Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the Transition Period from              to              **

 

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

 

**Convio, Inc.**

(Exact name of registrant 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 ofPrincipal Executive Offices)(Zip Code)

 

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

(Registrant’s Telephone Number, Including AreaCode)

 

Indicate by check mark whether registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes o  No x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).  Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-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 |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o  No x

 

Thenumber of shares outstanding of the Registrant’s Common Stock, $0.001 parvalue, was 17,451,305 as of October 31, 2010.

 

 

 

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**Convio, Inc.**

**Form 10-Q for the Three Months EndedSeptember 30, 2010**

**Table ofContents**

 
| ** **                              | ** **                                                                                          | ** **                                                                                                              | **Page** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.  Financial Information** | ** **                                                                                          |
|                                    | Item 1. Unaudited consolidated financial statements                                                 |                                                                                                                    |
|                                    |                                                                                                | Consolidated balance sheets as of September 30,  2010 (unaudited) and December 31, 2009                       | 1        |
|                                    |                                                                                                | Consolidated statements of operations for the three  and nine months ended September 30, 2010 and 2009 (unaudited) | 3        |
|                                    |                                                                                                | Consolidated statements of cash flows for the nine  months ended September 30, 2010 and 2009 (unaudited)           | 4        |
|                                    |                                                                                                | Notes to unaudited consolidated financial statements                                                                    | 5        |
|                                    | Item 2. Management’s discussion and analysis of  financial condition and results of operations | 18                                                                                                                      |
|                                    | Item 3. Quantitative and qualitative disclosures about  market risk                                 | 29                                                                                                                      |
|                                    | Item 4. Controls and procedures                                                                     | 30                                                                                                                      |
|                                    |                                                                                                |                                                                                                                    |     |
| **PART II.  Other Information**    | ** **                                                                                          |
|                                    | Item  1. Legal proceedings                                                                          | 30                                                                                                                      |
|                                    | Item  1A. Risk factors                                                                              | 30                                                                                                                      |
|                                    | Item 2. Unregistered sales of equity securities and  use of proceeds                                | 45                                                                                                                      |
|                                    | Item 3. Defaults upon senior securities                                                             | 45                                                                                                                      |
|                                    | Item 4. Removed and reserved                                                                        | 45                                                                                                                      |
|                                    | Item  5. Other information                                                                          | 45                                                                                                                      |
|                                    | Item 6. Exhibits                                                                                    | 46                                                                                                                      |
|                                    |                                                                                                |                                                                                                                    |     |
| **Signatures**                          | 48                                                                                                  |
| ** **                              | ** **                                                                                          | ** **                                                                                                              |
|                                    | EX-31.1                                                                                             |                                                                                                                    |
|                                    | EX-31.2                                                                                             |                                                                                                                    |
|                                    | EX-32.1                                                                                             |                                                                                                                    |

 

Cautionary Statement

 

*Except for the historical financial information contained herein, thematters discussed in this report on Form 10-Q (as well as documentsincorporated herein by reference) may be considered “forward-looking”statements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Such forward-looking statements include declarations regarding theintent, belief or current expectations of Convio, Inc. and its managementand may be signified by the words “expects,” “anticipates,” “target,” “project,”“goals,” “estimates,” “potential,” “predicts,” “may,” “might,” “could,” “intends,”“believes” or similar language. You are cautioned that any such forward-lookingstatements are not guarantees of future performance and involve a number ofrisks and uncertainties. Actual results could differ materially from thoseindicated by such forward-looking statements.  Factors that could cause orcontribute to such differences include those discussed under “Risk Factors” andelsewhere in this report.  Convio, Inc. disclaims any intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.*

 

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Table of Contents

 

**PART I. Financial Information**

 

**Item 1. Unaudited Consolidated Financial Statements**

 

Convio, Inc.

Consolidated Balance Sheets

 

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

 
| ** **                                                                                                                | ** ** | **September 30,********2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                | ** ** | **(unaudited)**                    | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                    | ** ** | ** **                         | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                           |       |                               |       |                        |       |
| Cash and cash equivalents                                                                                                 |       | $                                  | 20,173     |                        | $          | 16,662 |   |
| Restricted cash                                                                                                           |       | 1,248                              |       | —                      |       |
| Marketable securities                                                                                                     |       | 32,556                             |       | —                      |       |
| Accounts receivable, less allowance of $174 and  $231 at September 30, 2010 and December 31, 2009, respectively |       | 10,140                             |       | 9,143                       |       |
| Prepaid expenses and other current assets                                                                                 |       | 1,561                              |       | 1,610                       |       |
| Total current assets                                                                                                      |       | 65,678                             |       | 27,415                      |       |
| Property and equipment, net                                                                                               |       | 3,842                              |       | 3,276                       |       |
| Goodwill                                                                                                                  |       | 5,527                              |       | 5,527                       |       |
| Intangible assets, net                                                                                                    |       | 4,185                              |       | 4,973                       |       |
| Other assets                                                                                                              |       | 104                                |       | 153                         |       |
| Total assets                                                                                                              |       | $                                  | 79,336     |                        | $          | 41,344 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                       |       |                               |       |                        |       |
| Current liabilities:                                                                                                      |       |                               |       |                        |       |
| Accounts payable                                                                                                          |       | $                                  | 630        |                        | $          | 503 |   |
| Accrued liabilities                                                                                                       |       | 3,277                              |       | 2,386                       |       |
| Accrued compensation                                                                                                      |       | 1,634                              |       | 2,547                       |       |
| Deferred revenue                                                                                                          |       | 16,379                             |       | 17,362                      |       |
| Current portion of capital lease obligations                                                                              |       | 21                                 |       | 90                          |       |
| Current portion of long-term debt                                                                                         |       | —                             |       | 773                         |       |
| Convertible preferred stock warrant liability                                                                             |       | —                             |       | 1,375                       |       |
| Total current liabilities                                                                                                 |       | 21,941                             |       | 25,036                      |       |
| Capital lease obligations, net of current portion                                                                         |       | —                             |       | 16                          |       |
| Long-term debt, net of current portion                                                                                    |       | —                             |       | 1,332                       |       |
| Total liabilities                                                                                                         |       | 21,941                             |       | 26,384                      |       |
| Commitments and Contingencies (note 6)                                                                               |       |                               |       |                        |       |
| Convertible preferred stock (note 8)                                                                                      |       | —                             |       | 33,869                      |       |

 

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Convio, Inc.

Consolidated Balance Sheets (Continued)

 

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

 
| ** **                                                                                                                                                                                                                                | ** ** | **September 30,********2010** | ** ** | **December 31,  2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                | ** ** | **(unaudited)**                    | ** ** | ** **                  | ** ** |
| Stockholders’ equity (deficit):                                                                                                                                                                                                      |       |                               |       |                        |       |
| Common stock: $0.001 par value; 40,000,000 and  zero shares authorized at September 30, 2010 and December 31, 2009;  17,451,305 and zero shares issued and outstanding at September 30, 2010 and  December 31, 2009, respectively         |       | 17                                 |       | —                      |       |
| Series P common stock: $0.001 par value; zero and  19,118,440 shares authorized at September 30, 2010 and December 31, 2009;  zero and 5,366,076 shares issued and outstanding at September 30, 2010 and  December 31, 2009, respectively |       | —                             |       | 5                           |       |
| Series Q common stock: $0.001 par value; zero and  1,337,211 shares authorized at September 30, 2010 and December 31, 2009; zero  and 198,796 shares issued and outstanding at September 30, 2010 and December 31,  2009, respectively    |       | —                             |       | —                      |       |
| Series R common stock: $0.001 par value; zero and  676,055 shares authorized at September 30, 2010 and December 31, 2009; zero  and 676,025 shares issued and outstanding at September 30, 2010 and December 31,  2009, respectively      |       | —                             |       | 1                           |       |
| Series S common stock: $0.001 par value; zero and  1,086,233 shares authorized at September 30, 2010 and December 31, 2009; zero  and 1,086,209 shares issued and outstanding at September 30, 2010 and  December 31, 2009, respectively  |       | —                             |       | 1                           |       |
| Additional paid-in capital                                                                                                                                                                                                                |       | 110,253                            |       | 37,340                      |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                      |       | (9                                 | )          | —                      |       |
| Accumulated deficit                                                                                                                                                                                                                       |       | (52,866                            | )          | (56,256                     | )          |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                 |       | 57,395                             |       | (18,909                     | )          |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                                                                |       | $                                  | 79,336     |                        | $          | 41,344 |   |
|                                                                                                                                                                                                                                           |            |                                    |            |                             |            |  |  |

 

*See accompanying notes.*

 

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Convio, Inc.

Consolidated Statements ofOperations

(Unaudited)

 

*(inthousands, except per share amounts)*

 
| ** **                                                                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenue:                                                                                                         |       |                                                 |       |                                                      |       |   |   |   |   |
| Subscription and services                                                                                        |       | $                                                    | 14,634     |                                                      | $          | 13,953 |   | $ | 43,353 |   | $ | 40,738 |   |
| Usage                                                                                                            |       | 3,221                                                |       | 2,281                                                     |       | 9,411 |   | 6,564 |   |
| Total revenue                                                                                                    |       | 17,855                                               |       | 16,234                                                    |       | 52,764 |   | 47,302 |   |
| Cost of revenue (1)(2)                                                                                           |       | 6,495                                                |       | 6,191                                                     |       | 19,199 |   | 18,543 |   |
| Gross profit                                                                                                     |       | 11,360                                               |       | 10,043                                                    |       | 33,565 |   | 28,759 |   |
| Operating expenses:                                                                                              |       |                                                 |       |                                                      |       |   |   |   |   |
| Sales and marketing(2)                                                                                           |       | 5,075                                                |       | 5,191                                                     |       | 16,319 |   | 15,684 |   |
| Research and development(2)                                                                                      |       | 2,740                                                |       | 2,512                                                     |       | 7,896 |   | 7,480 |   |
| General and administrative(2)                                                                                    |       | 1,666                                                |       | 1,318                                                     |       | 4,760 |   | 4,376 |   |
| Amortization of other intangibles                                                                                |       | 195                                                  |       | 348                                                       |       | 662 |   | 1,052 |   |
| Total operating expenses                                                                                         |       | 9,676                                                |       | 9,369                                                     |       | 29,637 |   | 28,592 |   |
| Income from operations                                                                                           |       | 1,684                                                |       | 674                                                       |       | 3,928 |   | 167 |   |
| Interest income                                                                                                  |       | 25                                                   |       | 1                                                         |       | 41 |   | 5 |   |
| Interest expense                                                                                                 |       | (9                                                   | )          | (50                                                       | )          | (124 | ) | (288 | ) |
| Other income (expense)                                                                                           |       | —                                               |       | (96                                                       | )          | (15 | ) | (313 | ) |
| Income (loss) before income taxes                                                                                |       | 1,700                                                |       | 529                                                       |       | 3,830 |   | (429 | ) |
| Provision for income taxes                                                                                       |       | 195                                                  |       | 54                                                        |       | 440 |   | 104 |   |
| Net income (loss)                                                                                                |       | $                                                    | 1,505      |                                                      | $          | 475 |   | $ | 3,390 |   | $ | (533 | ) |
| Net income (loss) attributable to common  stockholders (note 2):                                            |       |                                                 |       |                                                      |       |   |   |   |   |
| Basic                                                                                                            |       | $                                                    | 1,505      |                                                      | $          | 270 |   | $ | 2,846 |   | $ | (533 | ) |
| Diluted                                                                                                          |       | $                                                    | 1,505      |                                                      | $          | 475 |   | $ | 3,390 |   | $ | (533 | ) |
| Net income (loss) per share attributable to common  stockholders (note 2):                                       |       |                                                 |       |                                                      |       |   |   |   |   |
| Basic                                                                                                            |       | $                                                    | 0.09       |                                                      | $          | 0.04 |   | $ | 0.22 |   | $ | (0.07 | ) |
| Diluted                                                                                                          |       | $                                                    | 0.08       |                                                      | $          | 0.03 |   | $ | 0.20 |   | $ | (0.07 | ) |
| Weighted average shares used in computing net  income (loss) per share attributable to common stockholders: |       |                                                 |       |                                                      |       |   |   |   |   |
| Basic                                                                                                            |       | 17,445                                               |       | 7,317                                                     |       | 13,031 |   | 7,311 |   |
| Diluted                                                                                                          |       | 18,911                                               |       | 13,842                                                    |       | 16,943 |   | 7,311 |   |

 

----

(1)                                  Includesamortization of acquired technology of $0 and $254 for the three month periodended September 30, 2010 and 2009, respectively, and $127 and $762 for thenine month period ended September 30, 2010 and 2009, respectively.

 

(2)                                  Includesstock-based compensation expense as follows:

 
| ** **                 | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                                   | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cost of revenue            |       | $                                                          | 112        |                                                      | $          | 156 |   | $ | 352 |   | $ | 472 |   |
| Sales and marketing        |       | 160                                                        |       | 161                                                       |       | 502 |   | 566 |   |
| Research and development   |       | 89                                                         |       | 81                                                        |       | 272 |   | 262 |   |
| General and administrative |       | 140                                                        |       | 134                                                       |       | 449 |   | 594 |   |
|                            |            |                                                            |            |                                                           |            |  |  |  |  |  |  |  |  |

 

*Seeaccompanying notes.*

 

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Convio, Inc.

ConsolidatedStatements of Cash Flows

(Unaudited)

 

*(inthousands)*

 
| ** **                                                                                                                                                | ** ** | **Nine Months Ended********September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                                                | ** ** | **2010**                                                  | ** ** | **2009** | ** ** |
| Cash flows from operating activities:                                                                                                                     |       |                                                      |       |   |   |
| Net income (loss)                                                                                                                                         |       | $                                                         | 3,390      |   | $ | (533 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:                                                            |       |                                                      |       |   |   |
| Depreciation and amortization                                                                                                                             |       | 1,610                                                     |       | 1,695 |   |
| Amortization of intangible assets                                                                                                                         |       | 789                                                       |       | 1,814 |   |
| Amortization of debt issuance costs                                                                                                                       |       | 28                                                        |       | 82 |   |
| Amortization of capitalized software development  costs                                                                                                   |       | 42                                                        |       | — |   |
| Revaluation of warrants to fair value                                                                                                                     |       | 15                                                        |       | 324 |   |
| Stock-based compensation                                                                                                                                  |       | 1,575                                                     |       | 1,894 |   |
| Changes in operating assets and liabilities:                                                                                                              |       |                                                      |       |   |   |
| Accounts receivable                                                                                                                                       |       | (997                                                      | )          | (1,226 | ) |
| Prepaid expenses and other assets                                                                                                                         |       | 128                                                       |       | (522 | ) |
| Accounts payable                                                                                                                                          |       | 127                                                       |       | 164 |   |
| Accrued liabilities                                                                                                                                       |       | (22                                                       | )          | (265 | ) |
| Deferred revenue                                                                                                                                          |       | (983                                                      | )          | 1,091 |   |
| Net cash provided by operating activities                                                                                                                 |       | 5,702                                                     |       | 4,518 |   |
| Cash flows from investing activities:                                                                                                                     |       |                                                      |       |   |   |
| Purchases of marketable securities                                                                                                                        |       | (32,625                                                   | )          | — |   |
| Increase in restricted cash                                                                                                                               |       | (1,248                                                    | )          | — |   |
| Capitalization of software development costs                                                                                                              |       | (621                                                      | )          | — |   |
| Purchase of property and equipment, net                                                                                                                   |       | (1,597                                                    | )          | (1,136 | ) |
| Net cash used in investing activities                                                                                                                     |       | (36,091                                                   | )          | (1,136 | ) |
| Cash flows from financing activities:                                                                                                                     |       |                                                      |       |   |   |
| Payments made on long-term debt and capital lease  obligations                                                                                            |       | (2,190                                                    | )          | (1,945 | ) |
| Proceeds from common stock issuance in connection  with initial public offering, net of issuance costs of $5,147                                          |       | 35,888                                                    |       | — |   |
| Proceeds from issuance of common stock upon  exercise of options                                                                                          |       | 202                                                       |       | 26 |   |
| Net cash provided by (used in) financing  activities                                                                                                      |       | 33,900                                                    |       | (1,919 | ) |
| Net change in cash and cash equivalents                                                                                                                   |       | 3,511                                                     |       | 1,463 |   |
| Cash and cash equivalents at beginning of period                                                                                                          |       | 16,662                                                    |       | 13,828 |   |
| Cash and cash equivalents at end of period                                                                                                                |       | $                                                         | 20,173     |   | $ | 15,291 |   |
| Supplemental information:                                                                                                                                 |       |                                                      |       |   |   |
| Cash paid during the periods for:                                                                                                                         |       |                                                      |       |   |   |
| Interest paid                                                                                                                                             |       | $                                                         | 71         |   | $ | 174 |   |
| Taxes paid, net of refunds                                                                                                                                |       | $                                                         | 239        |   | $ | 112 |   |
| Noncash investing activities:                                                                                                                             |       |                                                      |       |   |   |
| Gains/(losses) on marketable securities                                                                                                                   |       | $                                                         | (9         | ) | $ | — |   |
| Noncash financing activities:                                                                                                                             |       |                                                      |       |   |   |
| Conversion of convertible preferred stock to  common stock upon initial public offering                                                                   |       | $                                                         | (33,869    | ) | $ | — |   |
| Conversion of Series P, Series Q,  Series R and Series S common stock to undesignated common  stock upon initial public offering |       | $                                                         | (7         | ) | $ | — |   |
| Reclassification of preferred stock warrant  liability to additional paid-in capital upon initial public offering                                         |       | $                                                         | (1,390     | ) | $ | — |   |
| Net exercise of convertible preferred stock  warrants                                                                                                     |       | $                                                         | —     |   | $ | — |   |

