S-1/A 1 d612699ds1a.htm S-1/A S-1/A
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As filed with the Securities and Exchange Commission on February 25, 2014

Registration No. 333-193692

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Coupons.com Incorporated

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7310   77-0485123

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

400 Logue Avenue

Mountain View, California 94043

(650) 605-4600

 

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Steven R. Boal

President and Chief Executive Officer

Coupons.com Incorporated

400 Logue Avenue

Mountain View, California 94043

(650) 605-4600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

    Copies to:    

Peter M. Astiz, Esq.

Michael J. Torosian, Esq.

DLA Piper LLP (US)

2000 University Avenue

East Palo Alto, California 94303-2215

(650) 833-2000

 

Richard Hornstein, Esq.

Coupons.com Incorporated

General Counsel

400 Logue Avenue

Mountain View, California 94043

(650) 605-4600

 

Eric C. Jensen, Esq.

John T. McKenna, Esq.

Cooley LLP

3175 Hanover Street

Palo Alto, California 94304-1130

(650) 843-5000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Security to be Registered   Amount to be
Registered(1)
  Proposed
Maximum Offering
Price Per Share
  Proposed Maximum
Aggregate Offering
Price(2)
  Amount of
Registration Fee(3)

Common Stock, par value $0.00001 per share

  11,500,000   $14.00   $161,000,000.00   $20,736.80

 

 

(1) Includes an additional 1,500,000 shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) The Registrant previously paid $12,880 of this amount in connection with the initial filing of this registration statement.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject To Completion. Dated February 25, 2014.

10,000,000 Shares

 

 

LOGO

 

Coupons.com Incorporated

Common Stock

 

 

This is an initial public offering of shares of common stock of Coupons.com Incorporated.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $12.00 and $14.00. We intend to list the common stock on the New York Stock Exchange under the symbol “COUP.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for future filings.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                            $                        

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to us

   $         $     

 

(1) See the section titled “Underwriting” for a description of the compensation payable to the underwriters.

To the extent that the underwriters sell more than 10,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,500,000 shares from us at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2014.

 

Goldman, Sachs & Co.   Allen & Company LLC   BofA Merrill Lynch   RBC Capital Markets

Prospectus dated                 , 2014


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LOGO


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TABLE OF CONTENTS

Prospectus

 

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     38   

Industry and Market Data

     40   

Use of Proceeds

     41   

Dividend Policy

     42   

Capitalization

     43   

Dilution

     45   

Selected Consolidated Financial and Other Data

     48   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     51   

Business

     79   

Management

     93   

Executive Compensation

     99   

Certain Relationships and Related Party Transactions

     111   

Principal Stockholders

     115   

Description of Capital Stock

     117   

Shares Eligible for Future Sale

     125   

Material U.S. Federal Tax Consequences for Non-U.S. Holders of Common Stock

     127   

Underwriting

     131   

Legal Matters

     137   

Experts

     137   

Where You Can Find More Information

     137   

Index to Consolidated Financial Statements

     F-1   

 

 

Through and including                     , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We do not take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.


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PROSPECTUS SUMMARY

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “Coupons,” “the company,” “we,” “us” and “our” in this prospectus refer to Coupons.com Incorporated and its consolidated subsidiaries.

Overview

We operate a leading digital promotion platform that connects great brands and retailers with consumers. Over 2,000 brands from more than 700 consumer packaged goods companies, or CPGs, and many of the leading grocery, drug and mass merchandise retailers use our promotion platform to engage consumers at the critical moments when they are choosing which products they will buy and where they will shop. We deliver digital coupons to consumers, including coupons and coupon codes, and display advertising through our platform which includes our web, mobile and social channels, as well as those of our CPGs, retailers, and our extensive network of approximately 30,000 third-party websites, or publishers, that display our coupon and advertising offerings on their websites. During 2013, we generated revenue from over 1.3 billion transactions in which consumers selected a digital coupon or redeemed a coupon code offered through our platform, an increase of 43% over the same period in 2012.

In 2013, 315 billion total coupons were distributed, representing an aggregate discount value of $510 billion, with 2.8 billion redeemed representing an aggregate discount value of $3.5 billion, according to an annual industry report by NCH Marketing Services, Inc., or NCH, a provider of coupon audit and settlement services. Increasingly, CPGs and retailers are directing a greater proportion of their spending to digital promotions.

Our platform serves three key constituencies:

 

  Ÿ  

more than 700 CPGs representing over 2,000 brands;

 

  Ÿ  

retailers operating approximately 58,000 store locations in North America; and

 

  Ÿ  

consumers who (i) made an average of approximately 17 million monthly unique visits to Coupons.com and our other sites during 2013, (ii) visited the sites of our CPGs, retailers and publishers, and (iii) downloaded our mobile apps more than seven million times.

The combination of our CPGs, retailers, publishers and consumers, all served by our promotion platform, has resulted in powerful network effects, which we believe to be a significant competitive advantage. Our large and growing base of retailers integrated into our platform has allowed us to attract, retain and grow the digital promotion spending of leading CPGs. The breadth of our offerings from these leading brands enables us to attract and retain a growing and more diverse range of retailers, publishers and consumers. Additional offerings on our platform, in particular point of sale solutions, increase consumer engagement and retailer integration, which enhance the value offered to CPGs.

We generate revenues primarily from digital promotion transactions. Each time a consumer selects a digital coupon on our platform by either printing it for physical redemption at a retailer or saving it to a retailer online account for automatic digital redemption, we are paid a fee which is not

 

 

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dependent on the digital coupon being redeemed. For coupon codes, we are paid a fee when a consumer makes a purchase using a coupon code from our platform. If we deliver a digital coupon or coupon code on a retailer’s website or through its loyalty reward program, or the website of a publisher, we generally pay a distribution fee to the retailer or publisher which is included in our cost of revenues. We also generate advertising revenues through the placement of online advertisements from CPGs and retailers which are displayed with our coupon offerings on our websites and those of our publishers. We are paid a fee for the display of advertisements on a per impression or a per click basis. Advertising placements are generally sold as part of insertion orders for coupons as an integrated sale and not as a separate transaction.

Our CPG customers include many of the leading food, beverage, drug, personal and household product manufacturers. We primarily generate revenue from CPGs through coupons offered through our platform and to a lesser degree, through the sale of advertising. Our retailers include leading grocery, drug and mass market retailers which distribute and accept coupons offered through our platform. Our retailers also include a broad range of specialty stores, including clothing, electronics, home improvement and many others which offer codes through our platform.

In 2012, we generated revenues of $112.1 million, representing 23% growth over 2011, a net loss of $59.2 million, representing an increase of 158% over 2011, and an Adjusted EBITDA loss of $47.3 million, representing an increase of 233% over 2011. During 2013, we generated revenues of $167.9 million, representing 50% growth over 2012, a net loss of $11.2 million, representing a decrease of 81% over 2012, and Adjusted EBITDA of $1.7 million, as compared to an Adjusted EBITDA loss of $47.3 million in 2012. For information on how we define and calculate Adjusted EBITDA, and a reconciliation of net loss to Adjusted EBITDA, see the section titled “—Summary Consolidated Financial and Other Data—Non-GAAP Financial Measures” below.

Industry Overview

Since Coca-Cola introduced a coupon in the late 1800s, CPGs and retailers have used coupons and other promotions as a core tool to increase sales and drive awareness of their products. Newspapers and direct mail have traditionally been the primary channels for distributing coupons, but particularly with the decline in newspaper readership, the effectiveness of traditional channels has declined. In contrast to traditional promotions, digital coupons are redeemed at higher rates and are more effective. According to an annual industry report by NCH, in 2013, digital coupons (including print-at-home and paperless coupons) represented less than 1% of total U.S. CPG coupon distribution volume, but accounted for over 10% of total U.S. CPG coupon redemptions, illustrating the greater effectiveness of digital coupons. We believe that the simplicity of digital coupons is broadening the demographic reach and driving the increased use of digital coupons. According to a study by eMarketer, Inc., a market research company, 97 million U.S. adults will use digital coupons in 2013. Many of the digital coupons are offered through grocery store loyalty programs. According to the 2013 Colloquy Loyalty Census from LoyaltyOne, a provider of loyalty program services, total memberships in grocery-store loyalty programs totaled approximately 172.4 million in 2012.

The combination of continued CPG and retailer promotion spending, strong consumer demand for digital coupons and the greater effectiveness of digital coupons will offer significant opportunities for a solution that can effectively bring together CPGs, retailers and consumers on a digital promotion platform that addresses the challenges that each face, further accelerating the shift from traditional to digital promotions.

 

 

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Challenges for CPGs and Brands

 

  Ÿ  

difficulty engaging consumers at scale;

 

  Ÿ  

difficulty coordinating promotional channels that are optimized to their retail distribution channels;

 

  Ÿ  

complexity of reaching consumers at the moments critical to influencing their purchase decisions;

 

  Ÿ  

difficulty of integrating with retailer promotion efforts;

 

  Ÿ  

inability to measure and improve the effectiveness of promotions; and

 

  Ÿ  

lack of security.

Challenges for Retailers

 

  Ÿ  

coordinating CPG promotional spending to drive benefits to the retailer;

 

  Ÿ  

difficulty in engaging digitally savvy consumers with retailer promotions; and

 

  Ÿ  

improving the efficiency of redeeming all forms of coupons.

Challenges for Consumers

 

  Ÿ  

traditional and digital coupons may not be available in the form that a consumer finds easiest to use;

 

  Ÿ  

difficulty in finding coupons for preferred brands and retailers; and

 

  Ÿ  

lack of personalization.

Our Solution

We offer a comprehensive digital promotion platform that allows us to connect CPGs and retailers with consumers.

Why CPGs and their Brands Choose Us

Our platform’s increasing effectiveness has driven growth in the use of our platform by CPGs. The cohort of all CPGs that used our platform during 2011 increased their promotion spending with us two years later during 2013 by 52% over the amount spent by such cohort during 2011. Such revenue represented 74% of our total revenues in 2013 as compared to 90% of our total revenues in 2011. During 2013, we generated 26% of our revenue, or $43.0 million, from customers who were not CPGs which had used our platform during 2011.

Broad and effective reach.    We generated revenue from over 1.3 billion transactions pursuant to which consumers selected a coupon or redeemed a code offered through our platform during 2013.

Multi-channel engagement with consumers at key purchasing decision moments.    Our platform allows CPGs to better engage with consumers by enabling multiple touchpoints during a consumer’s shopping experience. For example, a consumer can use our mobile app while they are walking through the aisle of a retailer, find a coupon for their favorite detergent, save the coupon directly to the retailer’s loyalty program and receive the discount automatically at the point of sale without the need to present a physical coupon.

 

 

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Advertising solutions integrated with digital promotions.    Because consumers are focused on engaging with brands and products when they visit our websites, mobile applications and other consumer touchpoints, integrated advertising solutions enable CPGs to promote their brand and drive consumer loyalty at each decision point.

Ability to quickly deploy focused promotion spending for the benefit of specific brands.    Our ability to deploy promotions in days rather than weeks or months provides brands the ability to strategically allocate promotion spending to drive increased sales of their products.

Data-driven optimization of promotions.    We offer integrated measurement tools for campaign planning, and pre-campaign and post-campaign development and analysis. Through our Campaign iQ product, CPGs are able to track and analyze activations, inventory levels, redemption rates and volumes, distribution methods, buying rates, aggregated buyer demographics, and campaign effectiveness statistics.

Proven and secure technology.    We have proven technology, systems and processes that enable us to securely manage promotions within our CPGs’ objectives. The risk of counterfeiting is a potential barrier to CPGs’ adoption and use of digital coupons. Our proprietary security technology differentiates our solution for CPGs who want to prevent fraudulent use of coupons.

Why Retailers Choose Us

We enable retailers to effectively capture the benefits of promotion spending.

Use CPG promotion content to increase retailer sales.    Retailers can integrate promotions from our platform into their point of sale systems, retailer-branded websites, retailer loyalty/rewards programs, mobile applications and social media programs. By offering CPG promotions from our platform through their own digital channels, retailers are able to increase sales of the CPG promoted product at their locations and increase consumer loyalty.

Digital promotion distribution fee.    Retailers receive a distribution fee from us when we generate revenues from a digital promotion transaction on the retailer’s website or through its loyalty reward program. Retailers benefit from an additional source of revenues not available with traditional coupons, in addition to driving purchases of the CPG products at their stores. We believe this is one of the reasons why retailer partners have directed their CPG partners to increase their use of our platform or to begin using our platform.

Integration with retailer point of sale systems.    By enabling automatic redemption of coupons at the point of sale without requiring the consumer to present a physical coupon, our integration promotes consumer purchase of the promoted product at the retailer, strengthens consumer loyalty to the retailer, enables faster and more efficient check-out, improves the consumer’s experience in using promotions and simplifies the processing of coupons with the CPG issuer.

Platform offering manufacturer and retailer specific promotions.    We enable retailers to offer coupon codes on our website and mobile app and those of our publisher network which bring consumers directly to retailers’ websites. Our solution simplifies the shopping process for consumers, increases engagement and allows a retailer to directly drive additional traffic to its stores.

Why Consumers Choose Us

We provide consumers with a robust platform of digital promotions.

 

 

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Widely available.    Our digital coupons are widely available to consumers and delivered or redeemed through the point of sale and through our web, mobile and social channels and those of our CPGs, retailers and extensive network of publishers.

Easy to use in their preferred format.    Through our website and mobile applications and those of our publishers, consumers can browse or search for coupons, create shopping lists, download coupons to retailer loyalty cards, print coupons for use in-store, or use a coupon code for web and mobile commerce.

Broad selection of quality coupons.    We generated revenue from over 1.3 billion transactions pursuant to which consumers selected a coupon or redeemed a code offered through our platform in 2013. These transactions represent a broad selection of product categories and variety within each category.

Personalized promotions.    Our point of sale solutions and mobile applications help consumers save time and money by optimizing and personalizing the presentation of promotions. A consumer using these products will be presented with a set of optimized promotions based on their prior coupon selections, geography and other demographic and behavioral attributes.

Our Strengths

 

  Ÿ  

Powerful network effects.    The large and growing base of retailers using our platform has allowed us to attract, retain and grow the digital promotion spending of leading CPGs. The breadth of our offerings from these leading brands enables us to attract and retain a growing and more diverse range of retailers, publishers and consumers. Additional offerings on our platform, in particular point of sale solutions, increase consumer engagement and retailer integration, which enhance the value offered to CPGs.

 

  Ÿ  

Deep integration with retailers.    Our platform provides the promotion content for the web, mobile sites and applications, loyalty rewards and/or point-of-sale systems of our retail partners. Utilizing our integrated platform, CPGs and retailers can closely coordinate trade promotion spending to most effectively engage consumers with their products.

 

  Ÿ  

Extensive publisher network.    Our publisher network of approximately 30,000 publishers multiplies the reach of our promotion platform to consumers and increases the value of our platform to our CPGs and retailers. We enable these publishers to monetize their web and mobile traffic and drive user engagement.

 

  Ÿ  

Secure, proven and proprietary technology for digital coupons.    Our best-in-class technology has proven to meet the complex technical and operational requirements of CPGs and retailers, reflecting the cumulative investments that we have made over the past 15 years.

 

  Ÿ  

Proprietary data on consumer behavior from intent to purchase.    We use the insights from our significant differentiated data to enable highly effective promotions and advertising by CPGs and retailers, and in turn provide personalized user experiences to consumers on our platform and on our publisher network.

 

  Ÿ  

Experienced and specialized sales, integration, campaign management and customer support.     We have a team of dedicated specialists with skills and capabilities focused on CPGs, retailers, publishers and consumers.

 

  Ÿ  

Attractive business model.    We have invested in the technology, organization and process capabilities required to operate our business at significantly greater scale. Our platform already

 

 

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includes more than 2,000 brands and many of the retailers that are most important to the CPGs that own those brands. As a result, we believe that there is significant operating leverage in our business. Revenues grew from $35.8 million in the quarter ended December 31, 2012 to $52.6 million in the quarter ended December 31, 2013 while operating expenses increased from $32.7 million to $36.5 million. As a result, we generated net income of $1.5 million for the quarter ended December 31, 2013 as compared to a net loss of $9.1 million for the same period in the prior year. We believe that there will be further economies of scale as we further penetrate the CPGs and brands on our platform and deepen our integration with retailers.

Growth Strategy

We intend to grow our platform and our business through the following key strategies:

Increase revenues from CPGs already on our platform.    Based on our experience to date, we believe we have opportunities to continue increasing revenues from our existing CPG customer base through:

 

  Ÿ  

increasing our share of CPG spending on overall trade promotions and digital coupons;

 

  Ÿ  

increasing the number of brands that are using our platform within each CPG;

 

  Ÿ  

increasing media advertising spending on our platform; and

 

  Ÿ  

maximizing lifetime value of consumers across all products.

Deepen integration of retailers with our platforms.    We intend to continue to invest in technologies and product offerings that further integrate digital promotions into retailers’ in-store and point of sale systems.

Grow our current core CPG and retailer customer base and add new manufacturers and retailers from additional industry segments.    We believe we can significantly grow the number of CPGs and retailers that we serve. In addition, we intend to continue growing our business with other manufacturers and retailers in new industry segments.

Continue to grow consumer use of our digital promotion offerings.    We plan to continue to invest in our point of sale and mobile solutions. We believe that CPG spending on digital promotions will continue to grow as point of sale and mobile channels offer new opportunities to engage consumers from intent to purchase of their products.

Grow international operations.    We believe that we can opportunistically grow our operations and offerings in existing international markets and partner with our existing clients to enter new geographies in which they operate.

