10-K 1 dmdfy201110-k.htm DMD FY2011 10-K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________________
FORM 10-K
__________________________________________________
(Mark One)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to                       
Commission file number 001-35048
DEMAND MEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
20-4731239
(I.R.S. Employer Identification Number)
1299 Ocean Avenue, Suite 500
Santa Monica, CA
(Address of principal executive offices)
 
90401
(Zip Code)
(310) 394-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
(Title of each class)
 
(Name of each exchange on which registered)
Common Stock, $0.0001 par value
 
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer ý
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of June 30, 2011, the aggregate market value of the registrant's common stock, $0.0001 par value, held by non-affiliates of the registrant was approximately $439 million (based upon the closing sale price of the common stock on that date on the New York Stock Exchange). As of February 23, 2012, there were 83,388,483 shares of the common stock, $0.0001 par value, outstanding.
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference portions of the registrant's Proxy Statement for its 2012 Annual Meeting of Stockholders to be held on June 13, 2012.


 
 




DEMAND MEDIA, INC.
INDEX TO FORM 10-K
Insert Title Here
 
 
 
Page
PART I.
 
 
 
 
 
Item 1
 
Item 1A
 
Item 1B
 
Item 2
 
Item 3
 
Item 4
 
 
 
 
 
PART II.
 
 
 
 
 
Item 5
 
Item 6
 
Item 7
 
Item 7A
 
Item 8
 
Item 9
 
Item 9A
 
Item 9B
 
 
 
 
 
PART III.
 
 
 
 
 
Item 10
 
Item 11
 
Item 12
 
Item 13
 
Item 14
 
 
 
 
 
PART IV.
 
 
 
 
 
Item 15
 
 
 
 
 
SIGNATURES



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PART I
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our estimates of our financial results and our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Item 1A. under the heading entitled "Risk Factors." Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Annual Report on Form 10-K to conform these statements to actual results or to changes in our expectations.
You should read this Annual Report on Form 10-K and the documents that we reference in this Annual Report on Form 10-K and have filed with the Securities and Exchange Commission (the "SEC") with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
As used herein, "Demand Media," "the Company," "our," "we," or "us" and similar terms include Demand Media, Inc. and its subsidiaries, unless the context indicates otherwise.
"Demand Media," "eHow," "Cracked" and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.


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Item 1.    Business
Our Mission
Our mission is to fulfill the world's demand for commercially valuable content.
Overview
Demand Media is a leader in an Internet-based model for the professional creation and distribution of high-quality, commercially valuable, long-lived content at scale. Our differentiated approach to content creation is driven by consumers' desire to find specific information across the Internet. By listening to consumers and the signals that they send, we are able to create and deliver content that fulfills their needs. Through our content creation and distribution platform-which combines a studio of freelance creative professionals with proprietary algorithms and processes combined with editorial oversight-we identify, create, distribute, license, and monetize in-demand, long-lived content formats.
Our business is comprised of two distinct and complementary service offerings: Content & Media and Registrar.

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Our Content & Media offering includes a content creation studio and community of freelance creative professionals, social media applications, and a system of monetization tools. We deploy our proprietary Content & Media platform both to our owned and operated websites, such as eHow.com, LIVESTRONG.com and Cracked.com, as well as to websites operated by our customers, such as USATODAY.com. According to comScore, our owned and operated websites comprised the 17th largest web property in the United States and we attracted over 100 million unique visitors and over 815 million page views worldwide in January 2012.
•
Our Registrar, with over 12.5 million Internet domain names under management as of December 31, 2011, is the world's largest wholesale registrar and the world's second largest registrar overall. As a wholesaler, we provide domain name registration and offer value-added services to over 8,800 active resellers, including small businesses, large e-commerce websites, Internet service providers and web-hosting companies.

Our Content & Media service offering generates revenue primarily through the sale of advertising, both on our owned and operated websites and on our customer's websites, and through the sale or license of content we create for our customers. Our Registrar service offering generates revenue through domain name registration subscriptions and other related value-added services offered by us.
Demand Media was incorporated in Delaware in March 2006. We are headquartered in Santa Monica, California and have offices in other locations in North America, South America and Europe. We completed our initial public offering in January 2011 and our common stock is listed on the New York Stock Exchange under the symbol "DMD".
Industry Background
Over the last decade, the Internet has evolved into a new and significant source of content, challenging traditional media business models by reshaping how content is consumed, created, distributed and monetized. Increased access to the Internet as a result of extensive broadband penetration and the rapid proliferation of connected mobile devices is driving significant growth in demand for niche content online. As a result, there has been an exponential increase in the number of websites and mobile applications created and the amount of content available digitally. Businesses and brands have attempted to gain the attention of consumers by enhancing their online presence, blurring the distinction between traditional publishers and marketers. Concurrently, search technology and social media platforms have continued to improve the organization of and access to the broad range of websites and online information, reshaping consumer behavior and expectations for discovering credible and relevant information online.
Consumption Trends
The Internet has fundamentally changed the consumption of media. The proliferation of the Internet and social media has enabled consumers to seek out and interact with content in different formats across an increasing number of websites. As a result, consumers are changing the way they discover content online, increasingly typing queries into web search engines or directly navigating to well-known, engaging and topical websites to discover and access content from the millions of websites on the Internet. Further, advancements in web search technology and the popularity of social media have enhanced the ability to find specific content associated with personal needs and interests, leading to an accelerating migration of the consumer base away from content consumed on traditional portals. However, we believe that consumers are often faced with incomplete or

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inaccurate information because the demand for highly specific, relevant information is outpacing the supply of thoughtfully researched, professionally produced content.
Content Creation Trends
The rapid evolution of audience behavior, particularly the significant fragmentation and the shift of audiences online, is changing existing content creation models, including the formats of content that are produced for online consumption. Historically, traditional media companies have generated high-cost, general interest content targeted towards a mass audience of predominantly offline consumers, and have monetized it through advertising or by selling this content directly to consumers. This traditional cost structure is less effective for creating niche content and for selling targeted advertising to fragmented audiences. At the same time, the widespread adoption of social media and other publishing tools has reduced barriers to publishing online content and has enabled a large number of individuals to create and publish different types of content on the Internet. However, the difficulty in constructing profitable business models from their individual endeavors has relegated online content publication largely to bloggers and passionate enthusiasts whose limited resources have often resulted in varying levels of quality. Businesses with online presences have struggled to capitalize on the marketing opportunities presented by new forms of Internet-focused content publishing.
Distribution Trends
Advancements in social media, search monetization and digital publishing technologies have also dramatically reduced barriers to distributing content. As publishers attempt to meet increasing consumer demand for specific content, the number of websites has proliferated at an exponential scale. Prior to these developments, website publishers, similar to traditional media companies, relied primarily on marketing to attract audiences. Now consumers primarily use search engines, social recommendations and mobile applications to discover content. Brands have recognized the potential to attract consumers to their offerings by supplying them with valuable and engaging online content related to their products and services. Further, content increasingly is distributed and accessed virtually anywhere via smart phones, tablet computers and other mobile devices.
Monetization Trends

The percentage of advertising budgets allocated to online advertising still lags the percentage of time spent by people consuming media online. Marketers are seeking better ways to reach the fragmented consumer base in a more targeted fashion. This trend is likely to accelerate as advertising dollars move from offline to online media, and marketers increasingly adopt strategies such as search engine optimization, paid social media and search marketing. Some marketers are attempting to further enhance brand recognition by sponsoring featured online content that is both credible and responsive to consumer interests.
Our Solution
Consuming, creating, distributing and monetizing different types of content online presents new and complex challenges. Currently, content produced by media companies and Internet portals is often expensive to create and focused on event-driven topics that, given their short useful lives, are challenging to sell to advertisers for sufficient amounts to justify their production costs. On the other hand, individuals such as bloggers are able to economically create and publish niche content, but often lack recognized credibility, production scale and broader distribution and monetization capabilities. These challenges have had a profound impact on consumers, freelance creative professionals, website publishers and advertisers who are in need of a solution that connects this disparate media ecosystem.
We have built a platform with a proprietary set of solutions that we believe addresses the market challenges and unfulfilled needs of online consumers, freelance creative professionals, website publishers and advertisers. Our business is comprised of two distinct and complementary service offerings: Content & Media and Registrar. These service offerings provide us with a unique combination of proprietary technologies and social media tools, extensive audience reach through our owned and operated websites and our network of customer websites, a qualified community of freelance creative professionals and access to a significant amount of proprietary Internet data.
Our Content & Media service offering is engaged in creating media content, including text articles, videos and other formats and delivering it along with social media and monetization tools to our owned and operated websites and our network of customer websites. Key elements of our solution include:

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Content.  We create highly relevant and specific online text articles, videos and other content formats that we believe will have long-term commercial value. The process to select the subject matter of the majority of our content, or our title selection process, includes automated algorithms, third-party and proprietary data and several levels of editorial

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input to determine what content consumers are seeking, if it is likely to be valuable to advertisers or other customers and whether it can be cost effectively produced. To produce original content for these titles at scale, we engage our robust community of highly-qualified freelance creative professionals and expert contributors. By harnessing the reach of the Internet, we are able to recruit and retain previously inaccessible creative professionals located throughout the United States and in certain other countries. Our content creation process is scaled through a variety of online management tools and overseen by an in-house editorial team, resulting in high-quality, commercially valuable content.
•
Social Media.  We believe that social interaction and engagement is a core element of the online experience for consumers, online publishers, retailers and brands. Our social media tools and social media products, including Pluck, CoveritLive and RSS Graffiti, are interoperable with popular social media platforms such as Facebook. Our social media products are used by publishers to drive traffic, distribute content and increase engagement.
•
Monetization.  Our goal is to deliver targeted placements to advertisers who seek to reach consumers based on the content these consumers are seeking and discovering. Our platform generates revenue primarily through the sale of online advertisements, sourced through advertising networks and through our direct advertising sales force. The system of monetization tools in our platform includes contextual matching algorithms that place advertisements based on website content, yield optimization systems that continuously evaluate performance of advertisements on websites to maximize revenue and ad management infrastructures to manage multiple ad formats and control ad inventory. We sell branded advertisements to advertisers for display on both our owned and operated properties and certain of our network websites.
•
Distribution.  We deploy some or all components of our platform to our owned and operated websites, such as eHow, LIVESTRONG.com and Cracked, as well as to over 400 websites operated by our customers. We also distribute advertising to a portfolio of over 500,000 undeveloped websites that we own. In addition, our platform helps power websites for customers such as the San Francisco Chronicle (SFGate.com) and the National Football League (NFL.com). We also offer our Registrar customers the ability to add contextually related content from our extensive library to their sites as part of a recurring subscription offering.
 
Our Registrar service offering, in providing domain name registration and related value-added services, contributes several benefits to our Content & Media service offering, including: proprietary data that enhances our analysis of potential valuable websites to add to our portfolio of owned and operated websites; access to potential new customers; and numerous cost savings and efficiencies from shared data centers, infrastructure and personnel.

As a result, we are able to deliver value to our stakeholders, including consumers (individuals who seek and access our content over the Internet), advertisers (large corporations, brand marketers and small businesses seeking access to our consumers), customers (third-party website publishers and brands who display our content on their websites, deploy our social media tools or use our domain registrar services and individuals who pay us to access portions of our websites), and freelance creative professionals (individuals who create and edit text articles, videos and other content formats for our platform).

Content & Media Products and Services
Content Creation
Our Content & Media offering is focused on creating long-lived media content and delivering it along with our social media and monetization tools to our owned and operated websites and to our network of customer websites. We leverage proprietary technology and algorithms and our automated online workflow processes to create content with a predicted economic return above a minimum threshold. We also engage and coordinate the efforts of our community of freelance creative professionals to create content specially ordered or commissioned by our customers and advertisers.

•
Title Generation.  Utilizing a series of proprietary technologies, algorithms and processes, we analyze search query and user behavior data to identify commercially valuable topics that are in-demand. Once commercially valuable titles have been identified, they undergo a multi-step process whereby a subset of our community of qualified freelance creative professionals quality check, edit and approve specific article and video titles.
•
Content Generation.  Our creators can claim titles for text articles, videos and other content formats by searching within categories we make available to them online. After the creative professional submits work product to us, it undergoes a series of human editorial reviews, including, for text articles, copy editing, fact checking and reference checking, as well as an automated plagiarism check.


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Content Investment Strategy
We strive to create long-lived content with positive growth characteristics that is expected to yield an attractive financial return over its expected useful life. We base our capital allocation decisions primarily on our analysis of a predicted internal rate of return. Customers and advertisers may also sponsor the creation of content such as the premium online video content we have created for certain brand advertisers.
Internal rates of return for content produced now or in the future may be significantly less than those achieved in previous periods. See Item 1A. "Risk Factors-We base our capital allocation decisions primarily on our analysis of the predicted internal rate of return on content. If the estimates and assumptions we use in calculating internal rate of return on content are inaccurate, our capital may be inefficiently allocated. If we fail to appropriately allocate our capital, our growth rate and financial results will be adversely affected."
Community of Freelance Creative Professionals
We engage our robust community of freelance creative professionals, including copy editors, writers and filmmakers, to create original, commercially valuable online text and video content at scale. In order to ensure that we engage highly qualified content creators with relevant experience, the individuals undergo a rigorous qualification process, which includes the submission of writing samples or examples of previously published work and minimum experience thresholds before they are allowed to participate in generating content for our network of owned and operated websites and customer websites. On some of our video projects, we may engage the services of recognized screen personalities, subject matter experts, make-up artists, set designers and others.
Through our title and content creation processes, we enable our freelance creative professionals to produce valuable content, reach an audience of millions and earn income from available work assignments. We offer our freelance creative professionals the ability to pursue titles and topics in the categories that most align with their area of expertise and competitive payments for their services.
Content Distribution
Owned and Operated.    We deploy our content, social media and system of monetization tools on our owned and operated websites that collectively attracted over 100 million unique visitors who generated over 815 million page views globally during the month ended January 31, 2012, according to comScore. In addition to the content and social media features provided through our platform, some of our websites also feature unique online and mobile applications. Users visit our sites through search engine referrals, direct navigation and social media referrals. Our websites are designed to be easily discoverable by users due to the combination of relevant content, search engine optimization and the ability of users to recommend and share our content via social media websites such as Facebook.
Among our portfolio of owned and operated websites, eHow is our most successful website to-date based on the number of monthly unique visitors. eHow is the 19th largest website in the United States with over 48 million unique visitors in the US during the month ended January 31, 2012 as measured by comScore. eHow's library includes over 3 million text articles and over 160,000 instructional videos that are presented in an easy-to-understand manner. A significant majority of the text articles and videos in the eHow library was created by professionals and topical experts.
Another of our owned and operated sites, LIVESTRONG.com had over 12 million unique users in January 2012 according to comScore. LIVESTRONG.com has an extensive library of health, fitness, lifestyle and nutrition text articles and videos, which combined with interactive tools and social media community features, help users create customized goals and monitor their health, fitness and life achievements.
In addition to eHow and LIVESTRONG.com, our owned and operated websites include Cracked.com, a leading humor website offering original and engaging comedy-driven text articles and videos, and other enthusiast websites across a number of verticals, such as casual games, sports, automotive and general entertainment.
Customer Network.    Our customer network includes leading publishers, brands and retailers, providing the potential to expand our distribution and enhance our monetization opportunities. Over 400 websites operated by our customers, such as the San Francisco Chronicle, deploy some or all components of our platform across their websites, enhancing their content, social media and monetization features and capabilities. In addition, YouTube is a major distributor of our video content, including premium video produced under a multi-channel sponsorship arrangement with YouTube. We believe that our videos on YouTube, which have been viewed more than 3.5 billion times, are particularly attractive to advertisers because they are rights cleared and professionally produced. Collectively, our network of customer websites generated over 4.9 billion page views to our platform during the quarter ended December 31, 2011 according to our internal data.


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Content Monetization
We have developed a multi-faceted, proprietary system incorporating advertising networks, including Google AdSense, designed to maximize yields. Our system of monetization tools includes contextual matching algorithms which match advertisements with the content displayed on a website page, yield optimization systems which continuously evaluate performance of advertisements on websites to maximize revenue and ad management infrastructures to manage multiple ad formats and control ad inventory. Consistent with other performance-based advertising programs, we enter into revenue-sharing arrangements with website publishers that utilize our system of monetization tools.
We also have a direct sales force that sells display advertisements across our entire distribution network, spanning both our owned and operated websites and certain of our customer websites.
Social Media Applications
Our integrated social media applications for publishers and brands help drive audience, insights and revenue. Companies primarily use our social media applications to add community-building features to their websites and mobile applications. Key capabilities include user profiles, comments, forums, reviews, real-time blogging, content sharing, media galleries, groups and messaging. Through our social media products, websites can bridge user actions, identities and relationships to leading social networks such as Facebook.
Registrar Products & Services
We own and operate eNom, the world's largest wholesale registrar of Internet domain names and the world's second largest registrar overall, with over 12.5 million domain names under management as of December 31, 2011. As a wholesaler, we provide domain name registration services and related value-added services to resellers, including small businesses, large e-commerce websites, Internet service providers and web-hosting companies. These resellers, in turn, contract directly with domain name registrants to deliver these services. Our Registrar service offering gives resellers the choice of either a highly customizable API model or a turnkey solution. Our customizable API solution includes a selection of over 300 commands and integrates with third-party merchant account and billing tools, hosting and email tools as well as other value-added services. Our turnkey reseller solution allows a reseller to quickly start selling our Registrar service offering products through their own website. We also provide domain name registration and related value-added services directly to consumers.
The Internet Corporation for Assigned Names and Numbers (“ICANN”) recently authorized the launch of a program for the introduction of new generic top level domains ("gTLDs"), defined as the "New gTLD Program”. The New gTLD Program's goals include enhancing competition and consumer choice, and enabling the benefits of innovation via the introduction of a wide range of new gTLDs. We believe that the New gTLD Program will present a variety of significant potential revenue opportunities commencing in 2013, including operating the back end infrastructure for new gTLD registries, owning and operating one or more gTLDs and becoming a registry in our own right, as well as registering a greater number of domains over time through our existing registrar channels.
Through our Registrar, we currently provide the following services to our customers:
Domain Name Look-up and Registration
We offer our customers the ability to search for and register Internet domain names through our Registrar. Our Registrar serves existing and potential new customers looking to register new domain names or purchase existing domain names and allows customers to renew their existing registered domain names. Users can search for and identify an available domain name that best fits their needs, and in just a few clicks can claim and register the name. In addition, we offer customers the ability to transfer the registration of a single domain name or multiple domain names to us from other registrars using our automated domain name transfer service.
Domain Name System
Our Registrar service offering facilitates a significant portion of the world's domain name system Internet traffic with an average of over 2 billion DNS queries resolved per day. A DNS query represents the process of translating a domain name requested by an Internet user into the Internet Protocol, or IP, address, of the device hosting the requested website.
Value-Added Services
In addition to domain name registration services, we also offer a number of other products and services designed to help our customers easily develop, enhance and protect their domains, including the following:

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third-party website security services, such as Secure Socket Layer, or SSL, certificates;

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•
identification protection services that help keep domain owners' information private through our ID Protect service;
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web hosting plans for both Linux and Windows; and
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customizable email accounts that allow the customer to set up multiple mailboxes using a domain name.
 
We have also developed a number of proprietary services designed to help enhance visibility and help drive traffic to our customers' sites, including Business Listing services to help our customers advertise through Whois lookup inquiries and Rich Content, which allows website owners to add articles and videos from our content library to their sites.
 
Technology
Our technologies include software applications built to run on independent clusters of standard and commercially available servers, with redundancy at each layer: enterprise class storage systems, proprietary application logic and presentation to web visitors. We make substantial use of off the shelf available open source technologies such as Linux, PHP, MySQL, mongoDB, Memcache, and Lucene in addition to commercial platforms from Microsoft, including Windows Operating Systems, SQL Server, and .NET. These systems are connected to the Internet via load balancers, firewalls, and routers installed in multiple redundant pairs. Third-party services are also utilized to geographically deliver data using major Content Distribution Network ("CDN") providers.  Virtualization is heavily deployed throughout Demand Media's architecture, which affords scaling dozens of properties in a bi-directional manner.
Our data centers located in North America and Europe host our various public-facing websites and applications, as well as many of our back-end business intelligence and financial systems. Each major website is designed to be fault-tolerant, with collections of application servers connecting to a wide variety of database servers. The infrastructure is equipped with redundant systems as well as enterprise class security solutions to combat events such as Distributed Denial of Service attacks ("DDoS"). Our environment is staffed and equipped with a full scale monitoring solution, in a 24 hours a day-7 days a week manner.
Customers
We currently deploy our platform to website publishers and our Registrar products and services to resellers, including large e-commerce websites, Internet service providers and web-hosting companies and, to a lesser extent, retail consumers. Our top 3 Registrar customers, in the aggregate, represent more than 7.5% of our total consolidated revenue.
Competition
Content & Media
The online content and media market we participate in is new, rapidly evolving and intensely competitive. Competition is expected to intensify in the future as more companies enter the space. We compete for business on a number of factors including return on marketing investment, price, access to targeted audiences and quality. Our principal competitors in this space include traditional Internet companies like Yahoo! and AOL, both of whom are making significant investments in order to compete with aspects of our business. Additionally, we compete with web portals that focus on particular areas of consumer interest such as WebMD and About.com. With respect to our social media tools we compete with companies such as Jive Software and Lithium.
Registrar
The markets for domain name registration and web-based services are intensely competitive. We compete for business on a number of factors including price, value-added services, such as e-mail and web-hosting, customer service and reliability. Our principal competitors include existing registrars, such as GoDaddy, Tucows and Melbourne IT, and new registrars entering the domain name registration business.
Intellectual Property
Our intellectual property, consisting of trade secrets, trademarks, copyrights and patents, is, in the aggregate, important to our business. We rely on a combination of trade secret, trademark, copyright and patent laws in the United States and other jurisdictions, together with confidentiality agreements and technical measures, to protect the confidentiality of our proprietary rights. As of December 31, 2011, we have been granted 11 patents by the United States Patent and Trademark Office and have 26 patent applications pending in the United States and other jurisdictions. Our patents expire between 2021 and 2031. We rely more heavily on trade secret protection than patent protection. To protect our trade secrets, we control access to our proprietary systems and technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties. In addition, because of the relatively high cost we would experience in registering all of our copyrights with the United States Copyright Office, we generally do not register the

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copyrights associated with our content with the United States Copyright Office.
Government Regulation
Advertising and promotional information presented to visitors on our websites and our other marketing activities are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. In the United States, Congress has adopted legislation that regulates certain aspects of the Internet, including online content, user privacy, taxation, liability for third-party activities and jurisdiction.
Federal, state, local and foreign governments are also considering other legislative and regulatory proposals that would regulate the Internet in more and different ways than exist today. It is impossible to predict whether new taxes will be imposed on our services, and depending upon the type of such taxes, whether and how we would be affected. Increased regulation of the Internet both in the United States and abroad may decrease its growth and hinder technological development, which may negatively impact the cost of doing business via the Internet or otherwise materially adversely affect our business, financial condition or operational results.
Employees
As of December 31, 2011, we had over 600 employees. None of our employees is represented by a labor union or is subject to a collective bargaining agreement. We believe that relations with our employees are good.
Available Information
We file reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC. We make available free of charge in the investor relations section of our corporate website (http://ir.demandmedia.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. References to the Company's corporate website address in this report are intended to be inactive textual references only, and none of the information contained on our website is part of this report or incorporated in this report by reference.
The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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Item 1A.     Risk Factors
 
In addition to the other information set forth in this Annual Report on Form 10-K, you should consider carefully the risks and uncertainties described below, which could materially adversely affect our business, financial condition and results of operations.
 

Risks Relating to our Content & Media Service Offering
 
We are dependent upon certain material agreements with Google for a significant portion of our revenue. A termination of these agreements, or a failure to renew them on favorable terms, would adversely affect our business.
 
We have an extensive relationship with Google and a significant portion of our revenue is derived from cost-per-click performance-based advertising provided by Google. For the year ended December 31, 2010 and 2011, we derived approximately 29% and 33%, respectively, of our total revenue from our various advertising and content arrangements with Google. We use Google for cost-per-click advertising and cost-per-impression advertising on our owned and operated websites and on our network of customer websites, and receive a portion of the revenue generated by advertisements provided by Google on those websites. Our Google advertising agreement for our developed websites, such as eHow, expires in the third quarter of 2014. Our Google advertising agreement for our undeveloped websites expires in the second quarter of 2012. In addition, we also utilize Google’s DoubleClick ad-serving platform to deliver advertisements to our developed websites, which arrangement expires in the third quarter of 2014, and have another revenue-sharing agreement with respect to revenue generated by our content posted on Google’s YouTube, which expires in the fourth quarter of 2012. In the fourth quarter of 2011, we entered into a premium multi-channel initiative with Google in connection with the production of premium videos for YouTube, and we expect this initiative will generate significant revenue throughout 2012. Google, however, has termination rights in these agreements with us, including the right to terminate before the expiration of the terms upon the occurrence of certain events, including if our content violates the rights of third parties and other breaches of contractual provisions, a number of which are broadly defined. There can be no assurance that our agreements with Google will be extended or renewed after their respective expirations or that we will be able to extend or renew our agreements with Google on terms and conditions favorable to us. If our agreements with Google, in particular the cost-per-click agreement for our developed websites, are terminated we may not be able to enter into agreements with alternative third-party advertisement providers or ad-serving platforms on acceptable terms or on a timely basis or both. Any termination of our relationships with Google, and any extension or renewal after the initial term of such agreements on terms and conditions less favorable to us would have a material adverse effect on our business, financial condition and results of operations.

Our advertising agreements with Google may not continue to generate levels of revenue commensurate with what we have achieved during past periods. Our ability to generate online advertising revenue from Google depends on its assessment of the quality and performance characteristics of Internet traffic resulting from online advertisements on our owned and operated websites and on our network of customer websites as well as other components of our relationship with Google’s advertising technology platforms. We have no control over any of these quality assessments or over Google’s advertising technology platforms. Google may from time to time change its existing, or establish new, methodologies and metrics for valuing the quality of Internet traffic and delivering cost-per-click advertisements. Any changes in these methodologies, metrics and advertising technology platforms could decrease the amount of revenue that we generate from online advertisements. Since most of our agreements with Google contain exclusivity provisions, we are prevented from using other providers of services similar to those provided by Google. In addition, Google may at any time change or suspend the nature of the service that it provides to online advertisers and the catalog of advertisers from which online advertisements are sourced. These types of changes or suspensions would adversely impact our ability to generate revenue from cost-per-click advertising. Any change in the type of services that Google provides to us could have a material adverse effect on our business, financial condition and results of operations.
 
If we are unable to continue to drive and retain visitors to our owned and operated websites and to our customer websites by offering high-quality, engaging and commercially valuable content at scale in a cost-effective manner, our business, financial condition and results of operations could be adversely affected.
 
The primary method that we use to attract traffic to our owned and operated websites and to our customer websites and convert these visitors into repeat users and customers is the content created by our freelance creative professionals. How successful we are in these efforts depends, in part, upon our continued ability to create and distribute high-quality, commercially valuable content at scale in a cost-effective manner that connects consumers with the formats and types of

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content that meets their specific interests and enables them to share and interact with the content and supporting communities. We may not be able to create the variety and types of content in a cost-effective manner or that meets rapidly changing consumer demand in a timely manner, if at all. Any such failure to do so could adversely affect user and customer experiences and reduce traffic driven to our owned and operated websites and to our customer websites through which we distribute our content, which would adversely affect our business, revenue, financial condition and results of operations.
 
One effort we employ to create and distribute our content in a cost-effective manner is our proprietary technology and algorithms which are designed to predict consumer demand and return on investment. Our proprietary technology and algorithms have a limited history, and as a result the ultimate returns on our investment in content creation are difficult to predict, and may not be sustained in future periods at the same level as in past periods. Furthermore, our proprietary technology and algorithms are dependent on analyzing existing Internet search traffic data, and our analysis may be impaired by changes in Internet traffic or search engines’ methodologies which we do not have any control over. The failure of our proprietary technology and algorithms to accurately identify new content topics and formats, at scale, as well as the failure to create or effectively distribute new content would have an adverse impact on our business, revenue, financial condition and results of operations.
 
Throughout 2011, Google deployed a series of changes to its search engine algorithms, some of which have led the Company to experience a substantial reduction in the total number of Google search referrals to its owned and operated websites. The overall impact of these changes on traffic to the Company's owned and operated websites was negative primarily due to a decline in traffic to eHow.com beginning in the second quarter of 2011.  We have started making changes to the way we produce and distribute content in response to these changes by Google and intend to continue to do so in the future in an effort to improve the consumer experience on our websites and to expand and diversify our content offerings. There can be no assurance that these changes or any future changes will be successfully implemented, which could adversely affect our business, revenue, financial condition and results of operations.

Another method we employ to attract and acquire new, and retain existing, users and customers is commonly referred to as search engine optimization, or SEO. SEO involves developing websites to rank well in search engine results. Our ability to successfully manage SEO efforts across our owned and operated websites and our customer websites is dependent on our timely and effective modification of SEO practices implemented in response to periodic changes in search engine algorithms and methodologies and changes in search query trends. Our failure to successfully manage our SEO strategy could result in a substantial decrease in traffic to our owned and operated websites and to our customer websites through which we distribute our content, which would result in substantial decreases in conversion rates and repeat business, as well as increased costs if we were to replace free traffic with paid traffic. Any or all of these results would adversely affect our business, revenue, financial condition and results of operations.
 
Even if we succeed in driving traffic to our owned and operated websites and to our customer websites, neither we nor our advertisers and customers may be able to monetize this traffic or otherwise retain consumers. Our failure to do so could result in decreases in customers and related advertising revenue, which would have an adverse effect on our business, revenue, financial condition and results of operations.
 
If Internet search engines’ methodologies are modified, traffic to our owned and operated websites and to our customers’ websites and corresponding consumer origination volumes could decline.
 
We depend in part on various Internet search engines, such as Google, Bing, Yahoo!, and other search engines to direct a significant amount of traffic to our owned and operated websites. For the year ended December 31, 2011, approximately 39% of the page view traffic directed to our owned and operated websites came directly from these Internet search engines (and a majority of the traffic from search engines came from Google), according to our internal data. Our ability to maintain the number of visitors directed to our owned and operated websites and to our customers’ websites through which we distribute our content by search engines is not entirely within our control. Some of our owned and operated websites and our customers’ websites have experienced fluctuations in search result rankings and we cannot provide assurance that similar fluctuations may not continue to occur in the future.
 
Changes in the methodologies or algorithms used by search engines to display results could cause our owned and operated websites or our customers’ websites to receive less favorable placements or be removed from the search results.  Internet search engines could decide that content on our owned and operated websites and on our customers’ websites, including content that is created by our freelance creative professionals, is unacceptable or violates their corporate policies.
 
Throughout 2011, Google deployed a series of changes to its search engine algorithms, some of which caused the Company to experience a substantial reduction in the total number of Google search referrals to its owned and operated

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websites. The overall impact of these changes on the Company's owned and operated websites was negative primarily due to a decline in traffic to eHow.com beginning in the second quarter of 2011. 

There cannot be any assurance as to whether these changes or any future changes that may be made by Google or any other search engines might further impact our content and media business. Any reduction in the number of users directed to our owned and operated websites and to our customers’ websites would likely negatively affect our ability to earn revenue. If traffic on our owned and operated websites and on our customers’ websites declines, we may also need to resort to more costly sources to replace lost traffic, and such increased expense could adversely affect our business, revenue, cash flows, financial condition and results of operations.
 
We base our capital allocation decisions primarily on our analysis of the predicted internal rate of return on content. If the estimates and assumptions we use in calculating internal rate of return on content are inaccurate, our capital may be inefficiently allocated. If we fail to appropriately allocate our capital, our growth rate and financial results will be adversely affected.
 
We invest in content and content formats based on our calculation of the internal rate of return on previously published content cohorts for which we believe we have sufficient data. For purposes of these calculations, a content cohort is typically defined as all of the content we publish in a particular quarter. We calculate the internal rate of return on a cohort of content as the annual discount rate that, when applied to the advertising revenue, less certain direct ongoing costs, generated from the cohort over a period of time, produces an amount equal to the initial investment in that cohort. Our calculations are based on certain material estimates and assumptions that may not be accurate. Accordingly, the calculation of internal rate of return may not be reflective of our actual returns. The material estimates and assumptions upon which we rely include estimates about portions of the costs to create content and the revenue allocated to that content. We make estimates regarding when revenue for each cohort will be received. Our internal rate of return calculations are highly dependent on the timing of this revenue, with revenue earned earlier resulting in greater internal rates of return than the same amount of revenue earned in subsequent periods.
 
We use more estimates and assumptions to calculate the internal rate of return on video content because our systems and processes to collect historical data on video content are less robust. As a result, our data on video content may be less reliable. If our estimates and calculations do not accurately reflect the costs or revenue associated with our content, the actual internal rate of return of a cohort may be more or less than our estimated internal rate of return for such cohort. In such an event, we may misallocate capital and our growth, revenue, financial condition and results of operations could be negatively impacted.
 
We face significant competition to our Content & Media service offering, which we expect will continue to intensify, and we may not be able to maintain or improve our competitive position or market share.
 
We operate in highly competitive and still developing markets. We compete for advertisers and customers on the basis of a number of factors including return on marketing expenditures, price of our offerings, and ability to deliver large volumes or precise types of customer traffic. This competition could make it more difficult for us to provide value to our consumers, our advertisers and our freelance creative professionals and result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, decreased website traffic and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, revenue, financial condition and results of operations. There can be no assurance that we will be able to compete successfully against current or future competitors.
 
We face intense competition from a wide range of competitors, including online marketing and media companies, social media outlets, integrated social media platforms and other specialist and enthusiast websites. Our current principal competitors include:
 
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Online Marketing and Media Companies.  We compete with other Internet marketing and media companies, such as AOL, About.com and various startup companies as well as leading online media companies such as Yahoo!, for online marketing budgets. Most of these competitors compete with us across several areas of consumer interest, such as do-it-yourself, health, home and garden, beauty and fashion, golf, outdoors and humor.

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Social Media Outlets. We compete with social media outlets such as Facebook, Twitter and Google+, where brands and advertisers are focusing a significant portion of their online advertising spend in order to connect with their customers.
 
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Integrated Social Media Applications.  We compete with various software technology competitors, such as Jive

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Software and Lithium, in the integrated social media space where we offer our social media applications.

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Specialized and Enthusiast Websites.  We compete with companies that provide specialized consumer information websites, particularly in the do-it-yourself, health, home and garden, beauty and fashion, golf, outdoors and humor categories, as well as enthusiast websites in specific categories, including message boards, blogs and other enthusiast websites maintained by individuals and other Internet companies.

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Distributed Content Creation Platforms.  We compete with companies that employ a content creation model with aspects similar to our platform, such as the use of freelance creative professionals.
 
We may be subject to increased competition with any of these types of businesses in the future to the extent that they seek to devote increased resources to more directly address the online market for the professional creation of commercially valuable content at scale. For example, if Google chose to compete more directly with us, we may face the prospect of the loss of business or other adverse financial consequences given that Google possesses a significantly greater consumer base, financial resources, distribution channels and patent portfolio. In addition, should Google decide to directly compete with us in areas such as content creation, it may decide for competitive reasons to terminate or not renew our commercial agreements and, in such an event, we may experience a rapid decline in our revenue from the loss of our source for cost-per-click advertising on our owned and operated websites and on our network of customer websites. In addition, Google’s access to more comprehensive data regarding user search queries through its search algorithms would give it a significant competitive advantage over everyone in the industry, including us. If this data is used competitively by Google, sold to online publishers or given away for free, our business may face increased competition from companies, including Google, with substantially greater resources, brand recognition and established market presence.
 
In addition to Google, many of our current and other potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories, substantially greater financial, technical and other resources and, in some cases, the ability to combine their online marketing products with traditional offline media such as newspapers or magazines. These companies may use these advantages to offer products and services similar to ours at a lower price, develop different products to compete with our current offerings and respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. For example, both AOL and Yahoo! may have access to proprietary search data which could be utilized to assist them in their content creation processes. In addition, many of our current and potential competitors have established marketing relationships with and access to larger customer bases. As the markets for online and social media expand, we expect new competitors, business models and solutions to emerge, some of which may be superior to ours. Even if our platform is more effective than the products and services offered by our competitors, potential customers might adopt competitive products and services in lieu of using our services. For all of these reasons, we may not be able to compete successfully against our current and potential competitors.
 
Our Content & Media service offering primarily generates its revenue from advertising, and the reduction in spending by or loss of advertisers could seriously harm our business.
 
We generated 48% and 52% of our revenue for the years ended December 31, 2010 and 2011, respectively, from advertising. One component of our platform that we use to generate advertiser interest in our content is our system of monetization tools, which is designed to match content with advertisements in a manner that maximizes revenue yield and end-user experience. Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. The failure of our yield-optimized monetization technology to effectively match advertisements with our content in a manner that results in increased revenue for our advertisers would have an adverse impact on our ability to maintain or increase our revenue from advertising.
 
