S-1/A 1 d498394ds1a.htm AMENDMENT #2 TO FORM S-1 Amendment #2 to Form S-1
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As filed with the Securities and Exchange Commission on July 16, 2013

 

Registration No. 333-189397

 

 

 

 

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

 

RETAILMENOT, INC.

(Exact name of Registrant as Specified in Its Charter)

 

Delaware   7389   26-0159761
(State or Other Jurisdiction of   (Primary Standard Industrial   (IRS Employer
Incorporation or Organization)   Classification Code Number)   Identification No.)

301 Congress Avenue, Suite 700

Austin, Texas 78701

(512) 777-2970

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

G. Cotter Cunningham

Chief Executive Officer

301 Congress Avenue, Suite 700

Austin, Texas 78701

(512) 777-2970

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

 

Samer M. Zabaneh

Philip W. Russell

DLA Piper LLP (US)

401 Congress Avenue, Suite 2500

Austin, Texas 78701

(512) 457-7000

 

Louis J. Agnese, III

General Counsel and Secretary

RetailMeNot, Inc.

301 Congress Avenue, Suite 700

Austin, Texas 78701

(512) 777-2970

 

Paul R. Tobias

Joseph M. Alcorta

Wilson Sonsini Goodrich & Rosati,
Professional Corporation

900 South Capital of Texas Highway

Las Cimas IV, Fifth Floor

Austin, Texas 78746

(512) 338-5400

 

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 of 1933, as amended (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, 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 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, x Non-accelerated filer (do not check if a smaller reporting company) or ¨ Smaller reporting company.

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities To Be Registered
  Proposed
Maximum
Aggregate
Offering Price(1)
   Amount of
Registration Fee

Series 1 common stock, par value $0.001

  $230,000,000    $31,372.00(2)

 

 

 

  (1)   Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. Includes offering price of additional shares that the underwriters have the option to purchase.
  (2)   Previously paid.

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, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we and the selling stockholders are not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued July 16, 2013

 

9,090,908 Shares

LOGO

Series 1 Common Stock

 

 

 

RetailMeNot, Inc. is offering 4,545,454 shares of its Series 1 common stock, and the selling stockholders identified in this prospectus are offering an additional 4,545,454 shares of Series 1 common stock. We will not receive any of the proceeds from the sale of the shares being offered by the selling stockholders. This is our initial public offering and no public market currently exists for our Series 1 common stock. We anticipate that the initial public offering price of our Series 1 common stock will be between $20.00 and $22.00 per share.

 

 

 

We have two classes of common stock, Series 1 common stock and Series 2 common stock. The rights of the holders of Series 1 common stock and Series 2 common stock are identical, except for voting and conversion rights. Each share of Series 1 common stock is entitled to one vote. Each share of Series 2 common stock is also entitled to one vote other than with respect to the election of members of the board of directors and may be converted at any time at the election of the holder into one share of Series 1 common stock. As such, only holders of Series 1 common stock are entitled to vote on the election of members of the board of directors. After this offering our executive officers, directors, beneficial owners of 5.0% or more of our outstanding shares of capital stock, and affiliated entities, will own approximately 76.1% of our capital stock. In addition, in connection with this offering, our executive officers, directors, beneficial owners of 5.0% or more of our outstanding shares of capital stock, and affiliated entities, will receive approximately $79.8 million of net proceeds from the sale of shares in this offering, assuming an initial public offering price of $21.00 per share, the mid-point of the range set forth above, and after deducting underwriting discounts and commissions payable by such selling stockholders, and approximately $50.3 million in payment of accumulated but unpaid dividends upon conversion of outstanding shares of our preferred stock held by them into common stock.

 

 

 

We have applied to list our Series 1 common stock on the NASDAQ Global Select Market under the symbol “SALE”.

 

 

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, as such, will be subject to reduced public company reporting requirements.

 

 

 

Investing in our Series 1 common stock involves risks. See “Risk Factors” beginning on page 15.

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to
Public

    

Underwriting
Discounts
and
Commissions(1)

    

Proceeds to
Company

    

Proceeds to
Selling
Stockholders

Per Share

     $               $               $               $         

Total

     $                          $                          $                          $                    

 

  (1)   We have agreed to reimburse the underwriters for certain expenses. See the section titled “Underwriting” on page 155.

 

The selling stockholders have granted the underwriters the right to purchase up to an additional 1,363,636 shares of Series 1 common stock.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares to purchasers on                     , 2013.

 

 

 

MORGAN STANLEY        GOLDMAN, SACHS & CO.        CREDIT SUISSE

 

 

 

JEFFERIES       RBC CAPITAL MARKETS
   STIFEL           WILLIAM BLAIR   

 

                    , 2013.


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You should rely only on the information contained in this prospectus or in any free-writing prospectus we may authorize to be delivered or made available to you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with additional or different information. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our Series 1 common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus or any free-writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our Series 1 common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Dealer Prospectus Delivery Obligation

 

Until                     , 2013 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our Series 1 common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the U.S.: We have not, the selling stockholders have not and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the U.S. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Series 1 common stock and the distribution of this prospectus outside of the U.S.


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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and is a brief overview of key aspects of the offering. Before investing in our Series 1 common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the statements in this prospectus constitute forward-looking statements. See the section titled “Special Note Regarding Forward-Looking Statements and Industry Data” for more information.

 

RETAILMENOT, INC.

 

Overview

 

We operate the world’s largest digital coupon marketplace, connecting consumers with leading retailers and brands. In 2012, our marketplace featured digital coupons from over 60,000 retailers and brands, and according to our internal data compiled using Google Analytics, we had more than 450 million total visits to our desktop and mobile websites. As of December 31, 2012, we had contracts with more than 10,000 retailers, or paid retailers. We own and operate the largest digital coupon websites in the U.S. (RetailMeNot.com) and the U.K. (VoucherCodes.co.uk).

 

We are the leading digital coupon destination for consumers. In 2013, our marketplace featured more than 500,000 digital coupons in each month. Digital coupons are coupons, coupon codes and brand or category specific discounts made available online or through mobile applications that are used by consumers to make online or in-store purchases directly from retailers. Our websites, mobile applications, email newsletters, alerts and social media presence enable consumers to search for, discover and redeem hundreds of thousands of relevant digital coupons from retailers and brands. Our marketplace features digital coupons across multiple product categories, including clothing; electronics; health and beauty; home and office; travel, food and entertainment; personal and business services; and shoes. We believe our investments in digital coupon content quality, product innovation and direct retailer relationships allow us to offer a compelling experience to consumers looking to save money, whether online or in-store.

 

We believe we are a trusted partner to retailers and brands. During 2010, 2011 and 2012, our paid retailers realized over $0.2 billion, $1.2 billion and $2.4 billion, respectively, in sales attributable to consumer traffic from digital coupons in our marketplace. We estimate that during the five-day period from November 22, 2012, Thanksgiving Day, through November 26, 2012, commonly known as Cyber Monday, sales attributable to consumer traffic from digital coupons in our marketplace accounted for approximately 2% of retail e-commerce spending in the U.S. We provide our retailers and brands access to a large and engaged consumer audience. We help retailers and brands drive sales and acquire new customers, online through our websites and mobile applications, and in-store by displaying a digital coupon on our mobile applications. We enter into contracts with retailers using a pay-for-performance model that enables us to have a mutually beneficial relationship with our paid retailers, as they pay a commission to us only after a sale is made. Retailers are able to identify consumer traffic referred by our websites and measure the sales they realize from it.

 

We believe our marketplace benefits from network effects. As more consumers use our marketplace, we are better able to obtain high quality digital coupons from retailers and brands, which in turn attracts a larger consumer audience. We seek to reinforce our position as the leading digital coupon destination by continuing to increase consumer traffic and growing the breadth and depth of our digital coupons, as well as our retailer and brand relationships.

 

 

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Since we entered the digital coupon market in 2009, we have experienced significant growth. Our net revenues increased from $16.9 million in 2010 to $144.7 million in 2012, representing a 192.9% compound annual growth rate, or CAGR. In the same period, our net income increased from $2.3 million to $26.0 million, representing a 233.0% CAGR, and adjusted EBITDA increased from $6.8 million in 2010 to $70.4 million in 2012, representing a 221.7% CAGR. Our historic growth has been driven organically and through acquisitions. From 2011 to 2012, our consolidated net revenues grew from $80.4 million to $144.7 million. During this period, net revenues from RetailMeNot.com grew organically from $60.5 million to $113.4 million. This $52.9 million increase in net revenues from RetailMeNot.com represents 82.3% of our consolidated net revenues growth. During the three months ended March 31, 2013, we generated net revenues of $40.6 million, representing a 36.8% increase from the $29.6 million in net revenues we generated during the three months ended March 31, 2012. Net income for the three months ended March 31, 2013 increased to $7.0 million, representing an 11.9% increase from the $6.2 million of net income generated during the three months ended March 31, 2012. Adjusted EBITDA for the three months ended March 31, 2013 grew to $18.2 million, resulting in a 5.5% increase from the $17.3 million in adjusted EBITDA generated during the three months ended March 31, 2012. From the three months ended March 31, 2012 to the three months ended March 31, 2013, net revenues from RetailMeNot.com and VoucherCodes.co.uk collectively grew organically from $27.3 million to $37.5 million, respectively. This $10.2 million increase represented 92.7% of our consolidated net revenues growth. For further discussion regarding adjusted EBITDA, our use of this measure, the limitations of this measure and a reconciliation of adjusted EBITDA to net income, see the section titled “Selected Consolidated Financial and Other Data” on page 52.

 

In 2012 and the first three months of 2013, we generated 82.9% and 78.3% of our net revenues, respectively, in the U.S. and the balance in the U.K., France, Germany and the Netherlands. Effective March 1, 2013, we established operations in the Netherlands through the acquisition of Actiepagina.nl. As of March 31, 2013, we had 331 full-time employees and operations in the U.S., U.K., France, Germany and the Netherlands.

 

The below charts set forth the growth in our visits, net revenues, net income and adjusted EBITDA for the years ended December 31, 2010, 2011 and 2012:

 

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Our Industry

 

We enable consumers to save money while shopping online and in-store and help retailers to drive sales and acquire new customers. The retail industry is large. According to data compiled by Euromonitor International, the worldwide retail industry, excluding grocery retailers, totaled $7.5 trillion in 2012, of which $2.6 trillion was in the markets in which we currently operate. The following trends are driving our industry:

 

   

Consumers are increasingly using the Internet to inform purchase decisions and to shop online. According to data published in April 2013 by IDC, the consumer e-commerce market in 2012 was $987.0 billion globally and is projected to grow at a CAGR of 18.1% between 2012 and 2017.

 

 

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Mobile commerce is growing rapidly. The proliferation of smartphone devices and tablets makes mobile commerce, or m-commerce, one of the fastest growing retail channels. According to data published in April 2013, IDC estimates that m-commerce represented $63.4 billion globally in 2012 and expects it to grow at a 36.0% CAGR between 2012 and 2017.

 

   

Consumers have a mindset for savings. In a January 2013 article, eMarketer estimated that 48.0% of U.S. adult Internet users redeemed a digital coupon for online or offline shopping in the past year.

 

   

Retailers are focused on the return on investment, or ROI, of their marketing spend and are adopting solutions, like digital coupons, which allow them to measure and optimize the impact of their promotional campaigns.

 

Consumers and retailers face various challenges that represent barriers to increased retail commerce activity, online and in-store.

 

Consumers face the following challenges:

 

   

difficulty finding relevant coupons for the products and brands they want to purchase;

 

   

invalid or expired coupons; and

 

   

inconvenience associated with traditional coupons found in newspapers and circulars.

 

Retailers face the following challenges:

 

   

difficulty reaching consumers at scale;

 

   

difficulty engaging consumers across channels; and

 

   

ineffective and difficult to measure marketing solutions.

 

Our Solution

 

We operate the world’s largest digital coupon marketplace, connecting consumers with leading retailers and brands. Consumers are able to visit a trusted destination that allows them to search for, discover and redeem digital coupons from leading retailers, online or in-store. We aggregate digital coupons from retailers, performance marketing networks, our large user community, our employees and outsourced providers. Retailers are able to drive sales and acquire new customers by effectively attracting and engaging a large audience of consumers who are shopping across multiple channels. Our solution enables retailers to better manage their customer acquisition spend and effectively measure their marketing ROI.

 

Solutions for Consumers

 

   

Save money with a broad selection of digital coupons. In 2013, we have featured more than 500,000 digital coupons in each month from retailers and brands across multiple product categories.

 

   

Depth of digital coupon selection from leading retailers within each category. In 2012, we offered thousands of digital coupons per category. Our strong relationships with leading retailers allow us to offer digital coupons exclusive to our marketplace.

 

   

Reliability and curation of digital coupon content. We believe that we provide a high quality experience to consumers by actively monitoring and curating the most frequently visited digital coupon content in our marketplace and incorporating feedback from our large user community. Our merchandising team actively monitors the most frequently visited digital coupon content in our marketplace to ensure content quality and curates such digital coupon content by updating and changing the display and the description of digital coupons. We also provide users the ability to rank

 

 

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digital coupons made available through our marketplace to tell us if a digital coupon made available through our marketplace is valid or not and to submit comments about digital coupon content. Our merchandising team monitors the comments submitted by consumers for additional feedback on digital coupons, such as whether or not the description of the digital coupon contains an error, or is expired, and updates our digital coupon content accordingly.

 

   

Relevance and personalization. We keep consumers informed whenever a digital coupon from one of their preferred retailers becomes available. Consumers can sign up for alerts for digital coupons for specific retailers they have a personal affinity for that come from us via email or submit their brand “likes” and otherwise engage with us on Facebook. We then maintain and use this information to keep our users informed via email or Facebook whenever a digital coupon from one of their preferred retailers becomes available through our marketplace.

 

   

Anytime, anywhere availability and consistency of digital coupons online and in-store. Consumers can search for and discover our digital coupons at virtually any time via our websites, mobile applications, email newsletters and alerts or social media presence.

 

Solutions for Retailers

 

   

Access to a large consumer audience. In 2012, we had on average over 24.2 million monthly unique visitors to our websites, more traffic than the majority of our retailers’ own websites attract.

 

   

Multichannel engagement with consumers. We enable retailers and brands to consistently engage with consumers online (via our websites, mobile applications, email newsletters, email alerts and social media presence) and in-store (via mobile applications and printed coupons). We have had more than six million mobile application downloads and have more than nine million email subscribers.

 

   

Trusted partnerships and strategic dialogues with retailers. We help optimize digital coupon campaigns for our paid retailers to provide a consistent, high-quality user experience, which we believe reflects positively on the brand image of these retailers.

 

   

Quantifiable, pay-for-performance model that helps retailers measure marketing ROI. Our paid retailers pay a commission to us only after a consumer has made a purchase and are able to track the performance of their digital coupons.

 

Our Competitive Strengths

 

Global leader with scale and strong brands. According to comScore data, we are the largest web property focused on digital coupons as measured by unique visitors. Unique visitors are visitors who have visited one of our websites at least once in a given month. We believe that our strong brand recognition has allowed our marketplace to become the leading destination for consumers looking to save money on retail purchases. As a result, over 90% of traffic to our websites was generated from unpaid sources in 2012. In addition to RetailMeNot.com, our international brand portfolio includes VoucherCodes.co.uk in the U.K., Web.Bons-de-Reduction.com, Poulpeo.com and Ma-Reduc.com in France, Actiepagina.nl in the Netherlands, Deals.com in Germany and RetailMeNot.ca in Canada.

 

Trusted partner to leading retailers. In 2012, we maintained relationships with more than 10,000 paid retailers, including 367 of the top 500 retailers as ranked in the Internet Retailer 2012 Top 500 Guide, or the 2012 IR500. Additionally, our relationships with most of our top paid retailers are growing. Our top 500 paid retailers paid us, on average, total commission revenues of $235,544 in 2012, demonstrating growth from 2011, when we had paid relationships with 488 of these same retailers, with average total commission revenues of $121,523.

 

 

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Network effects. As more consumers use our marketplace, we are better able to obtain high quality digital coupons from retailers and brands, which in turn attracts a larger consumer audience.

 

Strong technology platform and proprietary data. Our technology platform is designed to provide the reliability and security necessary to support a large and growing base of consumers, retailers and brands in our marketplace. As engagement through our marketplace increases, we are able to collect more proprietary data on consumer shopping behavior, which allows us to further develop and improve our marketplace in order to better serve consumers and offer more value and insight to our paid retailers. Additionally, our scalable technology serves as a basis to design and support innovative solutions and to further automate and standardize our processes.

 

Large community of actively engaged users. We leverage our user community’s passion for savings by allowing them to submit digital coupons to our marketplace and to rank and comment on the digital coupons they find the most compelling and relevant, thereby enhancing the content made available to our broad consumer audience. We believe that this engagement by our consumers increases the quality of our content, while lowering our costs to curate and moderate that content ourselves.

 

Attractive business model with compelling value proposition. In the last three years, we have achieved a compelling combination of growth and profitability. From 2010 to 2012 our net revenues, net income and adjusted EBITDA grew at CAGRs of 192.9%, 233.0% and 221.7%, respectively. We believe our strong financial performance is in part a result of our mutually beneficially relationship with our paid retailers: we generate revenues on a commission basis when retailers complete a sale and consumers save money. For further discussion regarding adjusted EBITDA, our use of this measure, the limitations of this measure and a reconciliation of adjusted EBITDA to net income, see the section titled “Selected Consolidated Financial and Other Data” on page 52.

 

Our Growth Strategies

 

Our objective is to expand our position as the largest digital coupon marketplace, connecting consumers with leading retailers and brands. Our strategies to achieve this goal include:

 

   

increase traffic and monetization;

 

   

grow depth of paid relationships with retailers;

 

   

enhance mobile solutions and in-store enablement;

 

   

invest in technology and innovation;

 

   

expand internationally; and

 

   

pursue strategic acquisitions.

 

Risks Affecting Us

 

Our business is subject to a number of risks that you should understand before making an investment decision. These risks are discussed more fully in the section titled “Risk Factors” following this prospectus summary. Some of these risks are:

 

   

We are an early-stage company with a limited operating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

 

   

We depend on search engines for traffic. Changes to search engine algorithms or practices could adversely affect our ability to generate unpaid traffic, leading to lower revenues and/or increased traffic acquisition costs.

 

 

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If we are unable to retain existing retailers, expand our business with existing retailers or attract new consumers, our net revenues may not grow or could decline.

 

   

We depend on performance marketing networks as intermediaries. Factors adversely affecting our relationships with performance marketing networks may adversely affect our ability to attract and retain business and our operating results.

 

   

The market in which we participate is intensely competitive, and we may not be able to compete successfully.

 

   

If we are unsuccessful in expanding the capabilities of our digital coupon solutions for our mobile platforms to allow us to generate net revenues, our net revenues could decline.

 

   

Changes in consumer sentiment or laws, rules or regulations regarding the use of cookies and other tracking technologies and other privacy matters could have a material adverse effect on our ability to generate net revenues and could adversely affect our ability to collect proprietary data on consumer shopping behavior.

 

   

We may be sued by third parties for infringement or other violation of their intellectual or proprietary rights.

 

   

If Texas or any other jurisdiction in which we are resident implements regulations that impose sales tax on certain e-commerce or m-commerce transactions involving the use of performance marketing programs, our net revenues could decline and our business, financial condition and operating results could be adversely affected.