 

*Seeaccompanying notes.*

 

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**Convio, Inc.**

**Notes toUnaudited Consolidated Financial Statements**

**(unaudited)**

 

**1. The Company**

 

Convio, Inc., together with its wholly-owned subsidiary (collectively,the “Company” or “Convio”), is a provider of on-demand constituent engagementsolutions that enable nonprofit organizations (“NPOs”) to more effectivelyraise funds, advocate for change and cultivate relationships with donors,activists, volunteers, alumni and other constituents. The Company’s integratedsolutions include its Convio Online Marketing (“COM”) platform and ConvioCommon Ground CRM, its constituent relationship management application. The COMplatform enables NPOs to harness the full potential of the Internet and socialmedia as new channels for constituent engagement and fundraising. Common Grounddelivers next-generation donor management capabilities, integrates marketingactivities across online and offline channels and is designed to increaseoperational efficiency. The Company’s solutions are enhanced by a portfolio ofvalue-added services tailored 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”), a privately ownedcompany based in Berkeley, California. The Company acquired GetActive, aprovider of online constituent relationship management software and servicesand a competitor of the Company, to expand its client base and increase itsmarket presence in the nonprofit market. The Company currently markets itsproducts and services throughout North America.

 

**Basis of Presentation**

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States (“GAAP”) andapplicable rules and regulations of the Securities and Exchange Commission (“SEC”)regarding interim financial reporting. Certain information and note disclosuresnormally included in the financial statements prepared in accordance with GAAPhave been condensed or omitted pursuant to such rules and regulations.Accordingly, these interim consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretocontained in the Company’s Prospectus filed pursuant to rule 424(b) under theSecurities and Exchange Act, as amended (“the Securities Act”) with the SEC onApril 29, 2010 (the “Prospectus”). The December 31, 2009 consolidated balancesheet included herein was derived from the audited financial statements as ofthat date, but does not include all disclosures including notes required byGAAP.

 

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 ofSeptember 30, 2010 and December 31, 2009, the Company’s results of operationsfor the three and nine months ended September 30, 2010 and 2009 and its cashflows for the nine months ended September 30, 2010 and 2009. The results forthe three and nine months ended September 30, 2010 are not necessarilyindicative of the results to be expected for any subsequent quarter or for theyear ending December 31, 2010. All references to September 30, 2010 or to thethree or nine months ended September 30, 2010 and 2009 in the notes to theconsolidated financial statements are unaudited.

 

**Basis of Consolidation**

 

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

 

**Quarterly Financial Information**

 

TheCompany’s quarterly operating results normally fluctuate as a result ofseasonal and other variations in its business, principally due to usage revenuewhich is derived from funds raised by its clients at special events and salescommissions which are expensed in the period in which the agreements aresigned. The growth and amount of usage revenue vary based on the number ofevents, the percent of funds raised online for these events, the growth andsuccess of events and the signing of new clients for events. The Companyrecognizes the usage revenue from these events when the usage amounts aredetermined and reported and billed to the client. Usage revenue is seasonal asevents are typically held in the spring and fall. Historically, the Company’susage revenue has been higher during the second and third quarters. Inaddition, period-over-period comparisons may be impacted significantly by theaddition or loss of any special events of enterprise clients. The Company’soperating expenses may also fluctuate as a result of sales commissions. TheCompany expenses sales commissions in the period in which it signs agreements,but the Company generally recognizes the related revenue over the terms of thoseagreements. The Company may report poor operating results due to higher salecommissions in a period in which it experiences strong sales of its solutions,particularly sales to enterprise clients. Alternatively, the Company may reportbetter operating 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.

 

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**2. Summary of Significant Accounting Policies**

 

**Applicable Accounting 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 of Estimates**

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and reported amounts of revenues and expensesduring the reporting periods. Actual results could differ from those estimates,and such differences could be material to the Company’s financial statements.

 

**Marketable Securities**

 

Duringthe three months ended September 30, 2010, the Company purchased $32.6 millionof marketable securities. The Company follows authoritative guidance indetermining the classification of and accounting for its marketable securities.The Company’s marketable securities are classified as available-for-sale andare carried at fair value with the unrealized gains and losses, net of tax,reported as a component of accumulated other comprehensive loss in stockholders’equity. Realized gains and losses and declines in value judged to be other thantemporary are included as a component of interest income based on the specificidentification method. Fair value is determined based on quoted market pricesor pricing models using current market rates.

 

The Company views itsavailable-for-sale securities as available for use, if needed, for currentoperations.  Accordingly, the Company hasclassified all available-for-sale securities as short-term, even though thestated maturity date may be one year or more beyond the current balance sheetdate.

 

TheCompany reviews its available-for-sale investments as of the end of eachreporting period for other-than-temporary declines in fair value based on thespecific identification method. The Company considers various factors indetermining whether an impairment is other-than-temporary, including theseverity and duration of the impairment, changes in underlying credit ratings,forecasted recovery, its intent to sell or the likelihood that it would berequired to sell the investment before its anticipated recovery in market valueand the probability that the scheduled cash payments will continue to be made.When the Company concludes that an other-than-temporary impairment hasoccurred, the Company assesses whether it intends to sell the security or if itis more likely than not that it will be required to sell the security beforerecovery. If either of these two conditions is met, the Company recognizes acharge in earnings equal to the entire difference between the security’samortized cost basis and its fair value. If the Company does not intend to sella security or it is not more likely than not that it will be required to sellthe security before recovery, the unrealized loss is separated into an amountrepresenting the credit loss, which is recognized in earnings, and the amountrelated to all other factors, which is recorded in accumulated othercomprehensive loss.

 

**Revenue Recognition**

 

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 and the Company’s arrangements donot contain general rights of return. The Company recognizes revenue when allof the following conditions are met:

 

·                  there is persuasive evidence of anarrangement;

·                  the service has been provided to the client;

·                  the collection of the fees is reasonablyassured; and

·                  the amount of fees to be paid by the clientis 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.

 

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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 determined and 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 othervendors;

·                  whether objective and reliable evidence offair value exists for the undelivered elements;

·                  the nature of the services;

·                  the timing of when the services agreement wassigned in comparison to the subscription service start date; and

·                  the contractual dependence of thesubscription service on the client’s satisfaction 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.

 

**Deferred Revenue**

 

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.

 

**Research and Development**

 

The Company capitalizes thecosts to develop software for internal use (including the costs of developingthe Company’s COM and Common Ground solutions) incurred during the applicationdevelopment stage as well as costs to develop significant upgrades orenhancements to existing internal use software. These costs are amortized on astraight-line basis over an estimated useful life of three years. During thethree and nine months ended September 30, 2010, the Company capitalizedapproximately $158,000 and $621,000, respectively, of costs incurred to upgradeand enhance existing internal use software. Costs incurred to improve orenhance the Company’s products in the nine months ended September 30, 2009 wereexpensed as incurred as these costs did not qualify as significant upgrades orenhancements. Capitalized costs are recorded as part of property and equipment.

 

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**Comprehensive Income (Loss)**

 

Comprehensive income (loss)includes net income (loss), as well as other changes in stockholders’ equitythat result from transactions and economic events other than those withstockholders. The Company’s only element of other comprehensive loss isunrealized gains and losses on available-for-sale securities. There were norealized gains or losses recorded to net income (loss) for any of the three ornine month periods ended September 30, 2010 or 2009.

 

Comprehensiveincome (loss) was as follows (in thousands):

 
| ** **                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                       | ** ** | **2010**                              | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                             |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss)                                                |       | $                                     | 1,505      |                                 | $          | 475 |   | $ | 3,390 |   | $ | (533 | ) |
| Other comprehensive loss:                                        |       |                                  |       |                                 |       |   |   |   |   |
| Unrealized gains (losses) on available-for-sale  securities, net |       | (9                                    | )          | —                               |       | (9 | ) | — |   |
| Comprehensive income (loss)                                      |       | $                                     | 1,496      |                                 | $          | 475 |   | $ | 3,381 |   | $ | (533 | ) |

 

**Sales Commissions**

 

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

 

**Income Taxes**

 

Deferredincome taxes are provided for the tax effects of temporary differences betweenthe carrying amounts of assets and liabilities for financial reporting purposesand the amounts used for income tax purposes, and operating loss carryforwardsand credits using enacted tax rates expected to be in effect in the years inwhich the differences are expected to reverse. The Company assesses thelikelihood that deferred tax assets will be realized, and recognizes avaluation allowance if it is more likely than not that some portion of thedeferred tax assets will not be realized. This assessment requires judgment asto the likelihood and amounts of future taxable income by tax jurisdiction. Todate, the Company has provided a full valuation allowance against its deferredtax assets as it believes the objective and verifiable evidence of its historicalpretax net losses outweighs the positive evidence of its pre-tax income for thethree and nine months ended September 30, 2010 and forecasted future results.Although the Company believes that its tax estimates are reasonable, theultimate tax determination involves significant judgment that is subject toaudit by tax authorities in the ordinary course of business. The Company willcontinue to monitor the positive and negative evidence and it will adjust thevaluation allowance as sufficient objective positive evidence becomesavailable.

 

TheCompany evaluates its uncertain tax positions based on a determination ofwhether and how much of a tax benefit taken by the Company in its tax filingsor positions is more likely than not to be realized. Potential interest andpenalties associated with any uncertain tax positions are recorded as acomponent of income tax expense. Through September 30, 2010, the Company hasnot identified any material uncertain tax positions for which liabilities wouldbe required.

 

**Stock-Based Compensation**

 

Stock-basedcompensation is measured at the grant date, based on the estimated fair valueof the award on that date, and is recognized as expense over the requisiteservice period, which is generally over the vesting period, on a straight-linebasis. The Company uses the Black-Scholes option pricing model to estimate thegrant date fair value of stock based awards.

 

**Net Income (Loss) Per Share**

 

TheCompany used the two-class method to compute net income per share for the ninemonths ended September 30, 2010 and 2009, and the three months ended September 30,2009, because the Company had previously issued securities, other than commonstock, that contractually entitled the holders to participate in dividends andearnings of the Company. In May 2010, all of the Company’s outstandingconvertible preferred stock converted into common stock in connection with theCompany’s initial public offering. Prior to the conversion, the holders of theSeries C convertible preferred stock were entitled to receive dividends when,as and if declared by the board of directors, in preference to a declaration orpayment of a dividend, at a rate of $0.7114 per share. In addition, the holdersof the Series A and Series B convertible preferred stock were entitled toreceive dividends, when, as and if declared by the board of directors, inpreference to any common stock of the Company. The dividends werenon-cumulative and no such dividends were declared or paid. Holders of Series A,Series B and Series C convertible preferred stock did not share in losses ofthe Company.

 

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Underthe two-class method, basic net income per share attributable to commonstockholders is computed by dividing the net income attributable to commonstockholders by the weighted average number of common shares outstanding duringthe period. Net income attributable to common stockholders is determined byallocating undistributed earnings between the holders of common stock andSeries A, Series B and Series C convertible preferred stock. Diluted net incomeper share attributable to common stockholders is computed by using the weightedaverage number of common shares outstanding, including potential dilutiveshares of common stock assuming the dilutive effect of convertible preferredstock, on an if-converted basis, and outstanding stock options and convertiblepreferred stock warrants using the treasury stock method.

 

Dueto losses incurred during the nine months ended September 30, 2009, the sharesassociated with stock options, convertible preferred stock warrants andconvertible preferred stock are not included in diluted net loss per sharebecause they are anti-dilutive.

 

InMay 2010, in conjunction with the Company’s initial public offering, all of theCompany’s Series P, Series Q, Series R and Series S common stock converted intoundesignated common stock. Prior to the conversion, the Series P, Series Q,Series R and Series S common stock had the same dividend rights, and therefore,resulted in basic and diluted net income (loss) per share being the same foreach class of common stock. As such, net income (loss) per share for the threeand nine months ended September 30, 2009 is presented on a combined basis.

 

Basicand diluted net income (loss) per share was calculated as follows (inthousands, except per share amounts):

 
| ** **                                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                               | ** ** | **2010**                              | ** ** | **2009**                             | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Basic net income (loss) per share**                                    |       |                                  |       |                                 |       |   |   |   |   |
| **Numerator:**                                                           |       |                                  |       |                                 |       |   |   |   |   |
| Net income (loss)                                                        |       | $                                     | 1,505      |                                 | $          | 475 |   | $ | 3,390 |   | $ | (533 | ) |
| Less: Undistributed earnings allocated to  participating preferred stock |       | —                                |       | (205                                 | )          | (544 | ) | — |   |
| Net income (loss) attributable to common  stockholders                   |       | $                                     | 1,505      |                                 | $          | 270 |   | $ | 2,846 |   | $ | (533 | ) |
| **Denominator:**                                                         | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding, basic                        |       | 17,445                                |       | 7,317                                |       | 13,031 |   | 7,311 |   |
| **Basic net income (loss) per  common share**                            |       | $                                     | 0.09       |                                 | $          | 0.04 |   | $ | 0.22 |   | $ | (0.07 | ) |
|                                                                     |       |                                  |       |                                 |       |   |   |   |   |
| **Diluted net income (loss) per  share**                                 | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Numerator:**                                                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) attributable to common  stockholders                   |       | $                                     | 1,505      |                                 | $          | 475 |   | $ | 3,390 |   | $ | (533 | ) |
| **Denominator:**                                                         | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average common shares outstanding, basic                        |       | 17,445                                |       | 7,317                                |       | 13,031 |   | 7,311 |   |
| Add: Outstanding convertible preferred stock(1)                          |       | —                                |       | 5,316                                |       | 2,317 |   | — |   |
| Add: Outstanding convertible preferred stock  warrants(2)                |       | 47                                    |       | 49                                   |       | 81 |   | — |   |
| Add: Restricted stock units                                              |       | 1                                     |       | —                               |       | 1 |   | — |   |
| Add: Options to purchase common stock                                    |       | 1,418                                 |       | 1,160                                |       | 1,513 |   | — |   |
| Weighted average common shares outstanding,  diluted                     |       | 18,911                                |       | 13,842                               |       | 16,943 |   | 7,311 |   |
| **Diluted net income (loss) per  common share**                          |       | $                                     | 0.08       |                                 | $          | 0.03 |   | $ | 0.20 |   | $ | (0.07 | ) |

 

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(1)          Immediately prior to theclosing of the Company’s initial public offering, each share of the Company’soutstanding preferred stock was converted into one share of undesignated commonstock.

 

(2)          Upon the closing of theCompany’s initial public offering, all outstanding preferred stock warrantswere converted into warrants to purchase common stock.