We rely on third-party ad-providers, such as Google, to provide advertisements on our owned and operated websites and on our network of customer websites. Even if our content is effectively matched with such ad content, we cannot assure our current advertisers will fulfill their obligations under their existing contracts, continue to provide advertisements beyond the terms of their existing contracts or enter into any additional contracts. If any of our advertisers, but in particular Google, decided not to continue advertising on our owned and operated websites and on our network of customer websites, we could experience a rapid decline in our revenue over a relatively short period of time.
 
In addition, our customers who receive a portion of the revenue generated from advertisements matched with our content displayed on their websites, may not continue to do business with us if our content does not generate increased revenue for them. If we are unable to remain competitive and provide value to advertisers they may stop placing advertisements with us or with our network of customer websites, which would negatively harm our business, revenue, financial condition and results

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of operations.

Furthermore, brands and advertisers are increasingly focusing a portion of their online advertising budgets on social media outlets such as Facebook. If this trend were to continue and we were unable to offer a competitive or similar advertising opportunity, this could adversely impact our ability to maintain or increase our revenue from advertising.

Lastly, we believe that advertising spending on the Internet, as in traditional media, fluctuates significantly as a result of a variety of factors, many of which are outside of our control. These factors include:
 
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variations in expenditures by advertisers due to budgetary constraints;
 
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the cancellation or delay of projects by advertisers;
 
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the cyclical and discretionary nature of advertising spending;
 
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general economic conditions, as well as economic conditions specific to the Internet and online and offline media industry; and
 
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the occurrence of extraordinary events, such as natural disasters, international or domestic terrorist attacks or armed conflict.
 
If we are unable to generate advertising revenue due to factors outside of our control, then our business, financial condition and results of operations would be adversely affected.
 
Since the success of our Content & Media service offering has been closely tied to the success of eHow, if eHow’s performance falters it could have a material adverse effect on our business, financial condition, and operations.
 
For the years ended December 31, 2010 and 2011, Demand Media generated approximately 25% and 31%, respectively, of our revenue from eHow. No other individual site was responsible for more than 10% of our revenue in these periods. In addition, most of the content that we published during these periods was published to eHow.
 
eHow depends on various Internet search engines to direct traffic to the site. For the year ended December 31, 2011, approximately 54% of eHow’s page view traffic came from Google searches. The traffic directed to eHow and in turn the performance of the content created for and distributed on eHow may be adversely impacted by a number of factors related to Internet search engines, including the following: any further changes in search engine algorithms or methodologies similar to those recently implemented by Google, which changes had a negative effect on search referral traffic to eHow and a reduction in page views on eHow; our failure to properly manage SEO efforts for eHow; our failure to prevent internal technical issues that disrupt traffic to eHow; or reduced reliance by Internet users on search engines to locate relevant content. Additionally, we have already produced a significant amount of content that is housed on eHow and it may become difficult for us to continue to identify topics and produce content with the same level of broad consumer appeal as the content we have produced up to this point. A material adverse effect on eHow could result in a material adverse effect to Demand Media and its business, financial condition, and results of operations.
 
Poor perception of our brands, business or industry could harm our reputation and adversely affect our business, financial condition and results of operations.
 
Our business is dependent on attracting a large number of visitors to our owned and operated websites and our network of customer websites and providing leads and clicks to our advertisers and customers, which depends in part on our reputation within the industry and with our customers. Because our business is transforming traditional content creation models and is therefore not easily understood by casual observers, our brands, business and reputation are vulnerable to poor perception. For example, perception that the quality of our content may not be the same or better than that of other published Internet content, even though baseless, can damage our reputation. We are frequently the subject of unflattering reports in the media about our business and our model. While disruptive businesses are often criticized early on in their life cycles, we believe we are more frequently targeted than most because of the nature of the business we are disrupting—namely the traditional print and publication media as well as popular Internet publishing methods such as blogging. Any damage to our reputation could harm our ability to attract and retain advertisers, customers and freelance creative professionals who create a majority of our content, which would materially adversely affect our results of operations, financial condition and business. Furthermore, certain of our owned and operated websites, such as LIVESTRONG.com and eHow, as well as some of the content we produce for our network of customer websites, are associated with high-profile experts to enhance the websites’

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brand recognition and credibility. In addition, any adverse news reports, negative publicity or other alienation of all or a segment of our consumer base relating to these high-profile experts would reflect poorly on our brands and could have an adverse effect on our business.
 
We rely primarily on creative professionals for a majority of our online content. We may not be able to attract or retain sufficient creative professionals to generate content on a scale or of a quality sufficient to grow our business. As we do not control those persons or the source of content, we are at risk of being unable to generate interesting and attractive features and other material content.
 
We rely primarily on freelance creative professionals for the content that we distribute through our owned and operated websites and our network of customer websites. We may not be able to attract or retain sufficient qualified and experienced creative professionals to generate content on a scale or of a quality sufficient to grow our business. For example, our premium video initiatives may require the engagement of producers, contributors, talent, editors and filmmakers with a specialized skill set, and there is no assurance that we will be able to engage such specialists in a cost-effective manner or at all. Furthermore, as we develop new content formats to meet changing consumer demand, we may not offer the volume of traditional content assignments that our creative professionals have grown accustomed to, and some of our creative professionals may seek assignments elsewhere or otherwise stop producing content for us. In addition, our competitors may attempt to attract members of our freelance creative professional community by offering compensation that we are unable to match. We believe that over the past four years our ability to attract and retain creative professionals has benefited from the weak overall labor market and from the difficulties and resulting layoffs occurring in traditional media, particularly newspapers. We are uncertain whether this combination of circumstances is likely to continue and any change to the economy or the media jobs market may make it more difficult for us to attract and retain freelance creative professionals. While each of our freelance creative professionals are screened through our pre-qualification process, we cannot guarantee that the content created by our creative professionals will be of sufficient quality to attract users to our owned and operated websites and to our network of customer websites. In addition, in the vast majority of cases we have no written agreements with these persons which obligate them to create articles or videos beyond the one article or video that they elect to create at any particular time and have no ability to control their future performance. As a result, we cannot guarantee that our freelance creative professionals will continue to contribute content to us for further distribution through our owned and operated websites and our network of customer websites or that the content that is created and distributed will be sufficient to sustain our current growth rates. In the event that these creative professionals decrease their contributions of such content, we are unable to attract or retain qualified creative professionals or if the quality of such contributions is not sufficiently attractive to our advertisers or to drive traffic to our owned and operated websites and to our network of customer websites, we may incur substantial costs in procuring suitable replacement content, which could have a negative impact on our business, revenue and financial condition.
 
We may not be successful in developing premium video content and other new content formats, which may limit our future growth and have a negative effect on our business, revenue, financial condition and results of operations.

One potential area of growth for us is in the development of new content formats such as premium video for distribution through our owned and operated websites and our network of customer websites. We recently entered into a multi-channel, premium video sponsorship relationship with YouTube, and we are investing in our content creation studio capabilities to increase our capacity to produce premium video content and other non-video longer-form and high quality content formats. We have limited experience in developing premium video content and other types of new content formats. We cannot be certain that we will be successful in producing new content formats or that our new content formats will gain market acceptance. Our inability to expand our content offerings may limit our future growth and have a negative effect on our business, revenue, financial condition and results of operations.

The loss of third-party data providers could significantly diminish the value of our services and cause us to lose customers and revenue.
 
We collect data regarding consumer search queries from a variety of sources. When a user accesses one of our owned and operated websites, we may have access to certain data associated with the source and specific nature of the visit to our website. We also license consumer search query data from third parties. Our Content & Media algorithms utilize this data to help us determine what content consumers are seeking, if that content is valuable to advertisers and whether we can cost-effectively produce this content. Some of these third-party consumer search data agreements are for perpetual licenses of a discrete amount of data and generally do not provide for updates of the data licensed. There can be no assurances that we will be able to enter into agreements with these third parties to license additional data on the same or similar terms, if at all. If we are not able to enter into agreements with these providers, we may not be able to enter into agreements with alternative third-party consumer search data providers on acceptable terms or on a timely basis or both. Any termination of our relationships with these consumer search data providers, or any entry into new agreements on terms and conditions less favorable to us,

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could limit the effectiveness of our content creation process, which would have a material adverse effect on our business, financial condition and results of operations. In addition, new laws or changes to existing laws in this area may prevent or restrict our use of this data. In such event, the value of our algorithms and our ability to determine what consumers are seeking could be significantly diminished.
 
If we are unable to attract new customers for our social media applications products or to retain our existing customers, our revenue could be lower than expected and our operating results may suffer.

Our enterprise-class social media tools allow websites to add feature-rich applications, such as user profiles, comments, forums, reviews, blogs, photo and video sharing, media galleries, groups and messaging offered through our social media application product suite. We also provide social media services by powering live events with social engagement tools. In addition to adding new customers for our social media products, to increase our revenue, we must sell additional social media products to existing customers and encourage existing customers to maintain or increase their usage levels. If our existing and prospective customers do not perceive our social media products to be of sufficiently high quality, we may not be able to retain our current customers or attract new customers. We sell our social media products pursuant to service agreements that are generally one to two years in length. Our customers have no obligation to renew their contracts for our products after the expiration of their initial commitment period, and these agreements may not be renewed at the same or higher level of service, if at all. In addition, these agreements generally require us to keep our product suite operational with minimal service interruptions and to provide limited credits to media customers in the event that we are unable to maintain these service levels. To date, service level credits have not been significant. Moreover, under some circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements, including the right to cancel if our social media product suite suffers repeated service interruptions. If we are unable to attract new customers for our social media products, our existing customers do not renew or terminate their agreements for our social media products or we are required to provide service level credits in the future as a result of the operational failure of our social media products, then our operating results could be harmed.
 
Wireless devices and mobile phones are increasingly being used to access the Internet, and our online marketing services may not be as effective when accessed through these devices, which could cause harm to our business.
 
The number of people who access the Internet through devices other than personal computers has increased substantially in the last few years. In general our Content & Media services were designed for persons accessing the Internet on a desktop or laptop computer. The smaller screens, lower resolution graphics and less convenient typing capabilities of these devices may make it more difficult for visitors to respond to our offerings. In addition, mobile advertising yields are currently frequently lower than those on other devices. We must also ensure that our licensing arrangements with third-party content providers allow us to make this content available on these devices. If we cannot effectively make our content, products and services available on these devices, fewer consumers may access and use our content, products and services. Also, if our services continue to be less effective or economically attractive for customers seeking to engage in advertising through these devices and this segment of Internet traffic grows at the expense of traditional computer Internet access, we will experience difficulty attracting website visitors and attracting and retaining customers and our operating results and business will be harmed.
 
We are dependent upon the quality of traffic in our network to provide value to online advertisers, and any failure in our quality control could have a material adverse effect on the value of our websites to our third-party advertisement distribution providers and online advertisers and adversely affect our revenue.

We use technology and processes to monitor the quality of, and to identify any anomalous metrics associated with, the Internet traffic that we deliver to online advertisers and our network of customer websites. These metrics may be indicative of low quality clicks such as non-human processes, including robots, spiders or other software; the mechanical automation of clicking; and other types of invalid clicks or click fraud. Even with such monitoring in place, there is a risk that a certain amount of low-quality traffic, or traffic that is deemed to be invalid by online advertisers, will be delivered to such online advertisers. As a result, we may be required to credit future amounts owed to us by our advertisers. Furthermore, low-quality or invalid traffic may be detrimental to our relationships with third-party advertisement distribution providers and online advertisers, and could adversely affect our revenue.
 
The expansion of our owned and operated websites into new areas of consumer interest, products, services and technologies subjects us to additional business, legal, financial and competitive risks.
 
An important element of our business strategy is to grow our network of owned and operated websites to cover new areas of consumer interest, expand into new business lines and develop additional services, products and technologies. In

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directing our focus into new areas, we face numerous risks and challenges, including increased capital requirements, long development cycles, new competitors and the requirement to develop new strategic relationships. We cannot assure you that our strategy will result in increased net sales or net income. Furthermore, growth into new areas may require changes to our existing business model and cost structure, modifications to our infrastructure and exposure to new regulatory and legal risks, any of which may require expertise in areas in which we have little or no experience. If we cannot generate revenue as a result of our expansion into new areas that are greater than the cost of such expansion, our operating results could be harmed.
 
As a creator and a distributor of Internet content, we face potential liability and expenses for legal claims based on the nature and content of the materials that we create or distribute, or that are accessible via our owned and operated websites and our network of customer websites. If we are required to pay damages or expenses in connection with these legal claims, our operating results and business may be harmed.
 
We rely on the work product of freelance creative professionals to create original content for our owned and operated websites and for our network of customer websites and for use in our marketing messages. As a creator and distributor of original content and third-party provided content, we face potential liability based on a variety of theories, including defamation, negligence, unlawful practice of a licensed profession, copyright or trademark infringement or other legal theories based on the nature, creation or distribution of this information, and under various laws, including the Lanham Act and the Copyright Act. We may also be exposed to similar liability in connection with content that we do not create but that is posted to our owned and operated websites and to our network of customer websites by users and other third parties through forums, comments, personas and other social media features. In addition, it is also possible that visitors to our owned and operated websites and to our network of customer websites could make claims against us for losses incurred in reliance upon information provided on our owned and operated websites or our network of customer websites. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. If we become subject to these or similar types of claims and are not successful in our defense, we may be forced to pay substantial damages. While we run our content through a rigorous quality control process, including an automated plagiarism program, there is no guarantee that we will avoid future liability and potential expenses for legal claims based on the content of the materials that we create or distribute. Should the content distributed through our owned and operated websites and our network of customer websites violate the intellectual property rights of others or otherwise give rise to claims against us, we could be subject to substantial liability, which could have a negative impact on our business, revenue and financial condition.

We may face liability in connection with our undeveloped owned and operated websites and our customers’ undeveloped websites whose domain names may be identical or similar to another party’s trademark or the name of a living or deceased person.
A number of our owned and operated websites and our network of customer websites are undeveloped or minimally developed properties that primarily contain advertising listings and links. As part of our registration process, we perform searches, analysis and screenings to determine if the domain names of our owned and operated websites in combination with the advertisements displayed on those sites violate the trademark or other rights owned by third parties. Despite these efforts, we may inadvertently register the domain names of properties that are identical or similar to another party’s trademark or the name of a living or deceased person. Moreover, our efforts are inherently limited due to the fact that the advertisements displayed on our undeveloped websites are delivered by third parties and the advertisements may vary over time or based on the location of the viewer. We may face primary or secondary liability in the United States under the Anticybersquatting Consumer Protection Act or under general theories of trademark infringement or dilution, unfair competition or under rights of publicity with respect to the domain names used for our owned and operated websites. If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties and reputational harm, which could increase our costs of operations, reduce our profits or cause us to forgo opportunities that would otherwise support our growth.
 
We may not succeed in establishing our businesses internationally, which may limit our future growth.
 
One potential area of growth for us is in the international markets. We have launched a site in the United Kingdom, recently launched a beta version of eHow en Español (a Spanish language site that targets both the U.S. Hispanic market, as well as the larger Spanish-speaking market worldwide) and are exploring launches in certain other countries. We have also been investing in translation capabilities for our technologies. We recently acquired a Spanish language content creation business platform located in Argentina. Operating internationally, where we have limited experience, exposes us to additional risks and operating costs. We cannot be certain that we will be successful in introducing or marketing our services internationally or that our services will gain market acceptance or that growth in commercial use of the Internet internationally will continue. There are risks inherent in conducting business in international markets, including the need to localize our products and services to foreign customers’ preferences and customs, difficulties in managing operations due to language barriers, distance, staffing and cultural differences, application of foreign laws and regulations to us, tariffs and other trade barriers, fluctuations in currency

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exchange rates, establishing management systems and infrastructures, reduced protection for intellectual property rights in some countries, changes in foreign political and economic conditions, and potentially adverse tax consequences. Our inability to expand and market our products and services internationally may have a negative effect on our business, revenue, financial condition and results of operations.
 
Risks Relating to our Registrar Service Offering
 
We face significant competition to our Registrar service offering, which we expect will continue to intensify. We may not be able to maintain or improve our competitive position or market share.
 
We face significant competition from existing registrars and from new registrars that continue to enter the market. ICANN currently has approximately 1,000 registrars to register domain names in one or more of the generic top level domains, or gTLDs, that it oversees. There are relatively few barriers to entry in this market, so as this market continues to develop we expect the number of competitors to increase. The continued entry into the domain name registration market of competitive registrars and unaccredited entities that act as resellers for registrars, and the rapid growth of some competitive registrars and resellers that have already entered the market, may make it difficult for us to maintain our current market share.
 
The anticipated introduction of new gTLDs by ICANN could substantially change the domain name industry in unexpected ways. If we do not properly manage our response to the change in business environment, it could adversely impact our competitive position or market share.

The market for domain name registration and other related web-based services is intensely competitive and rapidly evolving. We expect competition to increase from existing competitors as well as from new market entrants. Most of our existing competitors are expanding the variety of services that they offer. These competitors include, among others, domain name registrars, website design firms, website hosting companies, Internet service providers, Internet portals and search engine companies, including GoDaddy, Network Solutions, Tucows, Microsoft and Yahoo!. Some of these competitors have greater resources, more brand recognition and consumer awareness, greater international scope, larger customer bases and larger bases of existing customers than we do. As a result, we may not be able to compete successfully against them in future periods.

In addition, these and other large competitors, in an attempt to gain market share, may offer aggressive price discounts on the services they offer. These pricing pressures may require us to match these discounts in order to remain competitive, which would reduce our margins, or cause us to lose customers who decide to purchase the discounted service offerings of our competitors. As a result of these factors, in the future it may become increasingly difficult for us to compete successfully.
 
If our customers do not renew their domain name registrations or if they transfer their existing registrations to our competitors and we fail to replace their business, our business would be adversely affected.
 
Our success depends in large part on our customers’ renewals of their domain name registrations. Registrar revenue, which is closely tied to domain name registrations represented approximately 40% and 37% of total revenue in the year ended December 31, 2010 and 2011, respectively. Our customer renewal rate for expiring domain name registrations was approximately 71% and 74% in the year ended December 31, 2010 and 2011, respectively. If we are unable to maintain or increase our overall renewal rates for domain name registrations or if any decrease in our renewal rates, including due to transfers, is not offset by increases in new customer growth rates, our customer base and our revenue would likely decrease. This would also reduce the number of domain name registration customers to whom we could market our other higher-margin services, thereby further potentially impacting our revenue and profitability, driving up our customer acquisition costs and harming our operating results. Since our strategy is to expand the number of services we provide to our customers, any decline in renewals of domain name registrations not offset by new domain name registrations would likely have an adverse effect on our business, revenue, financial condition and results of operations.
 
Regulation could reduce the value of Internet domain names or negatively impact the Internet domain name acquisition process, which could significantly impair the value attributable to our acquisitions of Internet domain names.
 
The acquisition of expiring domain names for development, undeveloped website commercialization, sale or other uses, involves the registration of thousands of Internet domain names, both with registries in the United States and internationally. We have and intend to continue to acquire previously-owned Internet domain names that have expired and that, following the period of permitted redemption by their prior owners, have been made available for registration. The acquisition of Internet domain names generally is governed by regulatory bodies. The regulation of Internet domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional requirements for previously-owned Internet domain names or modify the requirements for holding Internet domain names. As a result, we might not acquire

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or maintain names that contribute to our financial results in the same manner as we currently do. A failure to acquire or maintain such Internet domain names could adversely affect our business, revenue, financial condition and results of operations.
 
We could face liability, or our corporate image might be impaired, as a result of the activities of our customers or the content of their websites.
 
Our role as a registrar of domain names and a provider of website hosting services may subject us to potential liability for illegal activities by our customers on their websites. For example, we were named as a party to a lawsuit that has subsequently been dismissed in which a group registered a domain name through our registrar and proceeded to fill the site with content that was allegedly defamatory to another business whose name is similar to the domain name. We have also been criticized in the past for not being more proactive in policing online pharmacies acting in violation of U.S. laws. We provide an automated service that enables users to register domain names and populate websites with content. We do not monitor or review, nor does our accreditation agreement with ICANN require that we monitor or review, the appropriateness of the domain names we register for our customers or the content of our network of customer websites, and we have no control over the activities in which our customers engage. While we have policies in place to terminate domain names or to take other appropriate action if presented with a court order, governmental injunction or evidence of illegal conduct from law enforcement or a trusted industry partner, we have in the past been publicly criticized for not being more proactive in this area by consumer watchdogs and we may encounter similar criticism in the future. This criticism could harm our reputation. Conversely, were we to terminate a domain name registration in the absence of legal compulsion or clear evidence of illegal conduct from a legitimate source, we could be criticized for prematurely and improperly terminating a domain name registered by a customer. In addition, despite the policies we have in place to terminate domain name registrations or to take other appropriate actions, customers could nonetheless engage in prohibited activities.
 
Several bodies of law may be deemed to apply to us with respect to various customer activities. Because we operate in a relatively new and rapidly evolving industry, and since this field is characterized by rapid changes in technology and in new and growing illegal activity, these bodies of laws are constantly evolving. Some of the laws that apply to us with respect to customer activity include the following:
 
•
The Communications Decency Act of 1996, or CDA, generally protects online service providers, such as Demand Media, from liability for certain activities of their customers, such as posting of defamatory or obscene content, unless the online service provider is participating in the unlawful conduct. Notwithstanding the general protections from liability under the CDA, we may nonetheless be forced to defend ourselves from claims of liability covered by the CDA, resulting in an increased cost of doing business.

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The Digital Millennium Copyright Act of 1998, or DMCA, provides recourse for owners of copyrighted material who believe that their rights under U.S. copyright law have been infringed on the Internet. Under this statute, we generally are not liable for infringing content posted by third parties. However, if we receive a proper notice from a copyright owner alleging infringement of its protected works by web pages for which we provide hosting services, and we fail to expeditiously remove or disable access to the allegedly infringing material, fail to post and enforce a digital rights management policy or a policy to terminate accounts of repeat infringers, or otherwise fail to meet the requirements of the safe harbor under the statute, the owner may seek to impose liability on us.
 
Although established statutory law and case law in these areas to date generally have shielded us from liability for customer activities, court rulings in pending or future litigation may serve to narrow the scope of protection afforded us under these laws. In addition, laws governing these activities are unsettled in many international jurisdictions, or may prove difficult or impossible for us to comply with in some international jurisdictions. Also, notwithstanding the exculpatory language of these bodies of law, we may be embroiled in complaints and lawsuits which, even if ultimately resolved in our favor, add cost to our doing business and may divert management’s time and attention. Finally, other existing bodies of law, including the criminal laws of various states, may be deemed to apply or new statutes or regulations may be adopted in the future, any of which could expose us to further liability and increase our costs of doing business.

We may face liability or become involved in disputes over registration of domain names and control over websites.
 
As a domain name registrar, we regularly become involved in disputes over registration of domain names. Most of these disputes arise as a result of a third party registering a domain name that is identical or similar to another party’s trademark or the name of a living person. These disputes are typically resolved through the Uniform Domain-Name Dispute-Resolution Policy, or UDRP, ICANN’s administrative process for domain name dispute resolution, or less frequently through litigation under the Anticybersquatting Consumer Protection Act, or ACPA, or under general theories of trademark infringement or

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dilution. The UDRP generally does not impose liability on registrars, and the ACPA provides that registrars may not be held liable for registering or maintaining a domain name absent a showing of bad faith intent to profit or reckless disregard of a court order by the registrars. However, we may face liability if we fail to comply in a timely manner with procedural requirements under these rules. In addition, these processes typically require at least limited involvement by us, and therefore increase our cost of doing business. The volume of domain name registration disputes may increase in the future as the overall number of registered domain names increases.
 
Domain name registrars also face potential tort law liability for their role in wrongful transfers of domain names. The safeguards and procedures we have adopted may not be successful in insulating us against liability from such claims in the future. In addition, we face potential liability for other forms of “domain name hijacking,” including misappropriation by third parties of our network of customer domain names and attempts by third parties to operate websites on these domain names or to extort the customer whose domain name and website were misappropriated. Furthermore, our risk of incurring liability for a security breach on a customer website would increase if the security breach were to occur following our sale to a customer of an SSL certificate that proved ineffectual in preventing it. Finally, we are exposed to potential liability as a result of our private domain name registration service, wherein we become the domain name registrant, on a proxy basis, on behalf of our customers. While we have a policy of providing the underlying Whois information and reserve the right to cancel privacy services on domain names giving rise to domain name disputes including when we receive reasonable evidence of an actionable harm, the safeguards we have in place may not be sufficient to avoid liability in the future, which could increase our costs of doing business.
 
We may experience unforeseen liabilities in connection with our acquisition of Internet domain names or arising out of third-party domain names included in our distribution network, which could negatively impact our financial results.
 
We have acquired and intend to continue to acquire in the future additional previously-owned Internet domain names. While we have a policy against acquiring domain names that infringe on third-party intellectual property rights, including trademarks or confusingly similar business names, in some cases, these acquired names may have trademark significance that is not readily apparent to us or is not identified by us in the bulk purchasing process. As a result we may face demands by third-party trademark owners asserting infringement or dilution of their rights and seeking transfer of acquired Internet domain names under the UDRP administered by ICANN or actions under the ACPA. Additionally, we display paid listings on third-party domain names and third-party websites that are part of our distribution network, which also could subject us to a wide variety of civil claims including intellectual property infringement.
 
We intend to review each claim or demand which may arise from time to time on a case-by-case basis with the assistance of counsel and we intend to transfer any rights acquired by us to any party that has demonstrated a valid prior right or claim. We cannot, however, guarantee that we will be able to resolve these disputes without litigation. The potential violation of third-party intellectual property rights and potential causes of action under consumer protection laws may subject us to unforeseen liabilities including injunctions and judgments for money damages.

Our failure to register, maintain, secure, transfer or renew the domain names that we process on behalf of our customers or to provide our other services to our customers without interruption could subject us to additional expenses, claims of loss or negative publicity that have a material adverse effect on our business.
 
Clerical errors and system and process failures made by us may result in inaccurate and incomplete information in our database of domain names and in our failure to properly register or to maintain, secure, transfer or renew the registration of domain names that we process on behalf of our customers. In addition, any errors of this type might result in the interruption of our other services. Our failure to properly register or to maintain, secure, transfer or renew the registration of our customers’ domain names or to provide our other services without interruption, even if we are not at fault, might result in our incurring significant expenses and might subject us to claims of loss or to negative publicity, which could harm our business, revenue, financial condition and results of operations.
 
Governmental and regulatory policies or claims concerning the domain name registration system, and industry reactions to those policies or claims, may cause instability in the industry, disrupt our domain name registration business and negatively impact our business.
 
ICANN is a private sector, not for profit corporation formed in 1998 for the express purposes of overseeing a number of Internet related tasks previously performed directly on behalf of the U.S. government, including managing the domain name registration system. ICANN has been subject to strict scrutiny by the public and by the United States government. For example, in the United States, Congress has held hearings to evaluate ICANN’s selection process for new top level domains. In addition, ICANN faces significant questions regarding its financial viability and efficacy as a private sector entity. ICANN may continue

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to evolve both its long term structure and mission to address perceived shortcomings such as a lack of accountability to the public and a failure to maintain a diverse representation of interests on its board of directors. We continue to face the risks that:

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the U.S. or any other government may reassess its decision to introduce competition into, or ICANN’s role in overseeing, the domain name registration market;
 
•
the Internet community or the U.S. Department of Commerce or U.S. Congress may refuse to recognize ICANN’s authority or support its policies, which could create instability in the domain name registration system;
 
•
some of ICANN’s policies and practices, and the policies and practices adopted by registries and registrars, could be found to conflict with the laws of one or more jurisdictions;
 
•
the terms of the Registrar Accreditation Agreement, under which we are accredited as a registrar, could change in ways that are disadvantageous to us or under certain circumstances could be terminated by ICANN preventing us from operating our Registrar;
 
•
ICANN and, under their registry agreements, VeriSign and other registries may impose increased fees received for each ICANN accredited registrar and/or domain name registration managed by those registries;
 
•
international regulatory or governing bodies, such as the International Telecommunications Union or the European Union, may gain increased influence over the management and regulation of the domain name registration system, leading to increased regulation in areas such as taxation and privacy;
 
•
ICANN or any registries may implement policy changes that would impact our ability to run our current business practices throughout the various stages of the lifecycle of a domain name; and
 
•
foreign constituents may succeed in their efforts to have domain name registration removed from a U.S. based entity and placed in the hands of an international cooperative.

If any of these events occur, they could create instability in the domain name registration system. These events could also disrupt or suspend portions of our domain name registration solution, which would result in reduced revenue.
 
The relevant domain name registry and the ICANN regulatory body impose a charge upon each registrar for the administration of each domain name registration. If these fees increase, it would have a significant impact upon our operating results.
 
Each registry typically imposes a fee in association with the registration of each domain name. For example, VeriSign, the registry for .com, presently charges a $7.85 fee for each .com registration after a recently enacted 7% fee increase. ICANN charges a $0.18 fee for each domain name registered in the generic top level domains, or gTLDs, that fall within its purview. We have no control over these agencies and cannot predict when they may increase their respective fees. In terms of the registry agreement between ICANN and VeriSign that was approved by the U.S. Department of Commerce on November 30, 2006, VeriSign will continue as the exclusive registry for the .com gTLD through at least November 30, 2012. The recently announced 7% fee increase is the final fee increase authorized under the current registry agreement for the .com TLD. The increase in these fees either must be included in the prices we charge to our service providers, imposed as a surcharge or absorbed by us. If we absorb such cost increases or if surcharges act as a deterrent to registration, we may find that our profits are adversely impacted by these third-party fees.
 
We intend to participate in ICANN's New gTLD Program, which may present us with unique operational and other risks. If we are unsuccessful in managing these risks, our business, financial condition and results of operations could be adversely affected.

We intend to pursue certain opportunities in connection with ICANN's New gTLD Program, which may include operating the back-end infrastructure for new gTLD registries and/or owning and operating one or more of our own gTLDs. We currently have no operating experience providing back-end registry services to existing registries or acting as an owner and operator of domain name registries for gTLD strings. Our participation in the New gTLD Program may involve us in new and complex processes with respect to the application and awarding of gTLD strings by ICANN, as well as require us to rely upon, negotiate and collaborate with independent third parties. In addition, we expect to compete with other established and more experienced operators in these proposed service offerings. If we are unsuccessful in managing these risks, our business, financial condition and results of operations could be adversely affected.

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As the number of available domain names with commercial value diminishes over time, our domain name registration revenue and our overall business could be adversely impacted.
 
As the number of domain registrations increases and the number of available domain names with commercial value diminishes over time, and if it is perceived that the more desirable domain names are generally unavailable, fewer Internet users might register domain names with us. If this occurs, it could have an adverse effect on our domain name registration revenue and our overall business. 
Risks Relating to our Company
 
We have a history of operating losses and may not be able to operate profitably or sustain positive cash flow in future periods.
 
We were founded in 2006 and have a limited operating history. We have had a net loss in every year since inception. As of December 31, 2011, we had an accumulated deficit of approximately $70.8 million and we may incur net operating losses in the future. Moreover, our cash flows from operating activities in the future may not be sufficient to fund our desired level of investments in the production of content and the purchase of property and equipment, domain names and other intangible assets. Our business strategy contemplates making continued investments and expenditures in our content creation and distribution platform as well as the development and launch of new products and services. In addition, as a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. Our ability to generate net income in the future will depend in large part on our ability to generate and sustain substantially increased revenue levels, while continuing to control our expenses. We may incur significant losses in the future for a number of reasons, including those discussed in other risk factors and factors that we cannot foresee. Our inability to generate net income and sufficient positive cash flows would materially and adversely affect our business, revenue, financial condition and results of operations.
 
We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.
 
Our revenue and operating results could vary significantly from quarter-to-quarter and year-to-year and may fail to match our past performance because of a variety of factors, many of which are outside of our control. In particular, our operating expenses are fixed and variable and, to the extent variable, less flexible to manage period-to-period, especially in the short-term. For example, our ability to manage our expenses in the near term period-to-period is affected by our sales and marketing expenses to refer traffic to or promote our owned and operated websites, generally a variable expense which can be managed based on operating performance in the near term. This expense has historically represented a relatively small percentage of our operating expenses. In addition, comparing our operating results on a period-to-period basis may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:
 
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lower than anticipated levels of traffic to our owned and operated websites and to our customers’ websites;
 
•
our ability to generate revenue from traffic to our owned and operated websites and to our network of customer websites;
 
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failure of our content to generate sufficient or expected revenue during its estimated useful life to recover its unamortized creation costs, which may result in increased amortization expenses associated with, among other things, a decrease in the estimated useful life of our content, an impairment charge associated with our existing content, or expensing future content acquisition costs as incurred;

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creation of content in the future that may have a shorter estimated useful life as compared to our current portfolio of content, or which we license exclusively to third parties for periods that are less than the estimated useful life of our existing content, which may result in, among other things, increased content amortization expenses or the expensing of future content acquisition costs as incurred;
 
•
our ability to continue to create and develop content and content formats that attract users to our owned and operated websites and to our network of customer websites that distribute our content;
 

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•
our ability to expand our existing distribution network to include emerging and alternative channels, including complementary social media platforms such as Facebook, Google+ and Twitter, dedicated applications for mobile platforms such as the iPhone, Blackberry and Android operating systems, and new types of devices used to access the Internet such as tablet computers ;

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our ability to identify acquisition targets and successfully integrate acquired businesses into our operations;
 
•
our ability to attract and retain sufficient qualified and experienced freelance creative professionals to generate content formats on a scale sufficient to grow our business, as we continue to evolve the formats of content that we produce;
 
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our ability to effectively manage our freelance creative professionals, direct advertising sales force, in-house personnel and operations;
 
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a reduction in the number of domain names under management or in the rate at which this number grows, due to slow growth or contraction in our markets, lower renewal rates or other factors;
 
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reductions in the percentage of our domain name registration customers who purchase additional services from us;
 
•
timing of and revenue recognition for large sales transactions such as significant new contracts for branded advertising;
 
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the mix of services sold in a particular period between our Registrar and our Content & Media service offerings;
 
•
changes in our pricing policies or those of our competitors, changes in domain name fees charged to us by Internet registries or the Internet Corporation for Assigned Names and Numbers, or ICANN, or other competitive pressures on our prices;

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our ability to identify, develop and successfully launch new products and services;

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the timing and success of new services and technology enhancements introduced by our competitors, which could impact both new customer growth and renewal rates;
 
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the entry of new competitors in our markets;
 
•
our ability to keep our platform, domain name registration services and our owned and operated websites operational at a reasonable cost and without service interruptions;
 
•
increased product development expenses relating to the development of new services;
 
•
the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our services, operations and infrastructure;
 
•
changes in generally accepted accounting principles;
 
•
our focus on long-term goals over short-term results;
 
•
federal, state or foreign regulation affecting our business; and
 
•
weakness or uncertainty in general economic or industry conditions.
 
It is possible that in one or more future quarters, due to any of the factors listed above, a combination of those factors or other reasons, our operating results may be below our expectations and the expectations of public market analysts and investors. In that event, the price of our shares of common stock could decline substantially.
 
Changes in our business model or external developments in our industry could negatively impact our operating margins.
 
Our operating margins may experience downward pressure as a result of increasing competition and increased expenditures for many aspects of our business, including expenses related to content creation. For example, historically, we have focused on the creation of shorter-form text articles or standard videos for our owned and operated websites, including

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"how to" articles for eHow. However, as we increase the number of longer-form or "feature" articles or premium videos or choose to create other forms of content formats, and in turn reduce our investment in the shorter-form types of content, our operating margins may suffer as these other forms of content may be more expensive to create and the corresponding return on investment, if any, could be reduced. In addition, we intend to enter into additional revenue sharing arrangements with our customers which could cause our operating margins to experience downward pressure if a greater percentage of our revenue comes from advertisements placed on our network of customer websites compared to advertisements placed on our owned and operated websites. Additionally, the percentage of advertising fees that we pay to our customers may increase, which would reduce the margin we earn on revenue generated from those customers.
 
Our historic revenue growth rate may not be sustainable.
 
Our revenue increased rapidly in each of the fiscal years ended December 31, 2008 through December 31, 2011. We may not be able to sustain our revenue growth rate in future periods and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. If our future growth fails to meet investor or analyst expectations, it could have a materially negative effect on our stock price. If our growth rate were to decline significantly or become negative, it would adversely affect our business, financial condition and results of operations.

If we do not effectively manage our growth, our operating performance will suffer and we may lose consumers, advertisers, customers and freelance creative professionals.
 
We have experienced rapid growth in our operations since our founding in 2006, and we may experience continued growth in our business, both through internal growth and potential acquisitions. For example, our employee headcount grew from approximately 475 to over 600 in the three years ended December 31, 2011. This overall growth has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. In particular, continued growth may make it more difficult for us to accomplish the following:
 
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successfully scale our technology and infrastructure to support a larger business;
 
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continue to grow our platform at scale and distribute through our new and existing properties while successfully monetizing our content;
 
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maintain our standing with key advertisers as well as Internet search companies and our network of customer websites;
 
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maintain our customer service standards;
 
•
develop and improve our operational, financial and management controls and maintain adequate reporting systems and procedures;
 
•
acquire and integrate websites and other businesses;
 
•
successfully expand our footprint in our existing areas of consumer interest and enter new areas of consumer interest; and
 
•
respond effectively to competition and potential negative effects of competition on profit margins.
 
