Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                    |
| **For the quarterly period  ended March 31, 2010** |
|                                                    |
| **OR**                                                  |
|                                                    |       |                                                                                                    |
| **o**                                                   | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the Transition Period from****               ****to****             **

 

**Commission File Number: ****001-34707**

 

**Convio, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **74-2935609**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**11501 Domain Drive, Suite 200, Austin, Texas 78758**

(Address of Principal Executive Offices)(ZipCode)

 

**Telephone: (512) 652-2600**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by checkmark whether registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes o  No x

 

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

 

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

 

| Large  Accelerated Filer o |   | Accelerated  Filer o         |
|---------------------------------|--------|-----------------------------------|
|                            |   |                              |
| Non-Accelerated  Filer x   |   | Smaller  Reporting Company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

The number of sharesoutstanding of the Registrant’s Common Stock, $0.001 par value, was 17,369,797as of May 14, 2010.

 

 

 

----

Table ofContents

 

**Convio, Inc.**

**Form 10-Qfor the Three Months Ended March 31, 2010**

**Tableof Contents**

 
| ** **                             | ** **                                                                                          | ** **                                                                                                 | **Page**   |
|----------------------------------------|-----------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|------------|
| **PART I. Financial Information** | ** **                                                                                          |
|                                   | Item 1. Unaudited consolidated financial statements                                                 |                                                                                                       |
|                                   |                                                                                                | Consolidated  balance sheets as of March 31, 2010 (unaudited) and December 31,  2009             | 1          |
|                                   |                                                                                                | Consolidated statements of operations for the three  months ended March 31, 2010 and 2009 (unaudited) | 2          |
|                                   |                                                                                                | Consolidated statements of cash flows for the three  months ended March 31, 2010 and 2009 (unaudited) | 3          |
|                                   |                                                                                                | Notes to unaudited consolidated financial statements                                                       | 4          |
|                                   | Item 2. Management’s discussion and analysis of  financial condition and results of operations | 17                                                                                                         |
|                                   | Item 3. Quantitative and qualitative disclosures about  market risk                                 | 27                                                                                                         |
|                                   | Item 4T. Controls and procedures                                                                    | 27                                                                                                         |
|                                   |                                                                                                |                                                                                                       |
| **PART II. Other Information**    | ** **                                                                                          |
|                                   | Item 1. Legal proceedings                                                                           | 28                                                                                                         |
|                                   | Item 1A. Risk factors                                                                               | 28                                                                                                         |
|                                   | Item 2. Unregistered sales of equity securities and  use of proceeds                                | 45                                                                                                         |
|                                   | Item 3. Defaults upon senior securities                                                             | 46                                                                                                         |
|                                   | Item 4.  Removed and reserved                                                                       | 46                                                                                                         |
|                                   | Item 5. Other information                                                                           | 46                                                                                                         |
|                                   | Item  6. Exhibits                                                                                   | 47                                                                                                         |
|                                   |                                                                                                |                                                                                                       |
| **Signatures**                         | 49                                                                                                  |
| ** **                             | ** **                                                                                          | ** **                                                                                                 | ** ** |
|                                   | EX-31.1                                                                                             |                                                                                                       |
|                                   | EX-31.2                                                                                             |                                                                                                       |
|                                   | EX-32.1                                                                                             |                                                                                                       |

 

CautionaryStatement

 

*Exceptfor the historical financial information contained herein, the mattersdiscussed in this report on Form 10-Q (as well as documents incorporatedherein by reference) may be considered “forward-looking” statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. Such forward-lookingstatements include declarations regarding the intent, belief or currentexpectations of Convio, Inc. and its management and may be signified bythe words “expects,” “anticipates,” “target,” “project,” “goals,” “estimates,” “potential,”“predicts,” “may,” “might,” “could,” “intends,” “believes” or similar language.You are cautioned that any such forward-looking statements are not guaranteesof future performance and involve a number of risks and uncertainties. Actualresults could differ materially from those indicated by such forward-lookingstatements.  Factors that could cause or contribute to such differencesinclude those discussed under “Risk Factors” and elsewhere in thisreport.  Convio, Inc. disclaims any intention or obligation to updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.*

 

----

Table of Contents

 

**PART I.  Financial Information**

 

**Item1.  Unaudited Consolidated FinancialStatements**

 

Convio, Inc.Consolidated Balance Sheets

 

*(inthousands, except share and per share amounts)*

 
| ** **                                                                                                                                                                                                                                                  | ** ** | **March 31,********2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                  | ** ** | **(unaudited)**                | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                                                                                                                                      | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                                             |       |                           |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                   |       | $                              | 16,194     |                        | $          | 16,662 |   |
| Accounts receivable, less allowance of $90 and $231  at March 31, 2010 and December 31, 2009, respectively                                                                                                                                        |       | 9,170                          |       | 9,143                       |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                   |       | 2,750                          |       | 1,610                       |       |
| Total current assets                                                                                                                                                                                                                                        |       | 28,114                         |       | 27,415                      |       |
| Property and equipment, net                                                                                                                                                                                                                                 |       | 3,455                          |       | 3,276                       |       |
| Goodwill                                                                                                                                                                                                                                                    |       | 5,527                          |       | 5,527                       |       |
| Intangible assets, net                                                                                                                                                                                                                                      |       | 4,574                          |       | 4,973                       |       |
| Other assets                                                                                                                                                                                                                                                |       | 126                            |       | 153                         |       |
| Total assets                                                                                                                                                                                                                                                |       | $                              | 41,796     |                        | $          | 41,344 |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                                                                                  |       |                           |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                        |       |                           |       |                        |       |
| Accounts payable                                                                                                                                                                                                                                            |       | $                              | 565        |                        | $          | 503 |   |
| Accrued liabilities                                                                                                                                                                                                                                         |       | 3,273                          |       | 2,386                       |       |
| Accrued compensation                                                                                                                                                                                                                                        |       | 1,476                          |       | 2,547                       |       |
| Deferred revenue                                                                                                                                                                                                                                            |       | 16,922                         |       | 17,362                      |       |
| Current portion of capital lease obligations                                                                                                                                                                                                                |       | 31                             |       | 90                          |       |
| Current portion of long-term debt                                                                                                                                                                                                                           |       | 741                            |       | 773                         |       |
| Convertible preferred stock warrant liability                                                                                                                                                                                                               |       | 1,844                          |       | 1,375                       |       |
| Total current liabilities                                                                                                                                                                                                                                   |       | 24,852                         |       | 25,036                      |       |
| Capital lease obligations, net of current portion                                                                                                                                                                                                           |       | 10                             |       | 16                          |       |
| Long-term debt, net of current portion                                                                                                                                                                                                                      |       | 1,170                          |       | 1,332                       |       |
| Total liabilities                                                                                                                                                                                                                                           |       | 26,032                         |       | 26,384                      |       |
| Commitments and Contingencies (note 4)                                                                                                                                                                                                                 |       |                           |       |                        |       |
| Convertible preferred stock (note 6)                                                                                                                                                                                                                        |       | 33,869                         |       | 33,869                      |       |
| Stockholders’ deficit:                                                                                                                                                                                                                                 |       |                           |       |                        |       |
| Series P common stock: $0.001 par value;  19,118,440 shares authorized at March 31, 2010 and December 31,  2009; 5,426,203 and 5,366,076 shares issued and outstanding at March 31,  2010 and December 31, 2009, respectively |       | 5                              |       | 5                           |       |
| Series Q common stock: $0.001 par value;  1,337,211 shares authorized at March 31, 2010 and December 31,  2009; 198,796 shares issued and outstanding at March 31, 2010 and  December 31, 2009                           |       | —                         |       | —                      |       |
| Series R common stock: $0.001 par value;  676,055 shares authorized at March 31, 2010 and December 31,  2009; 676,025 shares issued and outstanding at March 31, 2010 and  December 31, 2009                             |       | 1                              |       | 1                           |       |
| Series S common stock: $0.001 par value;  1,086,233 shares authorized at March 31, 2010 and December 31,  2009; 1,086,209 shares issued and outstanding at March 31, 2010 and  December 31, 2009                         |       | 1                              |       | 1                           |       |
| Additional paid-in capital                                                                                                                                                                                                                                  |       | 37,962                         |       | 37,340                      |       |
| Accumulated deficit                                                                                                                                                                                                                                         |       | (56,074                        | )          | (56,256                     | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                            |       | (18,105                        | )          | (18,909                     | )          |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                            |       | $                              | 41,796     |                        | $          | 41,344 |   |

 

*See accompanying notes.*

 

1

----

Tableof Contents

 

Convio, Inc.

Consolidated Statements of Operations

(Unaudited)

 

*(inthousands, except per share amounts)*

 
| ** **                                                                                                 | ** ** | **Three  Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2010**                                | ** ** | **2009** | ** ** |
| Revenue:                                                                                                   |       |                                    |       |   |   |
| Subscription and services                                                                                  |       | $                                       | 14,363     |   | $ | 13,283 |   |
| Usage                                                                                                      |       | 2,330                                   |       | 1,377 |   |
| Total revenue                                                                                              |       | 16,693                                  |       | 14,660 |   |
| Cost of revenue (1)(2)                                                                                     |       | 6,297                                   |       | 6,196 |   |
| Gross profit                                                                                               |       | 10,396                                  |       | 8,464 |   |
| Operating expenses:                                                                                        |       |                                    |       |   |   |
| Sales and marketing(2)                                                                                     |       | 5,324                                   |       | 5,434 |   |
| Research and development(2)                                                                                |       | 2,525                                   |       | 2,495 |   |
| General and administrative(2)                                                                              |       | 1,538                                   |       | 1,660 |   |
| Amortization of other intangibles                                                                          |       | 272                                     |       | 356 |   |
| Total operating expenses                                                                                   |       | 9,659                                   |       | 9,945 |   |
| Income (loss) from operations                                                                              |       | 737                                     |       | (1,481 | ) |
| Interest income                                                                                            |       | 1                                       |       | 2 |   |
| Interest expense                                                                                           |       | (63                                     | )          | (143 | ) |
| Other income (expense)                                                                                     |       | (469                                    | )          | (164 | ) |
| Income (loss) before income taxes                                                                          |       | 206                                     |       | (1,786 | ) |
| Provision for income taxes                                                                                 |       | 24                                      |       | 25 |   |
| Net income (loss)                                                                                          |       | $                                       | 182        |   | $ | (1,811 | ) |
| Net income (loss) attributable to common  stockholders (note 2)                                       |       |                                    |       |   |   |
| Basic                                                                                                      |       | $                                       | 104        |   | $ | (1,811 | ) |
| Diluted                                                                                                    |       | $                                       | 182        |   | $ | (1,811 | ) |
| Net income (loss) per share attributable to common  stockholders (note 2)                             |       |                                    |       |   |   |
| Basic                                                                                                      |       | $                                       | 0.01       |   | $ | (0.25 | ) |
| Diluted                                                                                                    |       | $                                       | 0.01       |   | $ | (0.25 | ) |
| Weighted average shares used in computing net  income (loss) per share attributable to common stockholders |       |                                    |       |   |   |
| Basic                                                                                                      |       | 7,356                                   |       | 7,302 |   |
| Diluted                                                                                                    |       | 14,350                                  |       | 7,302 |   |

 

----

(1)                                  Includesamortization of acquired technology of $127 and $254 for the three month periodended March 31, 2010 and 2009, respectively.

 

(2)                                  Includesstock-based compensation expense as follows:

 
| ** **                 | ** ** | **Three  Months Ended March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Cost of revenue            |       | $                                      | 118        |   | $ | 140 |   |
| Sales and marketing        |       | 164                                    |       | 245 |   |
| Research and development   |       | 83                                     |       | 101 |   |
| General and administrative |       | 164                                    |       | 317 |   |
|                            |            |                                        |            |  |  |  |  |

 

*Seeaccompanying notes.*

 

2

----

Table of Contents

 

Convio, Inc.

ConsolidatedStatements of Cash Flows

(Unaudited)

 

*(inthousands)*

 
| ** **                                                                                          | ** ** | **Three  Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                                               |       |                                   |       |   |   |
| Net income (loss)                                                                                   |       | $                                      | 182        |   | $ | (1,811 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                                       |       | 574                                    |       | 569 |   |
| Amortization of intangible assets                                                                   |       | 399                                    |       | 610 |   |
| Amortization of debt issuance costs                                                                 |       | 7                                      |       | 40 |   |
| Revaluation of warrants to fair value                                                               |       | 469                                    |       | 174 |   |
| Stock-based compensation                                                                            |       | 529                                    |       | 803 |   |
| Changes in operating assets and liabilities:                                                        |       |                                   |       |   |   |
| Accounts receivable                                                                                 |       | (27                                    | )          | (2,333 | ) |
| Prepaid expenses and other assets                                                                   |       | (1,121                                 | )          | (616 | ) |
| Accounts payable                                                                                    |       | 62                                     |       | 224 |   |
| Accrued liabilities                                                                                 |       | (183                                   | )          | (591 | ) |
| Deferred revenue                                                                                    |       | (440                                   | )          | 2,361 |   |
| Net cash provided by (used in) operating activities                                                 |       | 451                                    |       | (570 | ) |
| Cash flows from investing activities:                                                               |       |                                   |       |   |   |
| Capitalization of software development costs                                                        |       | (225                                   | )          | — |   |
| Purchase of property and equipment, net                                                             |       | (528                                   | )          | (158 | ) |
| Net cash used in investing activities                                                               |       | (753                                   | )          | (158 | ) |
| Cash flows from financing activities:                                                               |       |                                   |       |   |   |
| Payments made on long-term debt and capital lease  obligations                                      |       | (259                                   | )          | (839 | ) |
| Proceeds from issuance of common stock upon  exercise of options                                    |       | 93                                     |       | 7 |   |
| Net cash used in financing activities                                                               |       | (166                                   | )          | (832 | ) |
| Net change in cash and cash equivalents                                                             |       | (468                                   | )          | (1,560 | ) |
| Cash and cash equivalents at beginning of period                                                    |       | 16,662                                 |       | 13,828 |   |
| Cash and cash equivalents at end of period                                                          |       | $                                      | 16,194     |   | $ | 12,268 |   |
| Supplemental information:                                                                           |       |                                   |       |   |   |
| Interest paid                                                                                       |       | $                                      | 49         |   | $ | 93 |   |
| Taxes paid                                                                                          |       | $                                      | 5          |   | $ | — |   |

 

*Seeaccompanying notes.*

 

3

----

Table of Contents

 

**Convio, Inc.**

**Notes to Unaudited ConsolidatedFinancial Statements**

**(unaudited)**

 

**1. TheCompany**

 

Convio, Inc., together with its wholly-owned subsidiary(collectively, the “Company” or “Convio”), is a provider of on-demandconstituent engagement solutions that enable nonprofit organizations (“NPOs”)to more effectively raise funds, advocate for change and cultivaterelationships with donors, activists, volunteers, alumni and otherconstituents. The Company’s integrated solutions include its Convio OnlineMarketing (“COM”) platform and Convio Common Ground CRM, its constituentrelationship management application. The COM platform enables NPOs to harnessthe full potential of the Internet and social media as new channels forconstituent engagement and fundraising. Common Ground delivers next-generationdonor management capabilities, integrates marketing activities across onlineand offline channels and is designed to increase operational efficiency. TheCompany’s solutions are enhanced by a portfolio of value-added servicestailored to its clients’ specific needs.

 

TheCompany was incorporated in Delaware on October 12, 1999. On February 16,2007, the Company acquired GetActive Software, Inc. (“GetActive”), aprivately owned company based in Berkeley, California. The Company acquiredGetActive, a provider of online constituent relationship management softwareand services and a competitor of the Company, to expand its client base andincrease its market presence in the nonprofit market. The Company currentlymarkets its products and services throughout North America.

 

**Basis ofPresentation**

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States (“GAAP”) and applicable rules andregulations of the Securities and Exchange Commission (“SEC”) regarding interimfinancial reporting. Certain information and note disclosures normally includedin the financial statements prepared in accordance with GAAP have beencondensed or omitted pursuant to such rules and regulations. Accordingly,these interim consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto contained in theCompany’s Prospectus filed pursuant to rule 424(b) under theSecurities and Exchange Act, as amended (“the Securities Act”) with the SEC on April 29,2010 (the “Prospectus”). The December 31, 2009 consolidated balance sheetincluded herein was derived from the audited financial statements as of thatdate, but does not include all disclosures including notes required by GAAP.

 

Theunaudited interim consolidated financial statements have been prepared on thesame basis as the audited consolidated financial statements and include alladjustments necessary, all of which are of a normal recurring nature, for thefair presentation of the Company’s statement of financial position as of March 31,2010 and December 31, 2009, the Company’s results of operations and itscash flows for the three months ended March 31, 2010 and 2009. The resultsfor the three months ended March 31, 2010 are not necessarily indicativeof the results to be expected for any subsequent quarter or for the year endingDecember 31, 2010. All references to March 31, 2010 or to the threemonths ended March 31, 2010 and 2009 in the notes to the consolidatedfinancial statements are unaudited.

 

**Basis ofConsolidation**

 

Theunaudited consolidated financial statements include the accounts of the Companyand its wholly-owned subsidiary. All material intercompany transactions andbalances have been eliminated in consolidation.

 

**QuarterlyFinancial Information**

 

The Company’s quarterlyoperating results normally fluctuate as a result of seasonal variations in itsbusiness, principally due to usage revenue which is derived from funds raisedby its clients at special events and sales commissions which are expensed inthe period in which the agreements are signed. The growth and amount of usagerevenue vary based on the number of events, the percent of funds raised onlinefor these events, the growth and success of events and the signing of newclients for events. The Company recognizes the usage revenue from these eventswhen it bills clients. Usage revenue is seasonal as events are typically heldin the spring and fall. Historically, the Company’s usage revenue has beenhigher during the second and third quarters. In addition, period-over-periodcomparisons may be impacted significantly by the addition or loss of anyspecial events of enterprise clients. The Company’s operating expenses may alsofluctuate as a result of sales commissions. The Company expenses salescommissions in the period in which it signs agreements, but the Companygenerally recognizes the related revenue over the terms of those agreements.The Company may report poor operating results due to higher sale commissions ina period in which it experiences strong sales of its solutions, particularlysales to enterprise clients. Alternatively, the Company may report betteroperating results due to lower sales commissions in a period in which itexperiences a slowdown in sales. As a result, its sales and marketing expensesmay fluctuate quarterly and will not be indicative of annual sales andmarketing expenses.

 

4

----

Table ofContents

 

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**2.Summary of Significant Accounting Policies**

 

**ApplicableAccounting Guidance**

 

Anyreference in these notes to applicable accounting guidance is meant to refer tothe authoritative non-governmental United States GAAP as found in the FinancialAccounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).

 

**Use ofEstimates**

 

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and reported amounts of revenues and expenses duringthe reporting periods. Actual results could differ from those estimates, andsuch differences could be material to the Company’s financial statements.

 

**RevenueRecognition**

 

TheCompany derives its revenue from subscriptions, services and usage andrecognizes revenue in accordance with relevant authoritative accountingprinciples. The Company’s subscription arrangements do not allow the client totake possession of the software application. The Company’s arrangements do notcontain general rights of return. The Company recognizes revenue when all ofthe following conditions are met:

 

·                  there is persuasive evidence of an arrangement;

·                  the service has been provided to the client;

·                  the collection of the fees is reasonably assured; and

·                  the amount of fees to be paid by the client is fixed or determinable.

 

Indetermining whether collection of the subscription and related services fee isreasonably assured, the Company considers financial and other information aboutclients, such as a client’s funding level, obtained as part of the Company’ssales effort with the clients. As a client relationship progresses, the Companyalso considers the client’s payment history. The Company’s experience indetermination of collectibility has historically been good as bad debt expenseshave not been significant to date.

