Our operations and financial results are subject to various risks and
uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows and the trading price of our Class A common stock. You should carefully consider the risks and
uncertainties described below before making an investment decision. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations.
We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described in our
Annual Report on Form 10-K for the year ended December 31, 2012.
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Risks Related to Our Business and Industry
*We have a short operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we
will not be successful.
We have a short operating history in an evolving industry that may not develop as expected, if at all.
This short operating history makes it difficult to assess our future prospects. You should consider our business and prospects in light of the risks and difficulties we may encounter in this rapidly evolving industry. These risks and difficulties
include our ability to, among other things:
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increase the number of users of our website and mobile app and the number of reviews and other content on our platform;
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increase the revenue from advertisers on our website and mobile app;
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continue to earn and preserve a reputation for providing meaningful and reliable reviews of local businesses;
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effectively monetize our mobile products as usage continues to migrate toward mobile devices;
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manage, measure and demonstrate the effectiveness of our advertising solutions and attract and retain new advertising clients, many of which may only have limited or no online advertising experience;
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successfully compete with existing and future providers of other forms of offline and online advertising;
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successfully compete with other companies that are currently in, or may in the future enter, the business of providing information regarding local businesses;
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successfully expand our business in new and existing markets, both domestic and international;
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successfully develop and deploy new features and products;
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effectively integrate businesses we may acquire, including Qype and SeatMe;
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avoid interruptions or disruptions in our service or slower than expected load times;
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develop a scalable, high-performance technology infrastructure that can efficiently and reliably handle increased usage globally, as well as the deployment of new features and products;
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hire, integrate and retain talented sales and other personnel;
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effectively manage rapid growth in our sales force, personnel and operations; and
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effectively partner with other companies.
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If the demand for information regarding local
businesses does not develop as we expect, or if we fail to address the needs of this demand, our business will be harmed. We may not be able to successfully address these risks and difficulties or others, including those described elsewhere in these
risk factors. Failure to address these risks and difficulties adequately could harm our business and cause our operating results to suffer.
*We
have incurred significant operating losses in the past, and we may not be able to generate sufficient revenue to achieve or maintain profitability, particularly given our significant ongoing sales and marketing expenses. Our recent growth rate will
likely not be sustainable, and a failure to maintain an adequate growth rate will adversely affect our results of operations and business.
Since our inception, we have incurred significant operating losses, and, as of September 30, 2013, we had an accumulated deficit of
approximately $68.4 million. Although our revenues have grown rapidly in the last several years, increasing from $12.1 million in 2008 to $137.6 million in 2012, we expect that our revenue growth rate will decline in the future as a result of a
variety of factors, including the maturation of our business and the gradual decline in the number of major geographic markets, especially within the United States, to which we have not already expanded, and you should not rely on the revenue growth
of any prior quarterly or annual period as an indication of our future performance. We also expect our costs to increase in future periods as we continue to expend substantial financial resources on:
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product and feature development;
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our technology infrastructure;
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domestic and international expansion efforts;
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strategic opportunities, including commercial relationships and acquisitions; and
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general administration, including legal and accounting expenses related to being a public company.
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These investments may not result in increased revenue or growth in our business. If we are unable to maintain adequate revenue growth and to
manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.
*We rely
on traffic to our website from search engines like Google, Bing and Yahoo!, some of which offer products and services that compete directly with our solutions. If information from and links to our website are not displayed as prominently on search
engine result pages as those from competing products and services, traffic to our website could decline and our business would be adversely affected.
Our success depends in part on our ability to attract users through unpaid Internet search results on search engines like Google, Bing and
Yahoo!. The number of users we attract from search engines to our website (including our mobile website) is due in large part to how and where information from and links to our website are displayed on search engine result pages. The display,
including rankings, of unpaid search results can be affected by a number of factors, many of which are not in our direct control, and they may change frequently. For example, a search engine may change its ranking algorithms, methodologies or design
layouts. As a result, links to our website may not be prominent enough to drive traffic to our website, and we may not know how or otherwise be in a position to influence the results. In some instances, search engine companies may change their
displays or rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. Although traffic to our mobile app is less reliant on search results than traffic to our website, growth
in mobile device usage may not decrease our overall reliance on search results if mobile users use our mobile website at the expense of our mobile app. In fact, growth in mobile device usage may exacerbate the risks associated with how and where our
website is displayed in search results because mobile device screens are smaller than desktop computer screens and therefore display fewer search results. Our website has experienced fluctuations in search result rankings in the past, and we
anticipate fluctuations in the future. Any reduction in the number of users directed to our website could adversely impact our business and results of operations.
Google in particular is the most significant source of traffic to our website, accounting for more than half of the visits to our website from
Internet searches during the three and nine months ended September 30, 2013. Our success depends on our ability to maintain a prominent presence in search results for queries regarding local businesses on Google. Google has removed links to our
website from portions of its web search product and has promoted its own competing products, including Googles local products, in its search results. Given the large volume of traffic to our website and the importance of the placement and
display of results of a users search, similar actions in the future could have a substantial negative effect on our business and results of operations.
If we fail to generate and maintain sufficient high quality content from our users, we will be unable to provide consumers with the information they are
looking for, which could negatively impact our traffic and revenue.
Our success depends on our ability to provide consumers with
the information they seek, which in turn depends on the quantity and quality of the content provided by our users. For example, we may be unable to provide consumers with the information they seek if our users do not contribute content that is
helpful and reliable, or if they remove content they previously submitted. For example, our ability to provide high quality content may be harmed as consumers increasingly contribute content through our mobile website and mobile app because desktop
contributions tend to be longer than content contributed through mobile devices. Similarly, we may be unable to provide consumers with the information they seek if our users are unwilling to contribute content because of concerns that they may be
harassed or sued by the businesses they review, instances of which have occurred in the past and may occur again in the future. In addition, we may not be able to provide users the information they seek if the information on our platform is not
up-to-date. We do not phase out or remove dated reviews, and consumers may view older reviews as less relevant, helpful or reliable. If our platform does not provide current information about local businesses or users perceive reviews on our
platform as less relevant, our brand and our business could be harmed.
If we are unable to provide consumers with the information they
seek, or if they can find equivalent content on other services, they may stop or reduce their use of our platform, and traffic to our website and on our mobile app will decline. If our user traffic declines, our advertisers may stop or reduce the
amount of advertising on our platform and our business could be harmed.
*Our business may be harmed if users view our platform as primarily limited
to reviews of restaurants and shopping experiences.
