e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-1158172
comScore, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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54-19555550 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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11465 Sunset Hills Road, Suite 200 |
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Reston, VA
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20190 |
(Address of principal executive offices)
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(Zip Code) |
(703) 483-2000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: As of November 9, 2007, there were
27,914,541 shares of the
registrants common stock outstanding.
comScore, Inc.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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3 |
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Item 1. Financial Statements |
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3 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. Quantitative and Qualitative Disclosure about Market Risk |
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33 |
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Item 4. Controls and Procedures |
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33 |
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PART II. OTHER INFORMATION |
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34 |
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Item 1. Legal Proceedings |
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34 |
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Item 1a. Risk Factors |
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34 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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52 |
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Item 3. Defaults Upon Senior Securities |
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53 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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53 |
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Item 5. Other Information |
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53 |
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Item 6. Exhibits |
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53 |
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SIGNATURES |
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54 |
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EXHIBIT INDEX |
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55 |
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Exhibit 31.1 |
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Certification of Chief Executive Officer Pursuant to Section
302 of The Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2 |
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Certification of Chief Financial Officer Pursuant to Section
302 of The Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1 |
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Certification of Chief Executive Officer Pursuant to Section
906 of The Sarbanes-Oxley Act of 2002 |
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Exhibit 32.2 |
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Certification of Chief Financial Officer Pursuant to Section
906 of The Sarbanes-Oxley Act of 2002 |
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the sections entitled Managements Discussion
and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative
Disclosure About Market Risk under Items 2 and 3, respectively, of Part I of this report, and the
sections entitled Legal Proceedings, Risk Factors, and Unregistered Sales of Equity Securities
and Use of Proceeds under Items 1, 1A and 2, respectively, of Part II of this report, may contain
forward-looking statements. These statements may relate to, but are not limited to, expectations of
future operating results or financial performance, capital expenditures, introduction of new
products, regulatory compliance, plans for growth and future operations, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. These risks and other factors
include, but are not limited to, those listed under the section entitled Risk Factors in Item 1A
of Part II of this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, could, expect, plan, anticipate,
believe, estimate, predict, intend, potential, continue, seek or the negative of
these terms or other comparable terminology. These statements are only predictions. Actual events
and/or results may differ materially.
We believe that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately predict or control
and that may cause our actual results to differ materially from the expectations we describe in our
forward-looking statements. Except as required by applicable law, including the securities laws of
the United States and the rules and regulations of the SEC, we do not plan to publicly update or
revise any forward-looking statements, whether as a result of any new information, future events or
otherwise, other than through the filing of periodic reports in accordance with the Securities
Exchange Act of 1934, as amended. Investors and potential investors should not place undue reliance
on our forward-looking statements. Before you invest in our common stock, you should be aware that
the occurrence of any of the events described in the Risk Factors section and elsewhere in this
Quarterly Report on Form 10-Q could harm our business, prospects, operating results and financial
condition. Although we believe that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMSCORE, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2007 |
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2006 |
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(Unaudited) |
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(In thousands, except share and per |
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share data) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
72,618 |
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$ |
5,032 |
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Short-term investments |
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27,584 |
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11,000 |
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Accounts receivable, net of allowances of $194 and $188, respectively |
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19,460 |
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14,123 |
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Prepaid expenses and other current assets |
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1,517 |
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1,068 |
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Restricted cash |
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537 |
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270 |
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Total current assets |
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121,716 |
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31,493 |
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Property and equipment, net |
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6,927 |
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6,980 |
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Other non-current assets |
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205 |
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1,267 |
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Intangible assets, net |
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186 |
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983 |
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Goodwill |
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1,364 |
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1,364 |
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Total assets |
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$ |
130,398 |
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$ |
42,087 |
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Liabilities and stockholders equity (deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
919 |
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$ |
1,353 |
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Accrued expenses |
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7,279 |
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6,020 |
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Deferred revenues |
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29,085 |
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22,776 |
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Capital lease obligations |
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882 |
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1,726 |
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Preferred stock warrant liabilities |
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1,005 |
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Total current liabilities |
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38,165 |
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32,880 |
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Capital lease obligations, long-term |
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1,209 |
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2,261 |
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Deferred tax liability |
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19 |
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77 |
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Other liabilities |
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258 |
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374 |
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Total liabilities |
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39,651 |
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35,592 |
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Commitments and contingencies |
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Redeemable preferred stock: |
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Series A preferred convertible stock, $0.001 par value; no shares
authorized, issued or outstanding at September 30, 2007; 9,187,500
shares authorized, 1,837,503 shares issued and outstanding as of
December 31, 2006. Liquidation preference of $7,715 at December 31,
2006 |
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8,154 |
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Series B preferred convertible stock, $0.001 par value; no shares
authorized, issued or outstanding at September 30, 2007;
3,535,486 shares authorized, 695,865 shares issued and outstanding as of
December 31, 2006. Liquidation preference of $14,315 at December 31,
2006 |
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15,130 |
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Series C preferred convertible stock, $0.001 par value; no shares
authorized, issued or outstanding at September 30, 2007; 13,355,052
shares authorized, 2,647,209 shares issued and outstanding as of
December 31, 2006. Liquidation preference of $25,220 at December 31,
2006 |
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26,633 |
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Series C-1 preferred convertible stock, $0.001 par value; no shares
authorized, issued or outstanding at September 30, 2007; 357,144
shares authorized, 71,430 shares issued and outstanding as of
December 31, 2006. Liquidation preference of $420 at December 31,
2006 |
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443 |
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Series D preferred convertible stock, $0.001 par value; no shares
authorized, issued or outstanding at September 30, 2007; 22,238,042
shares authorized, 4,312,813 shares issued and outstanding as of
December 31, 2006. Liquidation preference of $40,723 at December 31,
2006 |
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34,682 |
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Series E preferred convertible stock, $0.001 par value; no shares
authorized, issued or outstanding at September 30, 2007; 25,000,000
shares authorized, 4,801,116 shares issued and outstanding as of
December 31, 2006. Liquidation preference of $19,565 at December 31,
2006 |
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16,653 |
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Common Stock subject to put; 347,635 shares issued and outstanding |
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4,450 |
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4,357 |
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Stockholders equity (deficit): |
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Preferred stock, $0.001 par value; 5,000,000 shares authorized at
September 30, 2007; no shares issued or outstanding at September 30,
2007; no shares authorized, issued or outstanding at December 31,
2006 |
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Common stock, $0.001 par value; 100,000,000 shares authorized at
September 30, 2007; 27,552,939 shares issued and outstanding at
September 30, 2007; 130,000,000 shares authorized at December 31,
2006; 4,000,165 shares issued and outstanding at December 31, 2006 |
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28 |
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4 |
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Additional paid-in capital |
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179,650 |
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Accumulated other comprehensive income (loss) |
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204 |
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(75 |
) |
Accumulated deficit |
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(93,585 |
) |
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(99,486 |
) |
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Total stockholders equity (deficit) |
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86,297 |
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(99,557 |
) |
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Total liabilities and stockholders equity (deficit) |
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$ |
130,398 |
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$ |
42,087 |
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The accompanying notes are an integral part of these consolidated financial statements.
-3-
COMSCORE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September
30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(Unaudited) |
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(In thousands, except share and per share data) |
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Revenues |
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$ |
22,389 |
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$ |
16,165 |
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$ |
61,879 |
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$ |
48,056 |
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Cost of revenues (excludes amortization of
intangible assets resulting from acquisitions
shown below)(1) |
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5,942 |
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4,977 |
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17,330 |
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15,330 |
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Selling and marketing(1) |
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7,390 |
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5,171 |
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20,524 |
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15,839 |
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Research and development(1) |
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3,018 |
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2,273 |
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8,387 |
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6,668 |
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General and administrative(1) |
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3,059 |
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1,897 |
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7,994 |
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5,991 |
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Amortization of intangible assets resulting from
acquisitions |
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211 |
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333 |
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797 |
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1,037 |
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Total expenses from operations |
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19,620 |
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14,651 |
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55,032 |
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44,865 |
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Income from operations |
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2,769 |
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1,514 |
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6,847 |
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3,191 |
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Interest income, net |
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1,180 |
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84 |
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1,421 |
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118 |
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(Loss) gain from foreign currency |
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(111 |
) |
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3 |
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(321 |
) |
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(24 |
) |
Revaluation of preferred stock warrant liabilities |
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82 |
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(6 |
) |
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(1,195 |
) |
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(215 |
) |
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Income before income taxes |
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3,920 |
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|
1,595 |
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6,752 |
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3,070 |
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Provision for income taxes |
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(129 |
) |
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(181 |
) |
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Net income |
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3,791 |
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1,595 |
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6,571 |
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|
3,070 |
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Accretion of redeemable preferred stock |
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(21 |
) |
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(812 |
) |
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(1,829 |
) |
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(2,331 |
) |
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Net income attributable to common stockholders |
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$ |
3,770 |
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$ |
783 |
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$ |
4,742 |
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$ |
739 |
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Net income attributable to common stockholders
per common share: |
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Basic |
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$ |
0.13 |
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$ |
0.00 |
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$ |
0.29 |
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$ |
0.00 |
|
Diluted |
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$ |
0.12 |
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|
$ |
0.00 |
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|
$ |
0.25 |
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$ |
0.00 |
|
Weighted-average number of shares used in per
share calculation common stock: |
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Basic |
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|
27,248,379 |
|
|
|
3,958,059 |
|
|
|
12,211,143 |
|
|
|
3,805,156 |
|
Diluted |
|
|
29,545,321 |
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|
3,958,059 |
|
|
|
14,326,891 |
|
|
|
3,805,156 |
|
Net income attributable to common stockholders
per common share subject to put: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.10 |
|
|
$ |
0.55 |
|
|
$ |
0.30 |
|
Diluted |
|
$ |
0.18 |
|
|
$ |
0.10 |
|
|
$ |
0.51 |
|
|
$ |
0.30 |
|
Weighted-average number of shares used in per
share calculation common share subject to put: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
Diluted |
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
|
(1) Amortization of stock-based compensation is
included in the line items above as follows: |
|
Cost of revenues |
|
$ |
76 |
|
|
$ |
4 |
|
|
$ |
145 |
|
|
$ |
6 |
|
Selling and marketing |
|
|
298 |
|
|
|
23 |
|
|
|
509 |
|
|
|
55 |
|
Research and development |
|
|
67 |
|
|
|
4 |
|
|
|
128 |
|
|
|
6 |
|
General and administrative |
|
|
264 |
|
|
|
40 |
|
|
|
501 |
|
|
|
51 |
|
The accompanying notes are an integral part of these consolidated financial statements.
-4-
COMSCORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
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Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,571 |
|
|
$ |
3,070 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
2,770 |
|
|
|
2,105 |
|
Amortization of intangible assets resulting from acquisitions |
|
|
797 |
|
|
|
1,037 |
|
Provisions for (recoveries of) bad debts |
|
|
81 |
|
|
|
(64 |
) |
Stock-based compensation |
|
|
1,283 |
|
|
|
118 |
|
Revaluation of preferred stock warrant liabilities |
|
|
1,195 |
|
|
|
215 |
|
Amortization of deferred finance costs |
|
|
7 |
|
|
|
19 |
|
Deferred tax benefit |
|
|
(58 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5,096 |
) |
|
|
106 |
|
Prepaid expenses and other current assets |
|
|
(381 |
) |
|
|
(126 |
) |
Other non-current assets |
|
|
218 |
|
|
|
199 |
|
Accounts payable, accrued expenses, and other liabilities |
|
|
1,431 |
|
|
|
1,406 |
|
Deferred revenues |
|
|
5,830 |
|
|
|
455 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
14,648 |
|
|
|
8,540 |
|
Investing activities |
|
|
|
|
|
|
|
|
Payment of restricted cash |
|
|
(268 |
) |
|
|
(7 |
) |
Purchase of short-term investments |
|
|
(37,976 |
) |
|
|
(5,950 |
) |
Sale of short-term investments |
|
|
21,400 |
|
|
|
1,500 |
|
Purchase of property and equipment |
|
|
(2,702 |
) |
|
|
(1,385 |
) |
Payment of additional consideration for acquired businesses |
|
|
|
|
|
|
(300 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(19,546 |
) |
|
|
(6,142 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from the exercise of common stock options |
|
|
780 |
|
|
|
232 |
|
Proceeds from the issuance of common stock, net of offering costs |
|
|
73,116 |
|
|
|
|
|
Principal payments on capital lease obligations |
|
|
(1,896 |
) |
|
|
(917 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
72,000 |
|
|
|
(685 |
) |
Effect of exchange rate changes on cash |
|
|
484 |
|
|
|
72 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
67,586 |
|
|
|
1,785 |
|
Cash and cash equivalents at beginning of period |
|
|
5,032 |
|
|
|
5,124 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
72,618 |
|
|
$ |
6,909 |
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
256 |
|
|
$ |
181 |
|
Accretion of preferred stock |
|
$ |
1,829 |
|
|
$ |
2,331 |
|
The accompanying notes are an integral part of these consolidated financial statements.
-5-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
comScore, Inc. (the Company), a Delaware corporation incorporated in August 1999, provides a
digital marketing intelligence platform that helps customers make better-informed business
decisions and implement more effective digital business strategies. The Companys products and
solutions offer customers insights into consumer behavior, including objective, detailed
information regarding usage of their online properties and those of their competitors, coupled with
information on consumer demographic characteristics, attitudes, lifestyles and offline behavior.
The Companys digital marketing intelligence platform is comprised of proprietary databases
and a computational infrastructure that measures, analyzes and reports on digital activity. The
foundation of the platform is data collected from a panel of more than two million Internet users
worldwide who have granted to the Company explicit permission to confidentially measure their
Internet usage patterns, online and certain offline buying behavior and other activities. By
applying advanced statistical methodologies to the panel data, the Company projects consumers
online behavior for the total online population and a wide variety of user categories.
On July 2, 2007, the Company completed its initial public offering (IPO) of common stock in
which the Company issued and sold 5,000,000 shares of its common stock at an issuance price of
$16.50 per share. In addition, selling stockholders, including officers and directors of the
Company or entities affiliated therewith, sold an aggregate of 1,095,000 shares of common stock,
which amount included the exercise of the underwriters over-allotment option in the IPO. The
Company raised a total of $82,500,000 in gross proceeds from the IPO, or approximately $73,116,000
in net proceeds after deducting underwriting discounts and commissions of $5,775,000 and offering
costs of $3,609,000. The Company did not receive any proceeds from the sale of shares in the IPO by
the selling stockholders. Upon the closing of the IPO, all shares of convertible preferred stock
outstanding automatically converted into 17,257,362 shares of common stock and all preferred stock
warrants converted into common stock warrants.
In connection with the IPO, the Companys Board of
Directors and stockholders approved a 1-for-5 reverse stock split of its outstanding common stock
and convertible preferred stock effective June 21, 2007. All share and per share amounts contained
in these consolidated financial statements have been retroactively adjusted to reflect the reverse
stock split.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant inter-company transactions and accounts have been
eliminated upon consolidation. The Company consolidates investments where it has a controlling
financial interest as defined by Accounting Research Bulletin (ARB) No. 51, Consolidated Financial
Statements, as amended by Statement of Financial Accounting Standards (SFAS) No. 94, Consolidation
of all Majority-Owned Subsidiaries. The usual condition for controlling financial interest is
ownership of a majority of the voting interest and, therefore, as a general rule, ownership,
directly or indirectly, of more than 50% of the outstanding voting shares is a condition indicating
consolidation. For investments in variable interest entities, as defined by Financial Accounting
Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, the
Company would consolidate when it is determined to be the primary beneficiary of a variable
interest entity. The Company does not have any variable interest entities.
Certain amounts in the prior period financial statements have been reclassified to conform to
the current period presentation.
-6-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unaudited Interim Financial Information
The condensed consolidated financial statements included in this quarterly report on Form 10-Q
have been prepared by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures contained in this quarterly report
comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended,
for a quarterly report on Form 10-Q and are adequate to make the information presented not
misleading. The condensed consolidated financial statements included herein, reflect all
adjustments (consisting of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of operations and cash flows
for the interim periods presented. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto contained in the
Companys prospectus dated June 26, 2007. The results of operations for the three and nine months
ended September 30, 2007 are not necessarily indicative of the results to be anticipated for the
entire year ending December 31, 2007 or thereafter. All references to September 30, 2007 and 2006
or to the three and nine months ended September 30, 2007 and 2006 in the notes to the consolidated
financial statements are unaudited.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those estimates.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and are non-interest bearing. The
Company generally grants uncollateralized credit terms to its customers and maintains an allowance
for doubtful accounts to reserve for potentially uncollectible receivables. Allowances are based on
managements judgment, which considers historical experience and specific knowledge of accounts
where collectibility may not be probable. The Company makes provisions based on historical bad debt
experience, a specific review of all significant outstanding invoices and an assessment of general
economic conditions. If the financial condition of a customer deteriorates, resulting in an
impairment of its ability to make payments, additional allowances may be required.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable
assets acquired and liabilities assumed when other businesses are acquired. The allocation of the
purchase price to intangible assets and goodwill involves the extensive use of managements
estimates and assumptions, and the result of the allocation process can have a significant impact
on future operating results. The Company estimates the fair value of identifiable intangible assets
acquired using several different valuation approaches, including the replacement cost, income and
market approaches. The replacement cost approach is based on determining the discrete cost of
replacing or reproducing a specific asset. The Company generally uses the replacement cost approach
for estimating the value of acquired technology/methodology assets. The income approach converts
the anticipated economic benefits that the Company assumes will be realized from a given asset into
value. Under this approach, value is measured as the present worth of anticipated future net cash
flows generated by an asset. The Company generally uses the income approach to value customer
relationship assets and non-compete agreements. The market approach compares the acquired asset to
similar assets that have been sold. The Company generally uses the market approach to value
trademarks and brand assets.
-7-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), intangible assets with
finite lives are amortized over their useful lives while goodwill is not amortized but is evaluated
for potential impairment at least annually by comparing the fair value of a reporting unit, based
on estimated future cash flows, to its carrying value including goodwill recorded by the reporting
unit. If the carrying value exceeds the fair value, impairment is measured by comparing the derived
fair value of the goodwill to its carrying value, and any impairment determined is recorded in the
current period. In accordance with SFAS 142, all of the Companys goodwill is associated with
one reporting unit. Accordingly, on an annual basis the Company performs the impairment
assessment for goodwill required under SFAS 142 at the enterprise level. The Company completed its
annual impairment analysis for 2006 and determined that there was no impairment of goodwill. There
have been no indicators of impairment during the three and nine months ended September 30, 2007.
Intangible assets with finite lives are amortized using the straight-line method over the
following useful lives:
|
|
|
|
|
Useful Lives |
|
|
(Years) |
Non-compete agreements |
|
3 to 4 |
Customer relationships |
|
1 to 3 |
Acquired methodologies/technology |
|
1 to 3 |
Trademarks and brands |
|
2 |
-8-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment of Long-Lived Assets
Long-lived assets, including property and equipment, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount should be addressed pursuant
to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144).