 

Thefollowing table displays the Company’s other outstanding common stockequivalents that were excluded from the computation of diluted net loss pershare for the nine months ended September 30, 2009, as the effect of includingthem would have been anti-dilutive (in thousands):

 
| ** **                           | ** ** | **As of September 30,  2009** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| Convertible preferred stock          |       | 5,316                         |       |
| Convertible preferred stock warrants |       | 253                           |       |
| Options to purchase common stock     |       | 1,134                         |       |

 

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**Recent Accounting Pronouncements**

 

InOctober 2009, the FASB released ASU 2009-13, *Multiple-DeliverableRevenue Arrangements*(“ASU 2009-13”), which amended the accountingrules addressing revenue recognition for multiple-deliverable revenuearrangements by eliminating the currently existing criteria that objective andreliable evidence of fair value for undelivered products or services exist inorder to be able to separately account for deliverables. Additionally, ASU2009-13 provides for elimination of the use of the residual method ofallocating arrangement consideration and requires that arrangementconsideration be allocated at the inception of the arrangement to all deliverablesthat can be accounted for separately based on their relative selling price. Ahierarchy for estimating such selling price is included in the update. This ASUwill be effective prospectively for revenue arrangements entered into ormaterially modified in fiscal years beginning on or after June 15, 2010. Earlyadoption is permitted. Adoption of this ASU will likely result in the Companyrecognizing services revenue separately from subscription revenue. The Companyis planning to adopt ASU 2009-13 in the first quarter of 2011 and is currentlyevaluating the impact this update will have on its consolidated financialstatements.

 

InJanuary 2010, the FASB 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 of the newdisclosures and for periods beginning after December 15, 2010 for the new Level3 disclosures. Comparative disclosures are not required in the first year thedisclosures are required. The Company did not have any significant transfers inor out of Level 1 and Level 2 fair value measurements during the nine monthsended September 30, 2010.

 

**3. Cash, Cash Equivalents and Marketable Securities**

 

TheCompany’s cash equivalents and marketable securities as of September 30, 2010consisted primarily of U.S. government agency bonds, corporate bonds,commercial paper and money market funds.

 

AtSeptember 30, 2010, the Company’s cash, cash equivalents and marketablesecurities consist of the following (in thousands):

 
| ** **                                 | ** ** | **September 30, 2010** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **Cost**               | ** ** | **Gross  Unrealized  Losses** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair Value** | ** ** |
| **Cash and Cash Equivalents:**             |       |                   |       |   |   |   |   |   |   |
| Cash on hand                               |       | $                      | 8,980      |   |   |   |   |   | $ | 8,980 |   |
| Cash on hand held in money market funds    |       | 739                    |       |   |   |   |   | 739 |   |
| Restricted cash held in money market funds |       | 1,248                  |       |   |   |   |   | 1,248 |   |
| Available-for-sale securities:             |       |                   |       |   |   |   |   |   |   |
| Commercial paper                           |       | 7,730                  |       | $ | — |   | $ | — |   | 7,730 |   |
| U.S. government agency                     |       | 2,026                  |       | — |   | — |   | 2,026 |   |
| Corporate bonds                            |       | 621                    |       | — |   | — |   | 621 |   |
| Money market funds                         |       | 77                     |       | — |   | — |   | 77 |   |
| Total available-for-sale securities        |       | 10,454                 |       | — |   | — |   | 10,454 |   |
| Total cash and cash equivalents            |       | $                      | 21,421     |   | $ | — |   | $ | — |   | $ | 21,421 |   |
|                                       |       |                   |       |   |   |   |   |   |   |
| **Marketable Securities:**                 |       |                   |       |   |   |   |   |   |   |
| Available-for-sale securities:             |       |                   |       |   |   |   |   |   |   |
| U.S. government agency                     |       | $                      | 16,749     |   | $ | (4 | ) | $ | 2 |   | $ | 16,747 |   |
| Corporate bonds                            |       | 8,019                  |       | (8 | ) | 1 |   | 8,012 |   |
| Commercial paper                           |       | 7,797                  |       | — |   | — |   | 7,797 |   |
| Total marketable securities                |       | $                      | 32,565     |   | $ | (12 | ) | $ | 3 |   | $ | 32,556 |   |

 

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Thefollowing table summarizes the contractual underlying maturities of the Company’savailable-for-sale securities at September 30, 2010 (in thousands):

 
| ** **                           | ** ** | **September 30, 2010** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **Cost**               | ** ** | **Gross  Unrealized  Losses** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Fair Value** | ** ** |
| Due in one year or less              |       | $                      | 37,040     |   | $ | (10 | ) | $ | 2 |   | $ | 37,032 |   |
| Due after one year through two years |       | 5,979                  |       | (2 | ) | 1 |   | 5,978 |   |
| Total available-for-sale securities  |       | $                      | 43,019     |   | $ | (12 | ) | $ | 3 |   | $ | 43,010 |   |

 

AtSeptember 30, 2010, the Company performed a review of all of the securities inits portfolio with an unrealized loss position to determine if anyother-than-temporary impairments were required to be recorded.  Factors considered in the Company’sassessment included but were not limited to the following: the Company’s abilityand intent to hold the security until maturity, the number of months until thesecurity’s maturity, the length of time that each security has been in anunrealized loss position, ratings assigned to each security by independentratings agencies, the magnitude of the unrealized loss compared to the facevalue of the security and other market conditions.  Impairments are not considered other thantemporary as the Company has the intent to hold these investments untilmaturity.  No other-than-temporary impairmentswere identified as of September 30, 2010 related to securities currently in theCompany’s portfolio.  The Company alsonoted that none of the securities in the portfolio as of September 30, 2010have been in an unrealized loss position for greater than one year.

 

**4. Fair Value Measurements**

 

Financialassets and liabilities with carrying amounts approximating fair value includeaccounts receivable, 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 as of December 31, 2009, was based uponmanagement’s best estimate of interest rates that would be available forsimilar debt obligations. As of September 30, 2010, the Company had nooutstanding debt agreements. The Company measures certain financial instrumentsat fair value on a recurring basis, including cash equivalents andavailable-for-sale marketable securities. The fair value of these financial instruments was measured using ahierarchal disclosure framework based upon the level of subjectivity of theinputs used in measuring assets and liabilities.  The three levels are described below:

 

Level 1 – Inputs are unadjusted, quoted prices inactive markets for identical assets or liabilities at the measurement date.

 

Level 2 – Inputs are inputs other than quoted pricesincluded within Level 1 that are observable for the asset or liability, eitherdirectly or indirectly.

 

Level 3 – Inputs are unobservable for the asset orliability and are developed based on the best information available in thecircumstances, which might include the Company’s own data.

 

Priorto the Company’s initial public offering in May 2010, the Company also measuredthe fair value of the preferred stock warrant liability on a recurring basisusing the Black-Scholes valuation model. Upon the closing of the initial publicoffering on May 4, 2010, all outstanding preferred stock warrants wereconverted into warrants to purchase common stock and, accordingly, theliability was reclassified to additional paid-in capital.

 

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Thefair value of the Company’s cash equivalents and marketable securities wasdetermined using the following inputs at September 30, 2010 (in thousands):

 
| ** **                                 | ** ** | **Fair Value Measurements  at September 30, 2010 Using**              | ** ** | ** **                                           | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Description**                            | ** ** | **Quoted Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** | **Total** | ** ** |
| **Cash Equivalents:**                      |       |                                                                  |       |                                                 |       |   |   |   |   |
| Cash on hand held in money market funds    |       | $                                                                     | 739        |                                                 | $          | — |   | $ | — |   | $ | 739 |   |
| Restricted cash held in money market funds |       | 1,248                                                                 |       | —                                               |       | — |   | 1,248 |   |
| Available-for-sale securities:             |       |                                                                  |       |                                                 |       |   |   |   |   |
| Money market funds                         |       | 77                                                                    |       | —                                               |       | — |   | 77 |   |
| U.S. government agency                     |       | 2,026                                                                 |       | —                                               |       | — |   | 2,026 |   |
| Corporate bonds                            |       | 621                                                                   |       | —                                               |       | — |   | 621 |   |
| Commercial paper                           |       | 7,730                                                                 |       | —                                               |       | — |   | 7,730 |   |
| Total available-for-sale securities        |       | 10,454                                                                |       | —                                               |       | — |   | 10,454 |   |
| Total cash equivalents                     |       | $                                                                     | 12,441     |                                                 | $          | — |   | $ | — |   | $ | 12,441 |   |
|                                       |       |                                                                  |       |                                                 |       |   |   |   |   |
| **Marketable Securities:**                 |       |                                                                  |       |                                                 |       |   |   |   |   |
| U.S. government agency                     |       | $                                                                     | 16,747     |                                                 | $          | — |   | $ | — |   | $ | 16,747 |   |
| Corporate bonds                            |       | 8,012                                                                 |       | —                                               |       | — |   | 8,012 |   |
| Commercial paper                           |       | 7,797                                                                 |       | —                                               |       | — |   | 7,797 |   |
| Total marketable securities                |       | $                                                                     | 32,556     |                                                 | $          | — |   | $ | — |   | $ | 32,556 |   |
|                                       |       |                                                                  |       |                                                 |       |   |   |   |   |
| **Total**                                  |       | $                                                                     | 44,997     |                                                 | $          | — |   | $ | — |   | $ | 44,997 |   |

 

Changesin Level 3 assets measured at fair value on a recurring basis for the ninemonths ended September 30, 2010 were as follows (in thousands):

 
| December 31, 2009, preferred stock warrant  liability                                |   | $      | 1,375  |   |
|--------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Unrealized gains (losses), net                                                       |   | 15     |   |
| Reclassification of preferred stock warrant  liability to additional paid-in capital |   | (1,390 | )      |
| September 30, 2010                                                                   |   | $      | — |   |

 

**5. Long-term Debt**

 

On May 12, 2010, subsequent to the closing of theCompany’s initial public offering, the Company paid approximately $1.9 millionto its principal lender, Comerica Bank, in satisfaction of the remainingbalance on its line of credit. In July 2010, the Companycancelled the line of credit.

 

Inconjunction with the April 3, 2009 execution of the Washington D.C. operatinglease, the Company was required to provide a $350,000 standby letter of creditwith Comerica for the benefit of the landlord to secure the office space perthe lease agreement. In addition, the Company also has a standby letter ofcredit for the benefit of the landlord of the Company’s Austin, Texas facility,which was reduced in accordance with the terms of the lease to approximately$898,000 in June 2010, resulting in total standby letters of credit ofapproximately $1.2 million. In July, upon cancellation of the line of creditwith Comerica, the Company entered into a pledge agreement with Comerica tocash secure the letters of credit. The pledge agreement requires that theCompany maintain a minimum cash balance of $1.2 million in a money market accountwith the bank and is classified as restricted cash on the balance sheet.

 

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**6. Commitments and Contingencies**

 

OnNovember 17, 2006, the Company entered into an office building lease with RREEFDomain, LP pursuant to which Convio was leasing approximately 67,000 squarefeet in an office facility located in Austin, Texas. In January 2008, theCompany 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.

 

InJanuary 2010, the Company entered into a sublease agreement pursuant to whichConvio sublet approximately 12,000 square feet of its office facility locatedin Austin, Texas. The sublease has a term of forty-four months. The totalsublease payments receivable over the full forty-four month lease term will beapproximately $823,000.

 

OnApril 3, 2009, the Company entered into an office building lease with 1255 23rdStreet, L.P. pursuant to which Convio is leasing approximately 12,000 squarefeet in an office facility located in Washington, D.C. Pursuant to theagreement, Convio will lease an additional 2,600 square feet beginning onAugust 1, 2013. The lease has a term of one hundred twenty months, whichcommenced on August 1, 2009. The lease agreement contains escalating rentpayments, which may be adjusted for component charges, taxes, insurance andmaintenance related to the property. The total basic rent payable over the fullone hundred twenty month lease term will be approximately $7,420,000.

 

Fromtime to time, the Company is subject to various claims that arise in the normalcourse of business. In the opinion of management, the Company is unaware of anypending or unasserted claims that would have a material adverse effect on thefinancial position, liquidity or results of the Company.

 

Certainexecutive officers are entitled to certain payments if they are terminatedwithout cause or as a result of a change in control. Upon termination withoutcause, and not as a result of death or disability, each of such officers isentitled to receive a payment of base salary for four to six months followingtermination of employment and certain officers will be entitled to continue toreceive coverage under medical and dental benefit plans for four to six monthsor until such officers are covered under a separate plan from another employer.Upon a termination other than for cause or with good reason following a changein control, 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.

 

**7. Income Taxes**

 

Inaccordance with applicable accounting guidance, the income tax provision forthe three and nine month periods ended September 30, 2010 is based on theestimated annual effective tax rate for fiscal year 2010. The estimatedeffective tax rate may be subject to adjustment in subsequent quarterly periodsas the estimates of pretax income for the year, along with other items that mayaffect the rate change.

 

For the three months ended September 30, 2010 and 2009, the Company’sprovision for income taxes reflects an effective tax rate of approximately11.5% and 10.3%, respectively. For the nine months ended September 30, 2010 and2009, the Company’s provision for income taxes reflects an effective tax rateof approximately 11.5% and 24.1%, respectively. For each of the three and ninemonths ended September 30, 2010 and 2009, the Company’s effective tax rate waslower than the U.S. federal statutory rate primarily due to changes to itsvaluation allowance.

 

The Company has significant deferred tax assets related to its netoperating loss carryforwards and tax credits, and has provided a valuationallowance for the full amount of its deferred tax assets, as it is not morelikely than not that any future benefit from deductible temporary differences,net operating loss carryforwards, and tax credit carryforwards will berealized. This assessment requires judgment as to the likelihood and amounts offuture taxable income by tax jurisdiction.

 

To date, the Company has provided a full valuation allowance againstits deferred tax assets as it believes the objective and verifiable evidence ofits historical pretax net losses outweighs the positive evidence of its pre-taxincome for the nine months ended September 30, 2010 and forecasted futureresults. Although the Company believes that its tax estimates are reasonable,the ultimate tax determination involves significant judgment that is subject toaudit by tax authorities in the ordinary course of business. The Company willcontinue to monitor the positive and negative evidence and it will adjust thevaluation allowance as sufficient objective positive evidence becomesavailable.

 

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TheCompany had approximately $148,000 in unrecognized tax benefits as of September30, 2010. The Company does not expect to recognize any amount of theunrecognized tax benefit in the next twelve months, as the unrecognized incometax benefits relate to the uncertainty regarding certain credits taken onreturns that have not been examined by the applicable tax authority. TheCompany’s tax years 2006 through 2009 remain open to examination by the majortaxing jurisdictions to which the Company is subject. However, the Company isnot currently under examination by any taxing jurisdictions.

 

**8. Stockholders’ Equity**

 

**Reverse Stock Split**

 

OnApril 5, 2010, the board of directors approved an amended and restatedcertificate of incorporation that (a) increased the authorized common stock to40 million shares, (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 effected on April 22,2010.

 

**Initial Public Offering**

 

OnMay 4, 2010, the Company completed an initial public offering consisting of 5,132,728shares of common stock at $9.00 per share. The total shares sold in the offering included 1,343,201 shares sold byselling stockholders 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 and offering costs, the net proceeds to the Company from thesale of shares in the offering were approximately $35.9 million.

 

**Conversion of Common and Preferred Stock**

 

Immediatelyprior to the closing of the Company’s initial public offering, which occurredon May 4, 2010, each share of the Company’s outstanding preferred and commonstock was convertible into one share of undesignated common stock. Thefollowing table presents the conversion of all classes of stock on May 4, 2010:

 
| ** **                  | ** ** | **Prior to Conversion** | ** ** | **Subsequent to Conversion** | ** ** |
|-----------------------------|------------|-------------------------|------------|------------------------------|------------|
| Convertible Preferred Stock |       |                    |       |                         |       |
| Series A                    |       | 3,036,198               |       | —                       |       |
| Series B                    |       | 1,138,380               |       | —                       |       |
| Series C                    |       | 1,141,459               |       | —                       |       |
| Common Stock                |       |                    |       |                         |       |
| Series P                    |       | 5,458,168               |       | —                       |       |
| Series Q                    |       | 198,796                 |       | —                       |       |
| Series R                    |       | 676,025                 |       | —                       |       |
| Series S                    |       | 1,086,210               |       | —                       |       |
| Undesignated Common Stock   |       | —                  |       | 12,735,236                   |       |

 

**Preferred Stock Warrant Liability**

 

Priorto the Company’s completion of its initial public offering, freestandingwarrants that were related to the Company’s preferred stock were classified asliabilities in the accompanying balance sheets. The warrants were subject tore-measurement at each balance sheet date, and any change in fair value wasrecognized as a component of other income (expense). The Company did not recordany income or expense related to the warrants for the three months ended September30, 2010. The Company recorded $97,000 of other expense for the three monthsended September 30, 2009, and $15,000 of other expense and $324,000 of otherexpense for the nine months ended September 30, 2010 and 2009, respectively, toreflect the change in fair value of the preferred stock warrants during thoseperiods. Upon the closing of the initial public offering on May 4, 2010, alloutstanding preferred stock warrants were converted into warrants to purchasecommon stock and, accordingly, the liability was reclassified to additionalpaid-in capital.