 

Recent Developments

 

Although the results of our three months ended June 30, 2013 are not yet finalized, the following information reflects our preliminary expectations with respect to such results based on currently available information:

 

   

For the three months ended June 30, 2013, we expect to report $42.0 - $42.5 million of net revenues, representing growth of 39.5% - 41.2% over the three months ended June 30, 2012. Excluding the impact of businesses acquired in the last 12 months, net revenues for the three months ended June 30, 2013 increased 36.3% - 37.9% compared to the same period in the prior year. Approximately half of the organic portion of the growth in net revenues was driven by improved monetization as a result of an increase in the percentage of visits that resulted in a paid transaction, with the remainder due to an increase in visits.

 

   

For the three months ended June 30, 2013, we expect to report net income of $4.3 - $4.6 million, representing a decrease of 21.0% - 15.5% compared to the three months ended June 30, 2012. This expected decrease in net income is the result of our continued investment in the business, which includes increased spending in costs of net revenues, product development, sales and marketing and general and administrative expenses, partially offset by the increase in net revenues.

 

   

For the three months ended June 30, 2013, we expect to report adjusted EBITDA of $14.0 - $14.5 million, representing a decrease of 10.4% - 7.2% compared to the three months ended June 30, 2012. Adjusted EBITDA is a non-GAAP metric used by management to measure our operating performance. See the section titled “Summary Consolidated Financial and Other Data” for an additional description of adjusted EBITDA and below for a reconciliation of adjusted EBITDA to net income for the ranges presented above for the three months ended June 30, 2013 (estimated) and the three months ended June 30, 2012 (actual).

 

 

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The following table reconciles expected adjusted EBITDA to expected net income for the three months ended June 30, 2012 and 2013 and is unaudited:

 

(dollars in thousands)    June 30, 2013     June 30,
2012
 
     Low     High    
     unaudited     unaudited  

Net income

   $ 4,300      $ 4,600      $ 5,441   

Depreciation and amortization

     3,255        3,255        3,842   

Stock-based compensation expense

     2,294        2,294        934   

Third party acquisition-related costs

     150        175        630   

Other operating expenses

     428        428        233   

Interest expense, net

     606        606        774   

Other income (expense), net

     (35     (100     (25

Provision for income taxes

     3,002        3,242        3,795   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 14,000      $ 14,500      $ 15,624   
  

 

 

   

 

 

   

 

 

 

 

   

For the three months ended June 30, 2013, we had 121.2 million visits to our websites, representing growth of 18.7% over the three months ended June 30, 2012. As a result, we expect to report net revenues per visit of $0.35 for the three months ended June 30, 2013.

 

The data presented above reflects management’s estimates based solely upon information available to us as of the date of this prospectus, is not a comprehensive statement of our financial results for the three months ended June 30, 2013 and has not been audited, reviewed or compiled by our independent registered public accounting firm, Ernst & Young, LLP. Accordingly, Ernst & Young, LLP does not express an opinion or any other form of assurance with respect thereto. The preliminary financial results presented above are subject to the completion of our financial closing procedures. Those procedures have not yet been completed. Our actual second quarter results will not be available until after this offering is completed, may differ materially from these second quarter estimates and are not necessarily indicative of the results to be expected for the entire fiscal year. Accordingly, you should not place undue reliance upon these preliminary estimates. For example, during the course of the preparation of the respective financial statements and related notes, additional items that would require material adjustments to be made to the preliminary estimated financial information presented above may be identified. This summary is not meant to be a comprehensive statement of our unaudited financial results for this quarter and our actual results may differ from these estimates. There can be no assurance that these estimates will be realized, and estimates are subject to risks and uncertainties, many of which are not within our control. See the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements and Industry Data.”

 

Corporate Information

 

We were organized in May 2007 under the name smallponds LLC, which we incorporated into a corporation in September 2007, and are headquartered in Austin, Texas. Our principal executive offices are located at 301 Congress Avenue, Suite 700, Austin, Texas 78701. Our telephone number is (512) 777-2970. Our corporate website address is www.retailmenot.com. The information contained in, or that can be accessed through, our website is not part of this prospectus.

 

RetailMeNot, VoucherCodes.co.uk, Deals2Buy, Web.Bons-de-Reduction, Poulpeo, Ma-Reduc, Deals.com and Actiepagina.nl are trademarks or logos appearing in this prospectus owned by RetailMeNot, Inc. or one of its subsidiaries. All other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

 

 

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THE OFFERING

 

Series 1 common stock offered by us

   4,545,454 shares

Series 1 common stock offered by selling stockholders

   4,545,454 shares

Series 1 common stock to be outstanding after this offering

   44,099,480 shares

Series 2 common stock to be outstanding after this offering

   6,107,494 shares

Total Series 1 and Series 2 common stock to be outstanding after this offering

   50,206,974 shares

Use of proceeds

  

We intend to use the net proceeds from this offering as follows:

 

•     to pay accumulated and unpaid dividends on our outstanding shares of Series B-1, B-2, B-3 and BB-3 preferred stock that have accrued at a rate of 8.0% per annum of the original issue price of each such share of preferred stock; the amount payable was $44.3 million as of March 31, 2013 and is estimated to be $51.8 million upon the closing of this offering;

 

•     to pay accumulated and unpaid dividends on our outstanding shares of Series B-4 and B-5 preferred stock that have accrued at a rate of 4.0% per annum of the original issue price of each such share of preferred stock; the amount payable was $0.6 million as of March 31, 2013 and is estimated to be $0.7 million upon the closing of this offering; and

 

•     to repay six promissory notes with an aggregate principal amount of $6.0 million, which notes were issued in connection with our purchase of VoucherCodes.co.uk; the amount payable was $6.5 million as of March 31, 2013 and is estimated to be $6.6 million as of the closing of this offering.

 

We intend to use the remainder for working capital and other general corporate purposes, including to develop new technologies, fund capital expenditures or make investments in or acquisitions of other businesses, solutions or technologies. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See the section titled “Use of Proceeds.”

 

 

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Proceeds to be paid to certain affiliated parties

   In connection with this offering, our executive officers, directors, beneficial owners of 5.0% or more of our outstanding shares of capital stock, and affiliated entities, will receive approximately $79.8 million of net proceeds from the sale of shares in this offering, assuming an initial public offering price of $21.00 per share, the mid-point of the range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions payable by such selling stockholders, and approximately $50.3 million in payment, upon conversion of outstanding shares of our preferred stock, of unpaid dividends accumulated through the closing of this offering.

Risk Factors

   See the section titled “Risk Factors” for a discussion of factors that you should consider carefully before deciding whether to purchase shares of our Series 1 common stock.

Voting Rights

   Shares of Series 1 common stock are entitled to one vote per share. Shares of Series 2 common stock are also entitled to one vote per share other than with respect to the election of members of the board of directors. Shares of Series 2 common stock are convertible into an equal number of shares of Series 1 common stock at any time at the election of the holder. See the section titled “Description of Capital Stock.”

Proposed NASDAQ Global Select Market symbol

  

SALE

 

Our fiscal year ends on December 31. Except as otherwise indicated, all information in this prospectus (i) is based upon 45,661,520 shares of Series 1 common stock and Series 2 common stock outstanding as of March 31, 2013, and (ii) excludes:

 

   

5,373,750 shares of Series 1 common stock issuable upon the exercise of options outstanding as of March 31, 2013 having a weighted-average exercise price of $9.05 per share;

 

   

313,611 shares of Series 1 common stock available for future issuance under our 2007 Stock Plan as of March 31, 2013, which shall be added to the number of shares reserved for issuance under our 2013 Equity Incentive Plan as described in the section titled “Executive Compensation—Benefit Plans;”

 

   

3,926,349 shares of Series 1 common stock, subject to increase on an annual basis, reserved for future issuance under our 2013 Equity Incentive Plan; and

 

   

560,907 shares of Series 1 common stock available for future issuance under our 2013 Employee Stock Purchase Plan.

 

Unless otherwise noted, the information in this prospectus assumes:

 

   

the four-for-one reverse stock split of our Series 1 common stock and Series 2 common stock effected on June 12, 2013;

 

   

the conversion of all of our outstanding shares of preferred stock into shares of Series 1 common stock and Series 2 common stock prior to or upon the closing of this offering; and

 

   

the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, which will occur immediately prior to the completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables summarize the consolidated financial and operating data for the periods indicated. The summary consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the summary consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data presented below for the three months ended March 31, 2012 and 2013 and the summary consolidated balance sheet data as of March 31, 2013 have been derived from the unaudited interim consolidated financial statements that are included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the summary financial data presented below in conjunction with our consolidated financial statements and related notes and the sections titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
         2010             2011             2012             2012             2013      
     (in thousands, except per share amounts)  

Consolidated Statements of Operations Data:

  

Net revenues

   $ 16,862      $ 80,402      $ 144,685      $ 29,647      $ 40,561   

Costs and expenses:

          

Cost of net revenues

     1,848        3,980        9,113        1,707        2,588   

Product development

     658        4,388        14,481        2,399        5,950   

Sales and marketing

     5,661        15,341        40,672        5,969        11,190   

General and administrative

     2,472        6,883        15,758        3,035        5,366   

Amortization of purchased intangible assets

     3,394        11,296        13,158        3,414        2,830   

Other operating expenses

            35        6,006        1,962        430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     14,033        41,923        99,188        18,486        28,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,829        38,479        45,497        11,161        12,207   

Other income (expense):

          

Interest expense, net

     (930     (7,784     (3,221     (1,002     (649

Fair value change of common stock warrant

            (2,103                     

Fair value change of contingent consideration, net

     1,994                               

Other income (expense), net

     (16     (129     77        9        (64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     3,877        28,463        42,353        10,168        11,494   

Provision for income taxes

     (1,533     (11,502     (16,360     (3,935     (4,519
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,344      $ 16,961      $ 25,993      $ 6,233      $ 6,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends on participating preferred stock

     (3,247     (64,715     (24,577     (6,092     (6,054
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total undistributed earnings (loss)

     (903     (47,754     1,416      $ 141      $ 921   

Undistributed earnings allocated to participating preferred stock

                   (1,390     (139     (901
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ (903   $ (47,754   $ 26      $ 2      $ 20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

          

Basic and diluted

   $ (1.27   $ (64.19   $ 0.03      $ 0.00      $ 0.02   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares used in computing net income (loss) per share:

          

Basic

     709        744        841        767        1,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     709        744        2,277        2,228        2,965   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Year Ended December 31,     Three Months Ended March 31,  
      2010       2011       2012                2012                     2013            
    (in thousands, except per share amounts)  

Pro forma net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(1)

     

Basic (unaudited)

      $ 0.55        $ 0.15   
     

 

 

     

 

 

 

Diluted (unaudited)

      $ 0.54        $ 0.14   
     

 

 

     

 

 

 

Weighted-average number of shares used in computing pro forma net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(2)

         

Basic (unaudited)

        47,110          47,626   
     

 

 

     

 

 

 

Diluted (unaudited)

        48,547          49,591   
     

 

 

     

 

 

 

Pro forma as adjusted net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(3)

         

Basic (unaudited)

      $ 0.50        $ 0.13   
     

 

 

     

 

 

 

Diluted (unaudited)

      $ 0.49        $ 0.13   
     

 

 

     

 

 

 

Weighted-average number of shares used in computing pro forma as adjusted net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(4)

         

Basic (unaudited)

        51,655          52,171   
     

 

 

     

 

 

 

Diluted (unaudited)

        53,092          54,136   
     

 

 

     

 

 

 

 

    Year Ended December 31,     Three Months Ended March 31,  
    2010         2011         2012                2012                        2013            

Consolidated Statements of Operations as Percentage of Net Revenues:

         

Net revenues

    100.0     100.0     100.0     100.0     100.0

Costs and expenses:

         

Cost of net revenues

    11.0        5.0        6.3        5.8        6.4   

Product development

    3.9        5.5        10.0        8.1        14.7   

Sales and marketing

    33.6        19.1        28.1        20.1        27.6   

General and administrative

    14.7        8.6        10.9        10.2        13.2   

Amortization of purchased intangible assets

    20.1        14.0        9.1        11.5        7.0   

Other operating expenses

    0.0        0.0        4.2        6.7        1.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    83.3        52.2        68.6        62.4        69.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    16.7        47.8        31.4        37.6        30.1   
Other income (expense):          

Interest expense, net

    (5.5     (9.7     (2.2     (3.4     (1.6

Fair value change of common stock warrant

    0.0        (2.6     0.0        0.0        0.0   

Fair value change of contingent consideration, net

    11.8        0.0        0.0        0.0        0.0   

Other income (expense), net

    (0.1     (0.2     0.1        0.0        (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    22.9        35.3        29.3        34.3        28.3   

Provision for income taxes

    (9.1     (14.3     (11.3     (13.3     (11.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    13.8     21.0     18.0     21.0     17.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)   Pro forma net income per share represents net income divided by the pro forma weighted-average shares outstanding, as though the conversion of our preferred stock into common stock occurred on the later of the first day of the relevant period or the date of issuance.

 

 

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  (2)   Pro forma weighted-average number of shares outstanding reflects the conversion of our preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the first day of the relevant period or the date of issuance.
  (3)   Pro forma as adjusted net income per share represents net income divided by the pro forma weighted-average shares outstanding reflecting the conversion of our preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the first day of the relevant period or the date of issuance and our sale of 4,545,454 shares of common stock in this offering assuming an initial public offering price of $21.00, which is the mid-point of the price range set forth on the cover of this prospectus.
  (4)   Pro forma as adjusted weighted-average number of shares outstanding reflects the conversion of our preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the first day of the relevant period and the date of issuance and our sale of 4,545,454 shares of common stock in this offering assuming an initial public offering price of $21.00, which is the mid-point of the price range set forth on the cover of this prospectus.

 

     As of December 31,    

March 31,

 
     2011     2012     2013  
     (dollars in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 88,234      $ 97,142      $ 112,337   

Working capital

     78,631        98,152        106,577   

Total assets

     347,326        370,920        375,651   

Total liabilities

     74,817        63,266        61,818   

Redeemable convertible preferred stock

     321,450        349,027        355,082   

Total stockholders’ equity (deficit)

     (48,941     (41,373     (41,249

 

     Year Ended December 31,      Three Months Ended March 31,  
       2010          2011          2012          2012          2013    
     (in thousands, except net revenues per visit)  

Operating Metrics:(5)

        

Visits

     108,574         349,992         464,240         102,240         122,560   

Net revenues per visit

   $ 0.16       $ 0.23       $ 0.31       $ 0.29       $ 0.33   
     Year Ended December 31,      Three Months Ended March 31,  
       2010          2011          2012          2012          2013    
     (dollars in thousands)  

Other Financial Data:

              

Adjusted EBITDA(6)

   $ 6,800       $ 51,895       $ 70,373       $ 17,277       $ 18,234   

 

  (5)   See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics” on page 59 for a description of these operating metrics.
  (6)   We define adjusted EBITDA as net income plus depreciation, amortization of intangible assets, stock-based compensation expense, third party acquisition-related costs, other non-cash operating expenses (including asset impairment charges and compensation-related charges associated with seller notes issued in connection with acquisitions), net interest expense, other non-operating income or expense (including changes in fair value of warrant liabilities and contingent consideration) and income taxes, net of any foreign exchange income or expense.

 

 

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         The following table presents a reconciliation of adjusted EBITDA to net income for each of the periods indicated:

 

    Year Ended December 31,     Three Months Ended March 31,  
    2010     2011     2012              2012                        2013            
    (dollars in thousands)  

Reconciliation of Adjusted EBITDA:

     

Net income

  $ 2,344      $ 16,961      $ 25,993      $ 6,233      $ 6,975   

Depreciation and amortization expense

    3,460        11,556        14,192        3,584        3,263   

Stock-based compensation expense

    68        471        4,048        570        2,140   

Third-party acquisition-related costs

    443        1,354        630               194   

Other operating expenses

           35        6,006        1,962        430   

Interest expense, net

    930        7,784        3,221        1,002        649   

Fair value change of common stock warrant

           2,103                        

Fair value change of contingent consideration, net

    (1,994                            

Other (income) expense, net

    16        129        (77     (9     64   

Provision for income taxes

    1,533        11,502        16,360        3,935        4,519   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 6,800      $ 51,895      $ 70,373      $ 17,277      $ 18,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

         The following tables present depreciation and stock-based compensation expense as included in the various lines of our consolidated statements of operations:

 

    Year Ended December 31,     Three Months Ended March 31,  
        2010             2011             2012         2012     2013  
    (dollars in thousands)  

Depreciation Expense:

     

Cost of net revenues

  $ 16      $ 62      $ 99      $ 10      $ 61   

Product development

    12        74        380        52        182   

Sales and marketing

    27        84        382        77        121   

General and administrative

    11        40        173        31        68   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation expense

  $ 66      $ 260      $ 1,034      $ 170      $ 432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Year Ended December 31,     Three Months Ended March 31,  
        2010             2011             2012             2012             2013      
    (dollars in thousands)  

Stock-Based Compensation Expense:

     

Cost of net revenues

  $ 1      $ 23      $ 157      $ 22      $ 158   

Product development

    12        164        1,144        147        540   

Sales and marketing

    23        113        993        105        492   

General and administrative

    32        171        1,754        296        950   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 68      $ 471      $ 4,048      $ 570      $ 2,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Non-GAAP Financial Measures

 

Adjusted EBITDA

 

To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation above of adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

 

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our operating performance for the following reasons:

 

   

our management uses adjusted EBITDA in conjunction with GAAP financial measures as part of our assessment of our business and in communications with our board of directors concerning our financial performance;

 

   

our management and board of directors use adjusted EBITDA in establishing budgets, operational goals and as an element in determining executive compensation;

 

   

adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations that could otherwise be masked by the effect of the expenses that we exclude in this non-GAAP financial measure and facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results;

 

   

securities analysts use a measure similar to our adjusted EBITDA as a supplemental measure to evaluate the overall operating performance and comparison of companies, and we anticipate that after consummating this offering our investor and analyst presentations will include adjusted EBITDA; and

 

   

adjusted EBITDA excludes non-cash charges, such as depreciation, amortization and stock-based compensation, because such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations and can vary significantly between periods.

 

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

 

   

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;

 

   

adjusted EBITDA excludes stock-based compensation expense which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and is an important part of our employees’ compensation;

 

   

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

 

   

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.

 

 

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RISK FACTORS

 

An investment in our Series 1 common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all other information contained in this prospectus before deciding whether to purchase shares of our Series 1 common stock. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that are currently considered immaterial. The trading price of our Series 1 common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and related notes, before deciding to purchase any shares of our Series 1 common stock.

 

Risks Related to Our Business

 

We are an early-stage company with a limited operating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

 

We began our operations in September 2007 and did not enter the digital coupons industry until late 2009. Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including challenges in accurate financial planning and forecasting. You should consider our business and prospects in light of the risks and difficulties we may encounter as an early-stage company.

 

If we are unable to continue to attract visitors to our websites from search engines, then consumer traffic to our websites could decrease, which could negatively impact the number of purchases generated for our retailers through our marketplace, and therefore negatively impact our ability to maintain or grow our net revenues and profitability.