Pursuant to SFAS 144, impairment is determined by comparing the carrying value of these long-lived
assets to an estimate of the future undiscounted cash flows expected to result from the use of the
assets and eventual disposition. In the event an impairment exists, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the asset, which is generally
determined by using quoted market prices or valuation techniques such as the discounted present
value of expected future cash flows, appraisals, or other pricing models as appropriate. There were
no impairment charges recognized during the three and nine months ended September 30, 2007 and
2006. In the event that there are changes in the planned use of the Companys long-term assets or
its expected future undiscounted cash flows are reduced significantly, the Companys assessment of
its ability to recover the carrying value of these assets could change.
Foreign Currency Translation
The Company applies SFAS No. 52, Foreign Currency Translation, with respect to its
international operations. The functional currency of the Companys foreign subsidiaries is the
local currency. All assets and liabilities are translated at the current exchange rate as of the
end of the period, and revenues and expenses are translated at average exchange rates in effect
during the period. The gain or loss resulting from the process of translating foreign currency
financial statements into U.S. dollars is included as a component of other comprehensive income.
The Company incurred a foreign currency transaction loss of $111,000 for the three months ended
September 30, 2007 and a gain of $3,000 for the three months ended September 30, 2006. For the nine
months ended September 30, 2007 and 2006, the Company incurred a foreign currency transaction loss
of $321,000 and $24,000, respectively. These losses related to U.S. dollar denominated cash
accounts and accounts receivable held by the Companys foreign subsidiaries.
Revenue Recognition
The Company recognizes revenues in accordance with Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic
criteria must be met prior to revenue recognition: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or the services have been rendered, (iii) the fee is fixed or
determinable and (iv) collection of the resulting receivable is reasonably assured.
The Company generates revenues by providing access to the Companys online database or
delivering information obtained from the database, usually in the form of periodic reports.
Revenues are typically recognized on a straight-line basis over the period in which access to data
or reports are provided, which generally ranges from three to 24 months.
Revenues are also generated through survey services under contracts ranging in term from two
months to one year. Survey services consist of survey and questionnaire design with subsequent data
collection, analysis and reporting. Revenues are recognized on a straight-line basis over the
estimated data collection period once the survey or questionnaire has been delivered. Any change in
the estimated data collection period results in an adjustment to revenues recognized in future
periods.
Certain of the Companys arrangements contain multiple elements, consisting of the various
services the Company offers. Multiple element arrangements typically consist of a subscription to
the Companys online database combined with periodic reports of customized data. These arrangements
are accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. The Company has determined that there is not objective and
reliable evidence of fair value for any of its services and, therefore, accounts for all elements
in multiple elements arrangements as a single unit of accounting. Access to data under the
subscription element is generally provided shortly after the execution of the contract. However,
the initial delivery of periodic reports of customized data generally occurs after the data has
been accumulated for a specified period subsequent to contract execution, usually one calendar
quarter. The Company recognizes the entire
arrangement fee over the performance period of the last deliverable. As a result, the total
arrangement fee is recognized on a straight-line basis commencing upon the delivery of the first
report of customized data over the period such reports are delivered.
-9-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Generally, contracts are non-refundable and non-cancelable. In the event a portion of a
contract is refundable, revenue recognition is delayed until the refund provisions lapse. A limited
number of customers have the right to cancel their contracts by providing a written notice of
cancellation. In the event that a customer cancels its contract, the customer is not entitled to a
refund for prior services, and will be charged for costs incurred plus services performed up to the
cancellation date.
Advance payments are recorded as deferred revenues until services are delivered or obligations
are met and revenue can be recognized. Deferred revenues represent the excess of amounts invoiced
over amounts recognized as revenues
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under
the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS No.
123, Accounting for Stock-Based Compensation (SFAS 123). Effective January 1, 2006, the Company
adopted SFAS No. 123 ( R), Share-Based Payment (SFAS 123R), including the fair value recognition
provisions, using the prospective method. Under SFAS 123R, a non-public company that previously
used the minimum value method for pro forma disclosure purposes is required to adopt the standard
using the prospective method. Under the prospective method, all awards granted, modified or settled
after the date of adoption are accounted for using the measurement, recognition and attribution
provisions of SFAS 123R. As a result, stock-based awards granted prior to the date of adoption of
SFAS 123R will continue to be accounted for under APB 25 with no recognition of stock-based
compensation in future periods, unless such awards are modified or settled. Subsequent to the
adoption of SFAS 123R, the Company estimates the value of stock-based awards on the date of grant
using the Black-Scholes option-pricing model. For stock-based awards subject to graded vesting, the
Company has utilized the straight-line ratable method for allocating compensation cost by period.
In accordance with SFAS 123R, the Company recorded stock-based compensation expense of $705,000 and
$71,000 for the three months ended September 30, 2007 and 2006, respectively, and $1.3 million and
$118,000 for the nine months ended September 30, 2007 and 2006, respectively.
Comprehensive Income
Comprehensive income includes net income as well as the effects of foreign currency
translation adjustments reflected in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September
30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,791 |
|
|
$ |
1,595 |
|
|
$ |
6,571 |
|
|
$ |
3,070 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency cumulative translation adjustment |
|
|
168 |
|
|
|
(3 |
) |
|
|
271 |
|
|
|
71 |
|
Unrealized gain on marketable securities |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
3,967 |
|
|
$ |
1,592 |
|
|
$ |
6,850 |
|
|
$ |
3,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
Income taxes are accounted for using the liability method in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes are provided for temporary differences in
recognizing certain income, expense and credit items for financial reporting purposes and tax
reporting purposes. Such deferred income taxes primarily relate to the difference between the tax
bases of assets and liabilities and their financial reporting amounts. Deferred
tax assets and liabilities are measured by applying enacted statutory tax rates applicable to
the future years in which deferred tax assets or liabilities are expected to be settled or
realized.
-10-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes, an interpretation of SFAS No. 109. This interpretation clarifies the accounting
for income taxes by prescribing that a company should use a more-likely-than-not recognition
threshold based on the technical merits of the tax position taken. Tax provisions that meet the
more-likely-than-not recognition threshold should be measured as the largest amount of tax
benefits, determined on a cumulative probability basis, which is more likely than not to be
realized upon ultimate settlement in the financial statements. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting for interim periods, disclosure
and transition, and explicitly excludes income taxes from the scope of SFAS No. 5, Accounting for
Contingencies. It is the Companys policy to recognize interest and penalties related to income tax
matters in income tax expense.
Earnings Per Share
The Company computes earnings per share in accordance with the provisions of FASB No. 128,
Earnings Per Share (SFAS 128). In prior years, the Company has issued shares of common stock in
connection with business acquisitions that give the holders the right to require the Company to
repurchase the shares at a fixed price at a specified future date (Common Stock Subject to Put).
The difference between the fair value of the shares of Common Stock Subject to Put on the issuance
date and the price at which the Company may be required to repurchase those shares is being
accreted over the period from issuance to the first date at which the Company could be required to
repurchase the shares as a dividend to the holders. EITF Topic D-98, Classification and Measurement
of Redeemable Securities (EITF D-98) states that when a common shareholder has a contractual right
to receive, at share redemption, an amount that is other than fair value, such shareholder has
received, in substance, a preferential distribution. Under SFAS 128, entities with capital
structures that include classes of common stock with different dividend rates are required to apply
the two-class method of calculating earnings per share. Accordingly, the Company calculates
earnings per share for its common stock and its Common Stock Subject to Put using a method akin to
the two-class method under SFAS 128.
In addition, the Companys series of convertible redeemable preferred stock that was
outstanding until their automatic conversion upon the completion of the Companys initial public
offering on July 2, 2007 were considered participating securities as they were entitled to an 8%
noncumulative preferential dividend before any dividends could be paid to common stockholders. The
Company included its participating preferred stock in the computation of earnings per share using
the two-class method in accordance with EITF 03-06, Participating Securities and the Two-Class
Method under FASB Statement No. 128 (EITF 03-06) for the periods during which such participating
preferred stock remained outstanding.
The two-class computation method for each period allocates the undistributed earnings or
losses to each participating security based on their respective rights to receive dividends. In
addition to undistributed earnings or losses, the accretion to their redemption or put prices is
also allocated to the Common Stock Subject to Put and the convertible redeemable preferred stock.
In periods of undistributed losses, all losses are allocated to common stock in accordance with
EITF 03-06 as the holders of Common Stock Subject to Put and participating preferred stock are not
required to fund losses nor are their redemption or put prices reduced as a result of losses
incurred. In periods of undistributed income, income is first allocated to the participating
preferred stock for their preferential dividend, currently $7.1 million per annum. Any
undistributed earnings remaining are then allocated to holders of common stock, Common Stock
Subject to Put and preferred stock (assuming conversion) on a pro rata basis. The total earnings or
losses allocated to each class of common stock are then divided by the weighted-average number of
shares outstanding for each class of common stock to determine basic earnings per share. EITF 03-06
does not require the presentation of basic and diluted earnings per share for securities other than
common stock; therefore, earnings per share is only computed for the Companys common stock.
Diluted earnings per share for common stock reflects the potential dilution that could result
if securities or other contracts to issue common stock were exercised or converted into common
stock. Diluted earnings per share assumes the exercise of stock options and warrants using the
treasury stock method. Diluted earnings per share does not assume the conversion of the Companys convertible
preferred stock using the if-converted method as the result is
antidilutive for the period prior to conversion. No potentially dilutive securities are
convertible or exercisable into shares of Common Stock Subject to Put.
-11-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a summary of common stock equivalents for the securities outstanding during
the respective periods that have been excluded from the earnings per share calculations as their
impact was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September
30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Unaudited) |
Stock options and restricted stock units |
|
|
|
|
|
|
2,775,856 |
|
|
|
2,739 |
|
|
|
3,024,216 |
|
Convertible preferred stock warrants |
|
|
|
|
|
|
113,129 |
|
|
|
|
|
|
|
113,129 |
|
Common stock warrants |
|
|
2,000 |
|
|
|
62,057 |
|
|
|
2,000 |
|
|
|
132,069 |
|
Convertible preferred stock |
|
|
|
|
|
|
17,257,362 |
|
|
|
11,504,908 |
|
|
|
17,257,362 |
|
The following table sets forth the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September
30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
Calculation of basic and diluted net
income per share two class method: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
3,791 |
|
|
$ |
1,595 |
|
|
$ |
6,571 |
|
|
$ |
3,070 |
|
Accretion of redeemable preferred stock |
|
|
(21 |
) |
|
|
(812 |
) |
|
|
(1,829 |
) |
|
|
(2,331 |
) |
Accretion of common stock subject to put |
|
|
(22 |
) |
|
|
(34 |
) |
|
|
(90 |
) |
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings |
|
|
3,748 |
|
|
|
749 |
|
|
|
4,652 |
|
|
|
636 |
|
Allocation of undistributed earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
3,626 |
|
|
|
|
|
|
|
3,626 |
|
|
|
|
|
Preferred stock |
|
|
122 |
|
|
|
749 |
|
|
|
1,026 |
|
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allocated earnings |
|
|
3,748 |
|
|
|
749 |
|
|
|
4,652 |
|
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stockholders per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.13 |
|
|
$ |
0.00 |
|
|
$ |
0.29 |
|
|
$ |
0.00 |
|
Diluted |
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.25 |
|
|
$ |
0.00 |
|
Weighted-average number of shares used in
per share calculation common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
27,248,379 |
|
|
|
3,958,059 |
|
|
|
12,211,143 |
|
|
|
3,805,156 |
|
Diluted |
|
|
29,545,321 |
|
|
|
3,958,059 |
|
|
|
14,326,891 |
|
|
|
3,805,156 |
|
Net income attributable to common
stockholders per common share subject to
put: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.19 |
|
|
$ |
0.10 |
|
|
$ |
0.55 |
|
|
$ |
0.30 |
|
Diluted |
|
$ |
0.18 |
|
|
$ |
0.10 |
|
|
$ |
0.51 |
|
|
$ |
0.30 |
|
Weighted-average number of shares used in
per share calculation common share
subject to put: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
Diluted |
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
|
|
347,635 |
|
-12-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The purpose of this
statement is to define fair value, establish a framework for measuring fair value and enhance
disclosures about fair value measurements. The measurement and disclosure requirements are
effective for the Company as of January 1, 2008 and are applied prospectively. The Company is
currently evaluating the potential impact of adopting this new guidance on its results of
operations and financial position.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159), to permit all entities to choose to elect, at specified
election dates, to measure eligible financial instruments at fair value. An entity shall report
unrealized gains and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date, and recognize upfront costs and fees related to those items in
earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after
November 15, 2007, with early adoption permitted for an entity that has also elected to apply the
provisions of SFAS No. 157. An entity is prohibited from retrospectively applying SFAS No. 159,
unless it chooses early adoption. The Company is currently evaluating the impact of the provisions
of SFAS No. 159 on its consolidated financial statements.
3. Investments in Marketable Securities
Marketable securities, which are classified as available-for-sale, are summarized below as of
September 30, 2007 and December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheet |
|
|
|
Purchased/ |
|
|
Gross |
|
|
|
|
|
|
Cash and |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Cash |
|
|
Short-Term |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
|
Equivalents |
|
|
Investments |
|
|
|
(Unaudited) |
|
As of
September 30, 2007: |
|
Asset/mortgage-backed
securities |
|
$ |
3,951 |
|
|
$ |
8 |
|
|
$ |
3,959 |
|
|
$ |
|
|
|
$ |
3,959 |
|
Auction rate securities |
|
|
23,625 |
|
|
|
|
|
|
|
23,625 |
|
|
|
|
|
|
|
23,625 |
|
Money market funds |
|
|
65,985 |
|
|
|
|
|
|
|
65,985 |
|
|
|
65,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
93,561 |
|
|
$ |
8 |
|
|
$ |
93,569 |
|
|
$ |
65,985 |
|
|
$ |
27,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheet |
|
|
|
Purchased/ |
|
|
Gross |
|
|
|
|
|
|
Cash and |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Aggregate |
|
|
Cash |
|
|
Short-Term |
|
|
|
Cost |
|
|
Gains |
|
|
Fair Value |
|
|
Equivalents |
|
|
Investments |
|
As of
December 31, 2006: |
|
Auction rate securities |
|
$ |
11,000 |
|
|
$ |
|
|
|
$ |
11,000 |
|
|
$ |
|
|
|
$ |
11,000 |
|
Money market funds |
|
|
718 |
|
|
|
|
|
|
|
718 |
|
|
|
718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,718 |
|
|
$ |
|
|
|
$ |
11,718 |
|
|
$ |
718 |
|
|
$ |
11,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-13-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Goodwill and Intangible Assets
The carrying amounts of goodwill and intangible assets as of September 30, 2007 and December
31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
(In thousands) |
|
Goodwill |
|
$ |
1,364 |
|
|
$ |
1,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of the following: |
|
|
|
|
|
|
|
|
Trademarks and brands |
|
$ |
662 |
|
|
$ |
662 |
|
Non-compete agreements |
|
|
326 |
|
|
|
326 |
|
Customer relationships |
|
|
3,467 |
|
|
|
3,467 |
|
Acquired methodologies/technology |
|
|
688 |
|
|
|
688 |
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
5,143 |
|
|
|
5,143 |
|
Accumulated amortization |
|
|
(4,957 |
) |
|
|
(4,160 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
$ |
186 |
|
|
$ |
983 |
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was approximately $211,000 and $333,000 for
the three months ended September 30, 2007 and 2006, respectively, and $797,000 and $1.0 million for
the nine months ended September 30, 2007 and 2006, respectively.
Future expected amortization of intangible assets as of December 31, 2006, is as follows:
|
|
|
|
|
|
|
(In thousands) |
2007 |
|
$ |
967 |
|
2008 |
|
|
16 |
|
5. Commitments and Contingencies
Leases
In addition to equipment financed through capital leases, the Company is obligated under
various noncancelable operating leases for office facilities and equipment. These leases generally
provide for renewal options and escalation increases. Future minimum payments under noncancelable
lease agreements with initial terms of one year or more as of September 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
|
Capital Leases |
|
|
Leases |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
2007 |
|
$ |
255 |
|
|
$ |
636 |
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
1,021 |
|
|
|
1,858 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
1,022 |
|
|
|
1,443 |
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
1,223 |
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
1,243 |
|
Thereafter |
|
|
|
|
|
|
4,468 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
2,298 |
|
|
$ |
10,871 |
|
|
|
|
|
|
|
|
|
Less amount representing interest |
|
|
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
2,091 |
|
|
|
|
|
Less current portion |
|
|
(882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, long-term |
|
$ |
1,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
-14-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During August 2007, the Company paid the $582,000 principal balance of certain capital lease
obligations resulting in the termination of those lease agreements.
The Company is required to maintain a letter of credit in the amount of approximately $256,000
as additional security deposit pertaining to its New York office lease. In connection with the
modification of this lease in March 2007, the amount was increased to $537,000.
Contingencies
The Company has no asserted claims, but is from time to time exposed to unasserted potential
claims encountered in the normal course of business. Although the outcome of any legal proceedings
cannot be predicted with certainty, management believes that the final resolution of these matters
will not materially affect the Companys financial position or results of operations.
6. Income Taxes
The Companys tax provision for interim periods is determined using an estimate of its annual
effective tax ratee for each of its legal entities. During the three months and nine months ended
September 30, 2007, the Company recorded income tax provisions of $129,000 and $181,000,
respectively. The tax provisions for the three and nine months ended September 30, 2007 is comprised
of an income tax expense of $148,000 and $239,000, respectively, reflecting our alternative minimum
tax and is partly offset by decreases of $19,000 and $58,000, respectively, in the deferred tax
liability associated with a temporary difference related to certain acquired intangible assets. The
Company did not record a tax provision for the same periods in 2006.
The Company adopted FIN 48 on January 1, 2007. As of January 1, 2007 and September 30, 2007,
the Company does not have any material gross unrecognized tax benefit liabilities. The Company or
one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various
states and foreign jurisdictions. For income tax returns filed by the Company, the Company is no
longer subject to U.S. federal, state and local tax examinations by tax authorities for years
before 2002, although carryforward tax attributes that were generated prior to 2002 may still be
adjusted upon examination by tax authorities if they either have been or will be utilized.
As
of September 30, 2007 and December 31, 2006, the Company had valuation allowances of $31.1
million and $33.7 million, respectively, against certain deferred tax assets, which consisted
principally of net operating loss carryforwards. Management believes that, based on a number of
factors, the available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance is required. Such
factors include the lack of a significant history of profits, recent increases in expense levels to
support the Companys growth, the fact that the market in which the Company competes is intensely
competitive and characterized by rapidly changing technology, and the lack of carryback capacity to
realize deferred tax assets. The Company will continue to evaluate its valuation allowance position
on a regular basis. To the extent that the Company determines that all or a portion of its
valuation allowance is no longer necessary, the Company will recognize an income tax benefit in the
period such determination is made for the reversal of the valuation allowance. Once the valuation
allowance is eliminated in whole or in part, it will not be available to offset the Companys
future current tax provision. It is expected that any such reduction of the Companys
valuation allowance would have a material impact on its results from operations and financial
condition.
-15-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the provisions of the Internal Revenue Code Section 382, certain substantial changes in
the Companys ownership may result in a limitation on the amount of U.S. net operating loss
carryforwards which could be utilized annually to offset future taxable income and taxes payable.