 

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**Net Exercise of Preferred Stock Warrants**

 

OnApril 29, 2010, in conjunction with the Company’s initial public offering,252,665 shares of common stock issuable upon the exercise of outstandingwarrants were converted into an equivalent number of shares of a single classof common stock. Immediately prior to the closing of the initial publicoffering, a portion of the warrants were net exercised, resulting in the issuanceof 72,800 shares of common stock. Subsequent to the net exercise and as ofSeptember 30, 2010, 106,725 shares of common stock were issuable upon theexercise of the remaining warrants with a weighted average exercise price of$4.60 per share.

 

**Stock Option Plans**

 

TheCompany has in effect equity compensation plans under which it has grantedincentive stock options, non-qualified stock options and restricted stock unitsto employees, directors and consultants. The incentive stock options andnon-qualified stock options allow the holder to purchase shares of the Company’sundesignated common stock, or Series P common stock prior to the Company’sinitial public offering, at a price not less than the fair market value of thestock at the date of grant except in the event of a business combination. Therestricted stock units entitle the holder to receive shares of the Company’sstock after a vesting requirement is satisfied. The fair value of eachrestricted stock award is estimated using the intrinsic value method which isbased on the closing price on the date of grant. Compensation expense forrestricted stock and restricted stock unit awards is recognized over thevesting period on a straight-line basis net of estimated pre-vestingforfeitures.

 

*2009 Stock 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, consultantsand other independent advisors. The share reserve under the 2009 Plan containsan evergreen provision that allows for an annual increase on January 1 of eachyear equal to the lesser of (a) 4% of the aggregate outstanding shares on thefirst day of the applicable year and (b) any lesser amount determined by ourboard of directors. The 2009 Plan provides for the issuance of restrictedcommon stock, incentive stock options or nonqualified stock options. Pursuantto the 2009 Plan, the exercise price for incentive stock options is at least100% of the fair market value on the date of grant, or for employees owning inexcess of 10% of the voting power of all classes of stock, 110% of the fairmarket value on the date of grant.

 

Inthe event of a change in control, outstanding stock options and other awardsthat are 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.

 

Asof September 30, 2010, 251,291 options and 114,838 restricted stock units hadbeen granted from the 2009 Plan. Additionally, as of September 30, 2010, therewere 215,784 shares available for future grant under the 2009 Plan.

 

*Stock Options*

 

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 limited history of tradingin the public equity markets, the Company believes that comparable industrypeer groups 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.

 

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TheCompany estimates potential forfeitures of stock grants and adjustscompensation cost recorded accordingly. The estimate of forfeitures will beadjusted over the requisite service period to the extent that actualforfeitures differ, or are expected to differ, from such estimates. Changes inestimated forfeitures will be recognized through a cumulative catch-upadjustment in the period of change and will also impact the amount of stockcompensation expense to be recognized in future periods.

 

Thefollowing table summarizes the weighted average grant-date value of options andthe assumptions used to develop their fair value for the nine months endedSeptember 30, 2010 and 2009.

 
| ** **                                        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| Weighted-average grant-date fair value of options |       | $                                    | 4.44       |   | $ | 2.73 |   |
| Risk-free interest rate                           |       | 1.70 – 2.43                     | %          | 1.89 – 2.87 | % |
| Expected volatility                               |       | 0.61 – 0.63                     |       | 0.65 – 0.66 |   |
| Expected life in years                            |       | 4.2 – 4.3                       |       | 4.2 – 4.6 |   |
| Dividend yield                                    |       | —                               |       | — |   |
| Estimated forfeitures                             |       | 20                                   | %          | 20 | % |
|                                                   |            |                                      |            |  |  |  |  |

 

Asummary of the changes in common stock options issued under all of the existingstock options plans is as 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                                 |       | 251,291    |       | $7.85 - $9.15                  |       | 8.77                                    |       |                            |       |
| Exercised                               |       | (175,926   | )          | $0.09 - $5.40                  |       | 1.14                                    |       | $                               | 1,412,250  |   |
| Forfeited                               |       | (106,285   | )          | $0.09 - $17.05                 |       | 3.63                                    |       |                            |       |
| Options outstanding, September 30, 2010 |       | 3,097,702  |       | $0.09 - $12.78                 |       | $                                       | 3.66       |                            | $          | 17,234,102 |   |

 

FromJuly 1, 2010 to September 30, 2010, our employees exercised options to purchase13,014 shares of our common stock pursuant to options issued under our equityincentive plans at an average purchase price of $0.85 per share for anaggregate purchase price of $11,100. The aggregate intrinsic value of optionsoutstanding and options exercised was calculated based on the positivedifferences between the estimated fair value of the Company’s common stock of$9.22 and $8.75 per share on September 30, 2010 and December 31, 2009,respectively, or at time of exercise, and the exercise price of the options.

 

Thefollowing table summarizes information about options outstanding at September 30,2010:

 
| ** **          | ** ** | ** **              | ** ** | **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  |       | 947,574                 |       | 3.85                                                 |       | $                                       | 0.99       |   | 947,574 |   | $ | 0.99 |   |
| $1.24 – $4.15  |       | 350,351                 |       | 4.93                                                 |       | 2.15                                    |       | 344,771 |   | 2.13 |   |
| $4.57 – $4.57  |       | 1,157,884               |       | 5.19                                                 |       | 4.57                                    |       | 724,815 |   | 4.57 |   |
| $5.40 – $8.75  |       | 629,035                 |       | 5.81                                                 |       | 6.71                                    |       | 154,116 |   | 5.70 |   |
| $9.15 – $12.78 |       | 12,858                  |       | 6.07                                                 |       | 9.50                                    |       | 1,282 |   | 11.73 |   |
| $0.09 – $12.78 |       | 3,097,702               |       | 4.88                                                 |       | $                                       | 3.66       |   | 2,172,558 |   | $ | 2.71 |   |

 

At September 30, 2010, therewas an estimated $3.4 million of total unrecognized compensation costs relatedto stock-based compensation arrangements. These costs will be recognized over aweighted average period of 2.1 years.

 

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Certainstock options have been exercised prior to vesting resulting in the issuance ofnonvested shares. A summary of the Company’s nonvested shares as of September 30,2010, and changes during the nine months ended September 30, 2010, is presentedbelow:

 
| **Nonvested shares**            | ** ** | **Shares** | ** ** | **Weighted-Average********Intrinsic Value** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Nonvested at December 31, 2009  |       | 163        |       | $                                           | 1,000      |   |
| Issued                          |       | —     |       | —                                      |       |
| Vested                          |       | (163       | )          | (1,000                                      | )          |
| Nonvested at September 30, 2010 |       | —     |       | $                                           | —     |   |

 

Cashreceived from option exercises during the nine months ended September 30, 2010was $202,000. The Company has historically issued new shares to satisfy shareoption exercises.

 

*Restricted Stock Units*

 

Asummary of restricted stock unit activity under the Company’s stock incentiveplans as of September 30, 2010, and changes during the nine months then endedare as follows:

 
| ** **                   | ** ** | **Shares** | ** ** | **Weighted-  Average  Fair Value** | ** ** |
|------------------------------|------------|------------|------------|------------------------------------|------------|
| Unvested, January 1, 2010    |       | —     |       |                               |       |
| Granted                      |       | 114,838    |       | $                                  | 9.01       |   |
| Vested and issued            |       | —     |       |                               |       |
| Cancelled                    |       | (930       | )          | 9.15                               |       |
| Unvested, September 30, 2010 |       | 113,908    | ** ** | **$**                              | 9.01       |   |

 

Asof September 30, 2010, there was an estimated $973,000 of total unrecognizedcompensation cost related to unvested restricted stock units granted under theCompany’s 2009 Plan. The cost is expected to be recognized through November 2014with a weighted average recognition period of approximately 3.6 years.

 

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**Item 2. Management’s discussion and analysis of financialcondition and results of operations**

 

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

 

**Cautionary statement**

 

Thefollowing discussion should be read along with the unaudited consolidatedfinancial statements and unaudited notes thereto included in Item 1 of thisQuarterly Report on Form 10-Q, as well as the consolidated financial statementsand notes thereto contained in the Company’s Prospectus filed pursuant to rule 424(b)of the Securities Act of 1933, as amended (the “Securities Act”) with the SECon April 29, 2010 (the “Prospectus”). This management’s discussion and analysisof financial condition and results of operations contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward-looking statements regardingfuture events and our future results are based on current expectations,estimates, forecasts and projections, and the beliefs and assumptions of ourmanagement including, without limitation, our expectations regarding thefollowing: the sales of our software products and services; the impact of ourrevenue recognition policies; our belief that our current assets, includingcash, cash equivalents, marketable securities and expected cash flows fromoperating activities, will be sufficient to fund our operations; ouranticipated additions to property, plant and equipment; our belief that ourfacilities are suitable and adequate to meet our current operating needs; ourbelief that we do not have any material exposure to changes in the fair valueof our investment portfolio as a result of changes in interest 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 similar expressions areintended to identify these forward-looking statements. Readers are cautionedthat these forward-looking statements are predictions and are subject to risks,uncertainties, and assumptions that are difficult to predict. Therefore, actualresults may differ materially and adversely from those expressed in anyforward-looking statements.

 

**Overview**

 

We are a leading provider of on-demand constituent engagement solutionsthat enable nonprofit organizations, or NPOs, to more effectively raise funds,advocate for change and cultivate relationships with donors, activists,volunteers, alumni and other constituents. During 2009, our clients used oursolutions to raise over $920 million and deliver over 3.8 billion emails toaccomplish their missions. During the nine months ended September 30, 2010, ourclients used our solutions to raise over $1.0 billion and deliver approximately3.0 billion emails to accomplish their missions. Factoring out transactionsdirectly related to the relief for the earthquakes in Haiti and Chile duringthe nine months ended September 30, 2010, online fundraising increased byapproximately 30 percent from the same period last year.

 

We were incorporated in Delaware in October 1999, and we offered ourfirst commercially available online marketing solution in 2000. We acquiredGetActive Software, 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 our target market as public charities that raise more than$50,000 in contributions annually, of which there were over 71,000 in 2009 inthe United States according to GuideStar USA, Inc. We categorize our targetmarket into enterprise NPOs that raise more than $10 million annually andmid-market NPOs that raise between $50,000 and $10 million annually. We sellour solutions through a direct sales force complemented by our partner network.Our sales force is increasing its focus on acquiring a higher number ofmid-market clients.

 

We recognize subscription and services revenue ratably over the term ofour client agreements beginning on the date such products and services becomeavailable for use by the client, or the activation date. The terms of ouragreements are typically three years for COM and one year for Common Ground. Wecurrently derive the substantial majority of our revenue from subscriptions toour COM solution.

 

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Pricing for our COM solution is based on the number of moduleslicensed, the email list size and any related services. We also recognize usagerevenue from our clients as a percentage of funds raised at special events,such as runs, walks and rides, and based on additional fees for their increaseduse of our COM solution. Pricing for Common Ground is based on the number ofseats licensed. We typically do not derive revenue from deployment services forCommon Ground as deployment activities are generally handled by third-partyimplementation providers. Common Ground is built on salesforce.com’s Force.complatform. Common Ground clients enter into a license agreement with us andseparately enter into a license agreement with salesforce.com for use of itssolution.

 

We believe the nonprofit market for on-demand constituent engagementsolutions is large and underserved, and we plan to continue to invest in ourbusiness to pursue this opportunity. In particular, we expect to incursignificant sales and marketing expenses to increase the number of clients onour COM platform and Common Ground application. We also expect to makesubstantial investments in research and development, primarily on new features,platform extensibility and Common Ground. We anticipate increased operatingexpenses as a result of becoming a public company and more generally as we seekto grow our business domestically and outside of the United States. We expectthe percentage of revenue generated from clients outside the United States toincrease.

 

**Opportunities, Trends and Uncertainties**

 

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

 

·                  *IncreasingAdjusted EBITDA on an annual basis. *Our managementand board of directors use Adjusted EBITDA to monitor the performance of ourbusiness. Our Adjusted EBITDA was $8.0 million for the nine months endedSeptember 30, 2010, compared to $5.7 million for the nine months endedSeptember 30, 2009. The growth in Adjusted EBITDA was the result of the growthin our revenue and the improved productivity and scale of our business,combined with cost-saving measures we introduced in 2009. 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 andinvestment in Convio Go! and Common Ground.*We introduced Convio Go!,our mid-market COM offering, in the first quarter of 2008 and Common Ground inthe third quarter of 2008. We believe these solutions have been well receivedby NPOs. Both Convio Go! and Common Ground are targeted primarily at mid-marketNPOs and have had lower average pricing than our broader COM solution. CommonGround has higher gross margins than our COM solution because Common Ground ishosted on the Force.com platform and deployment services are typically providedby third parties. We intend to continue to invest significantly in Convio Go!and Common Ground research and development and sales and marketing, especiallyas we expand Common Ground into the enterprise market. As a result, we expectthe number of our mid-market clients to increase, and we expect our revenuefrom these clients to grow during 2010. However, these solutions are new, andit is difficult for us to predict whether NPOs will continue to adopt thesesolutions or what impact these solutions will have on our business. Inaddition, as we invest in significant upgrades or enhancements to our productsto support these solutions, we may incur additional costs to develop internaluse software that are capitalized under the applicable accounting guidance. Ourcapitalization of software development costs in future periods could cause ourfinancial results to fluctuate and be more difficult to predict.

 

·                  *Seasonalityand fluctuations in usage revenue. *A significantportion of our usage revenue is derived from funds raised by our COM clients atspecial events. The growth and amount of usage revenue vary based on the numberof events, the percent of funds raised online for these events, the growth andsuccess of events and our signing of new clients for events. We recognize theusage revenue from these events when the usage amounts are determined andreported and billed to the client. Usage revenue is seasonal as events aretypically held in the spring and fall. As a result, our usage revenue will behigher during the second and third quarters. In addition, period-over-periodcomparisons may be impacted significantly by the addition or loss of anyspecial events of our enterprise clients. Therefore, we believe that year overyear changes in our revenue and earnings are more indicative of our financialperformance rather than sequential changes.

 

·                  *Salescommissions expensed upon sale. *We expensesales commissions in the period in which we sign our agreements, but wegenerally recognize the related revenue over the terms of those agreements. Wemay report poor operating results due to higher sale commissions in a period inwhich we experience strong sales of our solutions, particularly sales toenterprise clients. Alternatively, we may report better operating results dueto lower sales commissions in a period in which we experience a slowdown insales. As a result, our sales and marketing expenses are difficult to predictand fluctuate as a percentage of revenue.

 

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·                  *Churn. *Our management uses churn tomonitor the satisfaction of our clients, to evaluate the effectiveness of ourbusiness strategies and as a factor in executive compensation. We define churnas the amount of any lost software monthly recurring revenue and usage revenuein a period, divided by our software monthly recurring revenue at the beginningof the year plus our average usage revenue of the prior year. Despite theeconomic slowdown in 2009, we had annual churn of less than 10% which was lowerthan our churn in 2007 and 2008. However, our churn is variable especially on aquarterly basis, and accordingly churn is difficult to predict and fluctuateson a quarterly basis. Our use of churn has limitations as an analytical tool,and you should not consider it in isolation. Other companies in our industry maycalculate churn differently, which reduces its usefulness as a comparativemeasure.