In addition, our personnel, systems, procedures and controls may be inadequate to support our current and future operations. The improvements required to manage our growth will require us to make significant expenditures, expand, train and manage our employee base and allocate valuable management resources. If we fail to effectively manage our growth, our operating performance will suffer and we may lose our advertisers, customers and key personnel.
 
If we do not continue to innovate and provide products and services that are useful to our customers, we may not remain competitive, and our revenue and operating results could suffer.
 
Our success depends on our ability to innovate and provide products and services useful to our customers in both our Content & Media and Registrar service offerings. Our competitors are constantly developing innovations in content creation and distribution as well as in domain name registration and related services, such as web hosting, email and website creation solutions. As a result, we must continue to invest significant resources in product development in order to maintain and enhance our existing products and services and introduce new products and services that deliver a sufficient return on investment and

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that our customers can easily and effectively use. If we are unable to provide quality products and services, we may lose consumers, advertisers, customers and freelance creative professionals, and our revenue and operating results would suffer. Our operating results would also suffer if our innovations are not responsive to the needs of our customers and our advertisers, are not appropriately timed with market opportunities or are not effectively brought to market.

Our industry is undergoing rapid change, and our business model is also evolving, which makes it difficult to evaluate our current business and future prospects.
We derive a significant portion of our revenue from the sale of advertising on the Internet, which is an evolving industry that has undergone rapid and dramatic changes in industry standards, consumer and customer demands and advertising trends. In addition, our business model is also evolving and is distinct from many other companies in our industry, and it may not lead to long-term growth or success. For example, the ways in which online advertisements are delivered are rapidly changing and an increasing percentage of advertisements are being delivered through social media websites and platforms as opposed to traditional portals or content websites. If advertisers determine that their yields on such social media sites significantly outstrip their return on other types of websites, such as our owned and operated websites, our business and operating results could be adversely impacted. We need to continually evolve our services and the way we deliver them in order to keep up with such changes to remain relevant to our customers, and we may not be able to do so quickly, cost-effectively or at all.
We have made and may make additional acquisitions that could entail significant execution, integration and operational risks.
We have made numerous acquisitions in the past, including four in 2011, and our future growth may depend, in part, on acquisitions of complementary websites, businesses, solutions or technologies rather than internal development. We may continue to make acquisitions in the future to increase the scope of our business domestically and internationally. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. If we are unable to identify suitable future acquisition opportunities, reach agreement with such parties or obtain the financing necessary to make such acquisitions, we could lose market share to competitors who are able to make such acquisitions. This loss of market share could negatively impact our business, revenue and future growth.

Furthermore, even if we successfully complete an acquisition, we may not be able to successfully assimilate and integrate the websites, business, technologies, solutions, personnel or operations of the company that we acquired, particularly if key personnel of an acquired company decide not to work for us. In addition, we may incur indebtedness to complete an acquisition, which would increase our costs and impose operational limitations, or issue equity securities, which would dilute our stockholders' ownership and could adversely affect the price of our common stock. We may also unknowingly inherit liabilities from previous or future acquisitions that arise after the acquisition and are not adequately covered by indemnities.

We may have difficulty scaling and adapting our existing technology and network infrastructure to accommodate increased traffic and technology advances or changing business requirements, which could lead to the loss of consumers, advertisers, customers and freelance creative professionals, and cause us to incur expenses to make architectural changes.
 
To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic and the greater the complexity of our products and services, the more computing power we will need. In the future, we may spend substantial amounts to purchase or lease data centers and equipment, upgrade our technology and network infrastructure to handle increased traffic on our owned and operated websites and roll out new products and services. This expansion could be expensive and complex and could result in inefficiencies or operational failures. If we do not implement this expansion successfully, or if we experience inefficiencies and operational failures during its implementation, the quality of our products and services and our users’ experience could decline. This could damage our reputation and lead us to lose current and potential consumers, advertisers, customers and freelance creative professionals. The costs associated with these adjustments to our architecture could harm our operating results. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our business, revenue and financial condition.
If the security measures for our systems are breached, or if our products or services are subject to attacks that degrade or deny the ability of administrators, developers, users and customers to maintain or access them, our systems, products and services may be perceived as not being secure.  If any such events occur, users, customers, advertisers and publishers may curtail or stop using our products and services, and we may incur significant legal and financial exposure, all of which could have a negative impact on our business, financial condition and results of operations.


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Some of our systems, products and services involve the storage and transmission of information regarding our users, customers, and our advertising and publishing partners, and security breaches could expose us to a risk of loss of this information, litigation, and potential liability. Our security measures may be breached due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to this information. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to our systems and the stored data therein. Any such breach or unauthorized access could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of our systems, products and services that could potentially have an adverse effect on our business, financial condition and results of operations. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose users, customers, advertisers or publishers.

If we do not adequately protect our intellectual property rights, our competitive position and business may suffer.
Our intellectual property, consisting of trade secrets, trademarks, copyrights and patents, is, in the aggregate, important to our business. We rely on a combination of trade secret, trademark, copyright and patent laws in the United States and other jurisdictions together with confidentiality agreements and technical measures to protect our proprietary rights. We rely more heavily on trade secret protection than patent protection. To protect our trade secrets, we control access to our proprietary systems and technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties. Effective trade secret, copyright, trademark and patent protection may not be available in all countries where we currently operate or in which we may operate in the future. In addition, because of the relatively high cost we would experience in registering all of our copyrights with the United States Copyright Office, we generally do not register the copyrights associated with our content. We cannot guarantee that:
•
our intellectual property rights will provide competitive advantages to us;
•
our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;
•
our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;
•
any of the patents, trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;
•
competitors will not design around our protected systems and technology; or
•
we will not lose the ability to assert our intellectual property rights against others.
Policing unauthorized use of our proprietary rights can be difficult and costly. In addition, it may be necessary to enforce or protect our intellectual property rights through litigation or to defend litigation brought against us, which could result in substantial costs and diversion of resources and management attention and could adversely affect our business, even if we are successful on the merits.
We rely on technology infrastructure and a failure to update or maintain this technology infrastructure could adversely affect our business.
 
Significant portions of our content, products and services are dependent on technology infrastructure that was developed over multiple years. Updating and replacing our technology infrastructure may be challenging to implement and manage, may take time to test and deploy, may cause us to incur substantial costs and may cause us to suffer data loss or delays or interruptions in service. For example, we have suffered a number of server outages at our data center facilities, which resulted from certain failures that triggered data center wide outages and disrupted critical technology and infrastructure service capabilities. These events impacted service to some of our significant media properties, including eHow, as well our proprietary online content production studio, and eNom customers. As a result of these data center outages, we have recently developed initiatives to create automatic backup capacity at an alternate facility for our top revenue generating services to address similar scenarios in the future.  However, there can be no assurance that our efforts to develop sufficient backup and redundant services will be successful or that we can prevent similar outages in the future. Delays or interruptions in our service may cause our consumers, advertisers, customers and freelance creative professionals to become dissatisfied with our offerings and could

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adversely affect our business. Failure to update our technology infrastructure as new technologies become available may also put us in a weaker position relative to a number of our key competitors. Competitors with newer technology infrastructure may have greater flexibility and be in a position to respond more quickly than us to new opportunities, which may impact our competitive position in certain markets and adversely affect our business.
 
We are currently expanding and improving our information technology systems. If these implementations are not successful, our business and operations could be disrupted and our operating results could suffer.
 
In 2010, we deployed the first phase of our enterprise reporting system, Oracle Applications ERP and Platform, to assist the management of our financial data and reporting, and to automate certain business wide processes and internal controls. In 2011, we have started to implement additional build-outs, customizations and/or applications associated with this system that require significant management time, support and cost. Moreover, there are inherent risks associated with developing, improving and expanding information systems. We cannot be sure that the expansion of any of our systems, including our Oracle system, will be fully or effectively implemented on a timely basis, if at all. If we do not successfully implement informational systems on a timely basis or at all, our operations may be disrupted and or our operating results could suffer. In addition, any new information system deployments may not operate as we expect them to, and we may be required to expend significant resources to correct problems or find alternative sources for performing these functions.

The interruption or failure of our information technology and communications systems, or those of third parties that we rely upon, may adversely affect our business, operating results and financial condition.
The availability of our products and services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems, or those of third parties that we rely upon (co-location providers for data servers, storage devices, and network access) could result in interruptions in our service, which could reduce our revenue and profits, and damage our brand. Our systems are also vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses or other attempts to harm our systems. We, and in particular our Registrar, have experienced an increasing number of computer distributed denial of service attacks which have forced us to shut down certain of our websites, including eNom.com. We have implemented certain defenses against these attacks, but we may continue to be subject to such attacks, and future denial of service attacks may cause all or portions of our websites to become unavailable. In addition, some of our data centers are located in areas with a high risk of major earthquakes. Our data centers are also subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning is currently underdeveloped and does not account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at our data centers could result in lengthy interruptions in our service.
Furthermore, third‑party service providers may experience an interruption in operations or cease operations for any reason. If we are unable to agree on satisfactory terms for continued data center hosting relationships, we would be forced to enter into a relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer servers ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. We also rely on third‑party providers for components of our technology platform, such as hardware and software providers. A failure or limitation of service or available capacity by any of these third‑party providers could adversely affect our business, revenue, financial condition and results of operations.

Changes in regulations or user concerns regarding privacy and protection of user data, or any failure to comply with such laws, could diminish the value of our services and cause us to lose customers and revenue.
 
When a user visits our websites or certain pages of our customers’ websites, we use technologies, including “cookies,” to collect information related to the user, such as the user’s Internet Protocol, or IP, address, demographic information, and history of the user’s interactions with content or advertisements previously delivered by us. The information that we collect about users helps us deliver appropriate content and targeted advertising to the user. A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from and about our users. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. We post privacy policies on all of our owned and operated websites which set forth our policies and practices related to the collection and use of consumer data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with industry standards or laws or regulations could result in a loss of consumer confidence in us, or result in actions against us by governmental entities or others, all of which could potentially cause us to lose consumers and revenues.
 

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In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. Recent developments related to “instant personalization” and similar technologies potentially allow us and other publishers access to even broader and more detailed information about users. These developments have led to greater scrutiny of industry data collection practices by regulators and privacy advocates. New laws may be enacted, new industry self-regulation may be promulgated, or existing laws may be amended or re-interpreted, in a manner which limits our ability to analyze user data. If our access to user data is limited through legislation or any industry development, we may be unable to provide effective technologies and services to customers and we may lose customers and revenue. 

We depend on key personnel to operate our business, and if we are unable to retain our current personnel or hire additional personnel, our ability to develop and successfully market our business could be harmed.
We believe that our future success is highly dependent on the contributions of our executive officers, in particular the contributions of our Chairman and Chief Executive Officer, Richard M. Rosenblatt, as well as our ability to attract and retain highly skilled managerial, sales, technical, engineering and finance personnel. We do not maintain “key person” life insurance policies for our Chief Executive Officer or any of our executive officers. Qualified individuals, including engineers, are in high demand, and we may incur significant costs to attract and retain them. All of our officers and other employees are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we are unable to attract and retain our executive officers and key employees, our business, operating results and financial condition will be harmed.
Volatility or lack of performance in our stock price may also affect our ability to attract employees and retain our key employees. Our executive officers have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own have significantly appreciated in value relative to the original purchase prices of the shares or if the exercise prices of the stock options that they hold are significantly above the market price of our common stock. In addition, employees may be more inclined to leave us if the exercise prices on their stock options that they hold are significantly below the market price of our common stock.
Impairment in the carrying value of goodwill or long-lived assets, including our media content, could negatively impact our consolidated results of operations and net worth.
Goodwill represents the excess of cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators are present. In general, long-lived assets, including our media content, are only reviewed for impairment if impairment indicators are present. In assessing goodwill and long-lived assets for impairment, we make significant estimates and assumptions, including estimates and assumptions about market penetration, anticipated growth rates and risk-adjusted discount rates based on our budgets, business plans, economic projections, anticipated future cash flows and industry data. Some of the estimates and assumptions used by management have a high degree of subjectivity and require significant judgment on the part of management. Changes in estimates and assumptions in the context of our impairment testing may have a material impact on us, and any potential impairment charges could substantially affect our financial results in the periods of such charges.
New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our marketing services and our financial results.

                Due to the global nature of the Internet, it is possible that, although our services and the Internet transmissions related to them typically originate in California, Texas, Illinois, Virginia and the Netherlands, governments of other states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.

Third parties may sue us for intellectual property infringement or misappropriation which, if successful, could require us to pay significant damages or curtail our offerings.
            We cannot be certain that our internally-developed or acquired systems and technologies do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from

28


third parties and may be subject to claims of infringement or misappropriation if such parties do not possess the necessary intellectual property rights to the products or services they license to us. We have in the past and may in the future be subject to legal proceedings and claims that we have infringed the patent or other intellectual property rights of a third party. These claims sometimes involve patent holding companies or other patent owners who have no relevant product revenue and against whom our own patents may provide little or no deterrence. In addition, third parties may in the future assert intellectual property infringement claims against our customers, which we have agreed in certain circumstances to indemnify and defend against such claims. Any intellectual property-related infringement or misappropriation claims, whether or not meritorious, could result in costly litigation and could divert management resources and attention. Moreover, should we be found liable for infringement or misappropriation, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages or limit or curtail our systems and technologies. Also, any successful lawsuit against us could subject us to the invalidation of our proprietary rights. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and increase our costs.

Certain U.S. and foreign laws could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the U.S. and abroad that may subject us to claims or other remedies. Our failure to comply with applicable laws may subject us to additional liabilities, which could adversely affect our business, financial condition and results of operations. Laws and regulations that are particularly relevant to our business address:
•
privacy;
•
freedom of expression;
•
information security;
•
pricing, fees and taxes;
•
content and the distribution of content, including liability for user reliance on such content;
•
intellectual property rights, including secondary liability for infringement by others;
•
taxation;
•
domain name registration; and
•
online advertising and marketing, including email marketing and unsolicited commercial email.
Many applicable laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues of the Internet. Moreover, the applicability and scope of the laws that do address the Internet remain uncertain. For example, the laws relating to the liability of providers of online services are evolving. Claims have been either threatened or filed against us under both U.S. and foreign laws for defamation, copyright infringement, patent infringement, privacy violations, cybersquatting and trademark infringement. In the future, claims may also be alleged against us based on tort claims and other theories based on our content, products and services or content generated by our users.
We receive, process and store large amounts of personal data of users on our owned and operated websites and from our freelance creative professionals. Our privacy and data security policies govern the collection, use, sharing, disclosure and protection of this data. The storing, sharing, use, disclosure and protection of personal information and user data are subject to federal, state and international privacy laws, the purpose of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. If requirements regarding the manner in which certain personal information and other user data are processed and stored change significantly, our business may be adversely affected, impacting our financial condition and results of operations. In addition, we may be exposed to potential liabilities as a result of differing views on the level of privacy required for consumer and other user data we collect. We may also need to expend significant resources to protect against security breaches, including encrypting personal information, or remedy breaches after they occur, including notifying each person whose personal data may have been compromised. Our failure or the failure of various third‑party vendors and service providers to comply with applicable privacy policies or applicable laws and regulations or any compromise of security that results in the unauthorized release of personal information or other user data could adversely affect our business, revenue, financial condition and results of operations.
Our business operations in countries outside the United States are subject to a number of United States federal laws

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and regulations, including restrictions imposed by the Foreign Corrupt Practices Act, or FCPA, as well as trade sanctions administered by the Office of Foreign Assets Control, or OFAC, and the Commerce Department. The FCPA is intended to prohibit bribery of foreign officials or parties and requires public companies in the United States to keep books and records that accurately and fairly reflect those companies' transactions. OFAC and the Commerce Department administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals.
If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm, incarceration of our employees or restrictions on our operations, which could increase our costs of operations, reduce our profits or cause us to forgo opportunities that would otherwise support our growth.

A reclassification of our freelance creative professionals from independent contractors to employees by tax authorities could require us to pay retroactive taxes and penalties and significantly increase our cost of operations.
We contract with freelance creative professionals as independent contractors to create the substantial majority of the content for our owned and operated websites and for our network of customer websites. Because we consider our freelance creative professionals with whom we contract to be independent contractors, as opposed to employees, we do not withhold federal or state income or other employment related taxes, make federal or state unemployment tax or Federal Insurance Contributions Act payments, or provide workers' compensation insurance with respect to such freelance creative professionals. Our contracts with our independent contractor freelance creative professionals obligate these freelance creative professionals to pay these taxes. The classification of freelance creative professionals as independent contractors depends on the facts and circumstances of the relationship. In the event of a determination by federal or state taxing authorities that the freelance creative professionals engaged as independent contractors are employees, we may be adversely affected and subject to retroactive taxes and penalties. In addition, if it was determined that our content creators were employees, the costs associated with content creation would increase significantly and our financial results would be adversely affected.

We are subject to risks related to credit card payments we accept. If we fail to be in compliance with applicable credit card rules and regulations, we may incur additional fees, fines and ultimately the revocation of the right to accept credit card payments, which would have a material adverse effect on our business, financial condition or results of operations.
Many of the customers of our Content & Media and Registrar service offerings pay amounts owed to us using a credit card or debit card. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise our operating expenses and adversely affect our net income. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. We believe we are compliant in all material respects with the Payment Card Industry Data Security Standard, which incorporates Visa's Cardholder Information Security Program and MasterCard's Site Data Protection standard. However, there is no guarantee that we will maintain such compliance or that compliance will prevent illegal or improper use of our payment system. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers. A failure to adequately control fraudulent credit card transactions would result in significantly higher credit card-related costs and could have a material adverse effect on our business, revenue, financial condition and results of operations.
Our revolving credit facility with a syndicate of commercial banks contains financial and other restrictive covenants which, if breached, could result in the acceleration of any outstanding indebtedness we may have under the facility.
Our revolving credit facility with a syndicate of commercial banks contains financial covenants that require, among other things, that we maintain a minimum fixed charge coverage ratio, a maximum net senior leverage ratio and a maximum net total leverage ratio. In addition, our revolving credit facility contains covenants restricting our ability to, among other things:
•
    incur additional debt or incur or permit to exist certain liens;
•
    pay dividends or make other distributions or payments on capital stock;
•
    make investments and acquisitions;
•
    enter into transactions with affiliates; and
•
    transfer or sell our assets.

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These covenants could adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities, including acquisitions. A breach of any of these covenants could result in a default and acceleration of our indebtedness. Furthermore, if the syndicate of commercial banks is unwilling to waive certain covenants, we may be forced to amend our revolving or replace credit facility on terms less favorable than current terms or enter into new financing arrangements. As of December 31, 2011, we had no indebtedness outstanding under this facility, but had standby letters of credit of approximately $7.0 million outstanding.

Risks Relating to Owning Our Common Stock
 
An active, liquid and orderly market for our common stock may not be sustained, and the trading price of our common stock is likely to be volatile.
 
An active trading market for our common stock may not be sustained, which could depress the market price of our common stock. The trading price of our common stock has been, and is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. For example, since shares of our common stock were sold in our initial public offering in January 2011 at a price of $17.00 per share, our closing stock price has ranged from $5.62 to $24.57 through February 23, 2012. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, these factors include:
 
•
our operating performance and the operating performance of similar companies;
 
•
the overall performance of the equity markets;
 
•
the number of shares of our common stock publicly owned and available for trading;
 
•
threatened or actual litigation;
 
•
changes in laws or regulations relating to our solutions;
 
•
changes in methodologies or algorithms used by search engines and their impact on search referral traffic;
 
•
any major change in our board of directors or management;
 
•
publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts;
 
•
publication of third-party reports that inaccurately assess the performance of our business or certain operating metrics such as search referral traffic, the ranking of our content in search engine results or page view trends;
 
•
large volumes of sales of our shares of common stock by existing stockholders; and
 
•
general political and economic conditions.

In addition, the stock market in general, and the market for Internet-related companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, operating results and financial condition. In addition, the recent distress in the financial markets has also resulted in extreme volatility in security prices.
 


The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.
 
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, and the perception that these sales could occur may also depress the market price of our common stock. As of February 23, 2012, we had 83,388,483 shares of common stock outstanding.

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Certain stockholders owning a majority of our outstanding shares are party to a stockholders agreement that entitles them to require us to register shares of our common stock owned by them for public sale in the United States, subject to the restrictions of Rule 144. In addition, certain shareholders, including investors in our preferred stock that converted into common stock as well as current and former employees, are eligible to resell shares of common stock under Rule 144 and Rule 701 without registering such stock with the SEC.
 
In addition, we have registered approximately 44 million shares reserved for future issuance under our equity compensation plans and agreements. Subject to the satisfaction of applicable exercise periods, vesting requirements and, in certain cases, performance conditions, the shares of common stock issued upon exercise of outstanding options, vesting of future awards or pursuant to purchases under our employee stock purchase plan will be available for immediate resale in the United States in the open market.
 
Sales of our common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for shareholders to sell shares of our common stock.
 
We also have previously and may in the future issue shares of our common stock from time to time as consideration for acquisitions and investments. If any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant. In addition, we may also grant registration rights covering those shares in connection with any such acquisitions and investments.
Our recently announced stock repurchase program may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.

We recently announced a stock repurchase program approved by our board of directors whereby we are authorized to repurchase shares of our common stock. Such purchases may be limited, suspended, or terminated at any time without prior notice. There can be no assurance that we will buy additional shares of our common stock under our stock repurchase program or that any future repurchases will have a positive impact on the trading price of our common stock or earnings per share. Important factors that could cause us to limit, suspend or terminate our stock repurchase program include, among others, unfavorable market conditions, the trading price of our common stock, the nature of other investment or strategic opportunities presented to us from time to time, the rate of dilution of our equity compensation programs and the availability of adequate funds, our ability to make appropriate, timely, and beneficial decisions as to when, how, and whether to purchase shares under the stock repurchase program,. If we limit, suspend or terminate our stock repurchase program, our stock price may be negatively affected.

As a public company, we are subject to compliance initiatives that will require substantial time from our management and result in significantly increased costs that may adversely affect our operating results and financial condition.

The Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as other rules implemented by the SEC and the New York Stock Exchange, impose various requirements on public companies, including requiring changes in corporate governance practices. These and proposed corporate governance laws and regulations under consideration may further increase our compliance costs. If compliance with these various legal and regulatory requirements diverts our management's attention from other business concerns, it could have a material adverse effect on our business, financial condition and results of operations.    We also expect that these laws and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than used to be available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors, on committees of our board of directors, or as executive officers.

We are required to make an assessment of the effectiveness of our internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Further, our independent registered public accounting firm has been engaged to express an opinion on the effectiveness of our internal controls over financial reporting for our financial year ending December 31, 2012. Section 404 requires us to perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting for each fiscal year. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. If we are unable to comply with the requirements of Section 404, management may not be

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able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could result in a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, if we fail to maintain effective controls and procedures, we may be unable to provide the required financial information in a timely and reliable manner or otherwise comply with the standards applicable to us as a public company. Any failure by us to provide the required financial information in a timely reliable manner could materially and adversely impact our financial condition and the trading price of our securities. In addition, we may incur additional expenses and commitment of management's time in connection with further assessments of our compliance with the requirements of Section 404, which could materially increase our operating expenses and adversely impact our operating results.

If securities or industry analysts publish inaccurate or unfavorable 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. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
 
We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
 
The terms of our credit agreement currently prohibit us from paying cash dividends on our common stock. In addition, we do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.
 
Our management has broad discretion over the use of the proceeds we received in our initial public offering and might not apply the proceeds in ways that increase the value of our common stock.
 
Our management will continue to have broad discretion to use the net proceeds to us from our initial public offering. Our management might not apply the net proceeds from our initial public offering in ways that increase the value of our common stock. We expect that we will use the net proceeds of our initial public offering for investments in content, international expansion, working capital, product development, sales and marketing activities, general and administrative matters and capital expenditures. We have not otherwise allocated the net proceeds from our initial public offering for any specific purposes. In addition, as discussed under “—Risks Relating to our Company—We have made and may make additional acquisitions that could entail significant execution, integration and operational risks,” we may consider making acquisitions in the future to increase the scope of our business domestically and internationally. Until we use the net proceeds to us from our initial public offering, we have invested them, principally in marketable securities with maturities of less than one year, including but not limited to commercial paper, money market instruments, and Treasury bills, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from our initial public offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.
 
Certain provisions in our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.
 
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors, including, among other things:
 
•
a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

•
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
 
•
the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

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•
the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
 
•
a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
 
•
the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, the Chief Executive Officer, the president (in absence of a Chief Executive Officer) or our board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
 
•
the requirement for the affirmative vote of holders of at least 662/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror from amending our certificate of incorporation or bylaws to facilitate a hostile acquisition;
 
•
the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent a hostile acquisition and inhibit the ability of an acquiror from amending the bylaws to facilitate a hostile acquisition; and
 
•
advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.
 
We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, our board of directors has approved the transaction.
 
Item 1B.    Unresolved Staff Comments
None.

Item 2.    Properties
We do not own any real estate. We lease an aggregate of 65,000 square feet at four locations in Santa Monica, California for our corporate headquarters and Content & Media service offering. We also lease an approximately 34,000 square-foot facility for the headquarters of our Registrar service offering in Kirkland, Washington and an approximately 27,000 square-foot facility primarily for our Content & Media service offering in Austin, Texas. We also lease sales offices, support facilities and data centers in other locations in North America, South America and Europe. We believe our current and planned data centers and offices will be adequate for the foreseeable future.
Item 3.        Legal Proceedings
 
In April 2011, the Company and eleven other defendants were named in a patent infringement lawsuit filed in the U.S. District Court, Eastern District of Texas.  The plaintiff filed and served a complaint making several claims related to a method for displaying advertising on the Internet.  In May 2011, the Company filed its response to the complaint, denying all liability, and is in the process of discussing a resolution with the plaintiff.  The Company intends to vigorously defend its position.

In addition, Demand Media from time to time is a party to other various litigation matters incidental to the conduct of its business. There is no pending or threatened legal proceeding to which Demand Media is a party that, in our opinion, is likely to have a material adverse effect on Demand Media’s future financial results.

Item 4.       Mine Safety Disclosures
 
Not applicable.

34



PART II
 
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock began trading publicly on the New York Stock Exchange under the symbol "DMD" on January 26, 2011. Prior to that time, there was no public market for our common stock. The following table sets forth, for the period indicated and on a per-share basis, the high and low intra-day sale prices of our common stock as reported by the New York Stock Exchange since our initial public offering.
 
High
 
Low
Fiscal Year end December 31, 2011
 
 
 
First Quarter (beginning January 26, 2011)
$26.46
 
$18.20
Second Quarter
$27.38
 
$12.56
Third Quarter
$13.89
 
$7.12
Fourth Quarter
$8.19
 
$5.24
Holders of Record
As of February 23, 2012, our common stock was held by approximately 104 stockholders of record and there were 83,388,483 shares of common stock outstanding. Stockholders of record does not include a substantially greater number of "street name" holders or beneficial holders of our common stock whose shares are held of record by banks, brokers and other financial institutions.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future. Instead, we anticipate that all of our earnings on our common stock will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any future determination to declare cash dividends 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. In addition, our credit agreement with a syndicate of commercial banks currently prohibits our payment of dividends.
Equity Plan Information
Our equity plan information required by this item is incorporated by reference to the information in Part III, Item 12 of this Annual Report on Form 10-K.
Performance Graph
The following performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Demand Media under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
The graph compares the cumulative total return of our common stock for the period starting on January 26, 2011, the date of our initial public offering, and ending on December 31, 2011, with that of the S&P 500 Index and RDG Internet Composite Index over the same period. The graph assumes that the value of the investment was $100 on January 26, 2011, and that all dividends and other distributions were reinvested. Such returns are based on historical results and are not intended to suggest future performance.

35


Use of Proceeds from Registered Securities
On January 25, 2011, registration statements on Form S-1 (File No. 333-168612 and File No. 333-171868) relating to our initial public offering of our common stock were declared effective by the SEC. An aggregate of 10,235,000 shares of our common stock were registered under the registration statements, of which 4,500,000 shares were sold by us, 4,400,000 shares were sold by the selling stockholders identified in the registration statements and 1,335,000 shares were sold by the selling stockholders and us in connection with the underwriters' exercise of their option to purchase additional shares, at an initial public offering price of $17.00 per share. The aggregate offering price for the shares registered and sold by us was approximately $88.0 million and the aggregate offering price for the shares registered and sold by the selling stockholders was approximately $86.0 million. The initial public offering closed on January 31, 2011 and, as a result, we received net proceeds of approximately $81.8 million, after deducting the underwriting discount but before deducting offering expenses and the selling stockholders received net proceeds of approximately $80.0 million, after deducting the underwriting discount of approximately $6.0 million. The Company did not receive any proceeds from the sale of shares by the selling stockholders.
No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.
The net offering proceeds have been invested in cash and cash equivalents. We have used the net offering proceeds for investments in media content, international expansion efforts, working capital, product development, sales and marketing activities, general and administrative matters, capital expenditures and to fund the acquisitions of Altcaster, EmergingCast, RSS Graffiti and IndieClick Media Group.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following provides information regarding our repurchase of our common stock during the quarter ended December 31, 2011:

Period
Total Number
of
Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Approximate Dollar Value of
Shares that May Yet Be
Purchased Under the
Plans or Programs
October 1 - October 31, 2011
609,905

 
7.01
 
 
609,905

 
$ [-]
November 1 - November 30, 2011
448,583

 
7.13
 
 
448,583

 
[-]
December 1 - December 31, 2011
825,708

(1) 
7.24
 
 
825,708

 
[-]
Total
1,884,196

 
7.14
 
 
1,884,196

 
[-]


36


(1) 
Excludes 192,020 shares of common stock that were repurchased under a Rule 10b5-1 Plan that were unsettled as of December 31, 2011.
As previously disclosed in a current report on Form 8-K filed on August 22, 2011, our Board of Directors approved a stock repurchase program effective as of August 19, 2011 to repurchase up to $25.0 million of our outstanding common stock as share price, market conditions and other factors warrant.  In addition, as previously disclosed in a current report on Form 8-K filed on February 16, 2012, our Board of Directors approved a $25.0 million increase to this previously approved stock repurchase program, for an aggregate amount of $50.0 million of repurchases under the program. Under the stock repurchase program, we have cumulatively repurchased a total of approximately 2.3 million shares at a total cost of $17.1 million through December 31, 2011, which amount excludes 192,020 unsettled shares repurchased at a total cost of approximately $1.3 million as of such date. The stock repurchase program does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time.  See “Liquidity and Capital Resources” in Part II, Item 7 of this report on Form 10-K for further discussion of our share repurchases.

Our revolving credit facility limits our ability to make cash distributions with respect to our equity interests, such as redemptions, cash dividends and share repurchases, based on a defined leverage ratio. See "Liquidity and Capital Resources" in Part II, Item 7 of this report on Form 10-K for further discussion of our long-term debt.


Item 6.    Selected Financial Data
Demand Media was incorporated on March 23, 2006 and had no substantive business activities prior to the acquisition of eNom, Inc in April 2006. The consolidated statements of operations data for the years ended December 31, 2009, 2010 and 2011, as well as the consolidated balance sheet data as of December 31, 2010 and 2011, are derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the nine months ended December 31, 2007 and year ended December 31, 2008, as well as the consolidated balance sheet data as of December 31, 2007, 2008 and 2009 are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.
The following selected consolidated financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.

37


 
Nine months ended December 31,
 
Year ended December 31,
 
2007 (2)
 
2008 (2)
 
2009
 
2010
 
2011(2)
Consolidated Statements of Operations:
 
 
(In thousands except per share amounts)
 
 
Revenue
$
102,295

 
$
170,250

 
$
198,452

 
$
252,936

 
$
324,866

Operating expenses
 
 
 
 
 
 
 
 
 
Service costs (exclusive of amortization of intangible assets)
57,833

 
98,184

 
114,536

 
131,332

 
155,830

Sales and marketing
3,601

 
15,310

 
20,044

 
24,424

 
37,394

Product development
10,965

 
14,252

 
21,657

 
26,538

 
38,146

General and administrative
19,584

 
28,070

 
28,479

 
37,371

 
59,451

Amortization of intangible assets
17,393

 
33,204

 
32,152

 
33,750

 
47,174

Total operating expenses
109,376

 
189,020

 
216,868

 
253,415

 
337,995

Loss from operations
(7,081
)
 
(18,770
)
 
(18,416
)
 
(479
)
 
(13,129
)
Other income (expense)
 
 
 
 
 
 
 
 
 
Interest income
1,415

 
1,636

 
494

 
25

 
56

Interest expense
(1,245
)
 
(2,131
)
 
(1,759
)
 
(688
)
 
(861
)
Other income (expense), net
(999
)
 
(250
)
 
(19
)
 
(286
)
 
(413
)
Total other income (expense)
(829
)
 
(745
)
 
(1,284
)
 
(949
)
 
(1,218
)
Loss before income taxes
(7,910
)
 
(19,515
)
 
(19,700
)
 
(1,428
)
 
(14,347
)
Income tax (expense) benefit
2,293

 
4,612

 
(2,771
)
 
(3,897
)
 
(4,177
)
Net loss
(5,617
)
 
(14,903
)
 
(22,471
)
 
(5,325
)
 
(18,524
)
Cumulative preferred stock dividends
(14,059
)
 
(28,209
)
 
(30,848
)
 
(33,251
)
 
(2,477
)
Net loss attributable to common stockholders
$
(19,676
)
 
$
(43,112
)
 
$
(53,319
)
 
$
(38,576
)
 
$
(21,001
)
Net loss per share:(1)
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(4.25
)
 
$
(5.27
)
 
$
(4.78
)
 
$
(2.86
)
 
$
(0.27
)
Weighted average number of shares(1)(3)
 
 
 
 
 
 
 
 
 
Basic and diluted
4,631

 
8,184

 
11,159

 
13,508

 
78,646

(1) 
Basic loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders is increased for cumulative preferred stock dividends earned during the period. For the periods where we presented losses, all potentially dilutive common shares comprising of stock options, restricted stock purchase rights, or RSPRs, restricted stock units, warrants and convertible preferred stock are antidilutive. RSPRs and restricted stock units are considered outstanding common shares and included in the computation of basic earnings per share as of the date that all necessary conditions of vesting are satisfied. RSPRs and restricted stock units are excluded from the dilutive earnings per share calculation when their impact is antidilutive. Prior to satisfaction of all conditions of vesting, unvested RSPRs and restricted stock units are considered contingently issuable shares and are excluded from weighted average common shares outstanding.
(2) 
The Company completed four business acquisitions during the year ended December 31, 2011 and 17 business acquisitions during the nine months ended December 31, 2007 and year ended December 31, 2008.
(3) 
In October 2010, our stockholders approved a 1-for-2 reverse stock split of our outstanding common stock, and a proportional adjustment to the existing conversion ratios for each series of preferred stock which was effected in January 2011. Accordingly, all share and per share amounts for all periods presented have been adjusted retrospectively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratio.

 
 
December 31,
 
 
 
2007
 
2008
 
2009
 
2010
 
2011
 
Consolidated Balance Sheet Data:
 
 
(In thousands)
 
 
 
Cash and cash equivalents and marketable securities
$
47,365

 
$
103,496

 
$
49,908

 
$
32,338

 
$
86,035

 
Working capital
44,992

 
64,266

 
18,961

 
(4,226
)
 
44,617

 
Total assets
424,328

 
526,401

 
467,790

 
488,467

 
590,103

 
Long term debt
4,000

 
55,000

 
10,000

 
—

 
—

 
Capital lease obligations, long term
—

 
—

 
488

 
—

 
—

 
Convertible preferred stock
338,962

 
373,754

 
373,754

 
373,754

 
—

 
Total stockholders' equity (deficit)
(3,205
)
 
(8,746
)
 
(23,079
)
 
(15,416
)
 
440,266

Non-GAAP Financial Measures
To provide investors and others with additional information regarding our financial results, we have disclosed in the table below the following non-GAAP financial measures: adjusted operating income before depreciation and amortization expense,

38


or Adjusted OIBDA, and revenue less traffic acquisition costs, or Revenue ex-TAC. We have provided a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures. Our non-GAAP Adjusted OIBDA financial measure differs from GAAP in that it excludes certain expenses such as depreciation, amortization, stock-based compensation, as well as the financial impact of acquisition and realignment costs, and any gains or losses on certain asset sales or dispositions. Acquisition and realignment costs include such items, when applicable, as (1) non-cash GAAP purchase accounting adjustments for certain deferred revenue and costs, (2) legal, accounting and other professional fees directly attributable to acquisition activity, and (3) integration and employee severance payments attributable to acquisition or corporate realignment activities. Our non-GAAP Revenue ex-TAC financial measure differs from GAAP as it reflects our consolidated revenues net of our traffic acquisition costs. Adjusted OIBDA, or its equivalent, and Revenue ex-TAC are frequently used by management, securities analysts, investors and others as a common financial measure of our operating performance.
These non-GAAP financial measures are the primary measures used by our management and board of directors to understand and evaluate our financial performance and operating trends, including period to period comparisons, to prepare and approve our annual budget and to develop short and long term operational plans. Additionally, Adjusted OIBDA is the primary measure used by the compensation committee of our board of directors to establish the target for and ultimately fund our annual employee bonus pool for virtually all bonus eligible employees. We also frequently use Adjusted OIBDA in our discussions with investors, commercial bankers and other users of our financial statements.
 