Additionally, despite the net operating loss carryforward, the Company may have a future tax
liability due to alternative minimum tax, foreign tax or state tax requirements.
7. Convertible Preferred Stock
Prior to the completion of the Companys IPO on July 2, 2007, the Companys certificate of
incorporation provided for the issuance of 9,187,500 shares of Series A Preferred Stock (Series A),
3,535,486 shares of Series B Preferred Stock (Series B), 13,355,052 shares of Series C Preferred
Stock (Series C), 357,144 shares of Series C-1 Preferred Stock (Series C-1), 22,238,042 shares of
Series D Preferred Stock (Series D) and 25,000,000 shares of Series E Preferred Stock (Series E).
In connection with the closing of the Companys IPO on July 2, 2007, all shares of convertible
preferred stock were converted into 17,257,362 shares of common stock.
Prior to the conversion of the Companys convertible preferred stock, all classes of preferred
stock were redeemable by the holder on or after August 1, 2008. The carrying values of Series A,
Series B, Series C and Series C-1 were in excess of their individual redemption values. The
carrying value of Series D was below its individual redemption value. The differences between the
carrying value of each series of preferred stock and its respective redemption value were being
accreted as preferred stock dividends using the interest method over the period to the redemption
date. Such accretion amounted to $21,000 and $812,000 for the three months ended September 30, 2007
and 2006, respectively, and $1.8 million and $2.3 million for the nine months ended September 30,
2007 and 2006, respectively.
8. Convertible Preferred Stock Warrants
In prior years, the Company issued fully vested warrants to purchase 97,324 shares of
convertible preferred stock in connection with a master lease and various equipment lease
agreements. The exercise prices of the warrants range from $2.50 to $24.50 per share and the
warrants expire 10 years from the date of issue.
In accordance with FSP 150-5, the Company classified warrants to purchase shares of its
convertible preferred stock as a liability and adjusted the warrants to fair value. The fair value
of the convertible preferred stock warrants at December 31, 2006 was approximately $1.0 million.
The fair value of warrants was estimated using the Black-Scholes option pricing model. The Company
continued to adjust the liabilities for changes in fair value until the completion of the Companys
IPO, which closed on July 2, 2007, at which time the liabilities were reclassified to stockholders
equity (deficit) (see Note 1).
To reflect the change in fair value of the preferred stock warrants, the Company recorded a
benefit of $82,000 for the three months ended September 30, 2007 and a charge of $6,000, for the
three months ended September 30, 2006. For the nine months ended September 30, 2007 and 2006 the
Company recorded charges of $1.2 million and $215,000, respectively
9. Common Stock Subject to Put
In prior years, the Company issued 347,635 shares of Common Stock Subject to Put. The carrying
value of the Common Stock Subject to the Put right is being accreted to the put obligation over the
three year term using the effective interest rate method. For the three months ended September 30,
2007 and 2006 the Company accreted a total of $22,000 and $34,000, respectively and for the nine
months ended September 30, 2007 and 2006 the Company accreted a total of $90,000 and $103,000,
respectively.
10. Stockholders Deficit
1999 Stock Option Plan and 2007 Equity Incentive Plan
-16-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prior to the effective date of the registration statement of the Companys IPO, June 26, 2007,
eligible employees and non-employees were granted options to purchase shares of the Companys
common stock, restricted stock or restricted stock units pursuant to the Companys 1999 Stock Plan
(the 1999 Plan). Upon the effective date of the registration statement of the Companys IPO, the
Company ceased using the 1999 Plan for the issuance of new equity awards. Upon the closing of the
Companys IPO on July 2, 2007, the Company established its 2007 Equity Incentive Plan (the 2007
Plan and together with the 1999 Plan, the Plans). The Companys 1999 Stock Plan will continue
to govern the terms and conditions of outstanding awards granted thereunder. The Plans provide for
the issuance of a maximum of 5.4 million shares of common stock. The exercise price is determined
by the Board of Directors, which is generally equal to fair value for incentive stock options and
is determined on a per-grant basis for nonqualified options. The vesting period of options granted
under the Plans is determined by the Board of Directors, generally ratably over a four-year period.
The options expire 10 years from the date of the grant. As of
September 30, 2007, 1,719,078 shares
were available for grant under the 2007 Plan and no shares were available for grant under the 1999
Plan
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS
123R using the prospective transition method, which requires the Company to apply its provisions
only to awards granted, modified, repurchased or cancelled after the effective date. Under this
transition method, stock-based compensation expense recognized beginning January 1, 2006 is based
on the following: (1) the grant-date fair value of stock option awards granted or modified
beginning January 1, 2006; and (2) the balance of deferred stock-based compensation related to
stock option awards granted prior to January 1, 2006, which was calculated using the
intrinsic-value method as previously permitted under APB 25. Results for prior periods have not
been restated.
In connection with the adoption of SFAS 123R, the Company estimates the fair value of stock
option awards granted beginning January 1, 2006 using the Black-Scholes option-pricing formula and
a single option award approach. The Company then amortizes the fair value of awards expected to
vest on a straight-line basis over the requisite service periods of the awards, which is generally
the period from the grant date to the end of the vesting period. The weighted-average expected
option term for options granted is calculated using the simplified method described in SAB No. 107,
Share-Based Payment. The simplified method defines the expected term as the average of the
contractual term and the vesting period. Estimated volatility also reflects the application of SAB
No. 107 interpretive guidance and, accordingly, incorporates historical volatility of similar
entities whose share prices are publicly available. The risk-free interest rate is based on the
yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with
a maturity equal to the expected term of the stock option award. The Company uses historical data
to estimate the number of future stock option forfeitures.
As of September 30, 2007, total unrecognized compensation expense related to non-vested stock
options, restricted stock and restricted stock units granted prior to that date is estimated at
$9.1 million, which the Company expects to recognize over a weighted average period of
approximately 2.14 years. Total unrecognized compensation expense as of September 30, 2007 is
estimated based on outstanding non-vested stock options, restricted stock and restricted stock
units and may be increased or decreased in future periods for subsequent grants or forfeitures.
During the three and nine months ended September 30, 2007, no stock options were granted The
following are the weighted-average assumptions used in valuing the stock options granted during the
three and nine months ended September 30, 2006 and a discussion of the Companys assumptions.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2006 |
|
2006 |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
60.98 |
% |
|
|
64.97 |
% |
Risk-free interest rate |
|
|
4.61 |
% |
|
|
4.79 |
% |
Expected life of options (in years) |
|
|
6.02 |
|
|
|
6.02 |
|
Dividend yield The Company has never declared or paid dividends on its common stock and does
not anticipate paying dividends in the foreseeable future.
-17-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expected volatility Volatility is a measure of the amount by which a financial variable such
as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected
volatility) during a period. The Company has used the historical volatility of its peer group to
estimate expected volatility. The peer group includes companies that are similar in revenue size,
in the same industry or are competitors.
Risk-free interest rate This is the average U.S. Treasury rate (with a term that most
closely resembles the expected life of the option) for the quarter in which the option was granted.
Expected life of the options This is the period of time that the options granted are
expected to remain outstanding. This estimate is derived from the average midpoint between the
weighted average vesting period and the contractual term as described in the SAB No. 107.
A summary of the Plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Intrinsic |
|
|
Number of |
|
Average |
|
Contractual |
|
Value (in |
|
|
Shares |
|
Exercise Price |
|
Term (in years) |
|
thousands) |
Options outstanding at December 31, 2006 |
|
|
2,723,940 |
|
|
$ |
2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
469,875 |
|
|
$ |
1.45 |
|
|
|
|
|
|
$ |
5,303 |
|
Options forfeited |
|
|
75,101 |
|
|
$ |
3.65 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
9,179 |
|
|
$ |
3.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2007 |
|
|
2,169,785 |
|
|
$ |
2.04 |
|
|
|
6.83 |
|
|
$ |
54,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2007 |
|
|
1,470,593 |
|
|
$ |
1.23 |
|
|
|
6.45 |
|
|
$ |
37,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of
the underlying stock option awards and the closing market price of the Companys common stock at
September 30, 2007. The aggregate intrinsic value of stock option awards exercised was determined
at the date of option exercise.
During the nine months ended September 30, 2007, the Company awarded an aggregate of 767,098
shares of restricted common stock to certain of its employees. The weighted average estimated fair
value for these shares is $13.40. The aggregate intrinsic value for all non-vested shares of
restricted common stock outstanding at September 30, 2007 was $10.4 million. The Company has a
right of repurchase on such shares that lapses at a rate of twenty-five percent (25%) of the total
shares awarded at each successive anniversary of the initial award date, provided that the employee
continues to provide services to the Company. In the event that an employee terminates their
employment with the Company, any shares that remain unvested and consequently subject to the right
of repurchase shall be automatically reacquired by the Company at the original purchase price paid
by the employee.
During the nine months ended September 30, 2007, the Company awarded an aggregate of 71,711
units of restricted common stock units to certain of its employees. The estimated fair value for
these units is $13.22. The aggregate intrinsic value for all non-vested restricted stock units
outstanding at September 30, 2007 was $988,000. The Company has a right of repurchase on such units
that lapses at a rate of twenty-five percent (25%) of the total shares awarded at each successive
anniversary of the initial award date, provided that the employee continues to provide service to
the Company. In the event that an employee terminates their employment with the Company, any units
that remain unvested shall be automatically reacquired by the Company.
Incentive Plan
In connection with its Series E Preferred Stock financing in December 2003, the Company
established a management incentive plan (the Incentive Plan) for certain officers, founders and key
employees of the Company. Under the terms of the Incentive Plan, up to 10% of any liquidation
proceeds from the consolidation, merger, or sale of the Company will be distributed to the plan
participants. Of the potential payout to a plan participant, 75% is based on a pre-determined
formula with the remaining 25% of the payout at the discretion of the administrators of the
Incentive Plan. The potential payout is reduced by any amounts the participant would receive in the
liquidation
through stock option exercises or stock ownership. The Incentive Plan terminated upon the
closing of our IPO on July 2, 2007 in connection with the automatic conversion of our outstanding
convertible preferred stock.
-18-
COMSCORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common Stock Warrants
In prior years, the Company had granted an aggregate of 403,368 warrants to purchase common
stock. The common stock warrants began to expire in February 2006 through to April 2015 with
exercise prices ranging from $3.00 to $24.50. As of September 30, 2007, warrants to purchase 92,031
shares of common stock were outstanding.
Shares Reserved for Issuance
At September 30, 2007, the Company has reserved for future issuance the following shares of
common stock upon the exercise of options and warrants:
|
|
|
|
|
Common stock available for future issuances under the Plan |
|
|
1,719,078 |
|
Common stock available for outstanding options and restricted stock units |
|
|
2,240,496 |
|
Common stock warrants |
|
|
92,031 |
|
|
|
|
|
|
|
|
|
4,051,605 |
|
|
|
|
|
|
11. Related Party Transactions
On August 1, 2003, the Company entered into a Licensing and Services Agreement with a
counterparty that until November 27, 2006 was a stockholder of the Company. Pursuant to the terms
of the Licensing and Services Agreement, the Company granted the counterparty a license to certain
digital marketing intelligence data and products. During each of the three month periods ended
September 30, 2007 and 2006, the Company recognized revenues of $925,000. During each of the nine
month periods ended September 30, 2007 and 2006, the Company recognized revenues of $2.8 million.
In relation to this counterparty, there were $3.0 million and $0 included in our accounts receivable
balance as of September 30, 2007 and December 31, 2006,
respectively. The $3.0 million receivable was paid in October
2007.
12. Geographic Information
The Company attributes revenues to customers based on the location of the customer. The
composition of the Companys sales to unaffiliated customers between those in the United States and
those in other locations for the three and nine months ended September 30, 2007 and 2006 is set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September
30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
(In thousands) |
|
United States |
|
$ |
19,912 |
|
|
$ |
14,626 |
|
|
$ |
55,271 |
|
|
$ |
44,080 |
|
Canada |
|
|
1,189 |
|
|
|
791 |
|
|
|
3,152 |
|
|
|
2,238 |
|
United Kingdom/Other |
|
|
1,288 |
|
|
|
748 |
|
|
|
3,456 |
|
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
22,389 |
|
|
$ |
16,165 |
|
|
$ |
61,879 |
|
|
$ |
48,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of the Companys property, plant and equipment between those in the United
States and those in other countries as of the end of each year is set forth below:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
United States |
|
$ |
6,532 |
|
|
$ |
6,525 |
|
Canada |
|
|
223 |
|
|
|
305 |
|
United Kingdom |
|
|
172 |
|
|
|
150 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,927 |
|
|
$ |
6,980 |
|
|
|
|
|
|
|
|
-19-
Item 2. Managements 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 the related notes to
those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to
historical financial information, the following discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results and timing of
selected events may differ materially from those anticipated in these forward-looking statements as
a result of many factors, including those discussed under Risk factors and elsewhere in this
document. Please see the section entitled Cautions Regarding Forward-Looking Statements at the
beginning of this Quarterly Report on Form 10-Q for additional information regarding
forward-looking statements.
Overview
We provide a leading digital marketing intelligence platform that helps our customers make
better-informed business decisions and implement more effective digital business strategies. Our
products and solutions offer our customers deep insights into consumer behavior, including
objective, detailed information regarding usage of their online properties and those of their
competitors, coupled with information on consumer demographic characteristics, attitudes,
lifestyles and offline behavior.
Our digital marketing intelligence platform is comprised of proprietary databases and a
computational infrastructure that measures, analyzes and reports on digital activity. The
foundation of our platform is data collected from our comScore panel of more than two million
Internet users worldwide who have granted us explicit permission to confidentially measure their
Internet usage patterns, online and certain offline buying behavior and other activities. By
applying advanced statistical methodologies to our panel data, we project consumers online
behavior for the total online population and a wide variety of user categories.
We deliver our digital marketing intelligence through our comScore Media Metrix product family
and through comScore Marketing Solutions. Media Metrix delivers digital media intelligence by
providing an independent, third-party measurement of the size, behavior and characteristics of Web
site and online advertising network audiences among home, work and university Internet users as
well as insight into the effectiveness of online advertising. Our Marketing Solutions products
combine the proprietary information gathered from the comScore panel with the vertical industry
expertise of comScore analysts to deliver digital marketing intelligence, including the measurement
of online advertising effectiveness, customized for specific industries. We typically deliver our
Media Metrix products electronically in the form of weekly, monthly or quarterly reports. Customers
can access current and historical Media Metrix data and analyze these data anytime online. Our
Marketing Solutions products are typically delivered on a monthly, quarterly or ad hoc basis
through electronic reports and analyses.
Our company was founded in August 1999. By 2000, we had established a panel of Internet users
and began delivering digital marketing intelligence products that measured online browsing and
buying behavior to our first customers. We also introduced netScore, our initial syndicated
Internet audience measurement product. We accelerated our introduction of new products in 2003 with
the launch of Plan Metrix (formerly AiM 2.0), qSearch, the Campaign R/F (Reach and Frequency)
analysis system and product offerings that measure online activity at the local market level. By
2004, we had built a global panel of over two million Internet users. In that year, in cooperation
with Arbitron, we launched a service that provides ratings of online radio audiences. In 2005, we
expanded our presence in Europe by opening an office in London. In 2006, we continued to expand our
measurement capabilities with the launch of World Metrix, a product that provides worldwide data on
digital media usage, and Video Metrix, our product that measures the audience for streaming online
video. In 2007, we completed our initial public offering of 5,000,000 shares.
We have complemented our internal development initiatives with select acquisitions. On June 6,
2002, we acquired certain Media Metrix assets from Jupiter Media Metrix, Inc. Through this
acquisition, we acquired certain Internet audience measurement services that report details of Web
site usage and visitor demographics. On July 28, 2004, we acquired the outstanding stock of Denaro
and Associates, Inc, otherwise known as Q2 Brand Intelligence, Inc. or Q2, to improve our ability
to provide our customers more robust survey research integrated with our underlying digital
marketing intelligence platform. The total cost of the acquisition was approximately $3.3 million,
consisting of cash and shares of our common stock. For the ninety-day period beginning July 28,
2007, the former
shareholder of Q2 (or its transferees) had the right to sell 212,000 shares of our common
stock back to us for an aggregate price of $2.65 million, or $12.50 per share. This right expired
unused on October 26, 2007. On January 4, 2005, we acquired the assets and assumed certain
liabilities of SurveySite Inc., or SurveySite. Through this acquisition, we acquired proprietary
Internet-based data-collection technologies and increased our customer penetration and revenues in
the survey business. The total cost of the acquisition was approximately $3.6 million, consisting
of cash and shares of our common stock. For the ninety-day period beginning January 1, 2008, the
former shareholders of SurveySite (or their transferees) have the right to sell 135,635 shares of
our common stock back to us for an aggregate price of approximately $1.8 million, or $13.35 per
share.
-20-
Our total revenues have grown from $15.4 million during the fiscal year ending January 31,
2003 to $66.3 million during the fiscal year ended December 31, 2006, a compounded annual growth
rate of approximately 63%. By comparison, our total expenses from operations have grown from $35.2
million to $60.7 million over the same period, a compounded annual growth rate of approximately
20%. The growth in our revenues was primarily the result of:
|
|
|
increased sales to existing customers, as a result of our efforts to deepen our
relationships with these clients by increasing their awareness of, and confidence in, the
value of our digital marketing intelligence platform; |
|
|
|
|
growth in our customer base through the addition of new customers; |
|
|
|
|
increases in the prices of our products and services; |
|
|
|
|
the sales of new products to existing and new customers; and |
|
|
|
|
growth in sales outside of the U.S. as a result of entering into new international
markets. |
As of September 30, 2007, we had 837 customers, compared to 334 as of January 31, 2003. We
sell most of our products through our direct sales force.
Our Revenues
We derive our revenues primarily from the fees that we charge for subscription-based products
and customized projects. We define subscription-based revenues as revenues that we generate from
products that we deliver to a customer on a recurring basis. We define project revenues as revenues
that we generate from customized projects that are performed for a specific customer on a
non-recurring basis. We market our subscription-based products, customized projects and survey
services within the comScore Media Metrix product family and through comScore Marketing Solutions.
A significant characteristic of our business model is our large percentage of
subscription-based contracts. Subscription-based revenues accounted for 78% of our total revenues
in 2004 and decreased to 70% of total revenues in 2005 primarily due to the acquisition of
SurveySite. Subscription-based revenue increased to 75% of total revenues in 2006 and to 80% of
total revenues during the three months ending September 30, 2007.
Many of our customers who initially purchased a customized project have subsequently purchased
one of our subscription-based products. Similarly, many of our subscription-based customers have
subsequently purchased additional customized projects.
Historically, we have generated most of our revenues from the sale and delivery of our
products to companies and organizations located within the United States. We intend to expand our
international revenues by selling our products and deploying our direct sales force model in
additional international markets in the future. For the fiscal year ended December 31, 2006, our
international revenues were $5.7 million, an increase of $2.4 million over international revenues
of $3.4 million for the fiscal year ended December 31,
2005. For the three and nine months ended September
30, 2007, our international revenues were $2.5 million and $6.6
million, respectively, an increase of $938,000 or 61% and $2.6 million or
66% over international revenues of $1.5 million and $4.0 million for the three and nine
months ended September 30, 2006, respectively. International
revenues comprised approximately 7% and 9% of our total revenues for the fiscal years ended
December 31, 2005 and 2006, respectively, and 11% in both the
three and nine months ended September 30, 2007.
