S-1 1 d721498ds1.htm FORM S-1 Form S-1
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As filed with the U.S. Securities and Exchange Commission on July 7, 2014.

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

YODLE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7311   57-1219336

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

50 West 23rd Street, Suite 401

New York, NY 10010

(212) 542-5400

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

 

 

Court Cunningham

Chief Executive Officer

Yodle, Inc.

50 West 23rd Street, Suite 401

New York, NY 10010

(212) 542-5400

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

 

 

Copies to:

 

Babak Yaghmaie

Nicole Brookshire

Stephane Levy

Cooley LLP

1114 Avenue of the Americas

New York, NY 10036

(212) 479-6000

 

Michael Gordon

Chief Operating Officer and

Chief Financial Officer

Yodle, Inc.

50 West 23rd Street, Suite 401

New York, NY 10010

(212) 542-5400

 

Kirk A. Davenport

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022-4834

(212) 906-1200

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

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

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

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities being Registered  

Proposed

Maximum

Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, $0.0002 par value per share

  $75,000,000   $9,660

 

 

(1) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price.

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 under the Securities Exchange Act of 1934. (Check one):

 

Large Accelerated Filer  ¨   Accelerated Filer  ¨   Non-accelerated Filer  x   Smaller Reporting Company  ¨

 

 

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

 

 

 


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

 

SUBJECT TO COMPLETION, DATED JULY 7, 2014

PRELIMINARY PROSPECTUS

                Shares

 

LOGO

Common Stock

 

 

We are selling                 shares of common stock and the selling stockholders are selling                 shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $             and $         per share. We intend to apply to list our common stock on                 under the symbol “YO.”

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

The underwriters have an option to purchase a maximum of                 additional shares from                 solely to cover over-allotments of shares.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.

 

      

Price to

Public

    

Underwriting

Discounts and

Commissions(1)

    

Proceeds to

Yodle, Inc.

    

Proceeds to

Selling
Stockholders

Per Share

     $                      $                      $                      $                

Total

     $                      $                      $                      $                

 

(1) See “Underwriting” on page 135 for additional information regarding underwriting compensation.

Delivery of the shares of common stock will be made on or about                 , 2014.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Credit Suisse   Deutsche Bank Securities   Jefferies   Piper Jaffray
Canaccord Genuity   Needham & Company   Oppenheimer & Co.

The date of this prospectus is                 , 2014.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     12   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     41   

USE OF PROCEEDS

     43   

DIVIDEND POLICY

     45   

CAPITALIZATION

     46   

DILUTION

     48   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     50   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     53   

BUSINESS

     79   

MANAGEMENT

     96   

EXECUTIVE AND DIRECTOR COMPENSATION

     103   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     114   

PRINCIPAL AND SELLING STOCKHOLDERS

     119   

DESCRIPTION OF CAPITAL STOCK

     122   

SHARES ELIGIBLE FOR FUTURE SALE

     128   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     131   

UNDERWRITING

     135   

LEGAL MATTERS

     140   

EXPERTS

     140   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     140   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this document or to which we have referred you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Dealer Prospectus Delivery Obligation

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

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

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “Yodle,” “company,” “our,” “us,” and “we” in this prospectus to refer to Yodle, Inc. and, where appropriate, our consolidated subsidiaries.

Overview

Yodle is a leading provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable and transparent. Our platform provides our customers with an online, mobile and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. We utilize our proprietary data assets and algorithms to increase the likelihood that consumers will find our customers and become their paying consumers. Our platform provides our customers with transparency into their marketing activities and business operations, thereby enabling them to evaluate their return on investment, or ROI. Our solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

We believe the market for our local marketing automation platform is large and underserved. According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. We currently target industry verticals with approximately 7 million local businesses, the largest categories of which include legal and professional, dental and medical and contractor and other home services. We served approximately 44,800 local businesses as of March 31, 2014. Local businesses are increasingly purchasing cloud-based technologies and services to operate and grow. According to a report by Parallels, a hosting and cloud services company, small- and medium-sized businesses, or SMBs, in the United States spent $8.5 billion in 2013 on cloud services related to web presence, web applications and business applications, and are expected to spend $15.1 billion in 2017. BIA/Kelsey estimates that spending on local digital advertising will increase from $28 billion in 2013 to $53 billion in 2018. In addition, AMI-Partners, an independent market research firm, estimates that there are approximately 74 million local businesses globally.