Selectively pursue strategic acquisitions.    We may expand our business through selective acquisitions.

Risks Associated with Our Business

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks include:

 

  Ÿ  

We have incurred net losses since inception and we may not be able to generate sufficient revenues to achieve or subsequently maintain profitability;

 

 

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  Ÿ  

We may not maintain our recent revenue growth;

 

  Ÿ  

If we are unable to successfully respond to changes in the digital promotions market and continue to grow the market, our business could be harmed;

 

  Ÿ  

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;

 

  Ÿ  

If we fail to attract and retain CPGs, retailers and publishers and expand our relationships with them, our revenues and business will be harmed;

 

  Ÿ  

If the distribution fees that we pay as a percentage of our revenues increases, our gross profit and business will be harmed;

 

  Ÿ  

If we fail to maintain and expand the use by consumers of digital coupons on our platform, our revenues and business will be harmed;

 

  Ÿ  

We are dependent on third-party advertising agencies as intermediaries, and if we fail to maintain these relationships, our business may be harmed;

 

  Ÿ  

Competition presents an ongoing threat to the success of our business;

 

  Ÿ  

If we fail to effectively manage our growth, our business and financial performance may suffer; and

 

  Ÿ  

We may expend substantial funds in connection with tax liabilities that arise upon the initial settlement of restricted stock units, or RSUs, in connection with this offering, and the manner in which we fund that expenditure may have an adverse effect on our financial condition.

In addition, we are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, enacted in April 2012, and therefore we may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these exemptions for up to five years after our initial public offering or until we are no longer an “emerging growth company.”

Corporate Information

Coupons was incorporated in California in May 1998 and reincorporated in Delaware in June 2009. Our principal executive offices are located at 400 Logue Avenue, Mountain View, California 94043, and our telephone number is (650) 605-4600. Our corporate website address is www.couponsinc.com. Information contained on, or that can be accessed through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

The Coupons logo and our other registered or common law trademarks, service marks or trade names appearing in this prospectus are the property of Coupons. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

 

 

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THE OFFERING

 

Common stock offered by us

   10,000,000 shares

Common stock to be outstanding after this offering

  

72,669,807 shares

Option to purchase additional shares of common stock

  

1,500,000 shares

Use of proceeds

  

We estimate that the net proceeds to us from this offering will be approximately $116.6 million, (or approximately $134.7 million if the underwriters’ option to purchase additional shares of our common stock from us is exercised in full), assuming an initial public offering price of $13.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. Additionally, we may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments at this time. We also may use a portion of the net proceeds to satisfy our anticipated tax withholding and remittance obligations related to the settlement of our outstanding RSUs. See the section titled “Use of Proceeds” for additional information.

Proposed NYSE symbol

   “COUP”

The number of shares of our common stock that will be outstanding after completion of this offering is based on 62,669,807 shares outstanding as of December 31, 2013, and excludes:

 

  Ÿ  

12,635,707 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2013, at a weighted average exercise price of $5.87 per share;

 

  Ÿ  

4,521,191 shares of common stock issuable upon the vesting of RSUs outstanding as of December 31, 2013;

 

  Ÿ  

400,000 shares of common stock reserved for issuance upon the exercise of a warrant outstanding as of December 31, 2013, at an exercise price of $4.03 per share;

 

  Ÿ  

2,035,282 shares of common stock reserved for issuance under our stock option plans as of December 31, 2013;

 

 

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  Ÿ  

4,000,000 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective upon the completion of this offering;

 

  Ÿ  

1,200,000 shares of our common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective upon the completion of this offering; and

 

  Ÿ  

1,000,040 shares of our common stock issued in connection with our acquisition of Yub, Inc., a privately-held company, in January 2014.

Unless otherwise noted, the information in this prospectus reflects and assumes the following:

 

  Ÿ  

a 2.5-for-1 reverse split of our outstanding common stock and preferred stock effected on February 19, 2014;

 

  Ÿ  

the conversion of all outstanding shares of our preferred stock into an aggregate of 41,580,507 shares of common stock immediately prior to the completion of this offering;

 

  Ÿ  

the filing of our amended and restated certificate of incorporation in connection with the completion of this offering; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase up to an additional 1,500,000 shares of common stock from us.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our consolidated financial and other data. You should read this summary consolidated financial and other data together with the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

The summary consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

     Year Ended December 31,  
     2011     2012     2013  
     (in thousands, except
per share data)
 

Consolidated Statements of Operations Data:

      

Revenues

   $ 91,325      $ 112,127      $ 167,892   

Cost of revenues

     27,841        41,745        52,080   
  

 

 

   

 

 

   

 

 

 

Gross profit

     63,484        70,382        115,812   

Operating expenses:

      

Sales and marketing

     44,834        63,526        61,793   

Research and development

     21,824        40,236        40,102   

General and administrative

     18,996        25,999        24,232   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     85,654        129,761        126,127   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (22,170     (59,379     (10,315

Interest expense

     (698     (212     (953

Other income (expense), net

     (220     92        19   
  

 

 

   

 

 

   

 

 

 

Loss before benefit from income taxes

     (23,088     (59,499     (11,249

Benefit from income taxes

     (118     (265       
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (22,970   $ (59,234   $ (11,249
  

 

 

   

 

 

   

 

 

 

Deemed dividend to investors in relation to tender offer

     6,933                 
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (29,903   $ (59,234   $ (11,249
  

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share attributable to common stockholders(1)

   $ (2.14   $ (3.72   $ (0.57
  

 

 

   

 

 

   

 

 

 

Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders(1)

     13,944        15,927        19,626   
  

 

 

   

 

 

   

 

 

 

Basic and diluted pro forma net loss per share attributable to common stockholders(1)

       $ (0.18
      

 

 

 

Other Data:

      

Adjusted EBITDA(2)

   $ (14,174   $ (47,255   $ 1,725   

Transactions(3)

     710,043        916,724        1,311,973   

 

(1) 

See Note 13 to our notes to consolidated financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share.

(2) 

Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net loss adjusted for interest expense, other income (expense), net, benefit from income taxes, depreciation and amortization, and stock-based compensation. Please see “—Non-GAAP Financial Measures–Adjusted EBITDA” below for more information as to the limitations of using non-GAAP measures and for the reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

(3) 

A transaction is the distribution of a digital coupon through our platform that generates revenues. We present transactions as we believe that our ability to increase the number of transactions using our platform is an important indicator of our ability to grow our revenues.

 

 

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The stock-based compensation expense included above was as follows:

 

     Year Ended December 31,  
     2011      2012      2013  
     (in thousands)  

Cost of revenues

   $ 295       $ 378       $ 300   

Sales and marketing

     849         1,880         1,492   

Research and development

     962         1,532         1,015   

General and administrative

     2,464         1,778         2,374   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $     4,570       $     5,568       $     5,181   
  

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2013  
     Actual     Pro
Forma(1)
     Pro  Forma
As
Adjusted(2)
 
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 38,972      $ 38,972       $ 155,572   

Working capital

     21,420        21,420         138,020   

Property and equipment, net

     29,942        29,942         29,942   

Deferred revenues

     6,751        6,751         6,751   

Total liabilities

     66,220        66,220         66,220   

Debt obligations

     23,077        23,077         23,077   

Redeemable convertible preferred stock

     270,262                  

Total stockholders’ equity (deficit)

     (202,246     68,016         184,616   

 

(1) 

The pro forma column reflects the conversion of all outstanding shares of preferred stock into 41,580,507 shares of common stock and stock-based compensation expense of $11.5 million associated with restricted stock units. Please see Note 2 to our notes to consolidated financial statements included elsewhere in this prospectus for further information related to this expense.

(2) 

The pro forma as adjusted column further reflects the sale by us of 10,000,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $13.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) each of the amount of our pro forma as adjusted cash and cash equivalents, working capital and total stockholders’ equity by $9.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of the amount of our pro forma as adjusted cash and cash equivalents, working capital and total stockholders’ equity by $12.1 million, assuming that the initial public offering price remains the same and after deducting the underwriting discount. The pro forma as adjusted information presented in the summary consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have presented Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as net loss adjusted for interest expense, other income (expense), net, benefit from income taxes, depreciation and amortization, and stock-based compensation. We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure for each of the periods presented.

 

     Year Ended December 31,  
     2011     2012     2013  
     (in thousands)  

Reconciliation of Adjusted EBITDA:

  

Net loss

   $ (22,970   $ (59,234   $ (11,249

Adjustments:

      

Interest expense

     698        212        953   

Other income (expense), net

     220        (92     (19

Benefit from income taxes

     (118     (265       

Depreciation and amortization

     3,426        6,556        6,859   

Stock-based compensation

     4,570        5,568        5,181   
  

 

 

   

 

 

   

 

 

 

Total adjustments

     8,796        11,979        12,974   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (14,174   $ (47,255   $ 1,725   
  

 

 

   

 

 

   

 

 

 

We have presented Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short and long-term operational plans, and to determine bonus payouts. In particular, we believe that the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, Adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

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

 

  Ÿ  

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

  Ÿ  

Adjusted EBITDA does not reflect: (i) changes in, or cash requirements for, our working capital needs; (ii) the potentially dilutive impact of equity-based compensation; or (iii) tax payments that may represent a reduction in cash available to us; and

 

  Ÿ  

other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP-based financial performance measures, including various cash flow metrics, net income or loss, and our other GAAP financial results.

 

 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and all of the other information contained in this prospectus before deciding whether to purchase our common stock. Our business, prospects, financial condition or operating results could be materially and adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock.

Risks Related to Our Business

We have incurred net losses since inception and we may not be able to generate sufficient revenues to achieve or subsequently maintain profitability.

We have incurred net losses of $23.0 million, $59.2 million and $11.2 million in 2011, 2012 and 2013, respectively, and had an accumulated deficit of $168.8 million as of December 31, 2013. We anticipate that our costs and expenses will increase in the foreseeable future as we continue to invest in:

 

  Ÿ  

sales and marketing;

 

  Ÿ  

research and development, including new product development;

 

  Ÿ  

our technology infrastructure;

 

  Ÿ  

general administration, including legal and accounting expenses related to our growth and being a public company;

 

  Ÿ  

efforts to expand into new markets; and

 

  Ÿ  

strategic opportunities, including commercial relationships and acquisitions.

For example, we have incurred and expect to continue to incur significant expenses developing our new point of sale solution. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these expenses. If we are unable to gain efficiencies in our operating costs, our business could be adversely impacted. We cannot be certain that we will be able to attain or maintain profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.

We may not maintain our recent revenue growth.

Our revenues have increased significantly quarter over quarter since the quarter ended September 30, 2012. We may not be able to maintain our recent rate of revenue growth, and we may not be able to generate sufficient revenues to achieve profitability. In addition, historically the growth rate of our business, and as a result, our revenue growth, has varied from quarter-to-quarter and year-to-year, and we expect that variability to continue. For example, our revenue growth was adversely affected in the first half of 2012 because as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers. In addition, our revenues may fluctuate due to changes in promotional spending budgets of CPGs and retailers and

 

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the timing of their promotional spending. Decisions by major CPGs or retailers to delay or reduce their promotional spending or divert spending away from digital promotions could slow our revenue growth or reduce our revenues. We believe that our continued revenue growth will depend on increasing the number of transactions on our platform, and, in particular, on our ability to:

 

  Ÿ  

increase our share of CPG spending on overall trade promotions, increase the number of brands that are using our platform within each CPG, increase media advertising spending on our platform, increase our share of retailer spending on coupon codes and maximize the lifetime value of our consumers across all of our products;

 

  Ÿ  

further integrate our digital promotions into retailers’ in-store and point of sale systems;

 

  Ÿ  

grow the number of CPGs and retailers in our current customer base and add new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment;

 

  Ÿ  

expand the use by consumers of our newest digital promotion offerings and broaden the selection and use of digital coupons;

 

  Ÿ  

obtain high quality coupons and increase the number of CPG-authorized activations;

 

  Ÿ  

expand the number, variety and relevance of digital coupons available on our web, mobile and social channels, as well as those of our CPGs, retailers and network of publishers;

 

  Ÿ  

increase the awareness of our brand and earn and preserve our reputation;

 

  Ÿ  

hire, integrate and retain talented personnel;

 

  Ÿ  

effectively manage growth in our personnel and operations; and

 

  Ÿ  

successfully compete with existing and new competitors.

However, we cannot assure you that we will successfully implement any of these actions. Failure to do so could harm our business and cause our operating results to suffer.

If we are unable to successfully respond to changes in the digital promotions market and continue to grow the market, our business could be harmed.

As consumer demand for digital coupons has increased, promotion spending has shifted from traditional coupons through traditional channels, such as newspapers and direct mail, to digital coupons. However, it is difficult to predict whether the pace of transition from traditional to digital coupons will continue at the same rate and whether the growth of the digital promotions market will continue. In order to expand our business, we must appeal to and attract consumers who historically have used traditional promotions to purchase goods or may prefer alternatives to our offerings, such as those of our competitors. If the demand for digital coupons does not continue to grow as we expect, or if we fail to successfully address this demand, our business will be harmed. For example, the continued growth of our revenues will require increasing the number of brands that are using our platform within each CPG and further integrating our digital promotions into retailers’ in-store and point of sale systems. We expect that the market will evolve in ways which may be difficult to predict. It is also possible that digital coupon offerings generally could lose favor with CPGs, retailers or consumers. In the event of these or any other changes to the market, our continued success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics. In addition, we will need to continue to grow demand for our digital promotions platform by CPGs, retailers and consumers. If we are unable to grow or successfully respond to changes in the digital promotions market, our business could be harmed and our results of operations could be negatively impacted.

 

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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.

Historically, our revenue growth has varied from quarter-to-quarter and year-to-year, and we expect that variability to continue. In addition, our operating costs and expenses have fluctuated in the past, and we anticipate that our costs and expenses will increase over time as we continue to invest in growing our business and incur additional costs of being a public company.

Our operating results could vary significantly from quarter-to-quarter and year-to-year as a result of these and other factors, many of which are outside of our control, and as a result we have a limited ability to forecast the amount of future revenues and expenses, which may adversely affect our ability to predict financial results accurately, and our operating results may vary from quarter-to-quarter and may fall below our estimates or the expectations of public market analysts and investors. Fluctuations in our quarterly operating results may lead analysts to change their long-term models for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key personnel or cause other unanticipated issues, all of which could cause our stock price to decline. As a result of the potential variations in our quarterly revenues and operating results, we believe that quarter-to-quarter comparisons of our net revenues and operating results may not be meaningful and the results of any one quarter or historical patterns should not be considered indicative of our future sales activity, expenditure levels or performance.

In addition to other factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

 

  Ÿ  

our ability to continue to grow our revenues by increasing our share of CPG spending and the number of brands using our platform within each CPG, increasing media advertising spending on our platform, further integrating with our retailers and increasing the use of retailer coupon codes by consumers, adding new CPGs and retailers to our network and growing our core current customer base and expanding into new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment;

 

  Ÿ  

our ability to successfully respond to changes in the digital promotions market and continue to grow the market and demand for our platform;

 

  Ÿ  

our ability to grow consumer selection and use of our digital promotion offerings and attract new consumers to our platform;

 

  Ÿ  

the amount and timing of digital promotions by CPGs, which are affected by budget cycles, economic conditions and other factors;

 

  Ÿ  

the impact of global business or macroeconomic conditions, including the resulting effects on the level of trade promotion spending by CPGs and spending by consumers;

 

  Ÿ  

the impact of competitors or competitive products and services, and our ability to compete in the digital promotions market;

 

  Ÿ  

our ability to obtain high quality coupons and increase the number of CPG-authorized activations;

 

  Ÿ  

changes in consumer behavior with respect to digital promotions and how consumers access digital coupons and our ability to develop applications that are widely accepted and generate revenues;

 

  Ÿ  

the costs of investing in and maintaining and enhancing our technology infrastructure;

 

  Ÿ  

the costs of developing new products and solutions and enhancements to our platform;

 

  Ÿ  

our ability to manage our growth;

 

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  Ÿ  

the success of our sales and marketing efforts;

 

  Ÿ  

government regulation of e-commerce and m-commerce and requirements to comply with security and privacy laws and regulations affecting our business, and changes in government regulation affecting our business or our becoming subject to new government regulation;

 

  Ÿ  

our ability to deal effectively with fraudulent transactions or customer disputes;

 

  Ÿ  

the attraction and retention of qualified employees and key personnel;

 

  Ÿ  

the effectiveness of our internal controls; and

 

  Ÿ  

changes in U.S. generally accepted accounting principles or tax laws.

If we fail to attract and retain CPGs, retailers and publishers and expand our relationships with them, our revenues and business will be harmed.

The success of our business depends in part on our ability to increase our share of CPG spending on overall trade promotions, increase media advertising spending on our platform, increase the number of brands that are using our platform within each CPG, increase our share of retailer spending on coupon codes, and maximize the lifetime value of our consumers across all of our products. It also depends on our ability to further integrate our digital promotions into retailers’ in-store and point of sale systems. In addition, we must acquire new CPGs and retailers in our current customer base and add new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment. If CPGs and retailers do not find that offering digital promotions on our platform enables them to reach consumers and sufficiently increase sales with the scale and effectiveness that is compelling to them, CPGs and retailers may not increase their distribution of digital promotions on our platform, or they may decrease them or stop offering them altogether, and new CPGs and retailers may decide not to use our platform.