-21-
We anticipate that revenues from our U.S. customers will continue to constitute the
substantial majority of our revenues, but we expect that revenues from customers outside of the
U.S. will increase as a percentage of total revenues as we build greater international recognition
of our brand and expand our sales operations globally.
Subscription Revenues
We generate a significant proportion of our subscription-based revenues from our Media Metrix
product family. Products within the Media Metrix family include Media Metrix 2.0, Plan Metrix,
World Metrix and Video Metrix. We launched Ad Metrix in the third quarter of 2007. These product
offerings provide subscribers with intelligence on digital media usage, audience characteristics,
audience demographics and online and offline purchasing behavior. Customers who subscribe to our
Media Metrix products are provided with login IDs to our Web site, have access to our database and
can generate reports at anytime.
We also generate subscription-based revenues from certain reports and analyses provided
through comScore Marketing Solutions, if that work is procured by customers for at least a nine
month period and the customer enters into an agreement to continue or extend the work. Through our
Marketing Solutions products, we deliver digital marketing intelligence relating to specific
industries, such as automotive, consumer packaged goods, entertainment, financial services, media,
pharmaceutical, retail, technology, telecommunications and travel. This marketing intelligence
leverages our global consumer panel and extensive database to deliver information unique to a
particular customers needs on a recurring schedule, as well as on a continual-access basis. Our
Marketing Solutions customer agreements typically include a fixed fee with an initial term of at
least one year. We also provide these products on a non-subscription basis as described under
Project Revenues below. In addition, we generate subscription-based revenues from survey products
that we sell to our customers. In conducting our surveys, we generally use our global Internet user
panel. After questionnaires are distributed to the panel members and completed, we compile their
responses and then deliver our findings to the customer, who also has ongoing access to the survey
response data as they are compiled and updated over time. These data include responses and
information collected from the actual survey questionnaire and can also include behavioral
information that we passively collect from our panelists. If a customer contractually commits to
having a survey conducted on a recurring basis, we classify the revenues generated from such survey
products as subscription-based revenues. Approximately half of the revenues derived from survey
products are generated on a subscription basis. Our contracts for survey services typically include
fixed fee agreements that range from two months to one year.
Project Revenues
We generate project revenues by providing customized information reports to our customers on a
nonrecurring basis as part of our comScore Marketing Solutions. For example, a customer in the
media industry might request a custom report that profiles the behavior of the customers active
online users and contrasts their market share and loyalty with similar metrics for a competitors
online user base. If this customer continues to request the report beyond an initial project term
of at least nine months and enters into an agreement to purchase the report on a recurring basis,
we begin to classify these future revenues as subscription-based.
In the second quarter of 2007, we launched Campaign Metrix, a suite of products that enables
our customers to measure their return on investment from their investment in digital marketing
campaigns and that we believe will help their revenue growth. Project revenues from Campaign Metrix
will be generated when a customer accesses or downloads a report through our Web site. Pricing for
our Campaign Metrix product is presently based on the scope of the information provided in the
report generated by the customer.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S. The preparation of these financial statements requires us
to make estimates, assumptions and judgments that
affect the amounts reported in our financial statements and the accompanying notes. We base
our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these estimates. While our
significant accounting policies are described in more detail in the notes to our consolidated
financial statements included in the Companys prospectus dated June 26, 2007, we believe the
following accounting policies to be the most critical to the judgments and estimates used in the
preparation of our consolidated financial statements.
-22-
Revenue Recognition
We recognize revenues in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be
met prior to revenue recognition: (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred or the services have been rendered, (iii) the fee is fixed or determinable, and (iv)
collection of the resulting receivable is reasonably assured. We generate revenues by providing
access to our online database or delivering information obtained from our database, usually in the
form of periodic reports. Revenues are typically recognized on a straight-line basis over the
period in which access to data or reports are provided, which generally ranges from three to 24
months. We also generate revenues through survey services under contracts ranging in term from two
months to one year. Our survey services consist of survey and questionnaire design with subsequent
data collection, analysis and reporting. We recognize revenues on a straight-line basis over the
estimated data collection period once the survey or questionnaire design has been delivered. Any
change in the estimated data collection period results in an adjustment to revenues recognized in
future periods.
Certain of our arrangements contain multiple elements, consisting of the various services we
offer. Multiple element arrangements typically consist of a subscription to our online database
combined with periodic reports of customized data. These arrangements are accounted for in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables. We have determined that there is not objective and reliable evidence of fair
value for any of our services and, therefore, account for all elements in multiple elements
arrangements as a single unit of accounting. Access to data under the subscription element is
generally provided shortly after the execution of the contract. However, the initial delivery of
periodic reports of customized data generally occurs after the data has been accumulated for a
specified period subsequent to contract execution, usually one calendar quarter. We recognize the
entire arrangement fee over the performance period of the last deliverable. As a result, the total
arrangement fee is recognized on a straight-line basis commencing upon the delivery of the first
report of customized data over the period such reports are delivered.
Generally, our contracts are non-refundable and non-cancelable. In the event a portion of a
contract is refundable, revenue recognition is delayed until the refund provisions lapse. A limited
number of customers have the right to cancel their contracts by providing us with written notice of
cancellation. In the event that a customer cancels its contract, it is not entitled to a refund for
prior services, and it will be charged for costs incurred plus services performed up to the
cancellation date.
Advance payments are recorded as deferred revenues until services are delivered or obligations
are met and revenue can be recognized. Deferred revenues represent the excess of amounts invoiced
over amounts recognized as revenues.
Goodwill and Intangible Assets
We record goodwill and intangible assets when we acquire other businesses. The allocation of
acquisition costs to intangible assets and goodwill involves the extensive use of managements
estimates and assumptions, and the result of the allocation process can have a significant impact
on our future operating results. We estimate the fair value of identifiable intangible assets
acquired using several different valuation approaches, including the replacement cost, income and
market approaches. The replacement cost approach is based on determining the discrete cost of
replacing or reproducing a specific asset. We generally use the replacement cost approach for
estimating the value of acquired technology/methodology assets. The income approach converts the
anticipated economic benefits that we assume will be realized from a given asset into value. Under
this approach, value is measured as the present worth of anticipated future net cash flows
generated by an asset. We generally use the income approach to value customer relationship assets
and non-compete agreements. The market approach
compares the acquired asset to similar assets that have been sold. We generally use the market
approach to value trademarks and brand assets.
-23-
Under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets (SFAS 142), intangible assets with finite lives are amortized over their useful
lives while goodwill and indefinite lived assets are not amortized, but rather are periodically
tested for impairment. An impairment review generally requires developing assumptions and
projections regarding our operating performance. In accordance with SFAS 142, we have determined
that all of our goodwill is associated with one reporting unit as we do not operate separate lines
of business with respect to our services. Accordingly, on an annual basis we perform the impairment
assessment for goodwill required under SFAS 142 at the enterprise level by comparing the fair value
of a reporting unit, based on estimated future cash flow, to its carrying value including goodwill
recorded by the reporting unit. If the carrying value exceeds the fair value, impairment is
measured by comparing the derived fair value of the goodwill to its carrying value and any
impairment determined is recorded in the current period. If our estimates or the related
assumptions change in the future, we may be required to record impairment charges to reduce the
carrying value of these assets, which could be material.
Long-lived assets
Our long-lived assets primarily consist of property and equipment and intangible assets. In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
evaluate the recoverability of our long-lived assets for impairment whenever events or changes in
circumstances indicate the carrying value of such assets may not be recoverable. If an indication
of impairment is present, we compare the estimated undiscounted future cash flows to be generated
by the asset to its carrying amount. If the undiscounted future cash flows are less than the
carrying amount of the asset, we record an impairment loss equal to the excess of the assets
carrying amount over its fair value. The fair value is determined based on valuation techniques
such as a comparison to fair values of similar assets or using a discounted cash flow analysis.
Substantially all of our long lived assets are located in the United States. Although we believe
that the carrying values of our long-lived assets are appropriately stated, changes in strategy or
market conditions or significant technological developments could significantly impact these
judgments and require adjustments to recorded asset balances. There were no impairment charges
recognized during the three and nine months ended September 30, 2007 and 2006.
Allowance for Doubtful Accounts
We manage credit risk on accounts receivable by performing credit evaluations of our customers
on a selective basis, by reviewing our accounts and contracts and by providing appropriate
allowances for uncollectible amounts. Allowances are based on managements judgment, which
considers historical experience and specific knowledge of accounts that may not be collectible. We
make provisions based on our historical bad debt experience, a specific review of all significant
outstanding invoices and an assessment of general economic conditions. If the financial condition
of a customer deteriorates, resulting in an impairment of its ability to make payments, additional
allowances may be required.
Income Taxes
We account for income taxes using the liability method in accordance with SFAS No. 109,
Accounting for Income Taxes. We estimate our tax liability through calculations we perform for the
determination of our current tax liability, together with assessing temporary differences resulting
from the different treatment of items for income tax and financial reporting purposes. These
differences result in deferred tax assets and liabilities, which are recorded on our balance sheet.
We then assess the likelihood that deferred tax assets will be recovered in future periods. In
assessing the need for a valuation allowance against the net deferred tax asset, we consider
factors such as future reversals of existing taxable temporary differences, taxable income in prior
carryback years, if carryback is permitted under the tax law, tax planning strategies and future
taxable income exclusive of reversing temporary differences and carryforwards. To the extent that
we cannot conclude that it is more likely than not that the benefit of such assets will be
realized, we establish a valuation allowance to adjust the net carrying value of such assets.
-24-
As
of September 30, 2007 and December 31, 2006, we had valuation allowances of $31.1 million
and $33.7 million, respectively, against certain deferred tax assets, which consisted principally
of net operating loss carryforwards. We believe that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax
assets such that a full valuation allowance is required. Such factors include the lack of a
significant history of profits, recent increases in expense levels to support our growth, the fact
that the market in which we compete is intensely competitive and characterized by rapidly changing
technology, and the lack of carryback capacity to realize deferred tax assets. We will continue to
evaluate our valuation allowance position on a regular basis. Depending upon our actual results for
the remainder of 2007, we may conclude that all or a portion of our valuation allowance should be
reduced during the fourth quarter of 2007. To the extent we determine that all or a portion of our
valuation allowance is no longer necessary, we will recognize an income tax benefit in the period
such determination is made for the reversal of the valuation allowance. Once the valuation
allowance is eliminated in whole or in part, it will not be available to offset our future current
tax provision. It is expected that any such reduction of our valuation allowance would have a
material impact on our results from operations and financial condition.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes, an interpretation of SFAS No. 109. This interpretation clarifies the accounting
for income taxes by prescribing that a company should use a more-likely-than-not recognition
threshold based on the technical merits of the tax position taken. Tax provisions that meet the
more-likely-than-not recognition threshold should be measured as the largest amount of tax
benefits, determined on a cumulative probability basis, which is more likely than not to be
realized upon ultimate settlement in the financial statements. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting for interim periods, disclosure
and transition, and explicitly excludes income taxes from the scope of SFAS No. 5, Accounting for
Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006, and was
adopted by us on January 1, 2007. As of the adoption date of FIN 48 on January 1, 2007 and
September 30, 2007, we do not have any material gross unrecognized tax benefits. We or one of our
subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and
foreign jurisdictions. For income tax returns filed by us, we are no longer subject to U.S.
federal, state and local tax examinations by tax authorities for years before 2002, although
carryforward tax attributes that were generated prior to 2002 may still be adjusted upon
examination by tax authorities if they either have been or will be utilized. It is our policy to
recognize interest and penalties related to income tax matters in income tax expense.
Stock-Based Compensation
Through December 31, 2005, as permitted by SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123), we applied the intrinsic value method for accounting for stock-based
compensation as set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). For purposes of the pro forma disclosures required under SFAS 123, we
used the minimum-value method to estimate the fair value of our stock-based awards. On January 1,
2006, we adopted SFAS No. 123R, Share-Based Compensation (SFAS 123R). Under SFAS 123R, a non-public
company that previously used the minimum value method for pro forma disclosure purposes is required
to adopt the standard using the prospective method. Under the prospective method, all awards
granted, modified or settled after the date of adoption are accounted for using the measurement,
recognition and attribution provisions of SFAS 123R. As a result, stock-based awards granted prior
to the date of adoption of SFAS 123R will continue to be accounted for under APB 25 with no
recognition of stock-based compensation in future periods, unless such awards are modified or
settled.
Subsequent to the adoption of SFAS 123R, we estimate the fair value of our stock-based awards
on the date of grant using the Black-Scholes option-pricing model. The determination of fair value
using the Black-Scholes model requires a number of complex and subjective variables. One key input
into the model is the estimated fair value of our common stock on the date of grant. Our board of
directors has estimated the fair value of our common stock for the purpose of determining
stock-based compensation expense. Our board utilized valuation methodologies commonly used in the
valuation of private company equity securities for purposes of estimating the fair value of our
common stock.
Other key variables in the Black-Scholes option-pricing model include the expected volatility
of our common stock price, the expected term of the award and the risk-free interest rate. In
addition, under SFAS 123R, we are required to estimate forfeitures of unvested awards when
recognizing compensation expense. If factors change and
we employ different assumptions in the application of SFAS 123R in future periods, the
compensation expense we record may differ significantly from what we have previously recorded.
-25-
At September 30, 2007, total estimated unrecognized compensation expense related to unvested
stock-based awards granted prior to that date was $9.1 million, which is expected to be recognized
over a weighted-average period of 2.14 years.
We expect stock-based compensation expense to increase in absolute dollars as a result of the
adoption of SFAS 123R as options that were granted at the beginning of 2006 and beyond vest.
Beginning in 2007, we made use of restricted stock awards and reduced our use of stock options as a
form of stock-based compensation. The actual amount of stock-based compensation expense we record
in any fiscal period will depend on a number of factors, including the number of shares subject to
the stock awards issued, the fair value of our common stock at the time of issuance and the
expected volatility of our stock price over time.
Estimation of Fair Value of Warrants to Purchase Redeemable Convertible Preferred Stock
On July 1, 2005, we adopted FASB Staff Position 150-5 (FSP 150-5). Our outstanding warrants to
purchase shares of our redeemable convertible preferred stock are subject to the requirements in
FSP 150-5, which require us to classify these warrants as current liabilities and to adjust the
value of these warrants to their fair value at the end of each reporting period. We estimated the
fair value of these warrants at the respective dates using the Black-Scholes option valuation
model, based on the estimated market value of the underlying redeemable convertible preferred stock
at the valuation measurement date, the contractual term of the warrant, risk free interest rates
and expected dividends on and expected volatility of the price of the underlying redeemable
convertible preferred stock. These estimates, especially the market value of the underlying
redeemable convertible preferred stock and the expected volatility, are highly judgmental and could
differ materially in the future. Upon the closing of our IPO on July 2, 2007, these liabilities
were reclassified to stockholders equity (deficit).
Seasonality
Historically, a slightly higher percentage of our customers have renewed their subscription
products with us toward the end of the fourth quarter.
Results of Operations
The following table sets forth selected consolidated statements of operations data as a
percentage of total revenues for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September
30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Unaudited) |
|
|
(In thousands) |
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
26.5 |
|
|
|
30.8 |
|
|
|
28.0 |
|
|
|
31.9 |
|
Selling and marketing |
|
|
33.0 |
|
|
|
32.0 |
|
|
|
33.2 |
|
|
|
33.0 |
|
Research and development |
|
|
13.5 |
|
|
|
14.1 |
|
|
|
13.6 |
|
|
|
13.9 |
|
General and administrative |
|
|
13.7 |
|
|
|
11.7 |
|
|
|
12.9 |
|
|
|
12.5 |
|
Amortization |
|
|
0.9 |
|
|
|
2.1 |
|
|
|
1.3 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses from operations |
|
|
87.6 |
|
|
|
90.7 |
|
|
|
89.0 |
|
|
|
93.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
12.4 |
|
|
|
9.3 |
|
|
|
11.0 |
|
|
|
6.5 |
|
Interest income, net |
|
|
5.3 |
|
|
|
0.5 |
|
|
|
2.3 |
|
|
|
0.2 |
|
Loss from foreign currency |
|
|
(0.5 |
) |
|
|
|
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revaluation of preferred stock warrant liabilities |
|
|
0.4 |
|
|
|
|
|
|
|
(1.9 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
17.6 |
|
|
|
9.8 |
|
|
|
10.9 |
|
|
|
6.3 |
|
Provision for income taxes |
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
17.0 |
|
|
|
9.8 |
|
|
|
10.6 |
|
|
|
6.3 |
|
Accretion of redeemable preferred stock |
|
|
|
|
|
|
(5.0 |
) |
|
|
(3.0 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
|
17.0 |
% |
|
|
4.8 |
% |
|
|
7.6 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-26-
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Change |
|
September 30, |
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
(Unaudited) |
|
|
(In thousands) |
Total revenues |
|
$ |
22,389 |
|
|
$ |
16,165 |
|
|
$ |
6,224 |
|
|
|
38.5 |
% |
|
$ |
61,879 |
|
|
$ |
48,056 |
|
|
$ |
13,823 |
|
|
|
28.8 |
% |
Total revenues increased by approximately $6.2 million and $13.8 million during the three
months and nine months ended September 30, 2007, respectively, as compared to the same periods in
2006. These increases were primarily due to increased sales to existing customers based in the U.S.
totaling $17.3 million and $47.9 million in the three and nine months ended September 30, 2007,
respectively, which was $4.8 million and $9.3 million, respectively, higher than in the same
periods in 2006. In addition, revenues in the three and nine months ended September 30, 2007 from
new U.S. customers were $2.6 million and $7.4 million, respectively, an increase of approximately
$453,000 and $1.9 million, respectively, as compared to the three and nine months ended September
30, 2006. Revenues from customers outside of the U.S. totaled approximately $2.5 million and $6.6
million, respectively, or approximately 11% of total revenues, in
both the three and nine months ended September 30, 2007, which was an increase of $938,000 and $2.6 million, respectively, as compared
to the same periods in 2006. These increases were due primarily to our ongoing expansion efforts in
Europe, plus continued growth in Canada.
During the three and nine months ended September 30, 2007, our total customer base grew by a
net increase of 61 and 131 customers, respectively, from 776 at June 30, 2007 and 706 at December
31, 2006 to 837 customers at September 30, 2007. There was continued revenue growth in both our
subscription revenues, which increased by approximately $5.0 million from $12.9 million in the
three months ended September 30, 2006 to $17.9 million in the three months ended September 30,
2007, and, to a lesser extent our project-based revenues, which increased by $1.3 million from $3.3
million in the three months ended September 30, 2006 to over $4.5 million in the three months ended
September 30, 2007.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Change |
|
September 30, |
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
(Unaudited) |
|
|
(In thousands) |
Total cost of
revenues |
|
$ |
5,942 |
|
|
$ |
4,977 |
|
|
$ |
965 |
|
|
|
19.4 |
% |
|
$ |
17,330 |
|
|
$ |
15,330 |
|
|
$ |
2,000 |
|
|
|
13.0 |
% |
As a percentage of
revenues |
|
|
26.5 |
% |
|
|
30.8 |
% |
|
|
|
|
|
|
|
|
|
|
28.0 |
% |
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
Cost of revenues consists primarily of expenses related to operating our network
infrastructure and the recruitment, maintenance and support of our consumer panels. Expenses
associated with these areas include the salaries and related expenses of network operations, survey
operations, custom analytics and technical support, all of which are expensed as they are incurred.