 

5

----

Table of Contents

 

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**2.Summary of Significant Accounting Policies (Continued)**

 

Indetermining whether the fee is fixed or determinable, the Company onlyrecognizes revenue for amounts that the client is legally obligated to pay.There are no instances where the Company is recognizing revenue prior toinvoicing the client. For example, for multi-year contracts where the clienthas the right to cancel a portion of the contractual term, the Company onlyrecognizes revenue for amounts related to the noncancellable portion of thecontract until the client has relinquished its right to cancel. For multi-yearcontracts with increasing annual payments, the Company recognizes revenue basedupon the amounts actually invoiced which results in an increasing amount ofrevenue recognized each year. For multi-year contracts with decreasing annualpayments, the Company recognizes revenue ratably using the entirenoncancellable contract value which results in cash received in the earlyportion of the contract term exceeding the amount of revenue recognized. Forcontracts that have usage-based terms, the Company recognizes revenue when theusage amounts are reported and billed to the client.

 

Subscriptionand services revenue is recognized ratably over the term of the agreementbeginning on the activation date. Amounts that have been invoiced are recordedin accounts receivable and in deferred revenue or revenue, depending on whetherthe revenue recognition criteria have been met.

 

Servicesrevenues, when sold with a subscription of the Company’s modules do not qualifyfor separate accounting as the Company does not have objective and reliableevidence of fair value of the undelivered subscription service. Therefore, itrecognizes such services revenue ratably over the term of the relatedsubscription agreement.

 

Whenthe Company sells services other than with the subscription of its modules, theCompany considers the following factors to determine the proper accounting:

 

·                  availability of the services from other vendors;

·                  whether objective and reliable evidence of fair value exists for theundelivered elements;

·                  the nature of the services;

·                  the timing of when the services agreement was signed in comparison tothe subscription service start date; and

·                  the contractual dependence of the subscription service on the client’ssatisfaction with the services.

 

Whenthe Company sells services other than with the subscription of its modules, theCompany recognizes revenue under time and material contracts as the servicesare rendered and the Company recognizes revenue from fixed price contracts asmilestones are achieved and, if applicable, accepted by the client.

 

Certainclients have contracts that provide for a percentage of donations receivedonline through its modules to be paid to the Company in place of or inconjunction with the standard monthly subscription fee. In addition, certainclients have contracts which require payment of additional fees for usage abovethe levels included in the standard monthly subscription fee. Such fees arerecognized as revenue when the usage amounts are determined and reported andbilled to the client.

 

**DeferredRevenue**

 

Deferredrevenue primarily consists of billings or payments received in advance ofrevenue recognition from the Company’s subscription service described above andis recognized as the revenue recognition criteria are met. The Companygenerally invoices its customers in quarterly installments. Accordingly, thedeferred revenue balance does not represent the total contract value of annualor multi-year, noncancellable subscription agreements.

 

6

----

Table of Contents

** **

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**2.Summary of Significant Accounting Policies (Continued)**

 

**Researchand Development**

 

The Company capitalizes the costs to develop softwarefor internal use (including the costs of developing the Company’s COM andCommon Ground solutions) incurred during the application development stage aswell as costs to develop significant upgrades or enhancements to existinginternal use software. These costs are amortized on a straight-line basis overan estimated useful life of three years. During the quarter ended March 31,2010, the Company capitalized approximately $225,000 of costs incurred toupgrade and enhance existing internal use software. Costs incurred to improveor enhance the Company’s products in the quarter ended March 31, 2009 wereexpensed as incurred as these costs did not qualify as significant upgrades orenhancements. Capitalized costs are recorded as part of property and equipment.

 

**SalesCommissions**

 

Salescommissions are earned by the salesperson at the time of contract signing andsales commissions are expensed as incurred.

 

**Income Taxes**

 

Deferred income taxes areprovided for the tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes, and operating loss carryforwards andcredits using enacted tax rates expected to be in effect in the years in whichthe differences are expected to reverse. The Company assesses the likelihoodthat deferred tax assets will be realized, and recognizes a valuation allowanceif it is more likely than not that some portion of the deferred tax assets willnot be realized. This assessment requires judgment as to the likelihood andamounts of future taxable income by tax jurisdiction. To date, the Company hasprovided a full valuation allowance against its deferred tax assets as itbelieves the objective and verifiable evidence of its historical pretax netlosses outweighs the positive evidence of its pre-tax income for the threemonths ended March 31, 2010 and forecasted future results. Although theCompany believes that its tax estimates are reasonable, the ultimate taxdetermination involves significant judgment that is subject to audit by taxauthorities in the ordinary course of business. The Company will continue tomonitor the positive and negative evidence and it will adjust the valuationallowance as sufficient objective positive evidence becomes available.

 

The Company evaluates itsuncertain tax positions based on a determination of whether and how much of atax benefit taken by the Company in its tax filings or positions is more likelythan not to be realized. Potential interest and penalties associated with anyuncertain tax positions are recorded as a component of income tax expense.Through March 31, 2010, the Company has not identified any materialuncertain tax positions for which liabilities would be required.

 

**Stock-BasedCompensation**

 

Stock-based compensationis measured at the grant date, based on the estimated fair value of the awardon that date, and is recognized as expense over the requisite service period,which is generally over the vesting period, on a straight-line basis. TheCompany uses the Black-Scholes option pricing model to estimate the grant datefair value of stock based awards.

 

7

----

Table ofContents

 

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**2.Summary of Significant Accounting Policies (Continued)**

 

**NetIncome (Loss) Per Share**

 

Netincome (loss) per share is presented in conformity with the two-class methodrequired for participating securities. The holders of the Series Cconvertible preferred stock are entitled to receive dividends when, as and if declaredby the board of directors, in preference to a declaration or payment of adividend, at a rate of $0.7114 per share. In addition, the holders of the Series Aand Series B convertible preferred stock are entitled to receivedividends, when, as and if declared by the board of directors, in preference toany common stock of the Company. The dividends are non-cumulative and as of March 31,2010, no dividends had been declared. Holders of Series A, Series Band Series C convertible preferred stock do not share in losses of theCompany.

 

Under the two-classmethod, basic net income per share attributable to common stockholders iscomputed by dividing the net income attributable to common stockholders by theweighted average number of common shares outstanding during the period. Netincome attributable to common stockholders is determined by allocatingundistributed earnings between the holders of common stock and Series A, Series B andSeries C convertible preferred stock. Diluted net income per shareattributable to common stockholders is computed by using the weighted averagenumber of common shares outstanding, including potential dilutive shares ofcommon stock assuming the dilutive effect of convertible preferred stock, on anif-converted basis, and outstanding stock options and convertible preferredstock warrants using the treasury stock method.

 

Due to losses incurredduring the three months ended March 31, 2009, the shares associated withstock options, convertible preferred stock warrants and convertible preferredstock are not included in diluted net loss per share because they areanti-dilutive.

 

Series P, Series Q,Series R and Series S common stock have the same dividend rights, andtherefore, result in basic and diluted net income (loss) per share being thesame for each class of common stock. As such, net income (loss) per share forthe three months ended March 31, 2010 and 2009 is presented on a combinedbasis.

 

Basic and diluted netincome (loss) per share was calculated as follows (in thousands, exceptper share amounts):

 
| ** **                                                     | ** ** | **Three  Months Ended  March 31, 2009** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------|------------|
| **Basic and diluted net loss per  share**                      |       |                                         |       |
| **Numerator:**                                                 |       |                                         |       |
| Net loss attributable to common stockholders                   |       | $                                            | (1,811     | ) |
| **Denominator:**                                               | ** ** | ** **                                   | ** ** |
| Weighted average common shares outstanding, basic  and diluted |       | 7,302                                        |       |
| **Basic and diluted net loss per  share**                      |       | $                                            | (0.25      | ) |

 

8

----

Table ofContents

 

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**2.Summary of Significant Accounting Policies (Continued)**

 
| ** **                                                               | ** ** | **Three  Months Ended  March 31, 2010** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **Basic net income per share**                                           |       |                                         |       |
| **Numerator:**                                                           |       |                                         |       |
| Net income                                                               |       | $                                            | 182        |   |
| Less: Undistributed earnings allocated to participating  preferred stock |       | (78                                          | )          |
| Net income attributable to common stockholders                           |       | $                                            | 104        |   |
| **Denominator:**                                                         | ** ** | ** **                                   | ** ** |
| Weighted average common shares outstanding, basic                        |       | 7,356                                        |       |
| **Basic net income per common share**                                    |       | $                                            | 0.01       |   |
| ** **                                                               |       |                                         |       |
| **Diluted net income per share**                                         | ** ** | ** **                                   | ** ** |
| **Numerator:**                                                           | ** ** | ** **                                   | ** ** |
| Net income attributable to common stockholders                           |       | $                                            | 182        |   |
| **Denominator:**                                                         | ** ** | ** **                                   | ** ** |
| Weighted average common shares outstanding, basic                        |       | 7,356                                        |       |
| Add: Outstanding convertible preferred stock                             |       | 5,316                                        |       |
| Add: Outstanding convertible preferred stock  warrants                   |       | 122                                          |       |
| Add: Options to purchase common stock                                    |       | 1,556                                        |       |
| Weighted average common shares outstanding, diluted                      |       | 14,350                                       |       |
| **Diluted net income per common  share**                                 |       | $                                            | 0.01       |   |

 

The following tabledisplays the Company’s other outstanding common stock equivalents that wereexcluded from the computation of diluted net loss per share for the threemonths ended March 31, 2009, as the effect of including them would havebeen anti-dilutive (in thousands):

 
| ** **                           | ** ** | **As  of March 31,  2009** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| Stock options                        |       | 2,900                           |       |
| Convertible preferred stock          |       | 5,316                           |       |
| Convertible preferred stock warrants |       | 253                             |       |

 

**RecentAccounting Pronouncements**

 

In October 2009, theFASB issued an ASU that amended the accounting rules addressing revenuerecognition for multiple-deliverable revenue arrangements by eliminating thecurrently existing criteria that objective and reliable evidence of fair valuefor undelivered products or services exist in order to be able to separatelyaccount for deliverables. Additionally the ASU provides for elimination of theuse of the residual method of allocating arrangement consideration and requiresthat arrangement consideration be allocated at the inception of the arrangementto all deliverables that can be accounted for separately based on theirrelative selling price. A hierarchy for estimating such selling price isincluded in the update. This ASU will be effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010. Early adoption is permitted. The Company iscurrently evaluating the impact this update will have on its consolidatedfinancial statements.

 

9

----

Table ofContents

 

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**2.Summary of Significant Accounting Policies (Continued)**

 

In January 2010, theFASB issued ASU 2010-06, *ImprovingDisclosures about Fair Value Measurements* (“ASU 2010-06”). ASU2010-06 requires additional disclosures about fair value measurements includingtransfers in and out of Levels 1 and 2 and more disaggregation for thedifferent types of financial instruments. This ASU is effective for annual andinterim reporting periods beginning after December 15, 2009 for most ofthe new disclosures and for periods beginning after December 15, 2010 forthe new Level 3 disclosures. Comparative disclosures are not required in thefirst year the disclosures are required. The Company did not have any significanttransfers in or out of Level 1 and Level 2 fair value measurements during thethree months ended March 31, 2010.

 

**3. FairValue Measurements**

 

Financial assets andliabilities with carrying amounts approximating fair value include accountsreceivable, accounts payable and accrued expenses and other currentliabilities. The carrying amount of these financial assets and liabilitiesapproximates fair value because of their short maturities. The carrying amountof the Company’s debt and other long-term liabilities approximate their fairvalue. The fair value of debt was based upon management’s best estimate ofinterest rates that would be available for similar debt obligations as of March31, 2010 and 2009. The Company measures certain financial instruments at fairvalue on a recurring basis. As of March 31, 2010, those instruments werecomprised of cash equivalents invested in money market mutual funds andpreferred stock warrants. The fair value of the preferred stock warrantliability was estimated using the Black-Scholes valuation model. The fair valueof these instruments was determined using the following inputs at March 31,2010:

 
| ** **                                    | ** ** | ** ** | ** ** | **Fair Value measurements at reporting date using**                                  | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Total**  | ** ** | **Quoted prices in  active markets for  identical assets  (Level 1)** | ** ** | **Significant other  observable inputs  (Level 2)** | ** ** | **Significant  unobservable inputs  (Level 3)** | ** ** |
| Cash and cash equivalents                     |       | $          | 16,194     |                                                                                 | $          | 16,194 |   | — |   | — |   |
| Convertible preferred stock warrant liability |       | 1,844      |       | —                                                                               |       | — |   | $ | 1,844 |   |
|                                               |            |            |            |                                                                                      |            |  |  |  |  |  |  |  |

 

Changes in Level 3assets measured at fair value on a recurring basis for the three months ended March 31,2010 were as follows:

 
| December 31, 2009         |   | $   | 1,375  |   |
|--------------------------------|--------|-----|--------|--------|
| Unrealized gains (losses), net |   | 469 |   |
| March 31, 2010            |   | $   | 1,844  |   |

 

**4.Commitments and Contingencies**

 

On November 17,2006, the Company entered into an office building lease with RREEFDomain, LP pursuant to which Convio was leasing approximately 67,000square feet in an office facility located in Austin, Texas. In January 2008,the Company entered into an amendment to that lease pursuant to which Convio isleasing an additional 23,000 square feet for a total of approximately 90,000square feet and the Company began occupying the additional space in January 2009.The lease has a term of seventy-eight months, which commenced in April 2007.The lease agreement contains escalating rent payments, which may be adjustedfor component charges, taxes, insurance and maintenance related to theproperty. The total basic rent payable over the full seventy-eight month leaseterm (net of three months’ rent abatement) will be approximately $8,678,000.The Austin office under the lease serves as the Company’s headquarters.

 

In January 2010, theCompany entered into a sublease agreement pursuant to which Convio subletapproximately 12,000 square feet of its office facility located in Austin,Texas. The sublease has a term of forty-four months. The total subleasepayments receivable over the full forty-four month lease term will beapproximately $823,000.

 

10

----

Table ofContents

 

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**4.Commitments and Contingencies (Continued)**

 

On April 3,2009, the Company entered into an office building lease with 1255 23rd Street,L.P. pursuant to which Convio is leasing approximately 12,000 square feet in anoffice facility located in Washington, D.C. Pursuant to the agreement, Conviowill lease an additional 2,600 square feet beginning on August 1, 2013.The lease has a term of one hundred twenty months, which commenced on August 1,2009. The lease agreement contains escalating rent payments, which may beadjusted for component charges, taxes, insurance and maintenance related to theproperty. The total basic rent payable over the full one hundred twenty monthlease term will be approximately $7,420,000.

 

From time to time, theCompany is subject to various claims that arise in the normal course ofbusiness. In the opinion of management, the Company is unaware of any pendingor unasserted claims that would have a material adverse effect on the financialposition, liquidity or results of the Company.

 

Certain executiveofficers are entitled to certain payments if they are terminated without causeor as a result of a change in control. Upon termination without cause, and notas a result of death or disability, each of such officers is entitled toreceive a payment of base salary for four to six months following terminationof employment and certain officers will be entitled to continue to receivecoverage under medical and dental benefit plans for four to six months or untilsuch officers are covered under a separate plan from another employer. Upon atermination other than for cause or with good reason following a change incontrol, each of such officers will be entitled to the same benefits as upontermination without cause and will also be entitled to certain acceleration ofsuch officer’s outstanding unvested options at the time of such termination.

 

**5.Income Taxes**

 

In accordance withapplicable accounting guidance, the income tax provision for the three monthsended March 31, 2010 is based on the estimated annual effective tax ratefor fiscal year 2010. The estimated effective tax rate may be subject toadjustment in subsequent quarterly periods as the estimates of pretax incomefor the year, along with other items that may affect the rate change.

 

For thethree-month periods ended March 31, 2010 and 2009, the Company’s provisionfor income taxes reflects an effective tax rate of approximately 11.5% and(1.4%), respectively. For each of the three-month periods ended March 31,2010 and 2009, the Company’s effective tax rate was lower than the U.S. federalstatutory rate primarily due to changes to its valuation allowance.

 

The Company hassignificant deferred tax assets related to its net operating loss carryforwardsand tax credits, and has provided a valuation allowance for the full amount ofits deferred tax assets, as it is not more likely than not that any futurebenefit from deductible temporary differences, net operating losscarryforwards, and tax credit carryforwards will be realized. This assessmentrequires judgment as to the likelihood and amounts of future taxable income bytax jurisdiction.

 

To date, theCompany has provided a full valuation allowance against its deferred tax assetsas it believes the objective and verifiable evidence of its historical pretaxnet losses outweighs the positive evidence of its pre-tax income for the threemonths ended March 31, 2010 and forecasted future results. Although theCompany believes that its tax estimates are reasonable, the ultimate taxdetermination involves significant judgment that is subject to audit by taxauthorities in the ordinary course of business. The Company will continue tomonitor the positive and negative evidence and it will adjust the valuationallowance as sufficient objective positive evidence becomes available.

 

The Company hadapproximately $148,000 in unrecognized tax benefits as of March 31, 2010.The Company does not expect to recognize any amount of the unrecognized taxbenefit in the next twelve months, as the unrecognized income tax benefitsrelate to the uncertainty regarding certain credits taken on returns that havenot been examined by the applicable tax authority. The Company’s tax years 2006through 2009 remain open to examination by the major taxing jurisdictions towhich the Company is subject. However, the Company is not currently underexamination by any taxing jurisdictions.

 

11

----

Table of Contents

** **

**Convio, Inc.**

**Notesto Unaudited Consolidated Financial Statements (Continued)**

**(unaudited)**

 

**6.Stockholders’ Equity**

 

**Series A,B and C Convertible Preferred Stock**

 

As of March 31,2010, the Company had outstanding 3,036,198, 1,138,380 and 1,141,459 shares of Series A,B and C convertible preferred stock, respectively. Each share of preferredstock was convertible into one share of common stock. The conversion of allshares of preferred stock into 5,316,037 shares of common stock occurredimmediately prior to the closing of the Company’s initial public offering on May 4,2010.

 

**StockWarrants**

 

As of March 31,2010, there were 252,655 shares of common stock issuable upon the exercise ofoutstanding warrants, assuming the conversion of all outstanding shares ofpreferred stock and common stock into shares of a single class of common stockimmediately prior to the closing of the Company’s initial public offering,which occurred on May 4, 2010. The warrants had a weighted averageexercise price of $4.55 per share.

 

**StockOption Plans**

 

TheCompany has in effect equity compensation plans under which incentive stockoptions and non-qualified stock options have been granted to employees,directors and consultants to purchase shares of the Company’s Series Pcommon stock at a price not less than the fair market value of the stock at thedate of grant except in the event of a business combination.

 

*2009Stock Incentive Plan*

 

During2009, the Company’s Board of Directors approved resolutions to adopt the 2009Stock Incentive Plan (the “2009 Plan”) providing for the issuance of up to580,096 shares of the Company’s common stock to directors, employees,consultants and other independent advisors. The share reserve under the 2009Plan contains an evergreen provision that allows for an annual increase on January 1of each year equal to the lesser of (a) 4% of the aggregate outstandingshares on the first day of the applicable year and (b) any lesser amountdetermined by our board of directors. The 2009 Plan provides for the issuanceof restricted common stock, incentive stock options or nonqualified stockoptions. Pursuant to the 2009 Plan, the exercise price for incentive stockoptions is at least 100% of the fair market value on the date of grant, or foremployees owning in excess of 10% of the voting power of all classes of stock,110% of the fair market value on the date of grant.

 

In theevent of a change in control, outstanding stock options and other awards thatare payable in or convertible into common stock under the 2009 Plan willterminate upon the effective time of the change in control unless provision ismade in connection with the transaction for the continuation or assumption ofsuch awards by, or for the substitution of the equivalent awards under a cashincentive program. Fifty percent of the outstanding stock options and otherawards that will terminate upon the effective time of the change in controlshall become fully vested immediately before the effective time of the changein control or upon involuntary termination, in the case the participant hascompleted at least one year of service with the company prior to the change incontrol. Participants not completing at least one year of service, shall onlyvest in that number of outstanding stock options and other awards in which theparticipant would have vested upon the participant’s completion of one year ofservice.

