Item 1A. Risk Factors
Our business, prospects, financial condition or operating results could be materially adversely affected by any of the risks and
uncertainties described below, as well as other risks not currently known to us or that are currently considered immaterial. The trading price of our Series 1 common stock could decline due to any of these risks, and you may lose all or part of your
investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes.
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Risks Related to Our Business
We are an early-stage company with a limited operating history, which makes it difficult to evaluate our current business and future prospects and may
increase the risk of your investment.
We began our operations in September 2007 and did not enter the digital offer industry
until late 2009. Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in
rapidly changing industries, including challenges in accurate financial planning and forecasting. You should consider our business and prospects in light of the risks and difficulties we may encounter as an early-stage company.
If we are unable to continue to attract visitors to our websites from search engines, then consumer traffic to our websites could decrease, which could
negatively impact the number of purchases generated for our retailers through our marketplace, and therefore negatively impact our ability to maintain or grow our net revenues and profitability.
We generate consumer traffic to our websites using various methods, including search engine marketing, or SEM, search engine optimization, or
SEO, email campaigns and social media referrals. Our net revenues and profitability levels are dependent upon our continued ability to use a combination of these methods to generate consumer traffic to our websites in a cost-efficient manner. We
have experienced and continue to experience fluctuations in search result rankings for a number of our websites. There can be no assurances that we will be able to grow or maintain current levels of consumer traffic to our websites.
Our SEM and SEO techniques have been developed to work with existing search algorithms utilized by the major search engines. Major search
engines frequently modify their search algorithms. Changes in these algorithms could cause our websites to receive less favorable placements, which could reduce the number of users who visit our websites. For example, in May 2014 Google released an
update to its search algorithm that impacted the rankings of all of our websites for certain keywords. In some of those instances, consumer traffic to our websites decreased when compared to traffic levels immediately prior to the algorithm update.
We may be unable to modify our SEM and SEO strategies in response to any future search algorithm changes made by the major search engines, which could require a change in the strategy we use to generate consumer traffic to our websites.
In addition, websites must comply with search engine guidelines and policies. These guidelines and policies are complex and may change at any
time. If we fail to follow such guidelines and policies properly, search engines may rank our content lower in search results or could remove our content altogether from their indices. If we fail to understand and comply with these guidelines, our
SEO strategy may become unsuccessful.
If we are listed less prominently or fail to appear in search result listings for any reason,
including as a result of our failure to successfully execute our SEM and SEO strategies, or our failure to comply with search engine guidelines and policies, it is likely that the number of visitors to our websites will decline. Any such decline in
consumer traffic to our websites could adversely impact the number of purchases we generate for our retailers, which could adversely affect our net revenues. For example, in May 2014, Google released an update to its search algorithm that impacted
the rankings of all our websites for certain keywords. In some of those instances, consumer traffic to our websites decreased when compared to traffic levels immediately prior to the algorithm update. We believe this negatively impacted our net
revenues in the three month period ended June 30, 2014 and may continue to do so in the future. We may not be able to replace this traffic with the same volume of visitors or in the same cost-effective manner from other channels, such as
cost-per-click search engine marketing or display or other advertising, or at all. An attempt to replace this traffic through other channels may require us to increase our sales and marketing expenditures, which would adversely affect our operating
results and which may not be offset by additional net revenues.
If we are unable to retain our existing retailers, expand our business with
existing retailers or attract new retailers and consumers, our net revenues could decline.
Our ability to continue to grow our
net revenues will depend in large part on expanding our business with existing retailers and attracting new retailers. The number of our current retailers may not expand materially beyond our existing base and may decline. Furthermore, even for our
largest retailers, the amount they pay us is typically only a small fraction of their overall advertising budget. Retailers may view their spend with us as experimental and may either reduce or terminate their spend with us if they determine a
superior alternative for generating sales. In addition, retailers may determine that distributing digital offers through our platform results in undesirably broad distribution of their digital offers or otherwise does not provide a compelling value
proposition. Some retailers have demanded that we remove digital offers relating to their products or services from our websites, and we anticipate that some retailers will do so in the future. Retailers also may reduce the commission rates they pay
to us for sales our websites facilitate. If we are unable to negotiate favorable terms with current or new retailers in the future, including the commission rates they pay us, our operating results will be adversely affected. Additionally, retailers
may fail to pay the performance marketing networks the fees the retailers owe, which is a prerequisite to us receiving our commissions from the networks.
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Retailers do not enter into long-term obligations with us requiring them to use our solutions and
their contracts with us are cancelable upon short or no notice and without penalty. We cannot be sure that our retailers will continue to use our solutions or that we will be able to replace retailers that do not renew their campaigns with new ones
generating comparable revenues.
If we are unable to attract new consumers and maintain or increase consumer traffic to our websites and
use of our mobile applications, new retailers may choose not to use, and existing retailers may not continue to use, our solutions for their promotional campaigns, and our volume of new digital offer inventory may suffer as the perceived usefulness
of our marketplace declines. If our existing retailers do not continue to use our solutions for their promotional campaigns, or if we are unable to attract and expand the amount of business we do with new retailers, our sales will decrease and our
operating results will be adversely affected.
We are highly dependent on performance marketing networks as intermediaries. Factors adversely
affecting our relationships with performance marketing networks, or the termination of these networks, may adversely affect our ability to attract and retain business and our operating results.
Most of our net revenues come from commissions earned for promoting digital offers on behalf of retailers. Often, the commissions we earn are
tracked and paid by performance marketing networks. For 2013, 96.1% of our net revenues came from retailers that pay us through performance marketing networks, primarily Commission Junction and LinkShare. Performance marketing networks provide
retailers with affiliate tracking links for attributing revenues to publishers and the ability to distribute digital offer content to multiple publishers. We do not have exclusive relationships with performance marketing networks. They do not enter
into long-term commitments to us allowing us to use their solutions, and their contracts with us are cancelable upon short or no notice and without penalty.
Our sales could be adversely impacted by industry changes relating to the use of performance marketing networks. For example, if retailers
seek to bring the distribution of their digital offer content in-house rather than using a performance marketing network, we would need to develop relationships with more retailers directly, which we might not be able to do and which could increase
our sales, marketing and product expenses. Additionally, we face challenges associated with consumers increasing use of mobile devices to complete their online purchases. For example, many retailers currently do not recognize affiliate
tracking links on their mobile websites or applications, and tracking mechanisms on mobile websites or applications may not function to allow retailers to properly attribute sales to us. As a result, we may not receive commission revenues when a
consumer makes a purchase from their mobile device on a retailers mobile website after clicking through a digital offer displayed on one of our websites or mobile applications if the retailers mobile monetization mechanisms are not
enabled.
Moreover, as a result of dealing primarily with performance marketing networks, we have less of a direct relationship with
retailers than would be the case if we dealt directly with retailers. The presence of performance marketing networks as intermediaries between us and retailers creates a challenge to building our own brand awareness and affinity with retailers.
Additionally, in the event that our relationship with a performance marketing network were to terminate, our mechanism for receiving payments from the retailers we service through that network would terminate, which could materially and adversely
impact our net revenues. Some performance marketing networks that we work with could be considered our competitors because they also offer some components of our solution, including publishing digital offers, on their own websites. If they further
develop these capabilities, they may offer their own competitive solutions to retailers and, as a result, our ability to compete effectively could be significantly compromised and our business and operating results could be adversely affected.
If retailers alter the way they attribute credit to publishers in their performance marketing programs, our net revenues could decline and our operating
results could be adversely affected.
Retailers often advertise and market digital offers through performance marketing programs,
a type of performance-based marketing in which a retailer rewards one or more publishers for each visitor or customer generated by the publishers own marketing efforts. When a consumer executes a purchase on a retailers website as a
result of a performance marketing program, most performance marketing conversion tracking tools credit the most recent link or ad clicked by the consumer prior to that purchase. This practice is generally known as last-click attribution.
We generate the vast majority of our net revenues through transactions for which we receive last-click attribution. In recent years, some retailers have sought, and in some cases adopted, alternatives to last-click attribution. These alternatives
are primarily first-click attribution, which credits the first link or ad clicked by a consumer prior to executing a purchase, or multichannel attribution, which applies weighted values to each of a retailers
advertisements and tracks how each of those advertisements contributed to a purchase. If retailers widely adopt first-click attribution, multichannel attribution or otherwise alter the ways they attribute credit for purchases to us, and if we are
unable to adapt our business practices to such alterations, our net revenues could decline and our business, financial condition and operating results could be adversely affected.
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The market in which we participate is intensely competitive, and we may not be able to compete
successfully.
The market for digital offer solutions is highly competitive, fragmented and rapidly changing. Our competition for
traffic from consumers seeking to save money on online or in-store purchases includes digital offer websites and mobile applications, cash back and loyalty websites and mobile applications, retailers, search engines, social networks, comparison
shopping websites, newspapers and direct mail campaigns. Our competition for retailer marketing spend includes digital offer sites that offer a pay-for-performance model, search engines and social networks that compete for online advertising spend
and television, magazines and newspapers that compete for offline advertising spend. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could
harm our ability to increase sales and maintain our profitability. We also expect competition in e-commerce generally, and digital offer solutions in particular, to continue to increase because there are no significant barriers to entry. A
substantial number of digital offer websites, including those that attempt to replicate our business model, have emerged globally. In addition to such competitors, we are experiencing increasing competition from other businesses that provide digital
offers similar to ours as an add-on to their core business. For example, Groupon, Living Social and Coupons.com are now providing digital offers, and Google and PayPal are now providing digital offers for in-store purchases. We also expect to
compete against other Internet sites that serve niche markets and interests. In addition, we compete with traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies that provide coupons
and discounts on products and services.