 

·                  *Impact ofeconomic conditions. *The downturn ineconomic conditions has caused many NPOs to be more cautious and to delay theirpurchases of technology and related services. During 2009, we faced increasedpricing pressure on our COM solution, and sales of our COM solution to newclients declined. However, COM sales to existing clients increased. Toincentivize NPOs to purchase our solutions, we invested heavily in the salesand marketing of our lower-priced Convio Go! and Common Ground solutions which resultedin higher sales of these solutions. We also offered promotional sales programs to incentivize organizations to makedecisions and help fuel growth.  Thesepromotions typically allow select organizations to get deployed and benefitfrom our solutions while deferring payment until their next budget cycle. Thefinancial impact of these promotions is that subscription revenue recognitionis delayed until billings commence.  Wewill continue to evaluate our solutions and our sales and marketing programs basedon general market conditions.

 

**Critical accounting policies and estimates**

 

Ourfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of ourfinancial statements and related disclosures requires us to make estimates,assumptions and judgments that affect the reported amount of assets,liabilities, revenue, costs and expenses, and related disclosures. We base ourestimates and assumptions on historical experience and other factors that webelieve to be reasonable under the circumstances. We evaluate our estimates andassumptions on an ongoing basis. Our actual results may differ from theseestimates under different assumptions and conditions. Our most criticalaccounting policies are listed below:

 

·                  Revenue recognition;

 

·                  Allowance for doubtfulaccounts;

 

·                  Marketable securities;

 

·                  Valuation of goodwill andidentifiable intangible assets;

 

·                  Preferred stock warrants;

 

·                  Stock-based compensation;and

 

·                  Income taxes.

 

Duringthe nine months ended September 30, 2010, there were no significant changes inour critical accounting policies or estimates other than the adoption of ourmarketable securities accounting policy as outlined in the footnotes to thefinancial statements contained herein. See our consolidated financialstatements and footnotes and our Management’s Discussion and Analysis includedin our Prospectus 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 Adjusted EBITDA as net income (loss) less interest income andgain (loss) on preferred stock warrant revaluation plus interest expense,provision for taxes, depreciation expense, amortization expense and stock-basedcompensation expense. We have included Adjusted EBITDA in this Form 10-Qbecause (i) we believe Adjusted EBITDA and similar measures are widely used byinvestors, securities analysts and other interested parties in our industry asa measure of financial performance and (ii) our management uses Adjusted EBITDAto monitor the performance of our business.

 

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We also believe Adjusted EBITDA facilitates operating performancecomparisons from period to period by excluding potential differences caused byvariations in capital structures affecting interest income and expense, taxpositions, such as the impact of changes in effective tax rates and the impactof depreciation and amortization expense.

 

Our use of Adjusted EBITDA has limitations as an analytical tool, andyou should not consider it in isolation or as a substitute for analysis of ourresults as reported under GAAP. Some of these limitations are:

 

·                  although depreciation andamortization are non-cash charges, the assets being depreciated and amortizedmay have to be replaced in the future, and Adjusted EBITDA does not reflectcash capital expenditure requirements for such replacements;

 

·                  Adjusted EBITDA does notreflect changes in, or cash requirements for, our working capital needs;

 

·                  Adjusted EBITDA does not considerthe potentially dilutive impact of equity-based compensation;

 

·                  Adjusted EBITDA does notreflect tax payments that may represent a reduction in cash available to us;and

 

·                  other companies, includingcompanies in our industry, may calculate Adjusted EBITDA differently, whichreduces its usefulness as a comparative measure.

 

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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                              | ** ** | **(in thousands)**                             | ** ** |
| **Reconciliation of Adjusted EBITDA  to net income (loss):** |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss)                                            |       | $                                                    | 1,505      |                                                | $          | 475 |   | $ | 3,390 |   | $ | (533 | ) |
| Interest (income) expense, net                               |       | (16                                                  | )          | 49                                                  |       | 83 |   | 283 |   |
| Depreciation and amortization                                |       | 733                                                  |       | 1,181                                               |       | 2,469 |   | 3,591 |   |
| Stock-based compensation                                     |       | 501                                                  |       | 532                                                 |       | 1,575 |   | 1,894 |   |
| (Gain) loss on warrant revaluation                           |       | —                                               |       | 97                                                  |       | 15 |   | 324 |   |
| Provision for income taxes                                   |       | 195                                                  |       | 54                                                  |       | 440 |   | 104 |   |
| Adjusted EBITDA                                              |       | $                                                    | 2,918      |                                                | $          | 2,388 |   | $ | 7,972 |   | $ | 5,663 |   |
| Adjusted EBITDA as a percentage of total revenue             |       | 16                                                   | %          | 15                                                  | %          | 15 | % | 12 | % |

 

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**Results of operations**

 

The following table sets forth our results of operations for theperiods indicated:

 
| ** **                         | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended********September 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                    | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                         | ** ** | **(in  thousands)**                         | ** ** | **(in  thousands)**                              | ** ** |
| **Statements of Operations Data:** |       |                                        |       |                                             |       |   |   |   |   |
| Revenue:                           |       |                                        |       |                                             |       |   |   |   |   |
| Subscription and services          |       | $                                           | 14,634     |                                             | $          | 13,953 |   | $ | 43,353 |   | $ | 40,738 |   |
| Usage                              |       | 3,221                                       |       | 2,281                                            |       | 9,411 |   | 6,564 |   |
| Total revenue                      |       | 17,855                                      |       | 16,234                                           |       | 52,764 |   | 47,302 |   |
| Cost of revenue                    |       | 6,495                                       |       | 6,191                                            |       | 19,199 |   | 18,543 |   |
| Gross profit                       |       | 11,360                                      |       | 10,043                                           |       | 33,565 |   | 28,759 |   |
| Operating expenses:                |       |                                        |       |                                             |       |   |   |   |   |
| Sales and marketing                |       | 5,075                                       |       | 5,191                                            |       | 16,319 |   | 15,684 |   |
| Research and development           |       | 2,740                                       |       | 2,512                                            |       | 7,896 |   | 7,480 |   |
| General and administrative         |       | 1,666                                       |       | 1,318                                            |       | 4,760 |   | 4,376 |   |
| Amortization of other  intangibles |       | 195                                         |       | 348                                              |       | 662 |   | 1,052 |   |
| Total operating expenses           |       | 9,676                                       |       | 9,369                                            |       | 29,637 |   | 28,592 |   |
| Income (loss) from  operations     |       | 1,684                                       |       | 674                                              |       | 3,928 |   | 167 |   |
| Interest income                    |       | 25                                          |       | 1                                                |       | 41 |   | 5 |   |
| Interest expense                   |       | (9                                          | )          | (50                                              | )          | (124 | ) | (288 | ) |
| Other income (expense)             |       | —                                      |       | (96                                              | )          | (15 | ) | (313 | ) |
| Income (loss) before  income taxes |       | 1,700                                       |       | 529                                              |       | 3,830 |   | (429 | ) |
| Provision for income taxes         |       | 195                                         |       | 54                                               |       | 440 |   | 104 |   |
| Net income (loss)                  |       | $                                           | 1,505      |                                             | $          | 475 |   | $ | 3,390 |   | $ | (533 | ) |

 

The following table sets forth our results of operations expressed as apercentage of total revenue for each of the periods indicated:

 
| ** **                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Statements of Operations Data:** | ** ** | ** **                                           | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                           |       |                                                 |       |                                                      |       |   |   |   |   |
| Subscription and services          |       | 82                                                   | %          | 86                                                        | %          | 82 | % | 86 | % |
| Usage                              |       | 18                                                   |       | 14                                                        |       | 18 |   | 14 |   |
| Total revenue                      |       | 100                                                  |       | 100                                                       |       | 100 |   | 100 |   |
| Cost of revenue                    |       | 36                                                   |       | 38                                                        |       | 36 |   | 39 |   |
| Gross margin                       |       | 64                                                   |       | 62                                                        |       | 64 |   | 61 |   |
| Operating expenses:                |       |                                                 |       |                                                      |       |   |   |   |   |
| Sales and marketing                |       | 29                                                   |       | 32                                                        |       | 31 |   | 33 |   |
| Research and development           |       | 16                                                   |       | 16                                                        |       | 15 |   | 16 |   |
| General and administrative         |       | 9                                                    |       | 8                                                         |       | 9 |   | 9 |   |
| Amortization of other intangibles  |       | 1                                                    |       | 2                                                         |       | 1 |   | 2 |   |
| Total operating expenses           |       | 55                                                   |       | 58                                                        |       | 56 |   | 60 |   |
| Income (loss) from operations      |       | 9                                                    |       | 4                                                         |       | 8 |   | 1 |   |
| Interest income                    |       | 0                                                    |       | 0                                                         |       | 0 |   | 0 |   |
| Interest expense                   |       | 0                                                    |       | 0                                                         |       | 0 |   | (1 | ) |
| Other income (expense)             |       | 0                                                    |       | (1                                                        | )          | 0 |   | (1 | ) |
| Income (loss) before income taxes  |       | 9                                                    |       | 3                                                         |       | 8 |   | (1 | ) |
| Provision for income taxes         |       | 1                                                    |       | 0                                                         |       | 1 |   | 0 |   |
| Net income (loss)                  |       | 8                                                    | %          | 3                                                         | %          | 7 | % | (1 | )% |

 

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*Comparison of the Three and Nine Months EndedSeptember 30, 2010 and 2009.*

 

The following discussion of our results of operations is based uponactual results of operations for each of the three and nine months endedSeptember 30, 2010 and 2009. Dollar information provided in the tablesbelow is in thousands.

 

***Revenue***

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Subscription and services  |       | $                                                    | 14,634     |                                                      | $          | 13,953 |   | $ | 43,353 |   | $ | 40,738 |   |
| *Percent of total revenue* | * *   | *82.0*                                               | *%*        | *85.9*                                                    | *%*        | *82.2* | *%* | *86.1* | *%* |
| Usage                      |       | $                                                    | 3,221      |                                                      | $          | 2,281 |   | $ | 9,411 |   | $ | 6,564 |   |
| *Percent of total revenue* | * *   | *18.0*                                               | *%*        | *14.1*                                                    | *%*        | *17.8* | *%* | *13.9* | *%* |

 

*For thethree months ended September 30, 2010 and 2009*

 

*Subscription and Services Revenue*

 

Subscription and services revenue increased $681,000, or 5%, for thethree months ended September 30, 2010 as compared to the three monthsended September 30, 2009. The increase in subscription and servicesrevenue was attributable to revenue recognized from sales of our solutions tonew clients and from sales of additional products and services to existingclients. We began offering promotional incentives to certain prospects latelast year to speed up their decision-making process. These promotions typically allow select organizations to get deployed andbenefit from our solutions while deferring payment until their next budgetcycle. The financial impact of these promotions is that subscriptionrevenue recognition is delayed until billings commence.  In the third quarter of 2010, billingscommenced on a number of deals sold under these promotional terms and asexpected subscription and services revenue returned to sequential growth forthe three months ended September 30, 2010 as compared to the three monthsended June 30, 2010.

 

*Usage Revenue*

 

Usage revenue increased $940,000, or 41%, for the three months endedSeptember 30, 2010 as compared to the three months endedSeptember 30, 2009. The increase was attributable to a $1.0 millionincrease in revenue from special events offset by an $84,000 decrease in feesfor client usage above the levels included in monthly subscription fees. Theincrease in usage revenue from special events was primarily due to the growthand success of our existing clients’ events and the addition of events from newclients. Usage revenue is seasonal as events are typically held in the springand fall. As a result, our usage revenue will be higher during the second andthird quarters, with the second quarter typically being the highest.

 

*For thenine months ended September 30, 2010 and 2009*

 

*Subscription and Services Revenue*

 

Subscription and services revenue increased $2.6 million, or 6%, forthe nine months ended September 30, 2010 as compared to the nine monthsended September 30, 2009. The increase in subscription and servicesrevenue was attributable to revenue recognized from sales of our solutions tonew clients and from sales of additional products and services to existingclients.

 

*Usage Revenue*

 

Usage revenue increased $2.8 million, or 43%, for the nine months endedSeptember 30, 2010 as compared to the nine months ended September 30,2009. The increase was attributable to a $2.4 million increase in revenue fromspecial events and a $417,000 increase in additional fees for client usageabove the levels included in monthly subscription fees. The increase in usagerevenue from special events was primarily due to the growth and success of ourexisting clients’ events and the addition of events from new clients. Theincrease in usage revenue from fees associated with client usage above thelevels included in monthly subscription fees is primarily attributable tohigher volumes of transactions related to online fundraising for disasterrelief efforts. As noted previously, usage revenue is seasonal as events aretypically held in the spring and fall. As a result, our usage revenue will behigher during the second and third quarters, with the second quarter typicallybeing the highest.

 

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***Cost of Revenue***

 
| ** **      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **      | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cost of revenue |       | $                                                    | 6,495      |                                                      | $          | 6,191 |   | $ | 19,199 |   | $ | 18,543 |   |
| Gross profit    |       | $                                                    | 11,360     |                                                      | $          | 10,043 |   | $ | 33,565 |   | $ | 28,759 |   |
| *Gross margin*  | * *   | *63.6*                                               | *%*        | *61.9*                                                    | *%*        | *63.6* | *%* | *60.8* | *%* |

 

*For thethree months ended September 30, 2010 and 2009*

 

Costof revenue increased $304,000, or 5%, for the three months endedSeptember 30, 2010 as compared to the three months endedSeptember 30, 2009. The increase was due primarily to a $384,000 increasein personnel costs, an $88,000 increase in contracting expense, an $86,000increase in hosting and transaction fees and a $54,000 increase in equipmentexpense, partially offset by a $254,000 decrease in amortization of acquiredtechnology and  a $54,000 decrease indepreciation expense. The increase in personnel costs was the result ofincreased Services personnel in addition to providing merit increases toexisting employees at the end of the first quarter of 2010. The increase incontracting expenses was primarily attributable to fees paid to our partners asa result of subcontracting certain deployment and migration services for ourclients. The increase in hosting and transaction fees was related to the correspondingincrease in the volume of online transactions processed by outside serviceproviders. The increase in equipment expense is related to an increase in datawarehousing fees. The decrease in depreciation is due to assets purchased in2007 to upgrade our servers becoming fully depreciated in 2010. Amortization ofacquired technology decreased as the related intangible assets became fullyamortized in February 2010. Gross margins for the three months endedSeptember 30, 2010 were 63.6% compared to gross margins of 61.9% for thesame period in the prior year.  This improvement in gross margins isdriven primarily by the higher than expected increase in usage revenue, inaddition to the decrease in amortization of acquired technology.

 

*For thenine months ended September 30, 2010 and 2009*

 

Costof revenue increased $656,000, or 4%, for the nine months endedSeptember 30, 2010 as compared to the nine months ended September 30,2009. The increase was due primarily to a $912,000 increase in personnel costs,a $288,000 increase in hosting and transaction fees, a $108,000 increase inequipment expense and a $74,000 increase in travel expense, offset by a$635,000 decrease in amortization of acquired technology and a $101,000decrease in depreciation expense. The increase in personnel costs was theresult of increased Services personnel in addition to providing merit increasesto existing employees at the end of the first quarter of 2010. The increase inhosting and transaction fees was related to the corresponding increase in thevolume of online transactions processed by outside service providers. Theincrease in equipment expense was attributable to increased maintenance andsupport agreements on the additional equipment placed in service. Amortizationof acquired technology decreased as the related intangible assets became fullyamortized in February 2010.  Thedecrease in depreciation is due to assets purchased in 2007 to upgrade ourservers becoming fully depreciated in 2010. Gross margins for the nine monthsended September 30, 2010 were 63.6% compared to gross margins of 60.8% forthe same period in the prior year.  This improvement in gross margins isdriven primarily by the higher than expected increase in usage revenue, inaddition to the decrease in amortization of acquired technology.

 

***Sales and Marketing***

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Sales and marketing        |       | $                                                    | 5,075      |                                                      | $          | 5,191 |   | $ | 16,319 |   | $ | 15,684 |   |
| *Percent of total revenue* | * *   | *28.4*                                               | *%*        | *32.0*                                                    | *%*        | *30.9* | *%* | *33.2* | *%* |
|                            |            |                                                      |            |                                                           |            |  |  |  |  |  |  |  |  |

 

*For thethree months ended September 30, 2010 and 2009*

 

Salesand marketing expenses decreased $116,000, or 2% for the three months endedSeptember 30, 2010 as compared to the three months endedSeptember 30, 2009. The decrease was primarily attributable to a $180,000decrease in personnel costs, partially offset by a $64,000 increase in travelexpense. The decrease in personnel costs was attributable to a $278,000decrease in commission expense, partially offset by a $78,000 increase insalaries and bonuses and a $37,000 increase in benefits expense. The decreasein commission expense was a direct result of the timing of closing clientcontracts.  On a year to date basis,commission expense has increased in 2010 as compared to 2009. As commissionsare expensed at the time of sale, commission expenses are difficult to predictand fluctuate significantly on a quarterly basis. The increase in salaries,bonuses and benefits expense is attributable to an increase in sales headcount.

