Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. Investors should consider carefully the risks and uncertainties described below and
all of the other information contained in this report before deciding whether to purchase our common stock. The market price of our common stock could decline due to any of these risks and uncertainties, and investors might lose all or part of their
investments in our common stock.
Risks Related to Our Business and Industry
Our hosted contact center services face intense competition, and our failure to compete successfully would make it difficult for us to add and
retain clients and would impede the growth of our business.
We derive, and expect to continue to derive for the
foreseeable future, a substantial majority of our revenues from sales of our hosted contact center services. The market for hosted contact center services is characterized by aggressive competition, particularly on pricing, that could result in
reduced sales or lower margins, and could prevent our current or future services from achieving or maintaining broad market acceptance. If we are unable to compete effectively in this market, it will be difficult for us to add and retain clients and
our business, financial condition and operating results will be seriously harmed.
The market for hosted contact center
services is fragmented and changing rapidly. Most vendors focus on providing a basic service with limited features and compete principally on the basis of price, but we also compete with a small number of hosted contact center vendors that deliver
services utilizing multiple channels on a software-as-a-service delivery model similar to ours.
Our hosted contact center
voice service also competes with on-premise predictive dialers from both established and smaller vendors, some of which offer forms of hosted solutions. Predictive dialers have been the basic method of automated customer communications for the last
two decades, particularly for telemarketing and collections activity. The vast majority of telephony customer contact today is completed using predictive dialer technology. Many businesses are likely to continue using on-premise predictive dialers
that have been purchased and are still operative, despite the availability of new features and functionality in alternative services.
Some of our competitors have significantly greater financial, technical, marketing, service and other resources than we have, and some competitors have larger installed client bases and longer operating
histories. Competitors with greater financial resources may be able to offer lower prices, additional products or services, or other incentives that we cannot match or offer. These competitors may be in a stronger position to respond quickly to new
technologies and may be able to undertake more extensive marketing campaigns.
We increasingly are focusing on our mobile marketing
offerings, and our business would be adversely affected if the market for mobile marketing services does not develop as we expect or if we fail to offer services that successfully address the needs of a rapidly changing market.
In recent years we increasingly have focused our internal development and sales efforts on mobile marketing services and have invested,
and expect to continue to invest, significant financial and management resources in building and offering our mobile marketing services. In June 2011 we acquired key assets of SmartReply, a provider of text messaging and mobile communications
solutions, and in February 2012 we acquired 2ergo Americas, a provider of mobile business and marketing solutions.
With our
introduction of mobile marketing solutions, we have entered a market that is not fully mature. Market acceptance of these types of services is subject to consumer and industry preferences that are continually changing and developing rapidly. Many
businesses still have limited experience with mobile marketing and may continue to devote larger portions of their marketing budgets to more traditional marketing methods, instead of shifting additional resources to mobile marketing. In addition,
our current and potential clients ultimately may find mobile marketing to be less effective than traditional marketing methods or other technologies for promoting their products and services, and they may even reduce their spending on mobile
marketing from current levels as a result. Market acceptance also is subject to a variety of other factors such as security, reliability, performance, consumer concerns with entrusting a third party to store and manage their data, public concerns
regarding privacy, and the enactment of laws or regulations that restrict our ability to provide such services to clients in the United States or internationally. If the market for mobile marketing deteriorates, or develops more slowly than we
expect, we may not be able to increase our revenues and our business will suffer.
The growth of our business depends in large
part on our ability to deliver compelling mobile marketing solutions to businesses. Our mobile marketing business is at an early stage of development, and we may not achieve or sustain demand for our mobile marketing offerings. The market for mobile
marketing services is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. To succeed, we need to enhance our current services and develop new
services on a timely basis to keep pace with market needs and satisfy the increasingly sophisticated requirements of clients. Consumers may choose not to allow marketing on their mobile devices, and consumer requirements could impact the willingness
of businesses to adopt and use some or all of our mobile marketing services. To the extent we incorrectly predict business or consumer requirements for our mobile marketing services, or if there is a delay in market acceptance of those services, our
business could be harmed.
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Our success in establishing and growing our mobile marketing business will depend in part on
the performance, availability and pricing of our mobile marketing services in comparison to a wide array of competing products and services. Competition in the market of mobile marketing applications and services is intense. New products and
services based on emerging technologies, consumer demands, industry standards or regulatory requirements could render our services obsolete and unmarketable.
Our mobile marketing endeavors involve significant risks and uncertainties, including distraction of management from other operations, insufficient revenues to offset associated expenses and inadequate
return on capital. We cannot assure you that our mobile marketing strategies and offerings will be successful and will not materially adversely affect our reputation, financial condition or operating results. As a result our mobile marketing
services may not achieve and sustain market acceptance sufficient to generate enough revenues to cover our costs and allow our mobile marketing operations to become profitable.
Our quarterly operating results can be difficult to predict and can fluctuate substantially, which could result in volatility in the price of our common stock.
Our quarterly revenues and other operating results have varied in the past and are likely to continue to vary significantly from quarter
to quarter. The substantial majority of our pricing agreements do not require minimum levels of usage or payments, and our revenues therefore fluctuate based on the actual usage of our services each quarter by existing and new clients. Quarterly
fluctuations in our operating results also might be due to numerous other factors, including:
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our ability to attract new clients, including the length of our sales cycles;
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our ability to sell new solutions and increased usage of existing solutions to existing clients;
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technical difficulties or interruptions in our cloud-based services;
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changes in privacy protection and other governmental regulations applicable to the communications industry;
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changes in our pricing policies or the pricing policies of our competitors;
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changes in the rates we incur for services provided by telecommunication or data carriers or by text or email aggregators;
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the financial condition and business success of our clients;
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purchasing and budgeting cycles of our clients;
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acquisitions of businesses and products by us or our competitors;
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competition, including entry into the market by new competitors or new offerings by existing competitors;
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our ability to hire, train and retain sufficient sales, client management and other personnel;
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restructuring expenses, including severance and other costs attributable to terminations of employment;
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timing of development, introduction and market acceptance of new communication services or service enhancements by us or our competitors;
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concentration of marketing expenses for activities such as trade shows and advertising campaigns;
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expenses related to any new or expanded data centers;
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expenses related to merger and acquisition activities; and
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general economic and financial market conditions.
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Many of these factors are beyond our control, and the occurrence of one or more of them could cause our operating results to vary widely. Because of quarterly fluctuations, we believe that
quarter-to-quarter comparisons of our operating results may not be meaningful.