For example, if CPGs decide that utilizing our platform provides a less effective means of connecting with consumers, we may not be able to increase our prices or CPGs may pay us less. Likewise if retailers decide that our platform is less effective at increasing sales to and loyalty of existing and new consumers, retailers may demand a higher percentage of the total proceeds from each digital promotion that is activated or demand minimum guaranteed payments. In addition, we expect to face increased competition, and competitors may accept lower payments from CPGs to attract and acquire new CPGs, or provide retailers and publishers a higher distribution fee than we currently offer to attract and acquire new retailers and publishers. In addition, we may experience attrition in our CPGs, retailers and publishers in the ordinary course of business resulting from several factors, including losses to competitors, changes in CPG budgets, and decisions by CPGs, retailers and publishers to offer digital coupons through their own websites or other channels without using a third-party platform such as ours. If we are unable to retain and expand our relationships with existing CPGs, retailers and publishers or if we fail to attract new CPGs, retailers and publishers to the extent sufficient to grow our business, or if too many CPGs, retailers and publishers are unwilling to offer digital coupons with compelling terms through our platform, we may not increase the number of transactions on our platform and our revenues, gross margin and operating results will be adversely affected.

If the distribution fees that we pay as a percentage of our revenues increases, our gross profit and business will be harmed.

When we deliver a digital coupon on a retailer’s website or through its loyalty reward program, or the website of a publisher, we generally pay a distribution fee to the retailer or publisher. Such fees have increased as a percentage of our revenues in recent periods. If such fees as a percentage of our revenues continue to increase, our cost of revenues as a percentage of revenues could increase and our operating results would be adversely affected.

 

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If we fail to maintain and expand the use by consumers of digital coupons on our platform, our revenues and business will be harmed.

We must continue to maintain and expand the use by consumers of digital coupons in order to increase the attractiveness of our platform to CPGs and retailers and to increase revenues and achieve profitability. If consumers do not perceive that we offer a broad selection of personalized and high quality digital coupons, we may not be able to attract or retain consumers on our platform. If we are unable to maintain and expand the use by consumers of digital coupons on our platform and do so to a greater extent than our competitors, CPGs may find that offering digital promotions on our platform does not reach consumers with the scale and effectiveness that is compelling to them. Likewise retailers may find that using our platform does not increase sales of the promoted products and consumer loyalty to the retailer to the extent they expect, the revenues we generate may not increase to the extent we expect or may decrease. Either of these would adversely affect our operating results.

We depend in part on third-party advertising agencies as intermediaries, and if we fail to maintain these relationships, our business may be harmed.

A portion of our business is conducted indirectly with third-party advertising agencies acting on behalf of CPGs and retailers. Third-party advertising agencies are instrumental in assisting CPGs and retailers to plan and purchase advertising and promotions, and each third-party advertising agency generally allocates advertising and promotion spend from CPGs and retailers across numerous channels. We do not have exclusive relationships with third-party advertising agencies and we depend in part on third-party agencies to work with us as they embark on marketing campaigns for CPGs and retailers. While in most cases we have developed relationships directly with CPGs and retailers, we nevertheless depend in part on third-party advertising agencies to present to their CPG and retailer clients the merits of our platform. Inaccurate descriptions of our platform by third-party advertising agencies, over whom we have no control, negative recommendations regarding use of our service offerings or failure to mention our platform at all could hurt our business. In addition, if a third-party advertising agency is disappointed with our platform on a particular campaign or generally, we risk losing the business of the CPG or retailer for whom the campaign was run, and of other CPGs and retailers represented by that agency. Since many third-party advertising agencies are affiliated with other third-party agencies in a larger corporate structure, if we fail to maintain good relations with one third-party advertising agency in such an organization, we may lose business from the affiliated third-party advertising agencies as well.

Our sales could be adversely impacted by industry changes relating to the use of third-party advertising agencies. For example, if CPGs or retailers seek to bring their campaigns in-house rather than using an agency, we would need to develop direct relationships with the CPGs or retailers, which we might not be able to do and which could increase our sales and marketing expenses. Moreover, to the extent that we do not have a direct relationship with CPGs or retailers, the value we provide to CPGs and retailers may be attributed to the third-party advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with CPG and retailers. CPGs and retailers may move from one third-party advertising agency to another, and we may lose the underlying business. The presence of third-party advertising agencies as intermediaries between us and the CPGs and retailers thus creates a challenge to building our own brand awareness and affinity with the CPGs and retailers that are the ultimate source of our revenues. In addition, third-party advertising agencies conducting business with us may offer their own digital promotion solutions. As such, these third-party advertising agencies are, or may become, our competitors. If they further develop their own capabilities they may be more likely to offer their own solutions to advertisers, and our ability to compete effectively could be significantly compromised and our business, financial condition and operating results could be adversely affected.

 

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Competition presents an ongoing threat to the success of our business.

We expect competition in digital promotions to continue to increase. The market for digital promotions is highly competitive, fragmented and rapidly changing. We compete against a variety of companies with respect to different aspects of our business, including:

 

  Ÿ  

traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies that provide coupon promotions and discounts on products and services in free standing inserts or other forms, including Valassis Interactive, Inc., News America Marketing Interactive, Inc. and Catalina Marketing Corporation;

 

  Ÿ  

providers of digital coupons such as Valassis’ Redplum.com and News America Marketing’s SmartSource, companies that offer coupon codes such as RetailMeNot, Inc., Exponential Interactive, Inc.’s TechBargains.com, Savings.com, Inc. and Ebates Performance Marketing, Inc., and companies providing other e-commerce based services that allow consumers to obtain direct or indirect discounts on purchases;

 

  Ÿ  

Internet sites that are focused on specific communities or interests that offer coupons or discount arrangements related to such communities or interests; and

 

  Ÿ  

companies offering other advertising and promotion related services.

We believe the principal factors that generally determine a company’s competitive advantage in our market include the following:

 

  Ÿ  

scale and effectiveness of reach in connecting CPGs and retailers to consumers;

 

  Ÿ  

ability to attract consumers to use digital coupons delivered by it;

 

  Ÿ  

platform security, scalability, reliability and availability;

 

  Ÿ  

number of channels by which a company engages with consumers;

 

  Ÿ  

integration of products and solutions;

 

  Ÿ  

rapid deployment of products and services for customers;

 

  Ÿ  

breadth, quality and relevance of the company’s digital coupons;

 

  Ÿ  

ability to deliver digital coupons that are widely available and easy to use in consumers’ preferred form;

 

  Ÿ  

integration with retailer applications;

 

  Ÿ  

brand recognition;

 

  Ÿ  

quality of tools, reporting and analytics for planning, development and optimization of promotions; and

 

  Ÿ  

breadth and expertise of the company’s sales organization.

We are subject to potential competition from large, well-established companies which have significantly greater financial, marketing and other resources than we do and have current offerings that may compete with our platform or may choose to offer digital promotions as an add-on to their core business on their own or in partnership with one of our competitors that would directly compete with ours. Many of our larger potential competitors may have the resources to significantly change the nature of the digital promotions industry to their advantage, which could materially disadvantage us. For example, Google, Yahoo!, Bing and Facebook and online retailers such as Amazon have highly trafficked industry platforms which they could leverage to distribute digital coupons or other digital promotions that could negatively affect our business. In addition, these potential competitors may be

 

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able to respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to attract more consumers and, as a result, more CPGs and retailers, or generate revenues more effectively than we do. Our competitors may offer digital coupons that are similar to the digital coupons we offer or that achieve greater market acceptance than those we offer. We are also subject to potential competition from smaller companies that launch new products and services that we do not offer and that could gain market acceptance.

Our success depends on the effectiveness of our platform in connecting CPGs and retailers with consumers and with attracting consumer use of the digital coupons delivered through our platform. To the extent we fail to provide digital coupons for high quality, relevant products, consumers may become dissatisfied with our platform and decide not to use our digital coupons and elect to use the digital coupons distributed by one of our competitors. As a result of these factors, our CPGs and retailers may not receive the benefits they expect, and CPGs may use the offerings of one of our competitors and retailers may elect to handle coupon codes themselves or exclude us from integrating with their in-store and point of sale systems, and our operating results would be adversely affected.

We also face significant competition for trade promotion spending. We compete against online and mobile businesses, including those referenced above, and traditional advertising outlets, such as television, radio and print, for trade promotion spending. In order to grow our revenues and improve our operating results, we must increase our share of CPG spending on digital coupons and advertising relative to traditional sources and relative to our competitors, many of whom are larger companies that offer more traditional and widely accepted advertising products.

We also directly and indirectly compete with retailers for consumer traffic. Many retailers market and offer their own digital coupons directly to consumers using their own websites, email newsletters and alerts, mobile applications and social media channels. Our retailers could be more successful than we are at marketing their own digital coupons or could decide to terminate their relationship with us.

We may face competition from companies we do not yet know about. If existing or new companies develop, market or offer competitive digital coupon solutions, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.

If we fail to effectively manage our growth, our business and financial performance may suffer.

We have significantly expanded our operations and anticipate expanding further to pursue our growth strategy. Such expansion increases the complexity of our business and places significant demands on our management, operations, technical performance, financial resources and internal control over financial reporting functions. Continued growth could strain our ability to deliver digital coupons on our platform, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. For example, our revenue growth was adversely affected in the first half of 2012 because as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers. Failure to manage our expansion may limit our growth, damage our reputation and negatively affect our financial performance and harm our business.

To effectively manage this growth, we will need to continue to improve our operational, financial and management controls, and our reporting systems and procedures. If we do not effectively manage the growth of our business and operations, the quality and scalability of our platform could suffer.

 

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Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage our future operations. We may not be able to hire, train, retain, motivate and manage required personnel. As we continue to grow, we must effectively integrate, develop and motivate a large number of new employees. We intend to continue to expand our research and development, sales and marketing, and general and administrative organizations, and over time, expand our international operations. To attract top talent, we have had to offer, and believe we will need to continue to offer, highly competitive compensation packages before we can validate the productivity of those employees. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and operating results could be adversely affected.

Providing our products and services to our CPGs, retailers and consumers is costly and we expect our expenses to continue to increase in the future as we grow our business with existing and new CPGs and retailers and develop new products and services that require enhancements to our technology infrastructure. In addition, our operating expenses, such as our research and development expenses and sales and marketing expenses are expected to continue to grow to support our anticipated future growth. As a public company we will incur significant legal, accounting and other expenses that we did not incur as a private company. Our expenses may grow faster than our revenues, and our expenses may be greater than we anticipate. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.

If we do not effectively grow and train our sales team, we may be unable to add new CPGs and retailers or increase sales to our existing CPGs and retailers and our business will be adversely affected.

We continue to be substantially dependent on our sales team to obtain new CPGs and retailers and to drive sales from our existing CPGs and retailers. We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training, integrating and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and it may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, if we continue to grow rapidly, a large percentage of our sales team will be new to the company and our solution. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new CPGs and retailers or increasing sales to our existing CPGs and retailers, our business will be adversely affected.

Our sales cycle with new CPGs and retailers is long and unpredictable and may require us to incur expenses before executing a customer agreement, which makes it difficult to project when, if at all, we will obtain new CPGs and retailers and when we will generate additional revenues from those customers.

We market our services and products directly to CPGs and retailers. New CPG and retailer relationships typically take time to obtain and finalize. A significant time period may pass between selection of our services and products by key decision-makers and the signing of a contract. The length of time between the initial sales call and the realization of a final contract is difficult to predict. As a result, it is difficult to predict when we will obtain new CPGs and retailers and when performance and delivery of services will be initiated with these potential CPGs and retailers. As part of our sales cycle,

 

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we may incur significant expenses before executing a definitive agreement with a prospective CPG or retailer and before we are able to generate any revenues from such agreement. If conditions in the marketplace generally or with a specific prospective CPG or retailer change negatively, it is possible that no definitive agreement will be executed, and we will be unable to recover any expenses incurred before a definitive agreement is executed, which would in turn have an adverse effect on our business, financial condition and results of operations.

Our business depends on our ability to maintain and scale the network infrastructure necessary to operate our websites and platform, and any significant disruption in service on our websites or platform could result in a loss of CPGs, retailers and consumers.

We deliver digital coupons through our websites, those of our CPGs and retailers as well as our publisher websites. Our reputation and ability to acquire, retain and serve CPGs and retailers, as well as consumers who use digital coupons on our platform are dependent upon the reliable performance of our platform. As the number of our CPG customers, retailers and consumers and the number of digital promotions and information shared through our platform continue to grow, we will need an increasing amount of network capacity and computing power. Our technology infrastructure is hosted across two data centers in co-location facilities in California and Nevada. In addition, we use two other co-location facilities in California and Virginia to host our in-development new point of sale solution. We have spent and expect to continue to spend substantial amounts on data centers and equipment and related network infrastructure to handle the traffic on our platform. The operation of these systems is expensive and complex and could result in operational failures. In the event that the number of transactions or the amount of traffic on our platform grows more quickly than anticipated, we may be required to incur significant additional costs. Interruptions in these systems or service disruptions, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our websites and platform, and prevent CPGs, retailers or consumers from accessing our platform. For example, as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers. A substantial portion of our network infrastructure is hosted by third-party providers. Any disruption in these services or any failure of these providers to handle existing or increased traffic could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. If we do not maintain or expand our network infrastructure successfully or if we experience operational failures, we could lose current and potential CPGs and retailers and consumers, which could harm our operating results and financial condition.

If we are not successful in responding to changes in consumer behavior and do not develop products and solutions that are widely accepted and generate revenues, our results of operations and business could be adversely affected.

The methods by which consumers access digital coupons are varied and evolving. Our platform has been designed to engage consumers at the critical moments when they are choosing the products they will buy and where they will shop. Consumers can select our digital coupons both online through web and mobile and in-store. In order for us to maintain and increase our revenues, we must be a leading provider of digital coupons in each of the forms by which consumers access them. As consumer behavior in accessing digital coupons changes and new distribution channels emerge, if we do not successfully respond and do not develop products or solutions that are widely accepted and generate revenues we may be unable to retain consumers or attract new consumers and as a result, CPGs and retailers, and our business may suffer.

 

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If our websites or those of our publishers fail to rank prominently in unpaid search results from search engines like Google, Yahoo! and Bing, traffic to our websites could decline and our business would be adversely affected.

Our success depends in part on our ability to attract consumers through unpaid Internet search results on search engines like Google, Yahoo! and Bing. The number of consumers we attract to our websites from search engines is due in large part to how and where our websites rank in unpaid search results. These rankings 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 websites may not be prominent enough to drive traffic to our websites, and we may not know how or otherwise be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate fluctuations in the future. In addition, websites must comply with search engine guidelines and policies. These guidelines and policies are complex and may change at any time. If we fail to follow such guidelines and policies properly, search engines may rank our content lower in search results or could remove our content altogether from their index. Any reduction in the number of consumers directed to our websites could reduce the effectiveness of our digital promotions for CPGs and retailers and could adversely impact our business and results of operations.

Factors adversely affecting performance marketing programs and our relationships with performance marketing networks, or the termination of these relationships, may adversely affect our ability to attract and retain business and our coupon codes business.

A portion of our business is based upon consumers using coupon codes in connection with the purchase of goods or services. The commissions we earn for coupon codes accessed through our platform are tracked by performance marketing networks. Third-party performance marketing networks provide CPGs and retailers with affiliate tracking links for revenues attributable to publishers and the ability to distribute digital promotions to multiple publishers. When a consumer executes a purchase on a CPG’s, a retailer’s or a publisher’s website as a result of a performance marketing program, most performance marketing conversion tracking tools credit the most recent link or ad clicked by the consumer prior to that purchase. This practice is generally known as “last-click attribution.” We generate revenues through transactions for which we receive last-click attribution. Risks that may adversely affect our performance marketing programs and our relationships with performance marketing networks include the following, some of which are outside our control:

 

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we may not be able to adapt to changes in the way in which CPGs and retailers attribute credit to us in their performance marketing programs, whether it be “first-click attribution” or “multichannel attribution,” which applies weighted values to each of a retailer’s advertisements and tracks how each of those advertisements contributed to a purchase, or otherwise;

 

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refund rates for products delivered by CPGs and retailers that may be greater than we estimate;

 

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performance marketing networks may not provide accurate and timely reporting on which we rely, we could fail to properly recognize and collect and report revenues and misstate financial reports, projections and budgets and misdirect our advertising, marketing and other operating efforts for a portion of our business;

 

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we primarily rely on a small number of performance marketing networks in non-exclusive arrangements, the loss of which could adversely affect our coupon codes business;

 

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industry changes relating to the use of performance marketing networks could adversely impact our commission revenues;

 

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to the extent performance marketing networks serve as intermediaries between us and CPGs and retailers, it may create challenges to building our own brand awareness and affinity with CPGs and retailers, and the termination of our relationship with the performance marketing networks would terminate our ability to receive payments from CPGs and retailers we service through that network; and

 

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performance marketing networks may compete with us.

If we fail to continue to obtain high quality coupons and sufficient numbers of CPG-authorized activations available through our platform, our revenue growth or our revenues may be harmed.

We generate revenues as consumers select, or activate, a digital coupon through our platform. Our business model depends upon the quality of digital coupons and the specified number of CPG-authorized activations available, which we do not control. CPGs and retailers have a variety of channels through which to promote their products and services. If CPGs and retailers elect to distribute their digital coupons through other channels or not to promote digital coupons at all, or if our competitors are willing to accept lower prices than we are, our ability to obtain high quality digital coupons and sufficient numbers of CPG-authorized activations available on our platform may be impeded and our business, financial condition and operating results will be adversely affected. If we cannot maintain sufficient digital coupons inventory to offer through our platform, consumers may perceive our service as less relevant, consumer traffic to our websites and those of our publishers will decline and, as a result, CPGs and retailers may decrease their use of our platform to deliver digital coupons and our revenue growth or revenues may be harmed.