 

As of March 31,2010, 239,348 options had been granted from the 2009 Plan.

 

12

----

Tableof Contents

 

**Convio, Inc.Notes to Unaudited Consolidated Financial Statements****(Continued)****(unaudited)**

 

**6****. Stockholders’ Equity(Continued)**

 

TheCompany uses the Black-Scholes model to estimate the fair value of itsshare-based payment awards. The Black-Scholes model requires estimatesregarding the risk-free rate of return, dividend yields, expected life of theaward and estimated forfeitures of awards during the service period. Thecalculation of expected volatility is based on historical volatility forcomparable industry peer groups over periods of time equivalent to the expectedlife of each stock option grant. As the Company has no history of trading inthe public equity markets, the Company believes that comparable industry peergroups provide a more reasonable measurement of volatility in order tocalculate an accurate fair value of each stock award. The expected term iscalculated based on the weighted average of the remaining vesting term and theremaining contractual life of each award. The Company bases the estimate ofrisk-free rate on the U.S. Treasury yield curve in effect at the time of grantor modification. The Company has never paid cash dividends and does not currentlyintend to pay cash dividends, and thus has assumed a dividend yield of zero.

 

The Company estimatespotential forfeitures of stock grants and adjusts compensation cost recordedaccordingly. The estimate of forfeitures will be adjusted over the requisiteservice period to the extent that actual forfeitures differ, or are expected todiffer, from such estimates. Changes in estimated forfeitures will berecognized through a cumulative catch-up adjustment in the period of change andwill also impact the amount of stock compensation expense to be recognized infuture periods.

 

The following tablesummarizes the weighted average grant-date value of options and the assumptionsused to develop their fair value for the three months ended March 31, 2010and 2009.

 
| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Weighted-average grant-date fair value of options |       | $                                      | 4.43       |   | $ | 2.45 |   |
| Risk-free interest rate                           |       | 2.29 – 2.43                       | %          | 1.89 – 1.92 | % |
| Expected volatility                               |       | 0.62 – 0.63                       |       | 0.65 – 0.66 |   |
| Expected life in years                            |       | 4.2 – 4.3                         |       | 4.5 – 4.6 |   |
| Dividend yield                                    |       | —                                 |       | — |   |
| Estimated forfeitures                             |       | 20                                     | %          | 20 | % |
|                                                   |            |                                        |            |  |  |  |  |

 

A summary of the changesin common stock options issued under all of the existing stock options plans isas follows:

 
| ** **                                | ** ** | **Shares** | ** ** | **Range of  Exercise  Prices** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|------------|------------|--------------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| Options outstanding, January 1, 2010 |       | 3,128,622  |       | $0.09–$17.05              |       | $                                       | 3.10       |                            | $          | 17,691,574 |   |
| Granted                                   |       | 239,348    |       | $8.75                          |       | 8.75                                    |       |                            |       |
| Exercised                                 |       | (60,127    | )          | $0.53–$4.57               |       | 1.52                                    |       | $                               | 434,677    |   |
| Surrendered                               |       | (55,725    | )          | $0.85–$8.75               |       | 3.08                                    |       |                            |       |
| Options outstanding, March 31, 2010  |       | 3,252,118  |       | $0.09–$17.05              |       | $                                       | 3.55       |                            | $          | 16,940,770 |   |

 

The aggregate intrinsicvalue was calculated based on the positive differences between the estimatedfair value of the Company’s common stock of $8.75 per share on March 31,2010 and December 31, 2009, or at time of exercise, and the exercise priceof the options.

 

13

----

Table ofContents

 

**Convio, Inc.Notes to Unaudited Consolidated Financial Statements****(Continued)****(unaudited)**

 

**6****. Stockholders’ Equity(Continued)**

 

The following tablesummarizes information about options outstanding at March 31, 2010:

 
| ** **             | ** ** | ** **              | ** ** | **Options  Outstanding**                             | ** ** | **Options  Exercisable**                | ** ** |
|------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
| **Exercise  Price**    | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable  and Vested** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $0.09–$ 1.14 |       | 1,061,881               |       | 4.17                                                 |       | $                                       | 0.96       |   | 1,061,881 |   | $ | 0.96 |   |
| $1.24–$ 4.15 |       | 373,291                 |       | 5.43                                                 |       | 2.18                                    |       | 347,175 |   | 2.10 |   |
| $4.57                  |       | 1,175,132               |       | 5.75                                                 |       | 4.57                                    |       | 630,407 |   | 4.57 |   |
| $5.40–$12.78      |       | 638,908                 |       | 6.33                                                 |       | 6.71                                    |       | 43,002 |   | 6.59 |   |
| $17.05                 |       | 2,906                   |       | 0.20                                                 |       | 17.05                                   |       | 2,906 |   | 17.05 |   |
|                   |       | 3,252,118               |       | 5.30                                                 |       | $                                       | 3.55       |   | 2,085,371 |   | $ | 2.38 |   |

 

At March 31, 2010, there was an estimated $4.4million of total unrecognized compensation costs related to stock-basedcompensation arrangements. These costs will be recognized over a weightedaverage period of 2.6 years.

 

At March 31, 2010,there were 340,924 options available for future grant under the 2009 Plan andthe Company had 3,593,042 shares of Series P common stock reserved for theexercise of outstanding stock options and stock options available for grant.

 

Certain stock optionshave been exercised prior to vesting resulting in the issuance of nonvestedshares. A summary of the Company’s nonvested shares as of March 31, 2010,and changes during the three months ended March 31, 2010, is presentedbelow:

 
| **Nonvested shares**                | ** ** | **Shares** | ** ** | **Weighted-Average********Intrinsic Value** | ** ** |
|-------------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Nonvested at December 31, 2009 |       | 163        |       | $                                           | 1,000      |   |
| Issued                              |       | —     |       | —                                      |       |
| Vested                              |       | (71        | )          | (300                                        | )          |
| Nonvested at March 31, 2010    |       | 92         |       | $                                           | 700        |   |

 

Cash received from optionexercises during the three months ended March 31, 2010 was $93,000. TheCompany has historically issued new shares to satisfy share option exercises.

 

14

----

Table ofContents

 

**Convio, Inc.Notes to Unaudited Consolidated Financial Statements****(Continued)****(unaudited)**

 

**7.Subsequent Events**

 

**ReverseStock Split**

 

On April 5,2010, the board of directors approved an amended and restated certificate ofincorporation that (a) increased the authorized common stock to 40 millionshares, (b) authorized 5 million shares of preferred stock and (c) effecteda reverse stock split of all the outstanding shares of preferred stock andcommon stock into 0.352 of a share of preferred stock or common stock,respectively. The par value of the common and convertible preferred stock wasnot adjusted as a result of the reverse stock split. All issued and outstandingcommon stock, convertible preferred stock, warrants for common stock andconvertible preferred stock, and per share amounts contained in the financialstatements have been retroactively adjusted to reflect this reverse stock splitfor all periods presented. The reverse stock split was affected on April 22,2010.

 

**InitialPublic Offering**

 

On May 4, 2010, theCompany completed an initial public offering consisting of 5,132,728 shares ofcommon stock at $9.00 per share. Thetotal shares sold in the offering included 1,343,201 shares sold by sellingstockholders and 3,789,527 shares sold by the Company. In addition, theunderwriters exercised their option to purchase an additional 769,909 shares tocover over-allotments. After deducting the payment of underwriters’ discountsand commissions, the net proceeds to the Company from the sale of shares in theoffering were approximately $38.2 million.

 

**Conversionof Common and Preferred Stock**

 

OnMay 4, 2010, in conjunction with the Company’s qualified underwritteninitial public offering of common stock, 5,316,037 outstanding shares of Series A,Series B and Series C preferred stock automatically converted into5,316,037 shares of undesignated common stock. In addition, 7,419,199outstanding shares of Series P, Series Q, Series R and Series Scommon stock automatically converted into 7,419,199 shares of undesignatedcommon stock.

 

**PreferredStock Warrant Liability**

 

Freestanding warrantsrelated to shares that are redeemable are accounted for in accordance with theapplicable guidance in ASC Topic 480. Under the provisions of this guidance,the freestanding warrants that are related to the Company’s preferred stock areclassified as liabilities in the accompanying balance sheets. The warrants weresubject to re-measurement at each balance sheet date, and any change in fairvalue was recognized as a component of other income (expense). The Companyrecorded $469,000 and $174,000 of other expense for the three months ended March 31,2010 and 2009, respectively, to reflect the change in fair value of thepreferred stock warrants during those periods. Immediately prior to theeffectiveness of the Company’s initial public offering the Company recorded a finalfair value adjustment based upon the offering price of $9.00 per share andrecorded other income of $454,000. Upon the closing of the offering, alloutstanding preferred stock warrants were converted into warrants to purchasecommon stock and, accordingly, the liability was reclassified to additionalpaid-in capital during the second quarter of 2010.

 

**NetExercise of Preferred Stock Warrants**

 

On April 29, 2010,in conjunction with the Company’s initial public offering, 252,665 sharesof common stock issuable upon the exercise of outstanding warrants wereconverted into an equivalent number of shares of a single class of commonstock. Immediately prior to the closing of the initial public offering, aportion of the warrants were net exercised, resulting in the issuance of72,800 shares of common stock. Subsequent to the net exercise, 106,725shares of common stock issuable upon the exercise of the remaining warrants hada weighted average exercise price of $4.60 per share.

 

15

----

Table of Contents

 

**Convio, Inc.Notes to Unaudited Consolidated Financial Statements****(Continued)****(unaudited)**

 

**7.Subsequent Events (Continued)**

 

**Use ofProceeds to Repay Debt**

 

OnMay 12, 2010, the Company paid approximately $1.9 million to its principallender, Comerica Bank, in satisfaction of the remaining balance on its line ofcredit. As a result, the Company has the ability to borrow $5.1 million underits revolving line of credit.

 

16

----

Table ofContents

 

**Item2. Management’s discussion and analysis of financial condition and results ofoperations**

 

*The terms “we,” “us” and “our” refer to Convio, Inc.and all of its subsidiaries that are consolidated in conformity with accountingprinciples generally accepted in the United States of America.*

 

**Cautionary statement**

 

The following discussionshould be read along with the unaudited consolidated financial statements andunaudited notes thereto included in Item 1 of this Quarterly Report on Form 10-Q,as well as the consolidated financial statements and notes thereto contained inthe Company’s Prospectus filed pursuant to rule 424(b) of theSecurities Act of 1933, as amended (the “Securities Act”) with the SEC on April 29,2010 (the “Prospectus”). This management’s discussion and analysis of financialcondition and results of operations contains forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995, Section 27Aof the Securities Act and Section 21E of the Securities Exchange Act of1934, as amended. These forward-looking statements regarding future events andour future results are based on current expectations, estimates, forecasts andprojections, and the beliefs and assumptions of our management including,without limitation, our expectations regarding the following: the sales of oursoftware products and services; the impact of our revenue recognition policies;our belief that our current assets, including cash, cash equivalents, andexpected cash flows from operating activities, will be sufficient to fund ouroperations; our anticipated additions to property, plant and equipment; ourbelief that our facilities are suitable and adequate to meet our currentoperating needs; our belief that we do not have any material exposure tochanges in the fair value of our investment portfolio as a result of changes ininterest rates.****Words such as “we expect,” “anticipate,”“target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,”“might,” “could,” “intend,” and variations of these types of words and similarexpressions are intended to identify these forward-looking statements. Readersare cautioned that these forward-looking statements are predictions and aresubject to risks, uncertainties, and assumptions that are difficult to predict.Therefore, actual results may differ materially and adversely from thoseexpressed in any forward-looking statements.

 

**Overview**

 

We are a leadingprovider of on-demand constituent engagement solutions that enable nonprofitorganizations, or NPOs, to more effectively raise funds, advocate for changeand cultivate relationships with donors, activists, volunteers, alumni andother constituents. We serve approximately 1,300 NPOs of all sizes, and during2009, our clients used our solutions to raise over $920 million anddeliver over 3.8 billion emails to over 154 million email addresses toaccomplish their missions. During the three months ended March 31, 2010,our clients used our solutions to raise over $436 million and deliverapproximately 1.0 billion emails to accomplish their missions. Factoring outtransactions directly related to the Haitian relief efforts during the threemonths ended March 31, 2010, online fundraising increased by approximately20 percent from the same period last year.

 

We wereincorporated in Delaware in October 1999, and we offered our firstcommercially available online marketing solution in 2000. We acquired GetActiveSoftware, Inc. in February 2007. Our integrated solutions now includeour Convio Online Marketing platform, or COM, and Convio Common Ground CRM, ourconstituent relationship management application. COM enables NPOs to harnessthe full potential of the Internet and new media as channels for constituentengagement and fundraising. Common Ground delivers next-generation donormanagement capabilities, integrates marketing activities across online andoffline channels and is designed to increase operational efficiency. Oursolutions are enhanced by a portfolio of value-added services tailored to ourclients’ specific needs.

 

**Our Business Approach**

 

We define ourtarget market as public charities that raise more than $50,000 in contributionsannually, of which there were over 71,000 in 2009 in the United Statesaccording to GuideStar USA, Inc. We categorize our target market intoenterprise NPOs that raise more than $10 million annually and mid-market NPOsthat raise between $50,000 and $10 million annually. We sell our solutionsthrough a direct sales force complemented by our partner network. Our salesforce is increasing its focus on acquiring a higher number of mid-market clients.

 

We recognizesubscription and services revenue ratably over the term of our clientagreements beginning on the date such products and services become availablefor use by the client, or the activation date. The terms of our agreements aretypically three years for COM and one year for Common Ground. We currentlyderive the substantial majority of our revenue from subscriptions to our COMsolution. 

 

17

----

Tableof Contents

 

Pricing for ourCOM solution is based on the number of modules licensed, the email list sizeand any related services. We also recognize usage revenue from our clients as apercentage of funds raised at special events, such as runs, walks and rides,and based on additional fees for their increased use of our COM solution. Pricingfor Common Ground is based on the number of seats licensed. We typically do notderive revenue from deployment services for Common Ground as deploymentactivities are generally handled by third-party implementation providers.Common Ground is built on salesforce.com’s Force.com platform. Common Groundclients enter into a license agreement with us and separately enter into alicense agreement with salesforce.com for use of its solution.

 

We believe thenonprofit market for on-demand constituent engagement solutions is large andunderserved, and we plan to continue to invest in our business to pursue thisopportunity. In particular, we expect to incur significant sales and marketingexpenses to increase the number of clients on our COM platform and CommonGround application. We also expect to make substantial investments in researchand development, primarily on new features, platform extensibility and CommonGround. We anticipate increased operating expenses as a result of becoming apublic company and more generally as we seek to grow our business domesticallyand outside of the United States. We expect the percentage of revenue generatedfrom clients outside the United States to increase.

 

**Opportunities, Trends and Uncertainties**

 

Wehave noted several opportunities, trends and uncertainties that we believe aresignificant to an understanding of our financial results:

 

·                  *Increasing Adjusted EBITDA on anannual basis. *Our management and board of directors useAdjusted EBITDA to monitor the performance of our business. Our Adjusted EBITDAwas $2.2 million for the three months ended March 31, 2010, compared to$551,000 for the three months ended March 31, 2009. The growth in AdjustedEBITDA was the result of the growth in our revenue and the improvedproductivity and scale of our business, combined with cost-saving measures weintroduced in 2009 as a result of the economic slowdown. We expect AdjustedEBITDA on an annual basis to continue to grow in absolute dollars, but weexpect its growth as a percentage of revenue to be slower. Adjusted EBITDA isnot determined in accordance with GAAP and is not a substitute for or superiorto financial measures determined in accordance with GAAP. For furtherdiscussion regarding Adjusted EBITDA and a reconciliation of Adjusted EBITDA tonet income, see “Use of Non-GAAP Financial Measures” below.

 

·                  *Growth and investment in Convio Go!and Common Ground.*Weintroduced Convio Go!, our mid-market COM offering, in the first quarter of2008 and Common Ground in the third quarter of 2008. We believe these solutionshave been very well received by NPOs. Both Convio Go! and Common Ground aretargeted primarily at mid-market NPOs and have had lower average pricing thanour broader COM solution. Common Ground has higher gross margins than our COMsolution because Common Ground is hosted on the Force.com platform anddeployment services are typically provided by third parties. We intend tocontinue to invest significantly in Convio Go! and Common Ground research anddevelopment and sales and marketing. As a result, we expect the number of ourmid-market clients to increase, and we expect our revenue from these clients togrow during 2010. However, these solutions are new, and it is difficult for usto predict whether NPOs will continue to adopt these solutions or what impactthese solutions will have on our business. In addition, as we invest in significantupgrades or enhancements to our products to support these solutions, we mayincur additional costs to develop internal use software that are capitalizedunder the applicable accounting guidance. Our capitalization of softwaredevelopment costs in future periods could cause our financial results tofluctuate and be more difficult to predict.

 

·                  *Seasonality and fluctuations inusage revenue. *A significant portion of our usagerevenue is derived from funds raised by our COM clients at special events. Thegrowth and amount of usage revenue vary based on the number of events, thepercent of funds raised online for these events, the growth and success ofevents and our signing of new clients for events. We recognize the usagerevenue from these events when we bill our clients. Usage revenue is seasonalas events are typically held in the spring and fall. As a result, our usagerevenue will be higher during the second and third quarters. In addition,period-over-period comparisons may be impacted significantly by the addition orloss of any special events of our enterprise clients.

 

18

----

Table of Contents

 

·                  *Sales commissions expensed uponsale. *We expense sales commissions in the period in which wesign our agreements, but we generally recognize the related revenue over theterms of those agreements. We may report poor operating results due to highersale commissions in a period in which we experience strong sales of oursolutions, particularly sales to enterprise clients. Alternatively, we mayreport better operating results due to lower sales commissions in a period inwhich we experience a slowdown in sales. As a result, our sales and marketingexpenses are difficult to predict and fluctuate as a percentage of revenue.

 

·                  *Churn. *Our management uses churn to monitor the satisfactionof our clients, to evaluate the effectiveness of our business strategies and asa factor in executive compensation. We define churn as the amount of any lostsoftware monthly recurring revenue and usage revenue in a period, divided byour software monthly recurring revenue at the beginning of the year plus ouraverage usage revenue of the prior year. Despite the economic slowdown in 2009,we had annual churn of less than 10% which was lower than our churn in 2007 and2008. However, our churn is variable especially on a quarterly basis, andaccordingly we cannot predict our churn rate in future periods. Our use ofchurn has limitations as an analytical tool, and you should not consider it inisolation. Other companies in our industry may calculate churn differently,which reduces its usefulness as a comparative measure.

 

·                  *Impact of economic conditions. *The downturn in economic conditions has caused manyNPOs to be more cautious and to delay their purchases of technology and relatedservices. During 2009, we faced increased pricing pressure on our COM solution,and sales of our COM solution to new clients declined. However, COM sales toexisting clients increased. To incentivize NPOs to purchase our solutions, weinvested heavily in the sales and marketing of our lower-priced Convio Go! andCommon Ground solutions which resulted in higher sales of these solutions. Wealso offered short-term promotional sales programs. We will continue toevaluate our solutions and our sales and marketing programs based on generalmarket conditions.

 

**Critical accounting policies and estimates**

 

Our financial statementsare prepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of our financial statements andrelated disclosures requires us to make estimates, assumptions and judgmentsthat affect the reported amount of assets, liabilities, revenue, costs andexpenses, and related disclosures. We base our estimates and assumptions onhistorical experience and other factors that we believe to be reasonable underthe circumstances. We evaluate our estimates and assumptions on an ongoingbasis. Our actual results may differ from these estimates under different assumptionsand conditions. Our most critical accounting policies are listed below:

 

·                  Revenue recognition;

 

·                  Allowance for doubtful accounts;

 

·                  Valuation of goodwill and identifiable intangibleassets;

 

·                  Preferred stock warrants;

 

·                  Stock-based compensation; and

 

·                  Income taxes.