Recently, our quarterly revenues have been
affected by seasonal factors as the result of the level of revenues we have derived from companies in the retail industry, following our acquisition of SmartReply and our increasing focus on selling to retail companies. These factors have caused our
revenues in the second half of the year to increase from the level of revenues in the first half of the year. We believe these factors reflect a higher level of retail marketing activities attributable to the holiday season in the second half of the
year.
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We may fail to forecast accurately the behavior of existing and potential clients or the
demand for our services. Our expense levels are based, in significant part, on our expectations as to future revenues and are largely fixed in the short term. As a result, we could be unable to adjust spending in a timely manner to compensate for
any unexpected shortfall in revenues.
Variability in our periodic operating results could lead to volatility in our stock
price as equity research analysts and investors respond to quarterly fluctuations. Moreover, as a result of any of the foregoing or other factors, our operating results might not meet our announced guidance or expectations of investors and analysts,
in which case the price of our common stock could decrease significantly.
We could be subject to substantial damages and expenses if
our clients violate U.S. Telephone Consumer Protection Act restrictions as the result of the use of mobile termination text messages
Class action litigation has been initiated against a number of banks and retailers, including some of our clients, alleging that mobile termination text messages violate the U.S. Telephone
Consumer Protection Act or TCPA, which seeks to protect the privacy interests of residential telephone subscribers.
In 2011
and 2012, several class action litigation proceedings were commenced against businesses with respect to mobile termination text messages confirming receipt of opt-out text requests. When a business receives a text message indicating that
the sender wishes to opt out of further text communications from the business, a mobile termination text message may be transmitted automatically in order to confirm that the business received the opt-out message and will not send any
additional text messages. In January 2012, for example, we agreed to indemnify GameStop Corp. and GameStop Inc. in connection with a now-concluded class action litigation entitled
Karayan v. GameStop Corp. and GameStop Inc.
that was initiated
against the GameStop entities based in part on opt-out confirmation text messages. In November 2012 the FCC issued a Declaratory Ruling indicating that the sending of a one-time opt-out confirmation text message is not a violation of the TCPA
subject to specified exceptions. It is unclear what effect this ruling will have on claims under the TCPA in relation to opt-out confirmation text messages.
In the future, new claims under the TCPA may be asserted against businesses, including some of our clients, as the result of mobile termination messages. The nature and materiality of those types of
claims cannot be foreseen at this time. If we are required to indemnify a client under such a claim, we could incur material costs and expenses that would have a material adverse effect on our business, financial condition and operating results. If
we were obligated to indemnify clients with respect to multiple class actions of this type, the costs of defending those actions could, by themselves and without regard to the ultimate outcomes of the actions, have a material adverse effect on our
business, financial condition and operating results. Moreover, the possibility of such future claims could discourage or dissuade existing or potential clients from taking full advantage of our offerings, which would have an adverse effect on our
revenues and operating results.
Our business will be harmed if we fail to develop new features that keep pace with technological
developments and emerging consumer trends.
Businesses can use a variety of communication channels to reach their
customers. Emerging consumer trends have forced a greater focus on alternative channels, customer preferences and communications via mobile devices and a failure to address these trends would be a threat to the adoption of our services. Our
business, financial condition and operating results will be adversely affected if we are unable to complete and introduce, in a timely manner, new features for our existing services that keep pace with technological developments. In particular, we
must continue to update our services to support consumers increasing use of mobile applications and devices.
Defects in our
platforms, disruptions in our services or errors in execution could diminish demand for our services and subject us to substantial liability.
Our multi-channel platforms are complex and incorporate a variety of hardware and proprietary and licensed software. From time to time we have found and corrected defects in a platform. Cloud-based
services such as ours frequently experience issues from undetected defects when first introduced or when new versions or enhancements are released. Defects in either of our platforms could result in service disruptions for one or more clients. For
example, in October 2008 we experienced a partial outage of the SoundBite Engage platform, which precluded some clients from executing their campaigns in their desired timeframes. Our clients might use our services in unanticipated ways that cause a
service disruption for other clients attempting to access their contact list information and other data stored on a platform. In addition, a client may encounter a service disruption or slowdown due to high usage levels of our services.
Clients engage our client management organization to assist them in creating and managing a campaign. As part of this process, we
typically construct and test a script, map the clients input file into our platforms, and map our output files to a client-specific format. In order for a campaign to be executed successfully, our client management staff must correctly design,
implement, test and deploy these work products. The performance of these tasks can require significant skill and effort, and from time to time has resulted in errors that adversely affected a clients campaign.
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Because clients use our services for critical business processes, any defect in one of our
platforms, any disruption in our services or any error in execution could cause existing or potential clients not to use our services, could harm our reputation, and could subject us to litigation and significant liability for damage to our
clients businesses.
The insurers under our existing liability insurance policy could deny coverage of a future claim
that results from an error or defect in our platforms or a resulting disruption in our services, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you
that our insurance premiums will not increase as a result of recent litigation or that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more
large claims that exceed our insurance coverage, or the occurrence of changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect
on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our managements attention will be diverted from our operations.
Interruptions, delays in service or errors in execution from our key vendors would impair the delivery of our services and could substantially harm
our business and operating results.
In delivering our cloud-based services, we rely upon a combination of hosting
providers, telecommunication and data carriers, and text and email aggregators. We serve our clients from five hosting facilities that are owned and operated by third parties. Three of the lease agreements for these facilities effectively renew for
one-year periods, subject to three months advance notice of termination, and one renews monthly, subject to thirty days advance notice of termination. The fifth lease agreement terminates in 2014. If one of these lease agreements
terminates and we are unable to renew the agreement on commercially reasonable terms, we may need to incur significant expense to relocate the data center or to agree to the terms demanded by the hosting provider, either of which could harm our
business, financial position and operating results.
Our clients campaigns are handled through a mix of
telecommunication and data carriers as well as text and email aggregators. We rely on these service providers to handle millions of customer contacts each day. From time to time these service providers may fail to handle contacts correctly, which
could cause existing or potential clients not to use our services, could harm our reputation, and could subject us to litigation and significant liability for damage to our clients businesses for which we are not fully indemnified or insured.
