer by revenue is AT&T Mobility, LLC. We have several agreements with AT&T including our Second Amended and Restated Wireless Services Agreement under which we host AT&T’s MediaNet and ATT.net portals, and our 2006 Master Services Agreement under which we host AT&T’s MediaMall storefront. Under the portal agreement, we receive a monthly fee based on the number of subscribers, with a volume discount, as well as certain fixed fees. The portal agreement contains service level agreements under which we commit to certain availability and performance metrics and are subject to financial penalties if we fail to perform. The portal agreement expires on April 22, 2011; however, it is terminable by AT&T without cause upon six months’ notice. As to the storefront agreement, we are currently operating under an extension to October 2010, which does not contain cancellation provisions. However, AT&T has the right to terminate on 90 days’ notice, which can be given after April 30, 2010.

Verizon Wireless.    After AT&T, our next largest customer is Cellco Partnership (d.b.a. Verizon Wireless). We host Verizon’s portals under our 2004 WAP 2.0 Hosting Agreement. Under our Verizon portal agreement, we receive a monthly fee based on the number of subscribers, with a volume discount, as well as certain fixed fees. The portal agreement contains service level agreements under which we commit to certain availability and performance metrics and are subject to financial penalties if we fail to perform. Verizon may terminate for convenience. The agreement expires on July 31, 2010, but will automatically renew for six-month periods unless either party elects not to renew upon 60 days’ notice.

 

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Vendors

We utilize strategic relationships with offshore and domestic vendors to increase technical resource capacity in the areas of technical development and quality assurance. We are in the process of expanding these relationships to assist in the expansion of our product development efforts. On an as needed basis, these vendors can also be utilized to assist in sales engineering and demo development. We have agreements in place with our vendors, particularly offshore vendors, that allow us to properly manage and oversee vendor activities across the organization.

We have a strategic relationship with GlobalLogic, Inc., a leading software research and development company with over 3,000 employees providing services worldwide. GlobalLogic has assisted our Solution and Services group, and we anticipate using the company to supplement our newly-expanded Product Development group. Our Master Services Agreement with GlobalLogic became effective on September 30, 2008, and expires on December 29, 2011, unless renewed. We may terminate this agreement upon breach or change in control, or without cause upon 90 days notice and payment of a termination fee, if the termination without cause occurs more than 12 months before December 29, 2011.

Competition

The mobile data communications market for products and services continues to be competitive and fragmented. The widespread and rising adoption of open industry standards, rapidly changing technology trends and burgeoning consumer demand has made it easier for new market entrants, existing competitors and non-traditional players to introduce new products and services that compete with our products. With the rapid growth and adoption of mobile data services, we expect competition to increase. As such, we believe there are a number of important factors to compete effectively in our market, including:

 

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strong mobile data expertise;

 

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scalable and highly reliable products and services;

 

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advanced user interface capabilities and subscriber insight;

 

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knowledge and delivery capabilities across a wide array of content and applications;

 

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service integration capabilities across a wide range of devices, networks and standards;

 

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sufficient scale and operational efficiencies to be able to offer the most cost effective solutions;

 

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high level of customer support;

 

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ability to onboard a wide range of devices and content; and

 

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adaptability to rapidly changing demand, technology and products external to our offerings.

Our competitors include mobile device manufacturers, wired search engines, Internet portals and directories, and wireless service integrators. In our current offerings, we compete with, among others, Amdocs and Ericsson in the portal and storefront businesses, and with Sybase, OpenMarket, Ericsson, mBlox and other wireless messaging providers in our messaging aggregation business. Additionally, we face the risk that our customers may seek to develop in-house products as an alternative to those currently being provided by us. Due to the dynamic and fragmented data services market, we are also increasingly encountering competition from new market entrants like Microsoft, IBM, Apple, Yahoo!, Google and other providers of software applications and content delivery solutions.

 

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Intellectual Property

Our intellectual property is an essential element of our business. We rely on a combination of trademark, copyright, trade secret, patent and other intellectual property laws of the U.S. and other countries, as well as confidentiality agreements and license agreements to protect our intellectual property. Our intellectual property includes trademarks, patents, copyrights, trade secrets, and we are involved in numerous licensing arrangements. Our employees and independent contractors are required to sign agreements acknowledging that all inventions, trade secrets, works of authorship, developments and other processes generated by them on our behalf are our property, and assigning to us any ownership that they may claim in those works.

Our core intellectual property is our software that we use to provide services to our customers. We generally host all of our software, although some customers have the right to self-host in some circumstances. We rely primarily on copyright and trade secrets to protect our software and other technology. We do not routinely register our copyrights in our software. Trade secrets are difficult to protect, but we seek to protect our proprietary technology and processes by, in part, confidentiality agreements with our employees, consultants, and other contractors.