 

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*For thenine months ended September 30, 2010 and 2009*

 

Salesand marketing expenses increased $635,000, or 4% for the nine months endedSeptember 30, 2010 as compared to the nine months ended September 30,2009. The increase was primarily attributable to a $278,000 increase inpersonnel costs, a $153,000 increase in marketing expense, a $103,000 increasein partner referral fees and a $75,000 increase in travel expense. The increasein personnel costs was primarily attributable to a $182,000 increase incommission expense driven primarily by three large enterprise transactions thatclosed during the nine months ended September 30, 2010 compared to onelarge enterprise transaction during the nine months ended September 30,2009, in addition to a $113,000 increase in benefits expense. The increase inmarketing expense was related to an increase in market research and marketingprograms in 2010 in order to drive new client acquisitions as well as marketingfor Common Ground and Convio Go!. The increase in partner referral fees wasrelated to an increase in transactions referred by partners.

 

***Research and Development***

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Research and development   |       | $                                                    | 2,740      |                                                      | $          | 2,512 |   | $ | 7,896 |   | $ | 7,480 |   |
| *Percent of total revenue* | * *   | *15.3*                                               | *%*        | *15.5*                                                    | *%*        | *15.0* | *%* | *15.8* | *%* |
|                            |            |                                                      |            |                                                           |            |  |  |  |  |  |  |  |  |

 

*For thethree months ended September 30, 2010 and 2009*

 

Researchand development expenses increased $228,000, or 9%, for the three months endedSeptember 30, 2010 as compared to the three months endedSeptember 30, 2009. The increase was attributable to a $361,000 increasein personnel costs and an $11,000 increase in allocated overhead, partiallyoffset by a $32,000 decrease in contracting expenses all of which were a resultof the decrease in our India-based contractors offset by a correspondingincrease in full-time headcount. Personnel costs also increased as a result ofproviding merit increases to existing employees at the end of the first quarterof 2010. In addition, research and development expenses of $158,000 that wereincurred to upgrade and enhance our internal use software during the threemonths ended September 30, 2010 were capitalized whereas there were nocosts incurred during the three months ended September 30, 2009 thatqualified for capitalization. The amount of capitalized software was offset byamortization of capitalized software of $31,000 during the three months ended September 30,2010.

 

*For thenine months ended September 30, 2010 and 2009*

 

Researchand development expenses increased $416,000, or 6%, for the nine months endedSeptember 30, 2010 as compared to the nine months ended September 30,2009. The increase was attributable to a $1.1 million increase in personnelcosts, an $85,000 increase in allocated overhead and an $18,000 increase intravel expense, partially offset by a $255,000 decrease in contracting expensesall of which were a result of the decrease in our India-based contractorsoffset by a corresponding increase in full-time headcount. Personnel costs alsoincreased as a result of providing merit increases to existing employees at theend of the first quarter of 2010. In addition, research and developmentexpenses of $621,000 that were incurred to upgrade and enhance our internal usesoftware during the nine months ended September 30, 2010 were capitalizedwhereas there were no costs incurred during the nine months endedSeptember 30, 2009 that qualified for capitalization. The amount ofcapitalized software was offset by amortization of capitalized software of$42,000 during the nine months ended September 30, 2010.

 

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***General and Administrative***

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| General and administrative |       | 1,666                                                |       | $                                                         | 1,318      |   | 4,760 |   | $ | 4,376 |   |
| *Percent of total revenue* | * *   | *9.3*                                                | *%*        | *8.1*                                                     | *%*        | *9.0* | *%* | *9.3* | *%* |
|                            |            |                                                      |            |                                                           |            |  |  |  |  |  |  |

 

*For thethree months ended September 30, 2010 and 2009*

 

Generaland administrative expenses increased $348,000, or 26%, for the three monthsended September 30, 2010 as compared to the three months endedSeptember 30, 2009. The increase was due primarily to a $130,000 increasein bad debt expense, an $85,000 increase in personnel costs, a $69,000 increasein contracting expense and a $41,000 increase in miscellaneous administrativecosts. The increase in bad debt expense was attributable to reversals of aportion of the provision for bad debts during the third quarter of 2009 due tocollections made in the period. The third quarter of 2010, however, includesgreater provisions for bad debts due to higher revenues. Personnel costsincreased as a result of providing merit increases to existing employees at theend of the first quarter of 2010, in addition to an increase in bonuses ascompared to the prior year. The increase in contracting expense was primarilyrelated to increased costs as a result of becoming a public company, includingan increase of $44,000 related to Sarbanes-Oxley compliance. The increase inmiscellaneous administrative costs was primarily due to fees associated withbecoming a public company, including NASDAQ listing and other investorrelations fees.

 

*For thenine months ended September 30, 2010 and 2009*

 

Generaland administrative expenses increased $384,000, or 9%, for the nine monthsended September 30, 2010 as compared to the nine months ended September 30,2009. The increase was due primarily to a $311,000 increase in contractingexpense, a $75,000 increase in charitable contributions and a $29,000 increasein equipment expense, partially offset by a $66,000 decrease in bad debtexpense. The increase in contracting expense was attributable to increasedcosts as a result of becoming a public company, including increased audit, taxand legal fees, an increase in Sarbanes-Oxley compliance fees and an increasein stock option administrative fees as a result of converting to a publiccompany platform. The increase in charitable donations was the result of aprogram the Company put in place during the first quarter of 2010 to matchdonations to Haitian relief efforts made by our employees as well as an expansionof our Convio Cares grant program. The decrease in bad debt expense was theresult of an improvement in the aging of our accounts receivable.

 

***Amortization of Other Intangibles***

 
| ** **                        | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                        | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Amortization of other intangibles |       | $                                                    | 195        |                                                      | $          | 348 |   | $ | 662 |   | $ | 1,052 |   |
| *Percent of total revenue*        | * *   | *1.1*                                                | *%*        | *2.1*                                                     | *%*        | *1.3* | *%* | *2.2* | *%* |
|                                   |            |                                                      |            |                                                           |            |  |  |  |  |  |  |  |  |

 

*For thethree and nine months ended September 30, 2010 and 2009*

 

Theseamounts represent the amortization of intangibles recorded in connection withour acquisition of GetActive in February 2007 and are being amortized on astraight-line basis over the estimated useful lives. Amortization of otherintangibles decreased for both periods presented as a portion of the relatedintangible assets became fully amortized in February 2010.

 

***Interest Income (Expense)***

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                      | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Interest income                 |       | $                                                    | 25         |                                                      | $          | 1 |   | $ | 41 |   | $ | 5 |   |
| Interest expense                |       | (9                                                   | )          | (50                                                       | )          | (124 | ) | (288 | ) |
| Total interest income (expense) |       | $                                                    | 16         |                                                      | $          | (49 | ) | $ | (83 | ) | $ | (283 | ) |
| *Percent of total revenue*      | * *   | *0.1*                                                | *%*        | *(0.3*                                                    | *)%*       | *(0.2* | *)%* | *(0.6* | *)%* |

 

*For thethree months ended September 30, 2010 and 2009*

 

Interestincome (expense), net increased $65,000, or 133% for the three months endedSeptember 30, 2010 as compared to the three months endedSeptember 30, 2009. The increase was due to a decrease in our averageoutstanding debt as a result of repaying the balance of our line of credit withComerica with a portion of the proceeds from our initial public offering aswell as increased interest income on the proceeds from our initial publicoffering.

 

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*For thenine months ended September 30, 2010 and 2009*

 

Interestincome (expense), net decreased $200,000, or 71% for the nine months endedSeptember 30, 2010 as compared to the nine months ended September 30,2009. The decrease was due to a decrease in our average outstanding debt as aresult of repaying the balance of our line of credit with Comerica with aportion of the proceeds from our initial public offering, partially offset byincreased interest income on the proceeds from our initial public offering.

 

***Other Income (Expense)***

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Other income (expense)     |       | $                                                    | —     |                                                      | $          | (96 | ) | $ | (15 | ) | $ | (313 | ) |
| *Percent of total revenue* |       | —                                               | *%*        | *(0.6*                                                    | *)%*       | *0.0* | *%* | *(0.7* | *)%* |
|                            |            |                                                      |            |                                                           |            |  |  |  |  |  |  |  |  |

 

*For thethree and nine months ended September 30, 2010 and 2009*

 

Weissued warrants exercisable for our convertible preferred stock in 2005. OnMay 4, 2010, immediately prior to the effectiveness of our initial publicoffering, we recorded a final fair value adjustment based upon the offeringprice of $9.00 per share and recorded other income of $454,000. Upon theclosing of the offering, all outstanding preferred stock warrants wereconverted into warrants to purchase common stock and the liability wasreclassified to additional paid-in capital. Therefore, we expect other incomeand expense to be minimal in future periods.

 

***Income Taxes***

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2010**                                             | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Provision for income taxes |       | $                                                    | 195        |                                                      | $          | 54 |   | $ | 440 |   | $ | 104 |   |
| *Percent of total revenue* | * *   | *1.1*                                                | *%*        | *0.3*                                                     | *%*        | *0.8* | *%* | *0.2* | *%* |
|                            |            |                                                      |            |                                                           |            |  |  |  |  |  |  |  |  |

 

*For thethree and nine months ended September 30, 2010 and 2009*

 

Werecorded a provision for federal alternative minimum taxes and state incometaxes totaling $195,000 and $54,000 for the three months endedSeptember 30, 2010 and 2009, respectively, and $440,000 and $104,000 forthe nine months ended September 30, 2010 and 2009, respectively. Oureffective tax rate varies from the U.S. federal tax rate primarily due to theutilization of previously reserved deferred tax assets. We assess thelikelihood that deferred tax assets will be realized, and we recognize avaluation allowance if it is more likely than not that some portion of thedeferred tax assets will not be realized. This assessment requires judgment asto the likelihood and amounts of future taxable income by tax jurisdiction. Todate, we have provided a full valuation allowance against our deferred taxassets as we believe the objective and verifiable evidence of our historicalpretax net losses outweighs the positive evidence of our pre-tax income for thethree and nine months ended September 30, 2010 and forecasted futureresults.

 

Althoughwe believe that our tax estimates are reasonable, the ultimate tax determinationinvolves significant judgment that is subject to audit by tax authorities inthe ordinary 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)***

 

*For thethree months ended September 30, 2010 and 2009*

 

Wegenerated net income of $1.5 million and $475,000 for the three months endedSeptember 30, 2010 and 2009. The increase in net income arose principallyfrom an increase in revenues and economies of scale.

 

*For thenine months ended September 30, 2010 and 2009*

 

Wegenerated net income of $3.4 million for the nine months endedSeptember 30, 2010, compared to a net loss of $533,000 for the nine monthsended September 30, 2009. The increase in net income arose principallyfrom an increase in revenues and economies of scale.

 

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**Liquidity and capital resources**

 

Priorto our initial public offering, we financed our operations and met our capitalexpenditure requirements primarily through the private sale of equitysecurities and debt financings. Since we became cash flow positive in 2009, amaterial driver of liquidity has been cash flow from operations offset bycapital expenditures. As of September 30, 2010, we had $20.2 million ofcash and cash equivalents, $32.6 million of marketable securities and $60.1 millionof working capital excluding deferred revenue. As of September 30, 2010,we had an accumulated deficit of $52.9 million. We funded this deficitfrom $47.4 million in net proceeds raised from the sale of our preferred stock.We last sold shares of our preferred stock in April 2007. On May 4,2010, we completed an initial public offering of our stock which included3,789,527 shares sold by us. In addition, the underwriters exercised theiroption to purchase an additional 769,909 shares from us to cover over-allotments.After deducting the payment of underwriters’ discounts and commissions andoffering costs, the net proceeds from the sale of shares were approximately$35.9 million.

 

The following table sets forth a summary of our cash flows for theperiods indicated:

 
| ** **                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                             | ** ** |
| Net cash provided by operating activities            |       | $                                                   | 5,702      |   | $ | 4,518 |   |
| Net cash used in investing activities                |       | (36,091                                             | )          | (1,136 | ) |
| Net cash provided by (used in) financing  activities |       | 33,900                                              |       | (1,919 | ) |
| Cash and cash equivalents at end of period           |       | 20,173                                              |       | 15,291 |   |
|                                                      |            |                                                     |            |  |  |  |  |

 

*Net Cash Provided By Operating Activities*

 

Duringthe nine months ended September 30, 2010, we generated $5.7million of cash from operating activities, which consisted of our netincome of $3.4 million and non-cash charges of $4.1 million. In addition, cashoutflows of $2.0 million from changes in operating assets and liabilitiesincluded an increase in accounts receivable of $997,000 as a result of thetiming of usage fee billings, a $983,000 decrease in deferred revenue as aresult of the timing of transactions and various sales promotions offeredduring 2009 and 2010 which resulted in deferred payments and a $22,000 decreasein accrued liabilities due to timing of payments. Cash inflows of $255,000 werethe result of a $127,000 increase in accounts payable as a result of timing ofpayments and a $128,000 decrease in prepaid expenses.

 

Duringthe nine months ended September 30, 2009, we generated $4.5 million ofcash from operating activities, which consisted of our net loss of $533,000,offset by non-cash charges of $5.8 million. In addition, cash outflows fromchanges in operating assets and liabilities included an increase in accountsreceivable of $1.2 million driven by sales activities and usage revenue growthduring the nine months ended September 30, 2009, an increase in prepaidexpenses of $522,000 due to the timing of payments for software term licensesand maintenance, insurance premiums and marketing programs or events that occurin or cover future periods, a decrease in accounts payable and accruedliabilities of $101,000 due to timing of payments and a decrease in deferredrevenue of $1.1 million resulting from the timing of transactions.

 

*Net Cash Used In Investing Activities*

 

Netcash used in investing activities decreased $35.0 million for the nine monthsended September 30, 2010 as compared to the nine months endedSeptember 30, 2009. The decrease is primarily the result of purchases ofmarketable securities of $32.6 million and a $1.2 million increase inrestricted cash related to our letters of credit that we cash secured in July 2010for the benefit of the landlords of our Austin, Texas and Washington D.C.offices, in addition to the capitalization of $621,000 of software developmentcosts incurred to upgrade and enhance our internal use software during the ninemonths ended September 30, 2010 and a $461,000 increase in capitalexpenditures. Net cash used in investing activities for the nine months endedSeptember 30, 2009 was comprised solely of capital expenditures.

 

*Net Cash Provided by (Used In) Financing Activities*

 

Duringthe nine months ended September 30, 2010, we generated $33.9million of cash from financing activities which consisted primarily of thenet proceeds we received from the sale of stock in our initial public offeringof $35.9 million and $202,000 in proceeds we received from the issuance ofcommon stock upon the exercise of stock options, partially offset by $2.2million used to repay our line of credit with Comerica. During the nine monthsended September 30, 2009, we utilized $1.9 million of cash for financingactivities for payments on our long-term debt.

 

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OnMay 4, 2010, we closed our initial public offering raising net proceeds ofapproximately $35.9 million after deducting underwriting discounts andcommissions and offering costs. We believe that our cash flows from operationsand our current cash, cash equivalents and marketable securities will besufficient to meet our working capital and capital expenditure requirements forat least the next twelve months. However, we may elect to raise additionalcapital through the sale of additional equity or debt securities or obtain acredit facility to develop or enhance our services, to fund expansion, torespond to competitive pressures or to acquire complementary products,businesses or technologies. If we elect, additional financing may not beavailable 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**

 

Duringthe nine months ended September 30, 2010, there were no material changesto our contractual obligations and commitments disclosures as set forth underthe caption, “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 theSecurities Act with the SEC on April 29, 2010, other than the changes toour credit facilities as discussed below.

 

**Credit Facilities**

 

On May 12, 2010, subsequent to the closing ofour initial public offering, we paid approximately $1.9 million to ourprincipal lender, Comerica Bank, in satisfaction of the remaining balance onour line of credit. In July 2010, we cancelled the line of credit.