While we have entered into contracts with multiple telecommunication carriers and text aggregators, we currently do not have fully redundant data, text or email services. Our contracts with carriers and aggregators generally can be terminated by
either party at the end of the contract term upon written notice delivered by the party a specified number of days before the end of the term. In addition, we generally can terminate a contract at any time upon written notice delivered a specified
number of days in advance, subject to the payment of specified termination charges. If a contract is terminated, we might be unable to obtain pricing on similar terms from another provider, which would affect our gross margins and other operating
results.
Our hosting facilities and the infrastructures of our service providers are vulnerable to damage or interruption
from floods, fires and similar natural events, as well as acts of terrorism, break-ins, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of such a natural disaster or misconduct, a loss of power, a decision by a hosting
provider to close a facility without adequate notice or other unanticipated problems could result in lengthy interruptions in our provision of our services. Any interruption or delay in providing our services, even if for a limited time, could have
an adverse effect on our business, financial condition and operating results.
Actual or perceived breaches of our security measures,
including cybersecurity incidents, could diminish demand for our services and subject us to substantial liability.
Our services involve the storage and transmission of clients proprietary information. Cloud-based services such as ours are
particularly subject to security breaches by third parties, including attacks on information technology and infrastructure by hackers, viruses, and other disruptions. Breaches of our security measures also might result from employee error or
malfeasance or other causes, including as a result of adding new communications services and capabilities to our platforms. In the event of a security breach, a third party could obtain unauthorized access to our clients contact list
information and other data. Failure to prevent, detect and recover from security breaches also could result in loss of revenues, disruptions in our business, misuse of our assets, loss of trade secrets and confidential information, incurrence of
legal claims or proceedings, errors in reporting, inefficiencies in processing, negative media attention, loss of sales, and interference with regulatory compliance.
We rely on information technology and other systems to maintain, use and transmit clients proprietary information. Techniques used to obtain unauthorized access or to sabotage systems change
frequently, and they typically are not recognized until after they have been launched against a target. As a result, we could be unable to anticipate, and implement adequate preventative measures against, these techniques.
Although management does not believe that our company has experienced any losses to date related to security breaches, including
cybersecurity incidents, we cannot assure you that we will not experience a material loss in the future. Because of the critical nature of data security, any actual or perceived breach of our security measures could subject us to litigation and
significant liability for damage to our clients businesses, could cause existing or potential clients not to use our services, and could harm our reputation. Moreover, as security threats continue to evolve, particularly around cybersecurity,
we may be required to expend significant resources to enhance its control environment, processes, practices and other protective measures.
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The insurers under our existing liability insurance policy could deny coverage of a future
claim that results from claims related to security breaches, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our current liability insurance
coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceed our insurance coverage, or the occurrence of changes in our liability insurance policy, including
an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are
likely to incur substantial costs and our managements attention will be diverted from our operations.
Our acquisitions to date
and any future acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value, divert management attention, and subject us to third-party claims or other unexpected costs.
In June 2011 we acquired key assets of SmartReply, a provider of text messaging and mobile communications solutions, and in February 2012
we acquired 2ergo Americas, a provider of mobile business and marketing solutions. We are completing the migration of former clients of SmartReply to our platforms.
We are continuing to integrate the operations, technology and personnel of 2ergo Americas. This process has been more complex than in our previous acquisitions due to the need to integrate elements of the
2ergo Americas software platform with our platforms and due to the complexities involved in addressing certain technologies previously shared by 2ergo Americas and its parent. We acquired 2ergo Americas in order to broaden our client base and gain
technology and personnel, and we will be unable to recognize the anticipated benefits of the acquisition if we are unable to integrate the acquired technology effectively in a timely manner or if we fail to maintain and incentivize the former 2ergo
Americas employees in a manner that enables us to maintain existing clients and add additional mobile marketing clients. In April and May 2012, three related class action litigations, which have now been consolidated, were filed against numerous
defendants, including us in our alleged capacity as successor-in-interest to 2ergo Americas, alleging violations of antitrust laws that purportedly occurred before we acquired 2ergo Americas. We may incur damages and other expenses as a result of
these litigations, or as the result of other actions of 2ergo Americas occurring prior to the acquisition, that could have a material adverse effect on our business, financial condition and operating results. In addition, any such matters could
divert managements attention from our operations.
If we encounter unforeseen technical or other challenges in these
integration and migration processes, our business and results of operations could be harmed. In particular, challenges or difficulties in migrating or expanding the legacy 2ergo Americas client base may distract our managements attention
from focusing on our other business operations and may result in our recognizing a lower level of revenues than we expected when we entered into the transactions.
Our business strategy contemplates that we will seek to identify and pursue additional acquisitions of businesses, technologies and products that will complement our existing operations. We cannot assure
you that any acquisition we make in the future will provide us with the benefits we anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including:
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difficulties in integrating the operations and personnel of the acquired companies;
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maintenance of acceptable standards, controls, procedures and policies;
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potential disruption of ongoing business and distraction of management;
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impairment of relationships with employees and clients as a result of any integration of new management and other personnel;
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inability to maintain relationships with suppliers and clients of the acquired business;
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difficulties in incorporating acquired technology and rights into our services and platforms;
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unexpected expenses resulting from the acquisition;
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potential unknown liabilities associated with acquired businesses; and
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unanticipated expenses related to acquired technology and its integration into our existing technology.
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Acquisitions could result in the incurrence of debt, restructuring charges and large one-time write-offs. Acquisitions could also result
in goodwill and other intangible assets that are subject to impairment tests, which might result in future impairment charges. Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders would
be diluted and earnings per share could decrease.
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From time to time, we might enter into negotiations for acquisitions that are not ultimately
consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If we are unable to evaluate and execute acquisitions properly, we could fail to achieve our anticipated level of growth and our
business and operating results could be adversely affected.
Our product development efforts could be constrained by the intellectual
property of others, and we could be subject to claims of intellectual property infringement, which could be costly and time-consuming.
Our success depends in part upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial
expenditures or adverse consequences. The customer communications and telecommunications industries and in particular the rapidly developing mobile industry are characterized by the existence of a large number of patents, trademarks
and copyrights, and by frequent litigation based upon allegations of infringement or other violations of intellectual property rights. In the past we have been subject to litigation, now concluded, with a third party that alleged that our services
violated the third partys intellectual property rights. As we seek to extend and expand our services, we could be constrained by the intellectual property rights of others.