 

We generate consumer traffic to our websites using various methods, including search engine marketing, or SEM, search engine optimization, or SEO, email campaigns and social media referrals. Our net revenues and profitability levels are dependent upon our continued ability to use a combination of these methods to generate consumer traffic to our websites in a cost-efficient manner. We have experienced and continue to experience fluctuations in search result rankings for a number of our websites. There can be no assurances that we will be able to grow or maintain current levels of consumer traffic to our websites.

 

Our SEM and SEO techniques have been developed to work with existing search algorithms utilized by the major search engines. Major search engines frequently modify their search algorithms. Changes in these algorithms could cause our websites to receive less favorable placements, which could reduce the number of users who visit our websites. We may be unable to modify our SEM and SEO strategies in response to any future search algorithm changes made by the major search engines, which could require a change in the strategy we use to generate consumer traffic to our websites.

 

In addition, websites must comply with search engine guidelines and policies. These guidelines and policies are complex and may change at any time. If we fail to follow such guidelines and policies properly, search engines may rank our content lower in search results or could remove our content altogether from their indices. If we fail to understand and comply with these guidelines, our SEO strategy may become unsuccessful.

 

If we are listed less prominently or fail to appear in search result listings for any reason, including as a result of our failure to successfully execute our SEM and SEO strategies, or our failure to comply with search engine guidelines and policies, it is likely that the number of visitors to our websites will decline. Any such decline in consumer traffic to our websites could adversely impact the number of purchases we generate for our retailers, which could adversely affect our net revenues. We may not be able to replace this traffic with the same volume of visitors or in the same cost-effective manner from other channels, such as cost-per-click search engine

 

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marketing or display or other advertising, or at all. An attempt to replace this traffic through other channels may require us to increase our sales and marketing expenditures, which would adversely affect our operating results and which may not be offset by additional net revenues.

 

If we are unable to retain our existing retailers, expand our business with existing retailers or attract new retailers and consumers, our net revenues could decline.

 

Our ability to continue to grow our net revenues will depend in large part on expanding our business with existing retailers and attracting new retailers. The number of our current retailers may not expand materially beyond our existing base and may decline. Furthermore, even for our largest retailers, the amount they pay us is typically only a small fraction of their overall advertising budget. Retailers may view their spend with us as experimental and may either reduce or terminate their spend with us if they determine a superior alternative for generating sales. In addition, retailers may determine that distributing digital coupons through our platform results in undesirably broad distribution of their coupons or otherwise does not provide a compelling value proposition. Some retailers have demanded that we remove digital coupons relating to their products or services from our websites, and we anticipate that some retailers will do so in the future. Retailers also may reduce the commission rates they pay to us for sales our websites facilitate. If we are unable to negotiate favorable terms with current or new retailers in the future, including the commission rates they pay us, our operating results will be adversely affected. Additionally, retailers may fail to pay the performance marketing networks the fees the retailers owe, which is a prerequisite to us receiving our commissions from the networks.

 

Retailers do not enter into long-term obligations with us requiring them to use our solutions and their contracts with us are cancelable upon short or no notice and without penalty. We cannot be sure that our retailers will continue to use our solutions or that we will be able to replace retailers that do not renew their campaigns with new ones generating comparable revenues.

 

If we are unable to attract new consumers and maintain or increase consumer traffic to our websites, new retailers may choose not to use, and existing retailers may not continue to use, our solutions for their promotional campaigns, and our volume of new digital coupon inventory may suffer as the perceived usefulness of our marketplace declines. If our existing retailers do not continue to use our solutions for their promotional campaigns, or if we are unable to attract and expand the amount of business we do with new retailers, our sales will decrease and our operating results will be adversely affected.

 

We are highly dependent on performance marketing networks as intermediaries. Factors adversely affecting our relationships with performance marketing networks, or the termination of these networks, may adversely affect our ability to attract and retain business and our operating results.

 

Most of our net revenues comes from commissions earned for promoting digital coupons on behalf of retailers. Often, the commissions we earn are tracked and paid by performance marketing networks. For 2012, 96.4% of our net revenues came from retailers that pay us through performance marketing networks, primarily Commission Junction, LinkShare and Google Affiliate Network. Performance marketing networks provide retailers with affiliate tracking links for revenues attribution to publishers and the ability to distribute digital coupon content to multiple publishers. We do not have exclusive relationships with performance marketing networks. They do not enter into long-term commitments to us allowing us to use their solutions, and their contracts with us are cancelable upon short or no notice and without penalty.

 

Our sales could be adversely impacted by industry changes relating to the use of performance marketing networks. For example, if retailers seek to bring the distribution of their digital coupon content in-house rather than using a performance marketing network, we would need to develop relationships with more retailers directly, which we might not be able to do and which could increase our sales, marketing and product expenses. Additionally, we face challenges associated with consumers’ increasing use of mobile devices to complete their online purchases. For example, many retailers currently do not recognize affiliate tracking links on their mobile-optimized websites or applications, and tracking mechanisms on mobile websites or applications may not

 

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function to allow retailers to properly attribute sales to us. As a result, we may not receive commission revenues when a consumer makes a purchase from their mobile device on a retailer’s mobile-optimized website after clicking through a digital coupon displayed on one of our websites or mobile applications if the retailer’s mobile monetization mechanisms are not enabled.

 

Moreover, as a result of dealing primarily with performance marketing networks, we have less of a direct relationship with retailers than would be the case if we dealt directly with retailers. The presence of performance marketing networks as intermediaries between us and retailers creates a challenge to building our own brand awareness and affinity with retailers. Additionally, in the event that our relationship with a performance marketing network were to terminate, our mechanism for receiving payments from the retailers we service through that network would terminate, which could materially and adversely impact our net revenues. On April 16, 2013, Google Affiliate Network announced that it planned to cease its operations and to disable the affiliate tracking links that provide for the attribution of revenues to publishers such as us on July 31, 2013. Historically, we have received significant revenues from paid retailers through Google Affiliate Network. In 2012, for example, approximately 14.5% of our net revenues from paid retailers were derived through this network. If those paid retailers do not quickly establish a relationship with another performance marketing network with which we have a relationship, or a direct paid relationship with us, or if those retailers fail to implement in a timely manner affiliate tracking links with such a performance marketing network, or with us, our net revenues and profitability could be adversely impacted. If other performance marketing networks on which we rely were to cease their operations, or terminate their relationships with us, our business and operating results could be negatively impacted.

 

Some performance marketing networks that we work with could be considered our competitors because they also offer some components of our solution, including publishing digital coupons on their own websites. If they further develop these capabilities, they may offer their own competitive solutions to retailers and, as a result, our ability to compete effectively could be significantly compromised and our business and operating results could be adversely affected.

 

If retailers alter the way they attribute credit to publishers in their performance marketing programs, our net revenues could decline and our operating results could be adversely affected.

 

Retailers often advertise and market digital coupons through performance marketing programs, a type of performance-based marketing in which a retailer rewards one or more publishers for each visitor or customer generated by the publisher’s own marketing efforts. When a consumer executes a purchase on a retailer’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 the vast majority of our net revenues through transactions for which we receive last-click attribution. In recent years, some retailers have sought, and in some cases adopted, alternatives to last-click attribution. These alternatives are primarily “first-click attribution,” which credits the first link or ad clicked by a consumer prior to executing a purchase, or “multichannel attribution,” which applies weighted values to each of a retailer’s advertisements and tracks how each of those advertisements contributed to a purchase. If retailers widely adopt first-click attribution, multichannel attribution or otherwise alter the ways they attribute credit for purchases to us, and if we are unable to adapt our business practices to such alterations, our net revenues could decline and our business, financial condition and operating results could be adversely affected.

 

The market in which we participate is intensely competitive, and we may not be able to compete successfully.

 

The market for digital coupon solutions is highly competitive, fragmented and rapidly changing. Our competition for traffic from consumers seeking to save money on online or in-store purchases includes digital coupon websites and mobile applications, cash back and loyalty websites, retailers, search engines, social networks, comparison shopping websites, newspapers and direct mail campaigns. Our competition for retailer marketing spend includes digital coupon sites that offer a pay-for-performance model, search engines and social networks that compete for online advertising spend and television, magazines and newspapers that compete for

 

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offline advertising spend. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our profitability. We also expect competition in e-commerce generally, and digital coupon solutions in particular, to continue to increase because there are no significant barriers to entry. A substantial number of digital coupon websites, including those that attempt to replicate our business model, have emerged globally. In addition to such competitors, we expect increasing competition from other large businesses that offer digital coupons similar to ours as an add-on to their core business. We also expect to compete against other Internet sites that serve niche markets and interests. In addition, we compete with traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies that provide coupons and discounts on products and services.

 

Our success depends on the breadth, depth, quality and reliability of our digital coupon selection, as well as our continued innovation and ability to provide features that make our marketplace useful and appealing to consumers. If we are unable to develop quality features that consumers want to use, then consumers may become dissatisfied with our marketplace and elect to use the offerings of one of our competitors, which could adversely affect our operating results.

 

Certain of our larger potential competitors may have the resources to significantly change the nature of the digital coupon industry to their advantage, which could materially disadvantage us. For example, Google, Yahoo!, Bing and Facebook have widely adopted industry platforms which they could leverage to distribute digital coupons that could be disadvantageous to our competitive position.

 

Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive consumer bases and deeper relationships, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies, develop deeper retailer relationships or offer services at lower prices. Any of these developments would make it more difficult for us to sell our solutions and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share.

 

In the traditional coupon landscape, our primary competitors for advertising spend include publishers of printable coupons. Many of these competitors have significant consumer reach, well-developed retailer relationships, and much larger financial resources and longer operating histories than we have.

 

We also directly and indirectly compete with retailers for consumer traffic. Many retailers market and offer their own digital coupons directly to consumers using their own websites, email newsletter and alerts, mobile applications, social media presence and other distribution channels. Our retailers could be more successful than we are at marketing their own digital coupons or could decide to terminate their relationship with us because they no longer want to pay us to compete against them.

 

We may face competition from companies we do not yet know about. If existing or new companies develop, market or resell 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.

 

We have experienced rapid growth in recent periods. If we fail to manage our growth, our financial performance may suffer.

 

We have expanded our overall business, consumer traffic, paid retailers, employee headcount and operations in recent periods. We increased our total number of full-time employees and contractors from 35 as of December 31, 2010 to 331 as of March 31, 2013. We have also established or acquired operations in other countries. In 2011, we acquired VoucherCodes.co.uk, which is based in the U.K. In 2012, we acquired

 

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Web.Bons-de-Reduction.com and Poulpeo.com, which are based in France, and relaunched Deals.com in Germany. In March 2013, we acquired Actiepagina.nl, which is based in the Netherlands. We previously had no presence in these countries. Our business is becoming increasingly complex, especially in light of the number of acquisitions we have integrated and are in the process of integrating. Our limited operating history, reliance on multiple websites and brands and our rapid expansion have placed, and will continue to place, a significant strain on our managerial, operational, product development, sales and marketing, administrative, financial and other resources.

 

We expect to continue to increase headcount and to hire more specialized personnel in the future. We will need to continue to hire, train and manage additional qualified website developers, software engineers, partner management personnel and sales and marketing staff in order to improve and maintain our technology to properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed.

 

Further, to accommodate our expected growth we must add new hardware and software and improve and maintain our technology, systems and network infrastructure. Failure to effectively upgrade our technology or network infrastructure to support our expected increases in traffic volume could result in unanticipated system disruptions, slow response times or poor experiences for consumers. To manage the expected growth of our operations and personnel and to support financial reporting requirements as a public company, we will need to improve our transaction processing and reporting, operational and financial systems, procedures and controls. These improvements will be particularly challenging if we acquire new operations with different back-end systems. For example, we are in the process of converting the method of collecting a substantial portion of the data necessary to record our net revenues. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage our growth successfully and hire additional qualified personnel in an efficient manner, our business, financial conditions and operating results could be adversely affected.

 

We experience quarterly fluctuations in our operating results due to a number of factors that make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

 

Our business is subject to seasonal fluctuations. Specifically, our net revenues are traditionally strongest in the third and fourth quarters of each year due to increases in holiday shopping. Conversely, our first and second quarter net revenues are typically lower.

 

Since the majority of our expenses are personnel-related and include salaries and stock-based compensation, benefits and incentive-based compensation plan expenses, we have not experienced significant seasonal fluctuations in the timing of our expenses from period to period other than increases in discretionary advertising and promotional spending during the third and fourth quarter holiday shopping period. Following this offering, we plan to continue to increase our investment in sales and marketing and product development substantially as we seek to leverage our solution to capitalize on what we see as a growing global opportunity. We also expect that our general and administrative expenses will increase both to support our growing operations and manage increased costs of operating as a public company. For the foregoing reasons or other reasons we may not anticipate, historical patterns should not be considered indicative of our future sales activity, expenditure levels or performance.

 

Factors that may affect our quarterly operating results include the following:

 

   

the number and quality of the digital coupons on our websites and mobile applications;

 

   

consumer visits to our websites and use of our mobile applications, and purchases of retail products by consumers resulting from those visits;

 

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the success and costs of our online advertising and marketing initiatives, including advertising costs for paid search keywords that we deem relevant to our business;

 

   

the levels of compensation that retailers are willing to pay us to attract customers;

 

   

the amount that consumers spend when they make purchases using the digital coupons we provide;

 

   

market acceptance of our current and future solutions, including our ability to sell additional solutions to existing retailers and to add new retailers to our business in multiple regions around the world;

 

   

overall levels of consumer spending;

 

   

the budgeting cycles of our retailers;

 

   

the cyclical and discretionary nature of marketing spend and any resulting changes in the number and quality of digital coupons that retailers choose to offer;

 

   

changes in the competitive dynamics of the digital coupon industry, including consolidation among competitors, performance marketing networks or customers, and our reputation and brand strength relative to our competitors;

 

   

the response of consumers to our digital coupon content;

 

   

our ability to control costs, including our operating expenses;

 

   

network outages, errors in our solutions or security breaches and any associated expenses and collateral effects;

 

   

our ability to achieve the growth rate that was anticipated by us in setting our operating and capital expense budgets;

 

   

foreign currency exchange rate fluctuations, as our foreign sales and costs are denominated in local currencies;

 

   

costs related to acquisitions or licensing of, or investments in, products, services, technologies or other businesses and our ability to integrate and manage any acquisitions successfully; and

 

   

general economic and political conditions in our domestic and international markets.

 

As a result of these and other factors, we have a limited ability to forecast the amount of future net revenues and expenses, and our operating results may vary from quarter to quarter and may fall below our estimates or the expectations of public market analysts and investors. Fluctuations in our quarterly operating results may lead analysts to change their long-term models for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key personnel or cause other unanticipated issues, all of which could cause our stock price to decline. As a result of the potential variations in our quarterly net revenues and operating results, we believe that quarter-to-quarter comparisons of our net revenues and operating results may not be meaningful and the results of any one quarter should not be relied upon as an indication of future performance.

 

If online commerce does not continue to grow, or contracts, our business may suffer.

 

The business of selling goods and services over the Internet, and the use of digital coupons in those transactions, is dynamic and relatively new. Concerns about fraud, privacy and other challenges may discourage additional consumers from adopting the Internet as a medium of commerce. Acquiring new customers for our marketplace and increasing consumer traffic may become more difficult and costly than it has been in the past, particularly in markets where our marketplace has been available for some time. In order to increase consumer traffic to our websites and use of our mobile applications, we must appeal to consumers who historically have used traditional means of commerce to purchase goods and services and may prefer alternatives to our websites, such as the retailer’s own website. If these consumers prove to be less active than consumers who are already providing traffic to our websites, or we are unable to gain efficiencies in our operating costs, including our cost

 

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of increasing consumer traffic to our websites, our business could be adversely impacted. Furthermore, to the extent that weak economic conditions cause consumer spending to decline or cause our customers and potential customers to freeze or reduce their marketing budgets, particularly in the online retail market, demand for our solutions may be negatively affected.

 

If we are not able to maintain a positive perception of the content available through our marketplace, maintain and enhance our RetailMeNot brand and the brands associated with each of our other websites, our reputation and business may suffer.

 

A decrease in the quality of the digital coupons available through our marketplace could harm our reputation and damage our ability to attract and retain consumers and retailers, which could adversely affect our business. Additionally, maintaining and enhancing our RetailMeNot brand and the brands of each of our other websites are critical to our ability to attract new retailers and consumers to our marketplace, generate net revenues and successfully introduce new solutions. We may not be able to successfully build our RetailMeNot brand in the U.S. without losing some or all of the value associated with, or decreasing the effectiveness of, our other brands. We expect that the promotion of our brands will require us to make substantial investments and as our market becomes more competitive, these branding initiatives may become increasingly difficult and expensive. The successful promotion of our brands will depend largely on our marketing and public relations efforts. If we do not successfully maintain and enhance our brands, we could lose consumer traffic, which could, in turn, cause retailers to terminate or reduce the extent of their relationship with us. Our brand promotion activities may not be successful or may not yield net revenues sufficient to offset this cost, which could adversely affect our reputation and business.

 

Our business model depends upon digital coupon inventory that we do not own or otherwise control, and the failure to maintain sufficient inventory or quality of the digital coupons available on our websites may adversely affect our perceived value by consumers and therefore retailers.

 

Our success depends on our ability to provide consumers with the digital coupons they seek. The vast majority of our revenues come from arrangements in which we are paid by retailers to promote their digital coupons. Additionally, approximately one-third of the digital coupons on our websites are submitted by users. Therefore, we do not own or control the inventory of content upon which our business depends. Because a large number of our digital coupons are submitted by users, our efforts to ensure the quality and reliability of those digital coupons are critical to our success. From time to time consumers submit complaints that our digital coupons are invalid or expired. If our algorithms and automated processes for sorting user-submitted digital coupons are ineffective, or if our employees responsible for manual review and curation of user-submitted digital coupons are unable to effectively select and sort the digital coupons that are reliable and most appealing to our users, we may be unable meet the needs of consumers and our operating results may be adversely affected.

 

Retailers have a variety of channels through which to promote their products and services. If these retailers elect to promote their coupons and discounts through other channels or not to promote coupons or discounts at all, or if our competitors are willing to accept lower commissions than we are to promote these digital coupons, our ability to obtain content may be impeded and our business, financial condition and operating results will be adversely affected. Similarly, if users do not contribute digital coupons to our websites, or if they contribute digital coupons that are not attractive or reliable, the digital coupon inventory in our marketplace may decrease or become less valuable to consumers. If we cannot maintain sufficient digital coupon inventory in our marketplace, consumers may perceive our marketplace as less relevant, consumer traffic to our websites and use of our mobile applications will decline and, as a result, our business, financial condition and operating results will be adversely affected.

 

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Consumers are increasingly using mobile devices to access our content and if we are unsuccessful in expanding the capabilities of our digital coupon solutions for our mobile platforms to allow us to generate net revenues as effectively as our desktop platforms, our net revenues could decline.

 

Web usage and the consumption of digital content are increasingly shifting to mobile platforms such as smartphones and other connected devices. Industry-wide solutions to monetize digital coupon content effectively on these platforms are at an early stage of development and the future demand and growth prospects for digital coupon content on these mobile platforms is uncertain.

 

The growth of our business depends in part on our ability to deliver compelling solutions to retailers through these new mobile marketing channels. Our success on mobile platforms will be dependent on our interoperability with popular mobile operating systems that we do not control, such as Android, iOS and Windows Mobile, and any changes in such systems that degrade our functionality or give preferential treatment to competitive services could adversely affect usage of our services through mobile devices.