 

Inconjunction with the April 3, 2009 execution of the Washington D.C.operating lease, we were required to provide a $350,000 standby letter ofcredit with Comerica for the benefit of the landlord to secure the office spaceper the lease agreement. In addition, we also had a standby letter of creditfor the benefit of the landlord of the Company’s Austin, Texas facility, whichwas reduced in accordance with the terms of the lease to approximately $898,000in June 2010, resulting in total standby letters of credit ofapproximately $1.2 million. In July, upon cancellation of the line of creditwith Comerica, we entered into a pledge agreement with Comerica to cash securethe letters of credit. The pledge agreement requires that we maintain a minimumcash balance of $1.2 million in a money market account with the bank.

 

**Off-Balance Sheet Arrangements**

 

Duringthe nine months ended September 30, 2010, we did not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes.

 

**Item 3. Quantitative and qualitative disclosures about market risk**

 

*Interest Rate Risk*

 

Wehad cash and cash equivalents of $20.2 million and marketable securities of$32.6 million at September 30, 2010. These amounts are held primarily incash or money market funds as well as U.S. government agency bonds, corporatebonds and commercial paper. We do not hold any auction-rate securities. Cashand cash equivalents are held for working capital purposes. Marketablesecurities are held and invested with capital preservation as the primaryobjective. Due to the short-term nature of these investments, we believe thatwe do not have any material exposure to changes in the fair value of ourinvestment portfolio as a result of changes in interest rates. Any declines ininterest rates will reduce future interest income. If overall interest ratesfell by 10% in the nine months ended September 30, 2010, our interestincome would not have been materially affected.

 

Ourexposure to interest rates also relates to the increase or decrease in theamount of interest paid on our outstanding debt. Outstanding borrowings underour term loan and line of credit bore a variable rate of interest based uponthe LIBOR rate adjusted monthly. OnMay 12, 2010, subsequent to the closing of our initial public offering, wepaid approximately $1.9 million to our principal lender, Comerica Bank, insatisfaction of the remaining balance on our line of credit. As ofSeptember 30, 2010, we had no outstanding debt agreements. If overallinterest rates had increased by 10% in the nine months ended September 30,2010, our interest expense would not have been materially affected.

 

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*Foreign Currency Risk*

 

Ourresults of operations and cash flows are not subject to fluctuations due tochanges in foreign currency exchange rates. We bill our clients in U.S. dollarsand receive payment in U.S. dollars, and substantially all of our operatingexpenses are denominated in U.S. dollars. If we grow sales of our solutionsoutside the United States, our contracts with foreign clients may not bedenominated in dollars and we may become subject to changes in currencyexchange rates.

 

**Item 4.  Controls and procedures**

 

**Evaluation of disclosure controls and procedures**

 

As of the end of the period covered by thisQuarterly Report on Form 10-Q, our management, with theparticipation of our principal executive officer and our principal financialofficer, evaluated the effectiveness of our disclosure controls and proceduresas defined inRules 13a-15(e) or 15d-15(e) under the Exchange Act of 1934, asamended (the “Exchange Act”). Based on this evaluation, our principalexecutive officer and our principal financial officer have concluded that ourdisclosure controls and procedures are effective to ensure that information weare required to disclose in reports that we file or submit under the ExchangeAct (i) is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms,and (ii) is accumulated and communicated to our management, including ourprincipal executive officer and our principal financial officer, as appropriateto allow timely decisions regarding required disclosure.

 

**Limitationson the Effectiveness of Controls**

 

Ourdisclosure controls and procedures provide our principal executive officer andour principal financial officer reasonable assurances that our disclosurecontrols and procedures will achieve their objectives. However, companymanagement, including our principal executive officer and our principalfinancial officer, does not expect that our disclosure controls and proceduresor our internal control over financial reporting can or will prevent all humanerror. A control system, no matter how well designed and implemented, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Furthermore, the design of a control system mustreflect the fact that there are internal resource constraints, and the benefitof controls must be weighed relative to their corresponding costs. Because ofthe limitations in all control systems, no evaluation of controls can providecomplete assurance that all control issues and instances of error, if any,within our company are detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur due to human error or mistake. Additionally, controls, no matter howwell designed, could be circumvented by the individual acts of specific personswithin the organization. The design of any system of controls is also based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its statedobjectives under all potential future conditions.

 

**Changes in internal controls over financial reporting**

 

Therehave been no changes in our internal control over financial reporting thatoccurred during the three months ended September 30, 2010 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II. Other Information**

 

**Item 1.  Legalproceedings**

 

Weare not currently involved in any material legal proceedings. From time totime, we may become involved in legal proceedings arising in the ordinarycourse of our business.

 

**Item 1A.  Riskfactors**

 

Our Prospectus filed with the SEC pursuant torule 424(b) under the Securities Act on April 29, 2010 includesa detailed discussion of certain material 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.

 

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**RisksRelated to Our Business**

 

**We have ahistory of losses, and we may not achieve profitability in the future whichcould limit the growth of our business.**

 

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 achieve profitabilityin the future. Our operating expenses, which include sales and marketing,research and development and general and administrative expenses, are based onour expectations of future revenue and are, to a large extent, fixed in theshort term. In addition, we may elect to spend more to grow our business in thefuture without certainty of near-term returns. Accordingly, we may not achieveprofitability, and we may incur losses in the future, which could affect themarket price of our common stock or harm our ability to raise additionalcapital.

 

**Ourfinancial results will fluctuate, and if we fail to meet the expectations ofanalysts or investors, our stock price and the value of your investment coulddecline 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 revenuein the period reported and billed to the client. The growth, if any, and amountof usage revenue vary based on the number of events, the percent of fundsraised online for these events, the growth and success of events and oursigning of new clients for events. These factors are very difficult to predict,and our usage revenue fluctuates significantly as a result.

 

Ourusage revenue reflects the general seasonality of special events which are heldmore often in the spring and fall. Therefore, we recognize a majority of ourusage revenue in the second and third quarters. We recognized 67% and 63% ofour annual 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 quarters representedbetween 8% and 10% of total revenue for those periods in 2008 and 2009,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 duringany period 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 renewal ratesand unexpected early contract terminations or concessions;

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

·                 the changing mix inour 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 of anysecurity incidents or service interruptions;

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

·                 our regulatorycompliance costs;

·                 any impairment ofour intangible assets;

·                 any introduction ofnew accounting rules; and

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

 

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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 financial resultsfall below the expectations of securities analysts or investors, our stockprice and the value of your investment could decline substantially. You shouldnot rely on the results of any one quarter as an indication of futureperformance.

 

**If NPOs do notadopt our solutions, our revenue and operating results will be adverselyimpacted.**

 

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 besuccessful utilizing our solutions to engage constituents and generate funds.The less they are able to do so, the less revenue we will generate.

 

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-demand solutions;

·                 the price and performance of our solutions;

·                 our ability to integrate with other solutions used by NPOs;

·                 the impact of the economic downturn on NPOs, their fundraising and theirspending on technology and services;

·                 the purchasing cycles of NPOs;

·                 the level of customization we can offer;

·                 the availability, performance and price of competing products andservices, including internally developed solutions and general solutions notdesigned specifically for NPOs;

·                 the breadth and quality of our service offerings;

·                 the concerns related to security and the reluctance by NPOs to trustthird parties to store and manage their internal data; and

·                 any adverse publicity about us, our solutions or the viability,reliability or security of on-demand software solutions generally fromthird-party reviews, industry analyst reports and adverse statements made byclients and competitors.

 

Whileno one client accounted for more than 10% of our revenue during the nine monthsended September 30, 2010, our enterprise clients can contributesubstantially to our revenue from quarter to quarter. If NPOs, especiallyenterprise NPOs, do not continue to adopt and renew their subscriptions to oursolutions, our revenues will experience volatility and our stock price couldfall.

 

**Our businessdepends on our clients’ renewing and expanding their subscriptions for oursolutions. Any decline in our client renewals and expansions would reduce ourrevenue.**

 

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 due to employee turnover in theclient organization;

·                 a client is dissatisfied with our agreement terms;

·                 a client encounters financial difficulties;

·                 our solutions do not continue to fit a client’s needs as they evolve; and

·                 our client has a poor service experience with our 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 buy additionalproducts and services from us, the growth of our business will be harmed.Further, if our clients elect to subscribe to a fewer number of products uponrenewal with us, our business will be harmed.

 

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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 oreven decline, and we may not be able to achieve profitability. Further, if aclient seeks to terminate its agreement with us, we may not be successful inenforcing, or we may not elect to enforce, our agreement with the client.

 

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 NPOsare price sensitive, and if the prices we charge for our solutions areunacceptable to NPOs, our operating results 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 weexpense commissions associated with sales of our solutions immediately uponexecution of a subscription agreement with a client and generally recognize therevenue associated with such sale over the term of the agreement, our operatingincome in 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 wegenerally recognize revenue from sales of our products and services ratablyover the term of our agreements, downturns or upturns in sales may not beimmediately reflected in our 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 any quartermay be from deferred revenue from previous quarters. A decline in new orrenewed 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.

 

**Weanticipate that our new Common Ground application will help us to grow ourbusiness, but if NPOs do not adopt Common Ground, the growth in our revenuecould be limited and our business harmed.***

 

Weintroduced our Common Ground application in September 2008. As ofSeptember 30, 2010, approximately 314 NPOs had adopted Common Ground. Weexpect to increase our spending on research and development and sales andmarketing to expand the number of Common Ground clients and the revenue wegenerate from these clients.

 

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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 Ground overlegacy 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 featureintroduction. This could harm our operating results by decreasing sales of ourhigher priced solution, exposing us to greater risk of decreased revenues. Anyor all of the above occurrences could harm our business and results ofoperations.

 

**We do nothave any control over the availability or performance of salesforce.com’sForce.com platform, and if we or our clients encounter problems with it, we maybe required to replace Force.com with another platform, which would bedifficult 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. Ifsalesforce.com has performance or other problems with its Force.com platform,they will reflect poorly on us and the adoption and renewal of our Common Groundapplication and our business may be harmed.

 

**Weencounter long sales cycles, particularly for our largest clients, which couldhave an adverse effect on the size, timing and predictability of our revenueand 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 to significantrisks and delays over which we have little or no control, including:

 

·                 our clients’ budgetary constraints;

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

·                 our competitors’ offerings and sales activities;

·                 our clients’ willingness to replace their current methods or solutions;

·                 our clients’ employee turnover rates; and

·                 our need to educate potential clients about the uses and benefits of oursolutions.

 

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.

 

**Interruptions,delays or security breaches at third-party datacenters or by our paymentprocessors could impair the delivery of our solutions and harm our reputationand 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 noobligation to renew its agreement with us on commercially reasonable terms, orat all. If we are unable to renew our agreement with a datacenter oncommercially reasonable terms, we may experience costs or downtime inconnection with the transfer to a new third-party datacenter.

 

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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 provideservice level commitments to our clients, which could cause us to issue creditsfor future products and services if the stated service levels are not met for agiven period and could significantly 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 arenot able to develop enhancements to, and new features for, our existingsolutions or acceptable new products and services that keep pace withtechnological developments, we may lose clients or fail to sell our solutionsto 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.

 

**Oursolutions, and in particular our new Common Ground application, may containerrors or defects, negatively affecting their adoption which may cause us tolose 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 oursolutions do not scale to accommodate a high volume of traffic andtransactions, we may experience client dissatisfaction and fail to grow ourrevenue.**

 

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.

 

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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 marketin which we operate is intensely competitive, and our failure to competesuccessfully would cause our revenue 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 areBlackbaud, Inc., The Sage Group plc and SunGard Data Systems, Inc. Inaddition, we compete with a variety of smaller, private companies, and alsowith custom web development providers, which provide custom in-houseapplications. Any of these competitors could take actions that adversely affectour business.

 

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 arenot able to manage our anticipated growth effectively, our operating costs mayincrease and our operating 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 donot migrate GetActive’s clients, we may not realize the expected benefits ofour acquisition of GetActive, 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 dependon our direct sales force and our partner network for sales and deployments ofour solutions and, if we do not attract and retain our sales personnel ormaintain our partner relationships, our revenue may not grow and our businesscould 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 increased revenue.Our typical partner agreement is not exclusive and our partners may choose notto promote sales of our solutions. If we do not maintain and increase ourpartner relationships, our revenue may not grow and could decline.

 

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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 primarily 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 require us to perform these services ourselves and may reflectpoorly on our reputation and the marketability of our solutions, which couldharm our business and results of operations. Our agreements with thesethird-party implementation providers do not obligate them to continue to deployour solutions. Our clients either enter into agreements directly with us oralternatively with the third-party implementation providers, so we have limitedability to seek recourse from them if deployment issues arise with clients.

 

**We rely onthird-party software in our solutions that may be difficult or costly toreplace or which could cause errors 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, orservices, 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 failto retain key personnel or if we fail to attract additional qualified personnelor if newly hired personnel fail to reach productivity as anticipated, we maynot be able to achieve our anticipated level of growth, our revenue maydecrease and our operating 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 whounderstand sales to, and the specific needs of, NPOs. For these reasons, wehave from time to time in the past experienced, and we expect to continue toexperience in the future, difficulty in hiring and retaining highly skilledemployees with appropriate qualifications for our business. In addition, ittakes time for our new sales and services personnel to become productive,particularly with respect to obtaining and supporting enterprise clients. If weare unable to hire or retain qualified personnel, or if newly hired personnelfail to develop the necessary skills or reach productivity slower thananticipated, it would be more difficult for us to sell our solutions andprovide services to our clients, and we could experience a shortfall in revenueand may not achieve our planned growth.

 

**Variousprivate spam blacklists have in the past reduced, and may in the future reduce,the effectiveness of our solutions and our ability to conduct our business,which may cause demand for our 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, Internetservice providers and Internet protocol addresses associated with thoseentities or individuals that do not adhere to those standards of conduct orpractices for commercial email solicitations that the blacklisting entitybelieves are appropriate. If a company’s Internet protocol addresses are listedby a blacklisting entity, emails sent from those addresses may be blocked byservers that receive or route email and subscribe to the blacklisting entity’sservice or purchase its blacklist. Any blocking of email communicationsgenerated by clients using our solutions will reduce the effectiveness of oursolutions and our ability to conduct our business, which may cause demand forour solutions to decline and increase non-renewals.

 

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**Governmentregulation could increase our compliance expenses, subject us to fines orpenalties of non-compliance or adversely affect the marketability of oursolutions.***

 

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 personal data;

·                 the pricing and taxation of products and services offered over theInternet;

·                 money laundering;

·                 transactions or sales to terrorist organizations or to nations whichsponsor terrorist activities;

·                 the content of websites;

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

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

·                 freedom of speech and expression;

·                 the online distribution of specific material or content over theInternet;

·                 the characteristics and quality of products and services offered over theInternet; and

·                 federal, state or local taxation, particularly with respect to charitablegiving, research and development activities, employee compensation and otheractivities generally pertaining to our 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 ofSeptember 30, 2010, we were registered in twenty states and hadregistrations pending in three others. If we fail to comply with any of theseregulations, our registrations could be revoked or we may be prevented fromregistering, and our clients could terminate their agreements with us if we donot meet their fundraising needs in those states. In addition, we could incurfines, penalties or other damages that could harm our reputation and increaseour operating costs, and we may be obligated to file client agreements that maydisclose competitively sensitive information. Furthermore, the states in whichwe are registered may impose new requirements and additional states may adoptregistration requirements that may increase our compliance expenses.

 

**Evolvingprivacy concerns and laws or other domestic or foreign regulations may reducethe effectiveness of our solutions, which could reduce overall demand for oursolutions and increase operating 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 healthcareindustry to use certain demographic protected health information (such as name,email or physical address and dates of service) for fundraising purposes and todisclose that subset of protected health information to their service providersfor fundraising. 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.

 

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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 of ourclients may limit the use and adoption of our solutions, reduce overall demandfor our solutions and increase our operating costs, and we may be unable topass 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. Ifregulatory burdens related to collection and use of personal informationincrease, our solutions would be less effective, which may reduce demand forour solutions and harm our business.