Our business relies in part on email and other messaging, including SMS text messages, and any technical, legal or other restrictions on the sending of emails or messages or an inability to timely deliver such communications could harm our business.

Our business is in part dependent upon email and other messaging. We provide emails and mobile alerts and other messages to consumers informing them of the digital coupons on our websites, and we believe these communications help generate a significant portion of our revenues. Because of the importance of email and other messaging services to our business, if we are unable to successfully deliver emails or other messages to consumers, if there are legal restrictions on delivering these messages to consumers, or if consumers do not open our emails or messages, our revenues and profitability would be adversely affected. Changes in how webmail applications organize and prioritize email may result in our emails being delivered in a less prominent location in a consumer’s inbox or viewed as “spam” by consumers and may reduce the likelihood of that consumer opening our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also harm our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to consumers. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications would also adversely impact our business. We also rely on social networking messaging services to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers and potential customers could harm our business.

We rely on a third-party service for the delivery of daily emails, and delay or errors in the delivery of such emails or other messaging we send may occur and be beyond our control, which could result in damage to our reputation or harm our business, financial condition and operating results. If we were

 

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unable to use our current email service or other messaging services, alternate services are available; however, we believe our sales could be impacted for some period as we transition to a new provider. Any disruption or restriction on the distribution of our emails or other messages, termination or disruption of our relationship with our messaging service providers, including our third-party service that delivers our daily emails, or any increase in our costs associated with our email and other messaging activities could harm our business.

If our security measures are compromised, or if our platform is subject to attacks that degrade or deny the ability of consumers to access our content, CPGs, retailers and consumers may curtail or stop use of our platform.

We deliver digital coupons via our platform and we collect and maintain data about consumers, including personally identifiable information, as well as other confidential or proprietary information. 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. If we experience compromises to our security that result in performance or availability problems, the complete shutdown of one or more of our websites or the loss or unauthorized disclosure of confidential information, CPGs and retailers as well as consumers may lose trust and confidence in us and decrease their use of our platform or stop using our platform entirely. 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. In addition, consumer information including email addresses and data on consumer usage of our websites could be hacked, hijacked, altered or otherwise claimed or controlled by unauthorized persons. Any or all of these issues could negatively impact our reputation and our ability to attract and retain CPGs and retailers as well as consumers or could reduce the frequency with which our platform is used, cause existing or potential CPG or retailer customers to cancel their contracts or subject us to third-party lawsuits, regulatory fines or other action or liability, thereby harming our results of operations.

Failure to deal effectively with fraudulent transactions could harm our business.

Digital coupons are issued in the form of redeemable coupons or coupon codes with unique identifiers. It is possible that third parties will seek to create counterfeit digital coupons or coupon codes in order to fraudulently claim discounts or credits for redemption. While we use advanced anti-fraud technologies, it is possible that individuals will attempt to circumvent our anti-fraud systems using increasingly sophisticated methods. In addition, our service could be subject to employee fraud or other internal security breaches, and we may be required to reimburse CPGs and retailers for any funds stolen or revenues lost as a result of such breaches. Our CPGs and retailers could also request reimbursement, or stop using digital coupons, if they are affected by buyer fraud or other types of fraud. We may incur significant losses from fraud and counterfeit digital coupons. If our anti-fraud measures do not succeed, our business will suffer.

Our business is subject to complex and evolving laws, regulations and industry standards, and unfavorable interpretations of, or changes in, or failure by us to comply with these laws, regulations and industry standards could substantially harm our business and results of operations.

We are subject to a variety of laws, regulations and industry standards that involve matters related to our business, including the Internet, privacy, anti-spam, data protection, intellectual property,

 

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e-commerce, competition and price discrimination, consumer protection, and taxation and state, local and municipal laws related to the use of promotions. Many of these laws and regulations are still evolving and being tested in courts and industry standards are still developing. Our business, including our ability to operate and expand, could be adversely affected if legislation, regulations or industry standards are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices or the design of our platform. Existing and future laws, regulations and industry standards could restrict our operations, and our ability to retain or increase our CPGs and retailers and consumers’ use of digital promotions delivered on our platform may be adversely affected and we may not be able to maintain or grow our revenues as anticipated.

Failure to comply with federal, state and international privacy and marketing laws, regulations and industry standards, or the expansion of current or the enactment of new privacy and marketing laws, regulations or the adoption of new industry standards, could adversely affect our business.

We are subject to a variety of federal, state and international laws, regulations and industry standards regarding privacy and marketing, which address the collection, storing, sharing, using, processing, disclosure and protection of personal information as well as the tracking of consumer behavior and other consumer data. Many of these laws, regulations and industry standards are changing and may be subject to differing interpretations, costly to comply with or inconsistent among countries and jurisdictions. For example, the Federal Trade Commission, or the FTC, expects companies like ours to comply with guidelines issued under the Federal Trade Commission Act that govern the collection, use and storage of consumer information, and establish 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 process, store, share, disclose and use information about consumers using our websites and our mobile and other applications which may include, depending upon the information that the consumer voluntarily provides to us and their interaction with our platform, name, mailing address, phone number, email address and any other information that the consumer provides to us. While we do not sell or share personally identifiable information to or with third parties, we use this consumer information in the aggregate, and may share this information with third parties for research and internal purposes, advertising and marketing and to improve our business, among other purposes. We believe our policies and practices comply with FTC privacy guidelines and other applicable laws and regulations. However, if our belief proves incorrect, or if these guidelines, laws or regulations or their interpretation change or new legislation or regulations are enacted, we may be compelled to provide additional disclosures to our consumers, obtain additional consents from our consumers before collecting or using their information or implement new safeguards to help our consumers manage our use of their information, among other changes.

We have posted privacy policies and practices concerning the collection, use and disclosure of consumer data on our websites and platform. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Various industry standards on privacy have been developed and are expected to continue to develop, which may be adopted by industry participants at any time. We comply with industry standards and are subject to the terms of our privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We strive to comply with applicable laws, policies, and legal obligations and certain applicable industry standards of conduct relating to privacy and data protection. However, it is possible that these obligations may be interpreted and applied in new ways and/or in a manner that is

 

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inconsistent from one jurisdiction to another and may conflict with other rules or our practices or that new regulations could be enacted. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, FTC requirements or orders or other federal, state or, as we continue to expand internationally, international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our own privacy policies and practices could result in a loss of consumers using our digital coupons or loss of CPGs and retailers and adversely affect our business. Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party web “cookies” for behavioral advertising. The regulation of these cookies and other current online advertising practices could adversely affect our business. Additionally, if third parties we work with violate applicable laws, our policies or other policy-related obligations, such violations may also put our consumers’ information at risk and could in turn have an adverse effect on our business. In addition, certain laws impose restrictions on communications with persons by email, sms text messages and other means of delivery. We strive to comply with applicable laws; however, it is possible that these obligations may be interpreted and applied in new ways and/or in a manner that is inconsistent from one jurisdiction to another.

In addition, various federal, state and, as we continue to expand internationally, foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. Public scrutiny of Internet privacy and security issues may result in increased regulation and different industry standards, which could deter or prevent us from delivering digital coupons on our platform consistent with our current business practices and may require changes to these practices or the design of our platform, thereby harming our business.

We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.

We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which we offer digital promotions. We also may not be able to acquire or maintain appropriate domain names or trademarks in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring and using domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary rights. We may be unable to prevent third parties from using and registering our trademarks, or trademarks that are similar to, or diminish the value of, our trademark in some countries.

We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. For example, from time to time we have identified and shut down websites that have attempted to misappropriate our brand and proprietary rights and sell fraudulent digital coupons. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We are currently subject to litigation and disputes related to our intellectual property and service offerings. We may in the future be subject to additional litigation and disputes. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained.

 

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In the past, we have been subject to third-party claims of infringement and we expect to be subject to infringement claims in the future. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.

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 Coupons.com 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 Coupons.com brand. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.

Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, or if we receive unfavorable media coverage, our ability to retain and expand our number of CPGs, retailers and consumers will be impaired and our business and operating results will be harmed.

We believe that the brand identity that we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing our brands are critical to expanding our base of CPGs, retailers and consumers. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain the Coupons.com brand, or if we incur excessive expenses in this effort, our business would be harmed. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend on our ability to continue to provide sufficient quantities of reliable, trustworthy and high quality digital coupons, which we may not do successfully.

Unfavorable publicity or consumer perception of our websites, platform, practices or service offerings, or the offerings of our CPGs and retailers, could adversely affect our reputation, resulting in

 

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difficulties in recruiting, decreased revenues and a negative impact on the number of CPGs and retailers we feature and our user base, the loyalty of our consumers and the number and variety of digital coupons we offer. As a result, our business could 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 websites that we use in our business, such as Coupons.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 new domain names, which could cause us substantial harm, or to incur significant expense in order to purchase rights to the domain names 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 management’s attention and harm our business.

Some of our solutions contain open source software, which may pose particular risks to our proprietary software and solutions.

We use open source software in our solutions and will use open source software in the future. 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.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with CPGs, retailers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement or other liabilities relating to or arising from our products, services or other contractual obligations. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our business.

Acquisitions, joint ventures and strategic investments could result in operating difficulties, dilution and other harmful consequences.

We expect to evaluate and consider a wide array of potential strategic transactions, including acquisitions and dispositions of businesses, joint ventures, technologies, services, products and other assets and strategic investments. At any given time, we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. We have limited experience managing

 

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acquisitions and integrating acquired businesses. The process of integrating any acquired business may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:

 

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diversion of management time, as well as a shift of focus from operating the businesses to issues related to integration and administration;

 

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the need to integrate the acquired company’s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

 

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retention of key employees from the acquired company and cultural challenges associated with integrating employees from the acquired company into our organization;

 

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the need to implement or improve controls, procedures and policies appropriate for a public company at companies that prior to acquisition had lacked such controls, procedures and policies;

 

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in some cases, the need to transition operations and customers onto our existing platforms;

 

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liability for activities of the acquired company before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities;

 

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write-offs or charges; and

 

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litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders or other third parties and intellectual property infringement claims.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of any or all of our acquisitions or joint ventures, or we may not realize them in the time frame expected or cause us to incur unanticipated liabilities, and harm our business. Future acquisitions or joint ventures may require us to issue dilutive additional equity securities, spend a substantial portion of our available cash, incur debt or contingent liabilities, amortize expenses related to intangible assets or incur incremental operating expenses or write-offs of goodwill, which could adversely affect our results of operations and harm our business.

Our business is subject to interruptions, delays or failures resulting from earthquakes, other natural catastrophic events or terrorism.

Our headquarters is located in Mountain View, California. Our current technology infrastructure is hosted across two data centers in co-location facilities in California and Nevada. In addition, we use two other co-location facilities in California and Virginia to host our in-development new point of sale solution. Our services, operations and the data centers from which we provide our services 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. A significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, financial condition and results of operations and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism could cause disruptions to the Internet, our business or the economy as a whole. We may not have sufficient protection or recovery plans in certain circumstances, such as natural disasters affecting areas where data centers upon which we rely are located, and our business interruption insurance may be insufficient to compensate us for losses that may occur. Such disruptions could negatively impact our ability to run our websites, which could harm our business.

 

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If we fail to expand effectively in international markets, our revenues and our business may be harmed.

We currently generate almost all of our revenues from the United States. We also operate to a limited extent in the United Kingdom and continental Europe. The CPGs and retailers on our platform have global operations and we plan to grow our operations and offerings through expansion in existing international markets and by partnering with our CPGs and retailers to enter new geographies that are important to them. Further expansion into international markets will require management attention and resources and we have limited experience entering new geographic markets. Entering new foreign markets will require us to localize our services to conform to a wide variety of local cultures, business practices, laws and policies. The different commercial and Internet infrastructure in other countries may make it more difficult for us to replicate our business model. In some countries, we will compete with local companies that understand the local market better than we do, and we may not benefit from first-to-market advantages. We may not be successful in expanding into particular international markets or in generating revenues from foreign operations. As we expand internationally, we will be subject to risks of doing business internationally, including the following:

 

  Ÿ  

competition with strong local competitors and preference for local providers, or foreign companies entering the same markets;

 

  Ÿ  

the cost and resources required to localize our platform;

 

  Ÿ  

burdens of complying with a wide variety of different laws and regulations, including intellectual property laws and regulation of digital coupon terms, Internet services, privacy and data protection, anti-competition regulations and different liability standards, which may limit or prevent us from offering of our solutions in some jurisdictions or limit our ability to enforce contractual obligations;

 

  Ÿ  

differences in how trade promotion spending is allocated;

 

  Ÿ  

differences in the way digital coupons and advertising are delivered and how consumers access and use digital coupons;

 

  Ÿ  

technology compatibility;

 

  Ÿ  

difficulties in recruiting and retaining qualified employees and managing foreign operations;

 

  Ÿ  

different employee/employer relationships and the existence of workers’ councils and labor unions;

 

  Ÿ  

shorter payment cycles, different accounting practices and greater problems in collecting accounts receivable;

 

  Ÿ  

higher product return rates;

 

  Ÿ  

seasonal reductions in business activity;

 

  Ÿ  

adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash; and

 

  Ÿ  

political and economic instability.

Changes in the U.S. taxation of international activities may increase our worldwide effective tax rate and harm our financial condition and results of operations. The taxing authorities of the jurisdictions in which we plan to 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. Significant judgment will be required in evaluating our tax positions and determining our provision for

 

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income taxes. During the ordinary course of business, there will be many transactions and calculations for which the ultimate tax determination is uncertain. As we expand our business to operate in numerous taxing jurisdictions, the application of tax laws may 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. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In particular, there is uncertainty in relation to the U.S. tax legislation in terms of the future corporate tax rate but also in terms of the U.S. tax consequences of income derived from intellectual property earned overseas in low tax jurisdictions.

Our planned corporate structure and intercompany arrangements will be 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.

Our failure to manage these risks and challenges successfully could materially and adversely affect our business, financial condition and results of operations.

We are exposed to fluctuations in currency exchange rates and interest rates.

To date, we have generated almost all of our revenues from within the United States. As a result, we currently do not have significant revenues or expenses in our international operations and we do not hedge our foreign currency exchange risk. However, we plan to grow our operations and offerings through expansion in existing international markets and by partnering with our existing CPGs and retailers to enter new geographies that are important to them. As we expand our business outside the United States we will face exposure to adverse movements in currency exchange rates. Our foreign operations will be exposed to foreign exchange rate fluctuations as the financial results are translated from the local currency into U.S. dollars upon consolidation. If the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions will result in increased revenues, operating expenses and net income. Similarly, if the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transaction will result in decreased revenues, operating expenses and net income. As exchange rates vary, sales and other operating results, when translated, may differ materially from expectations. Our risks related to currency fluctuations will increase as our international operations become an increasing portion of our business. In addition, we face exposure to fluctuations in interest rates which may impact our investment income unfavorably.

The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business.

We currently depend on the continued services and performance of the key members of our management team, including Steven R. Boal, our Chief Executive Officer. Mr. Boal is one of our founders and his leadership has played an integral role in our growth. Key institutional knowledge remains with a small group of long-term employees and directors whom we may not be able to retain. The loss of key personnel, including key members of management as well as our marketing, sales, product development and technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business. Moreover, some of our management, including our chief financial officer, are new to our team.

As we become a more mature company, we may find our recruiting and retention efforts more challenging. We are seeking to continue to hire a significant number of personnel, including certain key management personnel. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.

 

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Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

Our management team has limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that will be subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely impact our business operations.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may dilute the interests of our stockholders, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, and similar state law provisions, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. If our existing NOLs are subject to limitations arising from ownership changes, possibly including, but not limited to, this initial public offering, our ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, also could result in an ownership change under Section 382 of the Code. There is also a risk that our NOLs could expire, or otherwise be unavailable to offset future income tax liabilities due to changes in the law, including regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we attain profitability.

Risks Related to this Offering and Ownership of our Common Stock

There has been no prior market for our common stock. An active market may not develop or be sustainable, and investors may not be able to resell their shares at or above the initial public offering price.

Before this offering, there has not been a public market for our common stock, and an active public market for our common stock may not develop or be sustained after this offering. The initial public offering price will be determined by negotiations between the representative of the underwriters and us and may vary from the market price of our common stock at the completion of this offering. The price of our stock may change in response to variations in our operating results and also may change in response to other factors, including factors specific to technology companies, many of which are beyond our control. As a result, our stock price may experience significant volatility. Among other factors that could affect our stock price are:

 

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the financial projections that we or analysts may choose to provide to the public, any changes in these projections or our failure for any reason to meet these projections;

 

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  Ÿ  

the development and sustainability of an active trading market for our common stock;

 

  Ÿ  

success of competitive products or services;

 

  Ÿ  

the public’s response to press releases or other public announcements by us or others, including our filings with the Securities and Exchange Commission, or SEC;

 

  Ÿ  

announcements relating to litigation;

 

  Ÿ  

speculation about our business in the press or the investment community;

 

  Ÿ  

future sales of our common stock by our significant stockholders, officers and directors;

 

  Ÿ  

changes in our capital structure, such as future issuances of debt or equity securities;

 

  Ÿ  

our entry into new markets;

 

  Ÿ  

regulatory developments in the United States or foreign countries;

 

  Ÿ  

strategic actions by us or our competitors, such as acquisitions or restructurings; and

 

  Ÿ  

changes in accounting principles.

In particular, we cannot assure you that you will be able to resell your shares of our common stock at or above the initial public offering price.