We might not prevail in any future intellectual property infringement litigation given the complex technical issues and inherent
uncertainties in litigation. Any claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause product development delays, or require us to enter into royalty or licensing
agreements. If our services violate any third-party proprietary rights, we could be required to re-engineer our platforms or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to
re-engineer our services, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and
operating results. Further, our platforms incorporate open source software components that are licensed to us under various public domain licenses. While we believe we have complied with our obligations under the various applicable licenses for open
source software that we use, there is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses and therefore the potential impact of such terms on our business is somewhat unknown.
The expansion of our business into international markets exposes us to additional business risks, and failure to manage those risks could adversely
affect our business and operating results.
Historically we targeted substantially all of our sales and marketing
efforts principally to businesses located in the United States. In recent years, however, we have focused on increasing resources on businesses located outside the United States, particularly in the United Kingdom. The continued expansion of our
international operations will require substantial financial investment and significant management efforts and will subject us to a number of risks and potential costs, including:
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difficulty in establishing, staffing and managing sales and other operations in countries outside of the United States;
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compliance with multiple, conflicting and changing laws and regulations, including employment and tax laws and regulations;
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uncollectability of receivables or longer payment cycles in some countries;
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currency exchange rate fluctuations;
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limited protection of intellectual property in some countries outside of the United States;
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challenges encountered under local business practices, which vary by country and often favor local competitors;
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challenges caused by distance, language and cultural differences; and
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difficulty in establishing and maintaining reseller relationships.
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Our failure to manage the risks associated with our international operations could limit the growth of our business and adversely affect
our operating results.
Our clients typically are not obligated to pay any minimum amount for our services on an on-going basis, and if
those clients discontinue use of our services or do not use our services on a regular basis, our revenues would decline.
The substantial majority of the pricing agreements we enter into with our clients do not require minimum levels of usage or payments and are terminable at will by our clients. The periodic usage of our
services by an existing client could decline or fluctuate as a result of a number of factors, including the clients level of satisfaction with our services, the clients ability to satisfy its customer contact processes internally, and
the availability and pricing of competing products and services. If our services fail to generate consistent business from existing clients, our business, financial condition and operating results will be adversely affected.
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We derive a significant portion of our revenues from the sale of our services for use in the
collections process, and any event that adversely affects the accounts receivable management industry or in-house accounts receivable management departments would cause our revenues to decline.
We sell our hosted customer contact services for use in the collections process by accounts receivable management agencies and by large
in-house accounts receivable management departments. Revenues from these businesses represented 60% of our revenues in the first three months of 2013, 55% of our revenues in 2012, and 70% of our revenues in 2011. We expect that revenues from
accounts receivable management businesses will continue to account for a substantial part of our revenues for the foreseeable future.
Accounts receivable management businesses are particularly subject to changes in the overall economy. In a sustained economic downturn such as the recession experienced globally since 2009, accounts
receivable management agencies can be affected adversely by declines in liquidation rates as a result of higher debt and lower disposable income. A prolonged economic downturn will impact these agencies as fewer loans are granted due to the
imposition by lenders of conditions on the extension of credit that are not acceptable to potential borrowers. Accounts receivable management businesses also can be affected adversely by a sustained economic upturn, which may result in lower levels
of consumer debt default rates. In addition, these businesses may be affected adversely by tightening of credit granting practices as well as technological advances and regulatory changes that affect the collection of outstanding indebtedness. Any
such changes, conditions or events that adversely affect these businesses could cause us to lose some or all of the recurring business of our clients in the accounts receivable management industry, which in turn could have a material adverse effect
on our business, financial condition and operating results.
Moreover, two clients accounted for a total of 16% of our
revenues in the first three months of 2013, 17% of our revenues in 2012, and 23% of our revenues in 2011. One of these clients is an accounts receivable management agency and the other is a large in-house accounts receivable management department of
a telecommunications business. In addition to the risks associated with accounts receivable management businesses in general, our business, financial condition and operating results would be negatively affected if either of these clients were to
significantly decrease the extent to which it uses our hosted customer contact services.
Mergers or other strategic transactions
involving our competitors could weaken our competitive position, which could harm our operating results.
Our industry
is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or will be acquired, particularly in the market for mobile marketing solutions.
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In August 2011 Augme Technologies, a mobile marketing service, acquired substantially all of the assets of Hipcricket, a mobile marketing and
advertising company.
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In October 2011 Velti, a mobile marketing and advertising technology provider, acquired Air2Web, a provider of mobile customer relationship management
solutions.
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In December 2011 Lenco Mobile, a provider of advertising and technical platforms primarily for mobile and online marketing sectors, acquired iLoop
Mobile, a mobile marketing service organization.
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In September 2012 FICO a provider of decision management solutions, acquired Adeptra, a provider of cloud-based customer engagement and risk
intervention solutions.
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In September 2012 Noble Systems, a provider of unified contact center technology solutions, acquired assets of ALI Solutions (formerly Austin
Logistics), a provider of contact center decisioning and analytics applications.
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In addition, some of our
competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation, acquisition, alliance or cooperative
relationship could lead to pricing pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which could have a material adverse effect on our business,
operating results and financial condition.
Failure to maintain our direct sales force will impede our growth.
We are highly dependent on our direct sales force to obtain new clients and to generate repeat business from our existing client base. It
is therefore critical that our direct sales force maintain regular contact with our clients, both to gauge client satisfaction with our services as well as to highlight the value that use of our services adds to their enterprises. There is
significant competition for direct sales personnel. Our ability to achieve 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. New hires
require significant training and typically take more than a year before they achieve full productivity. Our recent and planned hires might not achieve full productivity as quickly as intended, or at all. If we fail to keep, hire and successfully
train sufficient numbers of direct sales personnel, we will be unable to increase our revenues and the growth of our business will be impeded.
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The loss of, or a deterioration in our relationship with, indirect sales partners, or our inability to
establish new indirect sales channels, could harm our sales, gross margins and other operating results.
We partner
with resellers, solution providers, original equipment manufacturers or OEMs, and international distributors in order to broaden our distribution reach. Establishing new indirect sales channels is an important part of our strategy to drive revenue
growth. Our operating results would be adversely affected if our contracts with these channel partners were terminated, if our relationships with channel partners were to deteriorate, if any of our competitors were to enter into strategic
relationships with or acquire a significant channel partner, or if the financial condition of our channel partners were to weaken. In addition, we may expend time, money and other resources on developing and maintaining channel relationships that
are ultimately unsuccessful. There can be no assurance that we will be successful in maintaining, expanding or developing relationships with channel partners. If we are not successful, we may lose sales opportunities, customers and market share. In
addition, there could be channel conflict among our varied sales channels, which could harm our business, financial condition and results of operations.