We are the owner of 18 trademarks registered with the United States Patent and Trademark office, including MOTRICITY and MCORE, and 15 trademarks registered internationally. We also have one trademark application pending with the United States Patent and Trademark Office and we are filing an application in Singapore.

Facilities

Our corporate headquarters is located in Bellevue, Washington and comprises approximately 65,000 square feet of space leased through December 20, 2013. We also perform a range of business functions out of offices in Durham, North Carolina. We have sales and product development functions in the United Kingdom and regional sales offices in the Netherlands and Singapore. We also operate two leased datacenter facilities located in Washington State. In addition, we lease three third-party operated datacenters located in Georgia, Massachusetts and North Carolina to provide services to our customers. We believe that our existing properties are in good condition and sufficient and suitable for the conduct of our business. As our existing leases expire and as we continue to expand our operations, we believe that suitable space will be available to us on commercially reasonable terms.

Legal Proceedings

We are a party in four purported class action lawsuits brought against us by individuals on behalf of customers receiving premium content from our content providers. The cases allege that we and our content providers charged consumers for mobile phone content without proper authorization and/or engaged in misleading marketing for premium content. The cases seek unspecified damages. The cases are:

 

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Camellia Walker individually and on behalf of a class of similarly situated individuals v. Motricity, Inc., California Superior Court, Alameda County, filed July 3, 2008;

 

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Susan Rynearson individually and on behalf of a class of similarly situated individuals v. Motricity, Inc., Washington Superior Court, King County, filed April 16, 2008;

 

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Baker v. Sprint and New Motion, Inc. (Motricity is a third-party defendant), Eleventh Judicial Circuit Court, Miami-Dade County, claim against Motricity filed May 29, 2008; and

 

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Vicky Stewart individually and on behalf of a class of similarly situated individuals v. New Motion, Inc. and Motricity, Inc., Minnesota District Court, Hennepin County, claim against Motricity filed October 1, 2009.

 

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The class representatives in the above matters all purchased content from Atrinsic, Inc. d/b/a New Motion, Inc. Atrinsic content is also at issue in several similar lawsuits brought against carriers who have, in turn, sought indemnification from us. Atrinsic has recently entered into a settlement in a class action not involving us that, if approved, is expected to release us from most, if not all of the claims asserted in the above actions and carrier indemnity claims.

In addition, we are involved in an unrelated proceeding with Atrinsic, Inc. in which Atrinsic seeks an accounting of sums paid by us and unspecified damages for Atrinsic subscribers whose subscriptions failed to renew due to a technical issue. We have counterclaimed for unpaid minimum fees due under our existing agreement. The case is Atrinsic, Inc. v. Motricity, Inc., AAA arbitration, filed June 25, 2009.

Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation, including the matters described above, is inherently uncertain. We do not, however, currently expect that the ultimate costs to resolve pending matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

From time to time, we may be subject to additional legal proceedings and claims in the ordinary course.

Employees

As of November 30, 2009, we had 346 employees. None of our employees are represented by a labor union or is covered by a collective bargaining agreement. We have never experienced any employment-related work stoppages and consider relations with our employees to be good.

 

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MANAGEMENT

Executive Officers and Directors

In connection with this offering we intend to amend and restate our certificate of incorporation and bylaws. The following summary of our executive officers and directors contains references to provisions of our amended and restated certificate of incorporation and bylaws, including the composition of the board of directors and its committees.

The following table sets forth information regarding our executive officers and directors, including their ages, as of January 22, 2010. All of our directors hold office for the remainder of the full term in which the new directorship was created or the vacancy occurred and until their successors are duly elected and qualified. The composition of the committees of the board of directors will be determined at the completion of this offering. Executive officers serve at the request of the board of directors. Other than as described below, there are no family relationships between our directors and executive officers.

 

Name

   Age   

Position

Ryan K. Wuerch

   42    Chief Executive Officer, Chairman and Founder

Jim Smith

   42    President and Chief Operating Officer

Allyn P. Hebner

   57    Chief Financial Officer

Richard E. Leigh, Jr.

   50    Senior Vice President, General Counsel and Corporate Secretary

James Ryan

   44    Chief Strategy and Marketing Officer

Chris Dorr

   47    Chief Human Resources Officer

Hunter C. Gary

   35    Director

Lady Barbara Judge

   62    Director

Suzanne H. King

   45    Director

Sohail Qadri

   49    Director

Brian Turner

   50    Director

Set forth below is information concerning our executive officers and directors.

Ryan K. Wuerch founded Motricity in 2001, and has served as chief executive officer since 2001, and chief executive officer and chairman since 2002. Previously, Mr. Wuerch was president of Learning 2000, Inc. an education software company, from 1998 to 2001. Prior to Learning 2000, Mr. Wuerch served as senior vice president of ShapeRite, a nutritional supplement manufacturer, from 1995 to 1998. Mr. Wuerch was named the 2005 Carolinas’ Ernst & Young Entrepreneur of the Year. He serves on the boards of the CTIA Wireless Foundation, the Miss America Organization, and ambassador for the Internet Innovation Alliance.