 

Further, to deliver high quality mobile offerings, it is important that our solutions integrate with a range of other mobile technologies, systems, networks and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks or standards. For example, many retailers today do not recognize affiliate tracking links on their mobile websites, and affiliate tracking links on mobile websites may not function to allow retailers’ sales to be attributed to us. As a result, we may not receive commission revenues when a consumer executes a purchase on the retailer’s platform after clicking through a digital coupon displayed on our mobile website or in our mobile applications. If retailers fail to recognize affiliate tracking links on their mobile websites, or affiliate tracking links on mobile websites do not function to allow retailers’ sales to be attributed to us and our mobile traffic continues to increase or represent a higher percentage of our consumer traffic, our business could be harmed and our operating results could be adversely affected.

 

If we fail to achieve success with our mobile applications and mobile website, or if we otherwise fail to deliver effective solutions to advertisers for mobile platforms and other emerging platforms, our ability to monetize these growth opportunities will be constrained, and our business, financial condition and operating results would be adversely affected.

 

Our failure or the failure of third-party service providers to protect our platform and network against security breaches, or otherwise protect our confidential information, could damage our reputation and brand and substantially harm our business and operating results.

 

We deliver digital coupon content via our websites, mobile applications and email newsletter and alerts and social media presence, and we collect and maintain data about consumers, including personally identifiable information, as well as other confidential or proprietary information. Our security measures may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our platform or that we or our third-party service providers otherwise maintain. Breaches of our security measures or those of our third-party service providers could result in unauthorized access to our platform or other systems; unauthorized access to and misappropriation of consumer information, including consumers’ personally identifiable information, or other confidential or proprietary information of ourselves or third parties; viruses, worms, spyware or other malware being served from our platform; deletion or modification of content, or the display of unauthorized content, on our websites or our mobile applications; or a denial of service or other interruption in our operations. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we and they may be unable to anticipate these attacks or to implement adequate preventative measures. Any actual or perceived breach of our security could

 

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damage our reputation and brand, expose us to a risk of loss or litigation and possible liability, require us to expend significant capital and other resources to alleviate problems caused by such breaches and deter consumers and retailers from using our online marketplace, which would harm our business, financial condition and operating results.

 

Interruptions or delays in service from third-party data center hosting facilities and other third parties could impair the delivery of our solutions and harm our business.

 

We currently serve our customers from third-party data center hosting facilities located in California, Virginia, the U.K., France, Germany and the Netherlands. All of our data gathering and analytics are conducted on, and the content we deliver is processed through, servers in these facilities. We also rely on bandwidth providers, internet service providers and mobile networks to deliver content. Any damage to, or failure of, the systems of our third-party providers could result in interruptions to our service.

 

Despite precautions taken at our third-party data centers, these facilities may be vulnerable to damage or interruption from break-ins, computer viruses, denial-of-service attacks, acts of terrorism, vandalism or sabotage, power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes and similar events. The occurrence of any of these events, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in loss of data, lengthy interruptions in the availability of our services and harm to our reputation and brand. While we have disaster recovery arrangements in place, they have not been tested under actual disasters or similar events.

 

Additionally, our third-party data center facility agreements are of limited durations, and our third-party data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If for any reason we are unable to renew our agreements with these facilities on commercially reasonable terms or if our arrangement with one or more of our data centers is terminated, we could experience additional expense in arranging for new facilities and support, and we may experience delays in the provisioning of our solutions until an agreement with another data center facility can be arranged. This shift to alternate facilities could take more than 24 hours depending on the nature of the event, which could cause significant interruptions in the delivery of our solutions and adversely affect our business and reputation. In addition, the failure of these facilities to meet our capacity requirements could result in interruptions in the availability or functionality of our solutions or impede our ability to scale our operations.

 

Furthermore, we depend on continuous and uninterrupted access to the Internet through third-party bandwidth providers to operate our business. If we lose the services of one or more of our bandwidth providers for any reason or if their services are disrupted, we could experience disruption in our services or we could be required to retain the services of a replacement bandwidth provider, which could increase our operating costs and harm our business and reputation.

 

Any errors, defects, disruptions or other performance problems with our solutions could harm our reputation and may damage our retailers’ businesses. Interruptions in our solutions could cause retailers to terminate their contracts with us, which would likely reduce our net revenues and harm our business, operating results and financial condition.

 

An increase in the return rate of paid retailers’ products or a change in the categories of products retailers choose to promote using digital coupons could reduce our net revenues.

 

The commission revenues we receive from paid retailers is in part a function of the amount consumers purchase from paid retailers and net of product returns. We do not have control over the categories or quality of products or services that our retailers deliver, nor do we have control over the digital coupons they provide us. As a result, we rely on our historical experience for our estimate of returns. If paid retailers’ actual levels of returns are greater than the level of returns we estimate or if paid retailers elect to use digital coupon content to promote products and services with a higher return rate than what we have experienced historically, our net revenues

 

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could decline. Because some categories of products tend to experience higher return rates than others, a shift in the types of goods consumers purchase using our solutions could lead to an increase in returns and our net revenues could decline. Additionally, return rates in the foreign countries in which we operate are currently higher than return rates in the U.S. If we continue to expand our operations in countries with high return rates, our operating results may be negatively affected.

 

Regulatory, legislative or self-regulatory developments regarding Internet privacy matters could adversely affect our ability to conduct our business.

 

Consumer and industry groups have expressed concerns about online data collection and use by companies, which has resulted in the release of various industry self-regulatory codes of conduct and best practice guidelines that are binding for member companies and that govern, among other things, the ways in which companies can collect, use and disclose user information, how companies must give notice of these practices and what choices companies must provide to consumers regarding these practices. We are obligated in certain cases to comply with best practices or codes of conduct addressing matters, such as the online tracking of users or devices.

 

U.S. regulatory agencies have also placed an increased focus on online privacy matters and, in particular, on online advertising activities that utilize cookies, which are small files of non-personalized information placed on an Internet user’s computer, and other online tracking methods. Such regulatory agencies have released, or are expected to release, reports pertaining to these matters. For example, on March 26, 2012, the Federal Trade Commission, or FTC, issued a report on consumer privacy intended to articulate best practices for companies collecting and using consumer data. The report recommends companies adopt several practices that could have an impact on our business, including giving consumers notice and offering them choices about being tracked across other parties’ websites and implementing a persistent “Do Not Track” mechanism to enable consumers to choose whether to allow tracking of their online search and browsing activities, including on mobile devices. Various industry participants have worked to develop and finalize standards relating to a Do Not Track mechanism, and such standards may be implemented and adopted by industry participants at any time. We may be required or otherwise choose to adopt Do Not Track mechanisms, in which case our ability to use our existing tracking technologies and permit their use by performance marketing networks and other third parties could be impaired. This could cause our net revenues to decline and adversely affect our operating results.

 

U.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’ ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools. A number of bills have been proposed in the U.S. Congress in the past that contained provisions that would have regulated how companies can use cookies and other tracking technologies to collect and use information about consumers. Some of those bills also contained provisions that would have specifically regulated the collection and use of information, particularly geolocation information, from mobile devices. At least one such bill presently has been proposed in the U.S. Congress.

 

Additionally, the EU has traditionally imposed more strict obligations under data privacy laws and regulations. Individual EU member countries have had discretion with respect to their interpretation and implementation of EU data privacy laws, resulting in variation of privacy standards from country to country. Legislation and regulation in the EU and some EU member states requires companies to obtain specific types of notice and consent from consumers before using cookies or other tracking technologies. To comply with these requirements, the use of cookies or other similar technologies may require the user’s affirmative, opt-in consent. Additionally, in January 2012, the European Commission announced significant proposed reforms to its existing data protection legal framework that, if implemented, may result in a greater compliance burden with respect to our operations in Europe.

 

Changes in global privacy laws and regulations and self-regulatory regimes may force us to incur substantial costs or require us to change our business practices. This could compromise our ability to pursue our growth

 

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strategies effectively and may adversely affect the demand for our solutions or otherwise harm our business and financial condition. For instance, new privacy laws or regulations or changed interpretations of existing laws or regulations could require performance marketing networks or us to take additional measures to facilitate consumer privacy preferences or to limit or cease altogether the collection, use or disclosure of data. For example, one potential restriction on the use of cookies would allow a website that a consumer has elected to visit to continue to place cookies on the user’s browser without explicit consent, but would require the user’s explicit consent for a third party to place its cookies on the user’s browser. The recent FTC staff report also recommends that websites offer consumers a choice about whether the owner of the website can use third parties to track the consumer’s activity for certain purposes. We are dependent on third parties, including performance marketing networks, to place cookies on browsers of users that visit our websites. If in the future we are restricted from allowing cookies, if there is a material increase in the number of users who choose to opt out or block cookies and other tracking technologies, or if performance marketing networks’ cookies or other tracking mechanisms otherwise do not function properly, our ability to generate net revenues would be significantly impaired.

 

Finally, we may be subject to foreign laws regulating online advertising even in jurisdictions where we do not have any physical presence to the extent a digital media content provider has advertising inventory that we manage or to the extent that we collect and use data from consumers in those jurisdictions. Such laws may vary widely around the world, making it more costly for us to comply with them. Failure to comply may harm our business and our operating results could be adversely affected.

 

Changes in consumer sentiment or laws, rules or regulations regarding the use of cookies and other tracking technologies and other privacy matters could have a material adverse effect on our ability to generate net revenues and could adversely affect our ability to collect proprietary data on consumer shopping behavior.

 

Consumers may become increasingly resistant to the collection, use and sharing of information online, including information used to deliver advertising and to attribute credit to publishers in performance marketing programs, and take steps to prevent such collection, use and sharing of information. For example, consumer complaints and/or lawsuits regarding online advertising or the use of cookies or other tracking technologies in general and our practices specifically could adversely impact our business.

 

Consumers can currently opt out of the placement or use of most cookies for online advertising purposes by either deleting or disabling cookies on their browsers, visiting websites that allow consumers to place an opt-out cookie on their browsers, which instructs participating entities not to use certain data about consumers’ online activity for the delivery of targeted advertising, or by downloading browser plug-ins and other tools that can be set to: identify cookies and other tracking technologies used on websites; prevent websites from placing third-party cookies and other tracking technologies on the user’s browser; or block the delivery of online advertisements on websites and applications.

 

Changes in device and software features could make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies. In particular, the default settings of consumer devices and software may be set to prevent the placement of cookies unless the user actively elects to allow them. For example, Apple’s Safari browser currently has a default setting under which third-party cookies are not accepted, and users must activate a browser setting to enable cookies to be set. Additionally, Mozilla Corporation announced on February 25, 2013, that its Firefox browser also will not accept third-party cookies by default. On February 22, 2012, the Digital Advertising Alliance announced that its members will work to add browser-based header signals to the set of tools by which consumers can express their preferences not to be tracked online. A recent FTC report on consumer privacy calls for the development and implementation of a persistent Do Not Track mechanism that enable consumers to choose whether to allow the tracking of their online search and browsing activities. Various industry participants have worked to develop and finalize standards relating to a Do Not Track mechanism, and such standards may be implemented and adopted by industry participants at any time.

 

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We are dependent on performance marketing networks or in some instances, retailers, to place cookies on browsers of users that visit our websites or to use other tracking mechanisms to allow retailer sales through our marketplace to be attributed to us, and if we are restricted from allowing these or if they do not function in a manner that allows retailer sales through our marketplace to be attributed to us, our ability to generate net revenues would be significantly impaired. In particular, if consumer sentiment regarding privacy issues or the development and deployment of new browser solutions or other Do Not Track mechanisms results in a material increase in the number of users who choose to opt out or block cookies and other tracking technologies or who are otherwise using browsers where they need to, and fail to, configure the browser to accept cookies, or otherwise results in cookies or other tracking technologies not functioning properly, our ability to conduct our business, operating results and financial condition would be adversely affected.

 

In addition to this change in consumer preferences, if retailers or brands perceive significant negative consumer reaction to targeted online advertising or the tracking of consumers’ online activities, they may determine that such advertising or tracking has the potential to negatively impact their brand. In that case, advertisers may limit or stop the use of our solutions, and our operating results and financial condition would be adversely affected.

 

Our business practices with respect to data and consumer protection could give rise to liabilities or reputational harm as a result of governmental regulation, legal requirements or industry standards relating to consumer privacy, data protection and consumer protection.

 

Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect. We strive to comply with all applicable laws, regulations, self-regulatory requirements and legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot assure you that our practices have complied, comply, or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with federal, state or international laws or regulations, including laws and regulations regulating privacy, data security, marketing communications or consumer protection, or other policies, self-regulatory requirements or legal obligations could result in harm to our reputation, a loss in business, and proceedings or actions against us by governmental entities, consumers, retailers or others. We may also be contractually liable to indemnify and hold harmless performance marketing networks or other third parties from the costs or consequences of noncompliance with any laws, regulations, self-regulatory requirements or other legal obligations relating to privacy, data protection and consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business. Any such proceeding or action, and any related indemnification obligation, could hurt our reputation, force us to incur significant expenses in defense of these proceedings, distract our management, increase our costs of doing business and cause consumers and retailers to decrease their use of our marketplace, and may result in the imposition of monetary liability.

 

Government regulation of the Internet, e-commerce and m-commerce is evolving, and unfavorable changes or failure by us to comply with these laws and regulations could substantially harm our business and results of operations.

 

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet, e-commerce and m-commerce in a number of jurisdictions around the world. Existing and future regulations and laws could impede the growth of the Internet, e-commerce, m-commerce or other online services. These regulations and laws may involve taxation, tariffs, privacy and data security, anti-spam, data protection, content, copyrights, distribution, electronic contracts, electronic communications and consumer protection. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet as the vast majority of these laws and regulations were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the

 

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Internet, e-commerce or m-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet, e-commerce or m-commerce may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot assure you that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business, and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant resources in defense of these proceedings, distract our management, increase our costs of doing business, and cause consumers and retailers to decrease their use of our marketplace, and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of noncompliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our websites and mobile applications or may even attempt to completely block access to our marketplace. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected and we may not be able to maintain or grow our net revenues as anticipated.

 

As we develop and provide solutions, we may be subject to additional and unexpected regulations, which could increase our costs or otherwise harm our business.

 

As we develop and provide solutions that address new market segments, we may become subject to additional laws and regulations, which could create unexpected liabilities for us, cause us to incur additional costs or restrict our operations.

 

We have begun to introduce new product offerings, which may be subject to regulation by federal, state and local authorities and by authorities in foreign countries. For example, unlike our other solutions, in order to facilitate card-linked offers which we are considering, we must acquire and store consumer credit card data. The storage of credit card data requires compliance with the Payment Card Industry Data Security Standard, or PCI DSS, which compliance certification we recently obtained. Under the PCI DSS, we are required to adopt and implement internal controls over the use, storage and security of credit card data to help prevent credit card fraud. Failure to comply with this standard or other loss of our PCI DSS compliance would result in breaches of contractual obligations with our payment processors, may subject us to fines, penalties, damages and civil liability and could eventually prevent us from processing or accepting credit cards.

 

From time to time, we may be notified of or otherwise become aware of additional laws and regulations that governmental organizations or others may claim should be applicable to our business. Our failure to anticipate the application of these laws and regulations accurately, or other failure to comply, could create liability for us, result in adverse publicity or cause us to alter our business practices, which could cause our net revenues to decrease, our costs to increase or our business otherwise to be harmed.

 

We may face liability for, and may be subject to claims related to, inaccurate or outdated content provided to us, or content provided to us without permission, which could require us to pay significant damages, may be extremely costly to defend even if decided in our favor and could limit our ability to operate.

 

The information on our websites and applications that is provided by performance marketing networks and retailers and collected from third parties relates to digital coupons from retailers participating in the digital coupon industry. We are exposed to the risk that some of this content may contain inaccurate or outdated information about retailer products or services or the discounts thereon, or digital coupons that are not made available or intended to be made available to all consumers. This could cause consumers and retailers to lose confidence in the information provided on our platform or become dissatisfied with our platform and result in lawsuits being filed against us.

 

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In addition, we may face potential liability relating to information that is published or made available through our marketplace, including information generated by us, user-generated content and proprietary information of third parties. This content may expose us to claims related to trademark and copyright infringement and other intellectual property rights, rights of privacy, defamation, fraud, negligence, breach of contract, tortious interference, unfairness, deceptiveness, false or misleading advertising, personal injury torts, noncompliance with state or federal laws relating to digital coupons or other theories based on the nature and content of the information. The laws relating to the liability of service providers for activities of their users is currently unsettled both within the U.S. and internationally, although risks related to these types of lawsuits may be enhanced in certain jurisdictions outside the U.S. where our protection from liability for third-party actions is more unclear and where we may be less protected under local laws than we are in the U.S.

 

Such claims or lawsuits could divert the time and attention of management and technical personnel away from our business and result in significant costs to investigate and defend, regardless of the merits of the claims, as well as significant damages if we are found liable. The scope and amount of our insurance may not adequately protect us against these types of damages. Additionally, as a result of such claims, we may elect or be compelled to remove valuable content from our websites or mobile applications, which could decrease the usefulness of our platform for consumers and result in less traffic to our websites and less usage of our mobile applications. If any of these events occur, our business and financial results could be adversely affected.

 

Our business could suffer if the jurisdictions in which we operate change the way in which they regulate user-generated content.

 

Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices related to user-generated content and that requires changes to these practices or the design of our platform or solutions. For example, if legislation is passed that limits the immunities afforded to websites that publish user-generated content, we may be compelled to remove content from our platform that we would otherwise publish or restrict the types of businesses that we can promote coupon content for, among other changes. Legislative changes such as these were proposed in the U.S. last year and could increase our operating costs and make it more difficult for consumers to use our platform, resulting in less consumer traffic and net revenues, and our business and operating results could suffer.

 

If Texas or any other jurisdiction in which we are resident implements regulations that impose sales tax on certain e-commerce or m-commerce transactions involving the use of performance marketing programs, our net revenues could decline and our business, financial condition and operating results will be adversely affected.

 

In 2008, New York implemented regulations that require retailers to collect and remit sales taxes on sales made to residents of New York if the publisher that facilitated that sale is a New York resident. In 2011, Illinois and California each passed similar regulations. In addition, several other states have proposed similar regulations, although some of the regulations proposed by these other states have not passed. None of these sales tax requirements have had a material impact on our results of operations to date. However, if Texas or any other jurisdiction in which we are resident were to pass similar regulations, we believe a substantial number of the retailers that we work with would cease using our marketplace or significantly alter the manner in which they pay us . This would decrease our sales and our business, financial condition and operating results would be adversely affected.

 

The growth of e-commerce and m-commerce in the U.S. could suffer if the federal government implements new regulations that obligate retailers, or permit states to obligate retailers, to collect sales taxes from consumers on certain e-commerce or m-commerce transactions, which would adversely affect our growth.

 

Legislation introduced in the 113th Congress in 2013, including H.R. 684 and S. 336, would grant states the authority to require out-of-state retailers to collect and remit sales taxes. The adoption of remote sales tax collection

 

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legislation would result in the imposition of sales taxes and additional costs associated with complex sales tax collection, remittance and audit compliance requirements on many of our retailers, which would make selling online or through mobile applications less attractive for these retailers. Additionally, the introduction of new or increased taxes applicable to online transactions could make online purchases less attractive to consumers relative to in-store retail purchases. These changes could substantially impair the growth of e-commerce and m-commerce in the U.S., and could diminish our opportunity to derive financial benefit from our activities in the U.S.