Our user traffic could be adversely affected if consumers perceive the utility
of our platform to be limited to finding businesses in the restaurant and shopping categories, which together accounted for approximately 43% of the businesses that have been reviewed on
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our platform and approximately 59% of our cumulative reviews through September 30, 2013. We believe that this concentration of reviews is primarily due to the frequency with which
individuals visit specific businesses or engage in certain activities versus others. For example, an individual may eat at a restaurant three times in one week or go shopping once a week, but the same individual is unlikely to visit a mechanic, get
a haircut or use a home or local service with the same frequency. However, if the high concentration of reviews in the restaurant and shopping categories generates a perception that our platform is primarily limited to these categories, traffic may
decline and advertising customers may be less likely to perceive value from using our services, which could harm our business.
If our technology
filters helpful content or fails to filter unhelpful content, consumers and businesses alike may stop or reduce their use of our platform and products, and our business could suffer.
While we have designed our technology to filter content that we believe may be offensive, biased, unreliable or otherwise unhelpful, we cannot
guarantee that our efforts will be effective or adequate. In addition, some consumers and businesses have expressed concern that our technology inappropriately filters legitimate reviews, which may cause them to stop or reduce their use of our
platform or our advertising solutions. If the performance of our filter proves inadequate or ineffective, our reputation and brand may be harmed, users may stop using our products and our business and results of operations could be adversely
affected.
Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or
expand our base of users and advertisers, or our ability to increase the frequency with which they use our solutions.
We have
developed a strong brand that we believe has contributed significantly to the success of our business. Maintaining, protecting and enhancing the Yelp brand is critical to expanding our base of users and advertisers and increasing the
frequency with which they use our solutions, and will depend largely on our ability to maintain consumer trust in our solutions and in the quality and integrity of the user content and other information found on our website and mobile app, which we
may not do successfully. If we do not successfully maintain a strong brand, our business could be harmed.
For example, consumers may
believe that the reviews, photos and other content contributed by our Community Managers or other employees are influenced by our advertising relationships or are otherwise biased. Although we take steps to prevent this from occurring by, for
example, displaying an ambassador badge on the account profile pages for each of our Community Managers identifying them as Yelp employees and explaining their role on our platform, the designation does not appear on the page for each
review contributed by the Community Manager and we may not be successful in our efforts to maintain consumer trust. As a result, our brand and our business could be harmed.
Our trademarks are an important element of our brand. We have faced in the past, and may face in the future, oppositions from third parties to
our applications to register key trademarks in foreign jurisdictions in which we expect to expand our presence. If we are unsuccessful in defending against these oppositions, our trademark applications may be denied. Whether or not our trademark
registration applications are denied, third parties may claim that our trademarks infringe their rights. As a result, we could be forced to pay significant settlement costs or cease the use of these trademarks and associated elements of our brand in
those or other jurisdictions. Doing so could harm our brand or brand recognition and adversely affect our business, financial condition and results of operations.
*Negative publicity could adversely affect our reputation and brand.
Negative publicity about our company, including our technology, sales practices, personnel, customer service or litigation or political
activities, could diminish confidence in and the use of our products. The media has previously reported allegations that we manipulate our reviews, rankings and ratings in favor of our advertisers and against non-advertisers. These allegations,
though untrue, could adversely affect our reputation and brand, require significant management time and attention, and subject us to inquiries or investigations. In order to demonstrate that our filtering process applies in a nondiscriminatory
manner to both advertisers and non-advertisers, we have made all filtered reviews accessible on our platform. We have also allowed businesses to comment publicly on negative reviews so that they can provide their response. Nevertheless, our
reputation and brand, the traffic to our website and mobile app and our business may suffer if negative publicity about our company persists or if users otherwise perceive that content on our website and mobile app is manipulated or biased. In
addition, our website and mobile app serve as a platform for expression by our users, and third parties or the public at large may attribute the political or other sentiments expressed by users on our platform to us, which could harm our reputation.
*If we fail to maintain and expand our base of advertisers, our revenue and our business will be harmed.
For the three and nine months ended September 30, 2013, substantially all of our revenue was generated by the sale of advertising
products. We have incurred significant costs to attract current and future advertisers and expect to incur significant additional costs for the foreseeable future. Our ability to grow our business depends on our ability to maintain and expand our
advertiser base. To do so,
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we must convince existing and prospective advertisers alike that our advertising products offer a material benefit and can generate a competitive return relative to other alternatives. Many
prospective advertisers, such as those in new markets, may not be familiar with our products or view them as unproven. Many of these businesses are more accustomed to using more traditional methods of advertising, such as newspapers or print yellow
pages directories. If we do not deliver ads in an effective manner, or we do not provide accurate analytics and measurement solutions that demonstrate the value of our ads, advertisers may choose not to advertise with us.
Our advertisers do not typically have long-term obligations to purchase our products, and their decisions to renew depend on a number of
factors, including the degree of satisfaction with our products and their ability to continue their operations and spending levels. We rely heavily on advertising spend by small and medium-sized local businesses, which have historically experienced
high failure rates and often have limited advertising budgets. As a result, we may experience attrition in our advertisers in the ordinary course of business resulting from several factors, including losses to competitors, declining advertising
budgets, closures and bankruptcies.
We may face greater challenges as we continue to expand our advertiser base in businesses outside the
restaurant and shopping categories, which together accounted for approximately 43% of the businesses that have been reviewed on our platform and approximately 59% of our cumulative reviews through September 30, 2013, especially if these
businesses believe that consumers perceive the utility of our platform to be limited to finding businesses in the restaurant and shopping categories. The ratings and reviews that businesses receive from our users may also affect advertising
decisions by current and prospective advertisers. For instance, favorable ratings and reviews, on the one hand, could be perceived as obviating the need to advertise, and unfavorable ratings and reviews, on the other, could discourage businesses
from advertising to an audience they perceive as hostile or cause them to form a negative opinion of our products and user base, which could discourage them from doing business with us.
We must continually add new advertisers both to replace advertisers who choose not to renew their advertising or who go out of business, or
otherwise fail to fulfill their advertising contracts with us, to grow our business. If our advertisers increase their rates of non-renewal or if we experience significant advertiser attrition or contract breach, or if we are unable to attract new
advertisers in numbers greater than the number of advertisers that we lose, our client base will decrease and our business, financial condition and results of operations would be harmed.
*If we fail to expand effectively into new markets, both domestically and abroad, our revenue and our business will be harmed.