Jim Smith has served as our president and chief operating officer since January 2009. Previously, from 2001 to 2008, Mr. Smith served as vice president and business unit general manager at Avaya, Inc. a communications systems company. Before Avaya, from 1999 to 2001, Mr. Smith was chief operating officer and co-founder of Vector Development, an e-commerce operating company. Earlier in his career, from 1989 to 1999, Mr. Smith held multiple positions with Accenture, most recently as an associate partner.

Allyn P. Hebner has served as our chief financial officer since March 2009. From August 2008 through February 2009, he served as a consultant to our company through Tatum, LLC, an executive services company, with whom he is still a non-participating partner. Previously, Mr. Hebner served as vice president, controller and chief accounting officer at T-Mobile USA, from April 2000 to April 2007. He has also held senior financial management positions at Puget Sound Energy, Washington Energy Company and Allwaste, Inc.

 

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Richard E. Leigh, Jr. has served as our senior vice president, general counsel and corporate secretary since September 2008. Previously, from 2006 to 2008, Mr. Leigh served as a legal consultant and advisor to Paul Allen’s Vulcan Inc. and its affiliate, the Seattle Seahawks of the National Football League. From 2004 to 2005, Mr. Leigh served as executive vice president, general counsel and corporate secretary of Cell Therapeutics, Inc. From 1997 to 2004, Mr. Leigh served as vice president and general counsel to Vulcan Inc. and from 1997 to 2000, he served as vice president and general counsel to the Seattle Seahawks. Prior to that, he spent eight years as a corporate attorney with the Seattle law firm of Foster Pepper PLLC, where he was a partner. Mr. Leigh currently serves on the Board of Trustees of the Flying Heritage Collection, a museum housing Paul Allen’s private collection of world-class 20th century military aviation.

James Ryan has served as our chief strategy and marketing officer since May 2009. Previously, from January 2008 to November 2008, Mr. Ryan served as president and chief executive officer of CMWare, Inc., a mobile optimization technology company. Prior to CMWare, Inc., from June 2007 to December 2007, Mr. Ryan served as president and chief executive officer of Mobile Campus, a mobile marketing company. Prior to Mobile Campus, from November 2003 to May 2007 Mr. Ryan was vice president of consumer data services for AT&T Mobility. Mr. Ryan has also served as president and chief executive officer of Teltier Technologies, a wireless solutions company, as vice president of strategic business development for O2, chief technology officer for Genie Internet and vice president of data services for Sprint PCS.

Chris Dorr has served as our chief human resources officer since June 2009. Previously, Mr. Dorr was human resources director for Microsoft from 2003 to 2009. Prior to Microsoft, from 2001 to 2003, Mr. Dorr led the human resources function for two companies—i2 Technologies and Brown and Caldwell. Mr. Dorr also helped establish the human resources function at Scient Corporation from 1999 to 2001. Mr. Dorr’s first 12 years in human resources were spent with American Express and MCI Communications.

Hunter C. Gary has served as one of our directors since 2007. Since 2003, Mr. Gary has served as the chief operating officer of Icahn Sourcing LLC, an entity owned by Mr. Carl Icahn, where he is responsible for monitoring and managing cost efficiency opportunities for businesses in which Mr. Carl Icahn has an interest. Since 2007, Mr. Gary has served as a director of WestPoint International, Inc., a company which is engaged in the home textiles business. Since 2008, Mr. Gary has served as a director of American Railcar Industries, Inc., a company that is primarily engaged in the business of manufacturing covered hopper and tank railcars. Mr. Gary is married to Mr. Carl Icahn’s wife’s daughter.

Lady Barbara Judge has served as one of our directors since January 2010. Since 2002, Lady Judge has been chairman of the United Kingdom Atomic Energy Authority. From 2004 to 2007, Lady Judge was the deputy chairman of the United Kingdom Financial Reporting Council in London. From 2002 through 2004, she was a director of the Energy Group of the United Kingdom’s Department of Trade and Industry. Earlier in her career, Lady Judge served as a commissioner of the U.S. Securities and Exchange Commission, was a partner at Kaye, Scholer, Fierman, Hays & Handler, and was a regional director at Samuel Montagu & Co. Ltd. Lady Judge serves as a director of Massey Energy Company and ATP Oil & Gas Corporation.