Substantial future sales of shares by our stockholders could negatively affect our stock price after this offering.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Based on the total number of shares of our common stock outstanding as of December 31, 2013, upon completion of this offering, we will have 72,669,807 shares of common stock outstanding, assuming no exercise of our outstanding options or vesting of our outstanding restricted stock units.

All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. Substantially all of the remaining 62,669,807 shares of common stock outstanding after this offering, based on shares outstanding as of December 31, 2013, will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus. Goldman, Sachs & Co. may, in its sole discretion, release all or some portion of the shares subject to lock-up agreements prior to expiration of the lock-up period.

Our equity incentive plans allow us to issue, among other things, stock options, restricted stock and restricted stock units. We intend to file a registration statement under the Securities Act as soon as practicable after the completion of this offering to cover the issuance of shares upon the exercise or vesting of awards granted under those plans. As a result, any shares issued or granted under the plans after the completion of this offering also will be freely tradable in the public market, subject to lock-up agreements as applicable. If equity securities are issued under the plans and it is perceived that they will be sold in the public market, then the price of our common stock could decline substantially.

Holders of 40,912,253 shares of our common stock issuable upon conversion of preferred stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other

 

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stockholders. Once we have registered the resale of these shares, they can be sold in the public market. If these additional shares are sold, or it is perceived that they will be sold, the trading price of our common stock could decline.

The concentration of our common stock ownership with our executive officers, directors and affiliates will limit your ability to influence corporate matters.

We anticipate that our executive officers, directors and owners of 5% or more of our outstanding common stock will together own approximately 61.7% of our outstanding common stock after this offering, based on the number of shares outstanding as of December 31, 2013. These stockholders will therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. This ownership could affect the value of your shares of common stock.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the New York Stock Exchange, or the NYSE. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, 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. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of management evaluations and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NYSE.

 

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We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report on Form 10-K. Our independent registered public accounting firm is not required to audit the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it concludes that our internal control is not effective.

Any failure to maintain effective disclosure controls and internal control over financial reporting could have a material and adverse effect on our business and operating results, and cause a decline in the price of our common stock.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company”, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We would cease to be an “emerging growth company” upon the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; the date we are deemed a “large accelerated filer” as defined in the Exchange Act; and the last day of the fiscal year ending after the fifth anniversary of this offering. We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will have broad discretion in using our net proceeds from this offering, and the benefits from our use of the proceeds may not meet investors’ expectations.

Our management will have broad discretion over the allocation of our net proceeds from this offering as well as over the timing of their use without stockholder approval. We have not yet determined how the net proceeds of this offering will be used, other than for working capital and other general corporate purposes. We also may use a portion of the net proceeds to satisfy our anticipated tax withholding and remittance obligations related to the settlement of our outstanding RSUs. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of our net proceeds from this offering. Our failure to apply these proceeds effectively could cause our business to suffer.

 

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If securities analysts do not publish research or if securities analysts or other third parties publish inaccurate or unfavorable research about us, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that securities analysts and other third parties choose to publish about us. We do not control these analysts or other third parties. The price of our common stock could decline if one or more securities analysts downgrade our common stock or if one or more securities analysts or other third parties publish inaccurate or unfavorable research about us or cease publishing reports about us.

Because our existing investors paid substantially less than the initial public offering price when they purchased their shares, new investors will incur immediate and substantial dilution in their investment.

Investors purchasing shares of common stock in this offering will incur immediate and substantial dilution in net tangible book value per share because the price that new investors pay will be substantially greater than the net tangible book value per share of the shares acquired. This dilution is due in large part to the fact that our existing investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, upon the completion of this offering, there will be options to purchase 12,635,707 shares of our common stock outstanding and 4,521,191 restricted stock units, based on the number of such awards outstanding on December 31, 2013. To the extent shares of common stock are issued with respect to such awards in the future, there will be further dilution to new investors.

We do not intend to pay dividends for the foreseeable future.

We intend to retain all of our earnings for the foreseeable future to finance the operation and expansion of our business and do not anticipate paying cash dividends on our common stock. The terms of our credit and security agreement also restrict our ability to pay dividends. As a result, you can expect to receive a return on your investment in our common stock only if the market price of the stock increases.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

Provisions in our certificate of incorporation and by-laws, as amended and restated prior to the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

  Ÿ  

authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to defend against a takeover attempt;

 

  Ÿ  

establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

 

  Ÿ  

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

 

  Ÿ  

provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;

 

  Ÿ  

prevent stockholders from calling special meetings; and

 

  Ÿ  

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

 

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In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder becomes an “interested” stockholder. For a description of our capital stock, see the section titled “Description of Capital Stock.”

We may expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs in connection with this offering, and the manner in which we fund that expenditure may have an adverse effect on our financial condition.

We may expend substantial funds to satisfy tax withholding and remittance obligations when we settle a portion of our RSUs granted prior to the date of this prospectus. Our RSUs vest upon the satisfaction of both a service condition and a liquidity-event condition. The service condition for the majority of the RSUs is satisfied over a period of four years. The liquidity-event condition will be satisfied on the earlier of (i) six months after the effective date of this initial public offering or (ii) March 15, 2015; and (iii) the time immediately prior to the consummation of a change in control. On the settlement dates for the RSUs, we may withhold shares and remit income taxes on behalf of the holders of the RSUs at the applicable minimum statutory rates, which we refer to as a net settlement. We expect the applicable minimum statutory rates to be approximately 40% on average, and the income taxes due would be based on the then-current value of the underlying shares of our common stock. Based on the number of RSUs outstanding as of December 31, 2013 for which the service condition had been satisfied on that date, and assuming (i) the liquidity-event condition had been satisfied on that date and (ii) that the price of our common stock at the time of settlement was equal to $13.00, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, we estimate that this tax obligation on the initial settlement date would be approximately $4.0 million in the aggregate. The amount of this obligation could be higher or lower, depending on the price of our common stock on the initial settlement date for the RSUs. To settle these RSUs on the initial settlement date, assuming a 40% tax withholding rate, if we choose to undertake a net settlement of all of these awards, we would expect to deliver an aggregate of approximately 457,000 shares of our common stock to RSU holders and withhold an aggregate of approximately 305,000 shares of our common stock. In connection with these net settlements, we would withhold and remit the tax liabilities on behalf of the RSU holders to the relevant tax authorities in cash.

If we choose to undertake a net settlement of our RSUs, then in order to fund the tax withholding and remittance obligations on behalf of our RSU holders, we would expect to use a substantial portion of our cash and cash equivalent balances, or, alternatively, we may choose to borrow funds or a combination of cash and borrowed funds to satisfy these obligations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available to our management at the date of this prospectus and our management’s good faith belief as of such date with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

  Ÿ  

our financial performance, including our revenues, margins, costs, expenditures, growth rates and operating expenses, and our ability to generate positive cash flow and become profitable;

 

  Ÿ  

the amount and timing of digital promotions by CPGs, which are affected by budget cycles, economic conditions and other factors;

 

  Ÿ  

our ability to adapt to changing market conditions;

 

  Ÿ  

our ability to retain and expand our business with existing CPGs and retailers;

 

  Ÿ  

our ability to maintain and expand the use by consumers of digital promotions on our platforms;

 

  Ÿ  

our ability to attract and retain third-party advertising agencies, performance marketing networks and other intermediaries;

 

  Ÿ  

our ability to effectively manage our growth;

 

  Ÿ  

the effects of increased competition in our markets and our ability to compete effectively;

 

  Ÿ  

our ability to effectively grow and train our sales team;

 

  Ÿ  

our ability to obtain new CPGs and retailers and to do so efficiently;

 

  Ÿ  

our ability to maintain, protect and enhance our brand and intellectual property;

 

  Ÿ  

costs associated with defending intellectual property infringement and other claims;

 

  Ÿ  

our ability to successfully enter new markets;

 

  Ÿ  

our ability to develop and launch new services and features;

 

  Ÿ  

our ability to attract and retain qualified employees and key personnel; and

 

  Ÿ  

other factors discussed in this prospectus under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In addition, in this prospectus, the words “anticipate,” “believe,” “continue,” “could,” “seek,” “might,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “approximately,” “project,” “should,” “will,” “would” or the negative or plural of these words or similar expressions, as they relate to our company, business and management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the future events and circumstances discussed in this prospectus may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors” and elsewhere in this prospectus. We derive

 

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many of our forward-looking statements from our operating budgets and forecasts, which we base on many assumptions. While we believe that our assumptions are reasonable, we caution that it is difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Given these uncertainties, you should not place undue reliance on these forward-looking statements. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Forward-looking statements speak only as of the date of this prospectus. We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statement to reflect actual results, changes in assumptions based on new information, future events or otherwise. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including independent industry publications by Accenture plc, or Accenture, Colloquy, eMarketer Inc., or eMarketer, Experian Marketing Services, or Experian, GfK SE, or Gfk, International Data Corporation, or IDC, International Telecommunication Union, or ITU, NCH Marketing Services, Inc., or NCH, The Nielsen Company (US), LLC and NetRatings, LLC, or Nielsen, and Promotion Optimization Institute, or POI. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and in our experience to date in, the markets for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information, we believe the information from these industry publications that is included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Certain information in the text of the prospectus is contained in independent industry publications. The source of, and selected additional information contained in, these independent industry publications are provided below:

 

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Accenture and POI, Charting Your Course to Trade Promotion Optimization Amid Economic Storm, Opportunity, May 6, 2011;

 

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Colloquy, The 2013 Colloquy Loyalty Census, June 2013;

 

  Ÿ  

eMarketer, Mobile Spurs Digital Coupon User Growth, January 31, 2013;

 

  Ÿ  

eMarketer, US Retail Ecommerce 2013 Forecast and Comparative Estimates, April 2013;

 

  Ÿ  

Experian, Simmons National Consumer Study;

 

  Ÿ  

GfK, Digital Coupon Redeemer: Shopper Trends, January 5, 2013;

 

  Ÿ  

IDC, Worldwide New Media Market Model IH2013 Worldwide and US Data, July 2013;

 

  Ÿ  

ITU, ITU World Telecommunication/ICT Indicators Database, 2013, June 7, 2013;

 

  Ÿ  

NCH, CPG Coupons: U.S. Market Analysis, 2013;

 

  Ÿ  

NCH, Annual Topline U.S. CPG Coupon Facts Report for Year-End 2013, February 2014; and

 

  Ÿ  

Nielsen, Netview Top Sites List, December 2013.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of 10,000,000 shares of our common stock that we are selling in this offering will be approximately $116.6 million, assuming an initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares is exercised in full, we estimate that we will receive additional net proceeds of approximately $18.1 million.

A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us by $9.3 million, after deducting the underwriting discount and estimated offering expenses payable by us, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Each increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) the net proceeds by approximately $12.1 million, assuming that the initial public offering price remains the same, and after deducting the underwriting discount.

The principal purposes of this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments at this time. We also may use a portion of the net proceeds to satisfy our anticipated tax withholding and remittance obligations related to the settlement of our outstanding RSUs. Based on the number of RSUs outstanding as of December 31, 2013 for which the service condition had been satisfied on that date, and assuming (i) the liquidity-event condition had been satisfied on that date, (ii) we choose to undertake a net settlement of all of our RSUs and (iii) that the price of our common stock at the time of settlement was equal to $13.00, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, we estimate that this tax obligation on the initial settlement date would be approximately $4.0 million in the aggregate. The amount of this obligation could be higher or lower, depending on the price of our common stock on the initial settlement date for the RSUs.

Our expected use of net proceeds of this offering represents our current intentions based upon our present plans and business conditions. The amounts and purposes for which we allocate the net proceeds from this offering may vary significantly depending upon a number of factors, including the actual cost of capital expenditures, our future sales, our cash flows from operations and the growth of our business. As a result, we will retain broad discretion in the allocation of the net proceeds from this offering and could utilize the proceeds in ways that do not necessarily improve our results of operations or enhance the value of our common stock. Pending the uses described above, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our common stock and do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Instead, we currently plan to retain any earnings to finance the growth of our business. The terms of our credit and security agreement also restrict our ability to pay dividends. Any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on our financial condition, results of operations and capital requirements as well as other factors deemed relevant by our board of directors.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, our debt obligations and our capitalization as of December 31, 2013:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock into 41,580,507 shares of common stock immediately prior to the completion of this offering and stock-based compensation expense of $11.5 million associated with restricted stock units which we will record upon completion of this offering; and

 

  Ÿ  

on a pro forma as adjusted basis, giving effect to the pro forma adjustments set forth above and our sale and issuance of 10,000,000 shares of our common stock in this offering at an assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus and after deducting the underwriting discount and estimated offering expenses payable by us.

You should read the information in this table together with “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and our financial statements and related notes included elsewhere in this prospectus.

 

     December 31, 2013  
     Actual     Pro
Forma
    Pro Forma
As Adjusted
 
    

(in thousands except per share
data)

 

Cash and cash equivalents

   $ 38,972      $ 38,972      $ 155,572   
  

 

 

   

 

 

   

 

 

 

Debt obligations

   $ 23,077      $ 23,077      $ 23,077   

Redeemable convertible preferred stock, $0.00001 par value – 50,437,000 shares authorized and 41,529,721 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     270,262                 

Stockholders’ equity (deficit):

      

Preferred stock, $0.00001 par value – no shares authorized, issued and outstanding, actual and pro forma; 10,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

                     

Common stock, $0.00001 par value – 96,000,000 shares authorized and 21,089,300 shares issued and outstanding, actual; 96,000,000 shares authorized and 62,669,807 shares issued and outstanding, pro forma; 250,000,000 authorized and 72,669,807 shares issued and outstanding, pro forma as adjusted

            1        1   

Additional paid-in capital

     28,403        310,115        426,715   

Treasury stock, at cost

     (61,935     (61,935     (61,935

Accumulated other comprehensive income (loss)

     37        37        37   

Accumulated deficit

     (168,751     (180,202     (180,202
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (202,246     68,016        184,616   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 91,093      $ 91,093      $ 207,693   
  

 

 

   

 

 

   

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $9.3 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase

 

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(decrease) each of the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by $12.1 million, assuming that the initial public offering price remains the same and after deducting the underwriting discount. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and terms of this offering determined at pricing.

The pro forma column and the pro forma as adjusted column of the table above do not include:

 

  Ÿ  

12,635,707 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2013, at a weighted average exercise price of $5.87 per share;

 

  Ÿ  

4,521,191 shares of common stock issuable upon the vesting of restricted stock units outstanding as of December 31, 2013;

 

  Ÿ  

400,000 shares of common stock reserved for issuance upon the exercise of a warrant outstanding as of December 31, 2013, at an exercise price of $4.03 per share;

 

  Ÿ  

2,035,282 shares of common stock reserved for issuance under our stock option plans as of December 31, 2013;

 

  Ÿ  

4,000,000 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective upon the completion of this offering;

 

  Ÿ  

1,200,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective upon the completion of this offering; and

 

  Ÿ  

1,000,040 shares of our common stock issued in connection with our acquisition of Yub, Inc., a privately-held company, in January 2014.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma as adjusted net tangible book value per share of our common stock immediately after completion of this offering.

Our historical net tangible book value as of December 31, 2013 was $56.3 million, or $2.67 per share. Our pro forma net tangible book value as of December 31, 2013 was $56.3 million, or $0.90 per share, based on the total number of shares of our common stock outstanding as of December 31, 2013, after giving effect to the conversion of all outstanding shares of our preferred stock as of December 31, 2013 into an aggregate of 41,580,507 shares of our common stock, which will occur immediately prior to the completion of this offering.

After giving effect to (i) the sale by us of shares of our common stock in this offering at the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us and (ii) the issuance of 762,094 shares of our common stock issuable with respect to RSUs for which the service vesting condition had been satisfied as of December 31, 2013 as if such shares had been issued as of that date, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been $172.9 million, or $2.35 per share. This represents an immediate increase in pro forma net tangible book value of $1.45 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $10.65 per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $ 13.00   

Pro forma net tangible book value per share as of December 31, 2013, before giving effect to this offering

   $ 0.90      

Increase in pro forma as adjusted net tangible book value per share attributable to new investors

     1.45      
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

        2.35   
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

      $ 10.65   
     

 

 

 

Our pro forma as adjusted net tangible book value will be $191.1 million, or $2.55 per share, and the dilution per share of common stock to new investors will be $10.45, if the underwriters’ option to purchase additional shares is exercised in full.

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $9.3 million, or $0.13 per share, and the pro forma dilution per share to investors in this offering by $0.87 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same

 

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and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted net tangible book value by $0.13 per share and increase (decrease) the dilution to new investors by $0.13 per share, assuming that the initial public offering price remains the same and after deducting the underwriting discount. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The following table presents, as of December 31, 2013, after giving effect to the conversion of all outstanding shares of our preferred stock into our common stock immediately prior to the completion of this offering, the differences between existing stockholders and new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock and preferred stock, cash received from the exercise of stock options and the average price per share paid or to be paid to us at the assumed initial public offering price of $13.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     62,669,807         86.24   $ 288,210,000         68.92   $ 4.60   

New investors

     10,000,000         13.76        130,000,000         31.08        13.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     72,669,807         100.0   $ 418,210,000         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $10.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, before deducting the underwriting discount and estimated offering expenses payable by us.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock from us. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares held by existing stockholders after this offering would be 62,669,807, or 84.50%, and the number of shares held by new investors would increase to 11,500,000, or 15.50%, of the total number of shares of our common stock outstanding after this offering.