Our success depends on the breadth, depth, quality and reliability of our digital offer
selection, as well as our continued innovation and ability to provide features that make our marketplace useful and appealing to consumers. If we are unable to develop quality features that consumers want to use, then consumers may become
dissatisfied with our marketplace and elect to use the offerings of one of our competitors, which could adversely affect our operating results.
Certain of our larger potential competitors may have the resources to significantly change the nature of the digital offer industry to their
advantage, which could materially disadvantage us. For example, Google, PayPal, Yahoo!, Bing and Facebook have widely adopted industry platforms which they could leverage to distribute digital offers that could be disadvantageous to our competitive
position. Google, in particular, now displays product-listing advertisements above the organic search results returned by its search engine in response to user searches, which may reduce the amount of traffic to our websites.
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to
devote greater resources to the development, promotion, sale and support of their products and services, have more extensive consumer bases and deeper relationships, and may have longer operating histories and greater name recognition than we have.
As a result, these competitors may be better able to respond quickly to new technologies, develop deeper retailer relationships or offer services at lower prices. Any of these developments would make it more difficult for us to sell our solutions
and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expense or the loss of market share.
In the traditional coupon landscape, our primary competitors for advertising spend include publishers of printable coupons. Many of these
competitors have significant consumer reach, well-developed retailer relationships, and much larger financial resources and longer operating histories than we have.
We also directly and indirectly compete with retailers for consumer traffic. Many retailers market and provide their own digital offers
directly to consumers using their own websites, email newsletter and alerts, mobile applications, social media presence and other distribution channels. Our retailers could be more successful than we are at marketing their own digital offers or
could decide to terminate their relationship with us because they no longer want to pay us to compete against them.
We may also face
competition from companies we do not yet know about. If existing or new companies develop, market or resell competitive digital offer solutions, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our
ability to compete effectively could be significantly compromised and our operating results could be harmed.
We have experienced rapid growth in
recent periods. If we fail to manage our growth, our financial performance may suffer.
We have expanded our overall business,
consumer traffic, paid retailers, employee headcount and operations in recent periods. We increased our total number of full-time employees from 35 as of December 31, 2010 to 508 as of June 30, 2014. We have also established or acquired
operations in other countries. In 2011, we acquired the business of VoucherCodes.co.uk, which is based in the U.K. In 2012, we acquired Bons-de-Reduction.com and Poulpeo.com, which are based in France, and relaunched Deals.com in Germany. In March
2013, we acquired Actiepagina.nl, which is based in the Netherlands. In July 2013, we acquired Ma-Reduc.com, which is based in France. In most of these instances, we previously had no presence in these countries. Our business is becoming
increasingly complex, especially in light of the number of acquisitions we have integrated and are in the process of integrating. Our limited operating history, reliance on multiple websites and brands and our rapid expansion have placed, and will
continue to place, a significant strain on our managerial, operational, product development, sales and marketing, administrative, financial and other resources.
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We expect to continue to increase headcount and to hire more specialized personnel in the future.
We will need to continue to hire, train and manage additional qualified website and mobile application developers, software engineers, partner management personnel and sales and marketing staff in order to improve and maintain our technology to
properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed.
Further, to accommodate our expected growth we must add new hardware and software and improve and maintain our technology, systems and network
infrastructure. Failure to effectively upgrade our technology or network infrastructure to support our expected increases in traffic volume could result in unanticipated system disruptions, slow response times or poor experiences for consumers. To
manage the expected growth of our operations and personnel and to support financial reporting requirements as a public company, we will need to improve our transaction processing and reporting, operational and financial systems, procedures and
controls. These improvements will be particularly challenging if we acquire new operations with different back-end systems. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. If
we are unable to manage our growth successfully and hire additional qualified personnel in an efficient manner, our business, financial conditions and operating results could be adversely affected.
We experience quarterly fluctuations in our operating results due to a number of factors that make our future results difficult to predict and could
cause our operating results to fall below expectations or our guidance.
Our business is subject to seasonal fluctuations.
Specifically, our net revenues are traditionally strongest in the third and fourth quarters of each year due to increases in holiday shopping. Conversely, our first and second quarter net revenues are typically lower.
Since the majority of our expenses are personnel-related and include salaries and stock-based compensation, benefits and incentive-based
compensation plan expenses, we have not experienced significant seasonal fluctuations in the timing of our expenses from period to period other than increases in discretionary advertising and promotional spending during the third and fourth quarter
holiday shopping period. We plan to continue to increase our investment in sales and marketing and product development substantially as we seek to leverage our solution to capitalize on what we see as a growing global opportunity. We also expect
that our general and administrative expense will increase both to support our growing operations and manage increased costs of operating as a public company. For the foregoing reasons or other reasons we may not anticipate, historical patterns
should not be considered indicative of our future sales activity, expenditure levels or performance.
Factors that may affect our
quarterly operating results include the following:
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the number and quality of the digital offers on our websites and mobile applications;
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consumer visits to our websites and use of our mobile applications, and purchases of retail products by consumers resulting from those visits;
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the success and costs of our online advertising and marketing initiatives, including advertising costs for paid search keywords that we deem relevant to our business;
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the levels of compensation that retailers are willing to pay us to attract customers;
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the amount that consumers spend when they make purchases using the digital offers we provide;
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market acceptance of our current and future solutions, including our ability to sell additional solutions to existing retailers and to add new retailers to our business in multiple regions around the world;
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overall levels of consumer spending;
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the budgeting cycles of our retailers;
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the cyclical and discretionary nature of marketing spend and any resulting changes in the number and quality of digital offers that retailers choose to offer;
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changes in the competitive dynamics of the digital offer industry, including consolidation among competitors, performance marketing networks or customers, and our reputation and brand strength relative to our
competitors;
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the response of consumers to our digital offer content;
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our ability to control costs, including our operating expenses;
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network outages, errors in our solutions or security breaches and any associated expenses and collateral effects;
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our ability to achieve the growth rate that was anticipated by us in setting our operating and capital expense budgets;
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foreign currency exchange rate fluctuations, as our foreign sales and costs are denominated in local currencies;
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costs related to acquisitions or licensing of, or investments in, products, services, technologies or other businesses and our ability to integrate and manage any acquisitions successfully; and
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general economic and political conditions in our domestic and international markets.
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As a
result of these and other factors, we have a limited ability to forecast the amount of future net revenues and expenses, and our operating results may vary from quarter to quarter and may fall below our estimates or the expectations of public market
analysts and investors. Fluctuations in our quarterly operating results may lead analysts to change their long-term models for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key
personnel or cause other unanticipated issues, all of which could cause our stock price to decline. As a result of the potential variations in our quarterly net revenues and operating results, we believe that quarter-to-quarter comparisons of our
net revenues and operating results may not be meaningful and the results of any one quarter should not be relied upon as an indication of future performance.
If online commerce does not continue to grow, or contracts, our business may suffer.
The business of selling goods and services over the Internet, and the use of digital offers in those transactions, is dynamic and relatively
new. Concerns about fraud, privacy and other challenges may discourage additional consumers from adopting the Internet as a medium of commerce. Acquiring new customers for our marketplace and increasing consumer traffic may become more difficult and
costly than it has been in the past, particularly in markets where our marketplace has been available for some time. In order to increase consumer traffic to our websites and use of our mobile applications, we must appeal to consumers who
historically have used traditional means of commerce to purchase goods and services and may prefer alternatives to our websites and mobile applications, such as the retailers own website or mobile application. If these consumers prove to be
less active than consumers who are already providing traffic to our websites or using our mobile applications, or we are unable to gain efficiencies in our operating costs, including our cost of increasing consumer traffic to our websites or
increasing the number of mobile application sessions, our business could be adversely impacted. Furthermore, to the extent that weak economic conditions cause consumer spending to decline or cause our customers and potential customers to freeze or
reduce their marketing budgets, particularly in the online retail market, demand for our solutions may be negatively affected.
Consumers are
increasingly using mobile devices to access our content and if we are unsuccessful in expanding the capabilities of our digital offer solutions for our mobile platforms to allow us to generate net revenues as effectively as our desktop platforms,
our net revenues could decline.
Web usage and the consumption of digital content are increasingly shifting to mobile platforms
such as smartphones, tablets and other connected devices. Industry-wide solutions to monetize digital offer content effectively on these platforms are at an early stage of development and the future demand and growth prospects for digital offer
content on these mobile platforms are uncertain.
The growth of our business depends in part on our ability to deliver compelling
solutions to retailers through these new mobile marketing channels. Our success on mobile platforms will be dependent on our interoperability with popular mobile operating systems that we do not control, such as Android, iOS and Windows Mobile, and
any changes in such systems that degrade our functionality or give preferential treatment to competitive services could adversely affect usage of our services through mobile devices.