We intend to expand our operations into new markets, both domestically and abroad. We may incur losses or otherwise fail to enter new markets
successfully. Our expansion into new markets places us in competitive environments with which we are unfamiliar and involves various risks, including the need to invest significant resources and the possibility that returns on such investments will
not be achieved for several years, or at all. In attempting to establish a presence in new markets, we expect, as we have in the past, to incur significant expenses and face various other challenges, such as expanding our sales force and community
management personnel to reach those new markets and encountering different and potentially lower levels of user engagement in some or all of these markets. Our current and any future expansion plans will require significant resources and management
attention. Furthermore, we have already entered many of the largest markets in the United States and further expansion in smaller markets may not yield similar results or sustain our growth.
*Our international operations involve additional risks, and our exposure to these risks will increase as we expand internationally.
We have started to expand our operations internationally. We expect to expand our international operations significantly by accessing new
markets abroad and expanding our offerings in new languages. Our platform is now available in English and several other languages. However, we may have difficulty modifying our technology and content for use in non-English-speaking markets or
fostering new communities in non-English-speaking markets. We acquired Qype in October 2012 to accelerate the expansion of our international footprint in Europe, but can make no assurance that we will be successful in integrating Qype with our
businesses or in taking advantage of Qypes presence in international markets. Our ability to manage our business and conduct our operations internationally requires considerable management attention and resources, and is subject to the
particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. Furthermore, in most
international markets, we would not be the first entrant, and our competitors may be better positioned than we are to succeed. Expanding internationally may subject us to risks that we have either not faced before or increase our exposure to risks
that we currently face, including risks associated with:
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recruiting and retaining qualified, multi-lingual employees, including sales personnel;
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integrating businesses we may acquire internationally, including Qype;
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increased competition from local websites and guides and potential preferences by local populations for local providers;
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compliance with applicable foreign laws and regulations, including different privacy, censorship and liability standards and regulations and different intellectual property laws;
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providing solutions in different languages for different cultures, which may require that we modify our solutions and features to ensure that they are culturally relevant in different countries;
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our ability to achieve prominent display of our content in unpaid search results, which may be more difficult in newer markets where we may have less content and more competitors than in established markets;
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the enforceability of our intellectual property rights;
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credit risk and higher levels of payment fraud;
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compliance with anti-bribery laws, including but not limited to compliance with the Foreign Corrupt Practices Act and the U.K. Bribery Act;
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currency exchange rate fluctuations;
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foreign exchange controls that might prevent us from repatriating cash earned outside the United States;
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political and economic instability in some countries;
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double taxation of our international earnings and potentially adverse tax consequences due to changes in the tax laws of the United States or the foreign jurisdictions in which we operate; and
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higher costs of doing business internationally.
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Many people use smartphones and other mobile devices to
access information about local businesses. We have limited experience with mobile advertising and have prioritized the quality of user experience with our mobile products over short-term monetization. As a result, growth in use of our mobile app and
mobile website, particularly if it substitutes for use of our website on personal computers, may adversely affect our results of operations and business.
The number of people who access information about local businesses through mobile devices, including smartphones and handheld tablets or
computers, has increased dramatically in the past few years and is expected to continue to increase. Although we currently deliver advertising on our mobile app and mobile website, we have limited experience with mobile advertising and have
prioritized the quality of user experience with our mobile products over short-term monetization. With our ability to effectively monetize our mobile products unproven, we may not be able to generate meaningful revenue from our mobile products
despite the expected growth in mobile usage. In addition, if consumers use our mobile app and mobile website as substitutes for, rather than in addition to, use of our website on personal computers and our mobile solutions prove ineffective, our
advertisers may stop or reduce their advertising with us. Similarly, we may be unable to attract new advertisers if our mobile advertising solutions are not compelling. If our advertising solutions are not effective or we fail to continue to
innovate and introduce enhanced mobile solutions, if our solutions alienate our user base, or if our solutions are not widely adopted or are insufficiently profitable, our business may suffer.
Additionally, as new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing
products for these alternative devices and platforms, and we may need to devote significant resources to the creation, support and maintenance of such products. We are dependent on the interoperability of our mobile products with popular mobile
operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade their functionality could adversely affect mobile usage. If we experience difficulties in the future in integrating our mobile app into
mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile application download stores, such as those of Google, with whose local products we compete, or Apple, Inc., our user growth and user
engagement could be harmed. In addition, if our applications receive unfavorable treatment compared to the promotion and placement of competing applications, such as the order of our products in the Apple AppStore, or if we face increased costs to
distribute our mobile app, our future growth and our results of operations could suffer. Further, in the event that it becomes more difficult for our users to access and use our mobile app, or if users choose to use mobile products that do not offer
access to our mobile app, we may be unable to decrease our reliance on traffic from Google and other search engines.
*We expect to face increased
competition in the market.
The market for information regarding local businesses and advertising is intensely competitive and
rapidly changing. With the emergence of new technologies and market entrants, competition is likely to intensify in the future. Our competitors include, among others, offline media companies and service providers; newspaper, television and other
media companies; Internet search engines, such as Google, Bing and Yahoo!; and various other online service providers and review websites, including regional review websites that may have strong positions in particular countries.
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Our competitors may enjoy competitive advantages, such as greater name recognition, longer
operating histories, substantially greater market share, large existing user bases and substantially greater financial, technical and other resources. These companies may use these advantages to offer products similar to ours at a lower price,
develop different products to compete with our current solutions and respond more quickly and effectively than we do to new or changing opportunities, technologies, standards or client requirements. In particular, major Internet companies, such as
Google, Facebook, Yahoo! and Microsoft may be more successful than us in developing and marketing online advertising offerings directly to local businesses and many of our advertisers and potential advertisers may choose to purchase online
advertising services from these competitors and may reduce their purchases of our products. In addition, many of our current and potential competitors have established marketing relationships with and access to larger client bases. Certain
competitors could also use strong or dominant positions in one or more markets to gain competitive advantage against us in areas where we operate, including by: integrating review platforms or features into products they control, such as search
engines, web browsers or mobile device operating systems; changing their unpaid search result rankings to promote their products; or refusing to enter into or renew licenses on which we depend.
As the market for local online advertising increases, new competitors, business models and solutions are likely to emerge. We also compete
with these companies for the attention of contributors and consumers, and may experience decreases in both if our competitors offer more compelling environments. For all of these reasons, we may be unable to maintain or grow the number of people who
use our website and mobile app and the number of businesses that use our advertising solutions and we may face pressure to reduce the price of our advertising solutions, in which case our business, results of operations and financial condition will
be harmed.