Except as otherwise indicated, the above discussion and tables are based on 62,669,807 shares of common stock outstanding as of December 31, 2013, and exclude:

 

  Ÿ  

12,635,707 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2013, at a weighted average exercise price of $5.87 per share;

 

  Ÿ  

4,521,191 shares of common stock issuable upon the vesting of RSUs outstanding as of December 31, 2013;

 

  Ÿ  

400,000 shares of common stock reserved for issuance upon the exercise of a warrant outstanding as of December 31, 2013, at an exercise price of $4.03 per share;

 

  Ÿ  

2,035,282 shares of common stock reserved for issuance under our stock option plans as of December 31, 2013;

 

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  Ÿ  

4,000,000 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective upon the completion of this offering;

 

  Ÿ  

1,200,000 shares of our common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective upon the completion of this offering; and

 

  Ÿ  

1,000,040 shares of our common stock issued in connection with our acquisition of Yub, Inc., a privately-held company, in January 2014.

The shares reserved for future issuance under our 2013 Equity Incentive Plan and our 2013 Employee Stock Purchase Plan will be subject to automatic annual increases in accordance with the terms of the plans. To the extent that options are exercised, new options are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 are derived from the audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2009 and 2010, the consolidated balance sheet data as of December 31, 2009, 2010 and 2011 are derived from audited consolidated financial statements that are not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future.

 

     Year Ended December 31,  
     2009     2010     2011     2012     2013  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenues

   $ 40,606      $ 61,406      $ 91,325      $ 112,127      $ 167,892   

Cost of revenues

     12,987        18,440        27,841        41,745        52,080   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     27,619        42,966        63,484        70,382        115,812   

Operating expenses:

          

Sales and marketing

     20,987        30,044        44,834        63,526        61,793   

Research and development

     7,655        10,019        21,824        40,236        40,102   

General and administrative

     8,647        10,723        18,996        25,999        24,232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     37,289        50,786        85,654        129,761        126,127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (9,670     (7,820     (22,170     (59,379     (10,315

Interest expense

     (48     (157     (698     (212     (953

Other income (expense), net

     256        (3,899     (220     92        19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for (benefit from) income taxes

     (9,462     (11,876     (23,088     (59,499     (11,249

Provision for (benefit from) income taxes

     12        17        (118     (265       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (9,474   $ (11,893   $ (22,970   $ (59,234   $ (11,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividend to investors in relation to tender offer

                   6,933                 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (9,474   $ (11,893   $ (29,903   $ (59,234   $ (11,249
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per share attributable to common stockholders(1)

   $ (1.22   $ (1.02   $ (2.14   $ (3.72   $ (0.57
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders(1)

     7,768        11,699        13,944        15,927        19,626   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted pro forma net loss per share attributable to common stockholders(1)

           $ (0.18
          

 

 

 

Other Data:

          

Adjusted EBITDA(2)

   $ (8,044   $ (4,624   $ (14,174   $ (47,255   $ 1,725   

Transactions(3)

     345,056        493,137        710,043        916,724        1,311,973   

 

(1) 

See Note 13 to our notes to consolidated financial statements for a description of the method used to compute basic and diluted net loss per share attributable to common stockholders and pro forma basic and diluted net loss per share.

(2) 

Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net loss adjusted for interest expense, other income (expense), net, provision for (benefit from) income taxes, depreciation and amortization, and stock-based compensation. Please see “—Non-GAAP Financial Measures—Adjusted EBITDA” below for more information as to the limitations of using non-GAAP measures and for the reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

(3) 

A transaction is the distribution of a digital coupon through our platform that generates revenues. We present transactions as we believe that our ability to increase the number of transactions using our platform is an important indicator of our ability to grow our revenues.

 

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The stock-based compensation expense included above was as follows:

 

     Year Ended December 31,  
     2009      2010      2011      2012      2013  
     (in thousands)  

Cost of revenues

   $ 22       $ 44       $ 295       $ 378       $ 300   

Sales and marketing

     73         203         849         1,880         1,492   

Research and development

     58         183         962         1,532         1,015   

General and administrative

     204         1,012         2,464         1,778         2,374   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 357       $ 1,442       $ 4,570       $ 5,568       $ 5,181   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31,  
     2009     2010     2011     2012     2013  
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

   $ 16,267      $ 19,732      $ 100,462      $ 58,395      $ 38,972   

Working capital

     12,594        21,987        97,108        45,423        21,420   

Property and equipment, net

     2,957        4,357        12,370        27,282        29,942   

Deferred revenues

     4,000        3,678        4,870        7,406        6,751   

Total liabilities

     19,455        33,477        28,125        62,012        66,220   

Debt obligations

            16,019               14,743        23,077   

Redeemable convertible preferred stock

     79,726        79,726        270,262        270,262        270,262   

Total stockholders’ deficit

     (60,138     (68,872     (149,639     (200,382     (202,246

Non-GAAP Financial Measures

Adjusted EBITDA.    To provide investors with additional information regarding our financial results, we have presented Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short and long-term operational plans, and to determine bonus payouts. In particular, we believe that the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, Adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

The following table presents a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, for each of the periods presented.

 

     Year Ended December 31,  
     2009     2010     2011     2012     2013  
     (in thousands)  

Net loss

   $ (9,474   $ (11,893   $ (22,970   $ (59,234   $ (11,249

Adjustments:

          

Interest expense

     48        157        698        212        953   

Other income (expense), net

     (256     3,899        220        (92     (19

Provision for (benefit from) income taxes

     12        17        (118     (265       

Depreciation and amortization

     1,269        1,754        3,426        6,556        6,859   

Stock-based compensation

     357        1,442        4,570        5,568        5,181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     1,430        7,269        8,796        11,979        12,974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (8,044   $ (4,624   $ (14,174   $ (47,255   $ 1,725   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

  Ÿ  

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

  Ÿ  

Adjusted EBITDA does not reflect: (i) changes in, or cash requirements for, our working capital needs; (ii) the potentially dilutive impact of equity-based compensation; or (iii) tax payments that may represent a reduction in cash available to us; and

 

  Ÿ  

other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider Adjusted EBITDA along with other GAAP-based financial performance measures, including various cash flow metrics, net income or loss, and our other GAAP financial results.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

Overview

We operate a leading digital promotion platform that connects great brands and retailers with consumers. Over 2,000 brands from more than 700 CPGs and many of the leading grocery, drug and mass merchandise retailers use our promotion platform to engage consumers. Retailers on our platform operate approximately 58,000 store locations in North America. We deliver digital coupons to consumers, including coupons and coupon codes, and display advertising through our platform which includes our web, mobile and social channels, as well as those of our CPGs, retailers, and our extensive network of approximately 30,000 third-party websites, or publishers, that display our coupon and advertising offerings on their websites. During 2013, we generated revenue from over 1.3 billion transactions pursuant to which consumers selected a coupon or redeemed a coupon code offered through our platform, an increase of 43% over the same period in 2012.

Our platform distributes digital promotions at scale across multiple channels enabling CPGs and retailers to deliver promotions and media advertisements to consumers at the point when they are most engaged and likely to make a purchasing decision. Our platform is comprised of promotional channels, including our Digital FSI Network, which is our network of owned and third-party websites that display our coupons and advertising offerings, retail point of sale solutions, mobile solutions, publishing tools, which enhance the effectiveness of the promotions we offer, and media advertising. Our secure technology gives CPGs control over the number of coupons distributed and the number of CPG-authorized activations per coupon, which enhances the security of digital coupons.

We generate revenues primarily from digital promotion transactions. Each time a consumer selects a digital coupon on our platform by either printing it for physical redemption at a retailer or saving it to a retailer online account for automatic digital redemption, we are paid a fee that is not dependent on the digital coupon being redeemed. For coupon codes, we are paid a fee when a consumer makes a purchase using a coupon code from our platform. If we deliver a digital coupon or coupon code on a retailer’s website or through its loyalty reward program, or the website of a publisher, we generally pay a distribution fee to the retailer or publisher which is included in our cost of revenues. We also generate advertising revenues through the placement of online advertisements from CPGs and retailers which are displayed with our coupon offerings on our websites and those of our publishers. We are paid a fee for the display of advertisements on a per impression or a per click basis. Advertising placements are generally sold as part of insertion orders for coupons as an integrated sale and not as a separate transaction.

Our CPG customers include many of the leading food, beverage, drug, personal and household product manufacturers. We primarily generate revenue from CPGs through coupons offered through our platform and to a lesser degree, through the display of advertising. Our retailers include leading

 

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grocery, drug and mass market merchandisers which distribute and accept coupons offered through our platform. Our retailers also include a broad range of specialty stores, including clothing, electronics, home improvement and many others which offer codes through our platform.

Our operating expenses may increase in the future as we continue to invest in research and development to enhance our platform and in sales and marketing to acquire new CPG and retailer customers and increase revenues from our existing customers.

For 2011, 2012 and 2013, our revenues were $91.3 million, $112.1 million and $167.9 million, respectively, representing a compound annual growth rate, or CAGR, of 36% from 2011 to 2013. Our net loss for 2011, 2012 and 2013 was $23.0 million, $59.2 million and $11.2 million, respectively. Our Adjusted EBITDA for 2011, 2012 and 2013 was $(14.2) million, $(47.3) million and $1.7 million, respectively.

Key Operating and Financial Performance Metrics

We monitor the key operating and financial performance metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies.

 

     Year Ended
December 31,
 
     2011     2012     2013  
     (in thousands)  

Adjusted EBITDA

   $ (14,174   $ (47,255   $ 1,725   

Transactions

     710,043        916,724        1,311,973   

Adjusted EBITDA.    Adjusted EBITDA is a non-GAAP financial measure. We have presented Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short and long-term operating plans and to determine bonus payouts. In particular, we believe that the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, Adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Please see the section titled “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” for information regarding the limitations of using Adjusted EBITDA as a financial measure and for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

Transactions.    A transaction is the distribution of a digital coupon through our platform that generates revenues. We present transactions as we believe that our ability to increase the number of transactions using our platform is an important indicator of our ability to grow our revenues.

Factors Affecting Our Performance

Obtain high quality coupons and increase the number of CPG-authorized activations.    Our growth in revenues will depend upon our ability to continue to obtain high quality coupons and increase the number of CPG-authorized activations available through our platform. If we are unable to obtain high quality coupons and increase the number of CPG-authorized activations, we will not be able to increase the number of transactions and the growth in our revenues or our revenues will be adversely affected.

 

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Variability in promotional spend by CPGs.    Our revenues may fluctuate due to changes in promotional spending budgets of CPGs and retailers and the timing of their promotional spending. Decisions by major CPGs or retailers to delay or reduce their promotional spending or divert spending away from digital promotions could slow our revenue growth or reduce our revenues.

Increase in software amortization expense.    As of December 31, 2013, we have capitalized $23.1 million for the development of and enhancements to our platform, primarily related to our in-development next generation solution for integrated coupon delivery at the point of sale, or Real Time Point of Sale platform. We expect to amortize these costs over their estimated useful life when it is ready for its intended use.

Stock-based compensation expense.    We have granted RSUs to our employees. These RSUs vest upon the satisfaction of both a service condition and a liquidity-event condition. The service condition for a majority of these RSUs will be satisfied over four years. The liquidity-event condition will be satisfied upon the earlier to occur of the closing of a change of control transaction or the six month anniversary of the date of this prospectus. RSUs for which the service condition has been satisfied are not forfeited should an employee’s employment terminate prior to the liquidity-event condition being met.

As of December 31, 2013, we have not recognized any stock-based compensation expense for these RSUs because an initial public offering or change of control was not considered probable as of the financial reporting date. In the quarter in which our initial public offering is completed, we will recognize stock-based compensation expense using the accelerated attribution method, net of forfeitures, based on the grant date fair value of the RSUs. If the initial public offering had been completed on December 31, 2013, we would have recognized $11.5 million of stock-based compensation expense for all RSUs that met the service condition as of that date, and would have $7.9 million of additional expense to be recognized over a weighted-average period of 3.4 years.

As of December 31, 2013, there was an additional $11.1 million of unrecognized stock-based compensation expense related to stock options. This unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of approximately 3.2 years.

Components of Our Results of Operations

Revenues

We generate revenues by delivering digital coupons, including coupons and coupon codes, and digital advertising through our platform. CPGs and retailers choose one or more of our offerings and are charged a fee for each selected offering. Our customers generally submit insertion orders that outline the terms and conditions of a campaign, including the channels through which the campaign will be run, the offerings for each selected channel, the type of content to be delivered, the timeframe of the campaign, the number of authorized activations and the pricing of the campaign. Substantially all of our revenues are generated from sales in the United States.

Coupons.    We generate revenues, as consumers select, or activate, a coupon through our platform by either printing it for physical redemption at a retailer or saving it to a retailer online account for automatic digital redemption. In the case of the setup fees, we recognize revenues proportionally, on a per activation basis, using the number of authorized activations per insertion order, commencing on the date of the first coupon activation. For coupons, the pricing is generally determined on a per unit activation basis and revenue recognition is not dependent upon whether our coupons are redeemed. Setup fees charged to customers represent charges for the creation of digital coupons and related activation, tracking and security features. Upfront insertion orders generally include a limit on the number of activations, or times consumers may select a coupon.

 

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Coupon Codes.    We generate revenues when a consumer makes a purchase using a coupon code from our platform and completion of the order is reported to us. In the same period that we recognize revenues for the delivery of coupon codes, we also estimate and record a reserve, based upon historical experience, to provide for end-user cancelations or product returns which may not be reported until a subsequent date.

Digital Advertising.    Our advertising services enable CPGs and retailers to display advertisements to promote their brands and products on our websites and through those third-party websites, or publishers, that display our coupon and advertising offerings on their websites. We charge a fee for these advertising campaigns, the pricing of which is based on the advertisement size and position. Related fees are billed monthly, based on a per impressions or a per click basis.

Cost of Revenues

Cost of revenues includes the costs resulting from distribution fees. If we deliver a digital coupon on a retailer’s website or through its loyalty reward program, or the website of a publisher, we generally pay a distribution fee to the retailer or publisher which is included in our cost of revenues. These costs are expensed as incurred. We do not pay a distribution fee for a coupon or code which is offered through the website of the CPG or retailer that is offering the coupon or code. From time to time, we have entered into arrangements pursuant to which we have agreed to the payment of minimum distribution or other service fees that are included in our cost of revenues. Such minimum commitments are less than the amounts we expect to actually pay, and as a result, we do not expect them to have a material impact on our results of operations. Distribution fees as a percent of total revenues increased from 11% in 2011 to 15% in 2013 as a higher proportion of our coupons and codes were distributed through our publishers. Cost of revenues also includes personnel costs, depreciation and amortization expense of equipment, software and acquired intangible assets incurred on revenue producing technologies, data center costs and third-party service fees. Personnel costs include salaries, bonuses, stock-based compensation and employee benefits. These costs are primarily attributable to individuals maintaining our data centers and members of our network operations group, which initiates, sets up and delivers digital promotion campaigns. Cost of revenues also includes third-party data center costs. We capitalize costs related to software that is developed or obtained for internal use. Costs incurred in connection with internal software development for revenue producing technologies are capitalized and will be amortized in cost of revenues over the internal use software’s useful life. The amortization of these costs will begin when the internally developed software is ready for its intended use. Once this milestone is achieved, we expect our cost of revenues to increase in absolute dollars in future periods as we begin to recognize the amortization of these previously capitalized costs and as we begin to incur additional related costs required to manage and operate our Real Time Point of Sale platform. We expect this milestone to be achieved in the first half of 2014 which may be prior to the recognition of material corresponding revenue.

Although our cost of revenues will increase in absolute dollars as our total revenue increases, we anticipate our cost of revenues other than distribution fees will generally increase at a rate lower than our rate of revenue growth.

Operating Expenses

We classify our operating expenses into three categories: sales and marketing, research and development and general and administrative. Our operating expenses consist primarily of personnel costs and, to a lesser extent, professional fees and rent. Personnel costs for each category of operating expenses generally include salaries, bonuses, stock-based compensation and employee benefits.

Sales and marketing.    Our sales and marketing expenses consist primarily of personnel costs (including commissions) and, to a lesser extent, costs associated with professional services, brand

 

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marketing, travel, trade shows and marketing materials. We expect sales and marketing expenses to increase in absolute dollars as we hire additional personnel and continue to expand our marketing related programs designed to increase our revenues.

Research and development.    Our research and development expenses consist primarily of personnel and related headcount costs and costs of professional services associated with the ongoing development of our technology. Personnel costs include salaries, bonuses, stock-based compensation expense and employee benefit costs. Currently, substantially all of our developers are located in our Mountain View, California headquarters.

We have entered into various long-term technology development and support agreements pursuant to which we utilize third-party software development and related services. We regularly evaluate the costs and benefits of utilizing third-party services versus internal resources and do not believe that our current commitments will result in any material change in the relationship between our costs and revenues. We anticipate that we will decrease our use of third-party services in the future. We believe that continued investment in technology is critical to attaining our strategic objectives, and, as a result, we expect research and development expenses to increase in absolute dollars in future periods.

General and administrative.    Our general and administrative expenses consist primarily of personnel costs associated with our executive, finance, legal, human resources, compliance and other administrative personnel, as well as accounting and legal professional services fees and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars in future periods as we continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums and compliance costs associated with Section 404 of the Sarbanes-Oxley Act.

Interest expense

Interest expense is primarily related to our debt obligations.