We cannot be certain we will be able to continue to attract additional indirect channel partners or retain our current channel partners. In addition, we cannot be certain our competitors will not attempt
to recruit certain of our current or future channel partners. Such competitive actions may have an adverse effect on our ability to attract and retain channel partners, which, in turn, may have a material adverse effect on our business, financial
condition and operating results.
Moreover, the gross margin on our products and services may differ depending upon the
channel through which they are sold and we may have greater difficulty in forecasting the mix of our products and the timing of orders from our customers for sales derived from our indirect sales channels. Changes in the balance of our distribution
model in future periods therefore may have an adverse effect on our gross margins and profitability.
Because competition for employees
in our industry is intense, we might not be able to attract and retain the highly skilled employees we need to execute our business plan.
To continue to execute our business plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for software engineers and senior sales executives.
We might not be successful in attracting and retaining qualified personnel. We have experienced from time to time in the past, and expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in technology-based industries, job candidates often
consider the value of the stock options they are to receive in connection with their employment. Volatility in the price of our common stock could therefore, adversely affect our ability to attract or retain key employees. Furthermore, the
requirement to expense stock options could discourage us from granting the size or type of stock options awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current
personnel, our business plan and future growth prospects could be severely harmed.
If we are unable to protect our intellectual
property rights, we would be unable to protect our technology and our brand.
If we fail to protect our intellectual
property rights adequately, our competitors could gain access to our technology and our business could be harmed. We rely on trade secret, copyright and trademark laws, and confidentiality and assignment of invention agreements with employees and
third parties, all of which offer only limited protection. The steps we have taken to protect our intellectual property might not prevent misappropriation of our proprietary rights. We have seven issued patents and ten patent applications pending in
the United States. Our issued patents and any patents issued in the future may not provide us with any competitive advantages or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity, enforceability
and scope of protection of intellectual property rights in other countries are uncertain and might afford little or no effective protection of our proprietary technology. Consequently, we could be unable to prevent our intellectual property rights
from being exploited abroad, which could diminish international sales or require costly efforts to protect our technology. Policing the unauthorized use of intellectual property rights is expensive, difficult and, in some cases, impossible.
Litigation could be necessary to enforce or defend our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and
diversion of management resources, either of which could harm our business. Accordingly, despite our efforts, we might not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
We are subject to risks associated with outsourcing services to third parties, and failure to manage those risks could adversely affect our
business and operating results.
We contract with several third-party vendors that provide services to us or to whom
we delegate selected functions. These third-party vendors supplement our internal engineering efforts. Our arrangements with these third-party vendors may make our operations vulnerable if the third parties fail to satisfy their obligations to us:
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The failure of a third-party vendor to provide high-quality services that conform to required specifications or contractual arrangements could impair
our ability to enhance our solutions or to develop new solutions, could create exposure for non-compliance with our contractual commitments to our clients, or could otherwise adversely affect our business and operating results. In particular, a
client may impose specific requirements on us, such as an obligation to provide our solutions using only personnel in the United States, with which it may be difficult or impossible for a third-party vendor to comply or for which we may be unable to
monitor compliance.
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If a third-party vendor fails to maintain and protect the security and confidentiality of data to which it has access, we could be exposed to lawsuits
or damage claims that, if upheld, could materially and adversely affect our profitability or we could be subject to substantial regulatory fines or other penalties.
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If a third-party vendor fails to comply with other applicable regulatory requirements, we may be held liable for the vendors failures or
violations. We cannot assure you that our third-party vendors are, or will be, in full compliance with all applicable laws and regulations at all times or that our third-party vendors will be able to comply with any future laws and regulations.
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Our third-party vendor arrangements could be adversely impacted by changes in a vendors operations or
financial condition or other matters outside of our control. There is no assurance that our third-party vendors will continue to provide services to us or that they will renew or not terminate their arrangements with us. Any interruption in their
services could adversely affect our operations unless and until we can identify a new vendor or replace an existing vendors services with internal resources at additional cost.
Our platforms rely on technology licensed from third parties, and our inability to maintain licenses of this technology on similar terms or errors in the licensed technology could result in
increased costs or impair the implementation or functionality of our cloud-based services, which would adversely affect our business and operating results.
Our multi-tenant customer communication platforms rely on technology licensed from third-party providers. For example, we use the Oracle WebLogic application server, Nuance Communications text-to-speech
and automated speech recognition software, and the Oracle database. We anticipate that we will need to continue to license technology from third parties in the future. There might not always be commercially reasonable software alternatives to the
third-party software that we currently license. Any such software alternatives could be more difficult or costly to replace than the third-party software we currently license, and integration of that software into our platforms could require
significant work and substantial time and resources. Any undetected errors in the software we license could prevent the implementation of our cloud-based services, impair the functionality of our services, delay or prevent the release of new
features or offerings, and injure our reputation. Our use of additional or alternative third-party software would require us to enter into license agreements with third parties, which might not be available on commercially reasonable terms or at
all.
Some of our services and technologies may use open source software, which may restrict how we use or distribute our
services or require that we release the source code of certain services subject to those licenses.
Our services
contain software modules licensed to us by third-party authors under open source licenses. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source
licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain provisions that require attribution or that we make available source
code for modifications or derivative works we create based upon the type of open source software used. If we combine our proprietary software with open source software in a certain manner, we could, under certain open
source licenses, be required to release the source code of our proprietary software to the public at no cost. This would allow our competitors to create similar products with lower development effort and time and ultimately could result in an
adverse impact upon our intellectual property rights and ability to commercialize our products.
Although we monitor our use
of open source software to avoid subjecting our products to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed
in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, we cannot assure you that our processes for controlling our use of open source software in our products will be
effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products on terms that are not economically feasible, to re-engineer
our products, to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business,
operating results and financial condition.
Industry consolidation could reduce the number of our clients and adversely affect our
business.
Some of our significant clients from time to time may merge, consolidate or enter into alliances with each
other. The surviving entity or resulting alliance may subsequently decide to use a different service provider or to manage customer contact campaigns internally. Alternatively, the surviving entity or resulting alliance may elect to continue using
our services, but its strengthened financial position or enhanced leverage may lead to pricing pressure. Either of these results could have a material adverse effect on our business, operating results and financial condition. We may not be able to
offset the effects of any such price reductions, and may not be able to expand our client base to offset any revenue declines resulting from such a merger, consolidation or alliance.