Suzanne H. King has served as one of our directors since 2004. Ms. King has been with New Enterprise Associates, Inc. since 1995, as a partner since 1999, where she focuses on information technology investments and manages the firm’s marketing and investor relations functions. Ms. King serves as a director of Approva corporation, a financial information technology company, and Virginia’s Center for Innovative Technology. Ms. King has served as a director of Cyveillance, Inc., an information technology security company, Quantum Bridge Communications, a broadband

 

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communications company, and Guardent, a security service provider. Prior to joining New Enterprise Associates, Ms. King led the financial team at XcelleNet, Inc., a developer of system management software for remote access. Ms. King also worked as a senior auditor for Arthur Andersen & Co., specializing in emerging information technology companies. Ms. King was a charter member of the Kauffman Fellows program and is a certified public accountant.

Sohail Qadri has served as one of our directors since November 2009. From March 2007 to October 2008, he was group director of strategy, business development and performance innovation for Telefónica S.A., a communications services company. Mr Qadri served on Telco, Telecom Italia’s Controlling Shareholder board as one of Telefónica’s representative directors, and also served as director of Telefónica O2 Czech Republic. From 2001 to 2007, Mr. Qadri held various positions with O2 plc, before it was acquired by Telefónica S.A. in 2006. Mr Qadri was a member of O2 plc’s executive committee and for part of the period sat on the company’s board. From 1997 to 2001, Mr. Qadri was the director of mobility for British Telecom’s mobile division, where he was on the boards of directors of Rogers AT&T, Maxis and SFR as British Telecom’s representative director, and from 1993 to 1997, he held various executive roles, including operations director, for Cellnet, a mobile services company. Earlier in his career, Mr. Qadri was a consultant with Coopers & Lybrand, now PricewaterhouseCoopers LLP.

Brian Turner has served as one of our directors since December 2009. Brian Turner was the chief financial officer of Coinstar, Inc. from 2003 until 2009. Prior to Coinstar, from 2001 to 2003, he was senior vice president for operations, chief financial officer and treasurer of Real Networks, Inc. Prior to Real Networks, from 1999 to 2001, Mr. Turner was employed by BSquare, a software company, where he initially served as senior vice president of operations and chief financial officer before being promoted to president and chief operating officer. From 1995 to 1999, Mr. Turner was chief financial officer of Radisys Corp., an embedded software and hardware company. Earlier in his career, Mr. Turner spent 13 years at PricewaterhouseCoopers LLP. Mr. Turner currently serves as a director of Microvision, Inc., MckinstryEssention, Rally Marketing Group and InfoArmor, Inc.

Composition of Board

Our board of directors is unclassified and currently consists of six directors.

Committees of the Board of Directors

Our board of directors has or plans to establish the following committees: an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.

Audit Committee.    The audit committee will consist of three members. The committee will assist our board of directors in its oversight responsibilities relating to (i) the quality and integrity of our financial statements, (ii) our accounting and reporting policies and procedures, (iii) our risk management policies, (iv) our compliance with legal and regulatory requirements that may have a material impact on our financial statement, (v) our independent registered public accounting firm’s qualifications, independence and performance, (vi) our disclosure controls and procedures, and (vii) our internal control over financial reporting. Audit committee members will be independent, and at least one member will qualify as an “audit committee financial expert” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K, as promulgated by the SEC.

Compensation Committee.    The compensation committee will consist of three members. The committee will be responsible for designing, approving and evaluating executive compensation and

 

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benefits, as well as reviewing and approving such other compensation matters as the committee deems appropriate. Each member of the committee shall be independent, a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act, and an “outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986.

Governance and Nominating Committee.    The governance and nominating committee will consist of three members, each of whom shall be independent. The committee will be responsible for identifying individuals qualified to become directors and committee members, recommending director nominees to the board, developing and recommending approval of policies and guidelines relating to, and generally overseeing matters of, corporate governance, and leading the board’s annual review of its committee charters.

Compensation Committee Interlocks and Insider Participation

Keith G. Daubenspeck, Suzanne H. King, Hunter C. Gary, and David Limp served as members of our compensation committee in the last fiscal year. None of them is or has at any time been one of our officers or employees. None of our executive officers serves as a member of the compensation committee or board of directors of any other entity that has an executive officer serving as a member of our board of directors or compensation committee.

Mr. Gary is married to Mr. Carl C. Icahn’s wife’s daughter. We have engaged in certain agreements and transactions with entities controlled by Mr. Icahn. First, Koala Holding LP is party to our Registration Rights Agreement and Stockholders Agreement. Second, we participate in a buying group arrangement with Icahn Sourcing LLC. We do not pay any fees in connection with this arrangement. Third, in 2007, in connection with financing for an abandoned transaction, we issued warrants as a fee to Icahn Enterprises, L.P., formerly known as American Real Estate Partners L.P. Fourth, we received consulting services from Koala Holding LP in connection with the Series I financing round, in exchange for cash and warrants. See the section entitled “Certain Relationships and Related Party Transactions” for more information.