 

19

----

Table ofContents

 

During the three monthsended March 31, 2010, there were no significant changes in our criticalaccounting policies or estimates. See our consolidated financial statements andfootnotes and our Management’s Discussion and Analysis included in ourProspectus filed with the SEC on April 29, 2010, for additionalinformation about these critical accounting policies, as well as a descriptionof our significant accounting policies.

 

**Use of Non-GAAP Financial Measures**

 

We define AdjustedEBITDA as net income (loss) less interest income and gain (loss) on preferredstock warrant revaluation plus interest expense, provision for taxes,depreciation expense, amortization expense and stock-based compensationexpense. We have included Adjusted EBITDA in this Form 10-Q because (i) webelieve Adjusted EBITDA and similar measures are widely used by investors,securities analysts and other interested parties in our industry as a measureof financial performance and (ii) our management uses Adjusted EBITDA tomonitor the performance of our business.

 

We also believeAdjusted EBITDA facilitates operating performance comparisons from period toperiod by excluding potential differences caused by variations in capitalstructures affecting interest income and expense, tax positions, such as theimpact of changes in effective tax rates and the impact of depreciation andamortization expense.

 

Our use ofAdjusted EBITDA has limitations as an analytical tool, and you should notconsider it in isolation or as a substitute for analysis of our results asreported under GAAP. Some of these limitations are:

 

·                  although depreciation and amortization are non-cash charges, the assetsbeing depreciated and amortized may have to be replaced in the future, andAdjusted EBITDA does not reflect cash capital expenditure requirements for suchreplacements;

 

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

 

·                  Adjusted EBITDA does not consider the potentially dilutive impact ofequity-based compensation;

 

·                  Adjusted EBITDA does not reflect the interest expense or the cash requirementsnecessary to service interest or principal payments on our indebtedness;

 

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

 

·                  other companies, including companies in our industry, may calculateAdjusted EBITDA differently, which reduces its usefulness as a comparativemeasure.

 

20

----

Table ofContents

 

Becauseof these limitations, you should consider Adjusted EBITDA alongside otherfinancial performance measures, including various cash flow metrics, net income(loss) and our other GAAP results. The following table presents areconciliation of Adjusted EBITDA to net income (loss), the most comparableGAAP measure, for each of the periods indicated:

 
| ** **                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                     | ** ** |
| **Reconciliation of Adjusted EBITDA  to net income (loss):** |       |                                   |       |   |   |
| Net income (loss)                                            |       | $                                      | 182        |   | $ | (1,811 | ) |
| Interest (income) expense, net                               |       | 62                                     |       | 141 |   |
| Depreciation and amortization                                |       | 980                                    |       | 1,219 |   |
| Stock-based compensation                                     |       | 529                                    |       | 803 |   |
| Loss on warrant revaluation                                  |       | 469                                    |       | 174 |   |
| Provision for income taxes                                   |       | 24                                     |       | 25 |   |
| Adjusted EBITDA                                              |       | $                                      | 2,246      |   | $ | 551 |   |
| Adjusted EBITDA as a percentage of total revenue             |       | 14                                     | %          | 4 | % |

 

**Results of operations**

 

The followingtable sets forth our results of operations for the periods indicated:

 
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                         | ** ** | **(in thousands)**                     | ** ** |
| **Statements of Operations Data:** |       |                                   |       |   |   |
| Revenue:                           |       |                                   |       |   |   |
| Subscription and services          |       | $                                      | 14,363     |   | $ | 13,283 |   |
| Usage                              |       | 2,330                                  |       | 1,377 |   |
| Total revenue                      |       | 16,693                                 |       | 14,660 |   |
| Cost of revenue                    |       | 6,297                                  |       | 6,196 |   |
| Gross profit                       |       | 10,396                                 |       | 8,464 |   |
| Operating expenses:                |       |                                   |       |   |   |
| Sales and marketing                |       | 5,324                                  |       | 5,434 |   |
| Research and development           |       | 2,525                                  |       | 2,495 |   |
| General and administrative         |       | 1,538                                  |       | 1,660 |   |
| Amortization of other intangibles  |       | 272                                    |       | 356 |   |
| Total operating expenses           |       | 9,659                                  |       | 9,945 |   |
| Income (loss) from operations      |       | 737                                    |       | (1,481 | ) |
| Interest income                    |       | 1                                      |       | 2 |   |
| Interest expense                   |       | (63                                    | )          | (143 | ) |
| Other income (expense)             |       | (469                                   | )          | (164 | ) |
| Income (loss) before income taxes  |       | 206                                    |       | (1,786 | ) |
| Provision for income taxes         |       | 24                                     |       | 25 |   |
| Net income (loss)                  |       | $                                      | 182        |   | $ | (1,811 | ) |

 

21

----

Table ofContents

 

The followingtable sets forth our results of operations expressed as a percentage of totalrevenue for each of the periods indicated:

 
| ** **                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Statements of Operations Data:** |       |                                   |       |   |   |
| Revenue:                           |       |                                   |       |   |   |
| Subscription and services          |       | 86                                     | %          | 91 | % |
| Usage                              |       | 14                                     |       | 9 |   |
| Total revenue                      |       | 100                                    |       | 100 |   |
| Cost of revenue                    |       | 38                                     |       | 42 |   |
| Gross margin                       |       | 62                                     |       | 58 |   |
| Operating expenses:                |       |                                   |       |   |   |
| Sales and marketing                |       | 32                                     |       | 37 |   |
| Research and development           |       | 15                                     |       | 17 |   |
| General and administrative         |       | 9                                      |       | 11 |   |
| Amortization of other intangibles  |       | 2                                      |       | 3 |   |
| Total operating expenses           |       | 58                                     |       | 68 |   |
| Income (loss) from operations      |       | 4                                      |       | (10 | ) |
| Interest income                    |       | 0                                      |       | 0 |   |
| Interest expense                   |       | 0                                      |       | (1 | ) |
| Other income (expense)             |       | (3                                     | )          | (1 | ) |
| Income (loss) before income taxes  |       | 1                                      |       | (12 | ) |
| Provision for income taxes         |       | 0                                      |       | 0 |   |
| Net income (loss)                  |       | 1                                      | %          | (12 | )% |

 

*ThreeMonths Ended March 31, 2010 Compared to the Three Months Ended March 31,2009*

 

The followingdiscussion of our results of operations is based upon actual results ofoperations for each of the three months ended March 31, 2010 and 2009.Dollar information provided in the tables below is in thousands.

 

***Revenue***

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Subscription and services  |       | $                                      | 14,363     |   | $ | 13,283 |   |
| *Percent of total revenue* | * *   | *86.0*                                 | *%*        | *90.6* | *%* |
| Usage                      |       | $                                      | 2,330      |   | $ | 1,377 |   |
| *Percent of total revenue* | * *   | *14.0*                                 | *%*        | *9.4* | *%* |

 

*Subscriptionand Services Revenue*

 

Subscription andservices revenue increased $1.1 million, or 8%, for the three months ended March 31,2010 as compared to the three months ended March 31, 2009. The increase insubscription and services revenue was attributable to revenue recognized fromsales of our solutions to new clients and from sales of additional products andservices to existing clients.

 

*UsageRevenue*

 

Usage revenueincreased $953,000, or 69%, for the three months ended March 31, 2010 ascompared to the three months ended March 31, 2009. The increase wasattributable to a $698,000 increase in revenue from special events and a$255,000 increase in additional fees for client usage above the levels includedin monthly subscription fees. The increase in usage revenue from feesassociated with client usage above the levels included in monthly subscriptionfees is primarily attributable to higher volumes of transactions related toonline fundraising for disaster relief efforts.

 

22

----

Table ofContents

 

***Cost of Revenue***

 
| ** **      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------|------------|----------------------------------------|------------|
| ** **      | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Cost of revenue |       | $                                      | 6,297      |   | $ | 6,196 |   |
| Gross profit    |       | $                                      | 10,396     |   | $ | 8,464 |   |
| *Gross margin*  | * *   | *62.3*                                 | *%*        | *57.7* | *%* |

 

Cost of revenue increased$101,000, or 2%, for the three months ended March 31, 2010 as compared tothe three months ended March 31, 2009. The increase was due primarily to a$117,000 increase in personnel costs and a $126,000 increase in transactionfees, offset by a $127,000 decrease in amortization of acquired technology. Theincrease in personnel costs was the result of increased IT and Servicespersonnel. The increase in transaction fees was related to the correspondingincrease in the volume of online transactions processed by outside serviceproviders. Amortization of acquired technology decreased as a portion of therelated intangible assets became fully amortized in February 2010. Grossmargins for the three months ended March 31, 2010 were 62.3% compared togross margins of 57.7% for the same period in the prior year.  Thisimprovement in gross margins is driven primarily by the increase in usagerevenue, which produces higher margins than our standard subscription andservices revenue, in addition to the decrease in amortization of acquiredtechnology.

 

***Sales and Marketing***

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Sales and marketing        |       | $                                      | 5,324      |   | $ | 5,434 |   |
| *Percent of total revenue* | * *   | *31.9*                                 | *%*        | *37.1* | *%* |
|                            |            |                                        |            |  |  |  |  |

 

Sales and marketingexpenses decreased $110,000, or 2% for the three months ended March 31,2010 as compared to the three months ended March 31, 2009. The decreasewas primarily attributable to a $219,000 decrease in personnel costs, offset byan $86,000 increase in marketing expenses. The decrease in personnel costs wasattributable to a $149,000 decrease in commission expense and an $82,000decrease in stock-based compensation partially offset by an increase inbenefits costs. The decrease in commission expense is a direct result of anenterprise deal that was entered into during the first quarter of 2009.  As commissions are expensed at the time ofsale, commission expenses are difficult to predict and fluctuate on a quarterlybasis. The increase in marketing expense was related to an increase in marketresearch and marketing programs in 2010 in order to drive new clientacquisitions as well as marketing for Common Ground and Convio Go!.

 

***Research and Development***

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Research and development   |       | $                                      | 2,525      |   | $ | 2,495 |   |
| *Percent of total revenue* | * *   | *15.1*                                 | *%*        | *17.0* | *%* |
|                            |            |                                        |            |  |  |  |  |

 

Research and developmentexpenses increased $30,000, or 1%, for the three months ended March 31,2010 as compared to the three months ended March 31, 2009. The increasewas attributable to a $324,000 increase in personnel costs and a $41,000increase in allocated overhead offset by a $116,000 decrease in contractingexpenses all of which were a result of the decrease in our India-basedcontractors offset by a corresponding increase in full-time headcount. Inaddition, research and development expenses of $225,000 that were incurred toupgrade and enhance our internal use software during the three months ended March 31,2010 were capitalized whereas there were no costs incurred during the threemonths ended March 31, 2009 that qualified for capitalization.

 

***General and Administrative***

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| General and administrative |       | $                                      | 1,538      |   | $ | 1,660 |   |
| *Percent of total revenue* | * *   | *9.2*                                  | *%*        | *11.3* | *%* |
|                            |            |                                        |            |  |  |  |  |

 

23

----

Table ofContents

 

General andadministrative expenses decreased $122,000, or 7%, for the three months ended March 31,2010 as compared to the three months ended March 31, 2009. The decreasewas due primarily to a $181,000 decrease in bad debt expense and a $131,000decrease in personnel costs primarily related to stock-based compensationexpense, partially offset by a $123,000 increase in contracting expense and a$35,000 increase in charitable donations. The decrease in bad debt expense wasthe result of an improvement in the aging of our accounts receivable. Theincrease in contracting expense was primarily related to increased legal andaccounting fees. The increase in charitable donations was a result of a programthe Company put in place during the first quarter of 2010 to match donations toHaitian relief efforts made by our employees.

 

***Amortization of Other Intangibles***

 
| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Amortization of other intangibles |       | $                                      | 272        |   | $ | 356 |   |
| *Percent of total revenue*        | * *   | *1.6*                                  | *%*        | *2.4* | *%* |
|                                   |            |                                        |            |  |  |  |  |

 

These amounts representthe amortization of intangibles recorded in connection with our acquisition ofGetActive in February 2007 and are being amortized on a straight-linebasis over the estimated useful lives. Amortization of other intangiblesdecreased as a portion of the related intangible assets became fully amortizedin February 2010.

 

***Interest Income (Expense)***

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Interest income                 |       | $                                      | 1          |   | $ | 2 |   |
| Interest expense                |       | (63                                    | )          | (143 | ) |
| Total interest income (expense) | * *   | (62                                    | )          | (141 | ) |
| *Percent of total revenue*      | * *   | *(0.4*                                 | *)%*       | *(1.0* | *)%* |
|                                 |            |                                        |            |  |  |  |  |

 

Interest income(expense), net decreased $79,000, or 56% for the three months ended March 31,2010 as compared to the three months ended March 31, 2009. The decreasewas due to a decrease in our average outstanding debt.

 

***Other Income (Expense)***

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Other income (expense)     |       | $                                      | (469       | ) | $ | (164 | ) |
| *Percent of total revenue* | * *   | *(2.8*                                 | *)%*       | *(1.1* | *)%* |
|                            |            |                                        |            |  |  |  |  |

 

We issued warrantsexercisable for our convertible preferred stock in 2005. In the three monthsended March 31, 2010, we recorded expense of $469,000 as the liabilitywith respect to the warrants increased, and we recorded the correspondingincrease in fair value. In the three months ended March 31, 2009, werecorded expense of $164,000 as the liability with respect to the warrantsincreased and we recorded the corresponding increase in fair value. Immediatelyprior to the effectiveness of our initial public offering we recorded a finalfair value adjustment based upon the offering price of $9.00 per share andrecorded other income of $454,000. Upon the closing of the offering, alloutstanding preferred stock warrants were converted into warrants to purchasecommon stock and, accordingly, the liability was reclassified to additionalpaid-in capital during the second quarter of 2010.

 

***Income Taxes***

 

We recorded a provisionfor federal alternative minimum taxes and state income taxes totaling $24,000and $25,000 for the three months ended March 31, 2010 and 2009,respectively. Our effective tax rate varies from the U.S. federal tax rateprimarily due to our recorded valuation allowance against our deferred taxassets. We assess the likelihood that deferred tax assets will be realized, andwe recognize a valuation allowance if it is more likely than not that someportion of the deferred tax assets will not be realized. This assessmentrequires judgment as to the likelihood and amounts of future taxable income bytax jurisdiction. To date, we have provided a full valuation allowance againstour deferred tax assets as we believe the objective and verifiable evidence ofour historical pretax net losses outweighs the positive evidence of our pre-taxincome for the three months ended March 31, 2010 and forecasted futureresults.

 

24

----

Table ofContents

 

Although we believe thatour tax estimates are reasonable, the ultimate tax determination involvessignificant judgment that is subject to audit by tax authorities in theordinary course of business. We will continue to monitor the positive andnegative evidence and we will adjust the valuation allowance as sufficientobjective positive evidence becomes available.

 

***Net Income (Loss)***

 

We generated net incomeof $182,000 for the three months ended March 31, 2010, compared to a netloss of $1.8 million for the three months ended March 31, 2009. Theincrease in net income arose principally from an increase in revenues.

 

**Liquidity and capital resources**

 

Prior to our initialpublic offering, we financed our operations and met our capital expenditurerequirements primarily through the private sale of equity securities and debtfinancings as well as cash flows from operations in 2009 and the three monthsended March 31, 2010. As of March 31, 2010, we had $16.2 million ofcash and cash equivalents and $20.2 million of working capital excludingdeferred revenue. As of March 31, 2010, we had an accumulated deficit of$18.1 million. We funded this deficit from $47.4 million in net proceedsraised from the sale of our preferred stock. We last sold shares of ourpreferred stock in April 2007. On May 4, 2010, we completed aninitial public offering of our stock which included 3,789,527 shares sold byus. In addition, the underwriters exercised their option to purchase anadditional 769,909 shares from us to cover over-allotments. After deducting thepayment of underwriters’ discounts and commissions, the net proceeds from thesale of shares were approximately $38.2 million.

 

The followingtable sets forth a summary of our cash flows for the periods indicated:

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                     | ** ** |
| Net cash provided by (used in) operating activities |       | $                                      | 451        |   | $ | (570 | ) |
| Net cash used in investing activities               |       | (753                                   | )          | (158 | ) |
| Net cash used in financing activities               |       | (166                                   | )          | (832 | ) |
| Cash and cash equivalents at end of period          |       | 16,194                                 |       | 12,268 |   |
|                                                     |            |                                        |            |  |  |  |  |

 

*NetCash Provided By (Used In) Operating Activities*

 

During the three monthsended March 31, 2010, we generated $451,000 of cash from operatingactivities, which consisted of our net income of $182,000 and non-cash chargesof $2.0 million. These amounts were partially offset by $1.7 million of cashoutflows from changes in operating assets and liabilities. The cash outflowswere primarily attributable to a $1.1 million increase in prepaid expenses as aresult of deferred stock offering costs paid during the three months ended March 31,2010, a decrease in accounts payable and accrued liabilities of $121,000 due tothe timing of payments and a decrease in deferred revenue of $440,000 as aresult of the timing of transactions and various sales promotions offeredduring 2009 which resulted in deferred payments.

 

During the three monthsended March 31, 2009, we utilized $570,000 of cash from operatingactivities, which consisted of our net loss of $1.8 million, offset by non-cashcharges of $2.2 million. In addition, cash outflows from changes in operatingassets included an increase in accounts receivable of $2.3 million driven bysales activities and usage revenue growth during the three months ended March 31,2009 and an increase in prepaid expenses of $616,000 due to the timing of paymentsfor software term licenses and maintenance, insurance premiums and marketingprograms or events that occur in or cover future periods. These cash outflowswere partially offset by cash inflows from changes in operating liabilitieswhich included an increase in deferred revenue of $2.4 million resulting fromthe timing of transactions and a large annual prepayment which was partiallyoffset by a decrease in accounts payable and accrued liabilities of $367,000due to the timing of payments.

 

25

----

Table ofContents

 

*NetCash Used In Investing Activities*

 

Net cash used ininvesting activities increased $595,000 for the three months ended March 31,2010 as compared to the three months ended March 31, 2009 as a result of a$370,000 increase in capital expenditures and the capitalization of $225,000 ofsoftware development costs incurred to upgrade and enhance our internal usesoftware during the three months ended March 31, 2010. Net cash used ininvesting activities for the three months ended March 31, 2009 wascomprised solely of capital expenditures.

 

*NetCash Used In Financing Activities*

 

Net cash used infinancing activities decreased $666,000 for the three months ended March 31,2010 compared to the three months ended March 31, 2009 as a result of a$580,000 decrease in payments made on long-term debt and capital leases and an$86,000 increase in proceeds received from the issuance of common stock uponthe exercise of stock options.

 

On May 4, 2010, weclosed our initial public offering raising net proceeds of approximately$38.2 million after deducting underwriting discounts and commissions. Webelieve that our cash flows from operations and our current cash and cashequivalents will be sufficient to meet our working capital and capitalexpenditure requirements for at least the next twelve months. However, we mayelect to raise additional capital through the sale of additional equity or debtsecurities or obtain a credit facility to develop or enhance our services, tofund expansion, to respond to competitive pressures or to acquire complementaryproducts, businesses or technologies. If we elect, additional financing may notbe available in amounts or on terms that are favorable to us, if at all. If weraise additional funds through the issuance of equity or convertible debtsecurities, our existing stockholders could suffer significant dilution, andany new equity securities we issue could have rights, preferences andprivileges superior to those of holders of our common stock.

 

**Contractual Obligations and Commitments**

 

During the three-monthperiod ended March 31, 2010, there were no material changes to ourcontractual obligations and commitments disclosures as set forth under thecaption, “Contractual Obligations and Commitments” in the Management’sDiscussion and Analysis of Financial Condition and Results of Operations, asreported in our Prospectus filed pursuant to Rule 424(b) under the SecuritiesAct with the SEC on April 29, 2010.