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Our ability to use net operating loss carryforwards in the United States may be limited.
As of December 31, 2012, we had net operating loss carryforwards of $29.8 million for U.S. federal tax purposes
and an additional $5.3 million for state tax purposes. These carryforwards expire between 2014 and 2032. To the extent available, we intend to use these net operating loss carryforwards to reduce the corporate income tax liability associated with
our operations. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in
stock ownership. We experienced ownership changes for these purposes in 2007, which resulted in an annual limitation amount of approximately $8.0 million on the use of net operating loss carryforwards generated from November 29, 2001 through
November 8, 2007. To the extent our use of net operating loss carryforwards is limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in
lower profits.
If we are unable to raise capital when needed in the future, we may be unable to execute our growth strategy, and if we
succeed in raising capital, we may dilute investors percentage ownership of our common stock or may subject our company to interest payment obligations and restrictive covenants.
We may need to raise additional funds through public or private debt or equity financings in order to:
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fund ongoing operations;
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take advantage of opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or
businesses;
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develop new services and products; and
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respond to competitive pressures.
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Any additional capital raised through the sale of equity may dilute investors percentage ownership of our common stock. Capital raised through debt financing would require us to make periodic
interest payments and may impose potentially restrictive covenants on the conduct of our business. Furthermore, additional financings may not be available on terms favorable to us, or at all. A failure to obtain additional funding could prevent us
from making expenditures that may be required to grow or maintain our operations.
Risks Related to Regulation of Use of Our
Services
We derive a significant portion of our revenues from the sale of our services for use in the collections process, and our
business and operating results could be substantially harmed if new U.S. federal and state laws or regulatory interpretations in one or more jurisdictions either make our services unavailable or less attractive for use in the collections process or
expose us to regulation as a debt collector.
Revenues from clients in the accounts receivable management industry and
large in-house, or first-party, accounts receivable management departments represented 60% of our revenues in the first three months of 2013, 55% of our revenues in 2012, and 70% of our revenues in 2011. These clients use of our services is
affected by an array of complex federal and state laws and regulations. The U.S. Fair Debt Collection Practices Act, or FDCPA, limits debt collection communications by clients in the accounts receivable management industry, including third parties
retained by creditors. For example, the FDCPA prohibits abusive, deceptive and other improper debt collection practices, restricts the timing and content of communications regarding a debt or a debtors location, and allows consumers to opt out
of receiving debt collection communications. In general, the FDCPA also prohibits the use of debt collection communications to cause debtors to incur more debt. Many states impose additional requirements on debt collection communications, including
limits on the frequency of debt collection calls, and some of those requirements may be more stringent than the comparable federal requirements. Moreover, debt collection communications are subject to new regulations, as well as changing regulatory
interpretations that may be inconsistent among different jurisdictions. For example, in February 2012 the FCC modified its rules to require opt-in for all prerecorded calls made to mobile phones, which limits our clients ability to use our
services to call a mobile phone for the purposes of collections without having prior consent from a customer. Our business, financial position and operating results could be substantially harmed by the adoption or interpretation of U.S. federal
or state laws or regulations that make our services either unavailable or less attractive for debt collection communications by existing and potential clients.
We provide our services for use by creditors and debt collectors, but we do not believe that we are a debt collector for purposes of these U.S. federal or state regulations. An allegation by one or more
jurisdictions that we are a debt collector for purposes of their regulations could cause existing or potential clients not to use our services, harm our reputation, subject us to administrative proceedings, or result in our incurring significant
legal fees and other costs. If it were to be determined that we are a debt collector for purposes of the regulations of one or more jurisdictions, we could be exposed to government enforcement actions and regulatory penalties and would be subject to
additional rules, including licensing and bonding requirements. The costs of complying with these rules could be substantial, and we might be unable to continue to offer our services for debt collection communications in those jurisdictions, which
would have a material adverse effect on our business, financial condition and operating results. In addition, if clients use our services in violation of limits on the content, timing and frequency of their debt collection communications, we could
be subject to claims by consumers that result in costly legal proceedings and that lead to civil damages, fines or other penalties.
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We could be subject to significant penalties or damages if our clients violate U.S. federal or state
restrictions on the use of artificial or prerecorded messages to contact wireless telephone numbers, and our business and operating results could be substantially harmed if those restrictions make our service unavailable or less attractive.
Under the TCPA, it is unlawful to use an automatic telephone dialing system or an artificial or prerecorded message
to contact any cellular or other wireless telephone number, unless the recipient previously has consented to receiving this type of communication. In February 2012 the FCC modified its rules and will require, effective as of October 16, 2013, a
written opt-in for all autodialed or prerecorded telemarketing calls made to mobile phones, which will limit our clients ability to use our service to call a mobile phone for telemarketing purposes without having prior written consent from a
customer. Many states have enacted restrictions on using automatic dialing systems and artificial and prerecorded messages to contact wireless telephone numbers, and some of those state requirements may be more stringent than the comparable
federal requirements.
Our services provide our clients with the capability to transmit artificial and prerecorded messages.
Although our services are designed to enable a client to screen a contact list to remove wireless telephone numbers, a client may determine that prerecorded communication to certain wireless telephone numbers are permitted because the recipients
previously have consented to receiving such communication. We cannot ensure that, in using our services for a campaign, a client removes from its contact list the names of all persons who are associated with wireless telephone numbers and who have
not consented to receiving artificial or prerecorded communication. For example, in January 2012 a now-concluded class action litigation was filed against Bank of America and us alleging that we and Bank of America sent text messages to the
plaintiff without the plaintiffs prior express consent, in violation of the TCPA.
In May 2008, a federal district court
in California held that the Telemarketing and Consumer Fraud and Abuse Prevention Act prohibits any autodialed or prerecorded telephone call to a consumers cell phone unless the consumer had specifically consented to such calls. The same
provision of such Act also applies to the sending of commercial text messages to cell phones. The ruling overturned an earlier FCC interpretation that permitted autodialed and prerecorded calls to the cell phone of any consumer who had provided the
cell phone number in connection with requesting a product or service. The ruling applied only in California and was subsequently overturned but, as a result of the initial decision, some existing or potential clients may decide to limit their use of
our service to reach consumers on wireless numbers, which could materially adversely affect our revenues and other operating results.
If clients use our services in a manner that violates any of these governmental regulations, federal or state authorities may seek to subject us to regulatory fines or other penalties, even if the
violation did not result from a failure of our service. If clients use our services to screen for wireless telephone numbers and our screening mechanisms fail, we may be subject to regulatory fines or other penalties as well as contractual claims by
clients for damages, and our reputation may be harmed.