Code of Ethics

We will adopt a new code of ethical conduct applicable to our principal executive, financial and accounting officers and all persons performing similar functions in connection with this offering. A copy of our code of ethical conduct will be available upon completion of this offering on our corporate website at www.motricity.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website. In addition, we will adopt a code of business conduct and ethics that will apply to anyone conducting business on our behalf, including our directors, officers, employees, contractors and agents.

 

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The purpose of this compensation discussion and analysis section is to provide information about the material elements of compensation that are paid, awarded to, or earned by, our “named executive officers,” who consist of our principal executive officer, principal financial officer, and the three other most highly compensated executive officers. For fiscal year 2009, our named executive officers were:

 

  Ÿ  

Ryan K. Wuerch, Chief Executive Officer;

 

  Ÿ  

Allyn P. Hebner, Chief Financial Officer;

 

  Ÿ  

Richard E. Leigh, Jr., Senior Vice President, General Counsel and Corporate Secretary;

 

  Ÿ  

Jim Smith, President and Chief Operating Officer; and

 

  Ÿ  

James Ryan, Chief Strategy and Marketing Officer.

Historical Compensation Decisions

Our compensation approach is tied to our stage of development. Prior to this offering, we were a privately-held company. As a result, we have not been subject to any stock exchange listing or SEC rules requiring a majority of our Board of Directors to be independent or relating to the formation and functioning of Board committees, including audit, compensation, and nominating and governance committees. We informally considered the competitive market for corresponding positions within comparable geographic areas and companies of similar size and stage of development operating in the software and mobile data services industry. This consideration was based on the general knowledge possessed by members of our Compensation Committee and also included consultations with our Chief Executive Officer. The Compensation Committee utilized research and informal benchmarking based on their personal knowledge of the competitive market. In addition, to complement our review of executive compensation for executive officers other than our Chief Executive Officer, our Compensation Committee consulted publicly available compensation surveys prepared by Radford, a compensation consulting firm, to benchmark our compensation against companies with similar revenues, market capitalization, and other financial measures within our industry. Our Compensation Committee will formally benchmark executive compensation for all executive officers in the future against a set of peer companies described below.

Compensation Philosophy and Objectives

Upon completion of this offering and as they have done in the past, our Compensation Committee will review and approve the compensation of our named executive officers and oversee and administer our executive compensation programs and initiatives. As we gain experience as a public company, we expect that the specific direction, emphasis and components of our executive compensation program will continue to evolve. We will favor a more empirically-based approach that involves benchmarking as well as best practices with respect to compensation and benefits. Accordingly, the compensation paid to our named executive officers for fiscal year 2009 is not necessarily indicative of how we will compensate our named executive officers after this offering.

Historically, as well as in the future, our executive compensation program is intended to balance short-term and long-term goals with a combination of cash payments and equity awards that we believe to be appropriate for motivating our executive officers. Our executive compensation program is designed to:

 

  Ÿ  

align the interests of our executive officers with stockholders by motivating executive officers to increase stockholder value and reward executive officers when stockholder value increases;

 

  Ÿ  

attract and retain talented and experienced executives that strategically address our short-term and long-term needs;

 

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  Ÿ  

reward executives whose knowledge, skills and performance are critical to our success;

 

  Ÿ  

ensure fairness among the executive management team by recognizing the contributions each executive makes to our success;

 

  Ÿ  

foster a shared commitment among executives by aligning their individual goals with the goals of the executive management team and our stockholders; and

 

  Ÿ  

compensate our executives in a manner that motivates them to manage our business to meet our long-range objectives and create stockholder value.

To help achieve these objectives, the Compensation Committee expects to maintain our current compensation plans and implement new plans as needed in order to tie a substantial portion of the executives’ overall compensation to key strategic financial and operational goals, such as revenue, CIP Adjusted EBITDA (defined below) and CIP Working Capital (defined below).

Our executive compensation program rewards both team and individual accomplishments by emphasizing a combination of corporate results and individual accountability. A portion of total compensation is placed at risk through annual performance bonuses and long-term incentives. In the aggregate, the annual performance bonuses at target represent between 3% and 7% of the total target direct compensation (which consists of annual base salary and long-term and short-term incentives) for our named executive officers. Our historic practice with regard to issuing long-term incentives has been to grant restricted stock at the time of hire or promotion, although we occasionally, based upon individual circumstances, issue restricted stock or incentive stock options on an ad-hoc basis, in each case with approval from the Compensation Committee. Going forward, the Compensation Committee believes that grants of stock options are better suited to aligning the interests of our named executive officers with our stockholders. Long-term incentives, based on grant date fair value, generally represent between 79% and 93% of the total target direct compensation for our named executive officers. This combination of incentives is designed to balance annual operating objectives and our earnings performance with longer-term stockholder value creation. In 2009, annual target bonuses represented between 3% and 33% of the total target direct compensation and long-term incentives represented between 0% and 89% of the total target direct compensation for our named executive officers. The disparity largely results from our historic practice of granting long-term equity awards upon an executive’s commencement of employment, where in 2009, all of our named executive officers, other than Mr. Wuerch and Mr. Leigh, received an equity award (Messrs. Hebner, Smith and Ryan each received commencement equity grants). As a result, the total target direct compensation for Mr. Wuerch and Mr. Leigh in 2009 consisted solely of cash compensation.