Further, to deliver high quality mobile offerings, it is important that our solutions integrate with a range of other mobile technologies,
systems, networks and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks
or standards. For example, many retailers today do not recognize affiliate tracking links on their mobile websites or applications, and affiliate tracking links on mobile websites or applications may not function to allow retailers sales to be
attributed to us. As a result, we may not receive commission revenues when a consumer executes a purchase on the retailers platform after clicking through a digital offer displayed on our mobile websites or in our mobile applications. If
retailers fail to recognize affiliate tracking links on their mobile websites or applications, or affiliate tracking links on mobile websites or applications do not function to allow retailers sales to be attributed to us and our mobile
traffic continues to increase or represent a higher percentage of our consumer traffic, our business could be harmed and our operating results could be adversely affected.
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If we fail to achieve success with our mobile applications and mobile website, or if we otherwise
fail to deliver effective solutions to advertisers for mobile platforms and other emerging platforms, our ability to monetize these growth opportunities will be constrained, and our business, financial condition and operating results would be
adversely affected.
If we are not able to maintain a positive perception of the content available through our marketplace, maintain and enhance our
RetailMeNot brand and the brands associated with each of our other websites, our reputation and business may suffer.
A decrease
in the quality of the digital offers available through our marketplace could harm our reputation and damage our ability to attract and retain consumers and retailers, which could adversely affect our business. Additionally, maintaining and enhancing
our RetailMeNot brand and the brands of each of our other websites is critical to our ability to attract new retailers and consumers to our marketplace, generate net revenues and successfully introduce new solutions. We may not be able to
successfully build our RetailMeNot brand in the U.S. without losing some or all of the value associated with, or decreasing the effectiveness of, our other brands. We expect that the promotion of our brands will require us to make substantial
investments and as our market becomes more competitive, these branding initiatives may become increasingly difficult and expensive. The successful promotion of our brands will depend largely on our marketing and public relations efforts. If we do
not successfully maintain and enhance our brands, we could lose consumer traffic, which could, in turn, cause retailers to terminate or reduce the extent of their relationship with us. Our brand promotion activities may not be successful or may not
yield net revenues sufficient to offset this cost, which could adversely affect our reputation and business.
Our business model depends upon
digital offer inventory that we do not own or otherwise control, and the failure to maintain sufficient inventory or quality of the digital offers available on our websites may adversely affect our perceived value by consumers and therefore
retailers.
Our success depends on our ability to provide consumers with the digital offers they seek. A substantial majority of
our revenues come from arrangements in which we are paid by retailers to promote their digital offers. Additionally, approximately one-third of the digital offers on our websites are submitted by users. Therefore, we do not own or control the
inventory of content upon which our business depends. Because a large number of our digital offers are submitted by users, our efforts to ensure the quality and reliability of those digital offers are critical to our success. From time to time
consumers submit complaints that our digital offers are invalid or expired. If our algorithms and automated processes for validating and sorting user-submitted digital offers are ineffective, or if our employees responsible for manual review and
curation of user-submitted digital offers are unable to effectively select and sort the digital offers that are reliable and most appealing to our users, we may be unable meet the needs of consumers and our operating results may be adversely
affected.
Retailers have a variety of channels through which to promote their products and services. If these retailers elect to promote
their offers and discounts through other channels, offer less compelling offers or discounts or not to promote offers or discounts at all, or if our competitors are willing to accept lower commissions than we are to promote these digital offers, our
ability to obtain content may be impeded and our business, financial condition and operating results will be adversely affected. Similarly, if users do not contribute digital offers to our websites, or if they contribute digital offers that are not
attractive or reliable, the digital offer inventory in our marketplace may decrease or become less valuable to consumers. If we cannot maintain sufficient digital offer inventory in our marketplace, consumers may perceive our marketplace as less
relevant, consumer traffic to our websites and use of our mobile applications would decline and, as a result, our business, financial condition and operating results would be adversely affected.
Our failure or the failure of third-party service providers to protect our platform and network against security breaches, or otherwise protect our
confidential information, could damage our reputation and brand and substantially harm our business and operating results.
We
deliver digital offers via our websites, mobile applications, email newsletter and alerts and social media presence, and we collect and maintain data about consumers, including personally identifiable information, as well as other confidential or
proprietary information. Our security measures may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks
and similar disruptions that may jeopardize the security of information stored in and transmitted by our platform or that we or our third-party service providers otherwise maintain. Breaches of our security measures or those of our third-party
service providers could result in unauthorized access to our platform or other systems; unauthorized access to and misappropriation of consumer information, including consumers personally identifiable information, or other confidential or
proprietary information of ourselves or third parties; viruses, worms, spyware or other malware being served from our platform; deletion or modification of content, or the display of unauthorized content, on our websites or our mobile applications;
or a denial of service or other interruption in our operations. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we
and they may be unable to anticipate these attacks or to implement adequate preventative measures. Any actual or perceived breach of our security could damage our reputation and brand, expose us to a risk of loss or litigation and possible
liability, require us to expend significant capital and other resources to alleviate problems caused by such breaches and deter consumers and retailers from using our online marketplace, which would harm our business, financial condition and
operating results.
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Interruptions or delays in service from third-party data center hosting facilities and other third parties
could impair the delivery of our solutions and harm our business.
We operate our business using third-party data center hosting
facilities located in California, Virginia, the U.K., France, Germany, Ireland and the Netherlands. All of our data gathering and analytics are conducted on, and the content we deliver is processed through, servers in these facilities. We also rely
on bandwidth providers, Internet service providers and mobile networks to deliver content. Any damage to, or failure of, the systems of our third-party providers could result in interruptions to our service.
Despite precautions taken at our third-party data centers, these facilities may be vulnerable to damage or interruption from break-ins,
computer viruses, denial-of-service attacks, acts of terrorism, vandalism or sabotage, power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes and similar events. The occurrence of any of these events, a decision
to close the facilities without adequate notice or other unanticipated problems at these facilities could result in loss of data, lengthy interruptions in the availability of our services and harm to our reputation and brand. While we have disaster
recovery arrangements in place, they have not been tested under actual disasters or similar events.
Additionally, our third-party data
center facility agreements are of limited durations, and our third-party data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If for any reason we are unable to renew our agreements
with these facilities on commercially reasonable terms or if our arrangement with one or more of our data centers is terminated, we could experience additional expense in arranging for new facilities and support, and we may experience delays in the
provisioning of our solutions until an agreement with another data center facility can be arranged. This shift to alternate facilities could take more than 24 hours depending on the nature of the event, which could cause significant interruptions in
the delivery of our solutions and adversely affect our business and reputation. In addition, the failure of these facilities to meet our capacity requirements could result in interruptions in the availability or functionality of our solutions or
impede our ability to scale our operations.
Furthermore, we depend on continuous and uninterrupted access to the Internet through
third-party bandwidth providers to operate our business. If we lose the services of one or more of our bandwidth providers for any reason or if their services are disrupted, we could experience disruption in our services or we could be required to
retain the services of a replacement bandwidth provider, which could increase our operating costs and harm our business and reputation.
Any errors, defects, disruptions or other performance problems with our solutions could harm our reputation and may damage our retailers
businesses. Interruptions in our solutions could cause retailers to terminate their contracts with us, which would likely reduce our net revenues and harm our business, operating results and financial condition.
An increase in the return rate of paid retailers products or a change in the categories of products retailers choose to promote using digital
offers could reduce our net revenues.
The commission revenues we receive from paid retailers are in part a function of the amount
consumers purchase from paid retailers net of product returns. We do not have control over the categories or quality of products or services that our retailers deliver, nor do we have control over the digital offers they provide us. As a result, we
rely on our historical experience for our estimate of returns. If paid retailers actual levels of returns are greater than the level of returns we estimate or if paid retailers elect to use digital offer content to promote products and
services with a higher return rate than what we have experienced historically, our net revenues could decline. Because some categories of products tend to experience higher return rates than others, a shift in the types of goods consumers purchase
using our solutions could lead to an increase in returns and our net revenues could decline. Additionally, return rates in the foreign countries in which we operate are currently higher than return rates in the U.S. If we continue to expand our
operations in countries with high return rates, our operating results may be negatively affected.
Regulatory, legislative or self-regulatory
developments regarding Internet privacy matters could adversely affect our ability to conduct our business.
Consumer and industry
groups have expressed concerns about online data collection and use by companies, which has resulted in the release of various industry self-regulatory codes of conduct and best practice guidelines that are binding for member companies and that
govern, among other things, the ways in which companies can collect, use and disclose user information, how companies must give notice of these practices and what choices companies must provide to consumers regarding these practices. We are
obligated in certain cases to comply with best practices or codes of conduct addressing matters, such as the online tracking of users or devices.
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U.S. regulatory agencies have also placed an increased focus on online privacy matters and, in
particular, on online advertising activities that utilize cookies, which are small files of non-personalized information placed on an Internet users computer, and other online tracking methods. Such regulatory agencies have released, or are
expected to release, reports pertaining to these matters. For example, on March 26, 2012, the Federal Trade Commission, or FTC, issued a report on consumer privacy intended to articulate best practices for companies collecting and using
consumer data. The report recommends companies adopt several practices that could have an impact on our business, including giving consumers notice and offering them choices about being tracked across other parties websites and implementing a
persistent Do Not Track mechanism to enable consumers to choose whether to allow tracking of their online search and browsing activities, including on mobile devices. Various industry participants have worked to develop and finalize
standards relating to a Do Not Track mechanism, and such standards may be implemented and adopted by industry participants at any time. We may be required or otherwise choose to adopt Do Not Track mechanisms, in which case our ability to use our
existing tracking technologies and permit their use by performance marketing networks and other third parties could be impaired. This could cause our net revenues to decline and adversely affect our operating results.