 

**Credit Facilities**

 

On July 31, 2009, weamended our credit facility with Comerica Bank to a $10.0 million revolvingline of credit plus an existing term loan. As of March 31, 2010, we had$975,000 outstanding under the revolving line of credit and $936,000outstanding under the term loan. Under our revolving line of credit, $1.0million is available on a non-formula basis. The remaining $9.0 million isformula-based and capped at 80% of eligible accounts receivable. Amountsoutstanding under this revolving line of credit bear interest at the greater ofthe daily adjusting LIBOR (floor of 2%) plus 300 basis points or the dailyadjusted LIBOR plus 325 basis points. Any amounts borrowed under this facilitymay be repaid and reborrowed at any time prior to April 26, 2011, at whichtime the entire principal balance outstanding becomes due and payable. The termloan bears interest at the same rate as the revolving line of credit above.This facility is secured by substantially all of our assets, includingintellectual property.

 

On May 12, 2010, wepaid approximately $1.9 million to our principal lender, Comerica Bank, insatisfaction of the balance outstanding on our line of credit and term loan utilizingproceeds from our initial public offering. As a result, we have the ability toborrow $5.1 million under our revolving line of credit. We are in compliancewith all the related financial covenants and restrictions included in theseagreements.

 

In conjunction with the April 3,2009 execution of our Washington D.C. operating lease, we were required toprovide a $350,000 standby letter of credit with Comerica for the benefit ofthe landlord to secure the office space per the lease agreement. In addition,we still have a standby letter of credit in the amount of $2.3 million for thebenefit of the landlord of our Austin, Texas facility, resulting in a totalstandby letter of credit of $2.6 million of the formula-based $9.0 millionline of credit.

 

26

----

Table ofContents

 

In addition to the aboveagreement, we entered into a capital lease agreement with ATEL Ventures on March 15,2006 to fund certain purchases of equipment. The ability to borrow under thislease agreement expired on March 31, 2007. As of March 31, 2010, ouroutstanding capital lease obligation was $5,000 and the final payment was madeon this lease during April 2010.

 

**Off-Balance Sheet Arrangements**

 

During the three monthsended March 31, 2010, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes.

 

**Item3.  Quantitative and qualitativedisclosures about market risk**

 

*InterestRate Risk*

 

We had cash and cashequivalents of $16.2 million and $16.7 million at March 31, 2010 and December31, 2009, respectively. These amounts are held primarily in cash or moneymarket funds. We do not hold any auction-rate securities. Cash and cashequivalents are held for working capital purposes. Due to the short-term natureof these investments, we believe that we do not have any material exposure tochanges in the fair value of our investment portfolio as a result of changes ininterest rates. Any declines in interest rates will reduce future interestincome. If overall interest rates fell by 10% in the three months ended March 31,2010, our interest income would not have been materially affected.

 

Our exposure to interestrates also relates to the increase or decrease in the amount of interest we mustpay on our outstanding debt. Outstanding borrowings under our term loan andline of credit bear a variable rate of interest based upon the LIBOR rate andare adjusted monthly. As of March 31, 2010, we had $1.9 million of debtoutstanding under our term loan and line of credit, which bore interest atLIBOR (not less than 2%) plus 3%, or 5%. If overall interest rates hadincreased by 10% in the three months ended March 31, 2010, our interestexpense would not have been materially affected.

 

*ForeignCurrency Risk*

 

Our results of operationsand cash flows are not subject to fluctuations due to changes in foreigncurrency exchange rates. We bill our clients in U.S. dollars and receivepayment in U.S. dollars, and substantially all of our operating expenses aredenominated in U.S. dollars. If we grow sales of our solutions outside theUnited States, our contracts with foreign clients may not be denominated indollars and we may become subject to changes in currency exchange rates.

 

**Item4T.  Controls and procedures**

 

**Evaluation of disclosure controls and procedures**

 

Asof the end of the period covered by this Quarterly Report on Form 10-Q,our management, withthe participation of our principal executive officer and our principalfinancial officer, evaluated the effectiveness of our disclosure controls andprocedures as defined in Rules 13a-15(e) or15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”).Based on this evaluation, our principal executive officer and our principalfinancial officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Exchange Act (i) is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms, and (ii) is accumulated andcommunicated to our management, including our principal executive officer andour principal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

**Limitations on the Effectiveness ofControls**

 

Our disclosure controlsand procedures provide our principal executive officer and our principalfinancial officer reasonable assurances that our disclosure controls andprocedures will achieve their objectives. However, company management,including our principal executive officer and our principal financial officer,does not expect that our disclosure controls and procedures or our internalcontrol over financial reporting can or will prevent all human error. A controlsystem, no matter how well designed and implemented, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Furthermore, the design of a control system must reflect the fact thatthere are internal resource constraints, and the benefit of controls must beweighed relative to their corresponding costs. Because of the limitations inall control systems, no evaluation of controls can provide complete assurancethat all control issues and instances of error, if any, within our company aredetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur due to human erroror mistake. Additionally, controls, no matter how well designed, could becircumvented by the individual acts of specific persons within theorganization. The design of any system of controls is also based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated objectives underall potential future conditions.

 

27

----

Tableof Contents

 

**Changes in internal controls over financial reporting**

 

There have been nochanges in our internal control over financial reporting that occurred duringthe three months ended March 31, 2010 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.  Other Information**

 

**Item1.  Legal proceedings**

 

We are not currentlyinvolved in any material legal proceedings. From time to time, we may becomeinvolved in legal proceedings arising in the ordinary course of our business.

 

**Item1A.  Risk factors**

 

OurProspectus filed with the SEC pursuant to rule 424(b) under theSecurities Act on April 29, 2010 includes a detailed discussion of certainmaterial risk factors facing our company.  Such risk factors continue to be relevant toan understanding of our business, financial condition and results of operationsand, accordingly, you should review and consider such risk factors in makingany investment decision with respect to our securities. We have marked with anasterisk (*) those risks described below that reflect substantive changes fromthe risks described under “Risk Factors” included in our Prospectus.

 

**Risks Related to Our Business**

 

**We have a history of losses, and wemay not achieve profitability in the future which could limit the growth of ourbusiness.**

 

Wehave had operating losses each year since our inception in October 1999.We expect to incur additional costs and operating expenditures as we furtherdevelop and expand our operations. In addition, as a public company, we incuradditional legal, accounting and other expenses that we did not incur as aprivate company. While our revenue has grown in recent periods, this growth maynot be sustainable, and we may not achieve sufficient revenues to achieveprofitability in the future. Our operating expenses, which include sales andmarketing, research and development and general and administrative expenses,are based on our expectations of future revenue and are, to a large extent, fixedin the short term. In addition, we may elect to spend more to grow our businessin the future without certainty of near-term returns. Accordingly, we may notachieve profitability, and we may incur losses in the future, which couldaffect the market price of our common stock or harm our ability to raiseadditional capital.

 

**Our financial results will fluctuate,and if we fail to meet the expectations of analysts or investors, our stockprice and the value of your investment could decline substantially.**

 

Ourresults of operations are difficult to forecast. We have experienced and expectto continue to experience fluctuations in revenue and operating results fromquarter to quarter. In particular, our usage revenue is difficult to predictbecause it is derived from our clients’ usage of our solutions for specialevents such as runs, walks and rides, and we recognize the associated revenue inthe period reported and billed to the client. The growth, if any, and amount ofusage revenue vary based on the number of events, the percent of funds raisedonline for these events, the growth and success of events and our signing ofnew clients for events. These factors are very difficult to predict, and ourusage revenue fluctuates significantly as a result.

 

28

----

Table of Contents

 

Ourusage revenue reflects the general seasonality of special events which are heldmore often in the spring and fall. Therefore, we recognize a majority of our usagerevenue in the second and third quarters. We recognized 67% and 63% of ourannual usage revenue in the combined second and third quarters of 2008 and2009, respectively. Usage revenue in the second and third quarters representedbetween 15% and 16% of total revenue for those periods in 2008 and 2009,respectively; whereas, usage revenue in the first and fourth quartersrepresented between 8% and 10% of total revenue for those periods in 2008 and2009, respectively. Furthermore, although we experience seasonally lower usagerevenue from special events during the first and fourth fiscal quarters, ouroperating expenses experience less of a reduction during those periods.

 

Inaddition, we experienced seasonality in our sales in the third quarter of 2008and 2009, and as a result accrued lower commissions during those quarters. Suchseasonality causes our quarterly operating results to fluctuate and bedifficult to predict.

 

Otherreasons for these fluctuations include but are not limited to:

 

·                 our ability during anyperiod or over time to sell our products and services to existing and newclients and to satisfy our clients’ requirements;

·                 the addition orloss of clients, particularly enterprise clients, and our inability to forecastthe timing and size of larger deals;

·                 changes in ourpricing policies, whether independent or in reaction to a change by ourcompetitors;

·                 client renewalrates and unexpected early contract terminations or concessions;

·                 the impact ofgeneral economic conditions on our clients and their ability to pay us in atimely manner;

·                 the changingmix in our client base and revenue per client;

·                 the amount andtiming of our sales and marketing expenses, in particular commission andreferral payments;

·                 the impact ofsignificant occurrences, such as natural disasters, on fundraising by NPOs,including those with missions unrelated to these occurrences;

·                 the expansion andincreasing complexity of our multiple solutions and our business generally;

·                 the timing ofproject and milestone achievements under our services arrangements and therelated revenue recognition;

·                 the amount andtiming of third-party contracting fees;

·                 the impact ofany security incidents or service interruptions;

·                 the timing andsignificance of the introduction of new products and services by us and ourcompetitors;

·                 our regulatorycompliance costs;

·                 any impairmentof our intangible assets;

·                 any introductionof new accounting rules; and

·                 future costsrelated to acquisitions of technologies or businesses and their integration.

 

Webelieve that our results of operations, including the levels of our revenue andoperating expenses, will vary in the future and that period-to-periodcomparisons of our operating results may not be meaningful. If our financialresults fall below the expectations of securities analysts or investors, ourstock price and the value of your investment could decline substantially. Youshould not rely on the results of any one quarter as an indication of futureperformance.

 

**If NPOs do not adopt our solutions,our revenue and operating results will be adversely impacted.**

 

Ourability to generate revenue and achieve profitability depends on the adoptionof our solutions by NPOs of all sizes. We cannot be certain that the demand ofNPOs for solutions such as ours will continue to develop and grow at itshistoric rates, if at all. We also do not know to what extent NPOs will be successfulutilizing our solutions to engage constituents and generate funds. The lessthey are able to do so, the less revenue we will generate.

 

29

----

Table of Contents

 

Weinitially began our business with one solution and now offer multiple productsand services. As we grow, we plan on offering new solutions and services in thefuture. We cannot be certain that NPOs will elect to use our solutions or wantor need the functionality of our new solutions and service offerings. As aresult, as NPOs become more comfortable and sophisticated in their use oftechnology for their constituent relationship needs, we may fail to develop andoffer solutions and services that meet NPOs’ needs in this area, and ourrevenue may not grow.

 

Factorsthat may affect market adoption of our solutions, some of which are beyond ourcontrol, include:

 

·                 reluctance by NPOs to adopt on-demandsolutions;

·                 the price and performance ofour solutions;

·                 our ability to integratewith other solutions used by NPOs;

·                 the impact of the economicdownturn on NPOs, their fundraising and their spending on technology andservices;

·                 the purchasing cycles ofNPOs;

·                 the level of customizationwe can offer;

·                 the availability,performance and price of competing products and services, including internallydeveloped solutions and general solutions not designed specifically for NPOs;

·                 the breadth and quality ofour service offerings;

·                 the concerns related tosecurity and the reluctance by NPOs to trust third parties to store and managetheir internal data; and

·                 any adverse publicity aboutus, our solutions or the viability, reliability or security of on-demandsoftware solutions generally from third-party reviews, industry analyst reportsand adverse statements made by clients and competitors.

 

Whileno one client accounted for more than 10% of our revenue in the first quarterof 2010, our enterprise clients can contribute substantially to our revenuefrom quarter to quarter. If NPOs, especially enterprise NPOs, do not continueto adopt and renew their subscriptions to our solutions, our revenues willexperience volatility and our stock price could fall.

 

**Our business depends on our clients’renewing and expanding their subscriptions for our solutions. Any decline inour client renewals and expansions would reduce our revenue.**

 

Wesell solutions pursuant to agreements that are generally three years in lengthfor Convio Online Marketing and one year in length for Common Ground. Ourclients have no obligation to renew their subscriptions for our solutions afterthe expiration of their initial subscription period. Our client renewal ratesmay decline or fluctuate and our client cancellation rates may increase orfluctuate as a result of a number of factors, including the following:

 

·                 a client switches to a competitor;

·                 a client terminates its agreement with us dueto employee turnover in the client organization;

·                 a client is dissatisfied with our agreementterms;

·                 a client encounters financial difficulties;

·                 our solutions do notcontinue to fit a client’s needs as they evolve; and

·                 our client has a poor service experience withour partners or us.

 

Ifclients do not renew their agreements, our revenue will decline and ouroperating results will be adversely affected.

 

Weseek to grow our business by expanding the products and services our clientsbuy from us as their needs evolve. However, if our clients fail to buyadditional products and services from us, the growth of our business will beharmed. Further, if our clients elect to subscribe to a fewer number ofproducts upon renewal with us, our business will be harmed.

 

Someof our agreements also provide that our clients may terminate their agreementsfor convenience after a specified period of time. Some of our agreements allowa client to cancel during the first year of such client’s initial subscriptionfor our solutions for performance-related reasons. If our clients terminatetheir agreements with us, our revenue will grow more slowly than expected or evendecline, and we may not be able to achieve profitability. Further, if a clientseeks to terminate its agreement with us, we may not be successful inenforcing, or we may not elect to enforce, our agreement with the client.

 

30

----

Table of Contents

 

Weserve a broad range of NPOs, the less established of whom may be subject to ahigher rate of insolvency or may have limited durations due to the underlyingcauses that they support, such as political campaigns. We are generally notable to perform financial due diligence on the creditworthiness of ourprospective clients, and we may not accurately predict a client’screditworthiness. As a result, if we are unable to collect from our clients,our revenue and cash flows could be less than what we expect.

 

**Many NPOs are price sensitive, and ifthe prices we charge for our solutions are unacceptable to NPOs, our operatingresults will be harmed.**

 

ManyNPOs are price sensitive. As the market for our solutions matures, or as newcompetitors introduce new products or services that compete with ours, we maybe unable to renew our agreements with existing clients or attract new clientsat prices that sustain historical margins.

 

Inaddition, poor general economic conditions have led to our offering salespromotions and to our clients’ renegotiating their pricing and contract termsas well as requesting other concessions, especially during their contract’srenewal period. These promotions and concessions can adversely impact ouroperating results. These general economic conditions can also lead ourcompetitors to aggressively price their product offerings, further intensifyingthe pricing pressure on our solutions. Furthermore, demand for our morecomprehensive and higher-priced solutions may decline. As a result, ourrevenue, gross margin and operating results may be adversely affected.

 

**Because we expense commissionsassociated with sales of our solutions immediately upon execution of asubscription agreement with a client and generally recognize the revenueassociated with such sale over the term of the agreement, our operating incomein any period may not be indicative of our financial health and futureperformance.**

 

Weexpense commissions paid to our sales personnel in the period in which we enterinto an agreement for the sale of our solutions. In contrast, we generallyrecognize the revenue associated with a sale of our solutions ratably over theterm of the subscription agreement, which is typically three years for COM andone year for Common Ground. Although we believe increased sales is a positiveindicator of the long-term health of our business, increased sales,particularly sales to enterprise clients, would increase our operating expensesand decrease earnings in any particular period. Thus, we may report pooroperating results due to higher sales commissions in a period in which weexperience strong sales of our solutions. Alternatively, we may report betteroperating results due to the reduction of sales commissions in a period inwhich we experience a slowdown in sales. Therefore, you should not rely on ouroperating income during any one quarter as an indication of our financialhealth and future performance.

 

**Because we generally recognizerevenue from sales of our products and services ratably over the term of ouragreements, downturns or upturns in sales may not be immediately reflected inour operating results.**

 

Wegenerally recognize revenue on a subscription basis, meaning we recognize therevenue ratably over the terms of our clients’ agreements. We typically do notinvoice clients the full contract amount at the time of the execution of anagreement. Rather, we invoice our clients periodically based on our arrangementwith each client. We record deferred revenue when we invoice a client and onlywith respect to the invoiced amount for such period, but we only recognize thecorresponding revenue ratably over the term of the agreement. As a result,deferred revenue is not an effective determinant of sales or predictor ofrevenue in any particular period, and much of the revenue we recognize in anyquarter may be from deferred revenue from previous quarters. A decline in newor renewed subscriptions in any one quarter may not result in a decrease inrevenue in such quarter but will negatively affect our revenue in futurequarters. We may be unable to adjust our cost structure to reflect thesereduced revenues. Accordingly, downturns in sales or renewals of our productsand services will adversely impact revenue and operating results on an on-goingbasis in future periods.

 

31

----

Table of Contents

 

**We anticipate that our new CommonGround application will help us to grow our business, but if NPOs do not adoptCommon Ground, the growth in our revenue could be limited and our businessharmed.***

 

Weintroduced our Common Ground application in September 2008. As of March 31,2010, over 200 NPOs had adopted Common Ground. We expect to increase ourspending on research and development and sales and marketing to expand thenumber of Common Ground clients and the revenue we generate from these clients.

 

CommonGround is a new product, and if NPOs do not adopt Common Ground, then ourbusiness will have difficulty growing and will be harmed. We believe CommonGround’s acceptance and adoption by NPOs will be dependent upon, among otherthings, Common Ground’s functional breadth, quality, ease of use, performance,reliability, and cost effectiveness. Even if the advantages of Common Groundover legacy solutions are established, we are unable to predict to what extentCommon Ground will be adopted in the marketplace.

 

Weplan on releasing more functionality for our Common Ground application. Theintroduction of these new features may replace sales of our Convio OnlineMarketing solution, thereby offsetting the benefit of a successful feature introduction.This could harm our operating results by decreasing sales of our higher pricedsolution, exposing us to greater risk of decreased revenues. Any or all of theabove occurrences could harm our business and results of operations.

 

**We do not have any control over theavailability or performance of salesforce.com’s Force.com platform, and if weor our clients encounter problems with it, we may be required to replaceForce.com with another platform, which would be difficult and costly.**

 

CommonGround runs on salesforce.com’s Force.com platform, and we do not have anycontrol over the Force.com platform or the prices salesforce.com charges ourNPO clients. salesforce.com may discontinue or modify Force.com. salesforce.comcould also increase its fees or modify its pricing incentives for NPOs. Ifsalesforce.com takes any of these actions, we may suffer lower sales, increasedoperating costs and loss of revenue from Common Ground until equivalenttechnology is either developed by us, or, if available, is identified, obtainedand integrated.

 

Inaddition, we do not control the performance of Force.com. If Force.comexperiences an outage, Common Ground will not function properly, and ourclients may be dissatisfied with our Common Ground application. If salesforce.comhas performance or other problems with its Force.com platform, they willreflect poorly on us and the adoption and renewal of our Common Groundapplication and our business may be harmed.

 

**We encounter long sales cycles,particularly for our largest clients, which could have an adverse effect on thesize, timing and predictability of our revenue and cash flows.**

 

Generally,our sales cycles last between three and nine months, but in the case ofenterprise NPOs our sales cycle can last longer. Potential clients,particularly our larger clients, generally commit significant resources to anevaluation of available technologies and require us to expend substantial time,effort and money educating them as to the value of our solutions. We may expendsignificant funds and management resources during a sales cycle and ultimatelyfail to close the sale. The sales cycle for our solutions is subject tosignificant risks and delays over which we have little or no control,including:

 

·                 our clients’ budgetaryconstraints;

·                 the timing of our clients’budget cycles and approval processes;

·                 our competitors’ offeringsand sales activities;

·                 our clients’ willingness toreplace their current methods or solutions;

·                 our clients’ employee turnoverrates; and

·                 our need to educatepotential clients about the uses and benefits of our solutions.