Management believes these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period to period comparisons and analysis of trends. In particular, the exclusion of certain expenses in calculating Adjusted OIBDA can provide a useful measure for period to period comparisons of our business’ underlying recurring revenue and operating costs which is focused more closely on the current costs necessary to utilize previously acquired long-lived assets. In addition, we believe that it can be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of our media content, revenue generated from our content assets in a given period bears little relationship to the amount of our investment in content in that same period. Accordingly, we believe that content acquisition costs represent a discretionary long-term capital investment decision undertaken by management at a point in time. This investment decision is clearly distinguishable from other ongoing business activities, and its discretionary nature and long term impact differentiate it from specific period transactions, decisions regarding day-to-day operations, and activities that would have immediate performance consequences if materially changed, deferred or terminated.
 
We believe that Revenue ex-TAC is a meaningful measure of operating performance because it is frequently used for internal managerial purposes and helps facilitate a more complete period to period understanding of factors and trends affecting our underlying revenue performance.
 
Accordingly, we believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated revenue and operating results in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.
The following table presents a reconciliation of Revenue ex-TAC and Adjusted OIBDA for each of the periods presented:

39


 
Nine months
ended
December 31,
2007
 
Year ended December 31,
 
2008
 
2009
 
2010
 
2011
 
(In thousands)
Non-GAAP Financial Measures:
 
 
 
 
 
 
 
 
 
Content & Media revenue
$
49,342

 
$
84,821

 
$
107,717

 
$
152,910

 
$
205,450

Registrar revenue
52,953

 
85,429

 
90,735

 
100,026

 
119,416

Less: traffic acquisition costs (TAC)(1)
(7,254
)
 
(7,655
)
 
(10,554
)
 
(12,213
)
 
(12,495
)
Total revenue ex-TAC
$
95,041

 
$
162,595

 
$
187,898

 
$
240,723

 
$
312,371

 
 
 
 
 
 
 
 
 
 
Income (loss) from operations(2)
$
(7,081
)
 
$
(18,770
)
 
$
(18,416
)
 
$
(479
)
 
$
(13,129
)
Add (deduct):
 
 
 
 
 
 
 
 
 
Depreciation
3,590

 
10,506

 
14,963

 
18,266

 
20,958

Amortization(2)
17,393

 
33,204

 
32,152

 
33,750

 
47,174

Stock-based compensation(3)
3,670

 
5,970

 
7,736

 
9,689

 
28,856

Acquisition and realignment costs(4)
1,282

 
1,533

 
960

 
779

 
2,099

Gain on sale of asset(5)
—

 
—

 
(582
)
 
—

 
—

Adjusted OIBDA
$
18,854

 
$
32,443

 
$
36,813

 
$
62,005

 
$
85,958


(1) 
Represents revenue-sharing payments made to our network customers from advertising revenue generated from such customers' websites.
(2) 
Income (loss) from operations and amortization expense for the year ended December 31, 2011 includes $5.9 million of accelerated non-cash amortization expense associated with the removal of certain content intangible assets from service during the fourth quarter of 2011.
(3) 
Represents the fair value of stock-based awards and certain warrants to purchase our stock included in our GAAP results of operations.
(4) 
Acquisition and realignment costs include non-cash purchase accounting adjustments, acquisition-related legal and accounting professional fees and employee severance payments attributable to corporate realignment activities.
(5) 
Represents a gain recognized on the sale of certain assets included in our GAAP operating results.
The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense that affect our operations. We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, measures prepared in accordance with GAAP. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.


40



Item 7.                     Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part II, Item 6, "Selected Financial Data" and our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in "Disclosure Regarding Forward-Looking Statements" and Item I, Part 1A, "Risk Factors" included elsewhere in this Annual Report on Form 10-K.
Overview
 
We are a leader in an Internet-based model for the professional creation and distribution of high-quality, commercially valuable, long-lived content at scale. Our business is comprised of two distinct and complementary service offerings: Content & Media and Registrar. Our Content & Media offering is engaged in creating media content, primarily consisting of text articles and videos, and delivering it along with our social media and monetization tools to our owned and operated websites and to our network of customer websites. Our Content & Media service offering also includes a number of websites primarily containing advertising listings, which we refer to as undeveloped websites. Our Registrar is the world’s largest wholesale registrar of Internet domain names and the world’s second largest registrar overall, based on the number of names under management, and provides domain name registration and related value-added services.

Our principal operations and decision-making functions are located in the United States. We report our financial results as one operating segment, with two distinct service offerings. Our operating results are regularly reviewed by our chief operating decision maker on a consolidated basis, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance. Together, our service offerings provide us with proprietary data that enable commercially valuable, long-lived content production at scale combined with broad distribution and targeted monetization capabilities. We currently generate the vast majority of our Content & Media revenue through the sale of advertising, and to a lesser extent through subscriptions to our social media applications and licensing and sales of select content and service offerings. Substantially all of our Registrar revenue is derived from domain name registration and related value-added service subscriptions. Our chief operating decision maker regularly reviews revenue for each of our Content & Media and Registrar service offerings in order to gain more depth and understanding of the key business metrics driving our business. Accordingly, we report Content & Media and Registrar revenue separately.
 
In January 2011, we completed our initial public offering and received proceeds, net of underwriters discounts but before deducting offering expenses, of $81.8 million from the issuance of 5.2 million shares of common stock. As a result of the initial public offering, all shares of our convertible preferred stock converted into 61.7 million shares of common stock and warrants to purchase common stock or convertible preferred stock net exercised into 0.5 million shares of common stock.
 
For the years ended December 31, 2009, 2010 and 2011, we reported revenue of $198 million, $253 million and $325 million, respectively.  For the years ended December 31, 2009, 2010 and 2011, our Content & Media offering accounted for 54%, 61% and 63% of our total revenue, respectively, and our Registrar service accounted for 46%, 39% and 37% of our total revenue, respectively.
 
Key Business Metrics
 
We regularly review a number of business metrics, including the following key metrics, to evaluate our business, measure the performance of our business model, identify trends impacting our business, determine resource allocations, formulate financial projections and make strategic business decisions. Measures which we believe are the primary indicators of our performance are as follows:
 
Content & Media Metrics
 
•
page views:  We define page views as the total number of web pages viewed across (1) our owned and operated websites and/or (2) our network of customer websites, to the extent that the viewed customer web pages host the Company's monetization, social media and/or content services. Page views are primarily tracked through internal

41


systems, such as our Omniture web analytics tool, contain estimates for our customer websites using our social media tools and may use data compiled from certain customer websites. We periodically review and refine our methodology for monitoring, gathering, and counting page views in an effort to improve the accuracy of our measure.

•
RPM:  We define RPM as Content & Media revenue per one thousand page views.

                          
Registrar Metrics
 
•
domain:  We define a domain as an individual domain name paid for by a third-party customer where the domain name is managed through our Registrar service offering. Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which we have recognized revenue. This metric does not include any of the company’s owned and operated websites.

•
average revenue per domain:  We calculate average revenue per domain by dividing Registrar revenues for a period by the average number of domains registered in that period. The average number of domains is the simple average of the number of domains at the beginning and end of the period.
 
The following table sets forth additional performance highlights of key business metrics for the periods presented:

 
 
 
 
 
 
 
2009 to
2010
 
2010 to
2011
 
Year ended December 31,
 
%
Change
 
%
Change
 
2009
 
2010
 
2011
 
Content & Media Metrics (1)
 
 
 
 
 
 
 
 
 
Owned & operated
 
 
 
 
 
 
 
 
 
Page views (in millions)
6,849

 
8,234

 
10,378

 
20
 %
 
26
 %
RPM
$
10.69

 
$
13.45

 
$
15.14

 
26
 %
 
13
 %
Network of customer websites
 
 
 
 
 
 
 
 
 
Page views (in millions)
10,009

 
13,155

 
17,436

 
31
 %
 
33
 %
RPM
$
3.45

 
$
3.20

 
$
2.77

 
(7
)%
 
(13
)%
RPM ex-TAC
$
2.39

 
$
2.28

 
$
2.06

 
(5
)%
 
(10
)%
Registrar Metrics (1)
 
 
 
 
 
 
 
 
 
End of Period # of Domains (2) (in millions)
9.1

 
11.0

 
12.7

 
21
 %
 
15
 %
Average Revenue per Domain (2)
$
10.11

 
$
9.96

 
$
10.08

 
(1
)%
 
1
 %
___________________________________
(1) 
For a discussion of these period to period changes in the number of page views, RPM, end of period domains and average revenue per domain and how they impacted our financial results, see “Results of Operations” below.
(2) 
Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which we have recognized revenue. Excluding the impact of this change, end of period domains at December 31, 2011 would have increased 22% and average revenue per domain during the year ended December 31, 2011 would have decreased 2%, each compared to the corresponding prior-year periods.


Opportunities, Challenges and Risks

To date, we have derived the majority of our revenue through the sale of advertising in connection with our Content & Media service offering and through domain name registration subscriptions in our Registrar service offering. Our advertising revenue is primarily generated by advertising networks, which include both performance based Internet advertising, such as cost-per-click where an advertiser pays only when a user clicks on its advertisement, and display Internet advertising where an advertiser pays when the advertising is displayed. For the year ended December 31, 2011, the majority of our advertising revenue was generated by our relationship with Google. We deliver online advertisements provided by Google on our owned and operated websites as well as on certain of our customer websites where we share a portion of the advertising revenue. For the years ended December 31, 2010 and 2011, approximately 29% and 33%, respectively, of our total consolidated revenue was derived from our advertising and content arrangements with Google. Google maintains the direct relationships with the advertisers and provides us with cost-per-click and display advertising services.

42


 
Our historical growth in Content & Media revenue has principally come from growth in RPMs and page views due to both the increased volume of commercially valuable content published on our owned and operated websites as well as an increase in the number of visitors to our existing content. To a lesser extent, Content & Media revenue growth has resulted from the publishing of our content on our network of customer websites and from utilizing our social media tools on certain of these sites. We believe that there are opportunities to grow our revenue and our page views by creating and publishing more content in a greater variety of formats on our owned and operated sites as well as by increasing our distribution to and expanding our network of customer websites. We also believe there is long term revenue growth opportunity from improving advertising yields to several of our owned and network websites and from introducing innovative new products.
 
We believe that there is an opportunity to accelerate the growth of our Content & Media service offering by publishing and distributing our content to an expanding number of distribution outlets. For example, we launched our premium multi-channel YouTube initiative in December 2011, and we currently have arrangements with a number of third-party customers to distribute and license our content on their websites. During the second half of 2011, we also expanded distribution to our network of customer websites via our acquisition of IndieClick and believe that IndieClick's innovative product offerings provide us an opportunity to increase revenue.

Throughout 2011, Google deployed a series of changes to its search engine algorithms, some of which led the Company to experience a substantial reduction in the total number of Google search referrals to its owned and operated websites. The overall impact of these changes on the Company's owned and operated websites was negative, primarily due to a decline in traffic to eHow.com beginning in the second quarter of 2011.  Due to the timing of the most significant changes, the vast majority of the adverse impact on eHow.com full-year revenue was concentrated in the second half of 2011. During the fourth quarter of 2011 and in response to the various 2011 changes in search engine algorithms, we performed an evaluation of our existing content library. As a result of this evaluation, we elected to remove certain content assets from service, resulting in $5.9 million of accelerated amortization expense in the fourth quarter of 2011. The evaluation is expected to be completed in the first quarter of 2012 and any further potential discretionary changes are not anticipated to result in acceleration of amortization greater than $2 million in that period.
We intend to evolve and continuously improve our content creation and distribution platform through a number of initiatives, including creating new content formats to meet rapidly changing consumer demand. Such changes may include increasing our investment in video and long-form content, increasing and expanding distribution of our content to our network of customer websites and an overall reduction in the volume of shorter-form text articles published on eHow.com. In the near term we also anticipate increased expenditures in non-algorithmic content such as premium video, longer-form and photo-centric content designed to further enhance user engagement. These potential changes to our content creation platform could increase our per unit content creation costs, including costs associated with our community of creative professionals, potentially resulting in higher service costs as a percentage of revenue if the changes are unsuccessful in generating additional revenue. While we assess such improvements to our content creation and distribution platform, we have begun and expect to maintain a reduced level of overall investment in media content when compared to historical amounts.
There can be no assurance that these or any future changes that may be implemented by the Company, by search engines to their algorithms and search methodologies, or by consumers in their web usage habits might not adversely impact the carrying value, estimated useful life or intended use of our long-lived assets. The Company will continue to monitor these changes as well as any future changes and emerging trends in search engine algorithms and methodologies, including the resulting impact that these changes may have on future operating results, the economic performance of the Company's long-lived assets and in its assessment as to whether significant changes in circumstances might provide an indication of potential impairment of the carrying value of its long-lived assets, including its media content and goodwill arising from acquisitions.

While we experienced a significant decline in the trading price of our common stock over the course of 2011, our market capitalization remained in excess of the carrying value of our net assets throughout the year.  Based upon our annual goodwill impairment test that we performed in the fourth quarter of 2011, the indicated fair value of each of our reporting units was substantially in excess of their carrying value and that the fair value of our Content & Media reporting unit, which includes our entire library of content assets, exceeded its carrying value by approximately 47%.

The growth in our Registrar revenue is dependent upon our ability to attract and retain customers to our Registrar platform through competitive pricing on domain registrations and value added services.  Beginning in the first quarter of 2010 and extending through the first quarter of 2011, we added several customers with large volumes of domains to our Registrar platform.  This resulted in fluctuations in our average revenue per domain over these periods, from which we only recognized revenue on a portion of these domain names while deferring revenue recognition on the remainder.   Beginning July 1, 2011, we adjusted the number of net new domains to include only new registered domains added to our platform for which we have

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recognized revenue.  Excluding the impact of this change, end of period domains at December 31, 2011 would have increased 22% and average revenue per domain during the year ended December 31, 2011 would have decreased 2%, each compared to the corresponding prior-year periods.  In the near term, we anticipate our average revenue per domain to continue to fluctuate as a result of the large volume customers added in 2011 and certain registry price increases in early 2012.  Due in part to the higher mix of large volume customers as we enter 2012 as compared to 2011, we also expect that our overall service costs as a percentage of our total revenue will increase when compared to our historical results.

The Internet Corporation for Assigned Names and Numbers, or ICANN has approved a framework for the significant expansion of the number of generic Top Level Domain "TLDs", or "gTLDs" in 2012. We believe that such expansion, once completed, will result in an increase in the number of domains registered on our platform in 2013.  In addition, we believe that the New gTLD Program could also provide us with new revenue opportunities in 2013, which include operating the back-end infrastructure for new TLD registries and/or owning one or more TLDs in our own right.  In preparation for the New gTLD Program, we also expect to incur up to $5 million of operating expenses in 2012.

Our service costs, the largest component of our operating expenses, can vary from period to period, particularly as a percentage of revenue, based upon the mix of the underlying Content & Media and Registrar services revenues we generate. In the near term and consistent with historical trends, we expect that the period-over-period growth in our Content & Media revenue will continue to exceed the growth in our Registrar revenue, which would typically provide for higher operating margins. We expect that service costs will increase in 2012 compared to 2011 in line with revenue growth and also due to our new premium multi-channel initiative with YouTube as well the impact of our acquisition of IndieClick. We believe that these factors, together with costs associated with our investment in new business initiatives in 2012, including our preparation for new gTLDs becoming available for registration in 2013, will result in our operating margin in 2012 being fairly consistent with 2011.

Our content studio identifies and creates online text articles and videos through a community of freelance creative professionals and is core to our business strategy and long-term growth initiatives. Historically, we have made substantial investments in our platform to support our expanding community of freelance creative professionals and the growth of our content production and distribution and expect to continue to make such investments. As we develop new content formats, we may not be able to attract and retain qualified creative professionals to produce such new content at scale, which may adversely impact our ability to execute against emerging business opportunities or retain existing content creators.
 
For the year ended December 31, 2011, more than 90% of our revenue has been derived from websites and customers located in the United States. While our content is primarily targeted towards English-speaking users in the United States today, we believe that there is an opportunity in the longer term for us to create content targeted to users outside of the United States and thereby increase our revenue generated from countries outside of the United States. We plan to further expand our operations internationally to address this opportunity, including through our recent acquisition of a Latin American language content creation company in July 2011 and the launch of eHow en Español and eHow Brasil in the second half of 2011. As we expand our business internationally, we may incur additional expenses associated with this growth initiative.

Basis of Presentation
Revenue
 
Our revenue is derived from our Content & Media and Registrar service offerings.
 
Content & Media Revenue
 
We currently generate the vast majority of our Content & Media revenue through the sale of advertising, and to a lesser extent through subscriptions to our social media applications and licensing and sales of select content and service offerings. Our revenue generating advertising arrangements, for both our owned and operated websites and our network of customer websites, include cost-per-click performance-based advertising; display advertisements where revenue is dependent upon the number of page views; and lead generating advertisements where revenue is dependent upon users registering for, or purchasing or demonstrating interest in, advertisers’ products and services. We generate revenue from advertisements displayed alongside our content offered to consumers across a broad range of topics and categories on our owned and operated websites and on certain customer websites. Our advertising revenue also includes revenue derived from cost-per-click advertising links we place on undeveloped websites owned both by us, which we acquire and sell on a regular basis, and certain of our customers. To a lesser extent, we also generate revenue from our subscription-based offerings, which include our social media applications deployed on our network of customer websites and subscriptions to premium content or services offered on certain of our owned and operated websites.
 

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Where we enter into revenue sharing arrangements with our customers, such as those relating to IndieClick and our undeveloped customer websites, and when we are considered the primary obligor, we report the underlying revenue on a gross basis in our consolidated statements of operations, and record these revenue-sharing payments to our customers as traffic acquisition costs, or TAC, which are included in service costs. In circumstances where we distribute our content on third-party websites and the customer acts as the primary obligor we recognize revenue on a net basis.
 
Registrar Revenue
 
Our Registrar revenue is principally comprised of registration fees charged to resellers and consumers in connection with new, renewed and transferred domain name registrations. In addition, our Registrar also generates revenue from the sale of other value-added services that are designed to help our customers easily build, enhance and protect their domains, including security services, e-mail accounts and web-hosting. Finally, we generate revenue from fees related to auction services we provide to facilitate the selling of third-party owned domains. Our Registrar revenue varies based upon the number of domains registered, the rates we charge our customers and our ability to sell value-added services. We market our Registrar wholesale services under our eNom brand, and our retail registration services under the eNomCentral brand, among others.

Operating Expenses
 
Operating expenses consist of service costs, sales and marketing, product development, general and administrative, and amortization of intangible assets. Included in our operating expenses are stock-based compensation and depreciation expenses associated with our capital expenditures.
 
Service Costs
 
Service costs consist of: fees paid to registries and ICANN associated with domain registrations; advertising revenue recognized by us and shared with others as a result of our revenue-sharing arrangements, such as TAC and content creator revenue-sharing arrangements; Internet connection and co-location charges and other platform operating expenses including depreciation of the systems and hardware used to build and operate our Content & Media platform and Registrar; personnel costs related to in-house editorial, customer service and information technology; and certain content production costs such as our new premium multi-channel video deal with YouTube. We anticipate that content production costs will comprise a higher proportion of total service costs in 2012 than prior years as we increase our production of non-algorithm based content under the new premium multi-channel video initiative with YouTube and similar contracts. Our service costs are dependent on a number of factors, including the number of page views generated across our platform and the volume of domain registrations and value-added services supported by our Registrar. In the near term and consistent with historical trends, we expect that the period-over-period growth in our Content & Media revenue will continue to exceed the growth in our Registrar revenue, and as a result, we expect our overall service costs as a percentage of our total revenue to continue to decrease when compared to our historical results.  However, we do expect that the new premium multi-channel initiative with the production of video for YouTube, an increase in advertising revenue through third-party publishers resulting from our acquisition of IndieClick and higher overall registration costs due to registry price increases in 2012 together with costs associated with our investment in new business initiatives in 2012 (including our preparation for new gTLDs becoming available for registration in 2013) will result in higher service costs when compared to historical results.
 
Sales and Marketing
 
Sales and marketing expenses consist primarily of sales and marketing personnel costs, sales support, public relations, advertising and promotional expenditures. Fluctuations in our sales and marketing expenses are generally the result of our efforts to support the growth in our Content & Media service, including expenses required to support the expansion of our direct advertising sales force. We currently anticipate that our sales and marketing expenses will continue to increase and will increase in the near term as a percent of revenue as we continue to build our sales and marketing organizations to support the growth of our business.
 
Product Development
 
Product development expenses consist primarily of expenses incurred in our software engineering, product development and web design activities and related personnel costs. Fluctuations in our product development expenses are generally the result of hiring personnel to support and develop our platform, including the costs to further develop our content algorithms, our owned and operated websites and future product and service offerings of our Registrar. We currently anticipate that our product development expenses will increase as we continue to hire more product development personnel and further develop our products and offerings to support the growth of our business, but remain flat as a percentage of revenue compared to 2011.

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General and Administrative
 
General and administrative expenses consist primarily of personnel costs from our executive, legal, finance, human resources and information technology organizations and facilities related expenditures, as well as third-party professional fees, insurance and bad debt expenses. Professional fees are largely comprised of outside legal, audit and information technology consulting. During the year ended December 31, 2010 and 2011, our allowance for doubtful accounts and bad debt expense were not significant and we expect that this trend will continue in the near term. However, as we grow our revenue from direct advertising sales, which tend to have longer collection cycles, our allowance for doubtful accounts may increase, which may lead to increased bad debt expense. As we continue to expand our business and incur additional expenses associated with being a publicly traded company, we anticipate general and administrative expenses will increase in the near term, but at a lesser rate than our projected revenue growth. Specifically, we expect that we will incur additional general and administrative expenses to provide insurance for our directors and officers and to comply with the regulatory and listing exchange requirements.
 
Amortization of Intangibles
 
We capitalize certain costs allocated to the purchase price of certain identifiable intangible assets acquired in connection with business combinations, to acquire content that our models show embody probable economic benefit, and to acquire undeveloped websites, including initial registration costs. We amortize these costs on a straight-line basis over the related expected useful lives of these assets, which have a weighted average useful life of approximately 5.3 years on a combined basis as of December 31, 2011. We estimate our capitalized content to have a weighted average useful life of 5.1 years as of December 31, 2011. The Company determines the appropriate useful life of intangible assets by performing an analysis of expected cash flows based on its historical experience of intangible assets of similar quality and value. We expect amortization expense to decrease in the near term as we intend to reduce our investment in content intangible assets as compared to the prior year.  Amortization as percentage of revenue will depend upon a variety of factors, such as the amounts and mix of our investments in content and identifiable intangible assets acquired in business combinations.
 
Stock-based Compensation    
 
Included in our operating expenses are expenses associated with stock-based compensation, which are allocated and included in service costs, sales and marketing, product development and general and administrative expenses. Stock-based compensation expense is largely comprised of costs associated with stock options and restricted stock units granted to employees, restricted stock issued to employees and expenses relating to our Employee Stock Purchase Plan.

We record the fair value of these equity-based awards and expense their cost ratably over related vesting periods. In addition, stock-based compensation expense includes the cost of warrants to purchase common and preferred stock issued to certain non-employees.  In addition, during the first quarter of 2011, we recognized approximately $5.0 million in additional stock-based compensation related to awards granted to certain executive officers in prior years to acquire approximately 2.6 million of our shares that vested in that quarter upon meeting an average closing price of our stock for a stipulated period of time subsequent to our initial public offering.
 
As of December 31, 2011, we had approximately $80.7 million of unrecognized employee related stock-based compensation, net of estimated forfeitures, that we expect to recognize over a weighted average period of approximately 3.2 years.  Stock-based compensation expense is expected to increase in 2012 compared to 2011 as a result of our existing unrecognized stock-based compensation and as we issue additional stock-based awards to continue to attract and retain employees and non-employee directors.
 
Interest Expense
 
Interest expense principally consists of interest on outstanding debt and amortization of debt issuance costs associated with our revolving credit facility. As of December 31, 2011 no principal balance was outstanding under the revolving credit facility.
 
Interest Income
 
Interest income consists of interest earned on cash balances and short-term investments. We typically invest our available cash balances in money market funds and short-term United States Treasury obligations.
 



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Other Income (Expense), Net
 
Other income (expense), net consists primarily of transaction gains and losses on foreign currency-denominated assets and liabilities and changes in the value of certain long term investments and prior to our initial public offering changes in the fair value of our preferred stock warrant liability. We expect our transaction gains and losses will vary depending upon movements in underlying currency exchange rates, and could become more significant when we expand internationally. Our preferred stock warrants were net exercised for common stock upon our initial public offering in January 2011 and thus we no longer record changes in the value of the warrant subsequent to that date.
 
Provision for Income Taxes
 
Since our inception, we have been subject to income taxes principally in the United States, and certain other countries where we have legal presence, including the United Kingdom, the Netherlands, Canada, Sweden and beginning in 2011, Ireland and Argentina. We anticipate that as we expand our operations outside the United States, we will become subject to taxation based on the foreign statutory rates and our effective tax rate could fluctuate accordingly.
 
Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
 
We currently believe that based on the available information, it is more likely than not that our deferred tax assets will not be realized, and accordingly we have taken a full valuation allowance against all of our United States deferred tax assets. As of December 31, 2011, we had approximately $54 million of federal and $12 million of state operating loss carry-forwards available to offset future taxable income which expire in varying amounts beginning in 2020 for federal and 2013 for state purposes if unused. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Currently, we do not expect the utilization of our net operating loss and tax credit carry-forwards in the near term to be materially affected as no significant limitations are expected to be placed on these carry-forwards as a result of our previous ownership changes. If an ownership change is deemed to have occurred as a result of our initial public offering, potential near term utilization of these assets could be reduced.

Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
 
We believe that the assumptions and estimates associated with our revenue recognition, accounts receivable and allowance for doubtful accounts, capitalization and useful lives associated with our intangible assets, including our internal software and website development and content costs, income taxes, stock-based compensation and the recoverability of our goodwill and long-lived assets have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition
We recognize revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. We consider persuasive evidence of a sales arrangement to be the receipt of a signed contract. Collectability is assessed based on a number of factors, including transaction history and the credit worthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue.

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Content & Media
Advertising Services
In determining whether an arrangement for our advertising services exists, we ensure that a binding arrangement is in place, such as a standard insertion order or a fully executed customer-specific agreement. Obligations pursuant to our advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of the other performance criteria. Revenue from performance-based arrangements, including cost-per-click and referral revenues, is recognized as the related performance criteria are met. We assess whether performance criteria have been met and whether our fees are fixed or determinable based on a reconciliation of the performance criteria and an analysis of the payment terms associated with a transaction. The reconciliation of the performance criteria generally includes a comparison of third-party performance data, such as periodic online reports provided by certain of our customer websites, to the contractual performance obligation and to internal or customer performance data in circumstances where such data is available. Historically, any difference between the amounts recognized based on preliminary information and cash collected has not been material to our results of operations.
Where we enter into revenue sharing arrangements with our customers, such as for the online version of the San Francisco Chronicle or with respect to undeveloped customer websites, and when we are considered the primary obligor, we report the underlying revenues on a gross basis in our consolidated statements of operations. In circumstances where the customer acts as the primary obligor, such as YouTube, we recognize the underlying revenue on a net basis in our statement of operations.
Content Revenue

Content revenue is generated through the sale or license of media content. Revenue from the sale or perpetual license of content is recognized when the content has been delivered and the contractual performance obligations have been fulfilled. Revenue from the license of content is recognized over the period of the license as content is delivered or when other related performance criteria are fulfilled.
Subscription and Social Media Services
Subscription services revenue is generated through the sale of membership fees paid to access content available on certain owned and operated websites, such as Trails.com. The majority of the memberships range from six to twelve month terms, and generally renew automatically at the end of the membership term, if not previously canceled. Membership revenue is recognized on a straight-line basis over the membership term.
We configure, host and maintain almost all of our platform's social media services for commercial customers. We earn revenues from our social media services through initial set-up fees, recurring management support fees, overage fees in excess of standard usage terms and outside consulting fees. Due to the fact that our social media services customers have no contractual right to take possession of our software, we account for our social media services as subscription service arrangements, whereby social media services revenues are recognized when persuasive evidence of an arrangement exists, delivery of the service has occurred and no significant obligations remain, the selling price is fixed or determinable and collectability is reasonably assured.
Social media service arrangements may contain multiple elements, including, but not limited to, single arrangements containing set-up fees, monthly support fees and overage billings and consulting services. To the extent that consulting services have value on a standalone basis and there is objective and reliable evidence of social media services, we allocate revenue to each element based upon each element's objective and reliable evidence of fair value. Objective and reliable evidence of fair value for all elements of a service arrangement is based upon our normal pricing and discounting practices for those services when such services are sold separately. To date, substantially all consulting services entered into concurrent with the original social media service arrangements are not treated as separate deliverables as such services are essential to the functionality of the hosted social media services and do not have value to the customer on a standalone basis. Such fees are recognized as revenue on a straight-line basis over the greater of the contractual or estimated customer life once monthly recurring services have commenced. Fees for other items are recognized as follows:
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Customer set-up fees:  set-up fees are generally paid prior to the commencement of monthly recurring services. We initially defer set-up fees and recognize the related revenue straight-line over the greater of the contractual or estimated customer life once monthly recurring services have commenced.
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Monthly support fees:  recognized each month at contractual rates.
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Overage billings:  recognized when delivered and at contractual rates in excess of standard usage terms.
We determine the estimated customer life based on analysis of historical attrition rates, average contractual term and renewal expectations. We periodically review the estimated customer life at least quarterly and when events or changes in

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circumstances, such as significant customer attrition relative to expected historical or projected future results, occur. Outside consulting services performed for customers on a stand-alone basis are recognized ratably as services are performed at contractual rates.
Registrar
Domain Name Registration Fees
Registration fees charged to third parties in connection with new, renewed and transferred domain name registrations are recognized on a straight line basis over the registration term, which range from one to ten years. Payments received in advance of the domain name registration term are included in deferred revenue in our consolidated balance sheets. The registration term and related revenue recognition commences once we confirm that the requested domain name has been recorded in the appropriate registry under accepted contractual performance standards. Associated direct and incremental costs, which principally consist of registry and ICANN fees, are also deferred and expensed as service costs on a straight line basis over the registration term.
Our wholly owned subsidiary, eNom, is an ICANN accredited registrar. Thus, we are the primary obligor with our reseller and retail registrant customers and are responsible for the fulfillment of our registrar services. As a result, we report revenue derived from the fees we receive from our resellers and retail registrant customers for registrations on a gross basis in our consolidated statements of operations. A minority of our resellers have contracted with us to provide billing and credit card processing services to the resellers' retail customer base in addition to registration services. Under these circumstances, the cash collected from these resellers' retail customer base exceeds the fixed amount per transaction that we charge for domain name registration services. Accordingly, these amounts, which are collected for the benefit of the reseller, are not recognized as revenue and are recorded as a liability until remitted to the reseller on a periodic basis. Revenue from these resellers is reported on a net basis because the reseller determines the price to charge retail customers and maintains the primary customer relationship.
Value-added Services
Revenue from online Registrar value-added services, which include, but are not limited to, security certificates, domain name identification protection, charges associated with alternative payment methodologies, web hosting services and email services is recognized on a straight line basis over the period in which services are provided. Payments received in advance of services being provided are included in deferred revenue.
Auction Service Revenue
Domain name auction service revenue represents fees received from facilitating the sale of third-party owned domains through an online bidding process primarily through NameJet, a domain name aftermarket auction company formed in October 2007 by us and an unrelated third party. While certain names sold through the auction process are registered on our Registrar platform upon sale, we have determined that auction revenue and related registration revenue represent separate units of accounting, given that the domain name has value to the customers on a standalone basis and there is objective and reliable evidence of the fair value of the registration service. We recognize the related registration fees on a straight-line basis over the registration term. We recognize the bidding portion of auction revenues upon sale, net of payments to third parties since we are acting as an agent only.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable primarily consist of amounts due from:
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third parties who provide advertising services to our owned and operated websites and certain customer websites in exchange for a share of the underlying advertising revenue. Accounts receivable from these advertising providers are recorded as the amount of the revenue share as reported to us by them and are generally due within 30 to 45 days from the month-end in which the invoice is generated. Certain accounts receivable from these providers are billed quarterly and are due within 45 days from the quarter-end in which the invoice is generated, and are non-interest bearing;
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social media services customers and include: account set-up fees, which are generally billed and collected once set-up services are completed; monthly recurring services, which are billed in advance of services on a quarterly or monthly basis; account overages, which are billed when incurred and contractually due; and consulting services, which are generally billed in the same manner as set-up fees. Accounts receivable from social media customers are recorded at the invoiced amount, are generally due within 30 days and are non-interest bearing;
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direct advertisers who engage us to deliver branded advertising views. Accounts receivable from our direct advertisers are recorded at negotiated advertising rates (customarily based on advertising impressions) and as the related advertising is delivered over our owned and operated websites. Direct advertising accounts receivables are due within

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30 to 60 days from the date the advertising services are delivered and billed; and
•
customers who syndicate the Company's content over their websites in exchange for a share of related advertising revenue. Accounts receivable from our customers are recorded at the revenue share as reported by our customers and are due within 30 to 45 days.
We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables from our customers based on our best estimate of the amount of probable losses from existing accounts receivable. We determine the allowance based on analysis of historical bad debts, advertiser concentrations, advertiser credit-worthiness and current economic trends. In addition, past due balances over 90 days and specific other balances are reviewed individually for collectability on at least a quarterly basis.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We perform our impairment testing for goodwill at the reporting unit level. As of December 31, 2011, we determined that we have three reporting units. For the purpose of performing the required impairment tests, we primarily apply a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. We test goodwill for impairment annually during the fourth quarter of our fiscal year or when events or circumstances change that would indicate that goodwill might be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.
The testing for a potential impairment of goodwill involves a two-step process. The first step involves comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, the second step is performed to determine if goodwill is impaired and to recognize the amount of impairment loss, if any. The estimate of the fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit and may require valuations of certain recognized and unrecognized intangible assets such as our content, software, technology, patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. To date, we have not recognized an impairment loss associated with our goodwill.
We estimate the fair value of our reporting units, using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. Assumptions about discount rates are based on a weighted-average cost of capital for comparable companies. Assumptions about sales, operating margins, and growth rates are based on our forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. As of December 31, 2011, the date of the most recent impairment assessment, we determined that the fair value of each of our reporting units was in excess of its carrying value.
Capitalization and Useful Lives Associated with our Intangible Assets, including Content and Internal Software and Website Development Costs
We publish long-lived media content generated by our content studio which we commission and acquire from third-party freelance creative professionals. Direct costs incurred for each individual content unit that we determine embodies a probable future economic benefit are capitalized. The vast majority of direct content costs represent amounts paid to freelance creative professionals to acquire content units and, to a lesser extent, specifically identifiable internal direct labor costs incurred to enhance the value of acquired content units prior to their publication. Internal costs not directly attributable to the enhancement of content units acquired prior to publication are expensed as incurred. All costs incurred to deploy and publish content are expensed as incurred, including the costs incurred for the ongoing maintenance of websites on which our content resides. We generally acquire content when our internal systems and processes, including an analysis of millions of historical Internet search queries, advertising marketing terms, or keywords, and other data provide reasonable assurance that, given predicted consumer and advertiser demand relative to our predetermined cost to acquire the content, the content unit will generate revenues over its useful life that exceed the cost of acquisition. In determining whether content embodies probable future economic benefit required for asset capitalization, we make judgments and estimates including the forecasted number of page views and the advertising rates that the content will generate. These estimates and judgments take into consideration various inherent uncertainties including, but not limited to, total expected page views over the articles useful life, our expected ability to renew at favorable terms or replace certain material agreements with Google that currently provide a significant

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portion of our revenues; the expected ability of our direct advertising sales force to sell branded advertisements; the fact that our content creation and distribution model is new and evolving and may be impacted by competition and technological advancements; our ability to expand existing and enter into new distribution channels and applications for our content; and whether we will be able to continue to create content of the same quality or generate similar economic returns from content in the future. Management has reviewed, and intends to regularly review the operating performance of content in determining probable future economic benefits of our content.
We also capitalize initial registration and acquisition costs of our undeveloped websites and our internally developed software and website development costs during their development phase.
In addition we have also capitalized certain identifiable intangible assets acquired in connection with business combinations and we use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions and estimates including projected revenues, operating costs, growth rates, useful lives and discount rates.
Our finite lived intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the estimated pattern in which the underlying economic benefits are consumed. Capitalized website registration costs for undeveloped websites are amortized on a straight-line basis over their estimated useful lives of one to seven years. Internally developed software and website development costs are depreciated on a straight-line basis over their estimated three year useful life. We amortize our intangible assets acquired through business combinations on a straight-line basis over the period in which the underlying economic benefits are expected to be consumed.
Capitalized content is amortized on a straight-line basis over five years, representing our estimate of the pattern that the underlying economic benefits are expected to be realized and based on our estimates of the projected cash flows from advertising revenues expected to be generated by the deployment of our content. These estimates are based on our current plans and projections for our content, our comparison of the economic returns generated by content of comparable quality and an analysis of historical cash flows generated by that content to date which, particularly for more recent content cohorts, is somewhat limited. To date, certain content that we acquired in business combinations has generated cash flows from advertisements beyond a five year useful life. The acquisition of content, at scale, however, is a new and rapidly evolving model, and therefore we closely monitor its performance and, periodically, assess its estimated useful life.
Advertising revenue generated from the deployment of our media content makes up a significant element of our business such that amounts we record in our financial statements related to our content are material. Significant judgment is required in estimating the useful life of our content. Changes from the five year useful life we currently use to amortize our capitalized content would have a significant impact on our financial statements. For example, if underlying assumptions were to change such that our estimate of the weighted average useful life of our media content was higher by one year from January 1, 2011, our net loss would decrease by approximately $4 million for the year ended December 31, 2011, and our net loss would increase by approximately $5 million should the weighted average useful life be reduced by one year. We periodically assess the useful life of our content, and when adjustments in our estimate of the useful life of content are required, any changes from prior estimates are accounted for prospectively.
Recoverability of Long-lived Assets
We evaluate the recoverability of our intangible assets, and other long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. These trigger events or changes in circumstances include, but are not limited to a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors, including changes that could result from our inability to renew or replace material agreements with certain of our partners such as Google on favorable terms, significant adverse changes in the business climate including changes which may result from adverse shifts in technology in our industry and the impact of competition, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrates continuing losses associated with the use of our long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We perform impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In making this determination, we consider the specific operating characteristics of the relevant long-lived assets, including (i) the nature of the direct and any indirect revenues generated by the assets; (ii) the interdependency of the revenues generated by the assets; and (iii) the nature and extent of any shared costs necessary to operate the assets in their intended use. An impairment test would be performed when the estimated undiscounted future cash flows expected to result from the use of the asset group is less than its carrying amount. Impairment is measured by assessing the usefulness of an asset by comparing its carrying value to its fair

51


value. If an asset is considered impaired, the impairment loss is measured as the amount by which the carrying value of the asset group exceeds its estimated fair value. Fair value is determined based upon estimated discounted future cash flows. The key estimates applied when preparing cash flow projections relate to revenues, operating margins, economic life of assets, overheads, taxation and discount rates. To date, we have not recognized any such impairment loss associated with our long-lived assets.
Income Taxes
We account for our income taxes using the liability and asset method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or in our tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the realizability of our deferred tax assets and valuation allowances are provided when necessary to reduce deferred tax assets to the amounts expected to be realized.
We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, and relevant tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.
We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in our income tax (benefit) provision in the accompanying statements of operations.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax issue is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.
Stock-based Compensation
We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting conditions, the fair value is estimated using the Black-Scholes option pricing model. The value of an award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to treat share-based payment awards, other than performance awards, with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based compensation expenses are classified in the statement of operations based on the department to which the related employee reports. Our stock-based awards are comprised principally of stock options restricted stock units, restricted stock awards and restricted stock purchase rights.
Some employee award grants contain certain performance and/or market conditions. We recognize compensation cost for awards with performance conditions based upon the probability of the performance condition being met, net of an estimate of pre-vesting forfeitures. Awards granted with performance and/or market conditions are amortized using the graded vesting method. The effect of a market condition is reflected in the award's fair value on the grant date. We use a Monte Carlo simulation model or a binomial lattice model to determine the grant date fair value of awards with market conditions. All compensation expense for an award that has a market condition is recognized as the requisite service period is fulfilled, even if the market condition is never satisfied.
We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Our management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

52


The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value of our underlying stock, the expected volatility and the expected term of the award. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.
Because our common stock was not publicly traded since our inception through January 31, 2011, we estimated the expected volatility of our awards from the historical volatility of selected public companies within the Internet and media industry with comparable characteristics to us, including similarity in size, lines of business, market capitalization, revenue and financial leverage. From our inception through December 31, 2008, the weighted average expected life of options was calculated using the simplified method as prescribed under guidance by the SEC. This decision was based on the lack of relevant historical data due to our limited experience and the lack of an active market for our common stock. Effective January 1, 2009, we calculated the weighted average expected life of our options based upon our historical experience of option exercises combined with estimates of the post-vesting holding period. The risk free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. The expected dividend rate is zero based on the fact that we currently have no history or expectation of paying cash dividends on our common stock. The forfeiture rate is established based on the historical average period of time that options were outstanding and adjusted for expected changes in future exercise patterns.
Under the Company's Employee Stock Purchase Plan (the "ESPP"), eligible officers and employees may purchase a limited amount of our common stock at a discount to the market price in accordance with the terms of the plan as described in Note 11 - Share-based Compensation Plans and Awards. The Company uses the Black-Scholes option pricing model to determine the fair value of the ESPP awards granted which is recognized straight-line over the total offering period.  
    