 

We may be sued by third parties for infringement or other violation of their intellectual property or proprietary rights.

 

Internet, advertising and e-commerce companies frequently are subject to litigation based on allegations of infringement, misappropriation, dilution or other violations of intellectual property rights. Some Internet, advertising and e-commerce companies, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us.

 

Third parties have asserted, and may in the future assert, that we have infringed, misappropriated or otherwise violated their intellectual property rights.

 

For instance, the use of our technology to provide our solutions could be challenged by claims that such use infringes, dilutes, misappropriates or otherwise violates the intellectual property rights of a third party. In addition, we may face claims that content published or made available through our websites or mobile applications violates third-party intellectual property rights. For example, retailers and other third parties frequently have complained that their trademarks, copyrights or other intellectual property are being used on our websites without their permission and in violation of their rights or in violation of laws or regulations.

 

As we face increasing competition and as a public company, the possibility of intellectual property rights claims against us grows. Such claims and litigation may involve patent holding companies or other adverse intellectual property rights holders who have no relevant product revenue, and therefore our own pending patents and other intellectual property rights may provide little or no deterrence to these rights holders in bringing intellectual property rights claims against us. There may be intellectual property rights held by others, including issued or pending patents and trademarks, that cover significant aspects of our technologies, content, branding or business methods, and we cannot assure that we are not infringing or violating, and have not violated or infringed, any third-party intellectual property rights or that we will not be held to have done so or be accused of doing so in the future.

 

Any claim that we have violated intellectual property or other proprietary rights of third parties, with or without merit, and whether or not settled out of court or determined in our favor, could be time-consuming and costly to address and resolve, and could divert the time and attention of management and technical personnel from our business. Furthermore, an adverse outcome of a dispute may result in an injunction and could require us to pay substantial monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property rights. Any settlement or adverse judgment resulting from such a claim could require us to enter into a licensing agreement to continue using the technology, content or other intellectual property that is the subject of the claim; restrict or prohibit our use of such technology, content or other intellectual property; require us to expend significant resources to redesign our technology or solutions; and require us to indemnify third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. There also can be no assurance that we would be able to develop or license suitable alternative technology, content or other intellectual property to permit us to continue offering the affected technology, content or services to our customers. Any of these events could harm our business, operating results and financial condition.

 

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Failure to protect or enforce our intellectual property rights could harm our business and results of operations.

 

We pursue the registration of our patentable technology, domain names, trademarks and service marks in the U.S. and in certain jurisdictions abroad. We also strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We typically enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, we may not be successful in executing these agreements with every party who has access to our confidential information or contributes to the development of our technology or intellectual property rights. Those agreements that we do execute may be breached, and we may not have adequate remedies for any such breach. These contractual arrangements and the other steps we have taken to protect our intellectual property rights may not prevent the misappropriation or disclosure of our proprietary information nor deter independent development of similar technology or intellectual property by others.

 

Effective trade secret, patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain, both in terms of initial and ongoing registration or prosecution requirements and expenses and the costs of defending our rights. We are seeking to protect our patentable technology, trademarks and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming. We have 17 pending patent applications, including five provisional patent applications. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims or we may otherwise be unable to obtain patent protection for the technology covered in our pending patent applications. Even if patents are issued, they and our trademarks and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Moreover, any issued patents may not provide us with a competitive advantage and, as with any technology, competitors may be able to develop similar or superior technologies to our own, now or in the future.

 

Additionally, in the U.S., the central provisions of the Leahy-Smith America Invents Act became effective recently. Among other things, this law switched U.S. patent rights from the former “first-to-invent” system to a “first inventor-to-file” system. This may result in inventors and companies having to file patent applications more frequently to preserve rights in their inventions. This may favor larger competitors that have the resources to file more patent applications.

 

Monitoring unauthorized use of the content on our websites and mobile applications, and our other intellectual property and technology, is difficult and costly. Our efforts to protect our proprietary rights and intellectual property may not have been and may not be adequate to prevent their misappropriation or misuse. Third parties from time to time copy content or other intellectual property or technology from our solutions without authorization and seek to use it for their own benefit. We generally seek to address such unauthorized copying or use, but we have not always been successful in stopping all unauthorized use of our content or other intellectual property or technology, and may not be successful in doing so in the future. Further, we may not have been and may not be able to detect unauthorized use of our technology or intellectual property, or to take appropriate steps to enforce our intellectual property rights. Our competitors may also independently develop similar technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our solutions or technology are hosted or available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. Further, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. The laws in the U.S. and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property rights could result in competitors offering solutions that incorporate our most technologically advanced features, which could reduce demand for our solutions.

 

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We may find it necessary or appropriate to initiate claims or litigation to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of intellectual property rights claimed by others. Litigation is inherently uncertain and any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property, our business and operating results may be harmed.

 

We may be unable to continue the use of our domain names, or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brands, trademarks or service marks.

 

We have registered domain names for our websites that we use in our business. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration, or any other cause, we may be forced to market our solutions under a new domain name, which could cause us substantial harm, or to incur significant expense in order to purchase rights to the domain name in question. In addition, our competitors and others could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the U.S. and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brands, trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management’s attention.

 

The consumer traffic to our websites and mobile applications may decline and our business may suffer if other companies copy information from our platform and publish or aggregate it with other information for their own benefit.

 

From time to time, other companies copy information or content from our platform, through website scraping, robots or other means, and publish or aggregate it with other information for their own benefit. When third parties copy, publish or aggregate content from our platform, it makes them more competitive, and decreases the likelihood that consumers will visit our websites or use our mobile applications to search and discover the information they seek, which could negatively affect our business, results of operations and financial condition. We may not be able to detect such third-party conduct in a timely manner or at all and, even if we are able to identify these situations, we may not be able to prevent them and have not always been able to prevent them in the past. In some cases, particularly in the case of websites operating outside of the U.S., our available remedies may be inadequate to protect us against such practices. In addition, we may be required to expend significant financial or other resources to successfully enforce our rights.

 

We rely on information technology to operate our business and maintain competitiveness, and any failure to adapt to technological developments or industry trends could harm our business.

 

We depend on the use of information technologies and systems. As our operations grow in size and scope, we must continuously improve and upgrade our systems and infrastructure while maintaining or improving the reliability and integrity of our infrastructure. Our future success also depends on our ability to adapt our systems and infrastructure to meet rapidly evolving consumer trends and demands while continuing to improve the performance, features and reliability of our solutions in response to competitive services and product offerings. The emergence of alternative platforms such as smartphones and tablets and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in technology. New developments in other areas, such as cloud computing, could also make it easier for competition to enter our markets due to lower up-front technology costs. In addition, we may not be able to maintain our existing systems or replace or introduce new technologies and systems as quickly as we would like or in a cost-effective manner.

 

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

 

We use open source software in our solutions and will use open source software in the future. Some licenses governing our use of open source software contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in certain manners. Although we monitor our use of open source software, we cannot assure you that all open source software is reviewed prior to use in our solutions, that our programmers have not incorporated open source software into our solutions, or that they will not do so in the future. Additionally, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our solutions. In addition, the terms of open source software licenses may require us to provide software that we develop using such open source software to others on unfavorable license terms. As a result of our current or future use of open source software, we may face claims or litigation, be required to release our proprietary source code, pay damages for breach of contract, re-engineer our solutions, discontinue making our solutions available in the event re-engineering cannot be accomplished on a timely basis or take other remedial action. Any such re-engineering or other remedial efforts could require significant additional research and development resources, and we may not be able to successfully complete any such re-engineering or other remedial efforts. Further, in addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business, financial condition and operating results.

 

We are subject to international business uncertainties that could adversely affect our operations and operating results.

 

Our net revenues from operations outside the U.S. comprised 17.1% and 21.7% of our net revenues in 2012 and for the three months ended March 31, 2013, respectively, and we expect this percentage to increase in the future. Currently, we have operations in the U.K., France, the Netherlands and Germany. We intend to expand our existing operations in these countries as well as establish a presence in additional countries to grow our international sales. Operating in foreign countries requires significant resources and management attention, and we have limited experience entering new geographic markets. In addition, the varying commercial and Internet infrastructure in other countries may make it difficult for us to replicate our business model. In many countries, we compete with local companies that have more experience in their respective markets than we do, and we may not benefit from first-to-market advantages. To achieve widespread acceptance in new countries and markets, we must continue to tailor our solutions and business model to the unique circumstances of such countries and markets, which can be difficult and costly. Failure to adapt practices and models effectively to each country into which we expand could slow our international growth. We cannot assure you that our international efforts will be successful. International sales and operations may be subject to risks such as:

 

   

competition with local or foreign companies entering the same markets;

 

   

the cost and resources required to localize our solutions, while maintaining retailer and consumer satisfaction such that our marketplace will continue to attract high quality retailers;

 

   

difficulties in staffing and managing foreign operations due to distance, time zones, language and cultural differences;

 

   

higher product return rates;

 

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

 

   

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

 

   

political and economic instability;

 

   

terrorist activities and natural disasters;

 

   

differing employment practices and laws and labor disruptions;

 

   

technology compatibility;

 

   

credit risk and higher levels of payment fraud;

 

   

increased financial accounting and reporting burdens and complexities and difficulties in implementing and maintaining adequate internal controls;

 

   

slower adoption of the Internet as an advertising, broadcast and commerce medium in certain of those markets as compared to the U.S.;

 

   

lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;

 

   

preference for local vendors; and

 

   

different or lesser degrees of intellectual property protection.

 

In addition, the U.S. has in the past proposed, and is currently evaluating, changes to the corporate tax structure that would include taxation of offshore earnings of U.S. businesses. If this were to occur, our effective tax rates would likely increase. Further, we are subject to U.S. and foreign legislation, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act. While we maintain high standards of ethical conduct, our policies, training and monitoring of compliance with applicable anti-corruption laws are at a very early stage of development. If any of our employees or agents were to violate these laws in the conduct of our business, we could be subject to substantial penalties and our reputation could be impaired.

 

These factors could have an adverse effect on our net revenues from advertisers located outside the U.S. and, consequently, on our business and operating results.

 

We may be unable to identify suitable acquisition candidates, effectively integrate newly acquired businesses, or achieve expected operating results from acquisitions.

 

Part of our growth strategy is to increase our net revenues and improve our operating results through the acquisition of similar or complementary businesses. There can be no assurance that suitable candidates for acquisitions will be identified or, if suitable candidates are identified, that acquisitions can be completed on acceptable terms, if at all.

 

Since our inception, we have completed ten acquisitions, and we may continue to make acquisitions in the future. Our success will depend in part on our ability to identify, negotiate, and complete acquisitions, and integrate the acquired businesses and, if necessary, satisfactory debt or equity financing to fund those acquisitions. As is the case with our current facility, if we finance an acquisition with debt financing, we will incur interest expense and may have to comply with financing covenants or secure the debt obligations with our assets. Mergers and acquisitions are inherently risky, and any mergers and acquisitions we complete may not be successful. Any mergers and acquisitions we undertake in the future would involve numerous risks, any of which

 

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could have a material adverse effect on our business and the market price of our common stock, including the following:

 

   

use of cash resources and incurrence of debt and contingent liabilities in funding acquisitions, which may limit our operational flexibility and other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness;

 

   

expected and unexpected costs incurred in identifying and pursuing acquisitions and performing due diligence on potential acquisition targets that may or may not be successful;

 

   

failure of the acquired company to achieve anticipated consumer traffic, revenue, earnings or cash flows;

 

   

our responsibility for the liabilities of the businesses we acquire, including the assumption of liabilities that were not disclosed to us or that exceed our estimates;

 

   

difficulties in integrating and managing the combined operations, technologies and solutions;

 

   

failure to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, including issues related to intellectual property, solution quality or architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues;

 

   

diversion of management’s attention or other resources from our existing business;

 

   

inability to maintain the key business relationships and the reputations of the businesses we acquire;

 

   

difficulties in assigning or transferring technology or intellectual property licensed by acquired companies from third parties to us or our subsidiaries;

 

   

uncertainty of entry into markets in which we have limited or no prior experience or in which competitors have stronger market positions;

 

   

our dependence on unfamiliar retailers or performance marketing networks of the companies we acquire;

 

   

insufficient incremental revenue to offset our increased expenses associated with acquisitions;

 

   

our inability to maintain internal standards, controls, procedures and policies;

 

   

challenges in integrating and auditing the financial statements of acquired companies that have not historically prepared financial statements in accordance with U.S. generally accepted accounting principles;

 

   

impairment of goodwill or other intangible assets such as trademarks or other intellectual property arising from acquisitions;

 

   

amortization of expenses related to acquired intangible assets and other adverse accounting consequences;

 

   

potential loss of key employees from the companies we acquire; and

 

   

dilution of our stockholders’ ownership interests if we finance all or a portion of the purchase price of any acquisition by issuing equity.

 

Further, we rely heavily on the representations and warranties provided to us by the sellers of acquired companies, including as they relate to creation of, ownership of and rights in intellectual property, existence of open source code, existence of encumbrances and operating restrictions and compliance with laws and contractual requirements. If any of these representations and warranties are inaccurate or breached, such inaccuracy or breach could result in costly litigation and assessment of liability for which there may not be adequate recourse against such sellers, in part due to contractual time limitations and limitations of liability.

 

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We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our Series 1 common stock.

 

After this offering, we will have an aggregate of 89,618,409 shares of Series 1 common stock authorized but unissued and not reserved for issuance under our stock option plans or otherwise. We may issue all of these shares without any action or approval by our stockholders, subject to certain limitations of the NASDAQ Global Select Market. We may require additional capital from equity or debt financing in the future in order to take advantage of strategic opportunities, or to support our existing business. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility, including our ability to issue or repurchase equity, develop new or enhanced existing products, complete acquisitions or otherwise take advantage of business opportunities. If we raise additional funds or finance acquisitions through further issuances of equity, convertible debt securities or other securities convertible into equity, you and our other stockholders could suffer significant dilution in your percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our Series 1 common stock, including shares of Series 1 common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

 

If our management team does not remain with us in the future, our business, operating results and financial condition could be adversely affected.

 

We have been successful in attracting a knowledgeable and talented management team. Our future success depends in large part on our ability to attract and retain high-quality management and operating personnel. Our senior management team’s in-depth knowledge of and deep relationships with the participants in our industry are extremely valuable to us. Our business also requires skilled technical and marketing personnel, who are in high demand and are often subject to competing offers. Competition for qualified employees is intense in our industry, and the loss of even a few qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the planned expansion of our business, could harm our operating results and impair our ability to grow.

 

To attract and retain key personnel, we use various measures, including an equity incentive program and incentive bonuses for executive officers and other employees. These measures may not be enough to attract and retain the personnel we require to operate our business effectively. We also have a number of employees who were granted stock options over the past few years that have an exercise price per share that is significantly lower than the current fair market value. If we are successful as a public company, these employees may choose to exercise their options and sell the shares, recognizing a substantial gain. As a result, it may be difficult for us to retain such employees.

 

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

 

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

 

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Our management team has a limited history of working together and may not be able to execute our business plan.

 

Our management team has worked together for only a limited period of time and has a limited track record of executing our business plan as a team. In addition, we have recently filled a number of positions in our senior management and finance and accounting staff. Accordingly, certain key personnel have only recently assumed the duties and responsibilities they are now performing, and it is difficult to predict whether our management team, individually and collectively, will be effective in operating our business.

 

If we are unable to attract additional partner management and sales representatives, or if a significant number of our partner manager or sales representatives leave us, our ability to increase our net revenues could be negatively impacted.

 

Our ability to expand our business will depend, in part, on our ability to attract additional partner management and sales representatives. Competition for qualified partner managers and sales representatives can be intense, and we may be unable to hire additional team members when we need them or at all. Any difficulties we experience in attracting additional partner managers or sales representatives could have a negative impact on our ability to expand our retailer base, increase net revenues and continue our growth.

 

In addition, we must retain our current partner management and sales representatives and properly incentivize them to obtain new retailer relationships. If a significant number of our partner managers and sales representatives were to leave us or join our competitors, our net revenues could be negatively impacted. In certain circumstances, we have entered into agreements with our partner managers and sales representatives that contain non-compete provisions to mitigate this risk, but we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive and ineffective. A significant increase in the turnover rate among our current partner managers or sales representatives could also increase our recruiting costs and decrease our operating efficiency, which could lead to a decline in our net revenues and profitability.

 

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute to our business.

 

We believe that a critical component of our success has been our corporate culture, which we believe fosters innovation, encourages teamwork, cultivates creativity and promotes focus on execution. We have invested substantial time, energy and resources in building a highly collaborative team that works together effectively in an environment designed to promote openness, honesty, mutual respect and the pursuit of common goals. As we continue to develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture and to attract competent personnel who are willing to embrace our culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

 

The intended tax benefits of our corporate structure and intercompany arrangements depend on the application of the tax laws of various jurisdictions and on how we operate our business.

 

Our corporate structure and intercompany arrangements, including the manner in which we develop and use our intellectual property and the transfer pricing of our intercompany transactions, are intended to reduce our worldwide effective tax rate. The application of the tax laws of various jurisdictions, including the U.S., to our international business activities is subject to interpretation and depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences, which could increase our worldwide effective tax rate

 

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and harm our financial position and results of operations. In order to effectively structure and execute our international tax strategy we will need to continue to hire, train and manage qualified personnel. If our new hires underperform, or if we are unsuccessful in hiring, training, managing and integrating these new employees, our business may be harmed.

 

Our corporate structure includes legal entities located in jurisdictions with income tax rates lower than the U.S. statutory tax rate. Our intercompany arrangements allocate income to such entities in accordance with arm’s-length principles and commensurate with functions performed, risks assumed and ownership of valuable corporate assets. We believe that income taxed in certain foreign jurisdictions at a lower rate relative to the U.S. statutory rate will have a beneficial impact on our worldwide effective tax rate.

 

Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In particular, there is uncertainty in relation to the U.S. tax legislation in terms of the future corporate tax rate but also in terms of the U.S. tax consequences of income derived from intellectual property held overseas in low tax jurisdictions.

 

Our existing corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current prevailing tax laws. However, the tax benefits which we intend to derive could be undermined if we are unable to adapt the manner in which we operate our business and if tax laws change.

 

The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial condition and results of operations.

 

The current administration has made public statements indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed new legislation. Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the U.S. are repatriated to the U.S., as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the U.S. Due to the expanding scale of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and harm our financial condition and results of operations.

 

We rely on performance marketing networks and retailers to determine the amount payable to us accurately. If their reports are inaccurate or delayed, our operating results could be harmed and we could experience fluctuations in our performance.