U.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry
participants ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools. A number of bills
have been proposed in the U.S. Congress in the past that contained provisions that would have regulated how companies can use cookies and other tracking technologies to collect and use information about consumers. Some of those bills also contained
provisions that would have specifically regulated the collection and use of information, particularly geolocation information, from mobile devices. At least one such bill presently has been proposed in the U.S. Congress.
Additionally, the EU has traditionally imposed more strict obligations under data privacy laws and regulations. Individual EU member countries
have had discretion with respect to their interpretation and implementation of EU data privacy laws, resulting in variation of privacy standards from country to country. Legislation and regulation in the EU and some EU member states requires
companies to obtain specific types of notice and consent from consumers before using cookies or other tracking technologies. To comply with these requirements, the use of cookies or other similar technologies may require the users affirmative,
opt-in consent. Additionally, in January 2012, the European Commission announced significant proposed reforms to its existing data protection legal framework that, if implemented, may result in a greater compliance burden with respect to our
operations in Europe. There remains uncertainty surrounding these proposed reforms both with respect to their scope and if and when they will be implemented.
Changes in global privacy laws and regulations and self-regulatory regimes may force us to incur substantial costs or require us to change our
business practices. This could compromise our ability to pursue our growth strategies effectively and may adversely affect the demand for our solutions or otherwise harm our business and financial condition. For instance, new privacy laws or
regulations or changed interpretations of existing laws or regulations could require performance marketing networks or us to take additional measures to facilitate consumer privacy preferences or to limit or cease altogether the collection, use or
disclosure of data. For example, one potential restriction on the use of cookies would allow a website that a consumer has elected to visit to continue to place cookies on the users browser without explicit consent, but would require the
users explicit consent for a third party to place its cookies on the users browser. A recent FTC staff report also recommends that websites offer consumers a choice about whether the owner of the website can use third parties to track
the consumers activity for certain purposes. We are dependent on third parties, including performance marketing networks, to place cookies on browsers of users that visit our websites. If in the future we are restricted from allowing cookies,
if there is a material increase in the number of users who choose to opt out or block cookies and other tracking technologies, or if performance marketing networks cookies or other tracking mechanisms otherwise do not function properly, our
ability to generate net revenues would be significantly impaired.
Finally, we may be subject to foreign laws regulating online
advertising even in jurisdictions where we do not have any physical presence to the extent a digital media content provider has advertising inventory that we manage or to the extent that we collect and use data from consumers in those jurisdictions.
Such laws may vary widely around the world, making it more costly for us to comply with them. Failure to comply may harm our business and our operating results could be adversely affected.
Changes in consumer sentiment or laws, rules or regulations regarding the use of cookies and other tracking technologies and other privacy matters could
have a material adverse effect on our ability to generate net revenues and could adversely affect our ability to collect proprietary data on consumer shopping behavior.
Consumers may become increasingly resistant to the collection, use and sharing of information online, including information used to deliver
advertising and to attribute credit to publishers such as us in performance marketing programs, and take steps to prevent such collection, use and sharing of information. For example, consumer complaints and/or lawsuits regarding online advertising
or the use of cookies or other tracking technologies in general and our practices specifically could adversely impact our business.
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Consumers can currently opt out of the placement or use of most cookies for online advertising
purposes by either deleting or disabling cookies on their browsers, visiting websites that allow consumers to place an opt-out cookie on their browsers, which instructs participating entities not to use certain data about consumers online
activity for the delivery of targeted advertising, or by downloading browser plug-ins and other tools that can be set to: identify cookies and other tracking technologies used on websites; prevent websites from placing third-party cookies and other
tracking technologies on the users browser; or block the delivery of online advertisements on websites and applications.
Changes in
device and software features could make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies. In particular, the default settings of consumer devices and software may be set to prevent the
placement of cookies unless the user actively elects to allow them. For example, Apples Safari browser currently has a default setting under which third-party cookies are not accepted, and users must activate a browser setting to enable
cookies to be set. Additionally, Mozilla Corporation announced on February 25, 2013, that its Firefox browser also will not accept third-party cookies by default. On February 22, 2012, the Digital Advertising Alliance announced that its
members will work to add browser-based header signals to the set of tools by which consumers can express their preferences not to be tracked online. As discussed above, a recent FTC report on consumer privacy calls for the development and
implementation of a persistent Do Not Track mechanism that enable consumers to choose whether to allow the tracking of their online search and browsing activities. Various industry participants have worked to develop and finalize standards relating
to a Do Not Track mechanism, and such standards may be implemented and adopted by industry participants at any time.
We are dependent on
performance marketing networks or in some instances, retailers, to place cookies on browsers of users that visit our websites or to use other tracking mechanisms to allow retailer sales through our marketplace to be attributed to us, and if we are
restricted from allowing these or if they do not function in a manner that allows retailer sales through our marketplace to be attributed to us, our ability to generate net revenues would be significantly impaired. In particular, if consumer
sentiment regarding privacy issues or the development and deployment of new browser solutions or other Do Not Track mechanisms results in a material increase in the number of users who choose to opt out or block cookies and other tracking
technologies or who are otherwise using browsers where they need to, and fail to, configure the browser to accept cookies, or otherwise results in cookies or other tracking technologies not functioning properly, our ability to conduct our business,
operating results and financial condition would be adversely affected.
In addition to this change in consumer preferences, if retailers
or brands perceive significant negative consumer reaction to targeted online advertising or the tracking of consumers online activities, they may determine that such advertising or tracking has the potential to negatively impact their brand.
In that case, advertisers may limit or stop the use of our solutions, and our operating results and financial condition would be adversely affected.
Our business practices with respect to data and consumer protection could give rise to liabilities or reputational harm as a result of governmental
regulation, legal requirements or industry standards relating to consumer privacy, data protection and consumer protection.
Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect. We
strive to comply with all applicable laws, regulations, self-regulatory requirements and legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is
possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot assure you that our practices have complied,
comply, or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with federal, state or international laws or regulations, including laws and regulations regulating
privacy, data security, marketing communications or consumer protection, or other policies, self-regulatory requirements or legal obligations could result in harm to our reputation, a loss in business, and proceedings or actions against us by
governmental entities, consumers, retailers or others. We may also be contractually liable to indemnify and hold harmless performance marketing networks or other third parties from the costs or consequences of noncompliance with any laws,
regulations, self-regulatory requirements or other legal obligations relating to privacy, data protection and consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
Any such proceeding or action, and any related indemnification obligation, could hurt our reputation, force us to incur significant expenses in defense of these proceedings, distract our management, increase our costs of doing business and cause
consumers and retailers to decrease their use of our marketplace, and may result in the imposition of monetary liability.
Government regulation of
the Internet, e-commerce and m-commerce is evolving, and unfavorable changes or failure by us to comply with these laws and regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet, e-commerce and
m-commerce in a number of jurisdictions around the world. Existing and future regulations and laws could impede the growth of the Internet, e-commerce, m-commerce or other online services. These regulations and laws may involve taxation, tariffs,
privacy and data security, anti-spam, data protection, content, copyrights, distribution, electronic contracts, electronic communications
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and consumer protection. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet as
the vast majority of these laws and regulations were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet, e-commerce or m-commerce. It is possible that general business regulations
and laws, or those specifically governing the Internet, e-commerce or m-commerce may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot assure
you that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in
business, and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant resources in defense of these proceedings, distract our management, increase
our costs of doing business, and cause consumers and retailers to decrease their use of our marketplace, and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from
the costs or consequences of noncompliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our websites and mobile applications or may even attempt to
completely block access to our marketplace. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability
to retain or increase our customer base may be adversely affected and we may not be able to maintain or grow our net revenues as anticipated.
As we
develop and provide solutions, we may be subject to additional and unexpected regulations, which could increase our costs or otherwise harm our business.
As we develop and provide solutions that address new market segments, we may become subject to additional laws and regulations, which could
create unexpected liabilities for us, cause us to incur additional costs or restrict our operations.
We have begun to introduce new
product offerings, which may be subject to regulation by federal, state and local authorities and by authorities in foreign countries. For example, unlike our other solutions, in order to facilitate card-linked offers that we are considering, we
must acquire and store consumer credit card data. The storage of credit card data requires compliance with the Payment Card Industry Data Security Standard, or PCI DSS, which compliance certification we recently obtained. Under the PCI DSS, we are
required to adopt and implement internal controls over the use, storage and security of credit card data to help prevent credit card fraud. Failure to comply with this standard or other loss of our PCI DSS compliance would result in breaches of
contractual obligations with our payment processors, may subject us to fines, penalties, damages and civil liability and could eventually prevent us from processing or accepting credit cards.
From time to time, we may be notified of or otherwise become aware of additional laws and regulations that governmental organizations or
others may claim should be applicable to our business. Our failure to anticipate the application of these laws and regulations accurately, or other failure to comply, could create liability for us, result in adverse publicity or cause us to alter
our business practices, which could cause our net revenues to decrease, our costs to increase or our business otherwise to be harmed.
We may face
liability for, and may be subject to claims related to, inaccurate or outdated content provided to us, or content provided to us without permission, which could require us to pay significant damages, may be extremely costly to defend even if decided
in our favor and could limit our ability to operate.
The information on our websites and mobile applications that is provided by
performance marketing networks and retailers and collected from third parties relates to digital offers from retailers. We are exposed to the risk that some of this content may contain inaccurate or outdated information about retailer products or
services or the discounts thereon, or digital offers that are not made available or intended to be made available to all consumers. This could cause consumers and retailers to lose confidence in the information provided on our platform or become
dissatisfied with our platform and result in lawsuits being filed against us.