Some equity awards granted by the Company contain certain performance and/or market conditions. The Company recognizes compensation cost for awards with performance conditions based upon the probability of that performance condition being met, net of an estimate of pre-vesting forfeitures. Awards granted with performance and/or market conditions are amortized using the graded vesting method.
 
The effect of a market condition is reflected in the award’s fair value on the grant date. The Company uses a Monte Carlo simulation model or binomial lattice model to determine the grant date fair value of awards with market conditions. Compensation cost for an award that has a market condition is recognized as the requisite service period is fulfilled, even if the market condition is never satisfied.

Stock-based awards issued to non-employees are accounted for at fair value determined using the Black-Scholes option-pricing model. Management believes that the fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee stock-based compensation award is re-measured each period until a commitment date is reached, which is generally the vesting date.


53


Results of Operations
 
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
 
 
Year ended December 31,
 
 
2009
 
2010
 
2011
 
(In thousands)
Revenue
 
$
198,452

 
$
252,936

 
$
324,866

Operating expenses(1)(2):
 
 
 
 
 
 
Service costs (exclusive of amortization of intangible assets)
 
114,536

 
131,332

 
155,830

Sales and marketing
 
20,044

 
24,424

 
37,394

Product development
 
21,657

 
26,538

 
38,146

General and administrative
 
28,479

 
37,371

 
59,451

Amortization of intangible assets
 
32,152

 
33,750

 
47,174

Total operating expenses
 
216,868

 
253,415

 
337,995

Loss from operations
 
(18,416
)
 
(479
)
 
(13,129
)
Other income (expense)
 
 

 
 
 
 
Interest income
 
494

 
25

 
56

Interest expense
 
(1,759
)
 
(688
)
 
(861
)
Other income (expense), net
 
(19
)
 
(286
)
 
(413
)
Total other expense
 
(1,284
)
 
(949
)
 
(1,218
)
Loss before income taxes
 
(19,700
)
 
(1,428
)
 
(14,347
)
Income tax expense
 
(2,771
)
 
(3,897
)
 
(4,177
)
Net loss
 
(22,471
)
 
(5,325
)
 
(18,524
)
Cumulative preferred stock dividends
 
(30,848
)
 
(33,251
)
 
(2,477
)
Net loss attributable to common shareholders
 
$
(53,319
)
 
$
(38,576
)
 
$
(21,001
)
 
(1) 
Depreciation expense included in the above line items:
 
Service costs
 
$
11,882

 
$
14,783

 
$
16,075

Sales and marketing
 
184

 
187

 
423

Product development
 
1,434

 
1,346

 
1,466

General and administrative
 
1,463

 
1,950

 
2,994

Total depreciation expense
 
$
14,963

 
$
18,266

 
$
20,958


 
(2) 
 Stock-based compensation included in the above line items:
 
Service costs
 
$
527

 
$
868

 
$
2,052

Sales and marketing
 
1,611

 
2,379

 
4,857

Product development
 
1,504

 
1,692

 
5,013

General and administrative
 
4,094

 
4,750

 
16,934

Total stock-based compensation
 
$
7,736

 
$
9,689

 
$
28,856






54


As a percentage of revenue:
 
 
 
Year ended December 31,
 
 
2009
 
2010
 
2011
Revenue
 
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
—

 
—

Service costs (exclusive of amortization of intangible assets)
 
57.7
 %
 
51.9
 %
 
48.0
 %
Sales and marketing
 
10.1
 %
 
9.7
 %
 
11.5
 %
Product development
 
10.9
 %
 
10.5
 %
 
11.7
 %
General and administrative
 
14.4
 %
 
14.8
 %
 
18.3
 %
Amortization of intangible assets
 
16.2
 %
 
13.3
 %
 
14.5
 %
Total operating expenses
 
109.3
 %
 
100.2
 %
 
104.0
 %
Loss from operations
 
(9.3
)%
 
(0.2
)%
 
(4.0
)%
Other income (expense)
 
 
 
—

 
—

Interest income
 
0.3
 %
 
—
 %
 
—
 %
Interest expense
 
(0.9
)%
 
(0.3
)%
 
(0.3
)%
Other income (expense), net
 
—
 %
 
(0.1
)%
 
(0.1
)%
Total other expense
 
(0.6
)%
 
(0.4
)%
 
(0.4
)%
Loss before income taxes
 
(9.9
)%
 
(0.6
)%
 
(4.4
)%
Income tax expense
 
(1.4
)%
 
(1.5
)%
 
(1.3
)%
Net Loss
 
(11.3
)%
 
(2.1
)%
 
(5.7
)%
 
Revenue
 
Revenue by service line was as follows:
 
 
 
 
 
 
 
% Change
 
Year Ended December 31,
 
 
2009 to 2010
 
2010 to 2011
 
2009
 
2010
 
2011
 
 
(In thousands)
 
 
 
 
Content & Media:
 
 
 
 
 
 
 
 
 
Owned and operated websites
$
73,204

 
$
110,770

 
$
157,089

 
51
%
 
42
%
Network of customer websites
34,513

 
42,140

 
48,361

 
22
%
 
15
%
Total Content & Media
107,717

 
152,910

 
205,450

 
42
%
 
34
%
Registrar
90,735

 
100,026

 
119,416

 
10
%
 
19
%
Total revenue
$
198,452

 
$
252,936

 
$
324,866

 
27
%
 
28
%
 
 
Content & Media Revenue from Owned and Operated Websites
 
2011 compared to 2010. Content & Media revenue from our owned and operated websites increased by $46.3 million, or 42%, to $157.1 million for the year ended December 31, 2011, as compared to $110.8 million for the same period in 2010. The increase was largely due to increased page views and RPMs. Page views on our owned and operated websites increased by 26%, from 8,234 million page views in the year ended December 31, 2010 to 10,378 million page views in the year ended December 31, 2011. RPMs on our owned and operated websites increased by 13%, from $13.45 in the year ended December 31, 2010 to $15.14 in the year ended December 31, 2011.

Page views and RPMs increased by 26% and 13%, respectively during the year ended December 31, 2011 when compared to the corresponding prior-year period. The page view increase included the impact of a website product enhancement we implemented in the second quarter of 2011 with respect to the presentation of photo-centric content on certain

55


of the Company's owned and operated sites, which did not impact advertising impressions. Excluding the impact of such change, we estimate that during the year ended December 31, 2011, page views would have increased approximately 19% and RPMs would have increased 19%, compared to the corresponding prior year. The remaining increase in underlying page views was due primarily to increased publishing of our platform content on our owned and operated websites. The underlying increase in RPMs was primarily attributable to the overall increase in page views on eHow, which has higher RPMs than the weighted average of our other owned and operated websites, as well as an increase in RPMs on the monetization of our undeveloped websites. In addition, RPM growth was driven by increased display advertising revenue sold directly through our sales force during the year ended December 31, 2011 as compared to 2010. On average, our direct display advertising sales generate higher RPMs than display advertising that we deliver from our advertising networks, such as Google.

2010 compared to 2009. Content & Media revenue from our owned and operated websites increased by $37.6 million, or 51%, to $110.8 million for the year ended December 31, 2010, compared to $73.2 million for the same period in 2009. The year-over-year increase was largely due to increased page views and RPMs. Page views on our owned and operated websites increased by 20%, from 6.8 billion page views in the year ended December 31, 2009 to 8.2 billion page views in the year ended December 31, 2010. The increase in page views was due primarily to increased publishing of our platform content on our owned and operated websites, offset by a decrease in page views from certain owned and operated websites that are not heavily dependent upon our platform content, such as certain entertainment web properties. RPMs on our owned and operated websites increased by 26%, from $10.69 in the year ended December 31, 2009 to $13.45 in the year ended December 31, 2010. The overall increase in RPMs was primarily attributable to the overall increase in page views on eHow, which has higher RPMs than the weighted average of our other owned and operated websites, offset by decreased RPMs on the monetization of our undeveloped websites, which was largely due to overall declines in advertising yields from our advertising networks. In addition RPM growth was driven by increased display advertising revenue sold directly through our sales force during the year ended December 31, 2010 as compared to 2009. On average, our direct display advertising sales generate higher RPMs than display advertising that we deliver from our advertising networks, such as Google.

Content & Media Revenue from Network of Customer Websites
 
2011 compared to 2010. Content & Media revenue from our network of customer websites for the year ended December 31, 2011 increased by $6.2 million, or 15%, to $48.4 million, as compared to $42.1 million in the same period in 2010. The increase was largely due to growth in page views, offset by a decline in RPMs. Page views on our network of customer websites increased by 4,281 million, or 33%, from 13,155 million page views in the year ended December 31, 2010, to 17,436 million pages viewed in the year ended December 31, 2011. The increase in page views was due primarily to the acquisition of IndieClick on August 8, 2011, which contributed 3,069 million page views during the period, growth in publishers utilizing our social media applications and the expansion of our arrangements with customers in which we deploy our content to their websites. RPMs decreased 13% from $3.20 in the year ended December 31, 2010 to $2.77 in the year ended December 31, 2011. The decrease in RPMs was largely due to a mix shift toward lower RPM page views such as IndieClick and our social media customers, as well as slight declines in advertising yields from our advertising networks relating to our customers’ undeveloped websites.

2010 compared to 2009.  Content & Media revenue from our network of customer websites for the year ended December 31, 2010 increased by $7.6 million, or 22%, to $42.1 million, as compared to $34.5 million in the same period in 2009. The increase was largely due to growth in page views, offset by a decline in RPMs. Page views on our network of customer websites increased by 3.2 billion, or 31%, from 10.0 billion page views in the year ended December 31, 2009 to 13.2 billion pages viewed in the year ended December 31, 2010. The increase in page views was due primarily to growth in the number of publishers adopting our social media applications. RPMs decreased 7% from $3.45 in the year ended December 31, 2009 to $3.20 in the year ended December 31, 2010. The decrease in RPMs was largely due to a mix shift to page views from our social media customers which typically generate lower RPMs, as well as overall declines in advertising yields from our advertising networks relating to our customers' undeveloped websites.

Registrar Revenue
 
Registrar revenue for the year ended December 31, 2011 increased 19.4 million, or 19%, to $119.4 million compared to $100.0 million for the same period in 2010. The increase was largely due to an increase in domains, which were attributable in large part to an increased number of new domain registrations and domain renewal registrations in 2011 compared to 2010, as well as an overall increase in our average revenue per domain. The number of domain registrations increased 1.7 million, or 15%, to 12.7 million during the year ended December 31, 2011 as compared to 11.0 million in the same period in 2010 driven by new partnerships with large domain owners and growth from existing resellers. Our average revenue per domain increased slightly by $0.12, or 1%, to $10.08 during the year ended December 31, 2011 from $9.96 in the same period in 2010 due in part to an increase in value added services revenue as compared to 2010.

56



Beginning July 1, 2011, the number of net new domains has been adjusted to include only new registered domains added to our platform for which we have recognized revenue. Excluding the impact of this change, end of period domains at December 31, 2011 would have increased 22% compared to the prior year and average revenue per domain during the year ended December 31, 2011 would have decreased 2% compared to the prior year.

2010 compared to 2009.  Registrar revenue for the year ended December 31, 2010 increased $9.3 million or 10%, to $100.0 million compared to $90.7 million for the same period in 2009. The increase was largely due to an increase in domains, due in large part to an increased number of new domain registration and domain renewal registrations in 2010 compared to 2009 partially offset by a slight decrease in our average revenue per domain. The number of domain registrations increased 1.9 million, or 21%, to 11.0 million during the year ended December 31, 2010 as compared to 9.1 million. Our average revenue per domain decreased slightly by $0.15, or 1%, to $9.96 during the year ended December 31, 2010 from $10.11 in the same period in 2009 largely due to a higher mix of volume-based domain resellers transferring over their domain registrations in the latter half of 2010 as compared to 2009.


Cost and Expenses
 
Operating costs and expenses were as follows:
 
 
 
 
 
 
 
% Change
 
Year ended December 31,
 
 
2009 to 2010
 
2010 to 2011
 
2009
 
2010
 
2011
 
 
(in thousands)
 
 
 
 
Service costs (exclusive of amortization of intangible assets)
$
114,536

 
$
131,332

 
$
155,830

 
15
%
 
19
%
Sales and marketing
20,044

 
24,424

 
37,394

 
22
%
 
53
%
Product development
21,657

 
26,538

 
38,146

 
23
%
 
44
%
General and administrative
28,479

 
37,371

 
59,451

 
31
%
 
59
%
Amortization of intangible assets
32,152

 
33,750

 
47,174

 
5
%
 
40
%


 Service Costs
 
2011 compared to 2010.  Service costs for the year ended December 31, 2011 increased by approximately $24.5 million, or 19%, to $155.8 million compared to $131.3 million in the same period in 2010. The increase was largely due to a $12.5 million increase in domain registry fees associated with our growth in domain registrations and related revenue over the same period, a $6.1 million increase in content and related costs, a $1.7 million increase in related information technology expense and a $1.3 million increase in depreciation expense of technology assets purchased in the prior and current periods required to manage the growth of our Internet traffic, data centers, advertising transactions, domain registrations and new products and services and a $2.6 million increase in personnel and related costs due to increased head count. As a percentage of revenues, service costs (exclusive of amortization of intangible assets) decreased 390 basis points to 48.0% for the year ended December 31, 2011 from 51.9% during the same period in 2010 primarily due to Content & Media revenues representing a higher percentage of total revenues during the year ended December 31, 2011 as compared to the same period in 2010.

2010 compared to 2009.  Service costs for the year ended December 31, 2010 increased by approximately $16.8 million, or 15%, to $131.3 million compared to $114.5 million in the same period in 2009. The increase was largely due to a $7.4 million increase in domain registry fees associated with our growth in domain registrations and related revenue over the same period, a $1.6 million increase in TAC due to an increase in undeveloped website customers and related revenue over the same period, a $1.4 million increase in direct costs associated with operating our network, a $2.9 million increase in depreciation expense of technology assets purchased in the prior and current periods required to manage the growth of our Internet traffic, data centers, advertising transactions, domain registrations and new products and services and a $1.5 million increase in personnel and related costs due to increased head count. As a percentage of revenues, service costs decreased 580 basis points to 51.9% for the year ended December 31, 2010 from 57.7% during the same period in 2009 primarily due to Content & Media revenues representing a higher percentage of total revenues during the year ended December 31, 2010 as compared to the same period in 2009.


57



Sales and Marketing
 
2011 compared to 2010. Sales and marketing expenses increased 53%, or $13.0 million, to $37.4 million for the year ended December 31, 2011 from $24.4 million for the same period in 2010. The increase was primarily due to our direct sales and marketing efforts in 2011 and acquisition of IndieClick in August 2011 and included a $10.1 million increase in personnel related costs, including stock-based compensation expense and sales commissions and $1.8 million related to expansion of marketing and promotional activities. As a percentage of revenue, sales and marketing expense increased 180 basis points to 11.5% during the year ended December 31, 2011 from 9.7% during the same period in 2010.

2010 compared to 2009.  Sales and marketing expenses increased 22%, or $4.4 million, to $24.4 million for the year ended December 31, 2010 from $20.0 million for the same period in 2009. The increase was largely due to growth in our business including a $2.8 million increase in personnel costs related to growing our direct advertising sales team and an increase in sales commissions and $0.8 million related to increase in stock-based compensation expense due to additional stock options granted to our employees. As a percentage of revenue, sales and marketing expense decreased 40 basis points to 9.7% during the year ended December 31, 2010 from 10.1% during the same period in 2009.

Product Development
 
2011 compared to 2010. Product development expenses increased by $11.6 million, or 44%, to $38.1 million during the year ended December 31, 2011 compared to $26.5 million in the same period in 2010. The increase was largely due to approximately $9.1 million increase in personnel and related costs including stock-based compensation expense, net of internal costs capitalized as internal software development, due to additional headcount to further develop our platform, our owned and operated websites, and to support and grow our Registrar product and service offerings. The remaining increase was largely attributable to additional consultant and associated costs of $2.2 million incurred to develop and enhance new and existing products to support the growth in our business, as well as a $0.1 million increase in depreciation expense. The stock-based compensation expense for the year ended December 31, 2011 included a one-time charge of $0.4 million related to certain stock awards vesting on certain conditions related to our IPO. As a percentage of revenue, product development expenses increased 120 basis points to 11.7% during the year ended December 31, 2011 compared to 10.5% during the same period in 2010.

2010 compared to 2009.  Product development expenses increased by $4.9 million, or 23%, to $26.5 million during the year ended December 31, 2010 compared to $21.7 million in the same period in 2009. The year-over-year increase was largely due to approximately $3.9 million increase in personnel and related costs, net of internal costs capitalized as internal software development, to further develop our platform, our owned and operated websites, and to support and grow our Registrar product and service offerings. As a percentage of revenue, product development expenses decreased 40 basis points to 10.5% during the year ended December 31, 2010 compared to 10.9% during the same period in 2009.

General and Administrative
 
2011 compared to 2010. General and administrative expenses increased by $22.1 million, or 59%, to $59.5 million during the year ended December 31, 2011 compared to $37.4 million in the same period in 2010. The increase was primarily due to a $15.8 million increase in personnel related costs, inclusive of a $12.2 million increase stock-based compensation expense, due to additional headcount to support the growth of our business and the first year as a public company, a $1.7 million increase in professional fees primarily related to our public company compliance initiatives and business acquisitions, a $1.9 million increase in facilities and rent expense for additional office space and an $1.0 million increase in depreciation expense to support our growth. The stock-based compensation expense for the year ended December 31, 2011 included a one-time charge of $4.6 million related to certain stock awards vesting on certain conditions related to our IPO. As a percentage of revenue, general and administrative costs increased 350 basis points to 18.3% during the year ended December 31, 2011 compared to 14.8% during the same period in 2010.

2010 compared to 2009.  General and administrative expenses increased by $8.9 million or 31% to $37.4 million during the year ended December 31, 2010 compared to $28.5 million in the same period in 2009. The increase was primarily due to a $2.7 million increase in personnel costs and a $1.6 million increase certain information technology costs to support the growth of our business, a $1.4 million increase in professional fees primarily related to our public company readiness efforts, a $0.7 million increase in stock-based compensation expense, a $0.4 million increase in rent expense for additional office space to support our growth, and the inclusion of a $0.6 million gain on sale of one of our acquired website properties as a reduction to general and administrative expenses in the year ended December 31, 2009. As a percentage of revenue, general and administrative costs increased 40 basis points to 14.8% during the year ended December 31, 2010 compared to 14.4% during

58


the year ended December 2009.

Amortization of Intangibles
 
2011 compared to 2010. Amortization expense for the year ended December 31, 2011 increased by $13.4 million, or 40%, to $47.2 million compared to $33.8 million in the same period in 2010. The increase was primarily due to a $15.5 million increase in amortization of media content which resulted from our increased investment in our content library during 2011 compared to 2010, $5.9 million of accelerated amortization expense resulting from our election to remove certain content assets from service in the fourth quarter of 2011 in conjunction with improvements to our content creation and distribution platform and incremental amortization expense of $1.4 million in the period arising from acquisitions completed in 2011. Offsetting this was a decrease of $3.5 million in the amortization of certain intangible assets primarily acquired via acquisitions in prior years that are now fully amortized.  As a percentage of revenue, amortization of intangible assets decreased 120 basis points to 14.5% during the year ended December 31, 2011 compared to 13.3% during the same period in 2010 as the result of the increase in revenue and the factors listed above.

2010 compared to 2009.  Amortization expense for the year ended December 31, 2010 increased by $1.6 million or 5% to $33.8 million compared to $32.2 million in the same period in 2009. The increase was primarily due to a $7.8 million increase in amortization of content due to our increased investment in our content library during 2010 compared to prior years. Offsetting this increase was a $4.0 million decrease in amortization of our identifiable intangible assets acquired in business combinations as a result of no business acquisition activities in 2010 compared to prior years, and a $2.1 million decrease in amortization of our undeveloped websites largely due to reduced investments in undeveloped websites in 2010 compared to 2009. As a percentage of revenue, amortization of intangible assets decreased 290 basis points to 13.3% during the year ended December 31, 2010 compared to 16.2% during the same period in 2009 as the result of the increase in revenue and the factors listed above.

Interest Income
 
Interest income for the year ended December 31, 2011 changed by less than $0.1 million compared to the same period in 2010.

2010 compared to 2009.  Interest income for the year ended December 31, 2010 decreased by $0.5 million, or 95%, to less than $0.1 million compared to $0.5 million in the same period in 2009. The decrease in our interest income during the year ended December 31, 2010 was a result of our maintaining higher average cash balances during the year ended December 31, 2009.

Interest Expense
 
2011 compared to 2010. Interest expense for the year ended December 31, 2011 increased by $0.2 million compared to the same period in 2010 primarily due to a one-time acceleration of the unamortized debt issuance costs following the replacement of our credit facility in the third quarter of 2011.

2010 compared to 2009.  Interest expense for the year ended December 31, 2010 decreased by $1.1 million or 61% to $0.7 million compared to $1.8 million in the same period in 2009. The decrease in our interest expense during the year ended December 31, 2010 was primarily a result of lower average debt balances during the year ended December 31, 2010 as compared to 2009. In addition, we issued $10.0 million in unsecured promissory notes in conjunction with the acquisition of our social media tools business in March 2008, which resulted in interest expense of $0.2 million in 2009. These promissory notes were repaid in full in April 200.

Other Income (Expense), Net
 
2011 compared to 2010. Other income (expense), net for the year ended December 31, 2011 increased by $0.1 million to $(0.4) million of expense compared to $(0.3) million in the same period in 2010. The increase in other income (expense) net during the year ended December 31, 2011 was primarily a result of the change in the value of our preferred stock warrants which were recorded at fair value with changes in value recorded in earnings through the closing date of our IPO.

2010 compared to 2009.  Other income (expenses), net for the year ended December 31, 2010 increased by $0.3 million to ($0.3) million of expense compared to less than ($0.1) million in the same period in 2009. The increase in other income (expense) net during the year ended December 31, 2010 was primarily a result of $0.3 million of expense increase in the impact of changes in the fair value associated with our preferred warrant outstanding in 2010 and 2009.

59



Income Tax (Benefit) Provision
 
2011 compared to 2010. During the year ended December 31, 2011, we recorded an income tax provision of $4.2 million compared to $3.9 million during the same period in 2010, representing a $0.3 million or 7% increase. The increase was primarily due to the recognition of a full valuation allowance against our state deferred tax assets during 2011. Our state deferred taxes reached a net deferred tax asset position during 2011, excluding the deferred tax liability for tax deductible goodwill, which is excluded because the ultimate realization of which is uncertain and thus not available to assure the realization of deferred tax assets. Our valuation allowance, which increased by $8.3 million from $14.4 million during the year ended December 31, 2010 to $22.7 million in the same period in 2011 now applies to both federal and state deferred tax assets. In addition, the tax increase was also impacted by movement in the company's state tax apportionment rates due to changes in state tax laws and the Company's state tax footprint during 2011, partially offset by a one-time benefit of $0.7 million associated with a business acquisition during 2011.

2010 compared to 2009.  During the year ended December 31, 2010, we recorded an income tax provision of $3.9 million compared to $2.8 million during the same period in 2009, representing a $1.1 million or 41% year-over-year increase despite no significant changes in our year-over-year operating losses before income taxes. The $1.1 million increase was largely due to a change in our valuation allowance, which increased by $3.0 million from $11.4 million during the year ended December 31, 2009, to $14.4 million in the same period in 2010, primarily as a result of increases in net deferred tax assets, which includes the impact of tax amortization of deductible goodwill, the ultimate realization of which is uncertain and thus not available to assure the realization of deferred tax assets. In addition, the increase was also due to corresponding movements in state deferred tax balances as a result of changes in state tax laws and the Company's state tax apportionment rates during 2010.


Quarterly Results of Operations
The following unaudited quarterly consolidated statements of operations for the quarters in the years ended December 31, 2010 and 2011, have been prepared on a basis consistent with our audited consolidated annual financial statements, and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. The period-to-period comparison of financial results is not necessarily indicative of future results and should be read in conjunction with our consolidated annual financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.


60


 
Quarter Ended,
 
March 31,
2010
 
June 30,
2010
 
September 30,
2010

 
December 31,
2010

 
March 31,
2011
 
June 30,
2011
 
September 30,
2011

 
December 31,
2011
 
(in thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Content & Media:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owned and operated websites
$
20,934

 
$
25,702

 
$
29,346

 
$
34,787

 
$
40,524

 
$
39,095

 
$
38,298

 
$
39,172

Network websites
9,264

 
10,391

 
10,471

 
12,015

 
11,328

 
10,727

 
12,446

 
13,860

Total Content & Media
30,198

 
36,093

 
39,817

 
46,802

 
51,852

 
49,822

 
50,744

 
53,032

Registrar
23,449

 
24,262

 
25,538

 
26,777

 
27,671

 
29,633

 
30,729

 
31,383

Total revenue
53,647

 
60,355

 
65,355

 
73,579

 
79,523

 
79,455

 
81,473

 
84,415

Operating expenses(1)(2):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service costs (exclusive of amortization of intangible assets)(3)
30,164

 
31,571

 
33,474

 
36,123

 
37,654

 
37,869

 
40,109

 
40,198

Sales and marketing
4,751

 
5,645

 
6,409

 
7,619

 
9,583

 
9,286

 
9,200

 
9,325

Product development
6,032

 
6,482

 
6,622

 
7,402

 
9,251

 
9,642

 
9,791

 
9,462

General and administrative
7,978

 
9,462

 
9,595

 
10,336

 
17,024

 
13,787

 
14,837

 
13,803

Amortization of intangible assets
7,935

 
8,238

 
8,309

 
9,268

 
10,203

 
9,750

 
10,828

 
16,393

Total operating expenses
56,860

 
61,398

 
64,409

 
70,748

 
83,715

 
80,334

 
84,765

 
89,181

Income (loss) from operations
(3,213
)
 
(1,043
)
 
946

 
2,831

 
(4,192
)
 
(879
)
 
(3,292
)
 
(4,766
)
Other income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
8

 
3

 
8

 
6

 
42

 
5

 
5

 
4

Interest expense
(181
)
 
(168
)
 
(168
)
 
(171
)
 
(162
)
 
(163
)
 
(385
)
 
(151
)
Other income (expense), net
(19
)
 
(109
)
 
(36
)
 
(122
)
 
(257
)
 
(2
)
 
(79
)
 
(75
)
Total other expense
(192
)
 
(274
)
 
(196
)
 
(287
)
 
(377
)
 
(160
)
 
(459
)
 
(222
)
Income (loss) before income taxes
(3,405
)
 
(1,317
)
 
750

 
2,544

 
(4,569
)
 
(1,039
)
 
(3,751
)
 
(4,988
)
Income tax expense
(717
)
 
(610
)
 
(1,055
)
 
(1,515
)
 
(1,013
)
 
(1,332
)
 
(394
)
 
(1,438
)
Net income (loss)
(4,122
)
 
(1,927
)
 
(305
)
 
1,029

 
(5,582
)
 
(2,371
)
 
(4,145
)
 
(6,426
)
Cumulative preferred stock dividends
(7,963
)
 
(8,243
)
 
(8,443
)
 
(8,602
)
 
(2,477
)
 
—

 
—

 
—

Net loss attributable to common stockholder
$
(12,085
)
 
$
(10,170
)
 
$
(8,748
)
 
$
(7,573
)
 
$
(8,059
)
 
$
(2,371
)
 
$
(4,145
)
 
(6,426
)
Net loss per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(0.94
)
 
$
(0.75
)
 
$
(0.64
)
 
$
(0.54
)
 
$
(0.13
)
 
$
(0.03
)
 
$
(0.05
)
 
$
(0.08
)
Weighted average shares outstanding(4)(5):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted
12,875

 
13,482

 
13,698

 
13,966

 
63,759

 
83,088

 
83,934

 
83,592

(1) Depreciation expense included in the above line items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service costs
$
3,343

 
$
3,483

 
$
3,598

 
$
4,359

 
$
4,044

 
$
4,149

 
$
4,112

 
$
3,770

Sales and marketing
41

 
41

 
46

 
59

 
72

 
115

 
109

 
127

Product development
341

 
318

 
337

 
350

 
321

 
438

 
399

 
308

General and administrative
405

 
516

 
494

 
535

 
572

 
878

 
683

 
861

Total depreciation expense
$
4,130

 
$
4,358

 
$
4,475

 
$
5,303

 
$
5,009

 
$
5,580

 
$
5,303

 
$
5,066

(2) Stock-based compensation included in the above line items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service costs
$
207

 
$
221

 
$
235

 
$
205

 
$
237

 
$
347

 
$
757

 
$
711

Sales and marketing
464

 
504

 
653

 
758

 
900

 
1,136

 
1,405

 
1,416

Product development
338

 
437

 
441

 
476

 
1,116

 
1,130

 
1,403

 
1,364

General and administrative
1,233

 
1,367

 
1,043

 
1,107

 
6,674

 
2,807

 
4,190

 
3,263

Total stock-based compensation
$
2,242

 
$
2,529

 
$
2,372

 
$
2,546

 
$
8,927

 
$
5,420

 
$
7,755

 
$
6,754

(3) Service costs include: traffic acquisitions costs of
$
2,693

 
$
3,063

 
$
3,155

 
$
3,302

 
$
3,190

 
$
2,813

 
$
3,381

 
$
3,111

(4) 
For a description of the method used to compute our basic and diluted net loss per share, refer to note 1 in Part II, Item 6, "Selected Financial Data."
(5) 
In October 2010, our stockholders approved a 1-for-2 reverse stock split of our outstanding common stock, and a proportional adjustment to the existing conversion ratios for each series of preferred stock which was effected in January 2011. Accordingly, all share and per share amounts for all periods presented have been adjusted retrospectively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratio.



61


Seasonality of Quarterly Results
In general, Internet usage and online commerce and advertising are seasonally strongest in the fourth quarter and generally slower during the summer months. While we believe that these seasonal trends have affected and will continue to affect our quarterly results, our rapid growth in operations may have overshadowed these effects to date. We believe that our business may become more seasonal in the future.
 
Liquidity and Capital Resources
 
As of December 31, 2011, our principal sources of liquidity were our cash and cash equivalents in the amount of $86.0 million, which primarily are invested in money market funds, and our $105 million revolving credit facility with a syndicate of commercial banks. We completed our initial public offering on January 31, 2011 and received proceeds, net of underwriting discounts but before deducting offering expenses, of $81.8 million from the issuance of 5.2 million shares of common stock.
 
Historically, we have principally financed our operations from the issuance of stock, net cash provided by our operating activities and borrowings under our revolving credit facility. Our cash flows from operating activities are significantly affected by our cash-based investments in operations, including working capital, and corporate infrastructure to support our ability to generate revenue and conduct operations through cost of services, product development, sales and marketing and general and administrative activities. Cash used in investing activities has historically been, and is expected to be, significantly impacted by our upfront investments in content and also reflects our ongoing investments in our platform, company infrastructure and equipment for both service offerings and the net sales and purchases of our marketable securities. During the fourth quarter of 2011, we commenced an evaluation of changes to improve our content creation and distribution platform, through a number of initiatives including creating new content formats to meet rapidly changing consumer demand. Such changes may include increasing our investment in premium video and long-form content, increasing and expanding distribution of our content to our network of customer websites, and an overall reduction in the volume of shorter-form text articles published on eHow.com. In the near term, we also anticipate increased expenditures in non-algorithmic content such as premium video and longer-form or photo-centric content designed to further enhance user engagement. Actions to implement such changes are undertaken only to the extent that we believe that their collective impact would improve the consumer experience on our owned and operated websites and/or increase the future overall revenue generated from our existing portfolio of media content. While we assess such improvements to our content creation and distribution platform, we have begun and expect to maintain a reduced level of overall investment in media content when compared to historical levels. We currently anticipate making investments, including in long-lived media content and the New gTLD Program, of $25 million or more during the year ending December 31, 2012, which amount could fluctuate based on a variety of factors, including our ongoing evaluation of our content and distribution platform, the gTLD auction process, and other investment opportunities.