 

Our performance marketing networks and retailers typically pay us on a monthly basis based upon sales generated from digital coupons. We rely on our performance marketing networks and retailers to report accurately and in a timely manner the amount of commission revenues earned by us. We calculate our net revenues, prepare our financial reports, projections and budgets and direct our advertising, marketing and other

 

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operating efforts based on reports we receive from our performance marketing networks and retailers. It is difficult for us to determine independently whether our performance marketing networks or retailers are reporting all revenue data due to us. We have occasionally experienced instances of incomplete or delayed reports from our performance marketing networks and retailers, and we generally do not have the contractual right to audit our performance marketing networks or retailers. To the extent that our performance marketing networks or retailers fail to report accurately the amount of net revenues payable to us in a timely manner or at all, we will not recognize and collect net revenues to which we are entitled, which could harm our operating results. If we are allowed to audit a performance marketing network or retailer and do so, or if we otherwise dispute the accuracy of a revenue report a performance marketing network or retailer has delivered to us, our recognition of net revenues to which we may ultimately be entitled could be delayed. Conversely, if a performance marketing network or retailer delivers a report overstating the amount of net revenues earned by us in one period and attempts to reverse the overpayment in a subsequent period, whether by seeking a refund from us or reducing a future payment due to us, our recognition of revenue could be overstated. Any such delay or overstatement in our revenue recognition could harm our business and operating results.

 

We obtain the revenue reporting information from our performance marketing networks using a variety of methods, including the use of file transfer protocol file feeds, various application programming interfaces provided by the performance marketing networks and manual downloads of data from the performance marketing networks’ web portals. However, we currently use only file transfer protocol file feeds and manual downloads when collecting the data we use to record our net revenues. The use of these methods inherently subjects us to lower levels of internal control over revenue data, which could result in a misstatement of our net revenues. We are in the process of converting our method of collecting a substantial portion of the data necessary to record our net revenues. We intend to automate this process by using the various application programming interfaces provided by the performance marketing networks. While we have developed detailed testing plans for the conversion to this new method, there is an inherent risk that some errors may go undetected for a period of time following conversion, which could result in a misstatement of our net revenues.

 

If we are unable to comply with all covenants of our current and future debt arrangements, and if our lenders fail to waive any violation of those covenants by us, we could be subject to substantial penalties, which would impair our ability to operate and adversely affect our operating results.

 

We currently have a term debt facility that provides us with cash, which we use to fund our operations and which requires us to comply with a number of restrictive covenants. We may enter into other debt arrangements in the future, which may contain similar or additional restrictive covenants. We are currently subject to covenants related to minimum cash balances and liquidity, net income and defense of our intellectual property, among others. We may become subject to additional covenants in connection with future debt arrangements. If we are unable to comply with one or more covenants applicable to us and our lenders are unwilling to waive our noncompliance, our lenders may have the right to terminate their commitments to lend to us, cause all amounts outstanding to become due and payable immediately, sell certain of our assets which are collateral for our obligations and take other measures which may impair our operations. If funds under our loan arrangements become unavailable or if we are forced unexpectedly to repay amounts outstanding under our loan arrangements, our assets and cash flow may be insufficient to make such repayments or may leave us with insufficient funds to continue our operations as planned and would have a material adverse effect on our business.

 

We are subject to currency exchange risk in connection with our international business operations.

 

Cash inflows and outflows in our international operations are typically denominated in currencies other than the U.S. dollar, which is our functional currency for financial reporting purposes. For 2010, 2011, 2012 and for the three months ended March 31, 2013, approximately 0.0%, 9.7%, 17.1% and 21.7%, respectively, of our net revenues were denominated in such foreign currencies. Our reliance on foreign currencies subjects our financial results to fluctuations in currency exchange rates and changes in the proportion of our net revenues and expenses attributable to each of our foreign locations. We recognized a foreign exchange loss of $40,000 in 2012. In

 

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addition, we expect our exposure to fluctuations in foreign exchange rates to increase as we expand our business in existing and new international markets. Although we do not currently engage in any hedging activities relating to foreign currency, we may in the future enter into hedging arrangements in order to manage foreign currency translation but such activity may not completely eliminate fluctuations in our operating results. Foreign currency exchange rate fluctuations could adversely impact our profitability.

 

We may be required to record a significant charge to earnings if our goodwill or amortizable intangible assets become impaired.

 

We are required under GAAP to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The events and circumstances we consider include the business climate, legal factors, operating performance indicators and competition. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined. This could adversely impact our results of operations.

 

Risks Related to this Offering and Ownership of Our Series 1 Common Stock

 

Our stock price may be volatile, and you may be unable to sell your shares at or above the offering price.

 

The trading price of our Series 1 common stock following this offering may be highly volatile and could be subject to wide fluctuations in response to various factors, including the risk factors described in this section of the prospectus, and other factors beyond our control. Furthermore, our Series 1 common stock has no prior trading history. Factors affecting the trading price of our Series 1 common stock will include:

 

   

variations in our operating results or the operating results of similar companies;

 

   

announcements of technological innovations, new services or service enhancements and strategic alliances or agreements by us or by our competitors;

 

   

marketing and advertising initiatives by us or our competitors;

 

   

the gain or loss of retailer relationships;

 

   

threatened or actual litigation;

 

   

major changes in our management;

 

   

recruitment or departure of key personnel;

 

   

changes in the estimates of our operating results or changes in recommendations by any securities analysts that follow our Series 1 common stock;

 

   

market conditions in our industry, the industries of our customers and the economy as a whole;

 

   

the overall performance of the equity markets;

 

   

sales of shares of our Series 1 common stock by existing stockholders;

 

   

volatility in our stock price, which may lead to higher stock-based compensation expense under applicable accounting standards;

 

   

adoption or modification of regulations, policies, procedures or programs applicable to our business; and

 

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the market’s reaction to our reduced disclosure as a result of being an emerging growth company under the JOBS Act.

 

In addition, the stock market in general and the market for e-commerce companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may harm the market price of our Series 1 common stock regardless of our actual operating performance. These fluctuations may even be more pronounced in the trading market for our stock shortly following this offering. Each of these factors, among others, could adversely affect your investment in our Series 1 common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management’s attention.

 

Our securities have no prior market and our stock price may decline after the offering.

 

Prior to this offering, there has been no public market for shares of our Series 1 common stock. Although we have applied to have our Series 1 common stock quoted on the NASDAQ Global Select Market, an active public trading market for our Series 1 common stock may not develop or, if it develops, may not be maintained after this offering. We and the representatives of the underwriters will negotiate to determine the initial public offering price. The initial public offering price may be higher than the trading price of our Series 1 common stock following this offering. As a result, you could lose all or part of your investment.

 

Insiders will continue to have substantial control over us after this offering, which may limit our stockholders’ ability to influence corporate matters and delay or prevent a third party from acquiring control over us.

 

Upon completion of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 56.0% of our outstanding Series 1 common stock compared to 20.6% represented by the shares sold in this offering. Further, we anticipate that C. Thomas Ball, a member of our board of directors and a general partner of Austin Ventures, and Jeffrey M. Crowe, a member of our board of directors and a general partner of Norwest Venture Partners, will hold an aggregate of approximately 28.9% and 18.6% of our Series 1 common stock, respectively, following this offering. This significant concentration of ownership may adversely affect the trading price for our Series 1 common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. In addition, these stockholders will be able to exercise influence over all matters requiring stockholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other stockholders. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, please see the section titled “Principal and Selling Stockholders.”

 

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

 

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

 

Upon completion of this offering, we will have 50,206,974 shares of common stock outstanding. The shares sold in this offering will be immediately tradable without restriction. Of the remaining shares, 41,116,066 shares

 

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will be eligible for sale upon the expiration of lock-up agreements, subject in some cases to volume and other restrictions under Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act, and various vesting agreements. In addition, 5,557,723 shares that are subject to outstanding options will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

 

The lock-up agreements expire 180 days after the date of this prospectus. The representatives of the underwriters may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements.

 

Following this offering, holders of approximately 80.5% of our common stock will be entitled to rights with respect to the registration of these shares under the Securities Act. Please see the section titled “Description of Capital Stock—Registration Rights.” If we register their shares of common stock following the expiration of the lock-up agreements, these stockholders could sell those shares in the public market without being subject to the volume and other restrictions of Rule 144 and Rule 701.

 

After this offering, we intend to register approximately 10,174,617 shares of our common stock that we have issued or may issue under our equity plans. Of these shares, 3,025,789 shares will be eligible for sale upon the exercise of vested options after the expiration of the lock-up agreements.

 

We will incur significant increased expenses and administrative burdens as a public company, which could have a material adverse effect on our operations and financial results.

 

We will face increased legal, accounting, administrative and other costs and expenses as a public company that we do not incur as a private company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the Securities and Exchange Commission, or SEC, the Public Company Accounting Oversight Board and the NASDAQ Global Select Market, impose additional reporting and other obligations on public companies. We expect that compliance with public company requirements will increase our costs and make some activities more time-consuming. A number of those requirements will require us to carry out activities we have not done previously. For example, we will create new board committees and adopt new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our SEC reporting requirements. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our auditors identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. We also expect that it will be more expensive to obtain director and officer liability insurance. Risks associated with our status as a public company may make it more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We expect that the additional reporting and other obligations imposed on us by these rules and regulations will increase our legal and financial compliance costs and the costs of our related legal, accounting and administrative activities by approximately $2.0 million per year. These increased costs will require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase our costs.

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us.

 

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs

 

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to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are in the process of documenting, reviewing and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act, which requires annual management assessment of the effectiveness of our internal control over financial reporting. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, harm our ability to operate our business, and reduce the trading price of our stock.

 

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements, which could make our common stock less attractive to investors.

 

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. In particular, we have not included all of the executive compensation related information that would be required in this prospectus if we were not an emerging growth company. In addition, for so long as we are an emerging growth company, we will not be required to:

 

   

have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

   

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis); and

 

   

submit certain executive compensation matters to shareholder advisory votes, such as “say on pay” and “say on frequency.”

 

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

 

Although we intend to rely on the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies. Also, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of this offering; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We will be deemed a large accelerated filer on the first day of the fiscal year after the market value of our common equity held by non-affiliates exceeds $700 million, measured on October 31. We are currently evaluating and monitoring developments with respect to these new rules and we cannot assure you that we will be able to enjoy part or all of the benefits from the JOBS Act. We cannot predict whether investors will find our common stock less attractive to the extent we rely on the exemptions available to emerging growth companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

If securities or industry analysts do not publish research or publish unfavorable or misleading research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research

 

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coverage by securities and industry analysts. If no or few securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes unfavorable or misleading research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the market for our stock and demand for our stock could decrease, which could cause our stock price or trading volume to decline.

 

Because our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution as a result of this offering and future equity issuances.

 

We expect the initial public offering price per share of our Series 1 common stock to be substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the total value of our tangible assets less our total liabilities immediately following this offering. As a result, investors purchasing Series 1 common stock in this offering will experience immediate and substantial dilution of approximately $18.41 per share, the difference between the mid-point of the price range set forth on the cover of this prospectus and its pro forma as adjusted net tangible book value after the completion of this offering. Any issuance of shares in connection with the exercise of stock options or otherwise would dilute the percentage ownership held by the investors who purchase our shares in this offering.

 

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our Series 1 common stock.

 

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the stockholder becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. For more information, see the section titled “Description of Capital Stock—Anti-Takeover Effects of Our Charter and Bylaws and Delaware Law.” In addition, our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws, which will be in effect immediately prior to the completion of this offering:

 

   

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

 

   

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;

 

   

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

 

   

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;

 

   

prevent stockholders from calling special meetings; and

 

   

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

 

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our Series 1 common stock appreciates.

 

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Any payment of future dividends will be at the discretion of our board of directors, subject to compliance with certain

 

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covenants contained in our credit facility, which limit our ability to pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. For more information, see the section titled “Dividend Policy.” Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay.

 

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply those proceeds in ways that increase the value of your investment.

 

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use approximately $52.5 million of the net proceeds from this offering to pay unpaid dividends accumulated through the closing of this offering on our Series B preferred stock, and the balance for general corporate purposes, including working capital and capital expenditures, which may in the future include investments in, or acquisitions of, complementary businesses, services or technologies. We have not allocated the net proceeds for general corporate purposes to any specific purpose. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how the net proceeds from this offering are used. For more information, please see the section titled “Use of Proceeds.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This prospectus, including the sections titled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this prospectus, other than statements of historical fact, are forward-looking. You can identify forward-looking statements by terminology such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” “will,” or “would” or the negative of these terms or similar expressions.

 

There are a number of important factors that could cause our actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in the section titled “Risk Factors.” You should read these factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act which does not extend to initial public offerings. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from various sources (including comScore, eMarketer, the e-tailing group, Euromonitor International, Forrester Research, Inc., IDC, Internet Retailer and other industry publications, surveys, forecasts and our internal research), and on assumptions that we have made, which we believe are reasonable, based on those data and other similar sources and on our knowledge of the markets for our services. Our internal research has not been verified by any independent source, and we have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe the market position, market opportunity and market share information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the projections, assumptions and estimates included in this prospectus.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from this offering will be approximately $85.5 million, based upon an assumed initial public offering price of $21.00 per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares, there will be no change in total proceeds to us, as any additional shares would be sold by the selling stockholders.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $21.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $4.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use approximately $52.5 million of the net proceeds from this offering to pay unpaid dividends accumulated through the closing of this offering on our outstanding shares of preferred stock, as follows:

 

   

$5.7 million in dividends will be paid on our outstanding shares of Series B-1 preferred stock, which have accumulated at a rate of 8.0% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of March 31, 2013 is $5.0 million;

 

   

$25.3 million in dividends will be paid on our outstanding shares of Series B-2 preferred stock, which have accumulated at a rate of 8.0% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of March 31, 2013 is $22.2 million;

 

   

$6.9 million in dividends will be paid on our outstanding shares of Series B-3 preferred stock, which have accumulated at a rate of 8.0% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of March 31, 2013 is $5.7 million;

 

   

$13.9 million in dividends will be paid on our outstanding shares of Series BB-3 preferred stock, which have accumulated at a rate of 8.0% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of March 31, 2013 is $11.4 million;

 

   

$0.6 million in dividends will be paid on our outstanding shares of Series B-4 preferred stock, which have accumulated at a rate of 4.0% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of March 31, 2013 is $0.5 million; and

 

   

$0.1 million in dividends will be paid on our outstanding shares of Series B-5 preferred stock, which have accumulated at a rate of 4.0% per annum of the original issue price of each such share of preferred stock, of which the amount payable in cash as of March 31, 2013 is $0.1 million.

 

As a result of the anticipated payment of accumulated and unpaid dividends on our outstanding shares of preferred stock, certain of our executive officers, directors, beneficial owners of 5.0% or more of our outstanding shares of common stock and affiliated entities who are holders of our preferred stock will receive approximately $50.3 million of the net proceeds received by us from this offering. In addition, we intend to use approximately $6.6 million of the net proceeds to repay principal and accrued but unpaid interest under six promissory notes held by the former owners of eConversions Limited, which notes accrue interest at a rate of 5.0% per annum and have a maturity date of August 17, 2013.

 

We will not receive any proceeds from the sale of shares of Series 1 common stock by the selling stockholders. The selling stockholders who are our executive officers, members of our board of directors, beneficial owners of 5.0% or more of our outstanding shares of common stock and affiliated entities, will receive approximately $79.8 million of net proceeds from the sale of shares in this offering, assuming an initial public offering price of $21.00 per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions payable by such selling stockholders.

 

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We do not have current specific plans for the use of a significant portion of the net proceeds from this offering. We generally intend to use the balance of the net proceeds of this offering for working capital and other general corporate purposes, including to develop new technologies, fund capital expenditures or make investments in or acquisitions of other businesses, solutions or technologies.

 

Pending the uses mentioned above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. Our management will have broad discretion in the application of the net proceeds to us from this offering, and investors will be relying on the judgment of our management regarding the application of the proceeds.

 

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DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our common stock. Neither Delaware law nor our amended and restated certificate of incorporation to be effective immediately prior to the completion of this offering requires our board of directors to declare dividends on our common stock. Any future determination to declare cash dividends on our common stock will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. We do not anticipate paying cash dividends on our common stock for the foreseeable future.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of March 31, 2013, on:

 

   

an actual basis;

 

   

a pro forma basis, giving effect to (i) the automatic conversion of (a) all outstanding shares of Series B-1 preferred stock, Series B-2 preferred stock, Series B-3 preferred stock, Series B-4 preferred stock and Series B-5 preferred stock into 38,072,967 shares of Series 1 common stock and (b) all outstanding shares of Series BB-3 preferred stock into 6,107,494 shares of Series 2 common stock, (ii) the payment of all accrued but unpaid dividends on the shares of Series B-1 preferred stock, Series B-2 preferred stock, Series B-3 preferred stock, Series B-4 preferred stock and Series B-5 preferred stock, totaling approximately $52.5 million upon the closing of this offering and (iii) the filing of our amended and restated certificate of incorporation; and

 

   

a pro forma as adjusted basis giving further effect to (i) the sale by us of 4,545,454 shares of Series 1 common stock in this offering at an assumed initial public offering price of $21.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and (ii) the payment of outstanding principal and accrued interest of seller notes payable issued in connection with our acquisition of eConversions Limited.

 

The pro forma as adjusted information set forth in the table below is for illustrative purposes only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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

 

     As of March 31, 2013  
     Actual     Pro Forma     Pro Forma
As Adjusted
 
     (Unaudited)  
     (dollars in thousands)  

Cash and cash equivalents

   $ 112,337      $ 59,793      $ 138,838   
  

 

 

   

 

 

   

 

 

 

Long-term debt, including current maturities

     37,853        37,853        31,358   

Preferred stock, $0.001 par value, 49,808,646 shares authorized and 44,180,461 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma; no shares authorized, issued or outstanding, adjusted pro forma

     355,082                 

Stockholders’ Equity (Deficit):

      

Preferred stock: $0.001 par value, no shares authorized, issued or outstanding, actual; no shares authorized, issued or outstanding, pro forma; 10,000,000 shares authorized and no shares issued or outstanding, adjusted pro forma

                     

Series 1 common stock: $0.001 par value, 58,107,284 shares authorized, 1,481,059 shares issued and outstanding, actual; 58,107,284 shares authorized, 39,554,026 shares issued and outstanding, pro forma; 150,000,000 shares authorized and 44,089,480 shares outstanding, adjusted pro forma

     1        40        44   

Series 2 common stock: $0.001 par value, 6,107,495 shares authorized and no shares issued or outstanding, actual; 6,107,494 shares issued and outstanding, pro forma; 6,107,495 shares authorized, 6,107,494 shares issued and outstanding, adjusted pro forma

            6        6   

Additional paid-in capital

     10,999        313,492        399,028   

Accumulated other comprehensive loss

     (3,760     (3,760     (3,760

Accumulated deficit

     (48,489     (48,489     (48,489
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (41,249     261,289        346,829   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 351,686      $ 299,142      $ 378,187   
  

 

 

   

 

 

   

 

 

 

 

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The number of shares of Series 1 and Series 2 common stock reflected in the discussion and the table above is based on 39,554,026 shares of Series 1 common stock and 6,107,494 shares of Series 2 common stock outstanding (assuming conversion of all preferred stock into common stock) as of March 31, 2013, and excludes:

 

   

5,373,750 shares of Series 1 common stock issuable upon exercise of options outstanding as of March 31, 2013, at a weighted-average exercise price of $9.05 per share;

 

   

313,611 shares of Series 1 common stock reserved for future issuance under our 2007 Stock Plan as of March 31, 2013, which will be added to the number of shares reserved for issuance under our 2013 Equity Incentive Plan upon its effectiveness, as more fully described in the section titled “Executive Compensation—Employee Benefit Plans;”

 

   

3,926,349 shares of Series 1 common stock, subject to increase on an annual basis, reserved for future issuance under our 2013 Equity Incentive Plan; and

 

   

560,907 shares of Series 1 common stock available for future issuance under our 2013 Employee Stock Purchase Plan.