The traffic to our website and mobile application 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 from our platform, through website scraping, robots or other means, and publish or aggregate it with other information for their own benefit. For example, in parts of 2010 and 2011, Google incorporated content from our website into its
own local product without our permission. Googles users, as a result, may not have visited our website because they found the information they sought on Google. While we do not believe that Google is still incorporating our content within its
local products, we have no assurance that Google or other companies will not copy, publish or aggregate content from our platform in the future.
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 website or use our mobile app to find 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 and, even if we could, we may not be able to prevent it. In some cases, particularly in the case of websites operating outside of the United States, 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.
*The impact of worldwide economic
conditions, including the resulting effect on advertising spending by local businesses, may adversely affect our business, operating results and financial condition.
Worldwide economic conditions, such as the sovereign debt and federal government funding issues in the United States, create uncertainty and
unpredictability and add risk to our future outlook. Our performance is subject to, among other things, the impact of worldwide economic conditions on levels of advertising spend by small and medium-sized businesses, which may be disproportionately
affected by economic downturns. In the event of an economic slowdown or deterioration of worldwide economic conditions, our existing and potential advertising clients may no longer consider investment in our advertising solutions a necessity, or may
elect to reduce advertising budgets. Historically, economic downturns have resulted in overall reductions in advertising spending. In particular, web-based advertising solutions may be viewed by some of our existing and potential advertising clients
as a lower priority and could cause advertisers to reduce the amounts they spend on advertising, terminate their use of our solutions or default on their payment obligations to us. In addition, economic conditions may adversely impact levels of
consumer spending, which could adversely impact the numbers of consumers visiting our website and mobile app. Consumer purchases of discretionary items generally decline during recessionary periods and other periods in which disposable income is
adversely affected. If spending at many of the local businesses reviewed on our platform declines, businesses may be less likely to use our advertising products, which could have a material adverse effect on our financial condition and results of
operations.
*We face potential liability and expense for legal claims based on the content on our platform.
We face potential liability and expense for legal claims relating to the information that we publish on our website and mobile app, including
claims for defamation, libel, negligence and copyright or trademark infringement, among others. For example, businesses in the past have claimed, and may in the future claim, that we are responsible for defamatory reviews posted by our users. We
expect claims like these to continue, and potentially increase in proportion to the amount of content on our platform. This risk is enhanced in certain jurisdictions outside the United States where our protection from liability for third-party
actions may be unclear and where we may be less protected under local laws than we are in the United States.
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These claims could divert management time and attention away from our business and result in
significant costs to investigate and defend, regardless of the merits of the claims. In some instances, we may elect or be compelled to remove content or may be forced to pay substantial damages if we are unsuccessful in our efforts to defend
against these claims. If we elect or are compelled to remove valuable content from our website or mobile app, our platform may become less useful to consumers and our traffic may decline, which could have a negative impact on our business and
financial performance.
*We process, store and use personal information and other data, which subjects us to governmental regulation and other legal
obligations related to privacy. Our actual or perceived failure to comply with such obligations could harm our business.
We
receive, store and process personal information and other user data, including credit card information for certain users. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing,
disclosure and protection of personal information and other user data, the scope of which are changing, subject to differing interpretations and may be inconsistent between countries or conflict with other rules. For example, the Federal Trade
Commission (FTC) currently expects companies like Yelp to comply with guidelines issued under the Federal Trade Commission Act that govern the collection, use and storage of consumer information, establishing principles relating to
notice, consent, access and data integrity and security. Our practices are designed to comply with these guidelines as described in our published privacy policy. For example, we disclose that we collect a range of information about our users, such
as their names, email addresses, search histories and activity on our platform. We also use and store such information primarily to personalize the experience on our platform, provide customer support and display relevant advertising. While we do
not sell or share personally identifiable information with third parties for direct marketing purposes, we do have relationships with third parties that may allow them access to user information for other purposes. For example, when we outsource
functions such as technical and customer support, tracking and reporting, quality assurance and payment processing to other companies, we make user information available to those companies to the extent necessary for them to provide the outsourced
services. We believe our policies and practices comply with the FTC privacy guidelines and other applicable laws and regulations. However, if our belief proves incorrect, if these guidelines, laws or regulations or their interpretation change or new
legislation or regulations are enacted, or if the third parties with whom we share user information fail to comply with such guidelines, laws, regulations or their contractual obligations to us, we may be compelled to provide additional disclosures
to our users, obtain additional consents from our users before collecting or using their information or implement new safeguards to help our users manage our use of their information, among other changes. For example, the FTC recently revised its
Childrens Online Privacy Protection Act rule, which regulates the way children use and access the Internet, and updated its guidance on distinguishing paid search results and other types of advertising from unpaid search results. As a result,
we may be required to make changes or implement additional safeguards.
We also generally comply with industry standards and are subject
to the terms of our privacy policies and privacy-related obligations to third parties (including, in certain instances, voluntary third-party certification bodies such as TRUSTe). It is possible that these obligations 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.
Any failure or
perceived failure by us to comply with our privacy policies, our privacy-related obligations to users or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or
transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation or negative publicity and could cause our users and advertisers to lose trust in us, which could have an adverse effect on
our business. Additionally, if third parties with whom we work, such as advertisers, vendors or developers, violate applicable laws or our policies, such violations may also put our users information at risk and could have an adverse effect on
our business.
*Our business could suffer if the jurisdictions in which we operate change the way in which they regulate the Internet, including
regulations relating to user-generated content and privacy.
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 and that requires changes to these practices or the design of our
platform, products or features. For example, if legislation is passed that limits the immunities afforded to websites that publish user-generated content, we may be compelled to remove content from our platform that we would otherwise publish,
restrict the types of businesses that our users can review or further verify the identity of our users, among other changes. Similarly, legislation could be passed that limits our ability to use or store information about our users.
Practices regarding the collection, use, storage, display, processing, transmission and security of personal information by companies offering
online services have recently come under increased public scrutiny. As a result, the regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. The U.S. government, including the
White House, the FTC and the Department of Commerce, and many state governments are reviewing the need for greater regulation of
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the collection of information concerning consumer behavior with respect to online services, including regulation aimed at restricting certain targeted advertising practices and the collection and
use of data from mobile services. The FTC in particular has approved consent decrees resolving complaints and their resulting investigations into the privacy and security practices of a number of social media companies. Similar investigations,
decrees or actions may adversely impact us directly. The FTC and certain members of Congress are also seeking legislation to impose Do-Not-Track requirements that limit or regulate user data tracking by third-party websites. The White
House continues to support a consumer privacy Bill of Rights and comprehensive privacy legislation that could impact the collection of data, internet and social media companies, as well as online and mobile advertising. In addition, the European
Union is in the process of promulgating a new General Data Protection Regulation, which would apply across the European Union and may result in significantly greater compliance burdens for companies such as us with users and operations in Europe.