We seek to provide competitive compensation that is commensurate with performance. We generally target compensation at the median for companies of a similar size in the software and mobile data services industry (based on revenues, market capitalization and other financial metrics) and calibrate both annual and long-term incentive opportunities to generate less-than-median awards when goals are not fully achieved and greater-than-median awards when performance goals are exceeded. The competitive market is comprised of companies in the software and mobile data services industry. To ensure we maintain our position to market, it has been our historical practice to review compensation data as well as best practices with respect to compensation and benefits on an annual basis, based upon informal benchmarking against Radford and other publicly available compensation surveys, to ensure executive compensation remains within the relative range noted above. We expect to continue this practice going forward and the Compensation Committee intends to continue to engage an independent compensation consultant to maintain and modify our executive compensation peer group to benchmark against. See the section captioned “Executive Compensation—Compensation Committee Procedures” for a more detailed discussion of the Compensation Committee’s use of compensation consultants.

 

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We also seek to promote a long-term commitment to us by our executives. We believe that there is great value to us in having a team of long-tenured, seasoned managers. Our team-focused culture and management processes are designed to foster this commitment. In addition, the vesting schedule attached to equity awards is based upon continued employment for each calendar quarter over four years, and is intended to retain our executives and reinforce this long-term orientation.

Compensation Committee Procedures

The Compensation Committee’s responsibilities and authorities are specified in the Compensation Committee’s Charter. The Compensation Committee charter will be filed as an exhibit to an amended registration statement. The Compensation Committee’s functions and authority include, but are not limited to, the review and approval of employment agreements, offer letters, severance and separation agreements, base salary, annual bonus and incentive, option and equity grants and other compensation and employment decisions for the following: employees with a base salary and bonus above a specified threshold, each executive officer of the Company including the named executive officers and such other senior officers as the Compensation Committee deems appropriate. In addition, the Compensation Committee is responsible for the evaluation of the performance of our Chief Executive Officer and other named executive officers, oversight and administration of our equity plans and approval of non-customary compensation, equity grants, severance or other plans that are outside of the terms and conditions contained in the applicable plan and have an aggregate dollar value exceeding a specified threshold. The Compensation Committee is also responsible for the review and approval of all our human resources plans such as the 401(k) plan, health and welfare plans, compensation of our board of directors and any other matters delegated to the Compensation Committee by our Board of Directors.

On or about August 24, 2009, David Limp resigned as chairperson of the Compensation Committee and subsequently resigned from our Board of Directors and ceased to serve as a member of the Compensation Committee on November 16, 2009. On January 11, 2010, Keith Daubenspeck resigned from our Board of Directors and ceased to serve as a member of the Compensation Committee. Lady Barbara Judge was elected to our Board of Directors on January 11, 2010 and appointed to the Compensation Committee. Effective as of January 13, 2010, Hunter Gary was elected as Chairperson by the Compensation Committee, in accordance with the Compensation Committee Charter.

Compensation Committee meetings are expected to be held at least quarterly to review and consider decisions on topics including, but not limited to: review and approval of bonus awards for the prior performance period under our Corporate Incentive Plan (“CIP”) and our long-term incentive plan, the term sheet for which was approved by the Compensation Committee on December 16, 2009. The chairperson will regularly report on Compensation Committee actions and recommendations at full meetings of our Board of Directors. The Compensation Committee will meet outside the presence of all of our executive officers, including our named executive officers, to consider appropriate compensation for our Chief Executive Officer. For all other named executive officers, the Compensation Committee will meet outside the presence of all executive officers and will consult with our Chief Executive Officer. Going forward, our Chief Executive Officer will review annually each other named executive officer’s performance with the Compensation Committee and recommend appropriate base salary, cash performance awards and grants of long-term equity incentive awards for all other executive officers for the Compensation Committee to consider. Based upon the recommendations of our Chief Executive Officer and in consideration of the objectives described above and the elements described below, the Compensation Committee will approve the annual compensation packages of our executive officers. The Compensation Committee also will annually analyze and review our Chief Executive Officer’s performance and determine any cash performance awards under the CIP and grants of long-term equity incentive awards based on its assessment of his performance with input from any independent consultants engaged by the Compensation Committee.