 

Ifwe are unsuccessful in closing sales after expending significant funds andmanagement resources or if we experience delays in our sales cycles, the size,timing and predictability of our revenue and cash flows could be harmed.

 

32

----

Table of Contents

 

**Interruptions, delays or securitybreaches at third-party datacenters or by our payment processors could impairthe delivery of our solutions and harm our reputation and business.**

 

Wehost our solutions and serve all of our clients from two third-partydatacenters, one located in Austin, Texas and the other in Sacramento,California. Any interruptions or problems at either datacenter would likelyresult in significant disruptions in our solutions hosted at such site. We donot control the operation of these datacenters, and each is vulnerable todamage or interruption from earthquakes, floods, fires, power loss,telecommunications failures and similar events. Each datacenter is also subjectto break-ins, sabotage, intentional acts of vandalism and similar misconduct.Despite precautions at each datacenter, the occurrence of a natural disaster oran act of terrorism, a decision to close a datacenter without adequate noticeor other unanticipated problems such as work stoppages at a datacentercould result in interruptions or delays in our solutions and our failure tomeet our service level commitments to our clients. Neither datacenter iscurrently configured to provide failover services to the other datacenter inthe event services at a facility are interrupted. Each datacenter has no obligationto renew its agreement with us on commercially reasonable terms, or at all. Ifwe are unable to renew our agreement with a datacenter on commerciallyreasonable terms, we may experience costs or downtime in connection with thetransfer to a new third-party datacenter.

 

Inaddition, we rely on third-party providers for payment processing of fundscontributed to our clients by their constituents. Such third-party providershave experienced significant downtime in the past due to high transactionvolumes and may experience similar downtime in the future. Althoughsubstantially all of our subscription agreements do not provide service levelcommitments relating to payment processing services provided by third parties,any interruptions in our solutions may cause harm to our reputation, causeclients to terminate their subscription agreements and harm our renewal rates.

 

**We provide service level commitmentsto our clients, which could cause us to issue credits for future products andservices if the stated service levels are not met for a given period and couldsignificantly harm our reputation and operating results.**

 

Weprovide service level commitments in our subscription agreements. Ourtransaction volumes are erratic, and our volumes spike significantly duringlarge special events or major occurrences such as natural disasters. Hightransaction volumes can cause delays in response times. If we are unable tomeet stated service level commitments, we may be contractually obligated orchoose to provide clients with refunds or credits for future products andservices. We may not be able to recover from our third-party datacenters anyrefunds or credits that we provide to our clients. Our revenue could also beadversely affected if we suffer unscheduled downtime that exceeds the alloweddowntimes under our agreements with our clients. Any service outages could harmour reputation, decrease our revenue and increase our operating costs.

 

**If we are not able to developenhancements to, and new features for, our existing solutions or acceptable newproducts and services that keep pace with technological developments, we maylose clients or fail to sell our solutions to new clients.**

 

Weintend to develop or license enhancements to and new features for our solutionsto keep pace with rapid technological developments and to improve oursolutions. The success of such enhancements, new features and services dependson several factors, including their timely completion, the license onacceptable terms of software from third parties and the introduction and marketacceptance of such enhancements, features or services. Failure in this regardmay significantly impair our ability to compete effectively and cause us tolose existing clients or fail to sell our solutions to new clients. Inaddition, because the software underlying our solutions is designed to operateon a variety of network hardware and software platforms using a standardbrowser, we will need to continuously modify and enhance our solutions to keeppace with changes in Internet-related hardware, software, communication,browser and database technologies. We may not be successful in eitherdeveloping these modifications and enhancements or bringing them to market in atimely manner. Furthermore, uncertainties about the timing and nature of newnetwork platforms or technologies, or modifications to existing platforms ortechnologies could increase our research and development expenses. Any failureof our solutions to operate effectively with future network platforms andtechnologies could reduce the demand for our solutions.

 

33

----

Table of Contents

 

**Our solutions, and in particular ournew Common Ground application, may contain errors or defects, negativelyaffecting their adoption which may cause us to lose clients and reimburse fees.**

 

Oursolutions are novel and complex and, accordingly, may contain undetected errorsor failures when first introduced or as new enhancements are released. This mayresult in the loss of, or delay in, market acceptance of our new solutions. Wehave in the past discovered software errors in our solutions and new solutionsafter their introduction. We have experienced delays in release, lost revenuesand customer frustration during the period required to correct these errors. Wemay in the future discover errors and scalability limitations in new solutions,such as Common Ground, after they become available or be required to compensatecustomers for such limitations or errors. In addition, our clients may use oursolutions in unanticipated ways that may cause a disruption in our solutionsfor other clients. Since our clients use our solutions for mission-criticalprocesses, any errors, defects or disruptions in, or other performance problemswith, the software underlying our solutions could harm our reputation and maydamage our clients’ activities. If that occurs, clients could elect not torenew or delay or withhold payment to us, we could lose future sales andclients may make claims against us.

 

**If our solutions do not scale toaccommodate a high volume of traffic and transactions, we may experience clientdissatisfaction and fail to grow our revenue.**

 

Weseek to generate a higher volume of website traffic and other electronictransactions for our clients as part of our product and service offerings. Ourtransaction volumes are erratic, and our volumes spike significantly duringlarge special events and major occurrences such as natural disasters. Inaddition, high transaction volumes can cause delays in response times. Thesatisfactory performance, reliability and availability of our solutions,including our network infrastructure, are critical to our reputation and ourability to attract and retain new clients. Any system interruptions that resultin the unavailability or under-performance of our solutions would reduce thevolume of traffic and transactions processed on our system for our clients andmay also diminish the attractiveness of our solutions to our clients.Furthermore, our inability to add software and hardware or to develop andfurther upgrade our existing technology or network infrastructure toaccommodate increased traffic or increased transaction volume may causeunanticipated system disruptions, slower response times, degradation in levelsof client service and impaired quality of the users’ experience. We expect tocontinue to upgrade our solutions, but we may be unable to upgrade and expandour solutions effectively or to integrate efficiently any new technologies withour existing solutions. Any inability to do so would harm our reputation,ability to maintain our client relationships and growth of our business.

 

Inaddition, most of our subscription agreements provide for higher revenue as thevolume of client traffic and transactions increase over the term of theagreement. If we are unable to scale our solutions to effectively accommodate ahigher volume of traffic and transactions, we will not be able to realize anincrease in our revenue.

 

**The market in which we operate isintensely competitive, and our failure to compete successfully would cause ourrevenue and market share to decline.**

 

Themarket in which we operate is fragmented, competitive and rapidly evolving, andthere are limited barriers to entry for some aspects of this market.Competitive pressures can adversely impact our business by limiting the priceswe can charge our clients and making the adoption and renewal of our solutionsmore difficult. With Convio Online Marketing, we compete with several onlinemarketing solutions and a variety of point applications targeted at tasks suchas email marketing, content management and fundraising event management. WithCommon Ground, we compete with generic database providers, as well asindustry-specific donor management solutions. Some of our competitors arefocused exclusively on the nonprofit industry while others sell to NPOs among abroader set of target industries. Our primary competitors are Blackbaud, Inc.,The Sage Group plc and SunGard Data Systems, Inc. In addition, we competewith a variety of smaller, private companies, and also with custom webdevelopment providers, which provide custom in-house applications. Any of thesecompetitors could take actions that adversely affect our business.

 

34

----

Table of Contents

 

Otherlarger potential competitors, such as Microsoft Corporation, Oracle Corporationand salesforce.com, Inc., could make acquisitions or develop solutions toestablish or expand their presence in the nonprofit market. Smallercompetitors, such as those providing open source solutions, web developmentservices and content management, email marketing and other point tools, maystrengthen their offerings through internal development or acquisitions andenhance their respective ability to compete. Other competitors have establishedor strengthened cooperative relationships with strategic partners serving thenonprofit market, thereby limiting our ability to promote our solutions and thenumber of partners available to help market our products and services. Thesecompetitive pressures could cause our revenue and market share to decline.

 

**If we are not able to manage ouranticipated growth effectively, our operating costs may increase and ouroperating margins may decrease.**

 

Wewill need to grow our infrastructure to address potential market opportunities.Our growth has placed, and will continue to place, to the extent that we areable to sustain such growth, a significant strain on our management,administrative, operational and financial infrastructure. We anticipate thatfurther growth will be required to address increases in our client base, aswell as our planned expansion into new geographic areas. If we continue to growour operations, we may not be effective in enlarging our physical facilitiesand our systems and our procedures or controls may not be adequate to supportsuch expansion or our business generally. If we are unable to manage ourgrowth, our operating costs may increase and our operating margins maydecrease.

 

**If we do not migrate GetActive’sclients, we may not realize the expected benefits of our acquisition ofGetActive, and our business may be harmed.**

 

InFebruary 2007, we acquired GetActive to enhance and broaden our serviceofferings. Since the closing of the acquisition, we have been migrating formerGetActive clients to our COM platform, and we intend to phase-out the GetActiveplatform by the end of 2010. If our remaining migration activities areunsuccessful, our reputation could be harmed, our revenue could decrease andour operating costs could increase.

 

**We depend on our direct sales forceand our partner network for sales and deployments of our solutions and, if wedo not attract and retain our sales personnel or maintain our partnerrelationships, our revenue may not grow and our business could be harmed.**

 

Wedepend primarily on our direct sales force to obtain new clients and to manageour client base. There is significant competition for direct sales personnelwith the advanced sales skills and technical knowledge that sales of oursolutions require. Our ability to achieve significant revenue growth in thefuture will depend, in large part, on our success in recruiting, training andretaining sufficient numbers of direct sales personnel.

 

Wecomplement our direct sales personnel with a network of over 55 partnersserving the nonprofit market, including interactive agencies, direct marketingagencies, public affairs firms and complementary technology companies. Ourpartner network helps us grow our client base and, we believe, enables us toprovide more complete solutions for our clients. If our partners fail toincrease awareness of our solutions or to assist us in gaining access todecision-makers at NPOs, then we may need to increase our marketing expenses,change our marketing strategy or enter into marketing relationships withdifferent parties, any of which could impair our ability to generate increasedrevenue. Our typical partner agreement is not exclusive and our partners maychoose not to promote sales of our solutions. If we do not maintain andincrease our partner relationships, our revenue may not grow and could decline.

 

Wealso rely on third-party implementation providers whom we recommend to ourclients to deploy COM and Common Ground. In the case of Common Ground, to datewe have relied solely on third-party implementation providers to providedeployment services. Any failure to perform, unprofessional conduct, delays ordifficulties with the deployment on the part of such third-party implementationproviders may reflect poorly on our reputation and the marketability of oursolutions, which could harm our business and results of operations. Ouragreements with these third-party implementation providers do not obligate themto continue to deploy our solutions. Generally our clients enter intoagreements directly with the third-party implementation providers, so we havelimited ability to seek recourse from them if deployment issues arise withclients.

 

35

----

Table of Contents

 

**We rely on third-party software inour solutions that may be difficult or costly to replace or which could causeerrors or failures and harm our reputation.**

 

Werely on software licensed from third parties in order to offer our solutions,including database software from Oracle Corporation. The third-party softwaremay not continue to be available on commercially reasonable terms, or at all.Any loss of the right to use any necessary third-party software could result indelays in the provisioning of our solutions until equivalent technology iseither developed by us, or, if available, is identified, obtained andintegrated, which could harm our reputation and increase our operating costs.Any errors or defects in third-party software could result in errors or afailure of our solutions which could harm our reputation and be costly tocorrect. Many of our third-party providers attempt to impose limitations ontheir liability for errors, defects, or failures in their hardware, software,or services, which we are required to pass through to our clients. Thoselimitations may or may not be enforceable, and we may have liability to ourclients or providers that could harm our reputation and increase our operatingcosts.

 

**If we fail to retain key personnel orif we fail to attract additional qualified personnel or if newly hiredpersonnel fail to reach productivity as anticipated, we may not be able toachieve our anticipated level of growth, our revenue may decrease and ouroperating costs may increase.**

 

Ourfuture success depends upon the continued service of our officers and other keyfinance, sales and marketing, research and development and professionalservices staff. In addition, our future success will depend in large part onour ability to attract a sufficient number of highly qualified personnel, andthere can be no assurance that we will be able to do so. Competition forqualified personnel can be intense, and we might not be successful inattracting and retaining them. The pool of qualified personnel with experienceworking with or selling to NPOs is limited overall and specifically in Austin,Texas, Washington, D.C., and Berkeley, California, where a significant portionof our operations are located. If we fail to retain key personnel or attract asufficient number of highly qualified personnel, we may expend more resourcesin an effort to recruit qualified personnel and our operating costs wouldincrease. In addition, the diversion of management’s attention to recruitingefforts may cause our sales and revenue to decrease.

 

Ourability to maintain and expand our finance, sales and marketing, research anddevelopment and professional services teams will depend on our ability torecruit, train and retain top quality people with advanced skills who understandsales to, and the specific needs of, NPOs. For these reasons, we have from timeto time in the past experienced, and we expect to continue to experience in thefuture, difficulty in hiring and retaining highly skilled employees withappropriate qualifications for our business. In addition, it takes time for ournew sales and services personnel to become productive, particularly withrespect to obtaining and supporting enterprise clients. If we are unable tohire or retain qualified personnel, or if newly hired personnel fail to developthe necessary skills or reach productivity slower than anticipated, it would bemore difficult for us to sell our solutions and provide services to ourclients, and we could experience a shortfall in revenue and may not achieve ourplanned growth.

 

**Various private spam blacklists havein the past reduced, and may in the future reduce, the effectiveness of oursolutions and our ability to conduct our business, which may cause demand forour solutions to decline.**

 

Wedepend on email to market to and communicate with our clients, and our clientsrely on email to communicate with their constituents. Various private entitiesattempt to limit the use of email for commercial solicitation. These entitiesoften advocate standards of conduct or practice that exceed current legalrequirements in the United States and classify certain email solicitations thatcomply with current legal requirements as spam. Some of these entities maintain“blacklists” of companies and individuals, and the websites, Internet serviceproviders and Internet protocol addresses associated with those entities orindividuals that do not adhere to those standards of conduct or practices forcommercial email solicitations that the blacklisting entity believes areappropriate. If a company’s Internet protocol addresses are listed by ablacklisting entity, emails sent from those addresses may be blocked by serversthat receive or route email and subscribe to the blacklisting entity’s serviceor purchase its blacklist. Any blocking of email communications generated byclients using our solutions will reduce the effectiveness of our solutions andour ability to conduct our business, which may cause demand for our solutionsto decline and increase non-renewals.

 

36

----

Table of Contents

 

**Government regulation could increaseour compliance expenses, subject us to fines or penalties of non-compliance oradversely affect the marketability of our solutions.**

 

Weare subject not only to laws and regulations applicable to businessesgenerally, but also to laws and regulations directly applicable to electroniccommerce and fundraising activities. In addition, our clients are subject toUnited States and foreign laws and regulations governing the collection, useand disclosure of personal information obtained from individuals, whichrestrict how our clients use our solutions. There are many laws and regulationsrelated to electronic commerce and online fundraising, and state, federal andforeign governments may adopt or enforce additional laws and regulationsapplicable to our business and to our clients’ use of our solutions. If theburdens or costs of our clients’ compliance with additional regulationsincrease, NPOs may decide not to use our solutions. Further, our failure tocomply with any such laws or regulations could subject us to fines, penaltiesor other damages that could harm our reputation and increase our operatingcosts.

 

Thepromulgation, amendment or enforcement of any laws or regulations in thefollowing areas could increase our compliance expenses:

 

·                 charitable fundraising and related services;

·                 campaign finance;

·                 user privacy and notification statutes;

·                 the transmission and storage of personaldata;

·                 the pricing and taxation of products andservices offered over the Internet;

·                 money laundering;

·                 transactions or sales to terroristorganizations or to nations which sponsor terrorist activities;

·                 the content of websites;

·                 patents, copyrights, trade secrets,trademarks and other areas of intellectual property;

·                 consumer protection, including the potentialapplication of “do not call” registry requirements on our clients;

·                 freedom of speech and expression;

·                 the online distribution of specific materialor content over the Internet;

·                 the characteristics and quality of productsand services offered over the Internet; and

·                 federal, state or local taxation,particularly with respect to charitable giving, research and developmentactivities, employee compensation and other activities generally pertaining toour business.

 

Weare also subject to certain state registration and periodic filing requirementsrelated to companies that provide fundraising consulting services. States’regulations vary and the application of these regulations to our business isunclear. Our clients rely in part on our registrations in states that requireregistration to conduct our clients’ national fundraising campaigns. As of March 31,2010, we were registered in ten states and had registrations pending in sixothers. If we fail to comply with any of these regulations, our registrationscould be revoked or we may be prevented from registering, and our clients couldterminate their agreements with us if we do not meet their fundraising needs inthose states. In addition, we could incur fines, penalties or other damagesthat could harm our reputation and increase our operating costs, and we may beobligated to file client agreements that may disclose competitively sensitiveinformation. Furthermore, the states in which we are registered may impose newrequirements and additional states may adopt registration requirements that mayincrease our compliance expenses.

 

**Evolving privacy concerns and laws orother domestic or foreign regulations may reduce the effectiveness of oursolutions, which could reduce overall demand for our solutions and increaseoperating costs.**

 

Ourclients can use our solutions to store personal or identifying informationregarding their constituents. Federal, state and foreign government bodies andagencies, however, have adopted or are considering adopting laws andregulations regarding the collection, use and disclosure of personalinformation obtained from consumers and other individuals. For instance, aspart of the American Recovery and Reinvestment Act of 2009, Congress passed theHealth Information Technology for Economic and Clinical Health Act, or HI-TECHAct. The HI-TECH Act expands the reach of data privacy and securityrequirements of the Health Insurance Portability and Accountability Act, orHIPAA, to service providers. HIPAA and associated United States Department ofHealth and Human Services regulations permit our clients in the healthcare industryto use certain demographic protected health information (such as name, email orphysical address and dates of service) for fundraising purposes and to disclosethat subset of protected health information to their service providers forfundraising. We may be included in this service provider group under therevised HIPAA regulations by virtue of our service provider relationship withour clients in the healthcare industry. In general, we are seeking to prohibitcontractually our healthcare industry clients from uploading other types ofhealth information of their clients into our systems because HIPAA does notpermit this information to be used for fundraising without certain permissions,but we believe that monitoring our healthcare clients’ compliance with suchprohibitions is not legally required of service providers and would be costprohibitive. The law and regulations under HI-TECH are new and still subject tochange or interpretation by legal authorities who could cause additionalcompliance burdens.

 

37

----

Table of Contents

 

Thecosts of compliance with, and other burdens imposed by, HIPAA, the HI-TECH Actand such other laws and regulations that are applicable to the businesses ofour clients may limit the use and adoption of our solutions, reduce overalldemand for our solutions and increase our operating costs, and we may be unableto pass along those costs to our clients in the form of increased fees.

 

Inaddition to government activity, privacy advocacy groups and the technology andother industries are considering various new, additional or differentself-regulatory standards that may place additional burdens on us. If regulatoryburdens related to collection and use of personal information increase, oursolutions would be less effective, which may reduce demand for our solutionsand harm our business.