Cost of revenues also includes data collection costs for our products and operational costs
associated with our data centers, including depreciation expense associated with computer
equipment.
Cost of revenues increased by approximately $965,000 and $2.0 million during the three months
and nine months ended September 30, 2007, respectively, as compared to the same periods in 2006.
These increases were primarily due to increased salaries and benefits, stock compensation and related
costs associated with supporting our consumer panel and data centers. During the three and nine
months ended September 30, 2007 we experienced an increase of approximately $139,000 and $14,000,
respectively, in panel recruiting costs as compared to the same periods in 2006. During the nine
months ended September 30, 2007 our data center costs increased as a result of the relocation in
June 2006 of our Illinois data center to a new service provider and increased utility costs at our
Virginia data center. Cost of revenues declined as a percentage of revenues by 4.3 percentage
points and 3.9 percentage points during the three and nine months ended September 30, 2007,
respectively, over the same periods in 2006. These decreases were primarily due to the increases in
revenues as described above and a moderation of the increases in costs to build and maintain our
panel. In addition, the headcount and costs associated with our technology staff grew at a lower
rate than our growth in revenues.
-27-
We expect cost of revenues to increase in absolute dollar amounts as we seek to grow our
business but vary as a percentage of revenues depending on whether we benefit from investments in
our panel and network infrastructure.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Change |
|
September 30, |
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
(Unaudited) |
|
|
(In thousands) |
Total selling and
marketing expense |
|
$ |
7,390 |
|
|
$ |
5,171 |
|
|
$ |
2,219 |
|
|
|
42.9 |
% |
|
$ |
20,524 |
|
|
$ |
15,839 |
|
|
$ |
4,685 |
|
|
|
29.6 |
% |
As a percentage of
revenues |
|
|
33.0 |
% |
|
|
32.0 |
% |
|
|
|
|
|
|
|
|
|
|
33.2 |
% |
|
|
33.0 |
% |
|
|
|
|
|
|
|
|
Selling and marketing expenses consist primarily of salaries, benefits, commissions and
bonuses paid to our direct sales force and industry analysts, as well as costs related to online
and offline advertising, product management, industry conferences, promotional materials, public
relations, other sales and marketing programs, and allocated overhead, including rent and
depreciation. All selling and marketing costs are expensed as they are incurred. Commission plans
are developed for our account managers with criteria and size of sales quotas that vary depending
upon the individuals role. Commissions are paid to a salesperson and are expensed as selling and
marketing costs when a sales contract is executed by both the customer and us. In the case of
multi-year agreements, one year of commissions is paid initially, with the remaining amounts paid
at the beginning of the succeeding years.
Selling and marketing expenses increased by $2.2 million and $4.7 million during the three and
nine months ending September 30, 2007, respectively, as compared
to the same periods in 2006. These increases were primarily due to increased employee salaries and benefits, stock compensation and
related costs associated with an increase in account management personnel for our sales force, the
formation of our product management team, our expansion in foreign markets and an increase in
commission costs associated with increased revenues. Our selling and marketing headcount totaled
195 employees as of September 30, 2007 an increase of 44 employees as compared to September 30,
2006. In addition, we experienced increases in consulting costs related to new products,
recruiting and relocation fees associated with the hiring of additional personnel and in advertising costs.
We expect selling and marketing expenses to increase in absolute dollar amounts as we continue
to grow our selling and marketing efforts but to vary in future periods as a percentage of revenues
depending on whether we benefit from increased productivity in our sales force and from increased
revenues resulting in part from our ongoing marketing initiatives.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Change |
|
September 30, |
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
(Unaudited) |
|
|
(In thousands) |
Total research and
development expense |
|
$ |
3,018 |
|
|
$ |
2,273 |
|
|
$ |
745 |
|
|
|
32.8 |
% |
|
$ |
8,387 |
|
|
$ |
6,668 |
|
|
$ |
1,719 |
|
|
|
25.8 |
% |
As a percentage of
revenues |
|
|
13.5 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
13.6 |
% |
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
Research and development expenses include new product development costs, consisting primarily
of compensation and related costs for personnel associated with research and development
activities, and allocated overhead, including rent and depreciation.
Research and development expenses increased by $745,000 and $1.7 million during the three
months and nine months ended September 30, 2007, respectively, as compared to the same periods in
2006. These increases were primarily due to increased employee salary and benefits, stock compensation and related costs associated with the increase in headcount and our continued focus on developing new products, such as World Metrix, Video Metrix, Campaign Metrix, Ad Metrix and Segment Metrix and the launch of qSearch
2.0, which is a second generation monthly scorecard of the search market. Research and development
costs decreased slightly as a percentage of revenues for the three and nine months ended September
30, 2007 as compared to the prior year period, primarily due to our growth in revenues outpacing
our existing investments in research and development. We also experienced an increase in costs paid
to outsourced service providers to support our development of new products.
-28-
We expect research and development expenses to increase in absolute dollar amounts as we
continue to enhance and expand our product offerings. As a result of the size and diversity of our
panel and our historical investment in our technology infrastructure, we expect that we will be
able to develop new products with moderate increases in research and development spending as
compared to our growth in revenues.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Change |
|
September 30, |
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
(Unaudited) |
|
|
(In thousands) |
Total general and
administrative
expense |
|
$ |
3,059 |
|
|
$ |
1,897 |
|
|
$ |
1,162 |
|
|
|
61.3 |
% |
|
$ |
7,994 |
|
|
$ |
5,991 |
|
|
$ |
2,003 |
|
|
|
33.4 |
% |
As a percentage of
revenues |
|
|
13.7 |
% |
|
|
11.7 |
% |
|
|
|
|
|
|
|
|
|
|
12.9 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
|
General and administrative expenses consist primarily of salaries and related expenses for
executive management, finance, accounting, human capital, legal, information technology and other
administrative functions, as well as professional fees, overhead, including allocated rent and
depreciation, and expenses incurred for other general corporate purposes.
General and administrative expenses increased by $1.2 million and $2.0 million in the three
months and nine months ended September 30, 2007, respectively, as compared to the same periods in
2006. These increases were primarily due to increased costs associated with being a public company.
Our professional fees and insurance costs increased by approximately $534,000 and $564,000 during
the three and nine months ending September 30, 2007, respectively, as compared to 2006. We also
experienced increases in employee salaries and benefits, stock compensation and related costs
associated with expanding our finance department. General and administrative expenses also
increased to a lesser extent due to our investment to support further revenue growth.
We expect general and administrative expenses to increase on an absolute basis in future
annual periods as we incur increased costs associated with being a public company. Operating as a
public company will present additional management and reporting requirements that will
significantly increase our directors and officers liability insurance premiums and professional
fees such as audit and outside legal counsel support both in absolute dollars and as a percentage
of revenues.
Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
September 30, |
|
Change |
|
September 30, |
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
(Unaudited) |
|
|
(In thousands) |
Total amortization
expense |
|
$ |
211 |
|
|
$ |
333 |
|
|
$ |
(122 |
) |
|
|
(36.6 |
)% |
|
$ |
797 |
|
|
$ |
1,037 |
|
|
$ |
(240 |
) |
|
|
(23.1 |
)% |
As a percentage of
revenues |
|
|
0.9 |
% |
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
1.3 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
-29-
Amortization expense consists of charges related to the amortization of intangible assets
associated with past acquisitions.
Amortization expense decreased by $122,000 and $240,000 during the three months and nine
months ended September 30, 2007, respectively, as compared to the same periods in 2006 because
certain intangible assets related to previous acquisitions were fully amortized during 2006 and
2007.
Absent additional acquisitions, we expect amortization expense to continue to decline as the
remaining amount of intangible assets related to previous acquisitions is amortized.
Interest Income, Net
Interest income consists primarily of interest earned from short-term investments, such as
auction rate securities, and our cash and cash equivalent balances. Interest expense is incurred
due to capital leases pursuant to several equipment loan and security agreements and a line of
credit that we have entered into in order to finance the lease of various hardware and other
equipment purchases. Our capital lease obligations are secured by a senior security interest in
eligible equipment.
Interest income, net was $1.2 million and $1.4 million for the three months and nine months
ended September 30, 2007, respectively, an increase of $1.1 million and $1.3 million compared to
the same periods in 2006. The change from 2006 to 2007 reflected the net effect of interest income
that we earned on our cash balances offset by the interest expense associated with the capital
leases that we had in place in each period. Our cash, cash equivalents and short-term investments
increased to $100.2 million from $16.0 million, or $84.2 million during the nine months ended
September 30, 2007 primarily due to the net proceeds from our IPO of $73.1 million. We also
continued to reduce the outstanding balance on our outstanding capital lease obligations.
(Loss) Gain from Foreign Currency
Our gains and losses from foreign currency transactions arise from our Canadian and United
Kingdom foreign subsidiaries that hold cash, receivables, deferred revenues and inter-company
payables in currencies other than their functional currency. Primarily due to the strength of the
Canadian dollar, during the three months and nine months ended September 30, 2007 we recorded a
loss of $111,000 and $321,000, respectively; compared to a gain of $3,000 and a loss of $24,000 in
the same periods in 2006. Our foreign currency transactions are recorded as a result of
fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar, Euro and British
Pound.
Provision for Income Taxes
As of September 30, 2007, we had net operating loss carryforwards for federal income tax
purposes in the amount of approximately $74.8 million, which begin to expire in 2020 for federal
and begin to expire in 2010 for state income tax reporting purposes. In the future, we intend to
utilize any carryforwards available to us to reduce our tax payments. Approximately $13.3 million
of our net operating loss carryforwards are subject to annual limitations under Section 382 of the
Internal Revenue Code based on changes in percentage of our ownership. We do not expect that this
limitation will impact our ability to utilize all of our net operating losses prior to their
expiration. During the three months and nine months ended September 30, 2007, we recorded an income
tax provision of $129,000 and $181,000, respectively, as compared to no provision recorded in the
same periods in 2006. For the three and nine months ended September 30, 2007, the tax provision is
comprised of an income tax expense of $148,000 and $239,000, respectively, reflecting our
alternative minimum tax and is partly offset by a decrease of $19,000 and $58,000, respectively, in
the deferred tax liability associated with a temporary difference related to certain acquired
intangible assets.
Recent Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The purpose of this
statement is to define fair value, establish a framework for measuring fair value and enhance
disclosures about fair value measurements. The measurement and disclosure requirements are
effective for the Company as of January 1, 2008
and are applied prospectively. The Company is currently evaluating the potential impact of
adopting this new guidance on its results of operations and financial position.
-30-
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159), to permit all entities to choose to elect, at specified
election dates, to measure eligible financial instruments at fair value. An entity shall report
unrealized gains and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date, and recognize upfront costs and fees related to those items in
earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after
November 15, 2007, with early adoption permitted for an entity that has also elected to apply the
provisions of SFAS No. 157. An entity is prohibited from retrospectively applying SFAS No. 159,
unless it chooses early adoption. The Company is currently evaluating the impact of the provisions
of SFAS No. 159 on its consolidated financial statements.
Liquidity and Capital Resources
Prior to our initial public offering (IPO), which closed on July 2, 2007, we funded our
operations and met our capital expenditure requirements primarily with venture capital and private
equity funding. In five separate issuances of preferred stock, from Series A on September 27, 1999
to Series E on August 1, 2003, we raised over $88 million from a number of institutional
investors. The proceeds from all of these issuances have been used for general business purposes,
with the exception of the Series E Preferred Stock offering, which was partially used to extinguish
a $1.5 million bank note. The conversion or our preferred stock occurred upon consummation of our
IPO.
During July 2007, we completed our IPO and issued 5 million shares of our common stock and
received gross proceeds of $82.5 million. Net proceeds were $73.1 million after deducting
underwriting discounts and commissions and offering costs. As of September 30, 2007, our principal
sources of liquidity consisted of cash, cash equivalents and short-term investments of $100.2
million.
We anticipate using our existing sources of liquidity, including the net proceeds from the IPO
for general corporate purposes, which may include expansion of our domestic and international
organizations, investments in our infrastructure to support our growth, further development and
expansion of our service offerings and possible acquisitions of complementary businesses,
technologies or other assets. We have no current agreements or commitments with respect to any
material acquisitions. We have invested the net proceeds of the IPO
in short-term investments.
Operating Activities
Our cash flows from operating activities are significantly influenced by our investments in
personnel and infrastructure to support the anticipated growth in our business, increases in the
number of customers using our products and the amount and timing of payments made by these
customers.
We generated approximately $14.6 million of net cash from operating activities during the nine
months ended September 30, 2007. The significant components of cash flows from operations were net
income of $6.6 million, $4.9 million in non-cash depreciation, amortization and stock based
compensation expenses, $1.2 million in non-cash revaluation of our preferred stock warrant
liability, and a $5.8 million increase in amounts collected from customers in advance of when we
recognize revenues as a result of our growing customer base and a $1.4 million increase in accounts
payable and accrued expenses, offset by a $5.1 million increase in accounts receivable.
We generated approximately $8.5 million of net cash from operating activities during the nine
months ended September 30, 2006. The significant components of cash flows from operations were net
income of $3.1 million, $3.3 million in non-cash depreciation, amortization, and stock based
compensation expenses, $215,000 in non-cash revaluation of our preferred stock warrant liability, a
$1.4 million increase in accounts payable and accrued expenses a $455,000 increase in amounts
collected from customers in advance of when we recognize revenues and a $106,000 decrease in
accounts receivable.
-31-
Investing Activities
Our primary investing activities have consisted of purchases of computer network equipment to
support our Internet user panel and maintenance of our database, furniture and equipment to support
our operations, and payments related to the acquisition of several companies. As our customer base
continues to expand, we expect purchases of technical infrastructure equipment to grow in absolute
dollars. The extent of these investments will be affected by our ability to expand relationships
with existing customers, grow our customer base, introduce new digital formats and increase our
international presence.
We used $19.5 million of net cash in investing activities during the nine months ended
September 30, 2007, a net $16.6 million of which was used to purchase short-term investments, and
$2.7 million of which was used to purchase property and equipment.
We used $6.1 million of net cash in investing activities during the nine months ended
September 30, 2006, a net $4.4 million of which was used to purchase short-term investments, $1.4
million of which was used to purchase property and equipment, and $300,000 of which was used to pay
contingent consideration associated with our acquisition of Q2.
We expect to achieve greater economies of scale and operating leverage as we expand our
customer base and utilize our Internet user panel and technical infrastructure more efficiently.
While we anticipate that it will be necessary for us to continue to invest in our Internet user
panel, technical infrastructure and technical personnel to support the combination of an increased
customer base, new products, international expansion and new digital market intelligence formats,
we believe that these investment requirements will be less than the revenue growth generated by
these actions. This should result in a lower rate of growth in our capital expenditures to support
our technical infrastructure. In any given period, the timing of our incremental capital
expenditure requirements could impact our cost of revenues, both in absolute dollars and as a
percentage of revenues.
Financing Activities
In December 2006, we entered into an equipment lease agreement with Banc of America Leasing &
Capital, LLC to finance the purchase of new hardware and other computer equipment as we continue to
expand our technology infrastructure in support of our business growth. This agreement includes a
$5 million line of credit available through December 31, 2007. Through September 30, 2007, we used
this credit facility to establish an equipment lease for the amount of approximately $2.9 million.
The base term for this lease is three years and includes a small charge in the event of prepayment.
We generated $72.0 million of cash during the nine months ended September 30, 2007. This cash
resulted from $73.1 million in net proceeds, after deducting offering costs, from the issuance of
common stock in our IPO and $780,000 in proceeds from the exercise of our common stock options. We
used $1.9 million to make payments on our capital lease obligations.
We used $685,000 of net cash from financing activities during the nine months ended September
30, 2006. We used $917,000 to make payments on our capital lease obligations partially offset by
$232,000 in proceeds from the exercise of our common stock options.
We do not have any special purpose entities, and we do not engage in off-balance sheet
financing arrangements.
Contractual Obligations and Known Future Cash Requirements
Our principal lease commitments consist of obligations under leases for office space and
computer and telecommunications equipment. We finance the purchase of some of our computer
equipment under a capital lease arrangement over a period of 36 months. Our purchase obligations
relate to outstanding orders to purchase computer equipment and are typically small; they do not
materially impact our overall liquidity. We currently have a line of credit for up to $5.0 million
available to us until December 31, 2007. We have used $2.9 million of such line of credit to
establish an equipment lease bearing interest at a rate of 7.75% per annum.
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Future Capital Requirements
We believe that our existing cash, cash equivalents, and short-term investments and operating
cash flow, will be sufficient to meet our projected operating and capital expenditure requirements
for at least the next twelve months. In addition, we expect that the net proceeds from our IPO will
provide us with the financial flexibility to execute our strategic objectives, including the
ability to make acquisitions and strategic investments. Our ability to generate cash, however, is
subject to our performance, general economic conditions, industry trends and other factors. To the
extent that funds from our IPO combined with existing cash, cash equivalents, short-term
investments and operating cash flow are insufficient to fund our future activities and
requirements, we may need to raise additional funds through public or private equity or debt
financing.
For the ninety-day period beginning July 28, 2007, the former shareholder of Q2 had the right
to sell its 212,000 shares back to us for an aggregate price of $2.65 million, or $12.50 per share.
The right expired unexercised on October 26, 2007. For the ninety-day period beginning January 1,
2008, the former shareholders of SurveySite have the right to sell their 135,635 shares back to us
for an aggregate price of approximately $1.8 million, or $13.35 per share.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements (as defined in Item 303 of regulation S-K).
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse
changes in financial market prices and rates. We do not hold or issue financial instruments for
trading purposes or have any derivative financial instruments. To date, most payments made under
our contracts are denominated in U.S. dollars and we have not experienced material gains or losses
as a result of transactions denominated in foreign currencies. As of September 30, 2007, our cash
reserves were maintained in money market investment accounts and fixed income securities totaling
$27.6 million. These securities, like all fixed income instruments, are subject to interest rate
risk and will decline in value if market interest rates increase. We have the ability to hold our
fixed income investments until maturity and, therefore, we would not expect to experience any
material adverse impact in income or cash flow.
Foreign Currency Risk
A portion of our revenues is derived from transactions denominated in U.S. dollars, even
though we maintain sales and business operations in foreign countries. As such, we have exposure to
adverse changes in exchange rates associated with operating expenses of our foreign operations, but
we believe this exposure to be immaterial at this time. As such, we do not currently engage in any
transactions that hedge foreign currency exchange rate risk. As we grow our international
operations, our exposure to foreign currency risk could become more significant.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Securities Exchange Act of
1934 (the Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by
this report (the Evaluation Date), have concluded that as of the Evaluation Date, our disclosure
controls and procedures are effective, in all material respects, to ensure that information
required to be disclosed in the reports that we file and submit under the Exchange Act (i) is
recorded, processed, summarized and reported as and when required and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the period covered by this quarterly report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting. During October 2007, we hired a Director of
Corporate Compliance to help support the Sarbanes-Oxley 404 effort.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course
of business activities. We are not presently a party to any pending legal proceedings the outcome
of which we believe, if determined adversely to us, would individually or in the aggregate have a
material adverse impact on our consolidated results of operations, cash flows or financial
position.