Various government and consumer agencies have also called for new regulation and changes in industry practices. Recently, the State of California and several other states adopted privacy guidelines with respect to mobile applications. Changes like
these could increase our administrative costs and make it more difficult for consumers to use our platform, resulting in less traffic and revenue. Similarly, changes like these could make it more difficult for us to provide effective advertising
tools to businesses on our platform, resulting in fewer advertisers and less revenue. In any of the cases above, our business could suffer.
*Our
acquisitions of Qype and SeatMe create numerous risks and uncertainties that could adversely affect our operating results or prevent us from realizing the expected benefits of the acquisitions.
In October 2012, we acquired Qype to accelerate our international expansion and in July 2013, we acquired SeatMe to enhance the experience for
our consumers and complement our existing partnerships. In order to realize any gains from these acquisitions, we must successfully complete the integration of each acquired business, its operations, services and personnel with our organization.
These transition activities are complex, and we may encounter unexpected difficulties or incur unexpected costs. In order to realize the expected benefits and synergies of our acquisitions, we must meet a number of significant challenges, including:
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retaining existing customers and obtaining new customers;
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migrating Qype users and content to our platform;
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implementing and retaining uniform standards, controls, procedures, policies and information systems;
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managing the combined businesses effectively; and
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integrating SeatMe in the manner and in the timeframe our management believes to be in our best interests while maintaining relationships with our strategic partners.
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The failure to integrate Qype and SeatMe successfully could adversely affect our ability to maintain relationships with customers and
employees, as well as strategic commercial partners, or to achieve the anticipated benefits of each acquisition. In addition, we may be required to spend additional time or funds on integration that otherwise would be spent on the development and
expansion of the combined businesses. Even if we are able to integrate Qype and SeatMe operations successfully, these integrations may not result in the realization of the full benefits of synergies, cost savings, innovation and operational
efficiencies that may be possible from the integration of each business, and these benefits may not be achieved within a reasonable period of time.
Our growth depends in part on the success of our strategic relationships with third parties, and any failure to maintain these relationships could harm
our business.
We rely in part on relationships with various third parties to grow our business, including strategic partners and
technology and content providers. Identifying, negotiating and maintaining relationships with third parties require significant time and resources, as does integrating their services and technologies onto our platform. We may also have competing
interests and obligations with respect to our partners, which may make it difficult to maintain, grow or maximize the benefit of each partnership. In addition, we have had, and may in the future have, disagreements or disputes with our partners
about our respective contractual obligations, which could result in legal proceedings or negatively affect our brand and reputation. It is also possible that these third parties may not be able to devote the resources we expect to the relationships
or they may terminate their relationships with us. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to grow our business could be impaired, and our operating results could suffer.
We may also acquire other companies or technologies, which could divert our managements attention, result in additional dilution to our
stockholders and otherwise disrupt our operations and harm our operating results.
Our success will depend, in part, on our ability
to expand our product offerings and grow our business in response to changing technologies, user and advertiser demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses
or technologies rather than through internal development. We have limited experience as a company in the complex process of acquiring other businesses and technologies. The pursuit of potential future acquisitions may
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divert the attention of management and cause us to incur expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. Acquisitions could also
result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations or our ability to achieve profitability.
Acquisitions also involve a number of risks to our business, including the difficulty of integrating operations, services, sites and
technologies, and personnel of the acquired companies, the potential disruption of our ongoing business, the potential distraction of management, the possibility that our business culture and the business culture of the acquired companies will not
be compatible, expenses related to the acquisition and to the integration of the acquired companies, the impairment of relationships with employees and customers as a result of any integration of new personnel, risks related to the businesses of
acquired companies that may continue to impact the businesses following the acquisition and potential unknown liabilities associated with acquired companies. Any inability to integrate services, sites and technologies, operations or personnel in an
efficient and timely manner could harm our results of operations.
*If we fail to manage our growth effectively, our brand, results of operations
and business could be harmed.
We have experienced rapid growth in our headcount and operations, including through our acquisitions
of Qype in October 2012 and SeatMe in July 2013, which places substantial demands on management and our operational infrastructure. Most of our employees have been with us for fewer than two years. We intend to make substantial investments in our
technology, sales and marketing and community management organizations. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees, including employees in international markets and from any acquired
businesses, while maintaining the beneficial aspects of our company culture. If we do not manage the growth of our business and operations effectively, the quality of our platform and efficiency of our operations could suffer, which could harm our
brand, results of operations and business.
We may not timely and effectively scale and adapt our existing technology and network infrastructure to
ensure that our platform is accessible.
It is important to our success that users in all geographies be able to access our
platform at all times. We have previously experienced, and may experience in the future, service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity
constraints due to an overwhelming number of users accessing our platform simultaneously, and denial of service or fraud or security attacks. In some instances, we may not be able to identify the cause or causes of these performance problems within
an acceptable period of time. It may become increasingly difficult to maintain and improve the availability of our platform, especially during peak usage times and as our solutions become more complex and our user traffic increases. If our platform
is unavailable when users attempt to access it or it does not load as quickly as they expect, users may seek other services to obtain the information for which they are looking, and may not return to our platform as often in the future, or at all.
This would negatively impact our ability to attract users and advertisers and increase the frequency with which they use our website and mobile app. We expect to continue to make significant investments to maintain and improve the availability of
our platform and to enable rapid releases of new features and products. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to
accommodate actual and anticipated changes in technology, our business and operating results may be harmed.
Our disaster recovery program
contemplates transitioning our platform and data to a backup center in the event of a catastrophe, but we have not yet tested the procedure in full, and the transition procedure may take several days or more to complete. During this time, our
platform may be unavailable in whole or in part to our users.
*We are, and may in the future be, subject to disputes and assertions by third
parties that we violate their rights. These disputes may be costly to defend and could harm our business and operating results.
We
currently face, and we expect to face from time to time in the future, allegations that we have violated the rights of third parties, including patent, trademark, copyright and other intellectual property rights and the rights of current and former
employees and business owners. For example, various businesses have sued us alleging that we manipulate Yelp reviews in order to coerce them and other businesses to pay for Yelp advertising. In addition, Deutsche Telekom filed suit against Qype in
Germany regarding fees payable for directory data that Qype and its predecessor purchased from Deutsche Telekom. The Regional Court of Bonn rejected Deutsche Telekoms claim in full and the Higher Regional Court of Düsseldorf denied its
appeal; however, Deutsche Telekom may challenge the Higher Regional Courts decision. In addition, in August 2013, Deutsche Telekom filed a claim against Qype in the Regional Court of Cologne seeking additional data service fees for data
delivered in 2009. Qype has requested that the Regional Court stay proceedings in this case pending final resolution of the 2010 Claim.