 

**United States federal legislationentitled Controlling the Assault of Non-Solicited Pornography and Marketing Actof 2003 imposes certain obligations on the senders of commercial emails, whichcould minimize the effectiveness of our email product and establishes financialpenalties for non-compliance, which could increase the costs of our business.**

 

InDecember 2003, Congress enacted Controlling the Assault of Non-SolicitedPornography and Marketing Act of 2003, or the CAN-SPAM Act, which establishescivil penalties for failure to meet certain requirements for commercial email messages(which may include email messages sent by NPOs that advertise a commercialproduct or service) and specifies criminal and civil penalties for thetransmission of commercial email messages that are intended to deceive therecipient as to source, transmission path or content. The CAN-SPAM Act, amongother things, obligates the sender of commercial emails to identify theirrecipients with the ability to opt out of receiving future emails from thesender. In addition, some states have passed laws regulating commercial emailpractices that are significantly more punitive and difficult to comply withthan the CAN-SPAM Act. For example, Utah and Michigan have enacted do-not-emailregistries listing minors who do not wish to receive unsolicited commercial emailthat markets certain covered content, such as products that minors areprohibited from purchasing. Some portions of these state laws may not bepreempted by the CAN-SPAM Act. The ability of our clients’ constituents to optout of receiving commercial emails may minimize the effectiveness of our emailproduct. Moreover, non-compliance with the CAN-SPAM Act can involve significantfinancial penalties. In addition, European Union member state laws typicallyprohibit sending promotional email messages outside of an established businessrelationship with the recipient unless the recipient has opted into receipt ofsuch messages and require honoring opt-out requests by recipients. Such lawslargely prevent the use of email to new prospects in the European Union, andsimilar laws have been adopted in some countries. Although our agreementsprohibit violations of these laws, if we were found to be in violation of theCAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, orEuropean Union or foreign laws regulating the distribution of commercial email,whether as a result of violations by our clients or if we were deemed to bedirectly subject to and in violation of these requirements by the futureinterpretation of such laws by a court of law or regulatory agency, we could berequired to pay penalties or we may be required to change one or more aspectsof the way we operate our business, which could impair our ability to attractand retain clients or increase our operating costs.

 

**We may be subject to legal costs andliabilities for content and activities of our clients and their constituents,which could harm our reputation and increase our operating costs.**

 

Wehost content provided by our clients and their constituents and provideproducts and services that enable them to exchange information, conductbusiness and engage in various online activities. From time to time, we arerequested to provide information or otherwise become involved in legal andother matters involving our clients’ online activities. While we require ourclients to agree to comply with acceptable usage policies and other contentrestrictions, clients and their constituents may provide content or undertakeactivities that could require us to conduct investigations or defend claims byprivate persons and entities or governmental entities that may be with orwithout merit and may subject us to legal costs and liabilities to ourthird-party suppliers and others, which could harm our reputation and increaseour operating costs.

 

38

----

Table of Contents

 

**If existing clients and prospectiveclients refuse to adopt or renew our solutions, or we choose not to engage a prospectiveclient, because of conflicts over ideological missions, our revenue will notgrow at our anticipated rate.**

 

Ourclients have a wide range of ideological missions. Many NPOs focus upon andsupport ideological causes that may conflict with the ideological causes of ourother clients. A few prospective clients in the past have hesitated or refusedto use our solutions because of our relationship with NPOs with ideologies thatdirectly conflict with the ideologies of such prospective clients. If the numberof our clients grow, the potential for such conflict will increase. We haveadopted a policy of working with NPOs supporting a wide range of ideologicalmissions other than those that promote violence, hatred, or racial or religiousintolerance. We will exercise our judgment in determining whether anorganization violates the spirit of these client engagement principles. Basedon these principles, we have and may continue in the future to choose not toengage prospective client NPOs. If our prospective clients refuse to adopt oursolutions, if we choose not to engage a prospective client, or if our existingclients do not renew or otherwise terminate their use of our solutions due tosuch conflicts, our revenue may be adversely affected and our reputation may beharmed.

 

**Changes in financial accountingstandards or practices may cause adverse, unexpected financial reportingfluctuations and harm our operating results.**

 

Achange in accounting standards or practices could harm our operating resultsand may affect our reporting of transactions completed before the change iseffective. New accounting pronouncements and varying interpretations ofaccounting pronouncements have occurred and may occur in the future. Changes toexisting rules or the questioning of current practices may harm ouroperating results or the way we conduct our business.

 

**We may incur significant expenses todefend against or settle claims that we infringe upon third parties’intellectual property rights.**

 

Litigationregarding intellectual property rights is common in the software industry. Weexpect that our solutions may be increasingly subject to third-partyinfringement claims as the number of competitors in our industry segment growsand the functionality of products and services in different industry segmentsoverlaps. We have encountered and may encounter in the future disputes overrights and obligations concerning intellectual property. In the past, we havebeen involved in litigation with Kintera, Inc., which was acquired by Blackbaud, Inc.Third parties may seek to bring claims against us in the future. Such claimsmay be with or without merit. Any litigation to defend against claims ofinfringement or invalidity could result in substantial costs and diversion ofresources. Furthermore, a party making such a claim could secure a judgmentthat requires us to pay substantial damages. A judgment could also include aninjunction or other court order that could prevent us from selling oursolutions. Our operating costs may increase or our revenue may decline if anyof these events occurred.

 

Inaddition, we generally indemnify our clients against certain claims that oursolutions infringe upon the intellectual property rights of others. We couldincur substantial costs in defending ourselves and our clients againstinfringement claims and paying any resulting damage awards or settlements. Inthe event of a claim of infringement, we and our clients might be required toobtain one or more licenses from third parties. We, or our clients, might beunable to obtain necessary licenses from third parties at a reasonable cost, ifat all. We, or our clients, might become subject to an injunction that preventsuse of the allegedly infringing technology. Any intellectual property rightsclaim against us or our clients, with or without merit, could betime-consuming, expensive to litigate or settle and could divert managementattention and financial resources. An adverse determination also could preventus from offering our solutions to our clients and may require that we procureor develop a substitute solution that does not infringe.

 

Forany intellectual property rights claim against us or our clients, we may haveto pay damages or stop using technology found to be in violation of a thirdparty’s rights. We may have to seek a license for the technology, which may notbe available on reasonable terms, if at all, may significantly increase ouroperating expenses or may require us to restrict our business activities in oneor more respects. As a result, we may also be required to develop alternativenon-infringing technology, which could require significant effort and expense.Defense of any lawsuit, the cost of any damages or settlements, failure toobtain any such required licenses or issuance of an injunction would increaseour operating costs and may reduce our revenue.

 

39

----

Table of Contents

 

**If the security of the software or systemsunderlying our solutions is breached, our reputation could be harmed and ouroperating costs could increase.**

 

Fundamentalto the use of our products and services is the secure collection, storage andtransmission of constituent information. Unauthorized third parties haveperiodically attempted to attack our system, and we have had security breachesin the past. We regularly upgrade our security technologies, policies andprograms. However, we expect third parties to continue to attempt to attack oursystem in the future with increasing sophistication. If a third party breachesour security, that of our clients or that of our third-party datacenters andpayment processing partners, our business could be harmed. It could result inmisappropriation of proprietary information or interruptions in operations. Wemight be liable to our clients or their constituents for damages from breachesof security, and clients could seek to terminate their agreements with us. Abreach could also harm our reputation and increase our operating costs,particularly any breach resulting in the imposition of liability that is notcovered by insurance or is in excess of insurance coverage. We might berequired to expend significant capital and other resources to notify and communicatewith state and federal regulatory agencies and affected clients and theirconstituents, provide credit monitoring or other protections, protect furtheragainst security breaches or to rectify problems caused by any security breach.Any of these results would be harmful to our business.

 

**We rely upon trademark, copyright andtrade secret laws to protect our proprietary rights, which might not provide uswith adequate protection, and we may therefore be unable to competeeffectively.**

 

Oursuccess and ability to compete depend to a significant degree upon theprotection of our software and other proprietary technology rights. We mightnot be successful in protecting our proprietary technology, and our proprietaryrights might not provide us with a meaningful competitive advantage. To protectour proprietary technology, we rely on a combination of trademark, copyrightand trade secret laws, as well as nondisclosure agreements, each of whichaffords only limited protection. We have no patents on our proprietarytechnology and, accordingly, have no way to exclude others from practicinginventions relating to similar technologies, unless wrongfully misappropriatedfrom us in violation of trade secret law or any non-disclosure agreements. Anyinability to protect our intellectual property rights could harm our ability tocompete effectively, which would reduce our revenue. Such harm includes but isnot limited to the following:

 

·                 without any patents of our own to counterassert, there is a greater risk that current and future competitors who mayhave patented similar technologies that cover our products and services wouldseek damages and a prohibition on the use and sale of such products andservices;

·                 our trademarks may not be protected in thosejurisdictions in which such trademarks have not been registered, and in suchjurisdictions others may be able to use confusingly similar marks or preventour use of such trademarks; and

·                 current and futurecompetitors may independently develop similar technologies or duplicate oursolutions.

 

Despitethe measures taken by us, it may be possible for a third party to copy orotherwise obtain and use our proprietary technology and information withoutauthorization. Policing unauthorized use of our solutions is difficult, andlitigation could become necessary in the future to enforce our intellectualproperty rights. Any litigation could be time consuming and expensive toprosecute or resolve and could result in substantial diversion of managementattention and resources.

 

**We use open source software in thesoftware underlying our solutions that may subject our software to generalrelease or require us to re-engineer such solutions, which could reduce ourrevenue or increase our operating costs.**

 

Weuse open source software in the software underlying our solutions and plan touse more open source software in the future. From time to time, there have beenclaims against companies that distribute or use open source software in theirproducts and services, asserting that open source software infringes theclaimants’ intellectual property rights. We could be subject to suits byparties claiming infringement of intellectual property rights resulting fromour use of open source software in accordance with the terms of the licenseunder which we received such open source software. Use and distribution of opensource software can lead to greater risks than use of third-party commercialsoftware, as open source licensors generally do not provide warranties or othercontractual protections regarding infringement claims or the quality of thecode. Some open source licenses contain requirements that we make availablesource code for modifications or derivative works we create based upon the opensource software and that we license such modifications or derivative worksunder the terms of a particular open source license or other license grantingthird parties certain rights of further use, modification and distribution. Ifwe combine our proprietary software with open source software in a certain manner,we could, under certain of the open source licenses, be required to release thesource code of our proprietary software and license such proprietary softwareunder the terms of the open source license for free or for a nominal fee. Opensource license terms may be ambiguous and many of the risks associated withusage of open source software cannot be eliminated and could, if not properlyaddressed, negatively affect our business. If we were found to haveinappropriately used open source software or failed to comply with the terms ofthe open source licenses, in addition to the potential that we licensemodifications or derivative works we create under open source license terms, wemay be subject to suits by licensors claiming infringement of intellectualproperty rights related to such open source software and required tore-engineer our software underlying our solution, discontinue the sale of oursolutions in the event re-engineering cannot be accomplished on a timely basis,take other remedial action that may divert resources away from our developmentefforts or be subject to an injunction or damage award or settlement, any ofwhich could reduce our revenue or increase our operating costs.

 

40

----

Table of Contents

 

**We may enter into acquisitions thatmay be difficult to integrate, fail to achieve our strategic objectives,disrupt our business, dilute stockholder value or divert management attention.**

 

Wecurrently do not have any agreements with respect to any acquisitions, but inthe future we may pursue acquisitions of businesses to complement our existingbusiness. We cannot assure you that any acquisition we make in the future willprovide us with the benefits we anticipated in entering into the transaction.Acquisitions are typically accompanied by a number of risks, including:

 

·                  difficulties inretaining key employees and clients and in integrating the operations and personnelof the acquired companies;

·                  difficulties inmaintaining acceptable standards, controls, procedures and policies;

·                  potentialdisruption of ongoing business and distraction of management;

·                  inability tomaintain relationships with clients of the acquired business;

·                  impairment ofrelationships with employees and clients as a result of any integration of newmanagement and other personnel;

·                  difficulties inincorporating acquired technology and rights into our products and services;

·                  unexpectedexpenses resulting from the acquisition; and

·                  potentialunknown liabilities associated with acquired businesses.

 

Inaddition, acquisitions may result in the incurrence of debt, restructuringcharges and write-offs, such as write-offs of acquired in-process research anddevelopment. We also may not be able to recognize as revenue the deferredrevenue of an acquired company. Acquisitions may result in goodwill and otherintangible assets that are subject to impairment tests, which could result infuture impairment charges. Furthermore, if we finance future acquisitions byissuing convertible debt or equity securities, our existing stockholders may bediluted and earnings per share may decrease. To the extent we finance futureacquisitions with debt, such debt could include financial or operationalcovenants that restrict our business operations.

 

Wemay enter into negotiations for acquisitions that are not ultimatelyconsummated. Those negotiations could result in diversion of management timeand significant out-of-pocket costs. If we fail to evaluate and executeacquisitions successfully, we may not be able to realize the benefits of theseacquisitions, and our operating results could be harmed.

 

**Our ability to raise capital in thefuture may be limited, and our failure to raise capital when needed couldprevent us from executing our growth strategy.**

 

Weintend to continue to make investments to support our growth and believe thatour existing cash and cash equivalents and our cash flow from future operatingactivities will be sufficient to meet our anticipated cash needs for the nexttwelve months. We may, however, require additional capital from equity or debtfinancings in the future to fund our operations or respond to competitivepressures or strategic opportunities. In addition, we may require additionalfinancing to fund the purchase price of future acquisitions. Additionalfinancing may not be available on terms favorable to us, or at all. Anyadditional capital raised through the sale of equity or convertible debtsecurities may dilute your percentage ownership of our common stock.Furthermore, any new debt or equity securities we issue could have rights,preferences and privileges superior to our common stock. Capital raised throughdebt financings could require us to make periodic interest payments and couldimpose potentially restrictive covenants on the conduct of our business. If weare unable to obtain adequate financing or financing on terms satisfactory tous, our ability to continue to support our business growth and to respond tobusiness challenges could be significantly limited.

 

41

----

Table of Contents

 

**If we expand our operations outsideof the United States, our expansion may subject us to risks that may increaseour operating costs.**

 

Anelement of our growth strategy is to expand our international operations anddevelop a worldwide client base. To date, we have not realized a materialportion of our revenue from clients outside the United States. Operating ininternational markets requires significant resources and management attentionand will subject us to regulatory, economic and political risks that aredifferent from those in the United States. Because of our limited experiencewith international operations, we cannot assure you that our internationalexpansion efforts will be successful. In addition, we will face risks in doingbusiness internationally that could increase our operating costs, including:

 

·                  economicconditions in various parts of the world;

·                  unexpected andmore restrictive laws and regulations, including those laws governing Internetactivities, email messaging, collection and use of personal information,ownership of intellectual property, solicitation of charitable contributionsand other activities important to our online business practices;

·                  new anddifferent sources of competition;

·                  multiple,conflicting and changing tax laws and regulations that may affect both ourinternational and domestic tax liabilities and result in increased complexityand costs;

·                  if we were toestablish international offices, the difficulty of managing and staffing suchinternational offices and the increased travel, infrastructure and legalcompliance costs associated with multiple international locations;

·                  difficulties inenforcing contracts and collecting accounts receivable, especially indeveloping countries;

·                  if contractsbecome denominated in local currency, fluctuations in exchange rates; and

·                  tariffs andtrade barriers, import/export controls and other regulatory or contractuallimitations on our ability to sell or develop our products in certain foreignmarkets.

 

Ifwe decide to expand our business globally, our success will depend, in part, onour ability to anticipate and effectively manage these and other risksassociated with future international operations. Our failure to manage any ofthese risks successfully could increase our operating costs.

 

**We incur increased costs as a resultof operating as a public company, and our management is required to devotesubstantial time to new compliance initiatives, which will increase ouroperating costs.**

 

Asa public company, we incur legal, accounting and other expenses that we did notincur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequentlyimplemented by the Securities and Exchange Commission, or SEC, and the NASDAQListing Rules, impose additional requirements on public companies, includingrequiring changes in corporate governance practices. For example, the listingrequirements of the NASDAQ Global Market require that we satisfy certaincorporate governance requirements relating to independent directors, auditcommittees, distribution of annual and interim reports, stockholder meetings,stockholder approvals, solicitation of proxies, conflicts of interest,stockholder voting rights and codes of conduct. Our management and otherpersonnel need to devote a substantial amount of time to these complianceinitiatives. Moreover, these rules and regulations increase our legal andfinancial compliance costs and make some activities more time-consuming andcostly. For example, these rules and regulations make it more difficultand more expensive for us to obtain director and officer liability insurance,and we may be required to accept reduced policy limits and coverage or incursubstantial additional costs to maintain the same or similar coverage. These rules andregulations also make it more difficult for us to attract and retain qualifiedpersons to serve on our board of directors, our board committees or asexecutive officers.

 

Inaddition, United States securities laws require, among other things, that wemaintain effective internal control over financial reporting and disclosurecontrols and procedures. In particular, for the year ending December 31,2011, we will be required to perform system and process evaluation and testingof our internal control over financial reporting to allow management and ourindependent registered public accounting firm to report on the effectiveness ofour internal control over financial reporting, as required by Section 404of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by ourindependent registered public accounting firm, may reveal deficiencies in ourinternal control over financial reporting that are deemed to be materialweaknesses. Our compliance with Section 404 will require that we incursubstantial accounting expense and expend significant management time oncompliance-related issues. Moreover, if we are not able to comply with therequirements of Section 404 in a timely manner, or if we or ourindependent registered public accounting firm identify deficiencies in ourinternal control over financial reporting that are deemed to be materialweaknesses, the market price of our stock could decline, and we could besubject to potential delisting by the NASDAQ Global Market and review by theNASDAQ Stock Market, the SEC, or other regulatory authorities which wouldrequire additional financial and management resources.

 

42

----

Table of Contents

 

**RisksRelating to Ownership of Our Common Stock**

 

**Ourstock price may be volatile, and the value of an investment in our common stockmay decline.***

 

Anactive public market for our shares may not continue to develop or besustained. Shares of our common stock were sold in our initial public offeringon April 29, 2010 at a price of $9.00 per share, and our common stock hassubsequently traded as high as $10.99 and as low as $9.12. The trading price ofour common stock could be highly volatile and could be subject to widefluctuations in response to various factors, some of which are beyond ourcontrol. Factors affecting the trading price of our common stock include:

 

·                  variations inour quarterly and annual operating results;

·                  announcementsof technological innovations, new products, services or enhancements, strategicalliances or agreements by us or by our competitors;

·                  the gain orloss of clients;

·                  recruitment ordeparture of key personnel;

·                  changes in theestimates of our operating results or changes in recommendations by anysecurities analysts that elect to follow our common stock;

·                  sales of commonstock or other securities by us in the future;

·                  market conditionsin our industry, the industries of our clients and the economy as a whole; and

·                  adoption ormodification of regulations, policies, procedures or programs applicable to ourbusiness.

 

Inaddition, if the market for technology stocks or the stock market in generalexperiences loss of investor confidence, the trading price of our common stockcould decline for reasons unrelated to our business, financial condition oroperating results. The trading price of our common stock might also decline inreaction to events that affect other companies in our industry even if theseevents do not directly affect us. Each of these factors, among others, couldharm the value of your investment in our common stock. Some companies that havehad volatile market prices for their securities have had securities classaction lawsuits filed against them. If a suit were filed against us, regardlessof its merits or outcome, it could result in substantial costs and divertmanagement’s attention and resources.

 

**Futuresales of shares by existing stockholders could cause our stock price todecline.***

 

If ourexisting stockholders sell, or indicate an intention to sell, substantialamounts of our common stock in the public market after the 180-day contractuallock-up, which period may be extended in certain limited circumstances, andother legal restrictions on resale discussed in our Prospectus lapse, thetrading price of our common stock could decline below the initial publicoffering price. As of May 14, 2010, factoring in the sale of an additional769,909 shares of common stock pursuant to the exercise of the underwriters’option to purchase additional shares on May 3, 2010, we had outstanding17,369,797 shares of common stock. Of these shares, only the 5,902,637 sharesof common stock sold in the initial public offering are freely tradable,without restriction, in the public market. Thomas Weisel Partners LLC and PiperJaffray & Co. may, in their sole discretion, permit our officers,directors, employees and current stockholders who are subject to thecontractual lock-up to sell shares prior to the expiration of the lock-upagreements.