Other Income (Expense), Net

Other income (expense), net, represents the net effect primarily from interest received on our cash and cash equivalents and charges related to our investment in CIPL Pty Limited and Castor IP, together, Couponstar. We acquired a 50% interest in Couponstar in 2006 which we accounted for under the equity method of accounting through the date of our acquisition of Couponstar in September 2011. Other income (expense), net is also impacted by foreign exchange gains and losses. We have limited foreign currency exposure related to our accounts receivable that are denominated currencies other than the U.S. dollar, principally the British Pound Sterling and the Euro. In 2011, other income (expense), net also includes expenses for the early retirement of debt.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes represents the tax benefit from deferred foreign tax assets offset by the current state tax expense. The deferred foreign tax benefit is related to the deferred tax liabilities that arose from intangible assets acquired as part of the Couponstar acquisition. The current state tax expense is related to certain gross receipt-based state tax payments required in specific jurisdictions. The difference between our benefit for income taxes computed at the federal statutory rate and the amounts represented on the consolidated statements of operations is primarily due to the valuation allowance recorded against substantially all of our deferred tax assets.

 

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Results of Operations

The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenues for the periods presented.

 

     Year Ended
December 31,
 
     2011     2012     2013  
     (in thousands)  

Consolidated Statements of Operations Data:

      

Revenues

   $ 91,325      $ 112,127      $ 167,892   

Cost of revenues

     27,841        41,745        52,080   
  

 

 

   

 

 

   

 

 

 

Gross profit

     63,484        70,382        115,812   

Operating expenses:

      

Sales and marketing

     44,834        63,526        61,793   

Research and development

     21,824        40,236        40,102   

General and administrative

     18,996        25,999        24,232   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     85,654        129,761        126,127   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (22,170     (59,379     (10,315

Interest expense

     (698     (212     (953

Other income (expense), net

     (220     92        19   
  

 

 

   

 

 

   

 

 

 

Loss before benefit from income taxes

     (23,088     (59,499     (11,249

Benefit from income taxes

     (118     (265       
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (22,970   $ (59,234   $ (11,249
  

 

 

   

 

 

   

 

 

 

The stock-based compensation expense included above was as follows:

 

  

     Year Ended
December 31,
 
       2011         2012         2013    
     (in thousands)  

Cost of revenues

   $ 295      $ 378      $ 300   

Sales and marketing

     849        1,880        1,492   

Research and development

     962        1,532        1,015   

General and administrative

     2,464        1,778        2,374   
  

 

 

   

 

 

   

 

 

 

Total stock-based compensation

   $    4,570      $    5,568      $    5,181   
  

 

 

   

 

 

   

 

 

 

 

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     Year Ended
December 31,
 
     2011     2012     2013  

Revenues

     100     100     100

Cost of revenues

     30        37        31   
  

 

 

   

 

 

   

 

 

 

Gross margin

     70        63        69   

Operating expenses:

      

Sales and marketing

     49        57        37   

Research and development

     24        36        24   

General and administrative

     21        23        14   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     94        116        75   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (24     (53     (6

Interest expense

     (1            (1

Other income (expense), net

                     
  

 

 

   

 

 

   

 

 

 

Loss before benefit from income taxes

     (25     (53     (7

Benefit from income taxes

                     
  

 

 

   

 

 

   

 

 

 

Net loss

     (25 )%      (53 )%      (7 )% 
  

 

 

   

 

 

   

 

 

 
The stock-based compensation expense included above was as follows:   
     Year Ended
December 31,
 
     2011     2012     2013  

Cost of revenues

            

Sales and marketing

     1        2        1   

Research and development

     1        1        1   

General and administrative

     3        2        1   
  

 

 

   

 

 

   

 

 

 

Total stock-based compensation

     5     5     3
  

 

 

   

 

 

   

 

 

 

Comparison of the Years Ended December 31, 2012 and 2013

Revenues

 

     Year Ended
December 31,
               
     2012      2013      $ Change      % Change  
     (in thousands, except percentages)  

Revenues

   $ 112,127       $ 167,892       $ 55,765         50

Revenues increased by $55.8 million, or 50%, during 2013 compared to 2012. This increase was primarily attributable to an increase in the number of transactions during 2013 to 1.3 billion from 0.9 billion during 2012 and to a lesser extent from increases in the number of insertion orders for coupons that also included advertisement placements. The increase in revenue was also driven by an increase in activity from consumers making a purchase using a coupon code from our platform. The size of the increase in the number of transactions was in part due to the recovery of our revenue growth after the first half of 2012. In the first half of 2012, as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers, which adversely affected our revenue growth. Our revenue growth improved beginning in the third quarter of 2012 once we resolved the issue. During 2013 and 2012, revenues from digital promotion transactions and display advertisements remained consistent at 81% and 19% of total revenues, respectively.

 

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Cost of Revenues and Gross Profit

 

     Year Ended
December 31,
              
     2012     2013     $ Change      % Change  
     (in thousands, except percentages)  

Cost of revenues

   $ 41,745      $ 52,080      $ 10,335         25

Gross profit

   $ 70,382      $ 115,812      $ 45,430         65

Gross margin

     63     69     

Cost of revenues increased by $10.3 million, or 25%, during 2013 compared to 2012. This increase was primarily due to an increase in distribution fees of $9.0 million and higher third-party service fees of $1.3 million. The increase in distribution fee costs was related to the increased number of transactions subject to a distribution fee completed through our platform. The higher costs for third-party service fees were due to an increase in the number of promotions that included advertisements subject to a fee completed through our platform.

Gross margin increased to 69% during 2013 from 63% during 2012. The increase in gross margin is primarily due to an increase in the percentage of coupon code transactions and an increase in the number of promotions that included advertisements, offset in part by an increase in the percentage of transactions subject to distribution fees. The increase in gross margin was also partially due to our revenues increasing at a higher rate than the increase in our cost of revenues other than distribution fees. We believe that as the number of transactions increases, we will be able to achieve increased operational efficiencies related to our cost of revenues other than distribution fees.

Sales and Marketing

 

     Year Ended
December 31,
             
     2012     2013     $ Change     % Change  
     (in thousands, except percentages)  

Sales and marketing

   $ 63,526      $ 61,793      $ (1,733     (3 )% 

Percent of revenues

     57     37    

Sales and marketing expenses decreased $1.7 million, or 3%, during 2013 compared to 2012. This decrease was primarily due to lower promotional advertising costs of $5.9 million, partially offset by higher personnel and related costs of $3.8 million. The decrease in promotional advertising costs was a result of improvements in the effectiveness of our distribution channels, including search engine optimization, email and consumer awareness of our brand as well as improvements in the automation of our sales and marketing functions. The increase in personnel and related costs was primarily driven by higher salaries and related headcount costs attributable to our sales and marketing organizations required to support our growth and new business objectives and higher commission expenses related to the increase in revenues.

Research and Development

 

     Year Ended
December 31,
             
     2012     2013     $ Change     % Change  
     (in thousands, except percentages)  

Research and development

   $ 40,236      $ 40,102      $ (134    

Percent of revenues

     36     24    

 

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Research and development expenses decreased $0.1 million, or 0.3%, during 2013 compared to 2012. This decrease was primarily due to lower personnel and related headcount costs of $2.2 million, almost fully offset by increased development and support costs of $2.0 million. The decrease in personnel and headcount costs is primarily due to lower salaries and headcount resulting from a reduction in our internal research and development personnel in the third quarter of 2012. The increase in development and support costs were due to increased costs for software development of $4.8 million, as part of our ongoing investment in the development of our technology, partially offset by reductions in the costs associated with the use of third-party development services.

We capitalized internal use software development costs of $16.3 million and $6.8 million during 2012 and 2013, respectively, related to the development of our new point of sale solution.

General and Administrative

 

     Year Ended
December 31,
             
     2012     2013     $ Change     % Change  
     (in thousands, except percentages)  

General and administrative

   $ 25,999      $ 24,232      $ (1,767     (7 )% 

Percent of revenues

     23     14    

General and administrative expenses decreased $1.8 million, or 7%, during 2013 compared to 2012. This decrease was primarily due to lower legal and outside services of $2.3 million, partially offset by increases in personnel and related headcount costs of $1.1 million.

Interest Expense and Other Income (Expense), Net

 

     Year Ended
December 31,
             
         2012             2013         $ Change     % Change  
     (in thousands, except percentages)  

Interest expense

   $ (212   $ (953   $ (741         *    

Other income (expense), net

     92        19        (73         *       
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (120   $ (934   $ (814         *    
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Not meaningful.

The increase in interest expense and other income (expense), net, primarily relates to increased interest expense during 2013 resulting from borrowings of $15.0 million in the fourth quarter of 2012 and $7.5 million during the third quarter of 2013.

Benefit from Income Taxes

 

     Year Ended
December 31,
               
         2012             2013          $ Change      % Change  
     (in thousands, except percentages)  

Benefit from income taxes

   $ (265   $       $ 265         (100 )% 

We recorded no benefit or provision for income taxes during 2013. Our benefit from income taxes during 2012 is related to the deferred tax liabilities that arose from intangible assets acquired as part of the Couponstar acquisition.

 

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Comparison of the Years Ended December 31, 2011 and 2012

Revenues

 

     Year Ended
December 31,
               
     2011      2012      $ Change      % Change  
     (in thousands, except percentages)  

Revenues

   $ 91,325       $ 112,127       $ 20,802         23

Revenues increased $20.8 million, or 23%, during 2012 compared to 2011. This increase was primarily attributable to an increase in the number of transactions in 2012 to 916.7 million from 710.0 million in 2011. As we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers, which adversely affected our revenue growth in the first half of 2012. Our revenue growth improved beginning in the third quarter of 2012 once we resolved this issue. For 2012, 81% and 19% of our revenue was derived from digital promotion transactions and display advertisements, respectively, as compared to 83% and 17%, respectively, for 2011.

Cost of Revenues and Gross Profit

 

     Year Ended
December 31,
              
     2011     2012     $ Change      % Change  
     (in thousands, except percentages)  

Cost of revenues

   $ 27,841      $ 41,745      $ 13,904         50

Gross profit

   $ 63,484      $ 70,382      $ 6,898         11

Gross margin

     70     63     

Costs of revenues increased $13.9 million, or 50%, during 2012 compared to 2011. This increase was primarily due to higher distribution fees of $5.7 million, personnel and related headcount costs of $3.9 million and depreciation and amortization expense of $1.7 million. The increase in distribution fees was related to the increased number of transactions subject to a distribution fee completed through our platform. The increase in personnel and related headcount costs was driven by additional employees in our network operations group, which initiates, sets up and delivers digital promotion campaigns. The increase in depreciation and amortization expense was as a result of the significant investments made in our operations and technology infrastructure during the second half of 2011.

Gross margin decreased to 63% in 2012 from 70% in 2011. The decrease in gross margin was a result of the additional investments we made in our platform and operations group personnel to support our future growth and an increase in the percentage of transactions subject to distribution fees.

Sales and Marketing

 

     Year Ended
December 31,
              
     2011     2012     $ Change      % Change  
     (in thousands, except percentages)  

Sales and marketing

   $ 44,834      $ 63,526      $ 18,692         42

Percent of revenues

     49     57     

Sales and marketing expenses increased by $18.7 million, or 42%, during 2012 compared to 2011. This increase was primarily due to higher personnel and related headcount costs of $8.9 million,

 

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higher promotional advertising costs of $5.1 million, higher costs relating to marketing research and trade shows of $1.2 million and higher costs related to our international operations of $1.3 million. The increase in personnel costs was primarily due to additional employees in our sales and marketing organization and higher commissions of $1.4 million related to the increase in revenues. The increased costs for our international operations were due to our acquisition of the assets of Couponstar in 2011 and our efforts in establishing a presence in international markets.

Research and Development

 

     Year Ended
December 31,
              
     2011     2012     $ Change      % Change  
     (in thousands, except percentages)  

Research and development

   $ 21,824      $ 40,236      $ 18,412         84

Percent of revenues

     24     36     

Research and development expenses increased by $18.4 million, or 84%, during 2012 compared to 2011. This increase was primarily due to higher personnel and related headcount costs of $11.6 million, higher professional services and consulting costs of $4.8 million, and an increase in facilities and support services of $1.2 million. The increase in personnel costs was driven by additional employees in our research and development organization.

We capitalized internal use software development costs of $16.3 million in 2012, related to the development of our new point of sale solution. There were no such capitalized costs in 2011.

General and Administrative

 

     Year Ended
December 31,
              
     2011     2012     $ Change      % Change  
     (in thousands, except percentages)  

General and administrative

   $ 18,996      $ 25,999      $ 7,003         37

Percent of revenues

     21     23     

General and administrative expenses increased by $7.0 million, or 37%, during 2012 compared to 2011. The increase was primarily due to higher legal services and consulting costs of $4.7 million and higher personnel and headcount related costs of $1.5 million. The increase in legal services was due to an increase in activity in connection with an arbitration proceeding. The increase in personnel and headcount related costs was driven by additional employees partially off-set by lower stock-based compensation expense.

Interest Expense and Other Income (Expense), Net

 

     Year Ended
December 31,
              
     2011     2012     $ Change      % Change  
     (in thousands, except percentages)  

Interest expense

   $ (698   $ (212   $ 486         (70 )% 

Other income (expense), net

     (220     92        312         142
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ (918   $ (120   $ 798         (87 )% 
  

 

 

   

 

 

   

 

 

    

 

 

 

The decrease in other income (expense), net, is primarily due to the effect of lower interest expense in 2012 compared to 2011 as a result of the early retirement of debt in 2011.

 

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Benefit from Income Taxes

 

     Year Ended
December 31,
             
     2011     2012     $ Change     % Change  
     (in thousands, except percentages)  

Benefit from income taxes

   $ (118   $ (265   $ (147     125

Our net benefit from income taxes of $0.1 million and $0.3 million for 2011 and 2012, respectively, primarily relates to deferred tax liabilities that arose from intangible assets acquired as part of the Couponstar acquisition.

Quarterly Results of Operations and Key Metrics

The following tables set forth our quarterly consolidated statements of operations data in dollars and as a percentage of total revenues for each of the eight quarters in the period ended December 31, 2013. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this prospectus. In our opinion, the financial information in these tables reflects all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results for any future period.

 

    Three Months Ended  
    Mar 31,
2012
    Jun 30,
2012
    Sep 30,
2012
    Dec 31,
2012
    Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
 
    (in thousands)  

Consolidated Statements of Operation Data:

               

Revenues

  $ 24,873      $ 24,219      $ 27,248      $ 35,787      $ 36,490      $ 39,089      $ 39,716      $ 52,597   

Cost of revenues

    9,384        9,535        10,838        11,988        12,801        12,933        12,111        14,235   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    15,489        14,684        16,410        23,799        23,689        26,156        27,605        38,362   

Operating expenses:

               

Sales and marketing

    16,127        15,424        15,786        16,189        14,903        14,167        14,504        18,219   

Research and development

    9,328        11,115        10,897        8,896        10,953        9,651        9,519        9,979   

General and administrative

    6,117        5,829        6,411        7,642        5,896        5,002        5,014        8,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    31,572        32,368        33,094        32,727        31,752        28,820        29,037        36,518   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (16,083     (17,684     (16,684     (8,928     (8,063     (2,664     (1,432     1,844   

Interest expense

    (4     (3     (4     (201     (206     (229     (211     (307

Other income (expense), net

    32        2        72        (14     29        5               (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (16,055     (17,685     (16,616     (9,143     (8,240     (2,888     (1,643     1,522   

Benefit from income taxes

    (197     (37            (31                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (15,858   $ (17,648   $ (16,616   $ (9,112   $ (8,240   $ (2,888   $ (1,643   $ 1,522   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Three Months Ended  
    Mar 31,
2012
    Jun 30,
2012
    Sep 30,
2012
    Dec 31,
2012
    Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
 
    (in thousands)  

Other Data:

  

   

Adjusted EBITDA(1)

  $ (12,970   $ (14,653   $ (13,637   $ (5,995   $ (4,892   $ 107      $     1,243      $     5,267   

Transactions(2)

    201,988        185,057        244,580        285,099        312,877        314,765        312,536        371,795   

 

(1) 

Adjusted EBITDA is a non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) adjusted for interest expense, other income (expense), net, benefit from income taxes, depreciation and amortization, and stock-based compensation. Please see the section titled “Selected Consolidated Financial and Other Data — Non-GAAP Financial Measures—Adjusted EBITDA” for more information as to the limitations of using non-GAAP measures. Please also see the reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP below.

(2) 

A transaction is the distribution of a digital coupon through our platform that generates revenues. We present transactions as we believe that our ability to increase the number of transactions using our platform is an important indicator of our ability to grow our revenues.