 

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In order to ensure that we continue to remunerate our executives appropriately and align our compensation programs with the interest of our stockholders, the Compensation Committee retained Frederic W. Cook & Co. in the fall of 2009 as its independent compensation consultant to review its policies and procedures with respect to executive compensation in connection with this offering. In addition, effective as of December 1, 2009, the Compensation Committee retained independent legal counsel, Brown Rudnick LLP, to provide advice and assistance with respect to the terms and conditions of the Company’s executive employment and compensation related agreements and plans. Frederic W. Cook & Co. has assisted the Compensation Committee by providing comparative market data on compensation practices and programs based on an analysis of peer competitors and by providing guidance on industry best practices. The Compensation Committee retains the right to modify or terminate its relationship with Frederic W. Cook & Co., and to retain other outside advisors to assist the Compensation Committee in carrying out its responsibilities. The Compensation Committee intends to continue to retain independent legal counsel. In 2009, the Company engaged an employee benefits consulting firm, Edify, to assist the Compensation Committee in benchmarking the Company’s benefit plans that cover executive officers and all other eligible employees against market benefit practices. The Compensation Committee intends to engage an employee benefits consultant to assist in similar evaluations in 2010.

Elements of Compensation

The Compensation Committee determines all components of executive compensation and has selected the following elements (discussed in detail below) to promote our pay-for-performance philosophy and compensation goals and objectives:

 

  Ÿ  

base salary;

 

  Ÿ  

annual cash incentive awards linked to our overall performance;

 

  Ÿ  

periodic grants of long-term equity-based compensation, such as restricted stock or options;

 

  Ÿ  

termination and change of control provisions; and

 

  Ÿ  

benefits generally available to employees.

We combine these elements in order to formulate compensation packages that provide competitive pay, reward the achievement of financial, operational and strategic objectives and align the interests of our executive officers and other senior personnel with those of our stockholders.

Pay Mix

We utilize the particular elements of compensation described above because we believe that it provides a well-proportioned mix of secure compensation, retention value and at-risk compensation which produces short-term and long-term performance incentives and rewards. By following this approach, we provide the executive with a measure of financial and job security, while motivating the executive to focus on business metrics that will produce a high level of short-term and long-term performance for the Company and long-term wealth creation for the executive, as well as reducing the risk of recruitment of top executive talent by competitors. The mix of metrics used for our annual performance bonus and long-term incentive program likewise provides an appropriate balance between short-term financial performance and long-term financial and stock performance.

For key executives, the mix of compensation is weighted more heavily toward at-risk pay (annual bonus incentives and long-term equity incentives). Total at-risk compensation for our named executive officers in 2009 represented between 33% and 93% of an executive’s total target direct compensation. Initial incentive packages for our key executives were negotiated at the time of employment offer.

 

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Equity incentives were viewed to be a critical element of the total compensation package and have historically been issued at the time of hire or promotion; although additional grants have been issued based upon individual circumstances. All incentives are aligned with our stated compensation philosophy of providing compensation commensurate with performance, while targeting pay at approximately the 50th percentile of the competitive market. To ensure we maintain our position to market, it has been our historical practice to review benchmark data on an annual basis to ensure executive compensation remains within the relative ranges noted above. The Compensation Committee intends to evaluate this practice of setting compensation at the 50th percentile going forward. In December 2009, the Compensation Committee’s compensation consultant, Frederic W. Cook & Co., selected the following 19 companies to create a benchmark for assistance in determining competitive compensation packages in accordance with our stated philosophy:

 

Aruba    Digital River    Limelight Networks    Riverbed    Syncronoss
CommVault Systems    Emdeon    Netsuite    Solar Winds    Syniverse
Concur Technologies    Epiq Systems    Neustar    Starent Networks    Taleo
DigitalGlobe    Infinera    Omniture    SuccessFactors     

The Compensation Committee intends to review the above list of companies and determine whether to develop a peer group for benchmarking of compensation going forward, or, instead, to rely on broader market conditions and best practices.

Base Salary

The primary component of short-term compensation of our executive officers has historically been base salary. The base salary established for each of our executive officers is intended to reflect competitive wages for positions in companies of similar size and stage of development operating in the software and mobile data services industry, representing each individual’s job duties and responsibilities, experience, and other discretionary factors deemed relevant by our Chief Executive Officer and/or Board of Directors. Base salary is also designed to provide our executive officers with steady cash flow during the course of the fiscal year that is not contingent on short-term variations in our corporate performance. Our Chief Executive Officer makes recommendations for each executive’s base salary (including his own), based on our executives’ experience and with reference to the base salaries of similarly situated executives in the software and mobile data services industry, that are then reviewed and approved by the Compensation Committee.

Historic annual salary increases have been based on our Chief Executive Officer’s assessment of each named executive officer’s performance, the Company’s overall performance and the other factors described above including our performance based on criteria such as defined revenue, CIP Adjusted EBITDA, and CIP Working Capital metrics.