In addition, we may face potential liability relating to
information that is published or made available through our marketplace, including information generated by us, user-generated content and proprietary information of third parties. This content may expose us to claims related to trademark and
copyright infringement and other intellectual property rights, rights of privacy, defamation, fraud, negligence, breach of contract, tortious interference, unfairness, deceptiveness, false or misleading advertising, personal injury torts,
noncompliance with state or federal laws relating to digital offers or other theories based on the nature and content of the information. The laws relating to the liability of service providers for activities of their users is currently unsettled
both within the U.S. and internationally, although risks related to these types of lawsuits may be enhanced in certain jurisdictions outside the U.S. where our protection from liability for third-party actions is more unclear and where we may be
less protected under local laws than we are in the U.S.
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Such claims or lawsuits could divert the time and attention of management and technical personnel
away from our business and result in significant costs to investigate and defend, regardless of the merits of the claims, as well as significant damages if we are found liable. The scope and amount of our insurance may not adequately protect us
against these types of damages. Additionally, as a result of such claims, we may elect or be compelled to remove valuable content from our websites or mobile applications, which could decrease the usefulness of our platform for consumers and result
in less traffic to our websites and less usage of our mobile applications. If any of these events occur, our business and financial results could be adversely affected.
Our business could suffer if the jurisdictions in which we operate change the way in which they regulate user-generated content.
Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are
adopted, interpreted or implemented in a manner that is inconsistent with our current business practices related to user-generated content and that requires changes to these practices or the design of our platform or solutions. For example, laws
relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims against third parties, including actions based on invasion of privacy and other torts,
unfair competition, copyright and trademark infringement and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. If immunities currently afforded to websites that publish
user-generated content are limited, we may be compelled to remove content from our platform that we would otherwise publish or restrict the types of businesses that we can promote digital offer content for, among other changes. Such changes in law
could increase our operating costs and make it more difficult for consumers to use our platform, resulting in less consumer traffic and net revenues, and our business and operating results could suffer.
If Texas or any other jurisdiction in which we are resident implements regulations that impose sales tax on certain e-commerce or m-commerce
transactions involving the use of performance marketing programs, our net revenues could decline and our business, financial condition and operating results will be adversely affected.
In 2008, New York implemented regulations that require retailers to collect and remit sales taxes on sales made to residents of New York if
the publisher that facilitated that sale is a New York resident. In 2011, California passed similar regulations, and several other states have proposed similar regulations, although some of the regulations proposed by these other states have not
passed. In addition, the State of New Jersey, a state in which we have operations, passed similar regulations on July 1, 2014. The requirement to collect and remit sales tax in New Jersey has not had a material impact on our results of
operations to date. However, in the future, paid retailers in our marketplace that do not currently have sales tax nexus in New Jersey may significantly alter the manner in which they pay us, cease paying us for sales we facilitate for that retailer
in New Jersey or cease using our marketplace, each of which could adversely impact our operating results. Further, if Texas were to pass similar regulations, we believe a substantial number of the paid retailers in our marketplace would cease paying
us for sales we facilitate for that retailer in Texas, significantly alter the manner in which they pay us or cease using our marketplace. This would decrease our sales and our business, financial condition and operating results would be adversely
affected.
The growth of e-commerce and m-commerce in the U.S. could suffer if the federal government implements new regulations that obligate
retailers, or permit states to obligate retailers, to collect sales taxes from consumers on certain e-commerce or m-commerce transactions, which would adversely affect our growth.
Legislation introduced in the 113
th
Congress in 2013, including H.R. 684 and S. 336, and
approved by the U.S. Senate in May 2014, would grant states the authority to require out-of-state retailers to collect and remit sales taxes. The adoption of remote sales tax collection legislation would result in the imposition of sales taxes and
additional costs associated with complex sales tax collection, remittance and audit compliance requirements on many of our retailers, which would make selling online or through mobile applications less attractive for these retailers. Additionally,
the introduction of new or increased taxes applicable to online transactions could make online purchases less attractive to consumers relative to in-store retail purchases. These changes could substantially impair the growth of e-commerce and
m-commerce in the U.S., and could diminish our opportunity to derive financial benefit from our activities in the U.S.
We may be sued by third
parties for infringement or other violation of their intellectual property or proprietary rights.
Internet, advertising and
e-commerce companies frequently are subject to litigation based on allegations of infringement, misappropriation, dilution or other violations of intellectual property rights. Some Internet, advertising and e-commerce companies, including some
of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us.
Third parties have asserted, and may in the future assert, that we have infringed, misappropriated or otherwise violated their intellectual
property rights.
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For instance, the use of our technology to provide our solutions could be challenged by claims
that such use infringes, dilutes, misappropriates or otherwise violates the intellectual property rights of a third party. In addition, we may face claims that content published or made available through our websites or mobile applications violates
third-party intellectual property rights. For example, retailers and other third parties frequently have complained that their trademarks, copyrights or other intellectual property are being used on our websites without their permission and in
violation of their rights or in violation of laws or regulations.
As we face increasing competition and as a public company, the
possibility of intellectual property rights claims against us grows. Such claims and litigation may involve patent holding companies or other adverse intellectual property rights holders who have no relevant product revenue, and therefore our own
pending patents and other intellectual property rights may provide little or no deterrence to these rights holders in bringing intellectual property rights claims against us. There may be intellectual property rights held by others, including issued
or pending patents and trademarks, that cover significant aspects of our technologies, content, branding or business methods, and we cannot assure that we are not infringing or violating, and have not violated or infringed, any third-party
intellectual property rights or that we will not be held to have done so or be accused of doing so in the future.
Any claim that we have
violated intellectual property or other proprietary rights of third parties, with or without merit, and whether or not settled out of court or determined in our favor, could be time-consuming and costly to address and resolve, and could divert the
time and attention of management and technical personnel from our business. Furthermore, an adverse outcome of a dispute may result in an injunction and could require us to pay substantial monetary damages, including treble damages and
attorneys fees, if we are found to have willfully infringed a partys intellectual property rights. Any settlement or adverse judgment resulting from such a claim could require us to enter into a licensing agreement to continue using the
technology, content or other intellectual property that is the subject of the claim; restrict or prohibit our use of such technology, content or other intellectual property; require us to expend significant resources to redesign our technology or
solutions; and require us to indemnify third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. There also
can be no assurance that we would be able to develop or license suitable alternative technology, content or other intellectual property to permit us to continue offering the affected technology, content or services to our customers. Any of
these events could harm our business, operating results and financial condition.
Failure to protect or enforce our intellectual property rights
could harm our business and results of operations.
We pursue the registration of our patentable technology, domain names,
trademarks and service marks in the U.S. and in certain jurisdictions abroad. We also strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We typically enter into
confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information.
However, we may not be successful in executing these agreements with every party who has access to our confidential information or contributes to the development of our technology or intellectual property rights. Those agreements that we do execute
may be breached, and we may not have adequate remedies for any such breach. These contractual arrangements and the other steps we have taken to protect our intellectual property rights may not prevent the misappropriation or disclosure of our
proprietary information nor deter independent development of similar technology or intellectual property by others.
Effective trade
secret, patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain, both in terms of initial and ongoing registration or prosecution requirements and expenses and the costs of defending our rights. We are
seeking to protect our patentable technology, trademarks and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our
investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming. We have two patents issued and 40 pending patent applications, including eight provisional applications. We do not know
whether any of our pending patent applications will result in the issuance of additional patents or whether the examination process will require us to narrow our claims or we may otherwise be unable to obtain patent protection for the technology
covered in our pending patent applications. Our patents, trademarks and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Moreover, any issued patents may not provide us with
a competitive advantage and, as with any technology, competitors may be able to develop similar or superior technologies to our own, now or in the future.
Additionally, in the U.S., the central provisions of the Leahy-Smith America Invents Act became effective recently. Among other things, this
law switched U.S. patent rights from the former first-to-invent system to a first inventor-to-file system. This may result in inventors and companies having to file patent applications more frequently to preserve rights in
their inventions. This may favor larger competitors that have the resources to file more patent applications.
Monitoring unauthorized use
of the content on our websites and mobile applications, and our other intellectual property and technology, is difficult and costly. Our efforts to protect our proprietary rights and intellectual property may not have been and may not be adequate to
prevent their misappropriation or misuse. Third parties from time to time copy content or other intellectual property or technology from our solutions without authorization and seek to use it for their own benefit. We generally seek to address such
unauthorized copying or use, but we have not always been successful in stopping all unauthorized use of our content or other
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intellectual property or technology, and may not be successful in doing so in the future. Further, we may not have been and may not be able to detect unauthorized use of our technology or
intellectual property, or to take appropriate steps to enforce our intellectual property rights. Our competitors may also independently develop similar technology. Effective patent, trademark, copyright and trade secret protection may not be
available to us in every country in which our solutions or technology are hosted or available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of
intellectual property rights may be inadequate. Further, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. The laws in the U.S. and elsewhere change rapidly, and any
future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property rights could result in competitors offering solutions that incorporate our most technologically advanced features,
which could reduce demand for our solutions.