Item 1a. Risk Factors
An investment in our common stock involves a substantial risk of loss. You should carefully
consider these risk factors, together with all of the other information included herewith, before
you decide to purchase shares of our common stock. The occurrence of any of the following risks
could materially adversely affect our business, financial condition or operating results. In that
case, the trading price of our common stock could decline, and you may lose part or all of your
investment.
Risks Related to Our Business and Our Technologies
If we are not able to maintain a panel of sufficient size and scope, or if the costs of maintaining
our panel materially increase, our business would be harmed.
We believe that the quality, size and scope of our Internet user panel are critical to our
business. There can be no assurance, however, that we will be able to maintain a panel of
sufficient size and scope to provide the quality of marketing intelligence that our customers
demand from our products. If we fail to maintain a panel of sufficient size and scope, customers
might decline to purchase our products or renew their subscriptions, our reputation could be
damaged and our business could be materially and adversely affected. We expect that our panel costs
may increase and may comprise a greater portion of our cost of revenues in the future. The costs
associated with maintaining and improving the quality, size and scope of our panel are dependent on
many factors, many of which are beyond our control, including the participation rate of potential
panel members, the turnover among existing panel members and requirements for active participation
of panel members, such as completing survey questionnaires. Concerns over the potential
unauthorized disclosure of personal information or the classification of our software as spyware
or adware may cause existing panel members to uninstall our software or may discourage potential
panel members from installing our software. To the extent we experience greater turnover, or churn,
in our panel than we have historically experienced, these costs would increase more rapidly. We
also have terminated any may in the future terminate relationships with service providers whose
practices we believe may not comply with our privacy policies and have removed and may in the
future remove panel members obtained through such service providers. Such actions may result in
increased costs for recruiting additional panel members. In addition, publishing content on the
Internet and purchasing advertising space on Web sites may become more expensive or restrictive in
the future, which could decrease the availability and increase the cost of advertising the
incentives we offer to panel members. To the extent that such additional expenses are not
accompanied by increased revenues, our operating margins would be reduced and our financial results
would be adversely affected.
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Our quarterly results of operations may fluctuate in the future. As a result, we may fail to meet
or exceed the expectations of securities analysts or investors, which could cause our stock price
to decline.
Our quarterly results of operations may fluctuate as a result of a variety of factors, many of
which are outside of our control. If our quarterly revenues or results of operations do not meet or
exceed the expectations of securities
analysts or investors, the price of our common stock could decline substantially. In addition
to the other risk factors set forth in this Risk Factors section, factors that may cause
fluctuations in our quarterly revenues or results of operations include:
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our ability to increase sales to existing customers and attract new customers; |
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our failure to accurately estimate or control costs; |
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our revenue recognition policies related to the timing of contract renewals, delivery
of products and duration of contracts and the corresponding timing of revenue recognition; |
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the mix of subscription-based versus project-based revenues; |
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the impact on our contract renewal rates, in particular for our subscription-based
products, caused by our customers budgetary constraints, competition, customer
dissatisfaction or our customers actual or perceived lack of need for our products; |
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the potential loss of significant customers; |
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the effect of revenues generated from significant one-time projects; |
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the amount and timing of capital expenditures and operating costs related to the
maintenance and expansion of our operations and infrastructure; |
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the timing and success of new product introductions by us or our competitors; |
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variations in the demand for our products and the implementation cycles of our products
by our customers; |
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changes in our pricing and discounting policies or those of our competitors; |
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service outages, other technical difficulties or security breaches; |
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limitations relating to the capacity of our networks, systems and processes; |
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maintaining appropriate staffing levels and capabilities relative to projected growth; |
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adverse judgments or settlements in legal disputes; |
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the timing of costs related to the development or acquisition of technologies, services
or businesses to support our existing customer base and potential growth opportunities; and |
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general economic, industry and market conditions and those conditions specific to
Internet usage and online businesses. |
We believe that our quarterly revenues and results of operations on a year-over-year and
sequential quarter-over-quarter basis may vary significantly in the future and that
period-to-period comparisons of our operating results may not be meaningful. You should not rely on
the results of prior quarters as an indication of future performance.
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The market for digital marketing intelligence is at an early stage of development, and if it does
not develop, or develops more slowly than expected, our business will be harmed.
The market for digital marketing intelligence products is at a relatively early stage of
development, and it is uncertain whether these products will achieve high levels of demand and
increased market acceptance. Our success will depend to a substantial extent on the willingness of
companies to increase their use of such products. Factors that may affect market acceptance
include:
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the reliability of digital marketing intelligence products; |
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public concern regarding privacy and data security; |
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decisions of our customers and potential customers to develop digital marketing
intelligence capabilities internally rather than purchasing such products from third-party
suppliers like us; |
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decisions by industry associations in the United States or in other countries that
result in association-directed awards, on behalf of their members, of digital measurement
contracts to one or a limited number of competitive vendors; |
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the ability to maintain high levels of customer satisfaction; and |
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the rate of growth in eCommerce, online advertising and digital media. |
The market for our products may not develop further, or may develop more slowly than we
expect, either of which could adversely affect our business and operating results.
We have a limited operating history and may not be able to achieve financial or operational
success.
We were incorporated in 1999 and introduced our first syndicated Internet audience measurement
product in 2000. Many of our other products were first introduced during the past few years.
Accordingly, we are still in the early stages of development and have only a limited operating
history upon which our business can be evaluated. You should evaluate our likelihood of financial
and operational success in light of the risks, uncertainties, expenses, delays and difficulties
associated with an early-stage business in an evolving market, some of which may be beyond our
control, including:
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our ability to successfully manage any growth we may achieve in the future; |
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the risks associated with operating a business in international markets, including
China; and |
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our ability to successfully integrate acquired businesses, technologies or services. |
We have a history of significant net losses, may incur significant net losses in the future and may
not maintain profitability.
We have incurred significant losses in recent periods, including net losses of $3.2 million
and $4.4 million in 2004 and 2005, respectively. Although we achieved net income of $5.7 million in
2006 and $6.6 million for the nine months ended September 30, 2007, we cannot assure you that we
will continue to sustain or increase profitability in the future. As of September 30, 2007, we had
an accumulated deficit of $93.6 million. Because a large portion of our costs are fixed, we may not
be able to reduce or maintain our expenses in response to any decrease in our revenues, which would
adversely affect our operating results. In addition, we expect operating expenses to increase as we
implement certain growth initiatives, which include, among other things, the development of new
products, expansion of our infrastructure, plans for international expansion and general and
administrative expenses associated with being a public company. If our revenues do not increase to
offset these expected increases in costs and operating expenses, our operating results would be
materially and adversely affected. You should not consider our revenue growth in recent periods as
indicative of our future performance, as our operating results for future periods are subject to
numerous uncertainties.
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Material defects or errors in our data collection and analysis systems could damage our reputation,
result in significant costs to us and impair our ability to sell our products.
Our data collection and analysis systems are complex and may contain material defects or
errors. In addition, the large amount of data that we collect may cause errors in our data
collection and analysis systems. Any defect in our panelist data collection software, network
systems, statistical projections or other methodologies could result in:
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loss of customers; |
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damage to our brand; |
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lost or delayed market acceptance and sales of our products; |
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interruptions in the availability of our products; |
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the incurrence of substantial costs to correct any material defect or error; |
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sales credits, refunds or liability to our customers; |
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diversion of development resources; and |
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increased warranty and insurance costs. |
Any material defect or error in our data collection systems could adversely affect our
reputation and operating results.
Our business may be harmed if we deliver, or are perceived to deliver, inaccurate information to
our customers or to the media.
If the information that we provide to our customers or the media is inaccurate, or perceived
to be inaccurate, our brand may be harmed. The information that we collect or that is included in
our databases and the statistical projections that we provide to our customers may contain
inaccuracies. Any dissatisfaction by our customers or the media with our digital marketing
intelligence, measurement or data collection and statistical projection methodologies could have an
adverse effect on our ability to retain existing customers and attract new customers and could harm
our brand. Additionally, we could be contractually required to pay damages, which could be
substantial, to certain of our customers if the information we provide to them is found to be
inaccurate. Any liability that we incur or any harm to our brand that we suffer because of actual
or perceived irregularities or inaccuracies in the data we deliver to our customers could harm our
business.
Our business may be harmed if we change our methodologies or the scope of information we collect.
We have in the past and may in the future change our methodologies or the scope of information
we collect. Such changes may result from identified deficiencies in current methodologies,
development of more advanced methodologies, changes in our business plans or expressed or perceived
needs of our customers or potential customers. Any such changes or perceived changes, or our
inability to accurately or adequately communicate to our customers and the media such changes and
the potential implications of such changes on the data we have published or will publish in the
future, may result in customer dissatisfaction, particularly if certain information is no longer
collected or information collected in future periods is not comparable with information collected
in prior periods. For example, in 2002, we integrated our existing methodologies with those of
Jupiter Media Metrix, which we had recently acquired. As part of this process, we discontinued
reporting certain metrics. Some customers were dissatisfied and either terminated their
subscriptions or failed to renew their subscriptions because of these changes. Future changes to
our methodologies or the information we collect may cause similar customer dissatisfaction and
result in loss of customers.
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We may lose customers or be liable to certain customers if we provide poor service or if our
products do not comply with our customer agreements.
Errors in our systems resulting from the large amount of data that we collect, store and
manage could cause the information that we collect to be incomplete or to contain inaccuracies that
our customers regard as significant. The failure or inability of our systems, networks and
processes to adequately handle the data in a high quality and consistent manner could result in the
loss of customers. In addition, we may be liable to certain of our customers for
damages they may incur resulting from these events, such as loss of business, loss of future
revenues, breach of contract or loss of goodwill to their business.
Our insurance policies may not cover any claim against us for loss of data, inaccuracies in
data or other indirect or consequential damages and defending a lawsuit, regardless of its merit,
could be costly and divert managements attention. Adequate insurance coverage may not be available
in the future on acceptable terms, or at all. Any such developments could adversely affect our
business and results of operations.
The market for digital marketing intelligence is highly competitive, and if we cannot compete
effectively, our revenues will decline and our business will be harmed.
The market for digital marketing intelligence is highly competitive and is evolving rapidly.
We compete primarily with providers of digital media intelligence and related analytical products
and services. We also compete with providers of marketing services and solutions, with full-service
survey providers and with internal solutions developed by customers and potential customers. Our
principal competitors include:
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large and small companies that provide data and analysis of consumers online behavior,
including Compete Inc., Hitwise Pty. Ltd and NetRatings, Inc.; |
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online advertising companies that provide measurement of online ad effectiveness,
including aQuantive, Inc., DoubleClick Inc., ValueClick, Inc. and WPP Group plc; |
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companies that provide audience ratings for TV, radio and other media that have
extended or may extend their current services, particularly in certain international
markets, to the measurement of digital media, including Arbitron Inc., Nielsen Media
Research, Inc. and Taylor Nelson Sofres plc; |
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analytical services companies that provide customers with detailed information of
behavior on their own Web sites, including Omniture, Inc., Visual Sciences. and WebTrends
Corporation; |
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full-service market research firms and survey providers that may measure online
behavior and attitudes, including Harris Interactive Inc., Ipsos Group, Taylor Nelson
Sofres plc and The Nielsen Company; and |
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specialty information providers for certain industries that we serve, including IMS
Health Incorporated (healthcare) and Telephia, Inc. (telecommunications). |
Some of our current competitors have longer operating histories, access to larger customer
bases and substantially greater resources than we do. As a result, these competitors may be able to
devote greater resources to marketing and promotional campaigns, panel retention, panel development
or development of systems and technologies than we can. In addition, some of our competitors may
adopt more aggressive pricing policies. Furthermore, large software companies, Internet portals and
database management companies may enter our market or enhance their current offerings, either by
developing competing services or by acquiring our competitors, and could leverage their significant
resources and pre-existing relationships with our current and potential customers.
If we are unable to compete successfully against our current and future competitors, we may
not be able to retain and acquire customers, and we may consequently experience a decline in
revenues, reduced operating margins, loss of market share and diminished value from our products.
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Concern over spyware and privacy, including any violations of privacy laws or perceived misuse
of personal information, could cause public relations problems and could impair our ability to recruit
panelists or maintain a panel of sufficient size and scope, which in turn could adversely
affect our ability to provide our products.
Any perception of our practices as an invasion of privacy, whether legal or illegal, may subject us
to public criticism. Existing and future privacy laws and increasing sensitivity of consumers to unauthorized
disclosures and use of personal information may create negative public reaction related to our business practices.
Public concern has increased recently regarding certain kinds of downloadable software known as spyware and adware. These
concerns might cause users to refrain from downloading software from the Internet, including
our proprietary technology, which could make it difficult to recruit additional panelists or
maintain a panel of sufficient size and scope to provide meaningful marketing intelligence. In
response to spyware and adware concerns, numerous programs are available, many of which are
available for free, that claim to identify and remove spyware and adware from users computers.
Some of these anti-spyware programs have in the past identified, and may in the future identify,
our software as spyware or as a potential spyware application. We actively seek to prevent the
inclusion of our software on lists of spyware applications or potential spyware applications, to
apply best industry practices for obtaining appropriate consent from panelists and protecting the
privacy and confidentiality of our panelist data and to comply with existing privacy laws. However,
to the extent that we are not successful, that new anti-spyware programs classify our software as
spyware or as a potential spyware application, or that third party service providers fail to comply
with our privacy or data security requirements, our brand may be harmed and users may refrain from
downloading these programs or may uninstall our software. Any resulting reputational harm,
potential claims asserted against us, or decrease in the size or scope of our panel could reduce
the demand for our products, increase the cost of recruiting panelists and adversely affect our
ability to provide our products to our customers. Any of these effects could harm our business.
Any unauthorized disclosure or theft of private information we gather could harm our business.
Unauthorized disclosure of personally identifiable information regarding Web site visitors,
whether through breach of our secure network by an unauthorized party, employee theft or misuse, or
otherwise, could harm our business. If there were an inadvertent disclosure of personally
identifiable information, or if a third party were to gain unauthorized access to the personally
identifiable information we possess, our operations could be seriously disrupted and we could be
subject to claims or litigation arising from damages suffered by panel members or pursuant to the
agreements with our customers. In addition, we could incur significant costs in complying with the
multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal
information. For example, California law requires companies that maintain data on California
residents to inform individuals of any security breaches that result in their personal information
being stolen. Finally, any perceived or actual unauthorized disclosure of the information we
collect could harm our reputation, substantially impair our ability to attract and retain panelists
and have an adverse impact on our business.
We may encounter difficulties managing our growth, which could adversely affect our results of
operations.
We have experienced significant growth in recent periods. We have substantially expanded our
overall business, customer base, headcount, data collection and processing infrastructure and
operating procedures as our business has grown. We increased our total number of full time
employees from 176 employees as of December 31, 2003 to 439 employees as of September 30, 2007, and
we expect to continue to expand our workforce to meet our strategic objectives. In addition, during
this same period, we made substantial investments in our network infrastructure operations as a
result of our growth. We believe that we will need to continue to effectively manage and expand our
organization, operations and facilities in order to accommodate our expected future growth. If we
continue to grow, our current systems and facilities may not be adequate. Our need to effectively
manage our operations and growth requires that we continue to assess and improve our operational,
financial and management controls, reporting systems and procedures. If we are not able to
efficiently and effectively manage our growth, our business may be impaired.
If the Internet advertising and eCommerce markets develop slower than we expect, our business will
suffer.
Our future success will depend on continued growth in the use of the Internet as an
advertising medium, a continued increase in eCommerce spending and the proliferation of the
Internet as a platform for a wide variety of consumer activities. These markets are evolving
rapidly, and it is not certain that their current growth trends will continue.
-39-
The adoption of Internet advertising, particularly by advertisers that have historically
relied on traditional offline media, requires the acceptance of new approaches to conducting
business. Advertisers may perceive Internet advertising to be less effective than traditional
advertising for marketing their products. They may also be unwilling to pay premium rates for
online advertising that is targeted at specific segments of users based on their demographic
profile or Internet behavior. The online advertising and eCommerce markets may also be
adversely affected by privacy issues relating to such targeted advertising, including that which
makes use of personalized information. Furthermore, online merchants may not be able to establish
online commerce models that are cost effective and may not learn how to effectively compete with
other Web sites or offline merchants. In addition, consumers may not continue to shift their
spending on goods and services from offline outlets to the Internet. As a result, growth in the use
of the Internet for eCommerce may not continue at a rapid rate, or the Internet may not be adopted
as a medium of commerce by a broad base of customers or companies worldwide. Because of the
foregoing factors, among others, the market for Internet advertising and eCommerce may not continue
to grow at significant rates. If these markets do not continue to develop, or if they develop
slower than expected, our business will suffer.
Our growth depends upon our ability to retain existing large customers and add new large customers;
however, to the extent we are successful in doing so, our ability to maintain profitability and
positive cash flow may be impaired.
Our success depends in part on our ability to sell our products to large customers and on the
renewal of the subscriptions of those customers in subsequent years. For the years ended December
31, 2004, 2005 and 2006 and the nine months ended September 30, 2007, we derived over 38%, 41%, 39%
and 38%, respectively, of our total revenues from our top 10 customers. The loss of any one or more
of those customers could decrease our revenues and harm our current and future operating results.
The addition of new large customers or increases in sales to existing large customers may require
particularly long implementation periods and other costs, which may adversely affect our
profitability. To compete effectively, we have in the past been, and may in the future be, forced
to offer significant discounts to maintain existing customers or acquire other large customers. In
addition, we may be forced to reduce or withdraw from our relationships with certain existing
customers or refrain from acquiring certain new customers in order to acquire or maintain
relationships with important large customers. As a result, new large customers or increased usage
of our products by large customers may cause our profits to decline and our ability to sell our
products to other customers could be adversely affected.
We derive a significant portion of our revenues from a single customer, Microsoft Corporation.
For the years ended December 31, 2004, 2005 and 2006 and the nine months ended September 30, 2007,
we derived approximately 5%, 14%, 12% and 13%, respectively, of our total revenues from Microsoft.
If Microsoft were to cease or substantially reduce its use of our products, our revenues and
earnings might decline.
If we fail to develop our brand, our business may suffer.
We believe that building and maintaining awareness of comScore and our portfolio of products
in a cost-effective manner is critical to achieving widespread acceptance of our current and future
products and is an important element in attracting new customers. We rely on our relationships with
the media and the exposure we receive from numerous citations of our data by media outlets to build
brand awareness and credibility among our customers and the marketplace. Furthermore, we believe
that brand recognition will become more important for us as competition in our market increases.
Our brands success will depend on the effectiveness of our marketing efforts and on our ability to
provide reliable and valuable products to our customers at competitive prices. Our brand marketing
activities may not yield increased revenues, and even if they do, any increased revenues may not
offset the expenses we incur in attempting to build our brand. If we fail to successfully market
our brand, we may fail to attract new customers, retain existing customers or attract media
coverage to the extent necessary to realize a sufficient return on our brand-building efforts, and
our business and results of operations could suffer.