Since our inception through December 31, 2011 we also used significant cash to make strategic acquisitions to further grow our business, including those detailed in Note 13 (Business Acquisitions) to our consolidated financial statements. We may make further acquisitions in the future.

We announced a $25 million stock repurchase plan on August 19, 2011 which was further increased on February 8, 2012 to $50 million. Under the plan, the Company is authorized to repurchase up to $50 million of its common stock from time to time in open market purchases or in negotiated transactions. During the year ended December 31, 2011, we repurchased 2.3 million shares at an average price of $7.29 per share for an aggregate amount of $17.1 million. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions.

On August 4, 2011, we replaced our previous revolving credit facility by entering into a new credit agreement (the “Credit Agreement”) with a syndicate of commercial banks. The Credit Agreement provides for a $105 million, five year revolving credit facility, with the right (subject to certain conditions) to increase such facility by up to $75 million in the aggregate. The syndicate of commercial banks under the Credit Agreement have no obligation to fund any increase in the size of the facility. The Credit Agreement contains customary events of default and affirmative and negative covenants and restrictions, including certain financial maintenance covenants such as a maximum total net leverage ratio and a minimum fixed charge ratio. As of December 31, 2011, no principal balance was outstanding and approximately $98.0 million was available for borrowing under the Credit Agreement, after deducting the face amount of outstanding standby letters of credit, and we were in compliance with all covenants.
In the future, we may utilize commercial financings, bonds, debentures, lines of credit and term loans with a syndicate of commercial banks or other bank syndicates for general corporate purposes, including acquisitions and investing in our intangible assets, platform and technologies.

62



We expect that our existing cash and cash equivalents, our $105 million revolving credit facility and our cash flows from operating activities will be sufficient to fund our operations for at least the next 24 months. However, we may need to raise additional funds through the issuance of equity, equity-related or debt securities or through additional credit facilities to fund our growing operations, invest in content and make potential acquisitions.
 
The following table sets forth our major sources and (uses) of cash for each period as set forth below:
 
 
Year ended December 31,
 
2009
 
2010
 
2011
 
(In thousands)
Net cash provided by operating activities
$
39,231

 
$
61,624

 
$
85,349

Net cash used in investing activities
(22,791
)
 
(66,296
)
 
(98,539
)
Net cash provided by (used in) financing activities
(54,990
)
 
(10,537
)
 
66,936

 
Cash Flow from Operating Activities
 
Year ended December 31, 2011
 
Net cash inflows from our operating activities of $85.3 million an increase of 38% or $23.7 million compared to the prior year. Our net loss during the period was $(18.5) million, which included non-cash charges of $100.4 million such as depreciation, amortization, stock-based compensation and deferred taxes. The remainder of our sources of net cash flow from operating activities was from changes in our working capital, including increases in deferred revenue, accounts payable and accrued expenses of $14.8 million, offset in part by increases in accounts receivable, deferred registration costs and deposits with registries of $13.3 million. The increases in our deferred revenue and deferred registry fees were primarily due to growth in our Registrar service during the period. The increase in accrued expenses is reflective of increases in amounts due to certain vendors and our employees resulting from growth in our business. The increase in our accounts receivable reflects growth in advertising revenue from our platform including a higher mix of balances from brand advertising sales.
Year ended December 31, 2010
Net cash inflows from our operating activities of $61.6 million primarily resulted from improved operating performance. Our net loss during the year was $5.3 million, which included non-cash charges of $64.3 million such as depreciation, amortization, stock-based compensation and deferred taxes. The remainder of our sources of net cash inflows was from changes in our working capital, including deferred revenue and accrued expenses of $17.6 million, offset by net cash outflows from deferred registry fees and accounts receivable of $16.9 million. The increases in our deferred revenue and deferred registry fees were primarily due to growth in our Registrar service during the period. The increase in accrued expenses is reflective of significant amounts due to certain vendors and our employees. The increase in our accounts receivable reflects growth in advertising revenue from our platform.
Year ended December 31, 2009
Net cash inflows from our operating activities of $39.2 million primarily resulted from improved operating performance. Our net loss during the year was $22.5 million, which included non-cash charges of $56.5 million such as depreciation, amortization, stock-based compensation and deferred taxes. The remainder of our sources of net cash inflows was from changes in our working capital, including deferred revenue and accrued expenses of $10.0 million, offset by net cash outflows from deferred registry fees and accounts receivable of $7.8 million. The increases in our deferred revenue and deferred registry fees were due to growth in our Registrar service during the period. The increase in accrued expenses is reflective of significant amounts due to certain vendors and our employees. The increase in our accounts receivable reflects growth in advertising revenue from our platform.
 
Cash Flow from Investing Activities
 
Year ended December 31, 2009, 2010 and 2011
 
Net cash used in investing activities was $98.5 million, $66.3 million and $22.8 million during the years ended December 31, 2011, 2010 and 2009, respectively. Cash used in investing activities during the year ended December 31, 2011,

63


2010 and 2009 included investments in our intangible assets of $49.3 million, $47.2 million and $22.7 million, respectively, investments in our property and equipment of $18.2 million, $21.4 million and $15.3 million, respectively, which included internally developed software of $18.2 million, $21.4 million and $15.3 million, respectively. Cash flows from investing activities in 2011 also included $31.0 million related to business acquisitions made in 2011 as described in Note 13 (Business Acquisitions) to our consolidated financial statements. Business acquisitions made during the year ended December 31, 2011 included RSS Graffiti for total purchase consideration of $16.3 million and IndieClick Media Group for total purchase consideration of $13.0 million. RSS Graffiti was acquired to enhance our social media service offering and the IndieClick Media Group was acquired to expand our sales organization with particular focus on online properties in the entertainment, music, film, fashion and comedy categories.
 
Cash invested in purchases of intangible assets and property and equipment, including internally developed software, was largely to support the growth of our business and infrastructure during these periods. 

Cash Flow from Financing Activities
 
Year ended December 31, 2009, 2010 and 2011
 
Net cash provided by (used in) financing activities was $66.9 million, $(10.5) million and $(55.0) million during the years ended December 31, 2011, 2010 and 2009, respectively.  Cash provided from financing activities in the year ended December 31, 2011 included $78.5 million in net proceeds from our IPO net of issuance costs of $3.3 million paid in that period. During the year ended December 31, 2011, we repurchased 2.3 million shares of common stock at a cost of $17.1 million and received proceeds of $7.6 million from the exercise of stock options and contributions from participants in our Employee Stock Purchase Plan. We also incurred $1.0 million of costs related to the replacement of our previous credit facility with our Credit Agreement in 2011 which provides for a $105 million, five year revolving loan facility, with the right (subject to certain conditions) to increase such facility by up to $75 million in the aggregate. The syndicate of commercial banks under the Credit Agreement have no obligation to fund any increase in the size of the facility.
 
In early 2009, we decided to borrow funds under our then existing revolving credit facility as a result of instability in the financial markets. During the year ended December 31, 2009, we borrowed $37.0 million from our credit facility with a syndicate of commercial banks, and used $10.0 million of these borrowings to pay down promissory notes issued in conjunction with the acquisition of Pluck in 2008. During the second half of 2009, we paid down $82.0 million of the $92.0 million outstanding under our revolving credit facility, and during the year ended December 31, 2010 we paid down the remaining $10.0 million outstanding under our revolving credit facility as we believed our operations were generating sufficient cash flow to support our operating and investing activities at such time and we had sufficient cash on our balance sheet to do so.
From time to time, we expect to receive cash from the exercise of employee stock options in our common stock. Proceeds from the exercise of employee stock options will vary from period to period based upon, among other factors, fluctuations in the market value of our common stock relative to the exercise price of such stock options. To date, proceeds from employee stock option exercises have not been significant.
 
Off Balance Sheet Arrangements
 
As of December 31, 2011, we did not have any off balance sheet arrangements.
 
Capital Expenditures
 
For the years ended December 31, 2009, 2010 and 2011, we used $15.3 million, $21.4 million and $18.2 million in cash to fund capital expenditures to create internally developed software and purchase equipment. We currently anticipate making capital expenditures of between $15 million and $25 million during the year ending December 31, 2012.
 
Contractual Obligations
The following table summarizes our outstanding contractual obligations as of December 31, 2011:

64


 
Total
 
Less Than
1 Year
 
1-3
Years
 
More Than
3 Years
 
(in thousands)
Operating lease obligations
$
8,548

 
$
3,851

 
$
4,424

 
$
273

Capital lease obligations
17

 
7

 
10

 
—

Purchase obligations(1)
875

 
700

 
175

 
—

Total contractual obligations
$
9,440

 
$
4,558

 
$
4,609

 
$
273


(1) 
consists of minimum contractual purchase obligations for undeveloped websites with one of our partners.
Included in operating lease obligations are agreements to lease our primary office space in Santa Monica, California and other locations under various non-cancelable operating leases that expire between January 2012 and April 2016.
We have no debt obligations, other than our $105.0 million revolving credit facility for general corporate purposes, which currently has no borrowings under it. At December 31, 2011, we had outstanding standby letters of credit for approximately $7.0 million primarily associated with certain payment arrangements with domain name registries and landlords.
Indemnifications
In the normal course of business, we have made certain indemnities under which we may be required to make payments in relation to certain transactions. Those indemnities include intellectual property indemnities to our customers, indemnities to our directors and officers to the maximum extent permitted under the laws of the State of Delaware and indemnifications related to lease agreements. In addition, certain of our advertiser and distribution partner agreements contain certain indemnification provisions, which are generally consistent with those prevalent in our industry. We have not incurred significant obligations under indemnification provisions historically, and do not expect to incur significant obligations in the future. Accordingly, we have no recorded liability for any of these indemnities.
Recent Accounting Pronouncements
See Note 2 of notes to the consolidated financial statements.

Item 7A.                            Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange, inflation, and concentration of credit risk. To reduce and manage these risks, we assess the financial condition of our large advertising network providers, large direct advertisers and their agencies, large Registrar resellers and other large customers when we enter into or amend agreements with them and limit credit risk by collecting in advance when possible and setting and adjusting credit limits where we deem appropriate. In addition, our recent investment strategy has been to invest in high credit quality financial instruments, which are highly liquid, are readily convertible into cash and that mature within three months from the date of purchase.
 
Foreign Currency Exchange Risk
 
While relatively small, we have operations and generate revenue from sources outside the United States. We have foreign currency risks related to our revenue being denominated in currencies other than the U.S. dollar, principally in the Euro and British Pound Sterling and a relatively smaller percentage of our expenses being denominated in such currencies. We do not believe movements in the foreign currencies in which we transact will significantly affect future net earnings or losses. Foreign currency risk can be quantified by estimating the change in cash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We believe such a change would not currently have a material impact on our results of operations. However, as our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we intend to continue to assess our approach to managing this risk.

Inflation Risk
 
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.



65


Concentrations of Credit Risk
 
As of December 31, 2011, our cash and cash equivalents were maintained primarily with four major U.S. financial institutions and two foreign banks. We also maintained cash balances with three Internet payment processors. Deposits with these institutions at times exceed the federally insured limits, which potentially subject us to concentration of credit risk. Historically, we have not experienced any losses related to these balances and believe that there is minimal risk of expected future losses. However, there can be no assurance that there will not be losses on these deposits.
 
As of December 31, 2010 and December 31, 2011, one customer accounted for more than 10% of our consolidated accounts receivable balance:
 
 
December 31,
2010
 
December 31,
2011
Google, Inc.
33%
 
27%
 

Item 8.    Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data required by Item 8 are contained in Item 7 and Item 15 of this Annual Report on Form 10-K and are incorporated herein by reference.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K.
Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2011, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2011. Management reviewed the results of its assessment with our Audit Committee.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.


66


This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to  rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report due to a transition period for newly public companies.

Item 9B.    Other Information
None.

PART III

Item 10.    Directors, Executive Officers, and Corporate Governance
The information required by this item will be set forth in our definitive proxy statement with respect to our 2012 annual meeting of stockholders (the "2012 Proxy Statement") to be filed with the SEC, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2011, and is incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Business Conduct and Ethics is posted on our website at http://ir.demandmedia.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on our corporate website, at the address and location specified above and, to the extent required by the listing standards of the New York Stock Exchange, by filing a Current Report on Form 8-K with the SEC, disclosing such information.

Item 11.    Executive Compensation
The information required by this item will be set forth in the 2012 Proxy Statement and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in the 2012 Proxy Statement and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be set forth in the 2012 Proxy Statement and is incorporated herein by reference.

Item 14.    Principal Accounting Fees and Services
The information required by this item will be set forth in the 2012 Proxy Statement and is incorporated herein by reference.
PART IV

Item 15.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as a part of this Annual Report on Form 10-K:
(a)
Financial Statements:
The following consolidated financial statements are included in this Annual Report on Form 10-K on the pages indicated:

67


(b)
Financial Statement Schedule:
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

(c)
Exhibits

EXHIBIT INDEX
Exhibit No.
 
Description of Exhibit
2.1
 
Securities Purchase Agreement, dated as of August 5, 2011, by and among Demand Media, Inc., RSS Graffiti, LLC, the holders of the membership interests of RSS Graffiti, LLC and Folie Investment Group LLC, as the Seller Representative (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on August 9, 2011)
2.2
 
Stock Purchase Agreement, dated as of August 8, 2011, by and among Demand Media, Inc., IndieClick Media Group, Inc, the holders of the shares of common stock of IndieClick Media Group, Inc. and Peter Luttrell, as the Seller Representative (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed with the SEC on August 9, 2011)
3.1
 
Amended and Restated Certificate of Incorporation of Demand Media, Inc., dated January 28, 2011 (incorporated by reference to Exhibit 3.01 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2011)
3.2
 
Amended and Restated Bylaws of Demand Media, Inc. (incorporated by reference to Exhibit 3.02 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2011)
4.1
 
Form of Demand Media, Inc. Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Company's Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on December 21, 2010)
4.2
 
Third Amended and Restated Stockholders' Agreement, by and among Demand Media, Inc., and the stockholders listed on Exhibit A thereto, dated March 3, 2008 (incorporated by reference to Exhibit 4.02 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
4.2A
 
Amendment No. 1 to Third Amended and Restated Stockholders' Agreement, dated October 21, 2010 (incorporated by reference to Exhibit 4.03 to the Company's Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on October 29, 2010)
10.1
†
Form of Indemnification Agreement entered into by and between Demand Media, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.01 to the Company's Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on October 12, 2010)
10.2
 
Sublease, by and between Dimensional Fund Advisors LP and Demand Media, Inc., dated September 24, 2009 (incorporated by reference to Exhibit 10.02 to the Company's Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on September 16, 2010)
10.3
†
Amended and Restated Demand Media, Inc. 2006 Equity Incentive Plan, adopted April 2006, amended and restated June 26, 2008 (incorporated by reference to Exhibit 10.03 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.3A
†
First Amendment to the Amended and Restated Demand Media, Inc. 2006 Equity Incentive Plan, dated June 1, 2009 (incorporated by reference to Exhibit 10.03A to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)

68


10.4
†
Form of Demand Media, Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement (incorporated by reference to Exhibit 10.06 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.5
†
Form of Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.07 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.6
†
Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Richard Rosenblatt, dated April 19, 2007, amended April 27, 2007, amended further February 10, 2010 (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.7
†
Demand Media Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement, between Demand Media, Inc. and Richard Rosenblatt, dated April 19, 2007, amended April 27, 2007, amended further February 10, 2010 (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.8
†
Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Charles Hilliard, dated June 1, 2007, amended February 9, 2010 (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.9
†
Demand Media, Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement, between Demand Media, Inc. and Charles Hilliard, dated June 1, 2007 (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.10
†
Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Michael Blend, dated May 29, 2008, amended February 10, 2010 (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.11
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Richard Rosenblatt, dated June 2009 (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.12
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Charles Hilliard, dated June 2009 (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.13
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Shawn Colo, dated June 2009 (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.14
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Michael Blend, dated June 2009 (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.15
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and David Panos, dated April 5, 2010 (incorporated by reference to Exhibit 10.29 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.16
†
Demand Media, Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement, between Demand Media, Inc. and Joanne Bradford, dated March 26, 2010 (incorporated by reference to Exhibit 10.30 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.17
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Joanne Bradford, dated March 26, 2010 (incorporated by reference to Exhibit 10.32 to the Company's Amendment No. 6 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 10, 2010)
10.18
†
Demand Media, Inc. 2010 Incentive Award Plan, adopted August 3, 2010 (incorporated by reference to Exhibit 10.04 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.19
†
Form of Demand Media, Inc. 2010 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference to Exhibit 10.05 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)

69


10.20
†
Form of Demand Media, Inc. 2010 Incentive Award Plan Restricted Stock Unit Award Grant Notice and Award Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 9, 2011)
10.21
†
Form of Demand Media, Inc. 2010 Incentive Award Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 12, 2011)
10.22
†
Demand Media, Inc. 2010 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement, between Demand Media, Inc. and Joanne Bradford, dated August 3, 2010 (incorporated by reference to Exhibit 10.31 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.23
†
Demand Media, Inc. 2010 Employee Stock Purchase Plan, dated September 27, 2010 (incorporated by reference to Exhibit 10.26 to the Company's Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on October 29, 2010)
10.24
†
Employment Agreement between Demand Media, Inc. and Richard Rosenblatt, dated August 5, 2010 (incorporated by reference to Exhibit 10.08 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.25
†
Employment Agreement between Demand Media, Inc. and Charles Hilliard, dated August 5, 2010 (incorporated by reference to Exhibit 10.09 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.26
†
Employment Agreement between Demand Media, Inc. and Shawn Colo, dated August 31, 2010 (incorporated by reference to Exhibit 10.10A to the Company's Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on December 21, 2010)
10.27
†
Employment Agreement between Demand Media, Inc. and Joanne Bradford, dated March 15, 2010 (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.27A
†
First Amendment to Employment Agreement between Demand Media, Inc. and Joanne Bradford, dated September 3, 2010 (incorporated by reference to Exhibit 10.13A to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2011)
10.28
†
Employment Agreement between Demand Media, Inc. and David Panos, dated August 24, 2010 (incorporated by reference to Exhibit 10.28 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.29
†
Offer Letter between Demand Media, Inc. and Michael Blend, dated August 1, 2006 (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.30
†
Executive Separation Agreement and General Release between Demand Media, Inc. and Larry Fitzgibbon, dated January 27, 2012 (filed herewith)
10.31
 
Google Services Agreement, between Google, Inc. and Demand Media, Inc., dated May 28, 2010 (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.31A
 
Amendment Number 3 to Google Services Agreement, entered into as of September 1, 2011, between Google, Inc. and Demand Media, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011)
10.32
 
Credit Agreement, dated as of August 4, 2011, among Demand Media, Inc., as Borrower, Silicon Valley Bank, as Administrative Agent, Documentation Agent, Issuing Lender and Swingline Lender, U.S. Bank, N.A., as Syndication Agent and Lenders party thereto from time to time (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 12, 2011)

14.1
 
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.01 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2011)
21.1
 
List of subsidiaries of Demand Media, Inc. (filed herewith)
23.1
 
Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1
 
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2
 
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

70


32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101.INS
 
XBRL Instance Document*
101.SCH
 
XBRL Taxonomy Extension Schema Document*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
 
 
 
 
 
† Indicates management contract or compensatory plan, contract or arrangement.
 
 
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

71


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
DEMAND MEDIA, INC.
 
By:
/s/ RICHARD M. ROSENBLATT
 
 
Richard M. Rosenblatt
 Chairman and Chief Executive Officer

 
Date:  February 24, 2012


POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Richard M. Rosenblatt and Charles S. Hilliard, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, solely for the purposes of filing any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof solely for the purposes stated therein.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
 
Title
 
 
 
/s/ RICHARD M. ROSENBLATT
Richard M. Rosenblatt
 
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ CHARLES S. HILLIARD
Charles S. Hilliard
 
President and Chief Financial Officer (Principal Financial Officer)
/s/ MICHAEL L. ZEMETRA
Michael L. Zemetra
 
Senior Vice President and Controller (Controller)
/s/ FREDRIC W. HARMAN
Fredric W. Harman
 
Director
/s/ VICTOR E. PARKER
Victor E. Parker
 
Director
/s/ GAURAV BHANDARI
Gaurav Bhandari
 
Director
/s/ JOHN A. HAWKINS
John A. Hawkins
 
Director
/s/ JAMES R. QUANDT
James R. Quandt
 
Director
/s/ PETER GUBER
Peter Guber
 
Director
/s/ JOSHUA G. JAMES
Joshua G. James
 
Director
/s/ ROBERT R. BENNETT
Robert R. Bennett
 
Director


72




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 

F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Demand Media, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of Demand Media, Inc. and its subsidiaries (the "Company") as of December 31, 2011 and 2010 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatF we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 24, 2012

F-2




Demand Media, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
 
December 31,
2010
 
December 31,
2011
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
32,338

 
$
86,035

Accounts receivable, net
26,843

 
32,665

Prepaid expenses and other current assets
7,360

 
8,656

Deferred registration costs
44,213

 
50,636

Total current assets
110,754

 
177,992

Deferred registration costs, less current portion
8,037

 
9,555

Deferred tax assets
845

 
42

Property and equipment, net
34,975

 
32,626

Intangible assets, net
102,114

 
111,304

Goodwill
224,920

 
256,060

Other assets
6,822

 
2,524

Total assets
$
488,467

 
$
590,103

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)
 

 
 

Current liabilities
 

 
 

Accounts payable
$
8,330

 
$
10,046

Accrued expenses and other current liabilities
29,570

 
33,932

Deferred tax liabilities
15,248

 
18,288

Deferred revenue
61,832

 
71,109

Total current liabilities
114,980

 
133,375

Deferred revenue, less current portion
14,106

 
14,802

Other liabilities
1,043

 
1,660

Total liabilities
130,129

 
149,837

Commitments and contingencies (Note 8)


 


Convertible preferred stock
 

 
 

Convertible Series A Preferred Stock, $0.0001 par value. Authorized 85,000; issued and outstanding 65,333 shares at December 31, 2010
122,168

 
—

Convertible Series B Preferred Stock, $0.0001 par value. Authorized 15,000; issued and outstanding 9,464 shares at December 31, 2010
17,000

 
—

Convertible Series C Preferred Stock, $0.0001 par value. Authorized 27,000; issued and outstanding 26,047 shares at December 31, 2010
100,098

 
—

Convertible Series D Preferred Stock, $0.0001 par value. Authorized 26,150; issued and outstanding 22,500 shares at December 31, 2010
134,488

 
—

Total convertible preferred stock
373,754

 
—

Stockholders’ equity (deficit)
 

 
 

Common Stock, $0.0001 par value. Authorized 500,000 shares; 15,372 shares issued and outstanding at December 31, 2010 and 85,946 shares issued and 83,605 shares outstanding at December 31, 2011
2

 
10

Additional paid-in capital
36,721

 
528,032

Accumulated other comprehensive income
108

 
59

Treasury stock at cost, 2,341 shares at December 31, 2011
—

 
(17,064
)
Accumulated deficit
(52,247
)
 
(70,771
)
Total stockholders’ equity (deficit)
(15,416
)
 
440,266

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)
$
488,467

 
$
590,103

The accompanying notes are an integral part of these consolidated financial statements. 

F-3


Demand Media, Inc. and Subsidiaries

Consolidated Statements of Operations
 
(In thousands, except per share amounts)
 

 
Year ended December 31,
 
 
2009
 
2010
 
2011
Revenue
 
$
198,452

 
$
252,936

 
$
324,866

Operating expenses
 
 
 
 
 
 
Service costs (exclusive of amortization of intangible assets shown separately below)
 
114,536

 
131,332

 
155,830

Sales and marketing
 
20,044

 
24,424

 
37,394

Product development
 
21,657

 
26,538

 
38,146

General and administrative
 
28,479

 
37,371

 
59,451

Amortization of intangible assets
 
32,152

 
33,750

 
47,174

Total operating expenses
 
216,868

 
253,415

 
337,995

Loss from operations
 
(18,416
)
 
(479
)
 
(13,129
)
Other income (expense)
 
 
 
 
 
 
Interest income
 
494

 
25

 
56

Interest expense
 
(1,759
)
 
(688
)
 
(861
)
Other income (expense), net
 
(19
)
 
(286
)
 
(413
)
Total other expense
 
(1,284
)
 
(949
)
 
(1,218
)
Loss before income taxes
 
(19,700
)
 
(1,428
)
 
(14,347
)
Income tax expense
 
(2,771
)
 
(3,897
)
 
(4,177
)
Net loss
 
(22,471
)
 
(5,325
)
 
(18,524
)
Cumulative preferred stock dividends
 
(30,848
)
 
(33,251
)
 
(2,477
)
Net loss attributable to common stockholders
 
$
(53,319
)
 
$
(38,576
)
 
$
(21,001
)
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(4.78
)
 
$
(2.86
)
 
$
(0.27
)
Weighted average number of shares
 
11,159

 
13,508

 
78,646

 
The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


Demand Media, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)
 
(In thousands)
 
 
Common stock
 
Additional
paid-in
capital
amount
 
Treasury Stock
 
Accumulated
other
comprehensive
income
 
Accumulated
deficit
 
Total
stockholders’
equity (deficit)
 
Shares outstanding
 
Amount
 
 
 
 
 
Balance at December 31, 2008
14,473

 
$
1

 
$
15,649

 
$
—

 
$
55

 
$
(24,451
)
 
$
(8,746
)
Exercise of stock options
289

 
—

 
591

 
—

 
—

 
—

 
591

Repurchase of restricted stock
(237
)
 
—

 
—

 
—

 
—

 
—

 
—

Stock-based compensation expense
—

 
—

 
7,433

 
—

 
—

 
—

 
7,433

Unrealized loss on marketable securities
—

 
—

 
—

 
—

 
(55
)
 
—

 
(55
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
169

 
—

 
169

Net loss
—

 
—

 
—

 
—

 
—

 
(22,471
)
 
(22,471
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(22,302
)
Balance at December 31, 2009
14,525

 
$
1

 
$
23,673

 
$
—

 
$
169

 
$
(46,922
)
 
$
(23,079
)
Grant of restricted stock purchase rights
200

 
—

 
—

 
—

 
—

 
—

 
—

Proceeds from exercise of stock options
647

 
1

 
1,569

 
—

 
—

 
—

 
1,570

Income tax windfall benefits
—

 
—

 
34

 
—

 
—

 
—

 
34

Issuance of warrants to purchase common stock
—

 
—

 
1,880

 
—

 
—

 
—

 
1,880

Stock-based compensation expense
—

 
—

 
9,565

 
—

 
—

 
—

 
9,565

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(61
)
 
—

 
(61
)
Net loss
—

 
—

 
—

 
—

 
—

 
(5,325
)
 
(5,325
)
Comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(5,386
)
Balance at December 31, 2010
15,372

 
$
2

 
$
36,721

 
$
—

 
$
108

 
$
(52,247
)
 
$
(15,416
)
Exercise of stock awards, net
2,806

 
1

 
7,285

 
—

 
—

 
—

 
7,286

Stock option windfall tax benefits
—

 
—

 
126

 
—

 
—

 
—

 
126

Conversion of preferred stock and warrants to common stock
62,149

 
6

 
374,544

 
—

 
—

 
—

 
374,550

Issuance of common stock on IPO, net of issuance costs
5,175

 
1

 
76,902

 
—

 
—

 
—

 
76,903

Issuance of common stock for acquisitions
444

 
—

 
4,322

 
 
 
 
 
 
 
4,322

Repurchases of common stock to be held in treasury
(2,341
)
 
—

 
—

 
(17,064
)
 
—

 
—

 
(17,064
)
Stock-based compensation expense
—

 
—

 
28,132

 
—

 
—

 
—

 
28,132

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(49
)
 
—

 
(49
)
Net loss
—

 
—

 
—

 
—

 
—

 
(18,524
)
 
(18,524
)
Comprehensive loss


 


 


 


 


 


 
(18,573
)
Balance at December 31, 2011
83,605

 
$
10

 
$
528,032

 
$
(17,064
)
 
$
59

 
$
(70,771
)
 
$
440,266

 
The accompanying notes are an integral part of these consolidated financial statements.

F-5


Demand Media, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 (In thousands)
 
Year ended December 31,
 
2009
 
2010
 
2011
Cash flows from operating activities
 
 
 

 
 

Net loss
$
(22,471
)
 
$
(5,325
)
 
$
(18,524
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 

 
 

Depreciation and amortization
47,115

 
52,016

 
68,132

Deferred income taxes
2,208

 
2,980

 
3,170

Stock-based compensation
7,171

 
9,329

 
28,730

Other
(311
)
 
394

 
321

Change in operating assets and liabilities, net of effect of acquisitions
 
 
 

 
 

Accounts receivable
(4,172
)
 
(8,344
)
 
(4,603
)
Prepaid expenses and other current assets
(437
)
 
124

 
1,501

Deferred registration costs
(3,608
)
 
(8,600
)
 
(7,882
)
Deposits with registries
1,329

 
(305
)
 
(840
)
Other assets
1,345

 
545

 
522

Accounts payable
1,100

 
1,237

 
1,251

Accrued expenses and other liabilities
4,247

 
6,886

 
3,598

Deferred revenue
5,715

 
10,687

 
9,973

Net cash provided by operating activities
39,231

 
61,624

 
85,349

Cash flows from investing activities
 
 
 

 
 

Purchases of property and equipment
(15,327
)
 
(21,404
)
 
(18,246
)
Purchases of intangible assets
(22,701
)
 
(47,192
)
 
(49,283
)
Purchases of marketable securities
(48,916
)
 
(975
)
 
—

Proceeds from maturities and sales of marketable securities
64,069

 
3,275

 
—

Cash paid for acquisitions, net of cash acquired
(525
)
 
—

 
(31,010
)
Other investing activities
609

 
—

 
—

Net cash used in investing activities
(22,791
)
 
(66,296
)
 
(98,539
)
Cash flows from financing activities
 
 
 

 
 

Proceeds from line of credit
37,000

 
—

 
—

Payments on line of credit and notes payable
(92,000
)
 
(10,000
)
 
—

Principal payments on capital lease obligations
(581
)
 
(546
)
 
(520
)
Proceeds from issuances of common stock (net of issuance costs of $3,336)
—

 
—

 
78,480

Proceeds from exercises of stock options and contributions to ESPP
591

 
1,552

 
7,599

Windfall tax benefit from exercises of stock options
—

 
34

 
126

Repurchases of common stock
—

 
—

 
(17,064
)
Issuance costs related to debt and equity financings
—

 
(1,577
)
 
(960
)
Payments of withholding tax on net exercise of stock-based awards
—

 
—

 
(725
)
Net cash provided by (used in) financing activities
(54,990
)
 
(10,537
)
 
66,936

Effect of foreign currency on cash and cash equivalents
169

 
(61
)
 
(49
)
Change in cash and cash equivalents
(38,381
)
 
(15,270
)
 
53,697

Cash and cash equivalents, beginning of period
85,989

 
47,608

 
32,338

Cash and cash equivalents, end of period
$
47,608

 
$
32,338

 
$
86,035

 
 
 
 
 
 
Supplemental disclosure of cash flows
 
 
 

 
 

Cash paid for interest
$
2,129

 
$
358

 
$
390

Cash paid for income taxes
175

 
452

 
960

 The accompanying notes are an integral part of these consolidated financial statements.

F-6



Demand Media, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)
 
(In thousands, except per share amounts)
 
1.
Company Background and Overview
 
Demand Media, Inc., together with its consolidated subsidiaries (the “Company”) is a Delaware corporation headquartered in Santa Monica, California. The Company’s business is focused on an Internet-based model for the professional creation of content at scale, and is comprised of two distinct and complementary service offerings, Content & Media and Registrar.
 
Content & Media
 
The Company’s Content & Media service offering is engaged in creating long-lived media content, primarily consisting of text articles and videos, and delivering it along with social media and monetization tools to the Company’s owned and operated websites and network of customer websites. Content & Media services are delivered through the Company’s Content & Media platform, which includes its content creation studio, social media applications and a system of monetization tools designed to match content with advertisements in a manner that is optimized for revenue yield and end-user experience.
 
Registrar
 
The Company’s Registrar service offering provides domain name registration and related value added service subscriptions to third parties through its wholly owned subsidiary, eNom.
 
Initial Public Offering
 
In January 2011, the Company completed its initial public offering whereby it received proceeds, net of underwriters discounts but before deducting offering expenses, of $81,817 from the issuance of 5,175 shares of common stock. As a result of the initial public offering, all shares of the Company’s convertible preferred stock converted into 61,672 shares of common stock and warrants to purchase common stock or convertible preferred stock net exercised into 477 shares of common stock.
 
Reverse Stock-Split
 
In October 2010, the Company’s stockholders approved a 1-for-2 reverse stock split of its outstanding common stock, and a proportional adjustment to the existing conversion ratios for each series of preferred stock which was effected in January 2011. Accordingly, all common stock share and per share amounts for all periods presented in these consolidated financial statements and notes thereto, have been adjusted retrospectively, where applicable, to reflect this reverse split and adjustment of the preferred stock conversion ratio.

2.
Summary of Significant Accounting Policies
 
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.
  
Principles of Consolidation
 
The consolidated financial statements include the accounts of Demand Media, Inc. and its wholly owned subsidiaries. Acquisitions are included in the Company’s consolidated financial statements from the date of the acquisition. The Company’s purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All significant intercompany transactions and balances have been eliminated in consolidation.
 
Investments in affiliates over which the Company has the ability to exert significant influence, but does not control and is not the primary beneficiary of, including NameJet, LLC (“NameJet”), are accounted for using the equity method of accounting. Investments in affiliates which the Company has no ability to exert significant influence are accounted for using the cost method of accounting. The Company’s proportional shares of affiliate earnings or losses accounted for under the equity method of accounting, which are not material for all periods presented, are included in other income (expense) in the

F-7


Company’s consolidated statements of operations. Affiliated companies are not material individually or in the aggregate to the Company’s financial position, results of operations or cash flows for any period presented.
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue, allowance for doubtful accounts, investments in equity interests, fair value of issued and acquired stock warrants, the assigned value of acquired assets and assumed liabilities in business combinations, useful lives and impairment of property and equipment, intangible assets and goodwill, the fair value of the Company’s equity-based compensation awards, and deferred income tax assets and liabilities. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents. The Company considers funds transferred from its credit card service providers but not yet deposited into its bank accounts at the balance sheet dates, as funds in transit and these amounts are recorded as unrestricted cash, since the amounts are generally settled the day after the outstanding date. Cash and cash equivalents consist primarily of checking accounts, money market accounts, money market funds, and short-term certificates of deposit.
Investments in Marketable Securities
Investments in marketable securities are classified as available for sale and are recorded at fair value, with the unrealized gains and losses if any, net of taxes, reported as a component of shareholders' deficit until realized or until a determination is made that an other-than-temporary decline in market value has occurred.    
When the Company does not intend to sell a debt security, and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. The Company did not have any securities with other-than-temporary impairment at December 31, 2010 and 2011.
In determining whether other-than-temporary impairment exists for equity securities, management considers: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company has determined that there has been no impairment of its equity marketable securities to date.
The cost of marketable securities sold is based upon the specific identification method and any realized gains or losses on the sale of investments are reflected as a component of interest income or expense. The unrealized gains or losses on short-term marketable securities were not significant for the years ended December 31, 2009, 2010 and 2011.
In addition, the Company classifies marketable securities as current or non-current based upon whether such assets are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business.
 
Revenue Recognition
 
The Company recognizes revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. The Company considers persuasive evidence of a sales arrangement to be the receipt of a signed contract or insertion order. Collectability is assessed based on a number of factors, including transaction history with the customer and the credit worthiness of the customer. If it is determined that the collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. The Company records cash received in advance of revenue recognition as deferred revenue.
 


F-8


For arrangements with multiple deliverables, the Company allocates revenue to each deliverable if the delivered item(s) has value to the customer on a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.  The fair value of the selling price for a deliverable is determined using a hierarchy of (1) Company specific objective and reliable evidence, then (2) third-party evidence, then (3) best estimate of selling price.  The Company allocates any arrangement fee to each of the elements based on their relative selling prices.
 
The Company’s revenue is principally derived from the following services:

Content & Media
 
Advertising Revenue.  Advertising revenue is generated by performance-based Internet advertising, such as cost-per-click, or CPC, in which an advertiser pays only when a user clicks on its advertisement that is displayed on the Company’s owned and operated websites and customer websites; fees generated by users viewing third-party website banners and text-link advertisements; fees generated by enabling customer leads or registrations for partners; and fees from referring users to, or from users making purchases on, sponsors’ websites. In determining whether an arrangement exists, the Company ensures that a binding arrangement is in place, such as a standard insertion order or a fully executed customer-specific agreement. Obligations pursuant to the Company’s advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of the other performance criteria. Revenue from performance-based arrangements, including referral revenue, is recognized as the related performance criteria are met. The Company assesses whether performance criteria have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and an analysis of the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of third-party performance data to the contractual performance obligation and to internal or customer performance data in circumstances where that data is available.
 