We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products. Marketing Essentials is our flagship product that includes three modules: presence, conversion optimization and communication automation. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the needs of national franchisors and other similar businesses. Lighthouse is our business practice automation product, which automates many of our customers’ daily consumer interactions or office routines. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of our Yodle Ads media product, which automates, manages and optimizes our customers’ media spend across mobile and desktop search engines. We refer to our offerings and the packages in which we sell them as products.

Over nine years of focusing on the unique and constantly evolving digital marketing needs of local businesses, we have developed a differentiated approach to addressing this large and fragmented market. We use our sophisticated technology, rigorous data collection and analytics and scalable process automation in all key aspects of our business. Our solutions are highly integrated and optimized using our proprietary algorithms and

 

 

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the data assets we have built by tracking billions of consumer interactions. Our local inside sales force utilizes our proprietary and sophisticated customer prospecting and sales force automation system, which helps us determine the most effective sales strategy for each local business prospect. In addition, our customer onboarding and service processes for all of our products are highly automated, which enables us to rapidly launch the digital presence of our customers. We also offer some customization for our brand network customers that enables them to tailor our products for their specific business objectives. As a result, we believe we have a compelling business model which is characterized by low customer acquisition and onboarding costs and rapid payback, resulting in attractive customer economics and high returns on our initial investment.

We have grown our revenues from $87.6 million in 2011 to $161.9 million in 2013, representing a compound annual growth rate of 36%. Over this same period, our cost of revenues as a percentage of revenues have decreased from 39% to 33%, while our net loss has decreased from $15.4 million to $10.4 million. For the three months ended March 31, 2014, we had revenues of $45.7 million and net losses of $5.9 million. Our customers have increased from approximately 6,000 as of December 31, 2009 to approximately 44,800 as of March 31, 2014.

Our Industry

Consumers are increasingly changing the way they discover and interact with local businesses, shifting away from traditional media such as yellow pages directories, newspapers, radio and television, and interactions in person and over the telephone, to various digital resources, including desktop and mobile search, online directories, review sites, email and other mobile applications. As a result, businesses are challenged to navigate and manage an increasingly complex marketing landscape. Businesses need a comprehensive digital presence that includes a professional quality website that is easily discoverable and optimized for mobile devices, exposure on leading online directories and ratings and reviews sites, and tools to communicate with customers via email, text messages and social media. Large enterprises address this complexity by using sophisticated third-party software solutions that are expensive and require significant internal expertise to manage. However, local businesses generally lack the resources and expertise to access the benefits of enterprise-level solutions. Instead, they are left to choose from a number of disparate point solutions that only address a limited set of their challenges, are not integrated to work together and require local businesses to pay for and manage multiple vendors.

In addition, many national franchisors, manufacturers and multi-location businesses operate networks of individually-operated franchises, dealerships and offices that sell products or provide services at a local level. We refer to these businesses as brand networks. We believe that the challenges faced by individual locations within a brand network are very similar to those of independent local businesses. Brand network owners, however, have additional unique challenges that include ensuring that individual network locations have a robust local digital presence that is consistent with their brand identity and facilitating their individual locations to maximize their investments in local marketing solutions in order to increase sales across the network. To accomplish this, a brand network owner requires clear visibility and analytics into the performance of its marketing programs across its network and an ability to enable the individual locations within its network to achieve the brand network owner’s marketing objectives.