We may find it necessary or appropriate to initiate claims or litigation to enforce our
intellectual property rights, protect our trade secrets or determine the validity and scope of intellectual property rights claimed by others. Litigation is inherently uncertain and any litigation of this nature, regardless of outcome or merit,
could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property, our business and
operating results may be harmed.
We may be unable to continue the use of our domain names, or prevent third parties from acquiring and using domain
names that infringe on, are similar to, or otherwise decrease the value of our brands, trademarks or service marks.
We have
registered domain names for our websites that we use in our business. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration, or any other cause, we may be forced to market our
solutions under a new domain name, which could cause us substantial harm, or to incur significant expense in order to purchase rights to the domain name in question. In addition, our competitors and others could attempt to capitalize on our brand
recognition by using domain names similar to ours. Domain names similar to ours have been registered in the U.S. and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or
otherwise decrease the value of our brands, trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of managements attention.
ICANN (the Internet Corporation for Assigned Names and Numbers), the international authority over top-level domain names, recently increased
the number of generic top-level domains, or TLDs. This may allow companies or individuals to create new web addresses that appear to the right of the dot in a web address, beyond such long-standing TLDs as .com,
.org and .gov. ICANN may also add additional TLDs in the future. As a result, we may be unable to maintain exclusive rights to all potentially relevant or desirable domain names in the United States or in other countries in
which we operate, which may harm our business. Furthermore, attempts may be made by third parties to register our trademarks as new TLDs or as domain names within new TLDs, and we may be required to enforce our rights against such registration
attempts, which could result in significant expense and the diversion of managements attention.
The consumer traffic to our websites and
mobile applications may decline and our business may suffer if other companies copy information from our platform and publish or aggregate it with other information for their own benefit.
From time to time, other companies copy information or content from our platform, through website scraping, robots or other means, and publish
or aggregate it with other information for their own benefit. When third parties copy, publish or aggregate content from our platform, it makes them more competitive, and decreases the likelihood that consumers will visit our websites or use our
mobile applications to search and discover the information they seek, which could negatively affect our business, results of operations and financial condition. We may not be able to detect such third-party conduct in a timely manner or at all and,
even if we are able to identify these situations, we may not be able to prevent them and have not always been able to prevent them in the past. In some cases, particularly in the case of websites operating outside of the U.S., our available remedies
may be inadequate to protect us against such practices. In addition, we may be required to expend significant financial or other resources to successfully enforce our rights.
We rely on information technology to operate our business and maintain competitiveness, and any failure to adapt to technological developments or
industry trends could harm our business.
We depend on the use of information technologies and systems. As our operations grow in
size and scope, we must continuously improve and upgrade our systems and infrastructure while maintaining or improving the reliability and integrity of our infrastructure. Our future success also depends on our ability to adapt our systems and
infrastructure to meet rapidly evolving consumer trends and demands while continuing to improve the performance, features and reliability of our solutions in response to competitive services and product offerings. The emergence of alternative
platforms such as smartphones and tablets and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in technology. New developments in other areas, such as
cloud computing, could also make it easier for competition to enter our markets due to lower up-front technology costs. In addition, we may not be able to maintain our existing systems or replace or introduce new technologies and systems as quickly
as we would like or in a cost-effective manner.
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Some of our solutions contain open source software, which may pose particular risks to our proprietary
software and solutions.
We use open source software in our solutions and will use open source software in the future. Some
licenses governing our use of open source software contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative
works under the terms of a particular open source license or other license granting third parties certain rights of further use. By the terms of certain open source licenses, we could be required to release the source code of our proprietary
software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in certain manners. Although we monitor our use of open source software, we cannot assure you that
all open source software is reviewed prior to use in our solutions, that our developers have not incorporated open source software into our solutions, or that they will not do so in the future. Additionally, the terms of many open source licenses to
which we are subject have not been interpreted by U.S. or foreign courts. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our
solutions. In addition, the terms of open source software licenses may require us to provide software that we develop using such open source software to others on unfavorable license terms. As a result of our current or future use of open source
software, we may face claims or litigation, be required to release our proprietary source code, pay damages for breach of contract, re-engineer our solutions, discontinue making our solutions available in the event re-engineering cannot be
accomplished on a timely basis or take other remedial action. Any such re-engineering or other remedial efforts could require significant additional research and development resources, and we may not be able to successfully complete any such
re-engineering or other remedial efforts. Further, in addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do
not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business, financial condition and operating results.
We are subject to international business uncertainties that could adversely affect our operations and operating results.
Our net revenues from operations outside the U.S. comprised 22.5% of our net revenues for the six months ended June 30, 2014, and we
expect this percentage to increase in the future. Currently, we have operations in the U.K., France, the Netherlands and Germany. We intend to expand our existing operations in these countries as well as establish a presence in additional countries
to grow our international sales. Operating in foreign countries requires significant resources and management attention, and we have limited experience entering new geographic markets. In addition, the varying commercial and Internet infrastructure
in other countries may make it difficult for us to replicate our business model. In many countries, we compete with local companies that have more experience in their respective markets than we do, and we may not benefit from first-to-market
advantages. To achieve widespread acceptance in new countries and markets, we must continue to tailor our solutions and business model to the unique circumstances of such countries and markets, which can be difficult and costly. Failure to adapt
practices and models effectively to each country into which we expand could slow our international growth. We cannot assure you that our international efforts will be successful. International sales and operations may be subject to risks such as:
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competition with local or foreign companies entering the same markets;
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the cost and resources required to localize our solutions, while maintaining retailer and consumer satisfaction such that our marketplace will continue to attract high quality retailers;
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difficulties in staffing and managing foreign operations due to distance, time zones, language and cultural differences;
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higher product return rates;
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burdens of complying with a wide variety of laws and regulations, including regulation of digital offer terms, Internet services, privacy and data protection, bulk emailing and anti-competition regulations, which may
limit or prevent us from offering of our solutions in some jurisdictions or limit our ability to enforce contractual obligations;
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adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;
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political and economic instability;
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terrorist activities and natural disasters;
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differing employment practices and laws and labor disruptions;
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technology compatibility;
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credit risk and higher levels of payment fraud;
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increased financial accounting and reporting burdens and complexities and difficulties in implementing and maintaining adequate internal controls;
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slower adoption of the Internet as an advertising, broadcast and commerce medium in certain of those markets as compared to the U.S.;
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lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;
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preference for local vendors; and
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different or lesser degrees of intellectual property protection.
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In addition, the U.S. has in
the past proposed, and is currently evaluating, changes to the corporate tax structure that would include taxation of offshore earnings of U.S. businesses. If this were to occur, our effective tax rates would likely increase. Further, we are subject
to U.S. and foreign legislation, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act. While we maintain high standards of ethical conduct, our policies, training and monitoring of compliance with applicable anti-corruption laws are at
a very early stage of development. If any of our employees or agents were to violate these laws in the conduct of our business, we could be subject to substantial penalties and our reputation could be impaired.
These factors could have an adverse effect on our net revenues from advertisers located outside the U.S. and, consequently, on our business
and operating results.
We may be unable to identify suitable acquisition candidates, effectively integrate newly acquired businesses, or achieve
expected operating results from acquisitions.
Part of our growth strategy is to increase our net revenues and improve our
operating results through the acquisition of similar or complementary businesses. There can be no assurance that suitable candidates for acquisitions will be identified or, if suitable candidates are identified, that acquisitions can be completed on
acceptable terms, if at all.
Since our inception, we have completed more than 10 acquisitions, and we may continue to make acquisitions
in the future. Our success will depend in part on our ability to identify, negotiate, and complete acquisitions, and integrate the acquired businesses and, if necessary, satisfactory debt or equity financing to fund those acquisitions. As is the
case with our current debt facility, if we finance an acquisition with debt financing, we will incur interest expense and may have to comply with financing covenants or secure the debt obligations with our assets. Mergers and acquisitions are
inherently risky, and any mergers and acquisitions we complete may not be successful. Any mergers and acquisitions we undertake in the future would involve numerous risks, any of which could have a material adverse effect on our business and the
market price of our common stock, including the following:
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use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions, which may limit our operational flexibility and other potential uses of our cash, including stock repurchases, dividend
payments and retirement of outstanding indebtedness;
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expected and unexpected costs incurred in identifying and pursuing acquisitions and performing due diligence on potential acquisition targets that may or may not be successful;
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failure of the acquired company to achieve anticipated consumer traffic or mobile application sessions, revenue, earnings or cash flows;
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our responsibility for the liabilities of the businesses we acquire, including the assumption of liabilities that were not disclosed to us or that exceed our estimates;
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difficulties in integrating and managing the combined operations, technologies and solutions;
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failure to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, including issues related to intellectual property, solution quality or architecture, regulatory compliance
practices, revenue recognition or other accounting practices or employee or customer issues;
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diversion of managements attention or other resources from our existing business;
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inability to maintain the key business relationships and the reputations of the businesses we acquire;
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difficulties in assigning or transferring technology or intellectual property licensed by acquired companies from third parties to us or our subsidiaries;
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uncertainty of entry into markets in which we have limited or no prior experience or in which competitors have stronger market positions;
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our dependence on unfamiliar retailers or performance marketing networks of the companies we acquire;
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insufficient incremental revenue to offset our increased expenses associated with acquisitions;
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our inability to maintain internal standards, controls, procedures and policies;
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challenges in integrating and auditing the financial statements of acquired companies that have not historically prepared financial statements in accordance with U.S. generally accepted accounting principles;
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impairment of goodwill or other intangible assets such as trademarks or other intellectual property arising from acquisitions;
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amortization of expenses related to acquired intangible assets and other adverse accounting consequences;
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potential loss of key employees from the companies we acquire; and
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dilution of our stockholders ownership interests if we finance all or a portion of the purchase price of any acquisition by issuing equity.