Companies in the Internet, technology and media industries own large numbers of patent and other intellectual property rights, and frequently
enter into litigation based on allegations of infringement or other violations of such rights. In addition, various non-practicing entities that own patents and other intellectual property rights often attempt to aggressively assert
their rights in order to
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extract value from technology companies. From time to time, we receive notice letters from patent holders alleging that certain of our products and services infringe their patent rights. We
presently are involved in numerous patent lawsuits, all of which involve plaintiffs targeting multiple defendants in the same or similar suits. As we face increasing competition and gain an increasingly high profile, we expect the number of patent
and other intellectual property claims against us to grow.
Other claims against us can be expected to be made in the future. Even if the
claims are without merit, the costs associated with defending these types of claims may be substantial, both in terms of time, money and management distraction. In particular, patent and other intellectual property litigation may be protracted and
expensive, and the results are difficult to predict and may require us to stop offering certain features, purchase licenses or modify our products and features while we develop non-infringing substitutes or may result in significant settlement
costs. We do not own any patents, and, therefore, may be unable to deter competitors or others from pursuing patent or other intellectual property infringement claims against us.
The results of litigation and claims to which we may be subject cannot be predicted with certainty. Even if these matters do not result in
litigation or are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, results of operations and reputation.
Some of our products contain open source software, which may pose particular risks to our proprietary software and solutions.
We use open source software in our products and will use open source software in the future. From time to time, we may face claims from third
parties claiming ownership of, or demanding release of, the open source software and/or derivative works that we developed using such software (which could include our proprietary source code), or otherwise seeking to enforce the terms of the
applicable open source license. These claims could result in litigation and could require us to purchase a costly license or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement. This re-engineering
process could require significant additional research and development resources. 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 and operating results.
We make the consumer experience our highest priority. Our dedication to making decisions based primarily on the best interests of consumers may cause us
to forgo short-term gains and advertising revenue.
We base many of our decisions upon the best interests of the consumers who use
our platform. We believe that this approach has been essential to our success in increasing our user growth rate and the frequency with which consumers use our platform and has served the long-term interests of our company and our stockholders. In
the past, we have forgone, and we may in the future forgo, certain expansion or revenue opportunities that we do not believe are in the best interests of consumers, even if such decisions negatively impact our results of operations in the short
term, and we believe that continued adherence to this principle will, in the long term, benefit our stockholders. In particular, our approach of putting our consumers first may negatively impact our relationships with our existing or prospective
advertisers. For example, unless we believe that a review violates our terms of service, such as reviews that contain hate speech or bigotry, we allow the review to remain on the platform, even if the business disputes its accuracy. Certain
advertisers may therefore perceive us as an impediment to their success as a result of negative reviews and ratings. This practice could result in a loss of advertisers, which in turn could harm our results of operations.
*We rely on third-party service providers for many aspects of our business, and any failure to maintain these relationships could harm our business.
We rely on data about local businesses from third parties, including various yellow pages and other third parties that license
such information to us. We also rely on third parties for other aspects of our business, such as mapping functionality and administrative software solutions. If these third parties experience difficulty meeting our requirements or standards, or our
licenses are revoked or not renewed, it could make it difficult for us to operate some aspects of our business, which could damage our reputation. In addition, if such third-party service providers were to cease operations, temporarily or
permanently, face financial distress or other business disruption, increase their fees or if our relationships with these providers deteriorate, we could suffer increased costs and delays in our ability to provide consumers and advertisers with
content or provide similar services until an equivalent provider could be found or we could develop replacement technology or operations.
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*We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis,
which may make it difficult to predict our future performance.
Our operating results could vary significantly from quarter to
quarter and year to year because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition to other risk factors discussed in this
section, factors that may contribute to the variability of our quarterly and annual results include:
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our ability to attract new local business advertisers and retain existing advertisers;
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our ability to accurately forecast revenue and appropriately plan our expenses;
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the effects of changes in search engine placement and prominence;
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the effects of increased competition in our business;
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our ability to successfully expand in existing markets, enter new markets and manage our international expansion;
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the impact of worldwide economic conditions, including the resulting effect on consumer spending at local businesses and the level of advertising spending by local businesses;
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our ability to protect and grow our intellectual property;
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our ability to maintain an adequate rate of growth and effectively manage that growth;
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our ability to maintain and increase traffic to our website and mobile app;
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our ability to keep pace with changes in technology;
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the success of our sales and marketing efforts;
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costs associated with defending intellectual property infringement and other claims and related judgments or settlements;
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our ability to manage successfully any acquisitions of businesses, solutions or technologies, including Qype and SeatMe;
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changes in government regulation affecting our business;
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interruptions in service and any related impact on our reputation;
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the attraction and retention of qualified employees and key personnel;
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our ability to choose and effectively manage third-party service providers;
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the impact of fluctuations in currency exchange rates;
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changes in consumer behavior with respect to local businesses;
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fluctuations in spending by our advertisers due to seasonality, such as historically stronger spending in the fourth quarter of each year, or other factors;
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the effects of natural or man-made catastrophic events;
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the effectiveness of our internal controls; and
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changes in our tax rates or exposure to additional tax liabilities.
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Because we recognize most of the
revenue from our advertising products over the term of an agreement, a significant downturn in our business may not be immediately reflected in our results of operations.
We recognize revenue from sales of our advertising products over the terms of the applicable agreements, which are generally three, six or 12
months. As a result, a significant portion of the revenue we report in each quarter is generated from agreements entered into during previous quarters. Consequently, a decline in new or renewed agreements in any one quarter may not significantly
impact our revenue in that quarter but will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our fixed costs in response to reduced revenue. Accordingly, the effect of significant declines in advertising
sales may not be reflected in our short-term results of operations.
We rely on the performance of highly skilled personnel, and if we are unable to
attract, retain and motivate well-qualified employees, our business could be harmed.
We believe our success has depended, and
continues to depend, on the efforts and talents of our employees, including our senior management team, software engineers, marketing professionals and advertising sales staff. Our future success depends on our
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continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract them.