The stock-based compensation expense included above was as follows:

 

     Three Months Ended  
     Mar 31,
2012
     Jun 30,
2012
     Sep 30,
2012
     Dec 31,
2012
     Mar 31,
2013
     Jun 30,
2013
     Sep 30,
2013
     Dec 31,
2013
 
     (in thousands)  

Cost of revenues

   $ 98       $ 98       $ 94       $ 88       $ 86       $ 85       $ 81       $ 48   

Sales and marketing

     543         449         463         425         382         322         304         484   

Research and development

     411         425         403         293         300         271         227         217   

General and administrative

     503         440         421         414         718         390         388         878   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 1,555       $ 1,412       $ 1,381       $ 1,220       $ 1,486       $ 1,068       $ 1,000       $ 1,627   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP:

 

    Three Months Ended    

 

 
    Mar 31,
2012
    Jun 30,
2012
    Sep 30,
2012
    Dec 31,
2012
    Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
 
    (in thousands)  

Net income (loss)

  $ (15,858   $ (17,648   $ (16,616   $ (9,112   $ (8,240   $ (2,888   $ (1,643   $ 1,522   

Interest expense

    4        3        4        201        206        229        211        307   

Other income (expense), net

    (32     (2     (72     14        (29     (5            15   

Benefit from income taxes

    (197     (37            (31                            

Depreciation and amortization

    1,558        1,619        1,666        1,713        1,685        1,703        1,675        1,796   

Stock-based compensation

    1,555        1,412        1,381        1,220        1,486        1,068        1,000        1,627   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (12,970   $ (14,653   $ (13,637   $ (5,995   $ (4,892   $ 107      $ 1,243      $ 5,267   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Three Months Ended  
    Mar 31,
2012
    Jun 30,
2012
    Sep 30,
2012
    Dec 31,
2012
    Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
 

Revenues

    100     100     100     100     100     100     100     100

Cost of revenues

    38        39        40        33        35        33        30        27   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    62        61        60        67        65        67        70        73   

Operating expenses:

               

Sales and marketing

    65        64        58        45        41        36        37        35   

Research and development

    38        46        40        25        30        25        24        19   

General and administrative

    25        24        24        21        16        13        13        16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    127        134        121        91        87        74        74        70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (65     (73     (61     (25     (22     (7     (4     3   

Interest expense

                         (1     (1     (1              

Other income (expense), net

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (65     (73     (61     (26     (23     (7     (4     3   

Benefit from income taxes

    (1                                                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (64 )%      (73 )%      (61 )%      (25 )%      (23 )%      (7 )%      (4 )%      3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The stock-based compensation expense included above was as follows:

 

     Three Months Ended  
     Mar 31,
2012
    Jun 30,
2012
    Sep 30,
2012
    Dec 31,
2012
    Mar 31,
2013
    Jun 30,
2013
    Sep 30,
2013
    Dec 31,
2013
 

Cost of revenues

             —             —             —             —             —             —             —             —

Sales and marketing

     2        2        2        1        1        1        1        1   

Research and development

     2        2        1        1        1        1        1          

General and administrative

     2        2        2        1        2        1        1        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

     6     6     5     3     4     3     3     3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Trends

Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside our control. We have experienced rapid growth in recent quarters. We are continuously working on enhancing our technology and our operational efficiencies to maximize our margins. Our historical results should not be considered a reliable indicator of our future results of operations.

Our quarterly revenues increased from $24.9 million during the quarter ended March 31, 2012 to $52.6 million during the quarter ended December 31, 2013 as our volume of transactions increased by 169.8 million, or 84%, to 371.8 million over the same period. Our revenue growth and volume of transactions were adversely affected in the first half of 2012 because as we scaled our technology infrastructure to support our growth, our technology for securely identifying unique users and devices inadvertently prevented our personalization algorithms from optimally displaying our digital coupons to consumers. Our revenues began to improve during the third quarter of 2012 and further increased in the fourth quarter of 2012 once we resolved this issue. We also benefited from a substantial increase in revenues through the fourth quarter of 2013 generated from coupon codes.

 

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Our gross margin has increased from 62% in the quarter ended March 31, 2012 to 73% in the quarter ended December 31, 2013. As we have been increasingly able to leverage the infrastructure and personnel investments we made in 2011, our cost of revenues other than distribution fees have decreased as a percentage of our total revenues. This has been offset in part as an increasing percentage of our revenues have been subject to distribution fees as a result of the broader distribution of coupons through the increased number of retailers and publishers on our platform. Our operating expenses have remained relatively flat or have declined since the quarter ended March 31, 2012 notwithstanding the growth of our business and revenues. We have benefited from our investments in systems improvements and operational efficiencies, including improvements in the effectiveness of our distribution channels, such as search engine optimization, email and consumer awareness of our brand as well as improvements in the automation of our sales and marketing functions.

Our Adjusted EBITDA loss increased in the quarter ended June 30, 2012. During this period, Adjusted EBITDA loss widened because of slowed revenue growth coupled with higher operating expenses. However, in each subsequent quarter our revenues have increased as we have grown our business and our operating expenses have generally remained flat or decreased as we have benefited from systems improvements and operational efficiencies. As a result, our Adjusted EBITDA has improved each subsequent quarter after the quarter ended June 30, 2012 to a positive Adjusted EBITDA during the quarters ended June 30, 2013, September 30, 2013 and December 31, 2013.

Liquidity and Capital Resources

Since our inception in May 1998, we have financed our operations and capital expenditures through private sales of preferred stock, term debt bank borrowings and cash flows from operations. Since our inception, we have issued $283.0 million of preferred stock, of which we used $70.3 million of the proceeds to repurchase shares of common stock and preferred stock. In addition, we have raised $39.0 million in aggregate principal amount through debt. As of December 31, 2013, we had cash and cash equivalents of $39.0 million and $23.1 million of indebtedness.

We believe that our existing cash and cash equivalents balance together with cash generated from operations, will be sufficient to meet our working capital requirements for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors.” We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain needed additional funds, we will have to reduce our operating expenses, which would impair our growth prospects and could otherwise negatively impact our business.

If we choose to undertake a net settlement of our RSUs, then in order to fund the tax withholding and remittance obligations on behalf of our RSU holders, we would expect to use a substantial portion of our cash and cash equivalent balances, or, alternatively, we may choose to borrow funds or a combination of cash and borrowed funds to satisfy these obligations.

 

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Cash Flows

The following table summarizes our cash flows for the periods presented:

 

     Year Ended December 31,  
     2011     2012     2013  
     (in thousands)  

Cash flows used in operating activities

   $ (9,663   $ (46,554   $ (14,158

Cash flows used in investing activities

     (21,052     (12,770     (14,485

Cash flows provided by financing activities

     111,445        17,263        9,222   

Effects of exchange rates on cash

            (6     (2
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 80,730      $ (42,067   $ (19,423
  

 

 

   

 

 

   

 

 

 

Operating Activities

Cash used in operating activities is primarily influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business and the increase in our revenues. Cash used in operating activities has typically been generated from net losses and further increased by changes in our operating assets and liabilities, particularly accounts receivable and accrued liabilities, adjusted for non-cash expense items such as depreciation, amortization and stock-based compensation.

During 2013, cash used in operating activities amounted to $14.2 million, reflecting our net loss of $11.2 million, offset by non-cash expenses of $12.4 million, which included depreciation, amortization, stock-based compensation, provision for allowance for doubtful accounts, accretion of debt discount and loss on disposal of property and equipment. These non-cash expenses increased primarily due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds was from the net change in working capital items, most notably a decrease in accounts payable and other current liabilities of $0.8 million related to the timing of payments, an increase in accounts receivable of $13.1 million due to an increase in billings for advertising campaigns as well as timing of payments, an increase in prepaid expenses and other current assets of $3.8 million primarily as a result of our prepayment of distribution fees and an increase in accrued compensation and benefits of $2.4 million related to the timing of compensation payments.

Cash used in operating activities in 2012 of $46.6 million was the result of a net loss of $59.2 million, offset by non-cash expenses of $12.3 million, which included depreciation, amortization, accretion of debt discount, loss on disposal of property and equipment, provision for allowance for doubtful accounts, benefit from income taxes and stock-based compensation. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining effect was from the net change in working capital items, primarily an increase in accounts payable and other current liabilities of $5.4 million and increases in accrued compensation and benefits of $2.1 million, respectively, related to the growth of our operations and the timing of compensation and other general expenses, and increases in deferred revenue of $2.5 million resulting from our revenue growth, offset by an increase in accounts receivable of $10.1 million, which was primarily due to our revenue growth and timing of the receipt of payments.

Cash used in operating activities in 2011 of $9.7 million was the result of a net loss of $23.0 million, offset by non-cash expenses of $8.5 million which included depreciation, amortization, loss on early retirement on debt, accretion of debt discount, benefit from income taxes, stock-based compensation and provision for allowance for doubtful accounts. These non-cash expenses increased primarily due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of was from the net change in working capital items, primarily an increase in accrued compensation and benefits of $4.3 million, an increase in accounts

 

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payable and other current liabilities of $4.1 million, respectively, related to the growth of our operations and the timing of compensation and other general expenses, and an increase in deferred revenues of $1.2 million resulting from our revenue growth, partially offset by an increase in our accounts receivable balance of $2.5 million resulting from our revenue growth and an increase in prepaid expenses and other assets of $2.2 million as we continued to invest in our growth.

Investing Activities

During 2013, cash used in investing activities consisted primarily of purchases of property and equipment, including technology hardware and software to support our growth as well as capitalized internal-use software development costs. Purchases of property and equipment may vary from period-to-period due to the timing of the expansion of our operations, the addition of headcount and the development cycles of our in-development new point of sale solution. We expect to continue to invest in property and equipment and in the further development and enhancement of our software platform for the foreseeable future.

During 2012, cash used in investing activities consisted primarily of capitalized internal-use software development costs for our in-development new point of sale solution as well as purchases of property, equipment and intangible assets, including technology hardware and software to support our growth.

During 2011, cash used in investing activities consisted primarily of purchases of property and equipment, including technology hardware and software to support our growth and our purchase of the remaining 50% interest of Couponstar.

Financing Activities

Our financing activities have consisted primarily of net proceeds from the issuance of preferred stock, net borrowings under term debt and a line of credit, and the issuance of shares of common stock upon the exercise of stock options.

During 2013, cash provided by financing activities amounted to $9.2 million, consisting primarily of $4.2 million in proceeds from the exercise of stock options and warrants, and $7.5 million in net borrowings under our revolving line of credit, partially offset by $2.2 million in cash used for deferred offering costs.

During 2012, cash provided by financing activities amounted to $17.3 million, consisting of $15.0 million in proceeds from borrowings under a term debt agreement and $2.3 million in proceeds from the exercise of stock options.

During 2011, cash provided by financing activities amounted to $111.4 million, consisting of $195.0 million in net proceeds from the issuance of 14.7 million shares of preferred stock, $3.2 million in proceeds from the exercise of stock options and warrants, partially offset by $70.3 million in cash used to repurchase common and preferred stock and $16.5 million used to repay debt.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2012 or 2013.

 

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Contractual Obligations and Commitments

The following table summarizes our future minimum payments under contractual commitments as of December 31, 2013:

 

     Payments Due by Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (in thousands)  

Operating leases(1)

   $ 9,387       $ 3,107       $ 6,136       $ 144       $   

Capital leases

     220         66         116         38           

Debt obligations(2)

     23,077         23,077                           

Unconditional purchase commitments(3)

     34,940         12,811         11,959         3,700         6,470   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total minimum payments

   $ 67,624       $ 39,061       $ 18,211       $ 3,882       $ 6,470   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

We lease various office facilities, including our corporate headquarters in Mountain View, California and various sales offices, under operating lease agreements that expire through July 2018. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods.

(2) 

In October 2012, we issued a subordinated secured promissory note payable with one of our existing stockholders with a principal amount of $15.0 million that bears at interest at 4%, per annum, with a maturity date of October 5, 2014. The note is secured by our accounts receivable. In September 2013, we entered into a credit and security agreement with Wells Fargo Bank. As of December 31, 2013, $7.5 million was outstanding under the revolving line of credit and interest was 3.0%.

(3) 

We have an unconditional purchase commitment for the years 2014 to 2034 in the amount of $7.9 million for marketing arrangements relating to the purchase of a 20-year suite license for a professional sports team which we intend to use for sales and marketing purposes.

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Wells Fargo Credit and Security Agreement

In September 2013, we entered into a credit and security agreement with Wells Fargo Bank, to establish an accounts receivable based revolving line of credit. The proceeds received from the credit agreement may be used for general corporate and working capital purposes, permitted acquisitions or permitted investments. The maximum amount available for borrowing under the revolving line of credit is the lesser of $25 million (which can be increased to $30 million if certain conditions are met) or an amount equal to 85% of certain eligible accounts, which excludes accounts that have aged over 60 days from the original due date (but not to exceed 120 days from the original invoice date), including accounts in which 25% of the total account is aged over such time periods, and certain other accounts, including, without limitation, governmental, intercompany, employee and certain foreign accounts. The revolving line of credit has a maturity date of September 30, 2016 and may be repaid and redrawn at any time prior to the maturity date, at which time all advances are due and payable. Interest is charged at a floating interest rate based on the daily three month London Interbank Offered Rate, or LIBOR, plus a 2.75% applicable margin (which applicable margin can be reduced to 2.50% based upon satisfaction of certain conditions). Interest was 3.00% as of December 31, 2013. As of December 31, 2013, $7.5 million was outstanding under the revolving line of credit. Borrowings under the credit agreement have priority in repayment to all of our other outstanding debt. Borrowings under the credit agreement are secured by substantially all of our assets, including our intellectual property. We may repay drawn amounts and reborrow under the revolving line of credit at any time and from time to time until the maturity date, without premium or penalty; provided, however, that any reduction or termination of the maximum amount available for borrowing under the revolving line of credit before the second anniversary of the closing date of the credit agreement is subject to a certain prepayment or termination fee, as applicable.

 

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As of December 31, 2013, we were in compliance with the financial and non-financial covenants under the credit agreement. We are required to maintain financial covenants with the credit agreement as follows:

 

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minimum liquidity of $15.0 million at all times; and

 

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minimum excess availability under the credit line of $2.5 million at all times, which limits our ability to draw the full amount of the credit line without Wells Fargo’s consent.

The terms of the credit agreement also require us to comply with other customary non-financial covenants. The operating and financial restrictions and covenants in the credit agreement, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in, expand or otherwise pursue our business activities and strategies.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, internal-use software development costs, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our consolidated financial statements.

Revenue Recognition

We recognize revenues primarily from the set-up and activation of coupons and coupons codes, and digital advertising services when all four of the following criteria are met:

 

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Persuasive evidence of an arrangement exists;

 

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Delivery has occurred or a service has been provided;

 

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Customer fees are fixed or determinable; and

 

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Collection is reasonably assured.

Coupons.    We generate revenues, as consumers select, or activate, a coupon through our platform by either printing it for physical redemption at a retailer or saving it to a retailer online account for automatic digital redemption. In the case of the setup fees, we recognize revenues proportionally, on a per activation basis, using the number of authorized activations per insertion order, commencing on the date of the first coupon activation. For coupons, the pricing is generally determined on a per unit activation basis and includes fees for the creation and setup of the digital coupons.

Coupon Codes.    We generate revenues when a consumer makes a purchase using a coupon code from our platform and completion of the order is reported to us. In the same period that we recognize revenues for the delivery of coupon codes, we also estimate and record a reserve, based upon historical experience, to provide for end-user cancelations or product returns which may not be reported until a subsequent date.

 

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Digital Advertising.    Our advertising services enable CPGs and retailers to display advertisements to promote their brands and products on our websites and through those of our affiliate publishers. We charge a fee for these advertising campaigns, the pricing of which is based on the advertisement size and position. Related fees are billed monthly, based on a per impressions or a per click basis.

We do not offer rights of refund of previously paid or delivered amounts, rebates, rights of return or price protection. In all instances, we limit the amount of revenue recognized to the amounts for which we have the right to bill our customers.

Gross versus Net Revenue Reporting

In the normal course of business and through our distribution network, we deliver digital coupons on retailers’ websites, through retailers’ loyalty reward programs, and on the websites of publishers. In these situations, we generally pay a distribution fee to the retailers or digital publishers which is included in our cost of revenues. The determination of whether revenues should be reported on a gross or net basis is based on our assessment of whether we are acting as the principal or an agent in the transaction. In determining whether we are the principal or an agent, we follow the accounting guidance for principal-agent considerations. Because we are the primary obligor and are responsible for (i) fulfilling the digital coupon delivery, (ii) establishing the selling prices for delivery of the digital coupons, and (iii) performing all billing and collection activities including retaining credit risk, we have concluded that we are the principal in these arrangements, and therefore report revenues and cost of revenues on a gross basis.

Multiple-element Arrangements

For arrangements with multiple-deliverables, we determine whether each of the individual deliverables qualify as a separate unit of accounting. In order to treat deliverables in a multiple element arrangement as a separate unit of accounting, the deliverable must have standalone value upon delivery.

We allocate the arrangement fee to all the deliverables (separate units of accounting) using the relative selling price method in accordance with the selling price hierarchy, which includes vendor-specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is not available and best estimate of selling price, or BESP, if neither VSOE nor TPE is available. VSOE and TPE do currently not exist for any of our deliverables. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, we allocate the arrangement fee to the separate units of accounting based on BESP. We determine BESP for deliverables by considering multiple factors, including, but not limited to, prices we charge for similar offerings, market conditions, competitive landscape and pricing practices. We limit the amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not contingent on future performance or future deliverables.

Changes in assumptions or judgments or changes to the elements in the arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Income Taxes

We account for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

 

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. We have established a full valuation allowance to offset domestic net deferred tax assets due to the uncertainty of realizing future tax benefits from our net operating loss carry forwards and other deferred tax assets. Our valuation allowance is attributable to the uncertainty of realizing future tax benefits from U.S. net operating losses, foreign timing differences and other deferred tax assets.

As of December 31, 2013, we had U.S. federal net operating loss carry forwards of approximately $162.2 million, which expire beginning in 2018. As of December 31, 2013, we had U.S. state net operating loss carry forwards of approximately $158.1 million, which expire beginning in 2014. In addition, we also have foreign net operating losses which do not expire.

We recognize liabilities for uncertain tax positions based upon a two-step process. To the extent a tax position does not meet a more-likely-than-not level of certainty, no benefit is recognized in the consolidated financial statements. If a position meets the more-likely-than-not level of certainty, it is recognized in the consolidated financial statements at the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Our policy is to analyze our tax positions taken with respect to all applicable income tax issues for al