When the Company enters into advertising revenue sharing arrangements where it acts as the primary obligor, the Company recognizes the underlying revenue on a gross basis. In determining whether to report revenue gross for the amount of fees received from the advertising networks, the Company assesses whether it maintains the principal relationship with the advertising network, whether it bears the credit risk and whether it has latitude in establishing prices. In circumstances where the customer acts as the primary obligor, the Company recognizes the underlying revenue on a net basis.
 
In certain cases, the Company records revenue based on available and preliminary information from third parties. Amounts collected on the related receivables may vary from reported information based upon third-party refinement of estimated and reported amounts owing that occurs typically within 30 days of the period end. For the years ended December 31, 2009, 2010 and 2011, the difference between the amounts recognized based on preliminary information and cash collected was not material.
 
Content Revenue. Content revenue is generated through the sale or license of media content. Revenue from the sale or perpetual license of content is recognized when the content has been delivered and the contractual performance obligations has been fulfilled. Revenue from the license of content is recognized over the period of the license as content is delivered or when other related performance criteria are fulfilled.

Subscription Services and Social Media Services.  Subscription services revenue is generated through the sale of membership fees paid to access content available on certain owned and operated websites. The majority of the memberships range from 6 to 12 month terms, and renew automatically at the end of the membership term, if not previously canceled. Subscription services revenue is recognized on a straight-line basis over the membership term.
 
The Company configures, hosts, and maintains its platform social media services under private-labeled versions of software for commercial customers. The Company earns revenue from its social media services through initial set-up fees, recurring management support fees, overage fees in excess of standard usage terms, and outside consulting fees. Due to the fact that social media services customers have no contractual right to take possession of the Company’s private labeled software, the Company accounts for its social media services revenue as service arrangements, whereby social media services revenue is recognized when persuasive evidence of an arrangement exists, delivery of the service has occurred and no significant obligations remain, the selling price is fixed or determinable, and collectability is reasonably assured.

Social media service arrangements may contain multiple deliverables, including, but not limited to, single arrangements containing set-up fees, monthly support fees and overage billings, consulting services and advertising services. To the extent that consulting services have value on a standalone basis, the Company allocates revenue to each element in the multiple deliverable arrangement based upon their relative fair values.  Fair value is determined based upon the best estimate of

F-9


the selling price. To date, substantially all consulting services entered into concurrent with the original social media service arrangements are not treated as separate deliverables as such services do not have value to the customer on a standalone basis. In such cases, the arrangement is treated as a single unit of accounting with the arrangement fee recognized over the term of the arrangement on a straight-line basis.  Set-up fees are recognized as revenue on a straight-line basis over the greater of the contractual or estimated customer life once monthly recurring services have commenced. The Company determines the estimated customer life based on analysis of historical attrition rates, average contractual term and renewal expectations. The Company periodically reviews the estimated customer life at least quarterly and when events or changes in circumstances, such as significant customer attrition relative to expected historical of projected future results, occur. Overage billings are recognized when delivered and at contractual rates in excess of standard usage terms.
 
Outside consulting services performed for customers that have value on a stand-alone basis are recognized as services are performed.
 
Registrar
 
Domain Name Registration Service Fees.  Registration fees charged to third parties in connection with new, renewed, and transferred domain name registrations are recognized on a straight-line basis over the registration term, which customarily range from one to two years but can extend to ten years. Payments received in advance of the domain name registration term are included in deferred revenue in the accompanying consolidated balance sheets. The registration term and related revenue recognition commences once the Company confirms that the requested domain name has been recorded in the appropriate registry under contractual performance standards. Associated direct and incremental costs, which principally consist of registry and Internet Corporation for Assigned Names and Numbers ("ICANN") fees, are also deferred and amortized to service costs on a straight-line basis over the registration term.
 
The Company’s wholly owned subsidiary, eNom, is an ICANN accredited registrar. Thus, the Company is the primary obligor with its reseller and retail registrant customers and is responsible for the fulfillment of its registrar services. As a result, the Company reports revenue derived from the fees it receives from resellers and retail registrant customers for registrations on a gross basis in the accompanying consolidated statements of operations. A minority of the Company’s resellers have contracted with the Company to provide billing and credit card processing services to the resellers’ retail customer base in addition to domain name registration services. Under these circumstances, the cash collected from these resellers’ retail customer base is in excess of the fixed amount per transaction that the Company charges for domain name registration services. As such, these amounts, which are collected for the benefit of the reseller, are not recognized as revenue and are recorded as a liability until remitted to the reseller on a periodic basis. Revenue from these resellers is reported on a net basis because the reseller determines the price to charge retail customers and maintains the primary customer relationship.
 
Value Added Services.  Revenue from online value added services, which includes, but is not limited to, web hosting services, email services, domain name identification protection, charges associated with alternative payment methods, and security certificates, is recognized on a straight-line basis over the period in which services are provided. Payments received in advance of services being provided are included in deferred revenue.
 
Auction Service Revenue.  Domain name auction service revenue represents fees received from selling third-party owned domains via an online bidding process primarily through NameJet, a domain name aftermarket auction company formed in October 2007 by the Company and an unrelated third party. For names sold through the auction process that are registered on the Company’s registrar platform upon sale, the Company has determined that auction revenue and related registration revenue represent separate units of accounting given the domain name has value to the customers on a standalone basis.  As a result, the Company recognizes the related registration fees on a straight-line basis over the registration term. The Company recognizes the bidding portion of auction revenue upon sale, net of payments to third parties since it is acting as an agent only.

Service Costs
 
Service costs consist primarily of fees paid to registries and ICANN associated with domain registrations, advertising revenue recognized by the Company and shared with its customers or partners as a result of its revenue-sharing arrangements, such as traffic acquisition costs and content revenue-sharing arrangements, Internet connection and co-location charges and other platform operating expenses associated with the Company’s owned and operated and customer websites, including depreciation of the systems and hardware used to build and operate the Company’s Content & Media platform and Registrar, personnel costs relating to in-house editorial, customer service, information technology and certain content production costs such as our multi-channel video deal with Youtube.



F-10


Registry fee expenses consist of payments to entities accredited by ICANN as the designated registry related to each top level domain (“TLD”). These payments are generally fixed dollar amounts per domain name registration period and are recognized on a straight-line basis over the registration term. The costs of renewal registration fee expenses for owned and operated undeveloped websites are also included in service costs. Amortization of the cost of website names and media content owned by the Company is included in amortization of intangible assets.
 
Accounts Receivable
Accounts receivable primarily consist of amounts due from:
•
Third parties who provide advertising services to the Company's owned and operated websites in exchange for a share of the underlying advertising revenue. Accounts receivable from third parties are recorded as the amount of the revenue share as reported to the Company by the advertising networks and are generally due within 30 to 45 days from the month-end in which the invoice is generated. Certain accounts receivable from these parties are billed quarterly and are due within 45 days from the quarter-end in which the invoice is generated, and are non-interest bearing;
•
Social media services customers and include (i) account set-up fees, which are generally billed and collected once set-up services are completed, (ii) monthly recurring services, which are billed in advance of services on a quarterly or monthly basis, (iii) account overages, which are billed when incurred and contractually due, and (iv) consulting services, which are generally billed in the same manner as set-up fees. Accounts receivable from social media customers are recorded at the invoiced amount, are generally due within 30 days and are non-interest bearing;
•
Direct advertisers who engage the Company to deliver branded advertising impressions. Accounts receivable from direct advertisers are recorded at negotiated advertising rates (customarily based on advertising impressions) and as the related advertising is delivered over the Company's owned and operated websites. Direct advertising accounts receivable are generally due within 30 to 60 days from the date the advertising services are delivered and billed; and,
•
Customers who syndicate the Company's content over their websites in exchange for a share of related advertising revenue. Accounts receivable from these customers are recorded at the revenue share as reported by the underlying customers and are generally due within 30 to 45 days.
The Company's Registrar services are primarily conducted on a prepaid basis or through credit card or Internet payments processed at the time a transaction is consummated, and as such, the Company does not carry significant receivables related to these business activities.
Receivables from registries represent refundable amounts for registrations that were placed on auto-renew status by the registries, but were not explicitly renewed by a registrant as of the balance sheet dates. Registry services accounts receivable is recorded at the amount of registration fees paid by the Company to a registry for all registrations placed on auto-renew status. Subsequent to the lapse of a prior registration period, a registrant either renews the applicable domain name with the Company, which results in the application of the refundable amount to a consummated transaction, or the registrant lets the domain name registration expire, which results in a refund of the applicable amount from a registry to the Company.
The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables from its customers based on its best estimate of the amount of probable losses in existing accounts receivable. The Company determines the allowance based on analysis of historical bad debts, advertiser concentrations, advertiser credit-worthiness and current economic trends. In addition, past due balances over 90 days and specific other balances are reviewed individually for collectability at least quarterly.
The allowance for doubtful account activity for the years ended December 31, 2009, 2010 and 2011 is as follows:
 
Balance at
beginning of
period
 
Charged to
costs and
expenses
 
Write-offs, net
of recoveries
 
Balance at end
of period
Allowance for doubtful accounts:
 
 
 
 
 
 
 
December 31, 2009
$
413

 
$
178

 
$
(199
)
 
$
392

December 31, 2010
392

 
144

 
(136
)
 
400

December 31, 2011
400

 
125

 
(106
)
 
419



Deferred Revenue and Deferred Registration Costs
 
Deferred revenue consists substantially of amounts received from customers in advance of the Company’s performance for domain name registration services, licensing and subscription services for premium media content, social

F-11


media services and online value added services. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the unexpired term of the related domain name registration, media subscription as services are rendered, over customer useful life, or online value added service period.
 
Deferred registration costs represent incremental direct costs made to registries, ICANN, and other third parties for domain name registrations and are recorded as a deferred cost on the balance sheets. Deferred registration costs are amortized to expense on a straight-line basis concurrently with the recognition of the related domain name registration revenue and are included in service costs.

Property and equipment
 
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Computer equipment is amortized over two to five years, software is amortized over two to three years, and furniture and fixtures are amortized over seven to ten years. Leasehold improvements are amortized straight-line over the shorter of the remaining lease term or the estimated useful lives of the improvements ranging from one to ten years. Upon the sale or retirement of property or equipment, the cost and related accumulated depreciation or amortization is removed from the Company’s financial statements with the resulting gain or loss reflected in the Company’s results of operations. Repairs and maintenance costs are expensed as incurred. In the event that property and equipment is no longer in use, the Company will record a loss on disposal of the property and equipment, which is computed as difference between the sales price, if any, and the net remaining value (gross amount of property and equipment less accumulated depreciation expense) of the related equipment at the date of disposal.
 
Intangibles—Undeveloped Websites
 
The Company capitalizes costs incurred to acquire and to initially register its owned and operated undeveloped websites (i.e. Uniform Resource Locators). The Company amortizes these costs over the expected useful life of the underlying undeveloped websites on a straight-line basis. The expected useful lives of the website names range from 12 months to 84 months. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on historical experience with domain names of similar quality and value.
 
In order to maintain the rights to each undeveloped website acquired, the Company pays periodic renewal registration fees, which generally cover a minimum period of twelve months. The Company records renewal registration fees of website name intangible assets in deferred registration costs and amortizes the costs over the renewal registration period, which is included in service costs.
 
Intangibles—Media Content
 
The Company capitalizes the direct costs incurred to acquire its media content that is determined to embody a probable future economic benefit. Costs are recognized as finite lived intangible assets based on their acquisition cost to the Company. Direct content costs primarily represent amounts paid to unrelated third parties for completed content units, and to a lesser extent, specifically identifiable internal direct labor costs incurred to enhance the value of specific content units acquired prior to their publication. Internal costs not directly attributable to the enhancement of an individual content unit acquired are expensed as incurred. All costs incurred to deploy and publish content are expensed as incurred, including the costs incurred for the ongoing maintenance of the Company’s websites in which the Company’s content is deployed.
 
Capitalized media content is amortized on a straight-line basis over five years, representing the Company’s estimate of the pattern that the underlying economic benefits are expected to be realized and based on its estimates of the projected cash flows from advertising revenue expected to be generated by the deployment of its content. These estimates are based on the Company’s plans and projections, comparison of the economic returns generated by its content of comparable quality and an analysis of historical cash flows generated by that content to date. Amortization of media content is included in amortization of intangible assets in the accompanying statement of operations and the acquisition costs are included in purchases of intangible assets within cash flows from investing activities in the Consolidated Statements of Cash Flows.
 
Intangibles—Acquired in Business Combinations
 
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase price of each acquired business to its respective net tangible and intangible assets. Acquired intangible assets include: trade names, non-compete agreements, owned website names, customer relationships, technology, media content, and content publisher relationships. The Company determines the appropriate useful

F-12


life by performing an analysis of expected cash flows based on historical experience of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight line method which approximates the pattern in which the economic benefits are consumed.

Long-lived Assets
 
The Company evaluates the recoverability of its long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such trigger events or changes in circumstances may include: a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate, including those resulting from technology advancements in the industry, the impact of competition or other factors that could affect the value of a long-lived asset, a significant adverse deterioration in the amount of revenue or cash flows we expect to generate from an asset group, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company performs impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable and the expected undiscounted future cash flows attributable to the asset group are less than the carrying amount of the asset group, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Fair value is determined based upon estimated discounted future cash flows. Through December 31, 2011, the Company has identified no such impairment loss. Assets to be disposed of would be separately presented on the balance sheets and reported at the lower of their carrying amount or fair value less costs to sell, and would no longer be depreciated or amortized.
 
Throughout 2011, Google, the largest provider of search engine referrals to the majority of the Company's websites, deployed a series of changes to its search engine algorithms, some of which have led the Company to experience a substantial reduction in the total number of Google search referrals to its owned and operated websites. The overall impact of these changes on the Company's owned and operated websites was negative primarily due to a decline in traffic to eHow.com. the Company's largest website.  The Company determined that the resulting decline in page views did not represent an indication of impairment of its Content & Media long-lived assets, including goodwill, based on an assessment of all relevant factors including increasing advertising yields and diversification of traffic sources contributing to continued growth in revenue and cash flows.

During the fourth quarter of 2011, and in response to the various changes in search engine algorithms in 2011, the Company performed an evaluation of its existing content library to assess improvements in its content creation and distribution platform. As a result of this evaluation, the Company elected to remove certain content assets from service, resulting in $5,898 of accelerated amortization expense in the fourth quarter of 2011. The evaluation was substantially completed in 2011. Any further discretionary actions may result in additional accelerated amortization in the periods the actions occur.

    We intend to evolve and continuously improve our content creation and distribution platform, by creating new content formats to meet rapidly changing consumer demand. Such changes may include increasing our investment in video and long-form content, increasing and expanding distribution of our content to our network of customer websites, and an overall reduction in the volume of shorter-form text articles published on eHow.com. In the near term we also anticipate increased expenditures in non-algorithmic content such as video, longer-form and photo-centric content designed to further enhance user engagement.
There can be no assurance that these changes or any future changes that may be implemented by the Company, by search engines to their algorithms and search methodologies, or by consumers in their web usage habits might not adversely impact the carrying value, estimated useful life or intended use of our long-lived assets. The Company will continue to monitor these changes as well as any future changes and emerging trends in search engine algorithms and methodologies, including the resulting impact that these changes may have on future operating results, the economic performance of the Company's long-lived assets and in its assessment as to whether significant changes in circumstances might provide an indication of potential impairment of the carrying value of its long-lived assets including its media content and goodwill arising from acquisitions.

Goodwill
 
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company tests goodwill for impairment annually during the fourth quarter of its fiscal year or when events or circumstances

F-13


change that would indicate that goodwill might be impaired. Events or circumstances which could trigger an impairment review include, but are not limited to a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.
 
The testing for a potential impairment of goodwill involves a two-step process. The first step is to identify whether a potential impairment exists by comparing the estimated fair values of the Company’s reporting units with their respective book values, including goodwill. If the estimated fair value of the reporting unit exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, then the second step is performed to determine if goodwill is impaired and to measure the amount of impairment loss, if any. The amount of the impairment loss is the excess of the carrying amount of the goodwill over its implied fair value. The estimate of implied fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit but may require valuations of certain internally generated and unrecognized intangible assets such as the Company’s software, technology, patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

The fair value of each reporting unit exceeded its carrying value in the first step of the Company's fourth quarter of 2011 and 2010 impairment tests.
 
Operating Leases
For operating leases that include rent free periods or escalation clauses over the term of the lease, the Company recognizes rent expense on a straight-line basis and the difference between expense and amounts paid are recorded as deferred rent in current and long-term liabilities.
Advertising Costs    
Advertising costs are expensed as incurred and generally consist of Internet based advertising, sponsorships, and trade shows. Such costs are included in sales and marketing expense in Company's consolidated statements of operations. Advertising expense was $2,230, $2,699 and $2,697 for the years ended December 31, 2009, 2010 and 2011, respectively.
Stock-Based Compensation
 
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period, on a straight-line basis. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options that do not include market conditions. Stock-based awards are comprised principally of stock options, restricted stock purchase rights (“RSPR”), restricted stock awards (“RSA”) and restricted stock units ("RSU").

 Under the Company's Employee Stock Purchase Plan (the "ESPP"), eligible officers and employees may purchase a limited amount of our common stock at a discount to the market price in accordance with the terms of the plan as described in Note 11 - Share-based Compensation Plans and Awards. The Company uses the Black-Scholes option pricing model to determine the fair value of the ESPP awards granted which is recognized straight-line over the total offering period.  
    
Some equity awards granted by the Company contain certain performance and/or market conditions. The Company recognizes compensation cost for awards with performance conditions based upon the probability of that performance condition being met, net of an estimate of pre-vesting forfeitures. Awards granted with performance and/or market conditions are amortized using the graded vesting method.
 
The effect of a market condition is reflected in the award’s fair value on the grant date. The Company uses a Monte Carlo simulation model or binomial lattice model to determine the grant date fair value of awards with market conditions. Compensation cost for an award that has a market condition is recognized as the requisite service period is fulfilled, even if the market condition is never satisfied.

Stock-based awards issued to non-employees are accounted for at fair value determined using the Black-Scholes option-pricing model. Management believes that the fair value of the stock options is more reliably measured than the fair value of the services received. The fair value of each non-employee stock-based compensation award is re-measured each period until a commitment date is reached, which is generally the vesting date.


F-14




Stock Repurchases

Under a stock repurchase plan, shares repurchased by the Company are accounted for when the transaction is settled. Repurchased shares held for future issuance are classified as treasury stock. Shares formally or constructively retired are deducted from common stock at par value and from additional paid in capital for the excess over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the repurchased shares.
Product Development and Software Development Costs
Product development expenses consist primarily of expenses incurred in research and development, software engineering and web design activities and related personnel compensation to create, enhance and deploy our software infrastructure. Product and software development costs, other than software development costs qualifying for capitalization, are expensed as incurred. Costs of computer software developed or obtained for internal use that are incurred in the preliminary project and post implementation stages are expensed as incurred. Certain costs incurred during the application and development stage, which include compensation and related expenses, costs of computer hardware and software, and costs incurred in developing additional features and functionality of the services, are capitalized. The estimated useful life of costs capitalized is evaluated for each specific project. Capitalized costs are generally amortized using the straight-line method over a three year estimated useful life, beginning in the period in which the software is ready for its intended use. Unamortized amounts are included in property and equipment, net in the accompanying consolidated balance sheets. The net book value of capitalized software development costs is $16,362 (net of $11,371 accumulated amortization) and $15,837 (net of $18,332 accumulated amortization) as of December 31, 2010 and 2011, respectively.
Preferred Stock Warrants
Preferred stock warrants on shares subject to mandatory or contingent redemption are classified as liabilities as the underlying preferred stock contains provisions that allow the holders the right to receive cash in the event of a deemed liquidation. Preferred stock warrants are recorded at fair value and are remeasured each reporting period, with changes in fair value recorded in other income (expense) in the accompanying statements of operations.
Income Taxes
 
Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the realizability of deferred tax assets and recognizes a valuation allowance for its deferred tax assets when it is more likely than not that a future benefit on such deferred tax assets will not be realized.
 
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in its income tax (benefit) provision in the accompanying statements of operations.
 
Net Loss Per Share
 
Basic loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders is increased for cumulative preferred stock dividends earned during the period. Diluted loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average common shares outstanding plus potentially dilutive common shares. Because the Company reported losses for the periods presented, all potentially dilutive common shares comprising of stock options, RSPRs, RSUs, stock from the employee stock purchase plan, warrants and convertible preferred stock are antidilutive.
 
RSPRs and RSUs and other restricted awards are considered outstanding common shares and included in the computation of basic earnings per share as of the date that all necessary conditions of vesting are satisfied. RSPRs and RSUs are excluded from the dilutive earnings per share calculation when their impact is antidilutive. Prior to satisfaction of all conditions of vesting, unvested RSPRs are considered contingently issuable shares and are excluded from weighted average

F-15


common shares outstanding.
Foreign Currency Transactions
Foreign currency transaction gains and losses are charged or credited to earnings as incurred. For the years ended December 31, 2009, 2010 and 2011, foreign currency transaction gains and losses that are included in other income (expense) in the accompanying statements of operations were not material.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S. dollars. Where the functional currency of a foreign subsidiary is its local currency, balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the period. Gains and losses resulting from translation are accumulated in accumulated other comprehensive earnings (loss) within stockholders' equity (deficit).
Fair Value of Financial Instruments
 
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company measures its financial assets and liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
 
•
Level 1—valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds.
 
•
Level 2—valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government and agency debt securities, and certain corporate obligations.

Valuations are usually obtained from third-party pricing services for identical or comparable assets or liabilities.
 
•
Level 3—valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
 
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk in its assessment of fair value.

The Company chose not to elect the fair value option for its financial assets and liabilities that had not been previously carried at fair value. Therefore, material financial assets and liabilities not carried at fair value, such as trade accounts receivable and payables, are reported at their carrying values.
 
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, receivables from domain name registries, registry deposits, accounts payable, accrued liabilities and customer deposits approximate fair value because of their short maturities.  The Company’s investments in marketable securities are recorded at fair value.  Prior to the net exercise of the Series C preferred stock warrants concurrent with the Company’s initial public offering, the Series C preferred stock warrants were recorded at fair value with changes in fair value recorded in other income (expense), net. Certain assets, including equity investments, investments held at cost, goodwill and intangible assets are also subject to measurement at fair value on a nonrecurring basis, if they are deemed to be impaired as the result of an impairment review. For the year ended December 2009, 2010 and 2011, no impairments were recorded on those assets required to be measured at fair value on a nonrecurring basis.
 

F-16


Financial assets and liabilities carried at fair value on a recurring basis were as follows:
 
December 31, 2010
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 

 
 

 
 

 
 

Cash equivalents(1)
$
—

 
$
18,702

 
$
—

 
$
18,702

Total assets at fair value
$
—

 
$
18,702

 
$
—

 
$
18,702

Liabilities
 

 
 

 
 

 
 

Series C preferred stock warrants(2)
—

 
—

 
477

 
477

Total liabilities at fair value
$
—

 
$
—

 
$
477

 
$
477

 ___________________________________
(1) comprises money market funds which are included in Cash and cash equivalents in the accompanying balance sheet
(2) included in Other liabilities in the accompanying balance sheet

December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 

 
 

 
 

 
 

Cash equivalents(1)
$
54,701

 
$
15,447

 
$
—

 
$
70,148

Total assets at fair value
$
54,701

 
$
15,447

 
$
—

 
$
70,148

___________________________________
(1)comprises money market funds which are included in Cash and cash equivalents in the accompanying balance sheet

For financial assets that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including quoted market prices (Level 1 inputs) or inputs that are derived principally from or corroborated by observable market data (Level 2 inputs). The fair value of the Company’s Series C preferred stock warrants was classified as a Level 3 instrument, as it uses unobservable inputs and requires management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments.
 
The following table presents a reconciliation of the Company’s liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2009, 2010 and 2011:
 
 
Series C
Preferred
Stock
Warrants
Balance at December 31, 2008
$
166

Change in fair value included in other income (expense)
59

Balance at December 31, 2009
225

Change in fair value included in other income (expense)
252

Balance at December 31, 2010
477

Change in fair value included in other income (expense)
319

Conversion into common stock
(796
)
Balance at December 31, 2011
$
—

 

Recent Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update 2011-04, “Fair Value Measurement” (“ASU 2011-04”). The primary focus of ASU 2011-04 is the convergence of accounting requirements for fair value measurements and related financial statement disclosures under U.S. GAAP and International Financial Reporting Standards (“IFRS”). While ASU 2011-04 does not significantly change existing guidance for measuring fair value, it does require additional disclosures about fair value measurements and changes the wording of certain requirements in the guidance to achieve consistency with IFRS. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and is required to be applied prospectively. The Company does

F-17


not anticipate a material impact to the consolidated financial statements upon adoption in 2012.
In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). This guidance requires companies to present the components of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, amounts reclassified from Other Comprehensive Income ("OCI") to net income for each reporting period must be displayed as components of both net income and OCI on the face of the financial statements. The guidance does not change the items that are reported in OCI. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. Other than presentational changes, the Company does not anticipate a significant impact to the consolidated financial statements upon adoption in 2012.
In September 2011, FASB issued amendments to its accounting guidance on testing goodwill for impairment. The amendments allow entities to use a qualitative approach to test goodwill for impairment. This permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance is effective for annual and interim goodwill impairment test performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company did not early adopt this guidance and does not anticipate a material impact to the consolidated financial statements upon adoption in 2012.

3.
Property and Equipment
 
Property and equipment consisted of the following:
 
 
December 31,
2010
 
December 31,
2011
Computers and other related equipment
$
29,632

 
$
33,680

Purchased and internally developed software
36,501

 
45,074

Furniture and fixtures
2,280

 
2,380

Leasehold improvements
2,740

 
3,368

 
71,153

 
84,502

Less accumulated depreciation
(36,178
)
 
(51,876
)
Property and equipment, net
$
34,975

 
$
32,626


At December 31, 2010 and 2011, total software under capital lease and vendor financing obligations consisted of $1,633 and $1,650 with accumulated amortization of $1,044 and $1,590, respectively. Amortization expense for assets under capital lease and vendor financing obligations for the years ended December 31, 2009, 2010 and 2011 was $499, $545 and $547, respectively.
Depreciation and amortization expense, which includes a loss on disposal of property and equipment of approximately $305, $663 and $965 for the years ended December 31, 2009, 2010 and 2011, respectively, by classification is shown below:
 
Year ended December 31,
 
2009
 
2010
 
2011
Service costs
$
11,882

 
$
14,783

 
$
16,075

Sales and marketing
184

 
187

 
423

Product development
1,434

 
1,346

 
1,466

General and administrative
1,463

 
1,950

 
2,994

Total depreciation and amortization
$
14,963

 
$
18,266

 
$
20,958


4.Intangible Assets
 
Intangible assets consist of the following:
 

F-18


 
December 31, 2010
 
 
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
 
Weighted
average
useful life
Owned website names
$
46,094

 
$
(36,018
)
 
$
10,076

 
3.7

Customer relationships
24,355

 
(17,653
)
 
6,702

 
5.5

Media content
96,412

 
(34,205
)
 
62,207

 
5.1

Technology
34,259

 
(19,518
)
 
14,741

 
6.1

Non-compete agreements
14,429

 
(14,306
)
 
123

 
3.3

Trade names
10,979

 
(3,615
)
 
7,364

 
14.8

Content publisher relationships
2,092

 
(1,191
)
 
901

 
5.0

 
$
228,620

 
$
(126,506
)
 
$
102,114

 
5.3

 
December 31, 2011
 
 
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
 
Weighted
average
useful life
Owned website names
$
43,343

 
$
(35,674
)
 
$
7,669

 
3.8

Customer relationships
27,325

 
(20,257
)
 
7,068

 
5.8

Media content
130,981

 
(56,847
)
 
74,134

 
5.1

Technology
38,694

 
(24,055
)
 
14,639

 
5.8

Non-compete agreements
14,806

 
(14,513
)
 
293

 
3.3

Trade names
11,294

 
(4,652
)
 
6,642

 
14.5

Content publisher relationships
2,092

 
(1,233
)
 
859

 
5.0

 
$
268,535

 
$
(157,231
)
 
$
111,304

 
5.3

 
Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.

Amortization expense by classification for years ended December, 2009, 2010 and 2011 is shown below:
 
 
Year ended December 31,
 
2009
 
2010
 
2011
Service costs
$
18,607

 
$
22,759

 
$
38,715

Sales and marketing
3,486

 
3,303

 
3,069

Product development
5,541

 
5,257

 
4,343

General and administrative
4,518

 
2,431

 
1,047

Total amortization
$
32,152

 
$
33,750

 
$
47,174


Service costs amortization for 2011 includes an accelerated amortization charge of $5,898 as a result of the Company removing certain content assets from service.
     
Based upon the current amount of intangible assets subject to amortization, the estimated amortization expense for the next five years as of December 31, 2011 is as follows: $36,247 in 2012, $28,914 in 2013, $23,701 in 2014, $14,196 in 2015, $4,127 in 2016 and $4,119 thereafter including amortization expense related to media content of $22,039 in 2012, $19,805 in 2013, $17,329 in 2014, $11,729 in 2015, $3,045 in 2016 and $187 thereafter.

5.
Goodwill
 
The following table presents the changes in the Company’s goodwill balance:


F-19


Balance at December 31, 2008
$
225,202

Adjustment related to sale of certain online game businesses
(282
)
Balance at December 31, 2009 and 2010
224,920

Goodwill arising from acquisitions (Note-13)
31,140

Balance at December 31, 2011
$
256,060


Goodwill in 2011 arose from four acquisitions completed in that year as detailed in Note 13 - Business Acquisitions. In December 2009, the Company completed the sale of one of the Company's online game businesses for aggregate cash consideration of $1,000. The combined and historical results of operations of this business were not significant for year ended December 31, 2009. The disposed assets included media content with an initial book value of $1,259 (fully amortized at the time of sale), trade names with an initial book value of $160 ($24 of accumulated amortization at the time of sale), and allocated goodwill of $282. In conjunction with this sale, the Company recorded a pretax gain on sale of $582, which is included as an offset against general and administrative expenses in the accompanying statements of operations.
        
The Company's most recent annual impairment analysis was performed in the fourth quarter of the year ended December 31, 2011 and indicated that the fair value of each of its three reporting units significantly exceeded the carrying amount of the respective reporting unit's book value of goodwill at that time.

6.
Other Balance Sheets Items
 
Accounts receivable consisted of the following:
 
 
December 31,
2010
 
December 31,
2011
Accounts receivable—trade
$
24,569

 
$
29,695

Receivables from registries
2,274

 
2,970

Accounts receivable, net
$
26,843

 
$
32,665

 
Accrued expenses and other liabilities consisted of the following:
 
 
December 31,
2010
 
December 31,
2011
Accrued payroll and related items
$
9,729

 
$
10,562

Domain owners’ royalties payable
1,366

 
1,336

Commissions payable
2,813

 
2,894

Customer deposits
5,458

 
7,898

Other
10,204

 
11,242

Accrued expenses and other liabilities
$
29,570

 
$
33,932


7.
Commitments and Contingencies
 
Leases
 
The Company conducts its operations utilizing leased office facilities in various locations and leases certain equipment under non-cancellable operating and capital leases. The Company’s leases expire between January 2012 and April 2016.

The following is a schedule of future minimum lease payments under operating and capital leases as of December 31, 2011:

F-20


 
Operating
Leases
 
Capital
Leases
Year ending December 31,
 
 
 
2012
$
3,851

 
$
7

2013
2,495

 
7

2014
947

 
3

2015
982

 
—

2016
273

 
—

Thereafter
—

 
—

Total minimum lease payments
$
8,548

 
17

Less interest expense
 

 
(1
)
Capital lease obligation
 

 
$
16

Rent expense incurred by the Company was $3,776, $4,141 and $4,914, respectively, for years ended December 31, 2009, 2010 and 2011. As of December 31, 2010 and 2011, accrued expenses and other current liabilities include a deferred rent liability of $541 and $1,208, respectively and $876 was included in other long-term liabilities as at December 31, 2011.
Letters of Credit
At December 31, 2011, the Company had outstanding standby letters of credit issued via the administrative agent under the Company's revolving credit facility of approximately $6,972 primarily associated with certain payment arrangements with domain name registries as well as security agreements related to real estate leases.
Revolving Line of Credit Agreements
On August 4, 2011, the Company replaced its previous revolving credit facility by entering into a credit agreement (the “Credit Agreement”) with a syndicate of commercial banks. The Credit Agreement provides for a $105,000, five year revolving credit facility, with the right (subject to certain conditions) to increase such facility by up to $75,000 in the aggregate.  The syndicate of commercial banks under the Credit Agreement have no obligation to fund any increase in the size of the facility.
The collateral for the Credit Agreement consists of substantially all tangible and intangible assets of the Company, under perfected security interests, including pledges of the common stock of all domestic subsidiaries and a portion of the equity of the foreign subsidiaries of the Company. The Credit Agreement contains customary events of default and affirmative and negative covenants and restrictions, including certain financial covenants such as a minimum fixed charge ratio and a maximum total net leverage ratio. As of December 31, 2010 and 2011, the Company was in compliance with these covenants, and those under the previous credit facility.
In addition, the Credit Agreement contains covenants restricting the Company's ability to, among other things, incur additional debt or incur or permit to exist certain liens; pay dividends or make other distributions or payments on capital stock; make certain investments and acquisitions; enter into transactions with affiliates; transfer or sell substantially all of the Company's assets.
At December 31, 2010 and 2011, the aggregate borrowings available under the Credit Agreement in place at that date was approximately $93,000 and $98,000. At December 31, 2010 and 2011, no amounts were outstanding under the Credit Agreements.
Total debt issuance costs associated with the Credit Agreement were $1,035, which are being amortized as interest expense on a straight-line basis over the five year term of the Credit Agreement. For the years ended December 31, 2009, 2010 and 2011, $386, $386 and $568 respectively, of debt issuance costs were amortized and included in interest expense. Interest expense for the year ended December 31, 2011 includes $240 relating to the acceleration of unamortized debt issuance costs from the credit agreement replaced during that year. At December 31, 2011, net debt issuance costs of $207 and $744 are included in other current assets and other assets, non-current, respectively.
Litigation
 
In April 2011, the Company and eleven other defendants were named in a patent infringement lawsuit filed in the U.S. District Court, Eastern District of Texas.  The plaintiff filed and served a complaint making several claims related to a method for displaying advertising on the Internet.  In May 2011, the Company filed its response to the complaint, denying all liability,

F-21


and is in the process of discussing a resolution with the plaintiff.  The Company intends to vigorously defend its position and does not expect to incur a material loss in respect of this matter.

In addition, from time to time the Company is a party to other various litigation matters incidental to the conduct of its business. There is no pending or threatened legal proceeding to which Company is a party that, in our opinion, is likely to have a material adverse effect on the Company’s future financial results.

Taxes
 
From time to time, various federal, state and other jurisdictional tax authorities undertake review of the Company and its filings. In evaluating the exposure associated with various tax filing positions, the Company accrues charges for possible exposures. The Company believes any adjustments that may ultimately be required as a result of any of these reviews will not be material to its consolidated financial statements.

Domain Name Agreement

On April 1, 2011, the Company amended its existing agreement with a customer to provide domain name registration services and manage certain domain names owned and operated by the customer over a twenty seven month term (the "Amended Domain Agreement").  In conjunction with the Amended Domain Agreement, the Company committed to purchase at least $175 of expired domain names every calendar quarter or a total of $1,575 over the term of the agreement.  The contract can be terminated by either the Company or the counter party within 60 days prior to the end of each annual renewal period.  The aggregate value of expired domain names purchased by the Company from inception through December 31, 2011 was $642.

Indemnifications
 
In its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. Those indemnities include intellectual property indemnities to the Company’s customers, indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware and indemnifications related to the Company’s lease agreements. In addition, the Company’s advertiser and distribution partner agreements contain certain indemnification provisions which are generally consistent with those prevalent in the Company’s industry. The Company has not incurred significant obligations under indemnification provisions historically and does not expect to incur significant obligations in the future. Accordingly, the Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying balance sheets.