-40-
Failure to effectively expand our sales and marketing capabilities could harm our ability to
increase our customer base and achieve broader market acceptance of our products.
Increasing our customer base and achieving broader market acceptance of our products will
depend to a significant extent on our ability to expand our sales and marketing operations. We
expect to continue to rely on our direct sales force to obtain new customers. We plan to continue
to expand our direct sales force both domestically and internationally. We believe that there is
significant competition for direct sales personnel with the sales skills and technical knowledge
that we require. Our ability to achieve significant growth in revenues in the future will depend,
in large part, on our success in recruiting, training and retaining sufficient numbers of direct
sales personnel. In general, new hires require significant training and substantial experience before becoming
productive. Our recent hires and planned hires may not become as productive as we require, and we
may be unable to hire or retain sufficient numbers of qualified individuals in the future in the
markets where we currently operate or where we seek to conduct business. Our business will be
seriously harmed if the efforts to expand our sales and marketing capabilities are not successful
or if they do not generate a sufficient increase in revenues.
We have limited experience with respect to our pricing model, and if the prices we charge for our
products are unacceptable to our customers, our revenues and operating results will be harmed.
We have limited experience in determining the prices for our products that our existing and
potential customers will find acceptable. As the market for our products matures, or as new
competitors introduce new products or services that compete with ours, we may be unable to renew
our agreements with existing customers or attract new customers at the prices we have historically
charged. As a result, it is possible that future competitive dynamics in our market may require us
to reduce our prices, which could have an adverse effect on our revenues, profitability and
operating results.
We derive a significant portion of our revenues from sales of our subscription-based digital
marketing intelligence products. If our customers terminate or fail to renew their subscriptions,
our business could suffer.
We currently derive a significant portion of our revenues from our subscription-based digital
marketing intelligence products. Subscription-based products accounted for 70%, 75% and 79% of our
revenues in 2005, 2006 and the nine months ended September 30, 2007, respectively. However, if our
customers terminate their subscriptions for our products, do not renew their subscriptions, delay
renewals of their subscriptions or renew on terms less favorable to us, our revenues could decline
and our business could suffer.
Our customers have no obligation to renew after the expiration of their initial subscription
period, which is typically one year, and we cannot assure you that current subscriptions will be
renewed at the same or higher price levels, if at all. Some of our customers have elected not to
renew their subscription agreements with us in the past. If we experience a change of control, as
defined in such agreements, some of our customers have the right to terminate their subscriptions.
Moreover, some of our major customers have the right to cancel their subscription agreements
without cause at any time. We have limited historical data with respect to rates of customer
subscription renewals, so we cannot accurately predict future customer renewal rates. Our customer
renewal rates may decline or fluctuate as a result of a number of factors, including customer
satisfaction or dissatisfaction with our products, the prices or functionality of our products, the
prices or functionality of products offered by our competitors, mergers and acquisitions affecting
our customer base or reductions in our customers spending levels.
If we are unable to sell additional products to our existing customers or attract new customers,
our revenue growth will be adversely affected.
To increase our revenues, we believe we must sell additional products to existing customers
and regularly add new customers. If our existing and prospective customers do not perceive our
products to be of sufficient value and quality, we may not be able to increase sales to existing
customers and attract new customers, and our operating results will be adversely affected.
We depend on third parties for data that is critical to our business, and our business could suffer
if we cannot continue to obtain data from these suppliers.
We rely on third-party data sources for information regarding certain offline activities of
our panelists. The availability and accuracy of these data is important to the continuation and
development of our products that link online activity to offline purchases. If this information is
not available to us at commercially reasonable terms, or is found to be inaccurate, it could harm
our reputation, business and financial performance.
-41-
System failures or delays in the operation of our computer and communications systems may harm our
business.
Our success depends on the efficient and uninterrupted operation of our computer and
communications systems and the third-party data centers we use. Our ability to collect and report
accurate data may be interrupted by a number of factors, including our inability to access the
Internet, the failure of our network or software systems, computer viruses, security breaches or
variability in user traffic on customer Web sites. A failure of our network or data gathering
procedures could impede the processing of data, cause the corruption or loss of data or prevent the
timely delivery of our products.
In the future, we may need to expand our network and systems at a more rapid pace than we have
in the past. Our network or systems may not be capable of meeting the demand for increased
capacity, or we may incur additional unanticipated expenses to accommodate these capacity demands.
In addition, we may lose valuable data, be unable to obtain or provide data on a timely basis or
our network may temporarily shut down if we fail to adequately expand or maintain our network
capabilities to meet future requirements. Any lapse in our ability to collect or transmit data may
decrease the value of our products and prevent us from providing the data requested by our
customers. Any disruption in our network processing or loss of Internet user data may damage our
reputation and result in the loss of customers, and our business and results of operations could be
adversely affected.
We rely on a small number of third-party service providers to host and deliver our products, and
any interruptions or delays in services from these third parties could impair the delivery of our
products and harm our business.
We host our products and serve all of our customers from two third-party data center
facilities located in Virginia and Illinois. While we operate our equipment inside these
facilities, we do not control the operation of either of these facilities, and, depending on
service level requirements, we may not continue to operate or maintain redundant data center
facilities for all of our products or for all of our data, which could increase our vulnerability.
These facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods,
fires, power loss, telecommunications failures and similar events. They are also subject to
break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. A
natural disaster or an act of terrorism, a decision to close the facilities without adequate notice
or other unanticipated problems could result in lengthy interruptions in availability of our
products. We may also encounter capacity limitations at our third-party data centers. Additionally,
our data center facility agreements are of limited durations, and our data center facilities have
no obligation to renew their agreements with us on commercially reasonable terms, if at all. Our
agreement for our data center facility located in Virginia expires on October 3, 2008, if not
renewed, and our agreement for our data center facility located in Illinois expires on April 28,
2008, if not renewed. Although we are not substantially dependent on either data center facility
because of planned redundancies, and although we currently are able to migrate to alternative data
centers, such a migration may result in an interruption or delay in service. If we are unable to
renew our agreements with the owners of the facilities on commercially reasonable terms, or if we
migrate to a new data center, we may experience delays in delivering our products until an
agreement with another data center facility can be arranged or the migration to a new facility is
completed.
Further, we depend on access to the Internet through third-party bandwidth providers to
operate our business. If we lose the services of one or more of our bandwidth providers for any
reason, we could experience disruption in the delivery of our products or be required to retain the
services of a replacement bandwidth provider. It may be difficult for us to replace any lost
bandwidth on commercially reasonable terms, or at all, due to the large amount of bandwidth our
operations require.
Our operations also rely heavily on the availability of electrical power and cooling capacity,
which are also supplied by third-party providers. If we or the third-party data center operators
that we use to deliver our products were to experience a major power outage or if the cost of
electrical power increases significantly, our operations and profitability would be harmed. If we
or the third-party data centers that we use were to experience a major power outage, we would have
to rely on back-up generators, which may not function properly, and their supply may be inadequate.
Such a power outage could result in the disruption of our business. Additionally, if our current
facilities fail to have sufficient cooling capacity or availability of electrical power, we would
need to find alternative facilities.
-42-
Any errors, defects, disruptions or other performance problems with our products caused by
third parties could harm our reputation and may damage our business. Interruptions in the
availability of our products may reduce our revenues due to increased turnaround time to complete
projects, cause us to issue credits to customers, cause
customers to terminate their subscription and project agreements or adversely affect our
renewal rates. Our business would be harmed if our customers or potential customers believe our
products are unreliable.
Because our long-term success depends, in part, on our ability to expand the sales of our products
to customers located outside of the United States, our business will become increasingly
susceptible to risks associated with international operations.
We have very limited experience operating in markets outside of the United States. Our
inexperience in operating our business outside of the United States may increase the risk that the
international expansion efforts we have begun to undertake will not be successful. In addition,
conducting international operations subjects us to new risks that we have not generally faced in
the United States. These risks include:
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recruitment and maintenance of a sufficiently large and representative panel both
globally and in certain countries; |
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different customer needs and buying behavior than we are accustomed to in the United
States; |
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difficulties and expenses associated with tailoring our products to local markets,
including their translation into foreign languages; |
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difficulties in staffing and managing international operations; |
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longer accounts receivable payment cycles and difficulties in collecting accounts
receivable; |
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potentially adverse tax consequences, including the complexities of foreign value-added
taxes and restrictions on the repatriation of earnings; |
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reduced or varied protection for intellectual property rights in some countries; |
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the burdens of complying with a wide variety of foreign laws and regulations; |
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fluctuations in currency exchange rates; |
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increased accounting and reporting burdens and complexities; and |
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political, social and economic instability abroad, terrorist attacks and security
concerns. |
Additionally, operating in international markets requires significant management attention and
financial resources. We cannot be certain that the investments and additional resources required to
establish and maintain operations in other countries will hold their value or produce desired
levels of revenues or profitability. We cannot be certain that we will be able to maintain and
increase the size of the Internet user panel that we currently have in various countries or that we
will be able to recruit a representative sample for our audience measurement products. In addition,
there can be no assurance that Internet usage and eCommerce will continue to grow in international
markets. In addition, governmental authorities in various countries have different views regarding
regulatory oversight of the Internet. For example, the Chinese government has recently taken steps
to restrict the content available to Internet users in China.
The impact of any one or more of these risks could negatively affect or delay our plans to
expand our international business and, consequently, our future operating results.
-43-
If we fail to respond to technological developments, our products may become obsolete or less
competitive.
Our future success will depend in part on our ability to modify or enhance our products to
meet customer needs, to add functionality and to address technological advancements. For example,
online publishers and advertisers have recently started to use Asynchronous JavaScript and XML, or
AJAX, a development technique that allows Web applications to quickly make incremental updates
without having to refresh the entire Web page. AJAX may make
page views a less useful metric for measuring the usage and effectiveness of online media. If
our products are not effective at addressing evolving customer needs that result from increased
AJAX usage, our business may be harmed. Similarly, technological advances in the handheld device
industry may lead to changes in our customers requirements. For example, if certain handheld
devices become the primary mode of receiving content and conducting transactions on the Internet,
and we are unable to adapt our software to collect information from such devices, then we would not
be able to report on online activity. To remain competitive, we will need to develop new products
that address these evolving technologies and standards. However, we may be unsuccessful in
identifying new product opportunities or in developing or marketing new products in a timely or
cost-effective manner. In addition, our product innovations may not achieve the market penetration
or price levels necessary for profitability. If we are unable to develop enhancements to, and new
features for, our existing products or if we are unable to develop new products that keep pace with
rapid technological developments or changing industry standards, our products may become obsolete,
less marketable and less competitive, and our business will be harmed.
The success of our business depends in large part on our ability to protect and enforce our
intellectual property rights.
We rely on a combination of patent, copyright, service mark, trademark and trade secret laws,
as well as confidentiality procedures and contractual restrictions, to establish and protect our
proprietary rights, all of which provide only limited protection. While we have filed a number of
patent applications and own two issued patents, we cannot assure you that any additional patents
will be issued with respect to any of our pending or future patent applications, nor can we assure
you that any patent issued to us will provide adequate protection, or that any patents issued to us
will not be challenged, invalidated, circumvented, or held to be unenforceable in actions against
alleged infringers. Also, we cannot assure you that any future trademark or service mark
registrations will be issued with respect to pending or future applications or that any of our
registered trademarks and service marks will be enforceable or provide adequate protection of our
proprietary rights. Furthermore, adequate (or any) patent, trademark, service mark, copyright and
trade secret protection may not be available in every country in which our services are available.
We endeavor to enter into agreements with our employees and contractors and with parties with
whom we do business in order to limit access to and disclosure of our proprietary information. We
cannot be certain that the steps we have taken will prevent unauthorized use of our technology or
the reverse engineering of our technology. Moreover, third parties might independently develop
technologies that are competitive to ours or that infringe upon our intellectual property. In
addition, the legal standards relating to the validity, enforceability and scope of protection of
intellectual property rights in Internet-related industries are uncertain and still evolving, both
in the United States and in other countries. The protection of our intellectual property rights may
depend on our legal actions against any infringers being successful. We cannot be sure any such
actions will be successful.
An assertion from a third party that we are infringing its intellectual property, whether such
assertions are valid or not, could subject us to costly and time-consuming litigation or expensive
licenses.
The Internet, software and technology industries are characterized by the existence of a large
number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on
allegations of infringement or other violations of intellectual property rights, domestically or
internationally. As we grow and face increasing competition, the probability that one or more third
parties will make intellectual property rights claims against us increases. In such cases, our
technologies may be found to infringe on the intellectual property rights of others. Additionally,
many of our subscription agreements may require us to indemnify our customers for third-party
intellectual property infringement claims, which would increase our costs if we have to defend such
claims and may require that we pay damages and provide alternative services if there were an
adverse ruling in any such claims. Intellectual property claims could harm our relationships with
our customers, deter future customers from subscribing to our products or expose us to litigation.
Even if we are not a party to any litigation between a customer and a third party, an adverse
outcome in any such litigation could make it more difficult for us to defend against intellectual
property claims by the third party in any subsequent litigation in which we are a named party. Any
of these results could adversely affect our brand, business and results of operations.
-44-
One of our competitors has filed patent infringement lawsuits against others, demonstrating
this partys propensity for patent litigation. It is possible that this third party, or some other
third party, may bring an action against us, and thus cause us to incur the substantial costs and
risks of litigation. Any intellectual property rights claim against us or our customers, with or
without merit, could be time-consuming and expensive to litigate or settle and could divert
management resources and attention. An adverse determination also could prevent us from offering
our products to our customers and may require that we procure or develop substitute products that
do not infringe on other parties rights.
With respect to any intellectual property rights claim against us or our customers, we may
have to pay damages or stop using technology found to be in violation of a third partys rights. We
may have to seek a license for the technology, which may not be available on reasonable terms or at
all, may significantly increase our operating expenses or may significantly restrict our business
activities in one or more respects. We may also be required to develop alternative non-infringing
technology, which could require significant effort and expense. Any of these outcomes could
adversely affect our business and results of operations.
Domestic or foreign laws, regulations or enforcement actions may limit our ability to collect and
use information about Internet users or restrict or prohibit our product offerings, causing a
decrease in the value of our products and an adverse impact on the sales of our products.
Our business could be adversely impacted by existing or future laws or regulations of, or
actions by, domestic or foreign regulatory agencies. For example, privacy concerns could lead to
legislative, judicial and regulatory limitations on our ability to collect, maintain and use
information about Internet users in the United States and abroad. Various state legislatures,
including those of Utah and California, have enacted legislation designed to protect Internet
users privacy, for example by prohibiting spyware. In recent years, similar legislation has been
proposed in other states and at the federal level and has been enacted in foreign countries, most
notably by the European Union, which adopted a privacy directive regulating the collection of
personally identifiable information online. These laws and regulations, if drafted or interpreted
broadly, could be deemed to apply to the technology we use, and could restrict our information
collection methods or decrease the amount and utility of the information that we would be permitted
to collect. In addition, our ability to conduct business in certain foreign jurisdictions,
including China, is restricted by the laws, regulations and agency actions of those jurisdictions.
The costs of compliance with, and the other burdens imposed by, these and other laws or regulatory
actions may prevent us from selling our products or increase the costs associated with selling our
products, and may affect our ability to invest in or jointly develop products in the United States
and in foreign jurisdictions.
In addition, failure to comply with these and other laws and regulations may result in, among
other things, administrative enforcement actions and fines, class action lawsuits and civil and
criminal liability. State attorneys general, governmental and non-governmental entities and private
persons may bring legal actions asserting that our methods of collecting, using and distributing
Web site visitor information are illegal or improper, which could require us to spend significant
time and resources defending these claims. For example, some companies that collect, use and
distribute Web site visitor information have been the subject of governmental investigations and
class-action lawsuits. Any such regulatory or civil action that is brought against us, even if
unsuccessful, may distract our managements attention, divert our resources, negatively affect our
public image or reputation among our panelists and customers and harm our business.
The impact of any of these current or future laws or regulations could make it more difficult
or expensive to attract or maintain panelists, particularly in affected jurisdictions, and could
adversely affect our business and results of operations.
-45-
Laws related to the regulation of the Internet could adversely affect our business.
Laws and regulations that apply to communications and commerce over the Internet are becoming
more prevalent. In particular, the growth and development of the market for eCommerce has prompted
calls for more stringent tax, consumer protection and privacy laws in the United States and abroad
that may impose additional burdens on companies conducting business online. The adoption,
modification or interpretation of laws or
regulations relating to the Internet or our customers digital operations could negatively
affect the businesses of our customers and reduce their demand for our products.
If we fail to respond to evolving industry standards, our products may become obsolete or less
competitive.
The market for our products is characterized by rapid technological advances, changes in
customer requirements, changes in protocols and evolving industry standards. For example, industry
associations such as the Advertising Research Foundation, the Council of American Survey Research
Organizations, the Internet Advertising Bureau, or IAB, and the Media Ratings Council have
independently initiated efforts to either review online market research methodologies or to develop
minimum standards for online market research. On April 19, 2007, we received a letter from the IAB,
citing discrepancies between our audience measurement data, those of our competitors and those
provided by the server logs of IABs member organizations. In its letter, the IAB asked us to
submit to an independent audit and accreditation process of our audience measurement systems and
processes In September 2007, we began a full audit to obtain accreditation by the Media Ratings
Council.
Any standards adopted by the IAB or similar organizations may lead to costly changes to our
procedures and methodologies. As a result, the cost of developing our digital marketing
intelligence products could increase. If we do not adhere to standards prescribed by the IAB or
other industry associations, our customers could choose to purchase products from competing
companies that meet such standards. Furthermore, industry associations based in countries outside
of the United States often endorse certain vendors or methodologies. If our methodologies fail to
receive an endorsement from an important industry association located in a foreign country,
advertising agencies, media companies and advertisers in that country may not purchase our
products. As a result, our efforts to further expand internationally could be adversely affected.
The success of our business depends on the continued growth of the Internet as a medium for
commerce, content, advertising and communications.
Expansion in the sales of our products depends on the continued acceptance of the Internet as
a platform for commerce, content, advertising and communications. The use of the Internet as a
medium for commerce, content, advertising and communications could be adversely impacted by delays
in the development or adoption of new standards and protocols to handle increased demands of
Internet activity, security, reliability, cost, ease-of-use, accessibility and quality-of-service.
The performance of the Internet and its acceptance as a medium for commerce, content commerce,
content, advertising and communications has been harmed by viruses, worms, and similar malicious
programs, and the Internet has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure. If for any reason the Internet does not remain a medium
for widespread commerce, content, advertising and communications, the demand for our products would
be significantly reduced, which would harm our business.
We rely on our management team and need additional personnel to grow our business, and the loss of
one or more key employees or the inability to attract and retain qualified personnel could harm our
business.
Our success and future growth depends to a significant degree on the skills and continued
services of our management team, including our founders, Magid M. Abraham, Ph.D. and Gian M.