Our Solution

We are seeking to transform the way that local businesses create and manage their online and mobile presence, and how they attract and engage with consumers. Our platform provides local businesses with a comprehensive suite of capabilities to compete in the digital world. For our customers, we establish a digital presence that is algorithmically optimized to increase the likelihood that consumers will find and transact with them and provide powerful tools that we believe help them attract, manage and retain consumers. Our cloud-based marketing automation platform provides local businesses with the following key benefits:

 

   

Comprehensive, intuitive and easy-to-use platform for attracting and engaging consumers. Our local marketing automation platform provides the essential features that local businesses need to attract, manage and retain consumers, including a mobile-optimized website, social presence, offer management, automated media buying and communication tools, such as email and text messaging. These features are

 

 

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bundled into an integrated and easy-to-use platform, thereby liberating a local business from the confusion and complexity of deciding which point solutions to utilize and avoiding the expense and challenges of managing multiple vendors.

 

    Increased revenues from new and existing consumers. Our platform is designed to help our customers to efficiently acquire and retain consumers, improve the effectiveness of their marketing efforts and help them meet their marketing and business objectives.

 

    Mobile solutions optimized for consumers and local business owners. We optimize our customers’ websites for use on mobile devices in order to make their websites easier for consumers to discover and use. We also provide our customers with a mobile dashboard that allows them to monitor performance metrics and manage their content from their mobile devices.

 

    Transparency. Our platform allows our customers to easily monitor and manage their digital presence and marketing activities. We present relevant, real-time performance metrics which enable our customers to better understand and evaluate their ROI.

 

    Affordable pricing. Based on data from BIA/Kelsey, we believe the average SMB spends approximately $400 per month on marketing. We have generally priced our flagship product, Marketing Essentials, including all three of its current modules, at less than $300 per month since its introduction in March 2014. We believe, based on publicly available market pricing information, that re-creating the functionality of our Marketing Essentials product by purchasing multiple point solutions would cost a local business at least twice that amount.

As a result of these benefits, we refer to our platform as a “CMO-in-a-box” for our local business customers, because our solutions are designed to develop and manage their marketing activities and other consumer interactions, similar to the manner in which a chief marketing officer, or CMO, would for a large enterprise.

We also address the unique requirements of brand networks with our Centermark product, which leverages the core capabilities of our platform by providing a standardized source of shared data, communication and reporting to brand network owners. Centermark enables brand network owners to extend many of the same benefits enjoyed by our local business customers to the individual locations in their network. Additionally, Centermark incorporates powerful communication, monitoring and analytics tools, which help brand network owners increase the value of their networks.

Our Competitive Strengths

Our key competitive strengths include:

 

    Comprehensive, integrated and easy-to-use platform. The breadth, depth and highly integrated nature of our platform offers significant advantages to our customers as it is designed to be comprehensive and work together. We believe that these attributes provide our customers with superior value and performance results compared to the disparate point solutions available in the market.

 

    Proprietary data assets. We utilize our proprietary data assets to algorithmically optimize our customers’ online and mobile content, email campaigns, website and ad copy templates, and keywords for search engine optimization, or SEO, and search engine marketing, or SEM, purposes. We believe our proprietary data assets allow us to more effectively measure and improve the marketing performance of websites, digital advertising and communications for our customers.

 

    Powerful data-driven network effects. As we continue to add more local business customers to our platform and collect and analyze more data about our customers’ marketing performance and business operations, we are able to improve the performance of our platform and ultimately drive higher value to our current and future customers by further improving their ROI.

 

 

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    Vertical expertise. We currently target local businesses in the following key categories of industry verticals: legal and professional, dental and medical and contractor and other home services. As we grow our presence in these industry verticals, we are able to develop additional expertise in those verticals. We believe that our scale, depth and operational integration in specific verticals provide us with a competitive advantage in gathering data and optimizing marketing performance and business operations for our customers in those industry verticals.

 

    Low customer acquisition costs. Our highly automated, technology- and data-driven approach to sales promotes efficiency and scalability in our business model and enables us to efficiently acquire customers. Between 2011 and 2013, we reduced our average cost to acquire a customer while at the same time more than doubling the headcount of our sales force.

 

    Rapid and scalable customer onboarding and service driven by process automation. We have made technology investments in process automation that allow us to scale rapidly and onboard customers without adding significant incremental costs or impacting the level of quality. Although we have designed our products to be highly intuitive, we provide our customers access to our responsive, technology-enabled customer service team.