8.
Income Taxes
 
Income/(loss) before income taxes for the years ended December 31, 2009, 2010 and 2011 consisted of the following:
 
December 31,
2009
 
December 31,
2010
 
December 31,
2011
Domestic
$
(19,856
)
 
$
(1,530
)
 
$
(13,820
)
Foreign
156

 
102

 
(527
)
Loss before income taxes
$
(19,700
)
 
$
(1,428
)
 
$
(14,347
)
The income tax benefit (expense) consists of the following:


F-22


 
December 31,
2009
 
December 31,
2010
 
December 31,
2011
Current (expense) benefit
 
 
 
 
 
Federal
$
(7
)
 
$
—

 
$
10

State
(175
)
 
(709
)
 
(1,011
)
International
(382
)
 
(208
)
 
(6
)
Deferred (expense) benefit
 
 
 
 
 
Federal
(2,807
)
 
(2,910
)
 
(2,551
)
State
600

 
(74
)
 
(640
)
International
—

 
4

 
21

Total income tax benefit (expense)
$
(2,771
)
 
$
(3,897
)
 
$
(4,177
)
The reconciliation of the federal statutory income tax rate of 35% to the Company's effective income tax rate is as follows:
 
December 31,
2009
 
December 31,
2010
 
December 31,
2011
Expected income tax benefit (expense) at U.S. statutory rate
$
6,895

 
$
489

 
$
5,022

Difference between U.S. and foreign taxes
(324
)
 
(126
)
 
(124
)
State tax (expense) benefit, net of federal taxes
743

 
(433
)
 
825

Non-deductible stock-based compensation
(937
)
 
(748
)
 
(295
)
Meals and entertainment
(125
)
 
(178
)
 
(260
)
State rate changes
(623
)
 
(350
)
 
(787
)
Indirect federal impact of state deferred taxes
138

 
274

 
(9
)
Valuation allowance
(8,743
)
 
(2,985
)
 
(8,241
)
Other
205

 
160

 
(308
)
Total income tax benefit (expense)
$
(2,771
)
 
$
(3,897
)
 
$
(4,177
)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2010 and 2011 are presented below:


F-23


 
2010
 
2011
Deferred tax assets
 
 
 
Accrued liabilities not currently deductible
$
5,424

 
$
5,648

Intangible assets—excess of financial statement amortization over tax basis
9,352

 
12,923

Indirect federal impact of deferred state taxes
678

 
314

Deferred revenue
4,973

 
6,507

Net operating losses
22,532

 
19,448

Stock-based compensation
3,783

 
12,083

Other
394

 
601

 
47,136

 
57,524

Deferred tax liabilities
 
 
 
Deferred registration costs
(16,461
)
 
(19,410
)
Prepaid expenses
(2,009
)
 
(2,037
)
Goodwill not amortized for financial reporting
(14,155
)
 
(18,293
)
Intangible assets—excess of financial statement basis over tax basis
(9,201
)
 
(8,243
)
Property and equipment
(5,292
)
 
(5,125
)
 
(47,118
)
 
(53,108
)
Valuation allowance
(14,421
)
 
(22,662
)
Net deferred tax liabilities
$
(14,403
)
 
$
(18,246
)
 
 
 
 
Current
$
(15,248
)
 
$
(18,288
)
Non-current
845

 
42

 
$
(14,403
)
 
$
(18,246
)
The Company had federal net operating loss ("NOL") carryforwards of approximately $62,000 and $54,000 as of December 31, 2010 and 2011, respectively, which expire between 2020 and 2029. In addition, as of December 31, 2010 and 2011 the Company had state NOL carryforwards of approximately $10,000 and $12,000, which expire between 2013 and 2030.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382. Changes in the Company's equity structure and the acquisitions by the Company of eNom, Trails.com, Maps a La Carte, Pagewise, Pluck, and Indieclick resulted in such an ownership change. Currently, the Company does not expect the utilization of its net operating loss and tax credit carry-forwards in the near term to be materially affected as no significant limitations are expected to be placed on these carry-forwards as a result of its previous ownership changes.
The Company reduces the deferred tax asset resulting from future tax benefits by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of these deferred taxes will not be realized. The Company has determined it is more likely than not that it will not realize the benefit of all its deferred tax assets and accordingly a valuation allowance of $ 14,421 and $22,662 against its deferred taxes was required at December 31, 2010 and 2011, respectively. The change in the valuation allowance for the years ended December 31, 2009, 2010, and 2011 was an increase of $8,743, $2,985 and $8,241 respectively. The valuation allowance is required as a result of the timing of the reversal of deferred tax liabilities associated with tax deductible goodwill which is not certain and thus not available to assure the realization of deferred tax assets. After consideration of these limitations associated with deferred tax liabilities, the Company has deferred tax assets in excess of deferred tax liabilities at December 31, 2011. As the Company has no history of generating book income, the ultimate future realization of these excess deferred tax assets is not more likely than not and thus subject to a valuation allowance.
Accounting standards related to stock-based compensation exclude tax attributes related to the exercise of employee stock options from being realized in the financial statements until they result in a decrease to taxes payable. Therefore, we have not included unrealized stock option tax attributes in our deferred tax assets. Cumulative tax attributes excluded through 2011 were $1,066. The benefit of these deferred tax assets will be recorded to equity when they reduce taxes payable.
The Company has not provided for U.S. federal income and foreign withholding taxes on $226 of cumulative undistributed earnings of various non-U.S. subsidiaries. Such earnings are intended to be reinvested in the non-

F-24


U.S. subsidiaries for an indefinite period of time. It is not practicable to compute the amount of incremental taxes that would result from the repatriation of those earnings.
The Company is subject to the accounting guidance for uncertain income tax positions. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company's financial condition, results of operations, or cash flow. The Company acquired an $85 uncertain tax position as a result of a business acquisition during 2011.
The Company's policy for recording interest and penalties associated with audits and uncertain tax positions is to record such items as a component of income tax expense, and amounts recognized to date are insignificant. No uncertain income tax positions were recorded during 2010 or 2011 other than one related to a business acquisition during the year, and the Company does not expect its uncertain tax position to change during the next twelve months.
During 2011 and 2010, the aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows:
 
Year ended December 31, 2010
 
Year ended December 31, 2011
Beginning balance
$
—

 
$
—

Gross increase in unrecognized tax benefits - prior year tax position
—

 
85

Gross decrease in unrecognized tax benefits - prior year tax position
—

 
—

Gross increase in unrecognized tax benefits - current year tax position
—

 
—

Gross decrease in unrecognized tax benefits - current year tax position
—

 
—

Settlements with tax authorities
—

 
—

Lapse of statute of limitations
—

 
—

Ending balance
—

 
85

The Company files a U.S. federal and many state tax returns. The tax years 2007 to 2010 remain subject to examination by the IRS and most tax years since the Company's incorporation are subject to examination by various state authorities.
9.
Related Party Transactions
 
The Company’s Chairman and Chief Executive Officer and certain members of the board of directors of the Company also sit on the board of directors of The FRS Company (“FRS”). The Company recognized approximately $151, $378 and $513 in revenue from FRS for advertising and creative services during the years ended December 31, 2009, 2010 and 2011, respectively. As of December 31, 2010 and December 31, 2011, the Company’s receivable balance due from FRS was $164 and $45, respectively.  The creative services agreement was terminated by the parties effective May 31, 2011.
 
In May 2009, the Company entered into a Master Relationship Agreement with Mom, Inc. (“Modern Mom”), a corporation that is co-owned and operated by the wife of the Company’s Chairman and Chief Executive Officer. In March 2010, the Company agreed to provide Modern Mom with ten thousand units of articles, to be displayed on the Modern Mom website, for an aggregate fee of up to $500. In March 2011, the parties agreed to discontinue the agreement and as a result, the Company no longer has an obligation to provide Modern Mom with any additional articles. The Company recognized revenue of approximately $57, $242 and $20 in the years ended December 31, 2009, 2010 and 2011, respectively, and amounts due from Modern Mom as of December 31, 2010 and December 31, 2011 were $44 and $0 respectively.

In May 2011, the Company entered into a Database Development and License Agreement with RSS Graffiti, LLC ("RSS Graffiti") to develop a data warehouse and analytics platform. Michael Blend, one of the Company's executive vice presidents, had an approximate 40% ownership interest in RSS Graffiti through his equity holding in an investment group that controlled RSS Graffiti as of the date of the transaction.  In consideration for the services to be provided under the agreement, the Company agreed to pay RSS Graffiti $700 over a seven month period commencing May 2011, and received a two year warrant to purchase 10% of RSS Graffiti for an aggregate exercise price of $2,000.  During the year ended December 31, 2011, the Company paid RSS Graffiti $100. On August 5, 2011, the Company acquired RSS Graffiti thereby effectively terminating the agreement (see Note 13-Business Acquisitions).




F-25


10. Employee Benefit Plan
The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code ("401(k) Plan") covering all full-time employees who meet certain eligibility requirements. Eligible employees may defer up to 90% of their pre-tax eligible compensation, up to the annual maximum allowed by the Internal Revenue Service. Under the 401(k) Plan, the Company may, but is not obligated to, match a portion of the employee contributions up to a defined maximum. The Company did not make any matching contributions for the years ended December 31, 2009, 2010 and 2011.
11. Share-based Compensation Plans and Awards
Stock Incentive Plans
Under the Company's 2010 Incentive Award Plan (the "2010 Plan"), the Administrator of the 2010 Plan, which is the compensation committee of the Company's board of directors, may grant up to 15,500 stock option, restricted stock, restricted stock unit and other incentive awards to employees, officers, non-employee directors, and consultants, and such options or awards may be designated as incentive or non-qualified stock options at the discretion of the Administrator. In connection with the adoption of the 2010 Plan on August 5, 20101, 334 stock-based awards then available for grant under the 2006 Plan were canceled. Any stock-based awards outstanding under the 2006 Plan when the 2010 Plan was adopted that subsequently are forfeited, expire or lapse are available for future grants under the 2010 Plan. In addition, awards available for grant under the 2010 Plan shall be increased on an annual basis as of January 1st of each fiscal year by an amount equal to the lesser of (i) 6,000 (ii) 5% of the total shares outstanding as of the end of the prior fiscal year and (iii) such lesser amount as determined by the Administrator of the 2010 Plan. As of December 31, 2011, 9,842 stock-based awards were available for future grant under the 2010 Plan. Generally, stock option grants have 10-year terms and employee stock options vest 1/4th on the anniversary of the vesting commencement date and 1/48th monthly thereafter, over a 4-year period. Restricted stock unit awards generally vest quarterly over a 3 or 4-year period. Certain stock options and restricted stock awards have accelerated vesting provisions in the event of a change in control or termination without cause.
Valuation of Awards
The per share fair value of stock options granted with service and/or performance conditions was determined on the date of grant using the Black-Scholes option pricing model with the following assumptions:
 
Year ended
December 31,
2009
 
Year ended
December 31,
2010
 
Year ended
December 31,
2011
Expected life (in years)
5.72

 
6.27

 
5.5

Risk-free interest rate
1.37-2.86

 
1.31-2.83

 
1.46-2.30

Expected volatility range
60-62

 
54-56

 
56

Weighted average expected volatility
61
%
 
56
%
 
56
%
Expected dividend yield
—
%
 
—
%
 
—
%
The expected term of stock options granted represents the weighted average period that the stock options are expected to remain outstanding. The Company determines the expected term assumption based on the Company's historical exercise behavior combined with estimates of the post-vesting holding period. Expected volatility is based on historical volatility of peer companies in the Company's industry that have similar vesting and contractual terms. The risk free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. The Company currently has no history or expectation of paying cash dividends on its common stock.
The expected term for performance-based and non-employee awards is based on the period of time for which each award is expected to be outstanding, which is typically the remaining contractual term.







F-26


Award Activity
Stock Options
Stock option activity for the year ended December 31, 2011 is as follows:
 
Number of
options
outstanding
 
Weighted
average
exercise
price
 
Weighted
average
remaining
contractual
term
(in years)
 
Aggregate
intrinsic
value
Outstanding at December 31, 2010
19,065

 
$
11.88

 
8.34

 
$
131,569

Options granted
530

 
16.64

 
 

 
 

Options exercised
(1,919
)
 
3.19

 
 

 
 

Options forfeited or canceled
(1,022
)
 
8.89

 
 

 
 

Outstanding at December 31, 2011
16,654

 
$
13.21

 
7.53

 
$
17,480

Exercisable at December 31, 2011
7,796

 
$
6.05

 
6.56

 
$
16,099

Vested and expected to vest at December 31, 2011
14,862

 
$
12.34

 
7.42

 
$
17,206

The pre-tax aggregate intrinsic value of outstanding and exercisable stock options is based on the difference between the estimated fair value of the Company's common stock at December 31, 2010 and 2011 and their exercise prices, respectively for all awards where the fair value of the Company's common stock exceeds the exercise price. Options expected to vest reflect an estimated forfeiture rate.
During the year ended December 31, 2010, the Company granted certain executive-level employees options to purchase 2,375, 1,150, 1,150 and 1,150 shares of common stock at exercise prices per share of $18.00, $24.00, $30.00, $36.00, respectively, which only commenced vesting upon the completion of its IPO in January 2011. The grant date fair value of these stock options was $30,800.
The following table summarizes information concerning outstanding and exercisable options at December 31, 2011:
Range of Exercise Prices
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Term
(in years)
 
Weighted
Average
Exercise
Price
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
$0.00 - 3.60
3,310

 
5.8

 
$
2.30

 
3,031

 
$
2.22

$3.61 - 7.20
1,919

 
6.2

 
5.05

 
1,524

 
4.91

$7.21 - 10.80
4,635

 
7.7

 
9.07

 
2,778

 
9.16

$10.81 - 14.40
318

 
8.6

 
13.36

 
105

 
13.30

$14.41 - 18.00
2,936

 
8.7

 
17.41

 
358

 
17.08

$18.01 - 21.60
86

 
9.1

 
21.36

 
—

 
—

$21.61 - 25.20
1,150

 
8.6

 
24.00

 
—

 
—

$28.81 - 32.40
1,150

 
8.6

 
30.00

 
—

 
—

$32.41 - 36.00
1,150

 
8.6

 
36.00

 
—

 
—

 
16,654

 
7.5

 
$
13.21

 
7,796

 
$
6.05

Information related to stock-based compensation activity is as follows:
 
Year ended December 31,
 
2009
 
2010
 
2011
Weighted average fair value of options granted (per option)
$
2.50

 
$
5.41

 
$
8.60

Intrinsic value of options exercised
991

 
5,889

 
16,487

Total fair value of restricted stock vested
6,617

 
7,502

 
8,377

There was $39,996 of stock-based compensation expense as of December 31, 2011 related to the non-vested portion of

F-27


time-vested stock options not yet recognized, which is expected to be recognized over a weighted average period of 3.2 years.
RSPRs, restricted stock awards and restricted stock units
Activity for the year ended December 31, 2011 is as follows:
 
Shares
 
Weighted
average
grant date
fair value
Unvested at December 31, 2010
1,302

 
$
3.38

Granted
4,092

 
12.63

Vested
(1,533
)
 
5.46

Forfeited
(255
)
 
15.27

Unvested at December 31, 2011
3,606

 
$
12.19


As of December 31, 2011, there was approximately $36,959 of unrecognized compensation cost related to employee non-vested RSUs, RSPRs and restricted shares.  The amount is expected to be recognized over a weighted average period of 3.3 years.  To the extent that the forfeiture rate is different from that anticipated, stock-based compensation expense related to these awards will be different.
In connection with the acquisition of Pluck in 2008, the Company agreed to pay out the remaining unvested Pluck stock options held by then-Pluck employees at the date of the acquisition. Payments were made as the then-unvested Pluck options would have otherwise vested and contingent upon the employees continued employment with the Company as of such date. As a result, the Company paid and expensed as part of stock-based compensation $564, $360 and $127 during the years ended December 31, 2009, 2010 and 2011, respectively, related to these options. There are no remaining unvested Pluck options at December 31, 2011.
Employee Stock Purchase Plan
 
In May 2011, the Company commenced its first offering under the Demand Media, Inc. 2010 Employee Stock Purchase Plan (the “ESPP”), which allows eligible employees to purchase, through payroll deductions, a limited amount of the Company's common stock at a 15% discount to the lower of market price as of the beginning or ending of each six-month purchase period. Participants can authorize payroll deductions for amounts up to the lesser of 15% of their qualifying wages or the statutory limit under the U.S. Internal Revenue Code. The ESPP provides a 24-month offering period which is comprised of four consecutive six-month purchase periods commencing May and November.  A maximum of one thousand two hundred and fifty shares of common stock may be purchased by each participant at six-month intervals during the offering period. The fair value of the ESPP options granted is determined using a Black-Scholes model and is amortized over the life of the 24-month offering period of the ESPP. The Black-Scholes model included an assumption for expected volatility of between 34% and 43% for each of the four purchase periods. During the year ended December 31, 2011, the Company recognized an expense of $1,015 in relation to the ESPP and there were 9,749 shares of common stock remaining authorized for issuance under the ESPP at December 31, 2011. As of December 31, 2011 there was approximately $3,773 of unrecognized compensation cost related to the ESPP which is expected to be recognized on a straight-line basis over the remainder of the offering period.

LIVESTRONG.com Warrants
 
In January 2008, the Company entered into a license agreement with the Lance Armstrong Foundation, Inc. (the “License Agreement”) and an Endorsement and Spokesperson Agreement with Lance Armstrong (the “Endorsement Agreement”). The Lance Armstrong Foundation, Inc. (“LAF”) is a non-profit organization dedicated to uniting people to fight cancer and Lance Armstrong (“Mr. Armstrong”) is a seven-time winner of the Tour de France and an advocate for cancer patients.  In consideration for the License Agreement and Mr. Armstrong's promotional services, the Company issued warrants to purchase an aggregate of 625 shares of the Company's common stock at an exercise price of $12.00 per share to the LAF (the “LAF Warrant”), to Lance Armstrong (the “Armstrong Warrant”) and Capital Sports & Entertainment (the “CSE Warrant”).

The LAF Warrant, Armstrong Warrant and CSE Warrant were automatically net exercised upon the closing date of the Company's IPO and as a result the Company issued 184, 156 and 28 shares of common stock to each of LAF, Mr. Armstrong and Capital Sports & Entertainment, respectively, in January 2011.

F-28



BEI Warrant
 
In June 2010, the Company entered into a website development, endorsement and license agreement with Bankable Enterprises, Inc. (“BEI”) (the “BEI Agreement”). BEI is wholly owned by Tyra Banks (“Ms. Banks”), a business woman and celebrity.
 
Under the terms of the BEI Agreement, which commenced on July 1, 2010 and ends on July 1, 2014, Ms. Banks provides certain services and endorsement rights to the Company, and licenses to the Company certain intellectual property. The Company used this intellectual property to build an owned and operated website on beauty and fashion, typeF.com, which was launched during the three months ended March 31, 2011. As consideration for Ms. Banks’ services, the Company issued a fully-vested four-year warrant to purchase 375 shares of the Company’s common stock at an exercise price of $12.00 per share. The warrant terminates on the earlier of (i) June 30, 2014 or (ii) the closing of a change of control (as defined). In addition, BEI receives royalties on advertising revenue in excess of certain minimum royalty thresholds (as defined).
Stock-based Compensation Expense
Stock-based compensation expense related to all employee and non-employee stock-based awards was as follows:
 
Year ended December 31,
 
2009
 
2010
 
2011
Stock-based compensation included in
 
 
 
 
 
Service costs
$
527

 
$
868

 
$
2,052

Sales and marketing
1,611

 
2,379

 
4,857

Product development
1,504

 
1,692

 
5,013

General and administrative
4,094

 
4,750

 
16,934

Total stock-based compensation included in net loss
7,736

 
9,689

 
28,856

Income tax benefit related to stock-based compensation included in net loss
—

 
(372
)
 
(1,625
)
 
$
7,736

 
$
9,317

 
$
27,231

Included in the table above are cash payments of $565, $360 and $127 related to the Pluck stock options for the years ended December 31, 2009, 2010, and 2011, respectively. In addition, $439 of expense related to the Livestrong Warrant are included in the table above, for the years ended December 31, 2009, 2010 and 2011, respectively. Also included in the table above is $226 and $452 of expense related to the BEI warrant for the years ended December 31, 2010 and 2011, respectively and $725 for the year ended December 31, 2011 related to taxes paid by the Company for vested RSUs which are included as stock-based compensation expense.
During the years ended December 31, 2009, 2010 and 2011, $700, $899 and $1,024 respectively, of stock-based compensation expense related to stock options was capitalized, primarily as part of internally developed software projects.
 
12. Stockholders' Equity
 
Stock Repurchases
Under the stock repurchase plan announced on August 19, 2011 and further increased on February 8, 2012, the Company is authorized to repurchase up to $50,000 of its common stock from time to time in open market purchases or in negotiated transactions. During the year ended December 31, 2011, the Company repurchased 2,341 shares at an average price of $7.29 per share for an aggregate amount of $17,064. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions.
Shares repurchased by the Company are accounted for when the transaction is settled. As of December 31, 2011, there were 192 unsettled share repurchases at a total cost of $1,323.
Other
    Each share of common stock has the right to one vote per share. Each restricted stock purchase right has the right to one vote per share and the right to receive dividends or other distributions paid or made with respect to common shares, subject to restrictions for continued employment service.

F-29


Effective January 31, 2011, all shares of preferred stock and preferred stock warrants were converted into 61,706 shares of common stock in connection with the Company initial public offering as described in Note 1— Company Background and Overview. As a result the carrying value of the preferred stock of $373,754 and the carrying value of the preferred stock warrants of $477 were reclassified from mezzanine equity and liabilities, respectively, to stockholder's equity.



13. Business Acquisitions
 
The Company accounts for acquisitions of businesses using the purchase method of accounting where the cost is allocated to the underlying net tangible and intangible assets acquired, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.
Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of advertiser and publisher turnover rates and estimates of terminal values.
During the year ended December 31, 2011, the Company acquired businesses consistent with the Company's strategic plan of acquiring, consolidating and developing Internet media properties and applications. In addition to identifiable assets acquired in these business combinations, the Company acquired goodwill that primarily derives from the ability to generate synergies across the Company's media services.
The acquisitions are included in the Company's consolidated financial statements as of the date of the acquisition. The following table summarizes the allocation of the purchase consideration, which is preliminary and subject to revision based on the finalization of hold back amounts for post-closing obligations and related matters, and the estimated fair value of the assets acquired and the liabilities assumed for business acquisitions made by the Company during the year ended December 31, 2011:
 
CoveritLive
Emerging Cast
RSS Graffiti
IndieClick
Total
Goodwill
$
2,929

$
3,402

$
13,325

$
11,484

$
31,140

Developed technology
1,160

—

2,640

635

4,435

Customer relationships
600

—

228

2,008

2,836

Non-compete arrangements
30

61

—

286

377

Trade names and other
35

10

12

250

307

Other assets acquired (liabilities assumed)
146

(41
)
23

(1,625
)
(1,497
)
 
 
 
 
 
 
Total
$
4,900

$
3,432

$
16,228

$
13,038

$
37,598

 

On February 23, 2011, the Company completed the acquisition of the assets of CoveritLive, a company that provides social media services by powering live events with social engagement tools.  The purchase consideration of $4,900 was comprised of cash of $4,469 and a pre-existing note receivable, including accrued interest, of $431. $632 was subject to a hold back to satisfy post-closing indemnification obligations and any remaining portion of such hold back amount that is not subject to then pending claims will be paid to the selling shareholders on the 18-month anniversary of the closing of the transaction.
On July 1, 2011, the Company acquired EmergingCast, a business in Argentina that specializes in the creation of Spanish and Portuguese language media content. The acquisition is intended to support the Company's international expansion efforts. The purchase consideration of $3,432 was comprised of cash of $2,725 and 53 shares of common stock valued at $707, based on the Company's stock price on the acquisition date.
On August 5, 2011, the Company acquired 100% of the membership units (including the profits interest) of RSS Graffiti, LLC, a creator of content sharing applications on Facebook, helping online publishers, brands and individuals to program content for their fan audience on Facebook. The purchase price of approximately $16,228 (subject to adjustment) was comprised of cash consideration of approximately $12,614 and 390 shares of unregistered common stock valued at $3,614, based on the Company's stock price on the acquisition date. $750 of the cash purchase price was held back by the Company to satisfy post-closing indemnification obligations and/or post-closing working capital adjustments based on the balance sheet as of the acquisition date.  Any remaining portion of the hold back amount that is not subject to then pending claims will be paid on the 12-month anniversary of the acquisition date.

F-30


On August 8, 2011, the Company acquired 100% of the equity of IndieClick Media Group, Inc., an online branding and advertising company that represents niche-focused online properties in the entertainment, music, film, fashion and comedy categories, for approximately $13,038 (subject to adjustment) in cash. $1,400 of the purchase consideration was subject to a hold back to satisfy post-closing indemnification obligations and/or post-closing working capital adjustments. Any remaining portion of such hold back amount that is not subject to then pending claims will be paid to the selling shareholders on the 18-month anniversary of the closing of the transaction.

For all acquisitions completed during the year ended December 31, 2011, developed technology has a weighted-average useful life of 4.1 years, customer relationships have a weighted-average useful life of 6.7 years, non-compete arrangements have a weighted-average useful life of 2.3 years and trade names and other long-lived intangible assets have a weighted-average useful life of 9 years.  Goodwill, which is comprised of the excess of the purchase consideration over the fair value of the identifiable net assets acquired, is primarily derived from assembled workforce and the Company's ability to generate synergies with its services. Goodwill of approximately $16,300 is expected to be deductible for tax purposes.

Supplemental Pro forma Information (unaudited)
Supplemental information on an unaudited pro forma basis, as if the 2011 acquisitions had been consummated as of January 1, 2010, is as follows:
 
Year ended December 31,
 
Year ended December 31,
 
2010
 
2011
 
(unaudited)
Revenue
$
261,897

 
$
328,925

Net loss
(6,925
)
 
(22,311
)

Disclosure of revenue and earnings for the 2011 acquisitions included in the consolidated results of the Company for the post acquisition periods is impracticable because their operations were integrated into our existing business and not managed or tracked on a separate basis.
The unaudited pro forma supplemental information is based on estimates and assumptions which the Company believes are reasonable and reflects amortization of intangible assets as a result of the acquisitions. The pro forma results are not necessarily indicative of the results that have been realized had the acquisitions been consolidated as of January 1, 2010.

14.
Business Segments
 
The Company operates in one operating segment. The Company’s chief operating decision maker (“CODM”) manages the Company’s operations on a consolidated basis for purposes of evaluating financial performance and allocating resources. The CODM reviews separate revenue information for its Content & Media and Registrar offerings. All other financial information is reviewed by the CODM on a consolidated basis. All of the Company’s principal operations and decision- making functions are located in the United States. Revenue generated outside of the United States is not material for any of the periods presented.
 
Revenue derived from the Company’s Content & Media and Registrar Services is as follows
 
Year ended December 31,
 
2009
 
2010
 
2011
Content & Media revenue
 
 
 
 
 
Owned & operated
$
73,204

 
$
110,770

 
$
157,089

Network
34,513

 
42,140

 
48,361

Total Content & Media revenue
107,717

 
152,910

 
205,450

Registrar revenue
90,735

 
100,026

 
119,416

Total Revenue
$
198,452

 
$
252,936

 
$
324,866



F-31


15. Concentrations
Concentration of the Cost of Registered Names
For the years ended December 31, 2009, 2010 and 2011, approximately 85%, 84% and 80%, respectively, of the payments for the cost of registered names and prepaid registration fees were made to a single domain name registry, which is accredited by ICANN to be the exclusive registry for certain TLD's. The failure of this registry to perform its operations may cause significant short-term disruption to the Company's domain registration business.

Concentrations of Credit and Business Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable securities and accounts receivable.
At December 31, 2010 and 2011, the Company's cash and cash equivalents and marketable securities were maintained primarily with four major U.S. financial institutions and four foreign banks. The Company also has used one Internet payment processor in both periods. Deposits with these institutions at times exceed the federally insured limits, which potentially subjects the Company to concentration of credit risk. The Company has not experienced any losses related to these balances and believes that there is minimal risk.
A substantial portion of the Company's advertising revenue is generated through arrangements with two advertising network partners. The Company may not be successful in renewing any of these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The Company may not be successful in renewing its agreements with advertising network partners on commercially acceptable terms. The percentage of revenue generated through advertising network partners representing more than 10% of consolidated revenue is as follows:
 
Year ended
December 31,
 
2009
 
2010
 
2011
Advertising Network Partner A
14
%
 
*

 
*

Advertising Network Partner B
18
%
 
29
%
 
33
%
At December 31, 2010 and 2011, advertising network partners comprising more than 10% of the consolidated accounts receivable balance were as follows:
 
2010
 
2011
Advertising Network Partner A
*

 
*

Advertising Network Partner B
33
%
 
27
%
*less than 10% as of or for the period

16. Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share of common stock:

F-32


 
Year ended December 31,
 
2009
 
2010
 
2011
Numerator:
 
 
 
 
 
Net loss
$
(22,471
)
 
$
(5,325
)
 
$
(18,524
)
Cumulative preferred stock dividends
(30,848
)
 
(33,251
)
 
(2,477
)
Net loss attributable to common stockholders
$
(53,319
)
 
$
(38,576
)
 
$
(21,001
)
Denominator:
 
 
 
 
 
Weighted average common shares outstanding
14,554

 
15,002

 
79,121

Weighted average unvested restricted stock awards
(3,395
)
 
(1,494
)
 
(475
)
Weighted average common shares outstanding—basic
11,159

 
13,508

 
78,646

Dilutive effect of stock options, warrants and convertible preferred stock
—

 
—

 
—

Weighted average common shares outstanding—diluted
11,159

 
13,508

 
78,646

Net loss per share—basic and diluted
$
(4.78
)
 
$
(2.86
)
 
$
(0.27
)
As of each period end, the following common equivalent shares were excluded from the calculation of the Company's net loss per share as their inclusion would have been antidilutive:
 
Year ended December 31,
 
2009
 
2010
 
2011
Stock options
11,771

 
19,065

 
16,654

Unvested RSUs and restricted shares
2,038

 
1,302

 
3,606

Convertible Series A Preferred Stock
32,667

 
32,667

 
—

Convertible Series B Preferred Stock
4,732

 
4,732

 
—

Convertible Series C Preferred Stock
13,024

 
13,024

 
—

Convertible Series D Preferred Stock
11,250

 
11,250

 
—

Convertible Series C Preferred Stock Warrants
63

 
63

 
—

Common Stock Warrants
1,374

 
1,749

 
375

ESPP shares
—

 
—

 
1,249


 
17.
Subsequent Events
 
On February 8, 2012, the Company's Board of Directors approved a plan to increase amounts authorized under the Company's stock repurchase plan by $25,000. Under the revised plan, the Company is authorized to repurchase up to $50,000 of its common stock from time to time in open market purchases or in negotiated transactions. During the period from January 1, 2012 to February 24, 2012, Company repurchased 421 shares for an aggregate amount of $2,988 and as at February 24, 2012, and approximately $29,900 remains available for future purchases.


F-33



EXHIBIT INDEX
Exhibit No.
 
Description of Exhibit
2.1
 
Securities Purchase Agreement, dated as of August 5, 2011, by and among Demand Media, Inc., RSS Graffiti, LLC, the holders of the membership interests of RSS Graffiti, LLC and Folie Investment Group LLC, as the Seller Representative (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on August 9, 2011)
2.2
 
Stock Purchase Agreement, dated as of August 8, 2011, by and among Demand Media, Inc., IndieClick Media Group, Inc, the holders of the shares of common stock of IndieClick Media Group, Inc. and Peter Luttrell, as the Seller Representative (incorporated by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed with the SEC on August 9, 2011)
3.1
 
Amended and Restated Certificate of Incorporation of Demand Media, Inc., dated January 28, 2011 (incorporated by reference to Exhibit 3.01 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2011)
3.2
 
Amended and Restated Bylaws of Demand Media, Inc. (incorporated by reference to Exhibit 3.02 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2011)
4.1
 
Form of Demand Media, Inc. Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Company's Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on December 21, 2010)
4.2
 
Third Amended and Restated Stockholders' Agreement, by and among Demand Media, Inc., and the stockholders listed on Exhibit A thereto, dated March 3, 2008 (incorporated by reference to Exhibit 4.02 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
4.2A
 
Amendment No. 1 to Third Amended and Restated Stockholders' Agreement, dated October 21, 2010 (incorporated by reference to Exhibit 4.03 to the Company's Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on October 29, 2010)
10.1
†
Form of Indemnification Agreement entered into by and between Demand Media, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.01 to the Company's Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on October 12, 2010)
10.2
 
Sublease, by and between Dimensional Fund Advisors LP and Demand Media, Inc., dated September 24, 2009 (incorporated by reference to Exhibit 10.02 to the Company's Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on September 16, 2010)
10.3
†
Amended and Restated Demand Media, Inc. 2006 Equity Incentive Plan, adopted April 2006, amended and restated June 26, 2008 (incorporated by reference to Exhibit 10.03 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.3A
†
First Amendment to the Amended and Restated Demand Media, Inc. 2006 Equity Incentive Plan, dated June 1, 2009 (incorporated by reference to Exhibit 10.03A to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.4
†
Form of Demand Media, Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement (incorporated by reference to Exhibit 10.06 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.5
†
Form of Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement (incorporated by reference to Exhibit 10.07 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.6
†
Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Richard Rosenblatt, dated April 19, 2007, amended April 27, 2007, amended further February 10, 2010 (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.7
†
Demand Media Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement, between Demand Media, Inc. and Richard Rosenblatt, dated April 19, 2007, amended April 27, 2007, amended further February 10, 2010 (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.8
†
Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Charles Hilliard, dated June 1, 2007, amended February 9, 2010 (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)



10.9
†
Demand Media, Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement, between Demand Media, Inc. and Charles Hilliard, dated June 1, 2007 (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.10
†
Demand Media, Inc. 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Michael Blend, dated May 29, 2008, amended February 10, 2010 (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.11
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Richard Rosenblatt, dated June 2009 (incorporated by reference to Exhibit 10.19 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.12
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Charles Hilliard, dated June 2009 (incorporated by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.13
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Shawn Colo, dated June 2009 (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.14
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Michael Blend, dated June 2009 (incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.15
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and David Panos, dated April 5, 2010 (incorporated by reference to Exhibit 10.29 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.16
†
Demand Media, Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement, between Demand Media, Inc. and Joanne Bradford, dated March 26, 2010 (incorporated by reference to Exhibit 10.30 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.17
†
Demand Media, Inc. Amended and Restated 2006 Equity Incentive Plan Stock Option Agreement, between Demand Media, Inc. and Joanne Bradford, dated March 26, 2010 (incorporated by reference to Exhibit 10.32 to the Company's Amendment No. 6 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 10, 2010)
10.18
†
Demand Media, Inc. 2010 Incentive Award Plan, adopted August 3, 2010 (incorporated by reference to Exhibit 10.04 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.19
†
Form of Demand Media, Inc. 2010 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement (incorporated by reference to Exhibit 10.05 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.20
†
Form of Demand Media, Inc. 2010 Incentive Award Plan Restricted Stock Unit Award Grant Notice and Award Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on May 9, 2011)
10.21
†
Form of Demand Media, Inc. 2010 Incentive Award Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 12, 2011)
10.22
†
Demand Media, Inc. 2010 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement, between Demand Media, Inc. and Joanne Bradford, dated August 3, 2010 (incorporated by reference to Exhibit 10.31 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.23
†
Demand Media, Inc. 2010 Employee Stock Purchase Plan, dated September 27, 2010 (incorporated by reference to Exhibit 10.26 to the Company's Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on October 29, 2010)
10.24
†
Employment Agreement between Demand Media, Inc. and Richard Rosenblatt, dated August 5, 2010 (incorporated by reference to Exhibit 10.08 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.25
†
Employment Agreement between Demand Media, Inc. and Charles Hilliard, dated August 5, 2010 (incorporated by reference to Exhibit 10.09 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)



10.26
†
Employment Agreement between Demand Media, Inc. and Shawn Colo, dated August 31, 2010 (incorporated by reference to Exhibit 10.10A to the Company's Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on December 21, 2010)
10.27
†
Employment Agreement between Demand Media, Inc. and Joanne Bradford, dated March 15, 2010 (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.27A
†
First Amendment to Employment Agreement between Demand Media, Inc. and Joanne Bradford, dated September 3, 2010 (incorporated by reference to Exhibit 10.13A to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2011)
10.28
†
Employment Agreement between Demand Media, Inc. and David Panos, dated August 24, 2010 (incorporated by reference to Exhibit 10.28 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on January 3, 2010)
10.29
†
Offer Letter between Demand Media, Inc. and Michael Blend, dated August 1, 2006 (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.30
†
Executive Separation Agreement and General Release between Demand Media, Inc. and Larry Fitzgibbon, dated January 27, 2012 (filed herewith)
10.31
 
Google Services Agreement, between Google, Inc. and Demand Media, Inc., dated May 28, 2010 (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on August 6, 2010)
10.31A
 
Amendment Number 3 to Google Services Agreement, entered into as of September 1, 2011, between Google, Inc. and Demand Media, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011)
10.32
 
Credit Agreement, dated as of August 4, 2011, among Demand Media, Inc., as Borrower, Silicon Valley Bank, as Administrative Agent, Documentation Agent, Issuing Lender and Swingline Lender, U.S. Bank, N.A., as Syndication Agent and Lenders party thereto from time to time (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 12, 2011)

14.1
 
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.01 to the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2011)
21.1
 
List of subsidiaries of Demand Media, Inc. (filed herewith)
23.1
 
Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1
 
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2
 
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101.INS
 
XBRL Instance Document*
101.SCH
 
XBRL Taxonomy Extension Schema Document*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
 
 
 
 
 
† Indicates management contract or compensatory plan, contract or arrangement.
 
 
* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.