 

Afterthe lock-up agreements pertaining to our initial public offering expire 180days from the date of the Prospectus, which period may be extended in certainlimited circumstances, up to the remaining 11,467,160 shares will be eligiblefor sale in the public market, 7,067,016 of which are held by directors,executive officers and other affiliates and will be subject to volumelimitations under Rule 144 under the Securities Act of 1933, as amended,or the Securities Act, and various vesting agreements. In addition, as of May 14,2010, 106,725, shares subject to the remaining outstanding warrants, 3,210,221shares that are subject to outstanding options and 340,924 shares reserved forfuture issuance under our equity plans, will become eligible for sale in thepublic market to the extent permitted by the provisions of various vestingagreements, the lock-up agreements and Rules 144 and 701 under the SecuritiesAct. If these additional shares are sold, or if it is perceived that they willbe sold, in the public market, the trading price of our common stock coulddecline.

 

43

----

Table of Contents

 

Someof our existing stockholders have contractual demand or piggyback rights torequire us to register with the SEC up to 11,334,891 shares of our commonstock. Of these shares, 1,343,201 shares were registered and sold bystockholders with such registration rights in our initial public offering. Ifwe register these shares of common stock, the stockholders would be able tosell those shares freely in the public market. All of these shares are subjectto lock-up agreements restricting their sale for 180 days after the date of theProspectus, which period may be extended in certain limited circumstances.

 

Weintend to register approximately 3,551,145 shares of our common stock that wehave issued or may issue under our equity plans. Once we register these shares,they can be freely sold in the public market upon issuance, subject to thelock-up agreements, if applicable, described above.

 

**Ifsecurities or industry analysts do not publish research or publish misleadingor unfavorable research about our business, our stock price and trading volumecould decline.**

 

Thetrading market for our common stock will depend in part on the research andreports that securities or industry analysts publish about us or our business.We do not currently have and may never obtain research coverage by securitiesand industry analysts. If no or few securities or industry analysts commencecoverage of us, the trading price for our stock would be negatively impacted.In the event we obtain securities or industry analyst coverage, if one or moreof the analysts who covers us downgrades our stock or publishes misleading orunfavorable research about our business, our stock price would likely decline.If one or more of these analysts ceases coverage of us or fails to publishreports on us regularly, demand for our stock could decrease, which could causeour stock price or trading volume to decline.

 

**Insiderswill continue to have substantial control over us, which may limit our stockholders’ability to influence corporate matters and delay or prevent a third party fromacquiring control over us. ***

 

As of May 14,2010, our directors and executive officers and their affiliates beneficiallyown, in the aggregate, approximately 38.3% of our outstanding common stock. Asa result, these stockholders will be able to exercise influence over allmatters requiring stockholder approval, including the election of directors andapproval of corporate transactions, such as a merger or other sale of ourcompany or our assets. This concentration of ownership could limit your abilityto influence corporate matters and delay or prevent a third party fromacquiring control over us.

 

**Anti-takeoverprovisions in our charter documents and Delaware law could discourage, delay orprevent a change of control of our company and may affect the trading price ofour common stock. ***

 

We area Delaware corporation and the anti-takeover provisions of the Delaware GeneralCorporation Law, which apply to us, may discourage, delay or prevent a changeof control by prohibiting us from engaging in a business combination with aninterested stockholder for a period of three years after the person becomes aninterested stockholder, even if a change of control would be beneficial to ourexisting stockholders. In addition, our restated certificate of incorporationand bylaws may discourage, delay or prevent a change in our management orcontrol over us that stockholders may consider favorable. Our restatedcertificate of incorporation and bylaws:

 

·                  authorize theissuance of “blank check” preferred stock that could be issued by our board ofdirectors to thwart a takeover attempt;

·                  establish aclassified board of directors, as a result of which the successors to thedirectors whose terms have expired will be elected to serve from the time ofelection and qualification until the third annual meeting following theirelection;

·                  require thatdirectors only be removed from office for cause and only upon a supermajoritystockholder vote;

·                  require that asupermajority vote be obtained to amend or repeal certain provisions of ourcertificate of incorporation;

 

44

----

Table of Contents

 

·                  require thatstockholders provide advance notice of any stockholder nominations of directorsor any proposal of new business to be considered at any meeting ofstockholders;

·                  provide thatvacancies on the board of directors, including newly-created directorships, maybe filled only by a majority vote of directors then in office rather than bystockholders;

·                  preventstockholders from calling special meetings; and

·                  prohibitstockholder action by written consent, requiring all actions to be taken at ameeting of the stockholders.

 

**Ourmanagement will continue to have broad discretion over the use of the proceedsraised in our recent initial public offering and might not apply the proceedsin ways that may enhance our operating results or the price of our commonstock.***

 

Ourmanagement will continue to have broad discretion over the use of proceeds fromour recent initial public offering, and you will be relying on the judgment ofour management regarding the application of these proceeds. Our managementmight not apply the net proceeds of the initial public offering in ways thatincrease the value of your investment. On May 12, 2010, weused $1.9 million of the net proceeds from the initial public offering toretire all the outstanding debt under the revolving line of credit and the termloan with Comerica Bank.  We anticipatethat we will use the remaining net proceeds from the initial public offeringfor the payment of offering related expenses and general corporate purposes. We have not allocated these net proceedsfrom the initial public offering for any specific purposes. Our managementmight not be able to yield a significant return, if any, on any investment ofthese net proceeds. You will not have the opportunity to influence our decisionson how the net proceeds of the initial public offering are used.

 

**Item2.  Unregistered sales of equitysecurities and use of proceeds**

 

***(a) Sales of Unregistered Securities***

 

From time to time we havegranted stock options and shares of common stock upon the exercise of stockoptions to employees, directors and consultants in compliance with Rule 701.The following tables set forth information on the stock options and shares ofcommon stock issued by us in the three months ending March 31, 2010:

 

**1999Stock Option/Stock Issuance Plan**

 
| **Date Of  Issuance**                             | ** ** | **Number  of Series P  Common Stock Issued  (shares)** | ** ** | **Exercise  Price  (per share)** | ** ** | **Class of  Purchasers** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| January 26, 2010                             |       | 28,160                                                      |       | $                                | 1.99       |                          | Employee   |   |
| January 7, 2010 – March 12, 2010   |       | 1,767                                                       |       | $                                | 4.57       |                          | Employee   |   |
| February 24, 2010 – March 12, 2010 |       | 2,019                                                       |       | $                                | 0.85       |                          | Employee   |   |

 

**GetActive2006 Plan**

 
| **Date Of  Issuance**                           | ** ** | **Number  of Series P  Common Stock Issued  (shares)** | ** ** | **Exercise  Price  (per share)** | ** ** | **Class of  Purchasers** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| January 7, 2010 – March 18, 2010 |       | 9,493                                                       |       | 1.24                             |       | Employee                      |       |

 

**GetActive2000 Plan**

 
| **Date Of  Issuance**                            | ** ** | **Number  of Series P  Common Stock Issued  (shares)** | ** ** | **Exercise  Price  (per share)** | ** ** | **Class of  Purchasers** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| January 23, 2010 – March 18, 2010 |       | 12,164                                                      |       | $                                | 0.53       |                          | Employee   |   |
| January 7, 2010                             |       | 282                                                         |       | $                                | 1.24       |                          | Employee   |   |

 

45

----

Table of Contents

 

No underwriters wereinvolved in the foregoing sales of securities. These issuances were undertakenin reliance upon the exemption from registration requirements of Rule 701of the Securities Act of 1933. The recipients of these shares of common stockrepresented their intentions to acquire the shares for investment only and notwith a view to or for sale in connection with any distribution, and appropriaterestrictions were set out in the award agreements issued in these transactions.All recipients had adequate access, through their relationships with us, toinformation about us.

 

***(b) Use of Proceeds from Public Offering of CommonStock***

 

On April 28, 2010,our registration statement on Form S-1 (File No. 333-164491) wasdeclared effective for our initial public offering, pursuant to which weregistered the offering and sale of 3,789,527 shares of common stock by us andthe associated sale of 1,343,201 shares of common stock by selling stockholdersand the sale pursuant to the underwriters’ over-allotment option for anadditional 769,909 shares of common stock by us, at a public offering price of$9.00 per share. On April 29, 2010, we sold 3,789,527 shares of commonstock, for an aggregate offering price of $34.1 million, and the sellingstockholders sold 1,343,201 shares of common stock for an aggregate offeringprice of $12.1 million. The underwriters’ subsequently exercised their optionto purchase additional shares and on May 3, 2010 we sold 769,909 shares ofcommon stock, for an aggregate offering price of $6.9 million, after which theoffering was terminated. Thomas Weisel Partners LLC and Piper Jaffray &Co. were the joint book-running managers and William Blair & Company,L.L.C., JMP Securities LLC and Pacific Crest Securities LLC were co-managers ofour initial public offering.

 

As a result of theinitial public offering, we raised a total of $41.0 million in gross proceeds,and $35.7 million in net proceeds after deducting underwriting discounts of$2.9 million and estimated offering expenses of $2.5 million.  We did not receive any proceeds from the saleof shares in the initial public offering by the selling stockholders.

 

None of such paymentswere direct or indirect payments to any of our directors or officers or theirassociates or to persons owning 10 percent or more of our common stock, ouraffiliates or direct or indirect payments to others.

 

There has been no materialchange in the planned use of proceeds from our initial public offering asdescribed in our Prospectus filed pursuant to Rule 424(b) under theSecurities Act with the SEC on April 29, 2010. On May 12, 2010, weused $1.9 million of the net proceeds from the initial public offering toretire all the outstanding debt under the revolving line of credit and the termloan with Comerica Bank. We anticipate that we will use the remaining netproceeds from the initial public offering for the payment of offering-relatedexpenses and for general corporate purposes. The amount and timing of what we actually spend may vary significantlyand will depend on a number of factors, including our future revenue and cashgenerated by operations as well as the other factors described in the sectiontitled “Risk Factors.” Pending the use of the net proceeds from the initialpublic offering described above, we invested the funds in a registered moneymarket account.

 

**Item3.  Defaults upon senior securities**

 

None.

 

**Item4. Removed and reserved**

 

**Item5.  Other information**

 

None.

 

46

----

Table ofContents

 

**Item6. Exhibits**

 
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                    |       | Agreement  and Plan of Merger, dated January 10, 2007, by and among Registrant,  GASI Acquisition Corp., GetActive Software, Inc. and Robert Epstein, as  stockholders’ agent (incorporated by reference from Exhibit 2.1 to the  Registrant’s registration statement on Form S-1, as amended, filed with  the SEC on January 22, 2010 (File No. 333-164491)(the “Registration  Statement”) |
| 3.1                    |       | Restated  Certificate of Incorporation, as currently in effect (incorporated by  reference from Exhibit 3.1.1 to the Registration Statement)                                                                                                                                                                                                                                                                                             |
| 3.2                    |       | Bylaws,  as currently in effect (incorporated by reference from Exhibit 3.2.1 to  the Registration Statement)                                                                                                                                                                                                                                                                                                                            |
| 4.1                    |       | Specimen  certificate for shares of common stock (incorporated by reference from  Exhibit 4.1 to the Registration Statement)                                                                                                                                                                                                                                                                                                             |
| 4.2                    |       | Reference  is made to 3.1 and 3.2 above                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3                    |       | Fifth  Amended and Restated Investors’ Rights Agreement, dated April 10, 2007,  by and among Registrant and certain stockholders (incorporated by reference  from Exhibit 4.3 to the Registration Statement)                                                                                                                                                                                                                   |
| 4.3.1                  |       | Amendment  No. 1 to Fifth Amended and Restated Investors’ Rights Agreement, dated  January 31, 2008, by and among Registrant and certain stockholders  (incorporated by reference from Exhibit 4.3.1 to the Registration  Statement)                                                                                                                                                                                      |
| 4.4                    |       | Form of  Warrant issued to Comerica Ventures Incorporated (incorporated by reference  from Exhibit 4.6 to the Registration Statement)                                                                                                                                                                                                                                                                                               |
| 4.5                    |       | Warrant  issued to Entrepreneurs Foundation of Central Texas Incorporated  (incorporated by reference from Exhibit 4.7 to the Registration  Statement)                                                                                                                                                                                                                                                                                   |
| 4.6                    |       | Warrant  issued to Piper Jaffray & Co. Incorporated (incorporated by  reference from Exhibit 4.8 to the Registration Statement)                                                                                                                                                                                                                                                                                            |
| 10.1                   | *          | 2009  Stock Incentive Plan, as amended to date, and forms of stock option  agreements Incorporated (incorporated by reference from Exhibit 10.1 to  the Registration Statement)                                                                                                                                                                                                                                                          |
| 10.2                   | *          | 1999  Stock Option/Stock Issuance Plan, as amended to date, and forms of stock  option agreements Incorporated (incorporated by reference from  Exhibit 10.2 to the Registration Statement)                                                                                                                                                                                                                                              |
| 10.3                   | *          | 2000  Stock Option Plan, as amended to date, and form of stock option agreement  Incorporated (incorporated by reference from Exhibit 10.3 to the  Registration Statement)                                                                                                                                                                                                                                                               |
| 10.4                   | *          | 2006  Equity Incentive Plan, as amended to date, and form of stock option agreement  Incorporated (incorporated by reference from Exhibit 10.4 to the  Registration Statement)                                                                                                                                                                                                                                                           |
| 10.5                   |       | Reference  is made to 4.3 and 4.3.1 above.                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.6                   |       | Loan  and Security Agreement, dated October 26, 2007, by and among Registrant,  GetActive Software, Inc. and Comerica Bank Incorporated (incorporated by  reference from Exhibit 10.6 to the Registration Statement)                                                                                                                                                                                                           |
| 10.6.1                 |       | Amendment  Number One to Loan and Security Agreement, dated as of January 14, 2008,  by and among Registrant, GetActive Software, Inc. and Comerica Bank  Incorporated (incorporated by reference from Exhibit 10.6.1 to the  Registration Statement)                                                                                                                                                                          |
| 10.6.2                 |       | Amendment  Number Two to Loan and Security Agreement, dated as of February 15,  2008, by and among Registrant, GetActive Software, Inc. and Comerica  Bank Incorporated (incorporated by reference from Exhibit 10.6.2 to the  Registration Statement)                                                                                                                                                                         |
| 10.6.3                 |       | LIBOR  Addendum to Loan and Security Agreement, dated as of July 31, 2008, by  and among Registrant, GetActive Software, Inc. and Comerica Bank  Incorporated (incorporated by reference from Exhibit 10.6.3 to the  Registration Statement)                                                                                                                                                                                   |
| 10.6.4                 |       | Amendment  Number Three to Loan and Security Agreement, dated as of February 9,  2009, by and among Registrant, GetActive Software, Inc. and Comerica  Bank Incorporated (incorporated by reference from Exhibit 10.6.4 to the  Registration Statement)                                                                                                                                                                        |
| 10.6.5                 |       | Amendment  Number Four to Loan and Security Agreement, dated as of July 31, 2009,  by and among Registrant, GetActive Software, Inc. and Comerica Bank  Incorporated (incorporated by reference from Exhibit 10.6.5 to the  Registration Statement)                                                                                                                                                                            |
| 10.7                   |       | Master  Lease Agreement, dated as of March 15, 2006, by and between Registrant  and ATEL Ventures, Inc. Incorporated (incorporated by reference from  Exhibit 10.7 to the Registration Statement)                                                                                                                                                                                                                              |
| 10.7.1                 |       | First  Amendment to Master Lease Agreement, dated as of September 28, 2006, by  and between Registrant and ATEL Ventures, Inc. (incorporated by  reference from Exhibit 10.7.1 to the Registration Statement)                                                                                                                                                                                                                  |
| 10.8                   |       | Office  Lease, dated as of November 17, 2006, by and between Registrant and  RREEF Domain, LP (incorporated by reference from Exhibit 10.8 to  the Registration Statement)                                                                                                                                                                                                                                                     |
| 10.8.1                 |       | First  Amendment to Lease, dated as of April 23, 2007, by and between  Registrant and RREEF Domain, LP (incorporated by reference from  Exhibit 10.8.1 to the Registration Statement)                                                                                                                                                                                                                                          |

 

47

----

Table of Contents

 
| 10.8.2  |   | Second  Amendment to Lease, dated January 22, 2008, by and between Registrant  and RREEF Domain, LP (incorporated by reference from Exhibit 10.8.2  to the Registration Statement)                                                                                                          |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8.3  |   | Third  Amendment to Lease, dated August 25, 2008, by and between Registrant and  RREEF Domain, LP (incorporated by reference from Exhibit 10.8.3 to  the Registration Statement)                                                                                                            |
| 10.9    |   | Office  Lease, dated April 3, 2009, by and between Registrant and 1255  23rd Street, L.P. (incorporated by reference from Exhibit 10.9  to the Registration Statement)                                                                                                                 |
| 10.10   | *      | Form of  Indemnity Agreement entered into among Registrant, its affiliates and its  directors and executive officers(incorporated  by reference from Exhibit 10.10 to the Registration Statement)                                                                                                |
| 10.11   | *      | Employment  Offer Letter, dated June 24, 2003, by and between the Registrant and  Gene Austin (incorporated by reference from Exhibit 10.11 to the  Registration Statement)                                                                                                                      |
| 10.12   | *      | Employment  Offer Letter, dated February 2, 2005, by and between the Registrant and  James R. Offerdahl (incorporated by reference from Exhibit 10.12 to  the Registration Statement)                                                                                                       |
| 10.13   | *      | Employment  Offer Letter, dated November 7, 2008, by and between the Registrant and  Sara E. Spivey (incorporated by reference from Exhibit 10.13 to the  Registration Statement)                                                                                                           |
| 10.14   | *      | Employment  Offer Letter, dated March 3, 2009, by and between the Registrant and  Marc Cannon (incorporated by reference from Exhibit 10.14 to the  Registration Statement)                                                                                                                      |
| 10.15   | *      | Employment  Offer Letter, dated August 25, 2003, by and between the Registrant and  Randy Potts (incorporated by reference from Exhibit 10.15 to the  Registration Statement)                                                                                                                    |
| 10.16   |   | Master  Agreement for U.S. Availability Services, dated as of June 1, 2008, by  and between Registrant and SunGard Availability Services, LP (incorporated  by reference from Exhibit 10.16 to the Registration Statement)                                                                  |
| 10.16.1 |   | Addendum  to the Master Agreement for U.S. Availability Services, between SunGard  Availability Services LP and Convio, Inc., dated June 1, 2008  (incorporated by reference from Exhibit 10.16.1 to the Registration  Statement)                                                      |
| 10.16.2 |   | Schedule  Number 29582 v. 1.0, For Recovery Services Governed by Master Agreement  for U.S. Availability Services, between SunGard Availability Services LP  and Convio, Inc., dated June 1, 2008 (incorporated by reference  from Exhibit 10.16.2 to the Registration Statement) |
| 31.1    | #      | Certification  of Chief Executive Officer Pursuant to Exchange Act  Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes Oxley Act of 2002                                                                                                                      |
| 31.2    | #      | Certification  of Chief Financial Officer Pursuant to Exchange Act  Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                      |
| 32.1    | #      | Certifications  of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                |

 

----

*Constitutes management contracts or compensatoryarrangements

# Filed or furnishedherewith

 

48

----

Table ofContents

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this Report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| Date: May 25, 2010 | By:      | /s/ GENE AUSTIN                                                                                         |
|-------------------------|----------|--------------------------------------------------------------------------------------------------------------|
|                    |     | Gene Austin                                                                                                  |
|                    |     | *Chief  Executive Officer (Principal Executive Officer), President and Chairman of  the Board of Directors*  |
|                    |     |                                                                                                         |
|                    |     |                                                                                                         |
| Date: May 25, 2010 | By:      | /s/ JAMES R.  OFFERDAHL                                                                            |
|                    |     | James R. Offerdahl                                                                                      |
|                    | * * | *Chief Financial Officer and  Vice President of Administration (Principal Financial and Accounting Officer)* |

 

49

----