 

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DILUTION

 

As of March 31, 2013, we had a pro forma net tangible book value of $40.6 million, or $0.89 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of common stock outstanding after giving effect to the conversion of our preferred stock into shares of common stock upon the completion of this offering. Dilution in net tangible book value per share to new investors in this offering represents the difference between the amount per share paid by purchasers of shares of Series 1 common stock in this offering and the pro forma net tangible book value per share of Series 1 common stock immediately after the completion of this offering. After giving effect to the sale of 4,545,454 shares of Series 1 common stock offered by us in this offering at an assumed initial public offering price of $21.00 per share, the mid-point of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2013 would have been $126.2 million, or $2.59 per share of common stock. This represents an immediate increase in net tangible book value of $1.70 per share to existing stockholders and an immediate dilution of $18.41 per share to new investors in our Series 1 common stock. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share of Series 1 common stock

      $ 21.00   
     

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

   $ 0.89      
     

Increase in net tangible book value per share attributable to new investors

   $ 1.70      
  

 

 

    

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

      $ 2.59   
     

 

 

 

Dilution per share to new investors in this offering

      $ 18.41   
     

 

 

 

 

If the underwriters exercise their option to purchase additional shares of our Series 1 common stock in full, the pro forma as adjusted net tangible book value per share after this offering would be $2.59 per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering would be $18.41 per share.

 

The following table summarizes, on a pro forma basis as of March 31, 2013 and after giving effect to this offering, based on an assumed initial public offering price of $21.00 per share, the differences between existing stockholders and new investors with respect to the number of shares of Series 1 common stock purchased from us, the total consideration paid to us and the average price per share paid.

 

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

Existing stockholders

     45,661,520         90.9   $ 313,023,859         76.6   $ 6.86   
            

New investors

     4,545,454         9.1        95,454,534         23.4        21.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     50,206,974         100.0   $ 408,478,393         100.0   $ 8.14   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own 88.5% and our new investors would own 11.5% of the total number of shares of our common stock outstanding after this offering.

 

If all our outstanding options had been exercised as of March 31, 2013, pro forma net tangible book value after this offering would have been $62.0 million, or $2.12 per share, causing dilution to new investors of $18.88 per share.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The tables on the following pages set forth the consolidated financial and operating data as of and for the periods indicated. Financial information for periods prior to 2010 has not been provided as we had no significant operations prior to 2010. The consolidated statements of operations data presented below for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 have been derived from the audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data presented below for the three months ended March 31, 2012 and 2013 and the consolidated balance sheet data as of March 31, 2013 have been derived from the unaudited interim consolidated financial statements that are included elsewhere in this prospectus.

 

We acquired the businesses of RetailMeNot.com in November 2010, VoucherCodes.co.uk in August 2011, Web.Bons-de-Reduction.com and Poulpeo.com in May 2012, and Actiepagina.nl in March 2013. The consolidated statements of operations, balance sheets and statements of cash flows include the results of businesses acquired from the effective date of the acquisition for accounting purposes.

 

The following information should be read in conjunction with our consolidated financial statements and related notes, the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other information included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.

 

     Year Ended
December 31,
    Three Months Ended
March 31,
 
         2010             2011             2012             2012             2013      
     (in thousands, except per share amounts)  

Consolidated Statements of Operations Data:

          

Net revenues

   $ 16,862      $ 80,402      $ 144,685      $ 29,647      $ 40,561   

Costs and expenses:

          

Cost of net revenues

     1,848        3,980        9,113        1,707        2,588   

Product development

     658        4,388        14,481        2,399        5,950   

Sales and marketing

     5,661        15,341        40,672        5,969        11,190   

General and administrative

     2,472        6,883        15,758        3,035        5,366   

Amortization of purchased intangible assets

     3,394        11,296        13,158        3,414        2,830   

Other operating expenses

            35        6,006        1,962        430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     14,033        41,923        99,188        18,486        28,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,829        38,479        45,497        11,161        12,207   

Other income (expense):

          

Interest expense, net

     (930     (7,784     (3,221     (1,002     (649

Fair value change of common stock warrant

            (2,103                     

Fair value change of contingent consideration, net

     1,994                               

Other income (expense), net

     (16     (129     77        9        (64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     3,877        28,463        42,353        10,168        11,494   

Provision for income taxes

     (1,533     (11,502     (16,360     (3,935     (4,519
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,344      $ 16,961      $ 25,993      $ 6,233      $ 6,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends on participating preferred stock

     (3,247     (64,715     (24,577     (6,092     (6,054
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total undistributed earnings (loss)

     (903     (47,754     1,416        141        921   

Undistributed earnings allocated to participating preferred stock

                   (1,390     (139     (901
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ (903   $ (47,754   $ 26      $ 2      $ 20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

          

Basic and diluted

   $ (1.27   $ (64.19   $ 0.03      $ 0.00      $ 0.02   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average number of shares used in computing net income (loss) per share:

          

Basic

     709        744        841        767        1,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     709        744        2,277        2,228        2,965   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended
December 31,
    Three Months Ended
March 31,
 
           2010                 2011                 2012                 2012                 2013        
     (in thousands, except per share amounts)  

Pro forma net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(1)

          

Basic (unaudited)

       $ 0.55        $ 0.15   
      

 

 

     

 

 

 

Diluted (unaudited)

       $ 0.54        $ 0.14   
      

 

 

     

 

 

 

Weighted-average number of shares used in computing pro forma net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(2)

          

Basic (unaudited)

         47,110          47,626   
      

 

 

     

 

 

 

Diluted (unaudited)

         48,547          49,591   
      

 

 

     

 

 

 

Pro forma as adjusted net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(3)

          

Basic (unaudited)

       $ 0.50        $ 0.13   
      

 

 

     

 

 

 

Diluted (unaudited)

       $ 0.49        $ 0.13   
      

 

 

     

 

 

 

Weighted-average number of shares used in computing pro forma as adjusted net income per share attributable to Series 1 common stockholders and Series 2 common stockholders:(4)

          

Basic (unaudited)

         51,655          52,171   
      

 

 

     

 

 

 

Diluted (unaudited)

         53,092          54,136   
      

 

 

     

 

 

 
     Year Ended
December  31,
    Three Months Ended
March 31,
 
     2010         2011         2012         2012         2013    

Consolidated Statements of Operations Data as Percentage of Net Revenues:

          

Net revenues

     100.0     100.0     100.0     100.0     100.0

Costs and expenses:

          

Cost of net revenues

     11.0     5.0     6.3     5.8     6.4

Product development

     3.9     5.5     10.0     8.1     14.7

Sales and marketing

     33.6     19.1     28.1     20.1     27.6

General and administrative

     14.7     8.6     10.9     10.2     13.2

Amortization of purchased intangible assets

     20.1     14.0     9.1     11.5     7.0

Other operating expenses

     0.0     0.0     4.2     6.7     1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     83.3     52.2     68.6     62.4     69.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     16.7     47.8     31.4     37.6     30.1

Other income (expense):

          

Interest expense, net

     (5.5 %)      (9.7 %)      (2.2 %)      (3.4 %)      (1.6 %) 

Fair value change of common stock warrant

     0.0     (2.6 %)      0.0     0.0     0.0

Fair value change of contingent consideration, net

     11.8     0.0     0.0     0.0     0.0

Other income (expense), net

     (0.1 %)      (0.2 %)      0.1     0.0     (0.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     22.9     35.3     29.3     34.3     28.3

Provision for income taxes

     (9.1 %)      (14.3 %)      (11.3 %)      (13.3 %)      (11.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     13.8     21.0     18.0     21.0     17.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)   Pro forma net income per share attributable to Series 1 common stockholders and Series 2 common stockholders represents net income divided by the pro forma weighted-average shares outstanding, as though the conversion of our preferred stock into common stock occurred on the later of the first day of the relevant period or the date of issuance.

 

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  (2)   Pro forma weighted-average number of shares attributable to Series 1 common stockholders and Series 2 common stockholders outstanding reflects the conversion of our preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the first day of the relevant period or the date of issuance.
  (3)   Pro forma as adjusted net income per share attributable to Series 1 common stockholders and Series 2 common stockholders represents net income divided by the pro forma weighted-average shares outstanding reflecting the conversion of our preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the first day of the relevant period or the date of issuance and our sale of 4,545,454 shares of Series 1 common stock in this offering assuming an initial public offering price of $21.00, which is the mid-point of the price range set forth on the cover of this prospectus.
  (4)   Pro forma as adjusted weighted-average number of shares attributable to Series 1 common stockholders and Series 2 common stockholders outstanding reflects the conversion of our preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the first day of the relevant period and the date of issuance and our sale of 4,545,454 shares of Series 1 common stock in this offering assuming an initial public offering price of $21.00, which is the mid-point of the price range set forth on the cover of this prospectus.

 

     As of December 31,     As of
March 31,
 
     2011     2012     2013  
     (dollars in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 88,234      $ 97,142      $ 112,337   

Working capital

     78,631        98,152        106,577   

Total assets

     347,326        370,920        375,651   

Total liabilities

     74,817        63,266        61,818   

Redeemable convertible preferred stock

     321,450        349,027        355,082   

Total stockholders’ equity (deficit)

     (48,941     (41,373     (41,249

 

     Year Ended December 31,      Three Months Ended March 31,  
             2010                      2011                      2012                      2012                      2013          
     (in thousands, except net revenues per visit)  

Operating Metrics:(5)

              

Visits

     108,574         349,992         464,240         102,240         122,560   

Net revenues per visit

   $ 0.16       $ 0.23       $ 0.31       $ 0.29       $ 0.33   
     Year Ended December 31,      Three Months Ended March 31,  
     2010      2011      2012      2012      2013  
     (dollars in thousands)  

Other Financial Data:

              

Adjusted EBITDA(6)

   $ 6,800       $ 51,895       $ 70,373       $ 17,277       $ 18,234   

 

  (5)   See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operating Metrics” on page 59 for a description of these operating metrics.
  (6)   We define adjusted EBITDA as net income plus depreciation, amortization of intangible assets, stock-based compensation expense, third-party acquisition-related costs, other non-cash operating expenses (including asset impairment charges and compensation-related charges associated with seller notes issued in connection with acquisitions), net interest expense, other non-operating income or expense (including changes in fair value of warrant liabilities and contingent consideration) and income taxes, net of any foreign exchange income or expense.

 

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The following table presents a reconciliation of adjusted EBITDA to net income for each of the periods indicated:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2010     2011      2012     2012     2013  
     (dollars in thousands)  

Reconciliation of Adjusted EBITDA:

           

Net income

   $ 2,344      $ 16,961       $ 25,993      $ 6,233      $ 6,975   

Depreciation and amortization expense

     3,460        11,556         14,192        3,584        3,263   

Stock-based compensation expense

     68        471         4,048        570        2,140   

Third-party acquisition-related costs

     443        1,354         630               194   

Other operating expenses

            35         6,006        1,962        430   

Interest expense, net

     930        7,784         3,221        1,002        649   

Fair value change of common stock warrant

            2,103                         

Fair value change of contingent consideration, net

     (1,994                             

Other (income) expense, net

     16        129         (77     (9     64   

Provision for income taxes

     1,533        11,502         16,360        3,935        4,519   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 6,800      $ 51,895       $ 70,373      $ 17,277      $ 18,234   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

The following tables present depreciation and stock-based compensation expense as included in the various lines of our consolidated statements of operations:

 

     Year Ended December 31,      Three Months Ended
March 31,
 
       2010          2011          2012          2012          2013    
     (dollars in thousands)  

Depreciation Expense:

              

Cost of net revenues

   $ 16       $ 62       $ 99       $ 10       $ 61   

Product development

     12         74         380         52         182   

Sales and marketing

     27         84         382         77         121   

General and administrative

     11         40         173         31         68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation expense

   $ 66       $ 260       $ 1,034       $ 170       $ 432   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year Ended December 31,      Three Months Ended
March 31,
 
       2010          2011          2012          2012          2013    
     (dollars in thousands)  

Stock-Based Compensation Expense:

        

Cost of net revenues

   $ 1       $ 23       $ 157       $ 22       $ 158   

Product development

     12         164         1,144         147         540   

Sales and marketing

     23         113         993         105         492   

General and administrative

     32         171         1,754         296         950   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 68       $ 471       $ 4,048       $ 570       $ 2,140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Non-GAAP Financial Measures

 

Adjusted EBITDA

 

To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation above of adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

 

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our operating performance for the following reasons:

 

   

our management uses adjusted EBITDA in conjunction with GAAP financial measures as part of our assessment of our business and in communications with our board of directors concerning our financial performance;

 

   

our management and board of directors use adjusted EBITDA in establishing budgets, operational goals and as an element in determining executive compensation;

 

   

adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations that could otherwise be masked by the effect of the expenses that we exclude in this non-GAAP financial measure and facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results;

 

   

securities analysts use a measure similar to our adjusted EBITDA as a supplemental measure to evaluate the overall operating performance and comparison of companies, and we anticipate that after consummating this offering our investor and analyst presentations will include adjusted EBITDA; and

 

   

adjusted EBITDA excludes non-cash charges, such as depreciation, amortization and stock-based compensation, because such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations and can vary significantly between periods.

 

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

 

   

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;

 

   

adjusted EBITDA excludes stock-based compensation expense which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and is an important part of our employees’ compensation;

 

   

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

 

   

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section titled “Risk Factors.”

 

We operate the world’s largest digital coupon marketplace, connecting consumers with leading retailers and brands. In 2012, our marketplace featured digital coupons from over 60,000 retailers and brands, and according to our internal data compiled using Google Analytics, we had more than 450 million total visits to our desktop and mobile websites. As of December 31, 2012, we had contracts with more than 10,000 retailers. We own and operate the largest digital coupon websites in the U.S. (RetailMeNot.com) and the U.K. (VoucherCodes.co.uk).

 

We derive substantially all of our net revenues from retailers or brands who pay us directly or through third-party performance marketing networks. A retailer is a merchant that sells goods or services directly to consumers. A paid retailer is a retailer or brand with which we have a contract pursuant to which it has agreed to pay us a commission for sales attributable to us using affiliate tracking links to digital coupons made available in our marketplace. These contracts specify the default commission rate that a paid retailer agrees to pay us, however, we generally attempt to negotiate increases in these rates with most of our top paid retailers. In 2012, we had contracts with more than 10,000 individual paid retailers. In some instances, the paid retailer itself provides affiliate tracking links for attribution of sales using digital coupons made available in our marketplace and pays us directly. However, in most cases, paid retailers contract with performance marketing networks to provide affiliate tracking links for attribution of sales using digital coupons made available in our marketplace. These paid retailers then pay the commissions we earn to the performance marketing network, which in turn pays those commissions to us. In general, our contracts with performance marketing networks govern our use of affiliate tracking links made available to us by the performance marketing network and the remittance of any commissions payable to us from paid retailers utilizing the performance marketing network. The performance marketing network with which a paid retailer contracts to provide affiliate tracking links provides us with the paid retailer’s contract terms, which must be accepted by us and the paid retailer, and which further govern our use of affiliate tracking links for such paid retailer and payment of commissions to us. Our contracts are generally short term, meaning that they can be cancelled by the paid retailer or performance marketing network, or us, on 30 days’ notice or less.

 

In 2012 and in the three months ended March 31, 2013, 96.9% and 97.2% of our net revenues, respectively, were derived from commissions earned when consumers made purchases using digital coupons featured on our websites and mobile applications, and 3.1% and 2.8% of our net revenues, respectively, were earned from advertising placements. We expect that substantially all of our net revenues in the future will continue to be derived from commissions. Commission rates are determined through negotiations with retailers based on a variety of factors, including the level of exposure to consumers in our marketplace, the quality and volume of sales realized from consumers using digital coupons from our marketplace and the category of products purchased using digital coupons. We sell our solutions to retailers through a direct sales force. We have contracts with more than 10,000 of the over 60,000 retailers whose digital coupons are featured in our marketplace.

 

Our net revenues increased from $16.9 million in 2010 to $144.7 million in 2012, representing a 192.9% CAGR. In the same period, our net income increased from $2.3 million to $26.0 million representing a 233.0% CAGR, and our adjusted EBITDA increased from $6.8 million in 2010 to $70.4 million in 2012, representing a 221.7% CAGR. Our historic growth has been driven organically and through acquisitions. From 2011 to 2012 our consolidated net revenues grew from $80.4 million to $144.7 million. During this period, net revenues from RetailMeNot.com grew from $60.5 million to $113.4 million. This $52.9 million increase in net revenues from

 

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RetailMeNot.com represented 82.3% of our consolidated net revenues growth. During the three months ended March 31, 2013, we generated net revenues of $40.6 million, representing a 36.8% increase from the $29.6 million in net revenues we generated during the three months ended March 31, 2012. Net income for the three months ended March 31, 2013 increased to $7.0 million, representing an 11.9% increase from the $6.2 million of net income generated during the three months ended March 31, 2012. Adjusted EBITDA for the three months ended March 31, 2013 grew to $18.2 million, resulting in a 5.5% increase from the $17.3 million in adjusted EBITDA generated during the three months ended March 31, 2012. From the three months ended March 31, 2012 to the three months ended March 31, 2013, net revenues from RetailMeNot.com and VoucherCodes.co.uk grew organically from $27.3 million to $37.5 million. This $10.2 million increase represented 92.7% of our consolidated net revenues growth. We have increased commissions as a result of increased commerce driven by an increase in consumer visits to our websites, an increase in digital coupons available in our marketplace and an increase in the dollar amount of products purchased by consumers. See page 56 for further discussion of adjusted EBITDA, our use of this measure, the limitations of this measure as an analytical tool, and the reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

 

To date, we have expanded our operations outside of the U.S. to the U.K., France, Germany and the Netherlands. We evaluate new market opportunities based on a number of market-specific factors, including the target market’s population size, local gross domestic product, or GDP, the size and the growth of e-commerce within the target market, the significance of Internet penetration in the target market, the breadth and depth of online retailers, the adoption of performance marketing by retail advertisers in the target market and consumer adoption and popularity of digital coupons. Each factor is weighted differently based on what we believe is important to our success in the market. We have made substantial investments in our international operations personnel, technology and infrastructure to drive consumer traffic and improved monetization to enhance our net revenues growth. We intend to continue to pursue a strategy of significant investment internationally.

 

LOGO

 

We were formed in 2007 and began our operations as a digital coupon marketplace in November 2009 with the acquisitions of the businesses of Deals2Buy.com, Coupon7.com, Couponshare.com and CheapStingyBargains.com. In November 2010, we acquired the business of RetailMeNot.com. As a result, our net revenues for 2010 include the net revenues of RetailMeNot.com for the period from the acquisition date through December 31, 2010 of $5.3 million, or 31.4% of 2010 net revenues. In August 2011, we acquired the business of VoucherCodes.co.uk, expanding our operations into the U.K. Our net revenues for 2011 include the net revenues of VoucherCodes.co.uk for the period from the acquisition date through December 31, 2011 of $7.8 million, or 9.7% of 2011 net revenues. In April 2012, we acquired the businesses of Web.Bons-de-Reduction.com and Poulpeo.com, expanding our

 

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operations into France. Our net revenues for 2012 include the net revenues of Web.Bons-de-Reduction.com and Poulpeo.com for the period from the acquisition date through December 31, 2012 of $3.3 million or 2.3% of 2012 net revenues. In March 2013, we acquired the business of Actiepagina.nl, expanding our operations into the Netherlands. Our net revenues for the three months ended March 31, 2013 include the revenues of Actiepagina.nl for the period from the acquisition date through March 31, 2013 of $0.2 million, or 0.5% of 2013 year-to-date net revenues.