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Further, we rely heavily on the representations and warranties provided to us by the sellers of acquired companies and assets, including as
they relate to creation of, ownership of and rights in intellectual property, existence of open source code, existence of encumbrances and operating restrictions and compliance with laws and contractual requirements. If any of these representations
and warranties are inaccurate or breached, such inaccuracy or breach could result in costly litigation and assessment of liability for which there may not be adequate recourse against such sellers, in part due to contractual time limitations and
limitations of liability.
We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may
dilute your ownership of our Series 1 common stock.
We have an aggregate of 84,599,483 shares of Series 1 common stock
authorized but unissued and not reserved for issuance under our stock option plans or otherwise. We may issue all of these shares without any action or approval by our stockholders, subject to certain limitations of the NASDAQ Global Select Market.
We may require additional capital from equity or debt financing in the future in order to take advantage of strategic opportunities, or to support our existing business. We may not be able to secure timely additional financing on favorable terms, or
at all. The terms of any additional financing may place limits on our financial and operating flexibility, including our ability to issue or repurchase equity, develop new or enhanced existing products, complete acquisitions or otherwise take
advantage of business opportunities. If we raise additional funds or finance acquisitions through further issuances of equity, convertible debt securities or other securities convertible into equity, you and our other stockholders could suffer
significant dilution in your percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our Series 1 common stock. If we are unable to obtain adequate
financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
If our management team does not remain with us in the future, our business, operating results and financial condition could be adversely affected.
We have been successful in attracting a knowledgeable and talented management team. Our future success depends in large part on
our ability to attract and retain high-quality management and operating personnel. Our senior management teams in-depth knowledge of and deep relationships with the participants in our industry are extremely valuable to us. Our business also
requires skilled technical and marketing personnel, who are in high demand and are often subject to competing offers. Competition for qualified employees is intense in our industry, and the loss of even a few qualified employees, or an inability to
attract, retain and motivate additional highly skilled employees required for the planned expansion of our business, could harm our operating results and impair our ability to grow.
To attract and retain key personnel, we use various measures, including an equity incentive program and incentive bonuses for executive
officers and other employees. These measures may not be enough to attract and retain the personnel we require to operate our business effectively. We also have a number of employees who were granted stock options over the past few years that have an
exercise price per share that is significantly lower than the current fair market value. If we are successful as a public company, these employees may choose to exercise their options and sell the shares, recognizing a substantial gain. As a result,
it may be difficult for us to retain such employees.
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Our management team has limited experience managing a public company, and regulatory compliance may divert
its attention from the day-to-day management of our business.
Some of the individuals who now constitute our management team have
limited experience managing a publicly traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our continued transition to a
public company that will be subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert
their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.
Our
management team has a limited history of working together and may not be able to execute our business plan.
Our management team
has worked together for only a limited period of time and has a limited track record of executing our business plan as a team. In addition, we have recently filled a number of positions in our senior management and finance and accounting staff.
Accordingly, certain key personnel have only recently assumed the duties and responsibilities they are now performing, and it is difficult to predict whether our management team, individually and collectively, will be effective in operating our
business.
If we are unable to attract additional partner management and sales representatives, or if a significant number of our partner manager or
sales representatives leave us, our ability to increase our net revenues could be negatively impacted.
Our ability to expand our
business will depend, in part, on our ability to attract additional partner management and sales representatives. Competition for qualified partner managers and sales representatives can be intense, and we may be unable to hire additional team
members when we need them or at all. Any difficulties we experience in attracting additional partner managers or sales representatives could have a negative impact on our ability to expand our retailer base, increase net revenues and continue our
growth.
In addition, we must retain our current partner management and sales representatives and properly incentivize them to obtain new
retailer relationships. If a significant number of our partner managers and sales representatives were to leave us or join our competitors, our net revenues could be negatively impacted. In certain circumstances, we have entered into agreements with
our partner managers and sales representatives that contain non-compete provisions to mitigate this risk, but we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive and ineffective. A
significant increase in the turnover rate among our current partner managers or sales representatives could also increase our recruiting costs and decrease our operating efficiency, which could lead to a decline in our net revenues and
profitability.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute to our
business.
We believe that a critical component of our success has been our corporate culture, which we believe fosters
innovation, encourages teamwork, cultivates creativity and promotes focus on execution. We have invested and continue to invest substantial time, energy and resources in building a highly collaborative team that works together effectively in an
environment designed to promote openness, honesty, mutual respect and the pursuit of common goals. As we continue to develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of
our corporate culture and to attract competent personnel who are willing to embrace our culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain personnel, encourage
innovation and teamwork and effectively focus on and pursue our corporate objectives.
The intended tax benefits of our corporate structure and
intercompany arrangements depend on the application of the tax laws of various jurisdictions and on how we operate our business.
Our corporate structure and intercompany arrangements, including the manner in which we develop and use our intellectual property and the
transfer pricing of our intercompany transactions, are intended to reduce our worldwide effective tax rate. We completed a restructuring of our non-U.S. entities to streamline our European operations, effective January 1, 2014, and we may
implement other such structures and arrangements in the future. The application of the tax laws of various jurisdictions, including the U.S., to our international business activities is subject to interpretation and depends on our ability to operate
our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany
arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and harm our financial position and
results of operations. In order to effectively structure and execute our international tax strategy we will need to continue to hire, train and manage qualified personnel. If our new hires underperform, or if we are unsuccessful in hiring, training,
managing and integrating these new employees, our business may be harmed.
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Our corporate structure includes legal entities located in jurisdictions with income tax rates
lower than the U.S. statutory tax rate. Our intercompany arrangements allocate income to such entities in accordance with arms-length principles and commensurate with functions performed, risks assumed and ownership of valuable corporate
assets. We believe that income taxed in certain foreign jurisdictions at a lower rate relative to the U.S. statutory rate will have a beneficial impact on our worldwide effective tax rate.
Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower
statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations.
As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different
countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arms length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. In
addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In particular, there is uncertainty in relation to the U.S. tax legislation in terms of the future corporate tax
rate but also in terms of the U.S. tax consequences of income derived from intellectual property held overseas in low tax jurisdictions.
Our existing corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current
prevailing tax laws. However, the tax benefits which we intend to derive from our current and any future intercompany transactions could be undermined if we are unable to adapt the manner in which we operate our business and if tax laws change.
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies
could materially impact our financial condition and results of operations.
The current administration has made public statements
indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed new legislation. Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim
and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the U.S. are repatriated to the U.S., as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our
foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the U.S. Due to the expanding scale of our international business activities, any changes in the U.S. taxation of such activities may increase our
worldwide effective tax rate and harm our financial condition and results of operations.
We rely on performance marketing networks and retailers to
determine the amount payable to us accurately. If their reports are inaccurate or delayed, our operating results could be harmed and we could experience fluctuations in our performance.
Our performance marketing networks and retailers typically pay us on a monthly basis based upon sales generated from digital offers. We rely
on our performance marketing networks and retailers to report accurately and in a timely manner the amount of commission revenues earned by us. We calculate our net revenues, prepare our financial reports, projections and budgets and direct our
advertising, marketing and other operating efforts based on reports we receive from our performance marketing networks and retailers. It is difficult for us to determine independently whether our performance marketing networks or retailers are
reporting all revenue data due to us. We have occasionally experienced instances of incomplete or delayed reports from our performance marketing networks and retailers, and we generally do not have the contractual right to audit our performance
marketing networks or retailers. To the extent that our performance marketing networks or retailers fail to report accurately the amount of net revenues payable to us in a timely manner or at all, we will not recognize and collect net revenues to
which we are entitled, which could harm our operating results. If we are allowed to audit a performance marketing network or retailer and do so, or if we otherwise dispute the accuracy of a revenue report a performance marketing network or retailer
has delivered to us, our recognition of net revenues to which we may ultimately be entitled could be delayed. Conversely, if a performance marketing network or retailer delivers a report overstating the amount of net revenues earned by us in one
period and attempts to reverse the overpayment in a subsequent period, whether by seeking a refund from us or reducing a future payment due to us, our recognition of revenue could be overstated. Any such delay or overstatement in our revenue
recognition could harm our business and operating results.
We obtain the revenue reporting information from our performance marketing
networks using a variety of methods, including the use of file transfer protocol file feeds, various application programming interfaces provided by the performance marketing networks and manual downloads of data from the performance marketing
networks web portals. The use of any of these methods, in isolation, inherently subjects us to lower levels of internal control over revenue data, which could result in a misstatement of our net
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revenues. We have automated the process for collecting a substantial portion of the data necessary to record our net revenues. We currently augment this automated data collection process
with manual validation of data from certain of the performance marketing networks web portals to help minimize risk of error. However, we may elect not to continue to manually validate data in the future, and if so, there is a risk that
errors in the data obtained through automated means could go undetected for a period of time which could result in a misstatement of our net revenues.
If we are unable to comply with all covenants of our current and future debt arrangements, and if our lenders fail to waive any violation of those
covenants by us, we could be subject to substantial penalties, which would impair our ability to operate and adversely affect our operating results.