Regulatory restrictions on the use of artificial and prerecorded
messages present particular problems for businesses in the accounts receivable management industry. These third-party accounts receivable management agencies and debt buyers do not have direct relationships with the consumer debtors and therefore
typically do not have the ability to obtain from a debtor the consent required to permit the use of autodialed or prerecorded messages in contacting a debtor at a wireless telephone number. These businesses lack of a direct relationship with
debtors also makes it more difficult for them to evaluate whether a debtor has provided such consent. For example, an accounts receivable management agency frequently must evaluate whether past actions taken by a debtor, such as providing a cellular
telephone number in a loan application, constitute consent sufficient to permit the agency to contact the debtor using autodialed or prerecorded messages. Moreover, a significant period of time elapses between the time at which a loan is made and
the time at which a accounts receivable management agency or debt buyer seeks to contact the debtor for repayment, which further complicates the determination of whether the accounts receivable management agency or debt buyer has the required
consent to use an automatic telephone dialing system or prerecorded messages. The difficulties encountered by these third-party accounts receivable management businesses are becoming increasingly problematic as the percentage of U.S. consumers using
cellular telephones continues to increase. If these third-party accounts receivable management businesses are unable to use an automatic telephone dialing system or prerecorded messages to contact a substantial portion of their debtors, our services
will be less useful to them. If our clients in the accounts receivable management industry significantly decrease their use of our services, our business, financial position and operating results would be substantially harmed.
We could be subject to penalties if we or our clients violate U.S. federal or state telemarketing restrictions due to a failure of our services or
otherwise, which could harm our financial position and operating results.
The use of our services for marketing
communications is affected by extensive federal and state telemarketing regulation. The Telemarketing and Consumer Fraud and Abuse Prevention Act and the TCPA, among other U.S. federal laws, empower both the Federal Trade Commission, or FTC, and the
FCC to regulate interstate telephone sales calling activities. The FTCs Telemarketing Sales Rule and analogous FCC rules require us to, for example, transmit Caller ID information, disclose certain information to call recipients, and retain
certain business records. FTC and FCC rules proscribe misrepresentations, prohibit the abandonment of telemarketing calls and limit the timing of calls to consumers. Both the FTC and FCC also prohibit telemarketing calls to persons who have placed
their numbers on the national Do-Not-Call Registry, except for calls made with an existing business relationship, or EBR,
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or subject to other limited exceptions. If we fail to comply with applicable FTC and FCC telemarketing regulations, we may be subject to substantial regulatory fines or other penalties as well as
contractual claims by clients for damages, and our reputation may be harmed. The FTCs Telemarketing Sales Rule, for example, imposes fines of up to $16,000 per violation. The FCC may also impose forfeitures of up to $16,000 per violation of
its telemarketing rules. If clients use our services in a manner that violates any of these telemarketing regulations, the FTC or FCC may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure
of our services.
In addition, in 2008 the FTC adopted an amendment to the Telemarketing Sales Rule requiring that
express written consent be obtained for all pre-recorded sales calls that are delivered as of September 1, 2009. Thus, a business that attempts to sell goods or services through the use of prerecorded messages will need to take the
extra step to obtain opt-in from consumers before pre-recorded sales calls can be delivered, even with respect to consumers with whom the business has an EBR. We cannot ensure that, in using our services for a campaign, a client will
obtain appropriate opt-in authorization before placing prerecorded telemarketing calls or that the client properly interprets and applies the opt-in requirement. If clients use our services to place unauthorized calls or in a
manner that otherwise violates FTC or FCC restrictions on prerecorded telemarketing calls, U.S. federal or state authorities may seek to subject us to substantial regulatory fines or other penalties, even if the violation did not result from a
failure of our screening mechanisms.
Many states have enacted prohibitions or restrictions on telemarketing calls into their
states, specifically covering the use of automatic dialing system and predictive dialing techniques. Some of those state requirements are more stringent than the comparable federal requirements. If clients use our services in a manner that violates
any of these telemarketing regulations, state authorities may seek to subject us to regulatory fines or other penalties, even if the violation did not result from a failure of our services.
To the extent that our services are used to send text or email messages, our clients will be, and we may be, affected by regulatory
requirements in the United States. Businesses may determine not to use these channels because of prior consent, or opt-in, requirements or other regulatory restrictions, which could harm our future business growth.
Our failure to comply with numerous and overlapping information security and privacy requirements in the United States could subject us to fines
and other penalties as well as claims by our clients for damages, any of which could harm our reputation and business.
Our collection, use and disclosure of personal information are affected by numerous U.S. federal and state privacy, security and data
protection regulations. We are subject to the Gramm-Leach-Bliley Privacy Act when we receive nonpublic personal information from clients that are treated as financial institutions under those rules. These rules restrict disclosures of consumer
information and limit uses of such information to certain purposes that are disclosed to consumers. The related Gramm-Leach-Bliley Safeguards Rule requires our financial institution clients to impose administrative, technical and physical data
security measures in their contracts with us. Compliance with these contractual requirements can be costly, and our failure to satisfy these requirements could lead to regulatory penalties or contractual claims by clients for damages.
In some instances our services require us to receive consumer information that is protected by the Fair Credit Reporting Act, which
defines permissible uses of consumer information furnished to or obtained from consumer reporting agencies. We generally rely on our clients assurances that any such information is requested and used for permissible purposes, but we cannot be
certain that our clients comply with these restrictions. We could incur costs or could be subject to fines or other penalties if the FTC determines that we have mishandled protected information.
Many U.S. jurisdictions, including the majority of states, have data security laws including data security breach notification laws. When
our clients operate in industries that have specialized data privacy and security requirements, they may be subject to additional data protection restrictions. For example, the federal Health Insurance Portability and Accountability Act, or HIPAA,
regulates the maintenance, use and disclosure of personally identifiable health information by certain health care-related entities. States may adopt privacy and security regulations that are more stringent than federal rules, and we may be required
by such regulations to establish comprehensive data security programs that could be costly. If we experience a breach of data security, we could be subject to costly legal proceedings that could lead to civil damages, fines or other penalties. We or
our clients could be required to report such breaches to affected consumers or regulatory authorities, leading to disclosures that could damage our reputation or harm our business, financial position and operating results.