With these principles in mind, base salaries are reviewed during the first half of the fiscal year by our Compensation Committee, and may be recommended for adjustment from time to time based on the results of this review. In past years, the Compensation Committee, with guidance from our Chief Executive Officer and/or Board of Directors, reviewed the performance of all executive officers, and based on this review and any relevant competitive market data (through salary survey information provided by our human resources department, informal discussions with recruiting firms and research), set the executive compensation package for each executive officer for the coming year.

Annual base salary increases have been based upon our pay for performance philosophy, whereby pre-determined quantitative and qualitative individual goals and objectives are established at the beginning of the performance period for named executive officers below the Chief Executive

 

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Officer, and measured and assessed at the end of the performance year. Based upon each individual’s performance rating and compensation range position, individuals are eligible for a merit increase based upon the established guidelines within budget for the performance year.

Based upon general economic conditions, like many other companies, we elected to forego merit increases for 2009; therefore, no named executive officers received base salary increases during 2009. Effective upon the consummation of this offering, Mr. Wuerch will receive a base salary increase (as well as an increase in his on-target annual cash bonus to 100% of his base salary) as a result of renegotiating his employment agreement and in contemplation of his additional responsibilities associated with the Company’s stock becoming publicly traded. Mr. Wuerch’s base salary and bonus increase are described in the section captioned “Executive Compensation—Employment Agreements.” The base salaries paid to our named executive officers in fiscal year 2009 are set forth in the Summary Compensation Table below.

Short-Term Incentives

On an annual basis, or at the commencement of an executive officer’s employment with us, the Compensation Committee typically sets a target level of bonus compensation that is structured as a percentage of such executive officer’s annual base salary. Our executives participate in our annual CIP which ensures that short-term incentives are tied directly to our financial performance for the fiscal year. Depending upon corporate performance, an executive officer may receive from 0% up to 150% of his target bonus amount. These corporate performance objectives are designed to be challenging but achievable. The performance metrics and objectives are weighted in a specific manner as defined by the Compensation Committee in the CIP and approved by the Board of Directors. For all named executive officers, 20% is tied directly to achievement of our revenue objectives; 60% is tied to achievement of our CIP Adjusted EBITDA objectives; and 20% is tied to our CIP Working Capital objectives. Executive officers are not eligible for bonuses if certain minimum targets are not met.

“CIP Adjusted EBITDA” means the Company’s fiscal year 2009 consolidated net income before interest income and expense, provision for income taxes, depreciation and amortization, restructuring charges, stock compensation and other income/expense. For 2010, the CIP Adjusted EBITDA will mean the Company’s fiscal year 2010 consolidated net income before interest income and expense, provision for income taxes, depreciation and amortization, fair value adjustments for warrants and stock compensation. CIP Adjusted EBITDA for fiscal 2010 includes, without limitation, (i) restructuring costs; (ii) other income/expense, with the sole exception being income/expense for fair value adjustment for warrants; and (iii) expenses associated with payments under this 2010 CIP, and the sales incentive plan, as well as all other incentive plans.

“CIP Working Capital” means the Company’s monthly average of (i) accounts receivable minus (ii) account payable minus (iii) other accrued liabilities for the Company’s fiscal year expenses.

Our named executive officers’ threshold and maximum awards under the CIP are based upon pre-determined quantitative goals and objectives established at the beginning of the performance period, as noted above. Maximum achievement of the CIP was set at a level that significantly exceeds our business plan and has a low probability of payout. These metrics are measured and assessed at the end of the performance year. In April 2009, our Compensation Committee established the target percentage amounts for the cash bonuses for each of our named executive officers in accordance with their respective employment agreements and offer letters. For fiscal year 2009, Messrs. Wuerch, Leigh, Hebner, Ryan and Smith were eligible to receive on-target annual cash bonuses of 75%, 50%, 55%, 50% and 55%, respectively, of their fiscal year 2009 base salaries. For fiscal year 2009, at threshold achievement for each of the CIP Adjusted EBITDA, revenue and CIP Working Capital objectives, our named executive officers were entitled to receive 70% of their target CIP bonus.

 

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The following tables illustrate the metrics, thresholds and potential awards for our named executive officers under the CIP. In order for a named executive officer to receive any payment under the 2009 CIP, a copy of which is attached as an exhibit to this S-1, the Company must meet the threshold performance targets for each of the revenue and CIP Adjusted EBITDA metrics, as established by the Compensation Committee on or about March 23, 2009.

2009 CIP Metrics:

 

% of CIP Adjusted EBITDA Target Achieved: Weighting 60%

  CIP Adjusted EBITDA Payout % of Target  
less than 91.2%   0
greater than or equal to 91.2%   70
100.0%   100
144.0%   125