 

Our acquisitions have required us to integrate new operations, offices and employees and to formulate and execute on marketing, product, partner management, content and technology strategies associated with the acquired businesses. We continue to manage multiple brands and technology platforms of the acquired businesses, which has increased our cost of operations.

 

We believe that featuring desirable digital coupons is necessary to attract visitors to our marketplace, which includes our websites, mobile applications and email and social media distribution channels. In addition to increasing the number of visitors to our marketplace, we are focused on increasing the rate and frequency at which these visitors make purchases from retailers whose digital coupons are featured in our marketplace. To meet these challenges, we are focused on a combination of marketing strategies, including pay-per-click advertising, search engine optimization and branding campaigns, with a goal of driving visits to our marketplace as well as increasing the exposure of the digital coupon category. We are also investing in product enhancements to make it easier for consumers visiting our marketplace to search and find the right digital coupons. We believe these enhancements will increase consumers’ interactions with our retailers, which will in turn increase the value we are able to provide to our paid retailers.

 

We intend to achieve future success by continuing to focus on recruiting, training and retaining talented employees, increasing our branding efforts and strengthening our relationships with retailers. We also plan to improve the consistency and reliability of our marketplace by investing in the development and implementation of a universal software platform to support all of our websites. We believe this investment will allow us to more easily and rapidly integrate the systems of any additional digital coupon businesses which we may acquire and should result in increased operational efficiency. We believe that these significant investments in our team, branding, relationships and technology will enable our expansion into new markets and improve the quality and consistency of our marketplace.

 

Key Financial and Operating Metrics

 

We measure our business using both financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments, and assess the longer-term performance of our business. The key financial and operating metrics we use are as follows:

 

     Year Ended December 31,      Three Months Ended March 31,  
       2010          2011          2012                 2012                         2013            
     (in thousands, except net revenues per visit)  

Financial Metrics

              

Net revenues

   $ 16,862       $ 80,402       $ 144,685       $ 29,647       $ 40,561   

Adjusted EBITDA

     6,800         51,895         70,373         17,277         18,234   

Operating Metrics

              

Visits

     108,574         349,992         464,240         102,240         122,560   

Net revenues per visit

   $ 0.16       $ 0.23       $ 0.31       $ 0.29       $ 0.33   

 

Financial Metrics

 

Net Revenues. Substantially all of our net revenues consist of commissions we receive from paid retailers, either directly or through performance marketing networks. In general, we earn a commission from a paid retailer

 

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when a consumer clicks on a digital coupon for that paid retailer on one of our websites or mobile applications and then makes a purchase from that paid retailer. In some instances, we earn commissions from a paid retailer when a consumer presents a digital coupon to the retailer and the digital coupon is scanned or a unique digital coupon code is entered by the retailer at the point of sale. We also earn advertising revenues from advertising placements on our websites and mobile applications. We believe net revenues are an important indicator for our business because they are a reflection of the value we offer to consumers and retailers through our websites and mobile applications.

 

Adjusted EBITDA. We define this metric as net income plus depreciation, amortization of intangible assets, stock-based compensation expense, third party acquisition-related costs, other non-cash operating expenses (including asset impairment charges and compensation-related charges associated with seller notes issued in connection with acquisitions), net interest expense, other non-operating income and expenses (including changes in fair value of warrant liabilities and contingent consideration) and income taxes net of any foreign exchange income or expenses. We believe that the use of adjusted EBITDA is helpful in evaluating our operating performance because it excludes certain non-cash expenses, including depreciation, amortization of intangible assets and stock-based compensation expense. See footnote 6 on page 54 to the table in the section titled “Selected Consolidated Financial and Other Data” for additional discussion of adjusted EBITDA and the reconciliation to net income.

 

Operating Metrics

 

Visits. We define a visit as a group of interactions that take place on one of our websites within a given time frame as measured by Google Analytics, a product that provides digital marketing intelligence. A single visit can contain multiple page views, events, social interactions, custom variables, and e-commerce transactions. A single visitor can open multiple visits. Visits can occur on the same day, or over several days, weeks, or months. As soon as one visit ends, there is then an opportunity to start a new visit. A visit ends either through the passage of time or a campaign change, with a campaign generally meaning arrival via search engine, referring site, or campaign-tagged information. A visit ends through passage of time either after thirty minutes of inactivity or at midnight Pacific Time. A visit ends through a campaign change if a visitor arrives via one campaign or source, leaves the site, and then returns via another campaign or source. Currently, visits do not include interactions through our mobile applications.

 

We view visits to our websites as a key indicator of our brand awareness among consumers and whether we are providing consumers with useful products and features, thereby increasing their usage of our marketplace. We believe that a higher level of usage may contribute to an increase in our net revenues and exclusive digital coupons as retailers will have exposure to a larger potential customer base.

 

Net Revenues Per Visit. Net revenues per visit is defined as net revenues for the period divided by visits for the period.

 

Key Components of Our Results of Operations

 

Net Revenues

 

Substantially all of our net revenues consist of commissions we receive from paid retailers, either directly or through performance marketing networks. In general, we earn commissions from a paid retailer when a consumer makes a purchase from that paid retailer after clicking on a digital coupon for that paid retailer on one of our websites, mobile websites or mobile applications. In some instances, we earn commissions from a paid retailer when a consumer presents a digital coupon to the retailer in-store and the digital coupon is scanned or a unique digital coupon code is entered by the retailer at the point of sale. We provide performance marketing solutions under contracts with retailers, which generally provide for commission payments to be facilitated by performance marketing networks. Commission rates are typically negotiated with individual retailers with which we have contracts. Our commission rates vary based on both the retailer as well as the product category. We recognize

 

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commission revenues when we receive confirmation that a consumer has completed a purchase transaction with a paid retailer, as reported to us through a performance marketing network, or in some cases, by the retailer directly. When a digital coupon applies only to specific items, the discount to the consumer will be applied only to those specific items, but our commission is generally based on the aggregate purchase price of all items purchased at that time by the consumer. We also earn advertising revenues from advertising placements on our websites and mobile applications, which have historically not been significant. We expect that substantially all of our net revenues in the future will continue to be derived from commissions. Commission revenues are reported net of a reserve for estimated returns. We estimate returns based on our actual historical returns experience; these returns have not been significant.

 

Costs and Expenses

 

We classify our costs and expenses into six categories: cost of net revenues, product development, sales and marketing, general and administrative, amortization of purchased intangibles and other operating expenses. We allocate our personnel facilities and general information technology, or IT, costs, which include IT and facilities-related personnel costs, rent, depreciation and other general costs, to all of the above categories of operating expenses, other than amortization of purchased intangibles and other operating expenses. We expect personnel costs will be higher in 2013, both in absolute dollars and as a percentage of net revenues, when compared to the prior year as a result of our plan to continue to increase the number of our employees as we continue to invest in our business. Personnel costs for employees include salaries and amounts earned under variable compensation plans, payroll taxes, benefits, stock-based compensation expense, costs associated with recruiting new employees, travel costs and other employee-related costs.

 

Cost of Net Revenues

 

Our cost of net revenues consists of direct and indirect costs incurred to generate net revenues. These costs consist primarily of personnel costs of our merchandising, site operations, and website technical support employees; fees paid to third-party contractors engaged in the operation and maintenance of our websites; depreciation; and website hosting and Internet service costs. We expect our cost of net revenues to increase in both absolute dollars and as a percentage of net revenues in 2013 as we build our infrastructure of employees and tools to support a larger business across multiple markets and endeavor to increase the number and amount of consumer purchases resulting from visits to our websites and from use of our mobile applications.

 

Product Development

 

Our product development expense consists primarily of personnel costs of our product management and software engineering teams, as well as fees paid to third-party contractors and consultants engaged in the design, development, testing and improvement of the functionality and user experience of our websites and mobile applications. We expense all internal product and development costs as we do not track and separately identify costs of identifiable development activities from costs of maintenance and related activities. We intend to significantly increase our technology and product resources over the next year by hiring additional personnel to develop new features and products for our websites and mobile applications. We expect these additional investments to cause our product development expenses to increase both in absolute dollars and as a percentage of net revenues in 2013 as compared to 2012.

 

Sales and Marketing

 

Our sales and marketing expense consists primarily of personnel costs of our sales, partner management, marketing, SEO and business analytics employees, as well as online and other advertising expenditures, branding programs and other marketing expenses. Our advertising, branding programs and other marketing costs include paid search advertising fees, online display advertising, including on social networking sites, television advertising, creative development fees, public relations, email campaigns, trade show costs and other general marketing costs. We intend to significantly increase our sales and marketing efforts in 2013 to support our

 

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products, increase consumer traffic to our websites, encourage downloads of our mobile applications and increase overall awareness of our brand. Therefore, we expect our sales and marketing expenses to increase in absolute dollars and as a percent of net revenues in 2013.

 

General and Administrative

 

Our general and administrative expense consists primarily of the personnel costs of our general corporate functions, including executive, finance, accounting, legal and human resources. Other costs included in general and administrative include professional fees for legal, audit and other consulting services, travel and entertainment, charitable contributions and other general corporate overhead expenses. We expect to incur incremental costs associated with operating as a public company, including increases in our accounting and legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation, costs associated with compliance with the Sarbanes-Oxley Act and other requirements. As a result, we expect our general and administrative expenses to increase both in absolute dollars and as a percentage of net revenues in 2013.

 

Amortization of Purchased Intangibles

 

We have recorded identifiable intangible assets in conjunction with our various acquisitions, and are amortizing those assets over their estimated useful lives. This amortization expense has increased as these acquisitions have occurred. We perform impairment testing of goodwill annually and, in the case of intangibles with definite lives, whenever events or circumstances indicate that impairment may have occurred. We expect our amortization expenses to decline in absolute dollars and as a percentage of net revenues in future periods, however, changes in our amortization expenses will depend upon the level of our future acquisition activity.

 

Other Operating Expenses

 

Other operating expenses primarily consist of amounts related to non-cash impairments of purchased intangible assets. In 2012, we determined that we would no longer support three of our websites, Coupon7.com, Couponshare.com and CheapStingyBargains.com. We have redirected traffic from CheapStingyBargains.com to Deals2Buy.com and refer visitors from Coupon7.com and Couponshare.com to RetailMeNot.com. We do not expect these sites to provide additional income. As a result of this impairment indicator, we determined that a complete impairment of the remaining unamortized intangible assets related to these websites was warranted, resulting in an impairment charge of $4.9 million. We did not record any intangible asset impairment charges during the years ended December 31, 2010 and 2011 or the three months ended March 31, 2013.

 

In 2012, we acquired Web.Bons-de-Reduction.com and Poulpeo.com and issued $3.5 million in seller notes to the selling stockholders of the business. These seller notes are due and payable contingent upon the continued employment of the selling stockholders and as a result have been recorded as deferred compensation, which we are amortizing over the term of the compensation arrangement with the sellers.

 

Other Income (Expense)

 

Amounts included in other income (expense) include interest income earned on our available cash and cash equivalents, interest expense incurred in connection with our senior debt, subordinated debt and seller notes issued in connection with acquisitions and the amortization of deferred financing costs. We repaid all amounts outstanding on our subordinated debt in 2011. We also include in other income (expense), fair value adjustments to contingent consideration related to certain acquisitions, net fair value adjustments to warrant liabilities, derivative instruments issued in connection with our subordinated debt and foreign currency exchange gains and losses. Changes in these amounts will depend to some extent upon the level of our future acquisition activities and the use of borrowings to fund any such acquisitions.

 

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Income Tax Expense

 

We accrue federal, state and foreign income taxes at the applicable statutory rates adjusted for certain items, including non-deductible expenses, the most significant of which are the change in fair value of a common stock warrant, acquisition costs and stock-based compensation. During 2012, our effective tax rate was 38.6%. Our effective tax rate in recent periods differed from our anticipated long-term effective tax rate due to the impact of foreign tax rates, as well as non-deductible expenses. Our mix of foreign versus U.S. income, our ability to generate tax credits and our incurrence of any non-deductible expenses will likely cause our effective tax rate to fluctuate in the future. As of December 31, 2012 we had no federal net operating loss or tax credit carryforwards.

 

Results of Operations

 

The following table presents our historical operating results for the periods indicated. The period-to-period comparisons of financial results are not necessarily indicative of future results.

 

     Year Ended December 31,     Three Months Ended March 31,  
     2010     2011     2012         2012             2013      
     (dollars in thousands)  

Consolidated Statements of Operations Data:

          

Net revenues

   $ 16,862      $ 80,402      $ 144,685      $ 29,647      $ 40,561   

Costs and expenses:

          

Cost of net revenues

     1,848        3,980        9,113        1,707        2,588   

Product development

     658        4,388        14,481        2,399        5,950   

Sales and marketing

     5,661        15,341        40,672        5,969        11,190   

General and administrative

     2,472        6,883        15,758        3,035        5,366   

Amortization of purchased intangible assets

     3,394        11,296        13,158        3,414        2,830   

Other operating expenses

            35        6,006        1,962        430   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     14,033        41,923        99,188        18,486        28,354   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,829        38,479        45,497        11,161        12,207   

Other income (expense):

          

Interest expense, net

     (930     (7,784     (3,221     (1,002     (649

Fair value change of common stock warrant

            (2,103                     

Fair value change of contingent consideration, net

     1,994                               

Other income (expense), net

     (16     (129     77        9        (64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     3,877        28,463        42,353        10,168        11,494   

Provision for income taxes

     (1,533     (11,502     (16,360     (3,935     (4,519
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,344      $ 16,961      $ 25,993      $ 6,233      $ 6,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Year Ended December 31,     Three Months Ended
March 31,
 
         2010           2011         2012         2012         2013    

Consolidated Statements of Operations Data as Percentage of Net Revenues:

          

Net revenues

     100.0     100.0     100.0     100.0     100.0

Costs and expenses:

          

Cost of net revenues

     11.0        5.0        6.3        5.8        6.4   

Product development

     3.9        5.5        10.0        8.1        14.7   

Sales and marketing

     33.6        19.1        28.1        20.1        27.6   

General and administrative

     14.7        8.6        10.9        10.2        13.2   

Amortization of purchased intangible assets

     20.1        14.0        9.1        11.5        7.0   

Other operating expenses

     0.0        0.0        4.2        6.7        1.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     83.3        52.2        68.6        62.4        69.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     16.7        47.8        31.4        37.6        30.1   

Other income (expense):

          

Interest expense, net

     (5.5     (9.7     (2.2     (3.4     (1.6

Fair value change of common stock warrant

     0.0        (2.6     0.0        0.0        0.0   

Fair value change of contingent consideration, net

     11.8        0.0        0.0        0.0        0.0   

Other income (expense), net

     (0.1     (0.2     0.1        0.0        (0.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     22.9        35.3        29.3        34.3        28.3   

Provision for income taxes

     (9.1     (14.3     (11.3     (13.3     (11.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     13.8     21.0     18.0     21.0     17.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Net Revenues

 

     Three Months Ended
March 31,
 
     2012     2013  
     (dollars in thousands)  

Net Revenues by Geography:

    

U.S.

   $ 25,392      $ 31,741   

International

     4,255        8,820   
  

 

 

   

 

 

 

Total net revenues

   $ 29,647      $ 40,561   
  

 

 

   

 

 

 

Percentage of Net Revenues by Geography:

    

U.S.

     85.6     78.3

International

     14.4     21.7
  

 

 

   

 

 

 

Total percentage

     100.0     100.0
  

 

 

   

 

 

 

 

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012. Net revenues increased by $10.9 million, or 36.8% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. In total, commissions paid to us as a result of consumer purchases made using RetailMeNot.com accounted for approximately 70.9% of the increase for the period. Of the increase in net revenues, $1.9 million was due to net revenues from the websites Web.Bons-de-Reduction.com and Poulpeo.com which we acquired in May 2012. The organic increases in net revenues were driven primarily by an increase in visits (approximately 81% of the increase) with the remainder due to improved monetization driven by an increase in the percentage of visits that resulted in a paid transaction. Net revenues were positively affected by continued expansion of our online and offline marketing efforts, including increased investment in both paid and organic search and email subscriptions. The merchandising, usability and functionality enhancements we implemented in 2012 also contributed to improved revenues per visit at RetailMeNot.com.

 

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Table of Contents
     Year Ended December 31,  
     2010     2011     2012  
     (dollars in thousands)  

Net Revenues by Geography:

      

U.S.

   $ 16,862      $ 72,616      $ 119,986   

International

            7,786        24,699   
  

 

 

   

 

 

   

 

 

 

Total net revenues

   $ 16,862      $ 80,402      $ 144,685   
  

 

 

   

 

 

   

 

 

 

Percentage of Net Revenues by Geography:

      

U.S.

     100.0     90.3     82.9

International

     0.0     9.7     17.1
  

 

 

   

 

 

   

 

 

 

Total percentage

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

 

2012 Compared to 2011. Net revenues increased by $64.3 million, or 80.0%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. In total, commissions paid to us as a result of consumer purchases made using RetailMeNot.com accounted for approximately 82.0% of the increase for the year. Of the increase in net revenues, $13.6 million was due to net revenues from VoucherCodes.co.uk, which we owned for a full year in 2012 as compared to less than five months in 2011. Another $3.3 million of this increase resulted from our May 2012 acquisition of the websites Web.Bons-de-Reduction.com and Poulpeo.com. The organic increases in net revenues were driven by an increase in visits (approximately 30% of the increase) with the remainder due primarily to improved monetization driven by an increase in the percentage of visits that resulted in a paid transaction. Net revenues were positively affected by a significant expansion in 2012 of the online and offline marketing efforts we initiated in 2011, including increased investment in both paid and organic search and email subscriptions. The merchandising, usability and functionality enhancements we implemented in late 2011 and in 2012 also contributed to improved revenues per visit at RetailMeNot.com.

 

2011 Compared to 2010. Net revenues increased by $63.5 million, or 376.8%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. Commissions paid to us as a result of consumer purchases made using RetailMeNot.com accounted for approximately 87.4% of the increase for the year. Of the increase in net revenues, $55.5 million was due to net revenues from RetailMeNot.com, which we owned for a full year in 2011 as compared to approximately one month in 2010. Further, our August 2011 acquisition of VoucherCodes.co.uk contributed $7.8 million. The organic increases in net revenues were driven by an increase in visits (approximately 8% of the increase) with the remainder due primarily to improved monetization. The improved monetization was due entirely to an increase in the percentage of visits that resulted in a paid transaction partially offset by a small decrease in earnings per transactions. The improved net revenues per visit was due primarily to website enhancements, particularly at RetailMeNot.com.

 

Cost of Net Revenues

 

     Three Months Ended
March 31,
 
       2012         2013    
     (dollars in thousands)  

Cost of net revenues

   $ 1,707      $ 2,588   

Percentage of net revenues

     5.8     6.4

 

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012. For the three months ended March 31, 2013, cost of net revenues increased by $0.9 million, o