Fulgoni. Our future success also depends on our ability to retain, attract and motivate highly
skilled technical, managerial, marketing and customer service personnel, including members of our
management team. All of our employees work for us on an at-will basis. We plan to hire additional
personnel in all areas of our business, particularly for our sales, marketing and technology
development areas, both domestically and internationally, which will likely increase our recruiting
and hiring costs. Competition for these types of personnel is intense, particularly in the Internet
and software industries. As a result, we may be unable to successfully attract or retain qualified
personnel. Our inability to retain and attract the necessary personnel could adversely affect our
business.
-46-
We may expand through investments in, acquisitions of, or the development of new products with
assistance from other companies, any of which may not be successful and may divert our
managements attention.
Our business strategy may include acquiring complementary products, technologies or
businesses. We also may enter into relationships with other businesses in order to expand our
product offerings, which could involve preferred or exclusive licenses, discount pricing or
investments in other companies.
Negotiating any such transactions could be time-consuming, difficult and expensive, and our
ability to close these transactions may be subject to regulatory or other approvals and other
conditions which are beyond our control. Consequently, we can make no assurances that any such
transactions, if undertaken and announced, would be completed.
An acquisition, investment or business relationship may result in unforeseen operating
difficulties and expenditures. In particular, we may encounter difficulties assimilating or
integrating the businesses, technologies, products, personnel or operations of the acquired
companies, particularly if the key personnel of the acquired company choose not to be employed by
us, and we may have difficulty retaining the customers of any acquired business due to changes in
management and ownership. Acquisitions may also disrupt our ongoing business, divert our resources
and require significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we cannot assure you that the anticipated benefits of any
acquisition, investment or business relationship would be realized or that we would not be exposed
to unknown liabilities. In connection with any such transaction, we may:
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encounter difficulties retaining key employees of the acquired company or integrating
diverse business cultures; |
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issue additional equity securities that would dilute the common stock held by existing
stockholders; |
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incur large charges or substantial liabilities; |
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become subject to adverse tax consequences, substantial depreciation or deferred
compensation charges; |
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use cash that we may need in the future to operate our business; and |
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incur debt on terms unfavorable to us or that we are unable to repay. |
The impact of any one or more of these factors could adversely affect our business or results
of operations or cause the price of our common stock to decline substantially.
Changes in, or interpretations of, accounting rules and regulations, including recent rules and
regulations regarding expensing of stock options, could result in unfavorable accounting charges or
cause us to change our compensation policies.
Accounting methods and policies, including policies governing revenue recognition, expenses
and accounting for stock options are continually subject to review, interpretation, and guidance
from relevant accounting authorities, including the Financial Accounting Standards Board, or FASB,
and the SEC. Changes to, or interpretations of, accounting methods or policies in the future may
require us to reclassify, restate or otherwise change or revise our financial statements, including
those contained in this prospectus.
On December 16, 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment, which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123R). SFAS No.
123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No.
95, Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach
described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their
fair values. We were required to adopt SFAS No. 123R on January 1, 2006, and have adopted it as of
that date.
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As permitted by SFAS No. 123, we accounted for share-based payments to employees through
December 31, 2005 using APB Opinion No. 25s intrinsic value method and, as such, generally
recognized no compensation cost for employee stock options. Accordingly, the adoption of SFAS No.
123Rs fair value method has had a significant
impact on the presentation of our results of operations, although it has not impacted our
overall financial position. The long-term impact of adoption of SFAS No. 123R cannot be predicted
at this time because it will depend on levels of share-based payments granted in the future and the
assumptions for the variables which impact the computation of the fair value of any such grants.
Historically, we have used stock options as part of our compensation programs to motivate and
retain existing employees and to attract new employees. Because we are now required to expense
stock options, we may choose to reduce our reliance on stock options as part of our compensation
packages. If we reduce our use of stock options, it may be more difficult for us to retain and
attract qualified employees. If we do not reduce our use of stock options, our expenses in future
periods may increase. Beginning in 2007, we issued restricted stock awards and restricted stock
units, and we expect to reduce our use of stock options as a form of stock-based compensation, but
we cannot be certain whether or how our stock-based compensation policy will change in the future.
Investors could lose confidence in our financial reports, and our business and stock price may be
adversely affected, if our internal control over financial reporting is found by management or by
our independent registered public accounting firm to not be adequate or if we disclose significant
existing or potential deficiencies or material weaknesses in those controls.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include a report on our internal
control over financial reporting in our Annual Report on Form 10-K for each year beginning with the
year ending December 31, 2008. That report must include managements assessment of the
effectiveness of our internal control over financial reporting as of the end of that and each
subsequent fiscal year. Additionally, our independent registered public accounting firm will be
required to issue a report on managements assessment of our internal control over financial
reporting and on their evaluation of the operating effectiveness of our internal control over
financial reporting. We continue to evaluate our existing internal controls against the standards
adopted by the Public Company Accounting Oversight Board, or PCAOB. During the course of our
ongoing evaluation of our internal controls, we have in the past identified, and may in the future
identify, areas requiring improvement, and may have to design enhanced processes and controls to
address issues identified through this review. Remedying any significant deficiencies or material
weaknesses that we or our independent registered public accounting firm may identify could require
us to incur significant costs and expend significant time and management resources. We cannot
assure you that any of the measures we may implement to remedy any such deficiencies will
effectively mitigate or remedy such deficiencies. In addition, we cannot assure you that we will be
able to complete the work necessary for our management to issue its management report in a timely
manner, or that we will be able to complete any work required for our management to be able to
conclude that our internal control over financial reporting is operating effectively. If we are not
able to complete the assessment under Section 404 in a timely manner or to remedy any identified
material weaknesses, we and our independent registered public accounting firm would be unable to
conclude that our internal control over financial reporting is effective as of December 31, 2008.
If our internal control over financial reporting is found by management or by our independent
registered public accountant to not be adequate or if we disclose significant existing or potential
deficiencies or material weaknesses in those controls, investors could lose confidence in our
financial reports, we could be subject to sanctions or investigations by The NASDAQ Global Market,
the Securities and Exchange Commission or other regulatory authorities and our stock price could be
adversely affected.
A determination that there is a significant deficiency or material weakness in the
effectiveness of our internal control over financial reporting could also reduce our ability to
obtain financing or could increase the cost of any financing we obtain and require additional
expenditures to comply with applicable requirements.
Our net operating loss carryforwards may expire unutilized or underutilized, which could prevent us
from offsetting future taxable income.
We have experienced changes in control that have triggered the limitations of Section 382 of
the Internal Revenue Code on our net operating loss carryforwards. As a result, we may be limited
in the portion of net operating loss carryforwards that we can use in the future to offset taxable
income for U.S. Federal income tax purposes.
-48-
At September 30, 2007 and December 31, 2006, we had both federal and state net operating loss
carryforwards of approximately $74.8 million and $81.2 million, respectively, which are available
to offset future taxable income. The federal net operating loss carryforwards will begin to expire in 2020. The state net
operating loss carryforwards begin to expire in 2010.
In addition, at September 30, 2007 and December 31, 2006, we had net operating loss
carryforwards for tax purposes related to our foreign subsidiaries of $592,000 and $703,000,
respectively, which begin to expire in 2010.
In the nine months ended September 30, 2007 and the year ended December 31, 2006, deferred tax
assets, before valuation allowance, decreased approximately $2.6 million and $2.4 million,
respectively, due to our use of net operating loss carryforwards to offset taxable income.
We periodically assess the likelihood that we will be able to recover our deferred tax assets.
We consider all available evidence, both positive and negative, including historical levels of
income, expectations and risks associated with estimates of future taxable income and ongoing
prudent and feasible profits. As a result of this analysis of all available evidence, both positive
and negative, we concluded that a full valuation allowance against deferred tax assets should be
applied as of September 30, 2007 and December 31, 2006. Depending on our actual results for the
remainder of 2007, there may be sufficient positive evidence to support the conclusion that all or
a portion of our valuation allowance should be reduced. To the extent we determine that all or a
portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit
in the period such determination is made for the reversal of the valuation allowance. Once the
valuation allowance is eliminated or reduced, its reversal will no longer be available to offset
our current tax provision. These events could have a material impact on our reported results of
operations.
We may require additional capital to support business growth, and this capital may not be available
on acceptable terms or at all.
We intend to continue to make investments to support our business growth and may require
additional funds to respond to business challenges, including the need to develop new products or
enhance our existing products, enhance our operating infrastructure and acquire complementary
businesses and technologies. Accordingly, we may need to engage in equity or debt financings to
secure additional funds. If we raise additional funds through further issuances of equity or
convertible debt securities, our existing stockholders could suffer significant dilution, and any
new equity securities we issue could have rights, preferences and privileges superior to those of
holders of our common stock. Any debt financing secured by us in the future could include
restrictive covenants relating to our capital raising activities and other financial and
operational matters, which may make it more difficult for us to obtain additional capital and to
pursue business opportunities, including potential acquisitions. In addition, we may not be able to
obtain additional financing on terms favorable to us or at all. If we are unable to obtain adequate
financing or financing on terms satisfactory to us when we require it, our ability to continue to
support our business growth and to respond to business challenges could be significantly limited.
In addition, the terms of any additional equity or debt issuances may adversely affect the value
and price of our common stock.
Risks Related to the Securities Market Ownership of our Common Stock
We cannot assure you that a market will continue to develop or exist for our common stock or what
the market price of our common stock will be.
Prior to our initial public offering which was completed on July 2, 2007, there was no public
trading market for our common stock, and we cannot assure you that one will continue to develop or
be sustained. If a market does not continue to develop or is not sustained, it may be
difficult for you to sell your shares of common stock at an attractive price or at all. We cannot
predict the prices at which our common stock will trade.
-49-
The trading price of our common stock may be subject to significant fluctuations and volatility and
our new stockholders may be unable to resell their shares at a profit.
The stock markets in general, and the markets for technology stocks in particular, have
experienced high levels of volatility. The market for technology stocks has been extremely volatile
and frequently reaches levels that bear no relationship to the past or present operating
performance of those companies. These broad market fluctuations may
adversely affect the trading price of our common stock. In addition, the trading price of our
common stock has been subject to significant fluctuations and may continue to fluctuate or decline.
The price of our common stock in the market may be higher or lower than the price you pay,
depending on many factors, some of which are beyond our control and may not be related to our
operating performance. It is possible that, in future quarters, our operating results may be below
the expectations of analysts or investors. As a result of these and other factors, the price of our
common stock may decline, possibly materially. These fluctuations could cause you to lose all or
part of your investment in our common stock. Factors that could cause fluctuations in the trading
price of our common stock include the following:
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price and volume fluctuations in the overall stock market from time to time; |
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volatility in the market price and trading volume of technology companies and of
companies in our industry; |
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actual or anticipated changes or fluctuations in our operating results; |
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actual or anticipated changes in expectations regarding our performance by investors or
securities analysts; |
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the failure of securities analysts to cover our common stock after this offering or
changes in financial estimates by analysts; |
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actual or anticipated developments in our competitors businesses or the competitive
landscape; |
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actual or perceived inaccuracies in information we provide to our customers or the
media; |
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litigation involving us, our industry or both; |
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regulatory developments; |
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privacy and security concerns, including public perception of our practices as an
invasion of privacy; |
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general economic conditions and trends; |
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major catastrophic events; |
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sales of large blocks of our stock; |
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the timing and success of new product introductions or upgrades by us or our
competitors; |
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changes in our pricing policies or payment terms or those of our competitors; |
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concerns relating to the security of our network and systems; |
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our ability to expand our operations, domestically and internationally, and the amount
and timing of expenditures related to this expansion; or |
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departures of key personnel. |
In addition, the stock prices of many technology companies have experienced wide fluctuations
that have often been unrelated to the operating performance of those companies.
-50-
In the past, following periods of volatility in the market price of a companys securities,
securities class action litigation has often been brought against that company. If our stock price
is volatile, we may become the target of securities litigation, which could result in substantial
costs and divert our managements attention and resources from our business. In addition,
volatility, lack of positive performance in our stock price or changes to our overall
compensation program, including our equity incentive program, may adversely affect our ability
to retain key employees.
If securities or industry analysts do not publish research or reports about our business, or if
they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume
could decline.
The trading market for our common stock will be influenced by the research and reports that
industry or securities analysts publish about us or our business. If any of the analysts who cover
us issue an adverse or misleading opinion regarding our stock, our stock price would likely
decline. If one or more of these analysts cease coverage of our company or fail to publish reports
on us regularly, we could lose visibility in the financial markets, which in turn could cause our
stock price or trading volume to decline.
Future sales of shares by existing stockholders could 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 after the lock-up that most of our stockholders entered into
at the time of our initial public offering lapses, the trading price of our common stock could
decline.
Insiders will continue to have substantial control over us after this offering, which could limit
your ability to influence the outcome of key transactions, including a change of control.
Our directors, executive officers and each of our stockholders who own greater than 5% of our
outstanding common stock and their affiliates, in the aggregate, together beneficially own a
majority of the outstanding shares of our common stock. As a result, these stockholders, if acting
together, would be able to influence or control matters requiring approval by our stockholders,
including the election of directors and the approval of mergers, acquisitions or other
extraordinary transactions. They may have interests that differ from yours and may vote in a way
with which you disagree and which may be adverse to your interests. This concentration of ownership
may have the effect of delaying, preventing or deterring a change of control of our company, could
deprive our stockholders of an opportunity to receive a premium for their common stock as part of a
sale of our company and might affect the market price of our common stock.
We have incurred and will continue to incur increased costs and demands upon management as a result
of complying with the laws and regulations affecting a public company, which could adversely affect
our operating results.
As a public company, we have incurred and will continue to incur significant legal, accounting and
other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of
2002, as well as rules implemented by the Securities and Exchange Commission and The NASDAQ Stock
Market, requires certain corporate governance practices for public companies. Our management and
other personnel devote a substantial amount of time to public reporting requirements and corporate
governance. These rules and regulations have significantly increased our legal and financial
compliance costs and made some activities more time-consuming and costly. We also have incurred
additional costs associated with our public company reporting requirements. If these costs do not
continue to be offset by increased revenues and improved financial performance, our operating
results would be adversely affected. These rules and regulations also make it more difficult and
more expensive for us to obtain director and officer liability insurance, and we may be required to
accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage if these costs continue to rise. As a result, it may be more difficult for us to
attract and retain qualified people to serve on our board of directors or as executive officers.
-51-
Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage,
delay or prevent a change of control of our company or changes in our management and, therefore,
depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could depress the trading
price of our common stock by acting to discourage, delay or prevent a change of control of our
company or changes in our management that the stockholders of our company may deem advantageous.
These provisions:
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establish a classified board of directors so that not all members of our board of
directors are elected at one time; |
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authorize blank check preferred stock that our board of directors could issue to
increase the number of outstanding shares to discourage a takeover attempt; |
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prohibit stockholder action by written consent, which means that all stockholder
actions must be taken at a meeting of our stockholders; |
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prohibit stockholders from calling a special meeting of our stockholders; |
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provide that the board of directors is expressly authorized to make, alter or repeal
our bylaws; and |
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establish advance notice requirements for nominations for elections to our board of
directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings. |
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which
prohibits a Delaware corporation from engaging in any of a broad range of business combinations
with any interested stockholder for a period of three years following the date on which the
stockholder became an interested stockholder and which may discourage, delay or prevent a change
of control of our company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities during the Three Months Ended September 30, 2007
On July 30, 2007, we sold 33,073 shares of our common stock to the holders of four of our
warrants pursuant to cashless exercises of such warrants.
On September 11, 2007, we sold 15,130 shares of our common stock to the holder of two of our
warrants pursuant to cashless exercises of such warrants.
None of the foregoing transactions involved any underwriters, underwriting discounts or
commissions, or any public offering. We believe the offers, sales and issuances of the securities
described above were exempt from registration under the Securities Act by virtue of Section 4(2) of
the Securities Act because the issuance of securities to the recipients did not involve a public.
Appropriate legends have been affixed to the securities issued in these transactions. We believe
that each of the recipients of securities in these transactions had adequate access, through
business or other relationships, to information about us.
(b) Use of Proceeds from Sale of Registered Equity Securities
On June 26, 2007, our Registration Statements on Form S-1, as amended (Reg. Nos. 333-131740
and 333-144071) were declared effective in connection with the initial public offering of our
common stock, pursuant to which we registered an aggregate of 6,095,000 shares of our common stock,
of which we sold 5,000,000 shares and certain selling stockholders sold 1,095,000 shares, including
the underwriters over-allotment, at a price to the public of $16.50 per share. The offering closed
on July 2, 2007, and, as a result, we received net proceeds of
approximately $73.1 million (after
underwriters discounts and commissions of approximately $5.8 million and additional
offering-related costs of approximately $3.6 million), and the selling stockholders received net
proceeds of approximately $16.8 million (after underwriters discounts and commissions of
approximately $1.3 million). The managing underwriter of the offering was Credit Suisse Securities
(USA) LLC.
No payments for such expenses were made directly or indirectly to (i) any of our officers or
directors or their associates, (ii) any persons owning 10% or more of any class of our equity
securities, or (iii) any of our affiliates. We did not receive any proceeds from the sale of shares
in the initial public offering by the selling stockholders.
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The principal purposes of the offering were to create a public market for our common stock and
to facilitate our future access to the public equity markets, as well as to obtain additional
capital. Except as discussed below, we
currently have no specific plans for the use of a significant portion of the net proceeds of
the offering. However, we anticipate that we will use the net proceeds from the offering for
general corporate purposes, which may include working capital, capital expenditures, other
corporate expenses and acquisitions of complementary products, technologies or businesses. We
expect to use approximately $4 million of the net proceeds for capital expenditures related to
computer hardware and equipment as well as office improvements. We currently have no agreements or
commitments with respect to acquisitions of complementary products, technologies or businesses. The
timing and amount of our actual expenditures will be based on many factors, including cash flows
from operations and the anticipated growth of our business.
Pending the uses described above, we intend to invest the net proceeds in a variety of
short-term, interest-bearing, investment grade securities. There has been no material change in the
planned use of proceeds from our initial public offering from that described in the final
prospectus filed by us with the SEC pursuant to Rule 424(b) on June 28, 2007.
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
The exhibits listed on the Exhibit Index attached hereto are filed or incorporated by
reference (as stated therein) as part of this Quarterly Report on Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto
duly authorized.
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comScore, Inc.
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/s/ John M. Green
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John M. Green |
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Chief Financial Officer
(Principal Financial Officer) |
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Date:
November 13, 2007
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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3.1(1)
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Amended and Restated Certificate of Incorporation of the Registrant (Exhibit 3.3) |
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3.2(1)
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Amended and Restated Bylaws of the Registrant (Exhibit 3.4) |
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10.1 (2)
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2007 Equity Incentive Plan (Exhibit 4.3) |
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31.1
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Certification of the Chief
Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of the Chief
Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 |
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32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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(1) |
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Incorporated by reference to the exhibits to the Registrants Registration Statement on Form
S-1, as amended, dated June 12, 2007 (No. 333-141740). The number given in parenthesis
indicates the corresponding exhibit number in such Form S-1. |
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(2) |
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Incorporated by reference to the exhibits to the Registrants Registration Statement on Form
S-8, as amended, dated July 2, 2007 (No. 333-144281). The number given in parenthesis
indicates the corresponding exhibit number in such Form S-8. |
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