 

**UnitedStates federal legislation entitled Controlling the Assault of Non-SolicitedPornography and Marketing Act of 2003 imposes certain obligations on thesenders of commercial emails, which could minimize the effectiveness of ouremail product and establishes financial penalties for non-compliance, whichcould 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 emailmessages (which may include email messages sent by NPOs that advertise acommercial product or service) and specifies criminal and civil penalties forthe transmission 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 commercialemail that 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 besubject to legal costs and liabilities for content and activities of ourclients and their constituents, which could harm our reputation and increaseour operating costs.**

 

Wehost content provided by our clients and their constituents and provideproducts and services that enable them to exchange information, conduct businessand engage in various online activities. From time to time, we are requested toprovide information or otherwise become involved in legal and other mattersinvolving our clients’ online activities. While we require our clients to agreeto comply with acceptable usage policies and other content restrictions,clients and their constituents may provide content or undertake activities thatcould require us to conduct investigations or defend claims by private personsand entities or governmental entities that may be with or without merit and maysubject us to legal costs and liabilities to our third-party suppliers andothers, which could harm our reputation and increase our operating costs.

 

**If existingclients and prospective clients refuse to adopt or renew our solutions, or wechoose not to engage a prospective client, because of conflicts overideological missions, our revenue will not grow 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 thenumber of our clients grow, the potential for such conflict will increase. Wehave adopted a policy of working with NPOs supporting a wide range ofideological missions other than those that promote violence, hatred, or racialor religious intolerance. We will exercise our judgment in determining whetheran organization violates the spirit of these client engagement principles.Based on these principles, we have and may continue in the future to choose notto engage prospective client NPOs. If our prospective clients refuse to adoptour solutions, if we choose not to engage a prospective client, or if ourexisting clients do not renew or otherwise terminate their use of our solutionsdue to such conflicts, our revenue may be adversely affected and our reputationmay be harmed.

 

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**Changes infinancial accounting standards or practices may cause adverse, unexpectedfinancial reporting fluctuations 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 mayincur significant expenses to defend against or settle claims that we infringeupon 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 byBlackbaud, Inc. Third parties may seek to bring claims against us in thefuture. Such claims may be with or without merit. Any litigation to defendagainst claims of infringement or invalidity could result in substantial costsand diversion of resources. Furthermore, a party making such a claim couldsecure a judgment that requires us to pay substantial damages. A judgment couldalso include an injunction or other court order that could prevent us fromselling our solutions. Our operating costs may increase or our revenue maydecline if any of 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 be time-consuming,expensive to litigate or settle and could divert management attention andfinancial resources. An adverse determination also could prevent us fromoffering our solutions to our clients and may require that we procure ordevelop 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.

 

**If thesecurity of the software or systems underlying our solutions is breached, ourreputation could be harmed and our operating 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 andcommunicate with state and federal regulatory agencies and affected clients andtheir constituents, provide credit monitoring or other protections, protectfurther against security breaches or to rectify problems caused by any securitybreach. Any of these results would be harmful to our business.

 

**We relyupon trademark, copyright and trade secret laws to protect our proprietaryrights, which might not provide us with adequate protection, and we may thereforebe unable to compete effectively.**

 

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, 

 

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unlesswrongfully misappropriated from us in violation of trade secret law or anynon-disclosure agreements. Any inability to protect our intellectual propertyrights could harm our ability to compete effectively, which would reduce ourrevenue. Such harm includes but is not limited to the following:

 

·                 without any patents of our own to counter assert, there is a greater riskthat current and future competitors who may have patented similar technologiesthat cover our products and services would seek damages and a prohibition onthe use and sale of such products and services;

·                 our trademarks may not be protected in those jurisdictions in which suchtrademarks have not been registered, and in such jurisdictions others may beable to use confusingly similar marks or prevent our 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 opensource software in the software underlying our solutions that may subject oursoftware to general release or require us to re-engineer such solutions, whichcould reduce our revenue 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 certainmanner, we could, under certain of the open source licenses, be required torelease the source code of our proprietary software and license suchproprietary software under the terms of the open source license for free or fora nominal fee. Open source license terms may be ambiguous and many of the risksassociated with usage of open source software cannot be eliminated and could,if not properly addressed, negatively affect our business. If we were found tohave inappropriately used open source software or failed to comply with theterms of the 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.

 

**We mayenter into acquisitions that may be difficult to integrate, fail to achieve ourstrategic objectives, disrupt our business, dilute stockholder value or divertmanagement 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 in retaining key employees and clients and in integratingthe operations and personnel of the acquired companies;

·                  difficulties in maintaining acceptable standards, controls, proceduresand policies;

·                  potential disruption of ongoing business and distraction of management;

·                  inability to maintain relationships with clients of the acquiredbusiness;

·                  impairment of relationships with employees and clients as a result of anyintegration of new management and other personnel;

·                  difficulties in incorporating acquired technology and rights into ourproducts and services;

·                  unexpected expenses resulting from the acquisition;

·                  potential intellectual property or other litigation if we do notconsummate an acquisition; and

·                  potential unknown liabilities associated with acquired businesses.

 

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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.

 

**If weexpand our operations outside of the United States, our expansion may subjectus to risks that may increase our 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:

 

·                  economic conditions in various parts of the world;

·                  unexpected and more restrictive laws and regulations, including thoselaws governing Internet activities, email messaging, collection and use ofpersonal information, ownership of intellectual property, solicitation ofcharitable contributions and other activities important to our online businesspractices;

·                  new and different sources of competition;

·                  multiple, conflicting and changing tax laws and regulations that may affectboth our international and domestic tax liabilities and result in increasedcomplexity and costs;

·                  if we were to establish international offices, the difficulty of managingand staffing such international offices and the increased travel, infrastructureand legal compliance costs associated with multiple international locations;

·                  the need to make capital expenditures in foreign jurisdictions;

·                  difficulties in enforcing contracts and collecting accounts receivable,especially in developing countries;

·                  if contracts become denominated in local currency, fluctuations inexchange rates; and

·                  tariffs and trade barriers, import/export controls and other regulatoryor contractual limitations on our ability to sell or develop our products incertain foreign markets.

 

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.

 

**Our abilityto raise capital in the future may be limited, and our failure to raise capitalwhen needed could prevent 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.

 

**We incurincreased costs as a result of operating as a public company, and ourmanagement is required to devote substantial time to new complianceinitiatives, which will increase our operating 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 asrules subsequently implemented by the Securities and Exchange Commission,or SEC, and the NASDAQ Listing Rules, impose additional requirements on publiccompanies, including requiring changes in corporate governance 

 

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practices.For example, the listing requirements of the NASDAQ Global Market require thatwe satisfy certain corporate governance requirements relating to independentdirectors, audit committees, distribution of annual and interim reports,stockholder meetings, stockholder approvals, solicitation of proxies, conflictsof interest, stockholder voting rights and codes of conduct. Our management andother personnel 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 incur substantialadditional 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.

 

In addition, United States securities laws require,among other things, that we maintain effective internal control over financialreporting and disclosure controls and procedures. In particular, for the yearending December 31, 2011, we will be required to perform system andprocess evaluation and testing of our internal control over financial reportingto allow management and our independent registered public accounting firm toreport on the effectiveness of our internal control over financial reporting,as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or thesubsequent testing by our independent registered public accounting firm, mayreveal deficiencies in our internal control over financial reporting that aredeemed to be material weaknesses. Our compliance with Section 404 willrequire that we incur substantial accounting expense and expend significantmanagement time on compliance-related issues. Moreover, if we are not able tocomply with the requirements of Section 404 in a timely manner, or if weor our independent registered public accounting firm identify deficiencies inour internal 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.

 

**Risks Relating to Ownership of Our Common Stock**

 

**Our stock price may be volatile, and the value of aninvestment in our common stock may decline.***

 

An active public market for our shares may notcontinue to develop or be sustained. Shares of our common stock were sold inour initial public offering on April 29, 2010 at a price of $9.00 pershare, and our common stock has subsequently traded as high as $10.99 and aslow as $6.90. The trading price of our common stock could be highly volatileand could be subject to wide fluctuations in response to various factors, someof which are beyond our control. Factors affecting the trading price of ourcommon stock include:

 

·                  variations in our quarterly and annual operating results;

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

·                  the gain or loss of clients;

·                  recruitment or departure of key personnel;

·                  changes in the estimates of our operating results or changes inrecommendations by any securities analysts that elect to follow our commonstock;

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

·                  market conditions in our industry, the industries of our clients and theeconomy as a whole; and

·                  adoption or modification of regulations, policies, procedures or programsapplicable to our business.

 

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.

 

**Future sales of shares by existing stockholders could causeour stock price to decline.***

 

Ifour existing 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 

 

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publicmarket. Thomas Weisel Partners LLC and Piper Jaffray & Co. may, intheir sole discretion, permit our officers, directors, employees and currentstockholders who are subject to the contractual lock-up to sell shares prior tothe expiration of the lock-up agreements.

 

Afterthe lock-up agreements pertaining to our initial public offering expire on November 21,2010, which period may be extended in certain limited circumstances, up to theremaining 11,467,160 shares will be eligible for sale in the public market,7,067,016 of which are held by directors, executive officers and otheraffiliates and will be subject to volume limitations under Rule 144 underthe Securities Act of 1933, as amended, or the Securities Act, and variousvesting agreements. In addition, as of May 14, 2010, 106,725, sharessubject to the remaining outstanding warrants, 3,210,221 shares that aresubject to outstanding options and 340,924 shares reserved for future issuanceunder our equity plans, will become eligible for sale in the public market tothe extent permitted by the provisions of various vesting agreements, thelock-up agreements and Rules 144 and 701 under the Securities Act. Ifthese additional shares are sold, or if it is perceived that they will be sold,in the public market, the trading price of our common stock could decline.

 

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.

 

OnJuly 12, 2010, we filed a Registration Statement on Form S-8 with theSEC to register 3,471,358 shares of our common stock that we have issued or mayissue under our equity plans. These shares can be freely sold in the publicmarket upon issuance, subject to the lock-up agreements, if applicable,described above.

 

**If securities or industry analysts do not publish research orpublish misleading or unfavorable research about our business, our stock priceand trading volume could 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 or unfavorableresearch about our business, our stock price would likely decline. If one ormore of these analysts ceases coverage of us or fails to publish reports on usregularly, demand for our stock could decrease, which could cause our stockprice or trading volume to decline.

 

**Anti-takeover provisions in our charter documents andDelaware law could discourage, delay or prevent a change of control of ourcompany and may affect the trading price of our common stock. ***

 

Weare a Delaware corporation and the anti-takeover provisions of the DelawareGeneral Corporation Law, which apply to us, may discourage, delay or prevent achange of control by prohibiting us from engaging in a business combinationwith an interested stockholder for a period of three years after the personbecomes an interested stockholder, even if a change of control would bebeneficial to our existing stockholders. In addition, our restated certificateof incorporation and bylaws may discourage, delay or prevent a change in ourmanagement or control over us that stockholders may consider favorable. Ourrestated certificate of incorporation and bylaws:

 

·                  authorize the issuance of “blank check” preferred stock that could beissued by our board of directors to thwart a takeover attempt;

·                  establish a classified board of directors, as a result of which thesuccessors to the directors whose terms have expired will be elected to servefrom the time of election and qualification until the third annual meetingfollowing their election;

·                  require that directors only be removed from office for cause and onlyupon a supermajority stockholder vote;

·                  require that a supermajority vote be obtained to amend or repeal certainprovisions of our certificate of incorporation;

·                  require that stockholders provide advance notice of any stockholdernominations of directors or any proposal of new business to be considered atany meeting of stockholders;

·                  provide that vacancies on the board of directors, including newly-createddirectorships, may be filled only by a majority vote of directors then inoffice rather than by stockholders;

·                  prevent stockholders from calling special meetings; and

·                  prohibit stockholder action by written consent, requiring all actions tobe taken at a meeting of the stockholders.

 

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**Our management will continue to have broad discretion overthe use of the proceeds raised in our recent initial public offering and mightnot apply the proceeds in ways that may enhance our operating results or theprice of our common stock.***

 

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, we used $1.9million of the net proceeds from the initial public offering to retire all theoutstanding debt under the revolving line of credit and the term loan withComerica Bank.  We anticipate that wewill use the remaining net proceeds from the initial public offering for thepayment of offering related expenses and general corporate purposes. We havenot allocated these net proceeds from the initial public offering for anyspecific purposes. Our management might not be able to yield a significantreturn, if any, on any investment of these net proceeds. You will not have theopportunity to influence our decisions on how the net proceeds of the initialpublic offering are used.

 

**Item 2. Unregistered sales of equity securities and use of proceeds**

 

***(a) Sales of UnregisteredSecurities***

 

None.

 

***(b) Use of Proceeds from PublicOffering of Common Stock***

 

OnApril 28, 2010, our registration statement on Form S-1 (FileNo. 333-164491) was declared effective for our initial public offering,pursuant to which we registered the offering and sale of 3,789,527 shares ofcommon stock by us and the associated sale of 1,343,201 shares of common stockby selling stockholders and the sale pursuant to the underwriters’over-allotment option for an additional 769,909 shares of common stock by us,at a public offering price of $9.00 per share. On April 29, 2010, we sold3,789,527 shares of common stock, for an aggregate offering price of $34.1million, and the selling stockholders sold 1,343,201 shares of common stock foran aggregate offering price of $12.1 million. The underwriters’ subsequentlyexercised their option to purchase additional shares and on May 3, 2010 wesold 769,909 shares of common stock, for an aggregate offering price of $6.9million, after which the offering was terminated. Thomas Weisel Partners LLCand Piper Jaffray & Co. were the joint book-running managers and WilliamBlair & Company, L.L.C., JMP Securities LLC and Pacific CrestSecurities LLC were co-managers of our initial public offering.

 

Asa result of the initial public offering, we raised a total of $41.0 million ingross proceeds, and $35.9 million in net proceeds after deducting underwritingdiscounts of $2.9 million and offering expenses of $2.3 million.  We did not receive any proceeds from the saleof shares in the initial public offering by the selling stockholders.

 

Noneof such payments were direct or indirect payments to any of our directors orofficers or their associates or to persons owning 10 percent or more of ourcommon stock, our affiliates or direct or indirect payments to others.

 

Therehas been no material change in the planned use of proceeds from our initialpublic offering as described in our Prospectus filed pursuant toRule 424(b) under the Securities Act with the SEC on April 29,2010. On May 12, 2010, we used $1.9 million of the net proceeds from theinitial public offering to retire all the outstanding debt under the revolvingline of credit and the term loan with Comerica Bank. We anticipate that we willuse the remaining net proceeds from the initial public offering for the paymentof offering-related expenses and for general corporate purposes.  The amount and timing of what we actuallyspend may vary significantly and will depend on a number of factors, includingour future revenue and cash generated by operations as well as the otherfactors described in the section titled “Risk Factors.” Pending the use of thenet proceeds from the initial public offering described above, we invested thefunds in U.S. government agency bonds, corporate bonds, commercial paper andmoney market accounts.

 

**Item 3. Defaults upon senior securities**

 

None.

 

**Item 4. Removed and reserved**

 

**Item 5.  Otherinformation**

 

None.

 

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**Item 6. 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 by  reference from Exhibit 4.7 to the Registration Statement)                                                                                                                                                                                                                                                                                                 |
| 4.6                    |       |       | Warrant  issued to Piper Jaffray & Co. (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 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 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 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 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 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 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 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 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 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 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 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)                                                                                                                                                                                                                                          |
| 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                                                                                                                                                                                                                                                                                                                     |

 

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|    |   |   | 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                                                                                                                |

 

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*Constitutes managementcontracts or compensatory arrangements

#Filed or furnished herewith

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this Report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date:  November 12, 2010 | By:      | /s/ GENE  AUSTIN                                                                                         |
|-------------------------------|----------|---------------------------------------------------------------------------------------------------------------|
|                          |     | Gene  Austin                                                                                                  |
| * *                      | * * | *Chief Executive Officer (Principal Executive Officer),  President and Chairman of the Board of Directors*    |
|                          |     |                                                                                                          |
|                          |     |                                                                                                          |
| Date:  November 12, 2010 | By:      | /s/ JAMES R.  OFFERDAHL                                                                             |
|                          |     | James R.  Offerdahl                                                                                      |
| * *                      | * * | *Chief  Financial Officer and Vice President of Administration (Principal Financial  and Accounting Officer)* |

 

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