In addition, the loss of any of our senior management or key employees could materially adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. All of our officers and other U.S. employees are
at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We cannot ensure that we will be able to retain the
services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business could be harmed.
Failure to protect or enforce our intellectual property rights could harm our business and results of operations.
We regard the protection of our trade secrets, copyrights, trademarks and domain names as critical to our success. In particular, we must
maintain, protect and enhance the Yelp brand. We pursue the registration of our domain names, trademarks and service marks in the United States and in certain jurisdictions abroad. We 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, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the
misappropriation or disclosure of our proprietary information nor deter independent development of similar technologies by others.
Effective trade secret, copyright, trademark and domain name protection is expensive to develop and maintain, both in terms of initial and
ongoing registration requirements and expenses and the costs of defending our rights. We are seeking to protect our 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. Litigation may be necessary to enforce our intellectual property rights, protect our respective trade secrets or determine the validity and scope of proprietary rights claimed by others. 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. We may incur significant costs in enforcing our
trademarks against those who attempt to imitate our Yelp brand. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.
We may be unable to continue to use the domain names that we use in our business, or prevent third parties from acquiring and using domain names that
infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks.
We have registered
domain names for our website that we use in our business, such as Yelp.com. 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 products 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 United States 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 brand or our 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.
If our security measures are compromised, or if our platform is subject to attacks that degrade or deny the ability of users to access
our content, users may curtail or stop use of our platform.
Our platform involves the storage and transmission of user and
business information, some of which may be private, and security breaches could expose us to a risk of loss of this information, which could result in potential liability and litigation. Like all online services, our platform is vulnerable to
computer viruses, break-ins, phishing attacks, attempts to overload our servers with denial-of-service or other attacks and similar disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays or
website shutdowns, causing loss of critical data or the unauthorized disclosure or use of personally identifiable or other confidential information. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage
systems change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate
preventative measures. If we experience compromises to our security that result in performance or availability problems, the complete shutdown of our website or the loss or unauthorized disclosure of confidential information, our users or
advertisers may lose trust and confidence in us and decrease their use of our platform or stop using our platform entirely, and we would suffer reputational and financial harm. For example, we work with third party vendors to process credit card
payments by certain of our users and local businesses and are subject to payment card association operating rules. If our security measures fail to protect this information adequately as a result of employee error, malfeasance or otherwise, or we
fail to comply with the applicable operating rules, we could be liable to our users and local businesses for their losses, as well as the vendors under our agreements with them, we could be subject to fines and higher transaction fees, we could face
regulatory action and our users, local businesses and vendors could end their relationships with us, any of which could harm our business and financial results.
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In addition, user and business owner accounts and profile pages could be hacked, hijacked,
altered or otherwise claimed or controlled by unauthorized persons. For example, we enable businesses to create free online business accounts and claim the business profile pages for each of their business locations. We verify these claims through
an automated telephone verification process, which is designed to confirm that the person setting up the account is affiliated with the business by confirming that the person has access to the businesss telephone. Our verification system could
fail to confirm that the recipient of the call is an authorized representative of the business, or mistakenly allow an unauthorized representative to claim the businesss profile page. Any or all of these issues could negatively impact our
ability to attract new users or could deter current users from returning or reduce the frequency with which consumers and advertisers use our solutions, cause existing or potential advertisers to cancel their contracts or subject us to third-party
lawsuits, regulatory fines or other action or liability, thereby harming our results of operations.
Our business is subject to a variety of U.S.
and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the United States and abroad, including laws regarding data retention, privacy, distribution of
user-generated content and consumer protection, that are frequently evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly outside the United
States. 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, 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. In addition, regulatory authorities around the world are
considering a number of legislative and regulatory proposals concerning data protection and other matters that may be applicable to our business. It is also likely that if our business grows and evolves and our solutions are used in a greater number
of countries, we will become subject to laws and regulations in additional jurisdictions. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject.
If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly
harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to discontinue certain products or features, which would negatively affect our business. In
addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred to prevent or mitigate this potential
liability could also harm our business and operating results.
Domestic and foreign laws may be interpreted and enforced in ways that impose new
obligations on us with respect to Yelp Deals, which may harm our business and results of operations.
Our Yelp Deals products may
be deemed gift certificates, store gift cards, general-use prepaid cards or other vouchers, or gift cards, subject to, among other laws, the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit
CARD Act) and similar federal, state and foreign laws. Many of these laws include specific disclosure requirements and prohibitions or limitations on the use of expiration dates and the imposition of certain fees. For example, the Credit CARD
Act requires that gift cards expire no earlier than five years after their issue. Yelp Deals are comprised of two components: (i) the purchase value, which is the amount paid by the purchaser and which does not expire, and (ii) the
promotional value, which is the remaining value for which the Yelp Deal can be redeemed during a limited period, which typically ends one year after the date of purchase. If, contrary to our belief, the Credit CARD Act and similar state laws were
held to apply to the promotional value component of Yelp Deals, consumers would be entitled to redeem the promotional value component of their Yelp Deals for up to five years after their issue, and we could face liability for redemption periods that
are less than five years. Various companies that provide deal products similar to ours are currently defendants in purported class action lawsuits that have been filed in federal and state court claiming that their deal products are subject to the
Credit CARD Act and various state laws governing gift cards and that the defendants have violated these laws as a result of expiration dates and other restrictions they have placed on their deals. Similar lawsuits have been filed in other locations
in which we plan to sell our Yelp Deals, such as the Canadian province of Ontario, alleging similar violations of provincial legislation governing gift cards.
The application of various other laws and regulations to our products, and particularly our Yelp Deals and Gift Certificates, is uncertain.
These include laws and regulations pertaining to unclaimed and abandoned property, partial redemption, refunds, revenue-sharing restrictions on certain trade groups and professions, sales and other local taxes and the sale of alcoholic beverages.
For example, although it is the responsibility of merchants to redeem or refund unexpired Yelp Deals and Gift Certificates that they offer through our platform, the law might be interpreted to require that we redeem or refund them. Because merchants
alone, and not Yelp, are in a position to track the redemption of Yelp Deals and Gift Certificates, we may not be able to comply with such a requirement
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without substantial and potentially costly changes to our infrastructure and business practices. In addition, we may become, or be determined to be, subject to federal, state or foreign laws
regulating money transmitters or aimed at preventing money laundering or terrorist financing, including the Bank Secrecy Act, the USA PATRIOT Act and other similar future laws or regulations.
If we become subject to claims or are required to alter our business practices as a result of current or future laws and regulations, our
revenue could decrease, our costs could increase and our business could otherwise be harmed. In addition, the costs and expenses associated with defending any actions related to such additional laws and regulations and any payments of related
penalties, fines, judgments or settlements could harm our business.