We currently have a term debt facility that provides us with cash, which we use to fund our operations and which requires us to comply with a
number of restrictive covenants. We may enter into other debt arrangements in the future, which may contain similar or additional restrictive covenants. We are currently subject to covenants related to minimum trailing twelve-month EBITDA levels, a
funded debt to EBITDA ratio, a fixed charge coverage ratio (each as more fully described in our amended and restated revolving credit and term loan agreement), and the defense of our intellectual and other property, among others. We may become
subject to additional covenants in connection with future debt arrangements. If we are unable to comply with one or more covenants applicable to us and our lenders are unwilling to waive our noncompliance, our lenders may have the right to terminate
their commitments to lend to us, cause all amounts outstanding to become due and payable immediately, sell certain of our assets which are collateral for our obligations and take other measures which may impair our operations. If funds under our
loan arrangements become unavailable or if we are forced unexpectedly to repay amounts outstanding under our loan arrangements, our assets and cash flow may be insufficient to make such repayments or may leave us with insufficient funds to continue
our operations as planned and would have a material adverse effect on our business.
We are subject to currency exchange risk in connection with our
international business operations.
Cash inflows and outflows in our international operations are typically denominated in
currencies other than the U.S. dollar, which is our functional currency for financial reporting purposes. For the six months ended June 30, 2014 and for 2013, approximately 22.5% and 20.6%, respectively, of our net revenues were denominated in
such foreign currencies. Our reliance on foreign currencies subjects our financial results to fluctuations in currency exchange rates and changes in the proportion of our net revenues and expenses attributable to each of our foreign locations. We
recognized a foreign exchange gain of $0.7 million in 2013 and a foreign exchange loss of $0.3 million in the six months ended June 30, 2014. In addition, we expect our exposure to fluctuations in foreign exchange rates to increase as we expand
our business in existing and new international markets. Although we did not engage in any hedging activities relating to foreign currency in the six months ended June 30, 2014, we may in the future enter into hedging arrangements in order to manage
foreign currency translation but such activity may not completely eliminate fluctuations in our operating results. Foreign currency exchange rate fluctuations could adversely impact our profitability.
We may be required to record a significant charge to earnings if our goodwill or amortizable intangible assets become impaired.
We are required under GAAP to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a
significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The events and circumstances we
consider include the business climate, legal factors, operating performance indicators and competition. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment
of our goodwill or amortizable intangible assets is determined. This could adversely impact our results of operations.
Risks Related to Ownership of
Our Common Stock
Our stock price may be volatile.
The trading price of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in
response to various factors, including the risk factors described in this section of the Quarterly Report on Form 10-Q, and other factors beyond our control. Factors affecting the trading price of our common stock include:
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variations in our operating results or the operating results of similar companies;
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announcements of technological innovations, new services or service enhancements and strategic alliances or agreements by us or by our competitors;
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periodic changes to search engine algorithms that lead to actual or perceived decreases in traffic to our websites;
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marketing and advertising initiatives by us or our competitors;
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the gain or loss of retailer relationships;
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threatened or actual litigation;
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major changes in our management;
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recruitment or departure of key personnel;
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changes in the estimates of our operating results or changes in recommendations by any securities analysts that follow our Series 1 common stock;
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market conditions in our industry, the industries of our customers and the economy as a whole;
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the overall performance of the equity markets;
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sales of shares of our Series 1 common stock by existing stockholders, including our directors and executive officers and their affiliates;
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volatility in our stock price, which may lead to higher stock-based compensation expense under applicable accounting standards;
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raising additional capital from any equity or debt financing in the future;
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adoption or modification of regulations, policies, procedures or programs applicable to our business; and
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the markets reaction to our reduced disclosure as a result of being an emerging growth company under the JOBS Act.
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In addition, the stock market in general and the market for e-commerce companies in particular, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may harm the market price of our Series 1 common stock regardless of our actual operating
performance. Each of these factors, among others, could adversely affect your investment in our Series 1 common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed
against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert managements attention.
Insiders have substantial control over us, and this control may limit our stockholders ability to influence corporate matters and delay or prevent
a third party from acquiring control over us.
As of June 30, 2014, our directors and executive officers and their affiliates beneficially
owned, in the aggregate, approximately 30.7% of our outstanding Series 1 common stock. This concentration of ownership may adversely affect the trading price for our Series 1 common stock because investors often perceive disadvantages in owning
stock in companies with concentrated ownership. In addition, these stockholders will be able to exercise influence over all matters requiring stockholder approval, including the election of directors and approval of corporate transactions, such as a
merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation or
other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other stockholders.
Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market
price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
As of June 30, 2014 we had 53,919,234 shares of common stock outstanding. Shares beneficially owned by our affiliates and employees are
subject to volume and other restrictions under Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act, various vesting agreements, our insider trading policy and any applicable 10b5-1 trading plan.
In addition, we have registered 12,896,037 shares of Series 1 common stock that we have issued and may issue under our equity plans (1,414,754
shares of which were issued and outstanding as of June 30, 2014), which includes 2,633,842 shares of Series 1 common stock that were added to our equity plans in January 2014 by virtue of those plans evergreen provisions. These shares can be
freely sold in the public market upon issuance, subject in some cases to volume and other restrictions under Rules 144 and 701 under the Securities Act, and various vesting agreements. In addition, some of our employees, including some of our
named executive officers, have entered into 10b5-1 trading plans regarding sales of shares of our Series 1 common stock. If any of these 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.
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As of June 30, 2014, holders of approximately 27.9% of our common stock were entitled to
rights with respect to the registration of these shares under the Securities Act. If we register their shares of common stock, these stockholders could sell those shares in the public market without being subject to the volume and other restrictions
of Rule 144 and Rule 701.
We have incurred and will continue to incur significant increased expenses and administrative burdens as a
public company, which could have a material adverse effect on our operations and financial results.
We face increased legal,
accounting, administrative and other costs and expenses as a public company that we did not incur as a private company, and greater expenditures may be necessary in the future with the advent of new laws, regulations and stock exchange listing
requirements pertaining to public companies. These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives. The Sarbanes-Oxley Act, including the
requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Public Company Accounting Oversight Board and the NASDAQ Global Select Market, impose additional reporting and other obligations on public
companies. Compliance with public company requirements has increased our costs and made some activities more time-consuming. For example, we have created new board committees and adopted new internal controls and disclosure controls and procedures.
In addition, we will have incurred and will continue to incur additional expenses associated with our SEC reporting requirements. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our auditors
identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or
investor perceptions of us. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase our costs.
Since we are currently an emerging growth company as defined in the JOBS Act, we have been able to take advantage of certain exemptions from
various requirements that are applicable to public companies that are not emerging growth companies, including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. We will no longer be able to take advantage of these exemptions beginning on December 31, 2014, when we will lose our status as an emerging growth company. Our inability to continue to take advantage
of these exemptions may place additional strain on our resources and divert our managements attention from other business concerns, which could harm our business and operating results.
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If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely
financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors views of us.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial
statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with GAAP. We are in the process of documenting, reviewing and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act, which
requires annual management assessment of the effectiveness of our internal control over financial reporting. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be
impaired, which could harm our operating results, harm our ability to operate our business, and reduce the trading price of our stock.
As an
emerging growth company under the JOBS Act, we have relied on exemptions from certain disclosure requirements, which could make our common stock less attractive to investors.
As an emerging growth company under the JOBS Act, we are permitted to rely, and have relied, on exemptions from certain disclosure
requirements. In particular, we did not include all of the executive compensation related information that would have been required in our proxy statement filed March 14, 2014 if we were not an emerging growth company. In addition, as an
emerging growth company, we have not been required to:
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have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding a supplement to the auditors report providing additional information about the audit and the financial
statements (auditor discussion and analysis); and
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submit certain executive compensation matters to shareholder advisory votes, such as say on pay and say on frequency.
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We will cease to be an emerging growth company on December 31, 2014, the day on which we will be deemed to be a large accelerated
filer under the Exchange Act because the aggregate worldwide market value of our common securities held by non affiliates as of June 30, 2014 exceeded $700 million. Nonetheless, we cannot predict whether investors will find our common
stock less attractive to the extent we have relied on the exemptions available to emerging growth companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our
stock price may be more volatile.
If securities or industry analysts do not continue to publish research or publish unfavorable or misleading
research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in
part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishes unfavorable or misleading research about our business, our stock
price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the market for our stock and demand for our stock could decrease, which could cause
our stock price or trading volume to decline.
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Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a
change in control of our company and may affect the trading price of our Series 1 common stock.
We are a Delaware corporation and
the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of
three years after the stockholder becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage, delay or prevent a change in
our management or control over us that stockholders may consider favorable. Our certificate of incorporation and bylaws:
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authorize the issuance of blank check preferred stock that could be issued by our board of directors to defend against a takeover attempt;
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establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual
meeting following their election;
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require that directors only be removed from office for cause and only upon a supermajority stockholder vote;
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provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;
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prevent stockholders from calling special meetings; and
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prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.
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We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if
the price of our Series 1 common stock appreciates.
We currently do not plan to declare dividends on shares of our common stock
in the foreseeable future. Any payment of future dividends will be at the discretion of our board of directors, subject to compliance with certain covenants contained in our credit facility, which limit our ability to pay dividends, and will depend
on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. Consequently, your only opportunity to achieve a return on your investment in our
company will be if the market price of our Series 1 common stock appreciates and you sell your shares at a profit.