Since 2007 we have been certified in the United States as compliant with the Payment Card Industry, or PCI, Data Security Standard, which
mandates a set of comprehensive requirements for protecting payment account data. Our continuing PCI compliance is essential for many of our customer communication offerings, such as fully-automated payment transactions and payment
authorizations, and is particularly important for financial institutions, credit card issuers and retailers. We must seek and receive certification of PCI compliance on an annual basis. PCI compliance measures are rigorous and subject to
change, and our implementation of new customer communication platform technology and solutions could adversely affect our ability to be re-certified. As a result, we cannot assure you that we will be able to maintain our certification for PCI
compliance. Our loss of PCI certification could make our customer communication solutions less attractive to potential customers, particularly those in the financial and retail industries, which in turn could have an adverse effect on our
revenues and other operating results.
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We may record certain of our calls for quality assurance, training or other purposes. Many
states require both parties to consent to such recording, and may adopt inconsistent standards defining what type of consent is required. Violations of these rules could subject us to fines or other penalties, criminal liability, or claims by
clients for damages, any of which could hurt our reputation or harm our business, financial position and operating results.
The insurers under our existing liability insurance policy could deny coverage of a future claim that results from claims related to
information security and privacy breaches, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our current liability insurance coverage will
continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceed our insurance coverage, or the occurrence of changes in our liability insurance policy, including an increase
in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results. Even if we succeed in litigation with respect to a claim, we are likely to
incur substantial costs and our managements attention will be diverted from our operations.
Government regulation of the mobile
industry is evolving, and unfavorable changes or our failure to comply with regulations could harm our mobile marketing business and operating results.
As the mobile industry continues to evolve, we believe greater governmental regulation, both within and outside the United States, becomes more likely. For example, we believe increased regulation is
likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information and other mobile marketing regulations could affect clients ability to use and share
data, potentially reducing their ability to utilize this information for the purpose of continued improvement of the overall mobile marketing experience. In addition, any regulation of the requirement to treat all content and application provider
services the same over the mobile Internet, sometimes referred to as net neutrality regulation, could reduce our clients ability to make full use of the value of our services. Further, taxation of services provided over the Internet or other
charges imposed by government agencies or by private organizations to access the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the
use of the Internet via a mobile device and in the viability of mobile data service providers, which could harm our business and operating results.
The expansion of our business into international markets requires us to comply with additional debt collection, telemarketing, data privacy or similar regulations, which may make it costly or
difficult to operate in these markets.
Although historically we have targeted substantially all of our sales and
marketing efforts principally to businesses located in the United States, more recently we have begun focusing more resources on businesses located in the United Kingdom. Countries other than the United States have laws and regulations governing
debt collection, telemarketing, data privacy or other communications activities comparable in purpose to the U.S. federal and state laws and regulations described above. Compliance with these requirements may be costly and time consuming, and may
limit our ability to operate successfully in one or more foreign jurisdictions.
Many of the regulations governing our
activities in the European Union result from EU legislation on privacy and data protection. As a result, the principal lawmakers for our purposes are European institutions the European Commission, the European Parliament and the Council of
Ministers. We take into account developments in the European Union as well as developments in the United Kingdom. Because our primary international business is driven from the United Kingdom, our regulatory due diligence to date has been focused on
this member State. In terms of enforcement, the U.K. regulators of primary importance to us are:
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Ofcom, the independent regulator and competition authority for the U.K. communications industry;
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the Information Commissioner, an independent authority whose role is to uphold information rights in the public interest, promoting openness by public
bodies and data privacy for individuals; and
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the Office of Fair Trading, an independent authority that enforces consumer protection and competition laws and reviews proposed mergers.
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The Communications Act of 2003 gives Ofcom the power to issue and enforce notifications when it has
reasonable grounds to believe a person has persistently misused an electronic communications network or service in such a manner, or otherwise engage in conduct that has either the effect, or likely effect, of causing another person unnecessarily to
suffer annoyance, inconvenience or anxiety. The other sector-specific legislation governing our U.K. operations consists of The Privacy and Electronic Communications (EC Directive) (Amendment) Regulations (2003) as amended in 2011 to implement
the new e-privacy EU Directive. These regulations contain marketing rules governing businesses that send marketing and advertising by electronic means such as telephone, fax, email, text message and picture (including video) message and by using an
automated calling system. These regulations also cover related areas such as telephone directories, traffic and location data, and the use of cookies.
It may be impossible for us to comply with the different data protection regulations that affect us in different jurisdictions. For example, the USA PATRIOT Act provides U.S. law enforcement authorities
certain rights to obtain personal information in the control of U.S. persons and entities without notifying the affected individuals. Some foreign laws, including some in the European Union, prohibit such disclosures. Such conflicts could subject us
and clients to costs, liabilities or negative publicity that could impair our ability to expand our operations into some countries and therefore limit our future growth.
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Risks Related to Ownership of Our Common Stock
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common
stock, the price of our common stock could decline.
The trading market for our common stock depends in part on the
research and reports that equity research analysts publish about our company and business. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable
commentary or cease publishing reports about our company and business.
Future sales of our common stock by existing stockholders could
cause our stock price to decline.
If our existing stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock. The market price
of shares of our common stock could drop significantly if our officers, directors or other stockholders decide to sell shares of our common stock into the market.
Our directors, executive officers and their affiliated entities will continue to have substantial control over us and could limit the ability of other stockholders to influence the outcome of key
transactions, including changes of control.
As April 30, 2013, our executive officers and directors and their
affiliated entities, in the aggregate, beneficially owned 47% of our common stock. In particular, affiliates of North Bridge Ventures Partners, including William J. Geary, one of our directors, in the aggregate, beneficially owned 29% of our common
stock. Our executive officers, directors and their affiliated entities, if acting together, are able to control or significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of
mergers or other significant corporate transactions. These stockholders may have interests that differ from those of other investors, and they might vote in a way with which other investors disagree. The concentration of ownership of our common
stock could 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 could negatively
affect the market price of our common stock.
Our corporate documents and Delaware law make a takeover of our company more difficult,
which could prevent certain changes in control and limit the market price of our common stock.
Our charter and
by-laws and Section 203 of the Delaware General Corporation Law contain provisions that could enable our management to resist a takeover of our company. These provisions could discourage, delay, or prevent a change in the control of our company
or a change in our management. They could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors are
willing to pay in the future for shares of our common stock. Some provisions in our charter and by-laws could deter third parties from acquiring us, which could limit the market price of our common stock.
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