We may require additional capital to support business growth, and this capital
might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth
and may require or otherwise seek additional funds to respond to business challenges, including the need to develop new features and products or enhance our existing services, improve our operating infrastructure or acquire complementary businesses
and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer
significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing we secure in the future could involve restrictive covenants
relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able
to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to
business challenges could be significantly impaired, and our business may be harmed.
Our business is subject to the risks of earthquakes, fires,
floods and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.
Our
systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. For example, a significant
natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, operating results and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our
U.S. corporate offices and one of the facilities we lease to house our computer and telecommunications equipment are located in the San Francisco Bay Area, a region known for seismic activity. In addition, acts of terrorism, which may be targeted at
metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our local business advertisers businesses or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins
and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential client data. We may not have sufficient protection or
recovery plans in certain circumstances, such as natural disasters affecting the San Francisco Bay Area, and our business interruption insurance may be insufficient to compensate us for losses that may occur. As we rely heavily on our servers,
computer and communications systems and the Internet to conduct our business and provide high quality customer service, such disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt our local
business advertisers businesses, which could have an adverse effect on our business, operating results and financial condition.
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. The application of the tax laws of various jurisdictions, including the United States, 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.
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.
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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 income related to intellectual property earned 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 eventually derive could be undermined if we are unable to adapt the manner in which we operate our business and due to changing tax laws.
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 United States are repatriated to the United States, 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. 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.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
Under GAAP, we review our 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. Factors that may be considered include a change in circumstances indicating that the carrying value of our goodwill or other intangible assets may not be recoverable
include declines in our stock price and market capitalization or future cash flows projections. We recorded a significant amount of goodwill related to our acquisition of Qype in the fourth quarter of 2012. A decline in our stock price, or any other
adverse change in market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our
goodwill and intangible assets. Any such material charges may have a material negative impact on our financial and operating results.
Risks Related to
Ownership of Our Class A Common Stock
*The dual class structure of our common stock has the effect of concentrating voting control with
those stockholders who held our stock prior to our initial public offering, including our founders, directors, executive officers and employees and their affiliates, and limiting your ability to influence corporate matters.
Our Class B common stock has 10 votes per share, and our Class A common stock has one vote per share. Stockholders who hold shares of
Class B common stock, including our founders, directors, executive officers and employees and their affiliates, together beneficially own shares representing approximately 70% of the voting power of our outstanding capital stock as of
September 30, 2013. Consequently, the holders of Class B common stock collectively will continue to be able to control all matters submitted to our stockholders for approval even though their stock holdings represent less than 50% of the
outstanding shares of our common stock. Because of the 10-to-1 voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of
our common stock even when the shares of Class B common stock represent a small minority of all outstanding shares of our Class A and Class B common stock. This concentrated control will limit your ability to influence corporate matters for the
foreseeable future, and, as a result, the market price of our Class A common stock could be adversely affected. Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock,
which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long term, which may include existing founders, officers and directors and their affiliates.
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*Our share price has been and will likely continue to be volatile.
The trading price of our Class A 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, some of which are beyond our control. Since shares of our common stock were sold in our initial public offering in March 2012 at a price of $15.00 per share through October 28, 2013, our Class A
common stocks daily closing price has ranged from $15.22 to $74.89. In addition to the factors discussed in this
Risk Factors
section and elsewhere in this quarterly report, factors that may cause volatility in our share
price include:
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actual or anticipated fluctuations in our financial condition and operating results;
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changes in projected operating and financial results;
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actual or anticipated changes in our growth rate relative to our competitors;
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announcements of technological innovations or new offerings by us or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;
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additions or departures of key personnel;
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issuance of research or reports by securities analysts;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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sales of our Class A or Class B common stock;
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changes in laws or regulations applicable to our solutions;
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; and
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general economic and market conditions.
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Furthermore, the stock markets recently have
experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of
those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of
our Class A common stock. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future.
Securities litigation against us could result in substantial costs and divert our managements attention from other business concerns, which could harm our business.
We do not intend to pay dividends for the foreseeable future, and as a result your ability to achieve a return on your investment will depend on
appreciation in the price of our Class A common stock.
We have never declared or paid any cash dividends on our common stock
and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in
the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their
investments.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit
attempts by our stockholders to replace or remove our current management and limit the market price of our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change in control or changes in our
management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
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authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock;
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require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
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specify that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer;
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establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
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establish that our board of directors is divided into three classes, with directors in each class serving three-year staggered terms;
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prohibit cumulative voting in the election of directors;
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provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
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require the approval of our board of directors or the holders of a supermajority of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation; and
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reflect two classes of common stock, as discussed above.
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These provisions may frustrate or
prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In
addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business
combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share
price and trading volume could decline.
The trading market for our Class A common stock, to some extent, depends on the
research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our
share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to
decline.
*Future sales of our Class A common stock in the public market could cause our share price to decline.
Sales of a substantial number of shares of our Class A common stock in the public market, particularly sales by our directors, officers
and employees and significant stockholders, or the perception that these sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity
securities. As of September 30, 2013, we had 53,573,297 shares of Class A common stock and 12,400,324 shares of Class B common stock outstanding. Although a public market exists for our Class A common stock only, shares of Class B
common stock are generally convertible into an equivalent number of shares of Class A common stock at the option of the holder or upon transfer (subject to certain exceptions).
The requirements of being a public company may strain our resources, divert managements attention and affect our ability to attract and retain
qualified board members.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank
Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs,
make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control
over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a
result, managements attention may be diverted from other business concerns, which could harm our business and operating results. Although we have hired additional employees to comply with these requirements, we may need to hire more employees
in the future, which will increase our costs and expenses.
In addition, changing laws, regulations and standards relating to corporate
governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying
interpretations, in many cases due to their lack of specificity, and, as a
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result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters
and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative
expenses and a diversion of managements time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
We also expect that being a public company that is subject to these new rules and regulations will make it more expensive for us to obtain
director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our
board of directors and qualified executive officers.
As a result of becoming a public company, we will be obligated to develop and maintain proper
and effective internal controls over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely
affect investor confidence in our company and, as a result, the value of our Class A common stock.
We will be required,
pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the fiscal year ending 2013. This assessment will need to
include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on our managements assessment of our
internal controls. We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our
evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our
internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor
confidence in the accuracy and completeness of our financial reports, which would cause the price of our Class A common stock to decline.