 

    Track record of innovation. We are focused on driving innovation in the local digital marketing industry, identifying and interpreting emerging technology and trends on behalf of our customers to enable them to benefit from our innovation. Our focus on innovation allows us to quickly adapt to the evolving landscape and provide our customers with valuable solutions, often before they identify a need for such solutions.

Our competitive strengths result in what we believe is an attractive business model. Our low customer acquisition and onboarding costs minimize our initial investment to bring on new customers and allow us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for our tenured customers. We expect the revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe that our low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of our tenured customers results in a business model that generates attractive customer economics and high returns on our initial investment.

Our Growth Strategy

We believe that we are in the very early stages of a large and long-term business opportunity. Our growth strategy for pursuing this opportunity includes the following key components:

 

    Further penetrate our existing industry verticals. Of the estimated 28 million local businesses in the United States, we currently target industry verticals that include approximately 7 million local businesses. We plan to further penetrate these verticals by leveraging our existing sales infrastructure, investing in our direct sales teams and expanding our sales through partnerships with resellers.

 

   

Increase the number of customers that are operationally integrated with our platform. We intend to increase the number of customers with whom we have operational systems integration, including business

 

 

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management, scheduling and billing. We intend to accomplish this by increasing the number of salespeople selling Lighthouse, our business practice automation product, and Centermark, and increasing the number of industry verticals that we are targeting with our Lighthouse product.

 

    Expand our distribution channels. We intend to pursue opportunities to sell our products through organizations that have existing relationships with local businesses, including by targeting brand network owners through our Centermark product and selectively partnering with resellers.

 

    Expand into new industry verticals and geographies. We see significant opportunity in continuing to expand our footprint beyond our current industry verticals across a broad spectrum of local businesses in the United States. While we believe that the global market of 74 million local businesses provides us with further growth opportunities over the long term, our focus in the near term is growing our business in the United States and Canada.

 

    Continue to introduce new products and enhance the functionality of our platform. We plan to introduce new products, develop new functionality for our platform and address the latest marketing opportunities and challenges facing local businesses.

 

 

    Pursue selective strategic acquisitions. We intend to selectively acquire businesses that can provide us with complementary technologies and products, or access to new customers, industry verticals or geographies.

Risks Related to Our Business and Our Industry

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

    We have a short operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

 

    We have incurred significant operating losses in the past, and we may not be able to generate sufficient revenues to achieve or maintain profitability.

 

    Our products are sold on a short-term basis, and if subscription renewal or customer retention rates decrease or we do not accurately predict these rates, our future revenues and operating results may be harmed.

 

    Many of our products are new and if we are unsuccessful at marketing our products to local businesses, we may not be able to achieve our growth and business objectives.

 

    Our future success will depend in part on our ability to expand into new industry verticals.

 

    We purchase a majority of our media from Google, and our business could be adversely affected if Google takes actions that are adverse to our interests. Similar actions from Yahoo!, Microsoft and other media providers could adversely affect our business to a lesser degree.

 

    If our SEO strategies fail to help our customers get discovered more easily in unpaid search results, our business could be adversely affected.

 

    Our revenue growth will be adversely affected if we cannot continue to successfully retain, hire, train and manage qualified personnel, especially those in sales and marketing.

 

    We may not be able to continue to add new customers or retain or increase sales to our existing customers, which could adversely affect our operating results.

 

    We expect to face increased competition in the digital marketing industry, which could require us to reduce our selling prices or expand the products or features that we offer. As a result of such competitive pressures, we may not be able to maintain or improve our competitive position or market share.

 

 

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Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

    a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

    an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

    an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;

 

    reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

    no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of some or all these provisions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.0 billion or (c) in which we are deemed to be a “large accelerated filer,” under the rules of the U.S. Securities and Exchange Commission, or SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

We are choosing to “opt out” of the provision of the JOBS Act that permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.

We have elected to adopt the reduced disclosure requirements available to emerging growth companies, and only provide three years of selected financial data and reduced disclosure about our executive compensation arrangements in this prospectus. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of these elections, which may result in a less active trading market for our common stock and higher volatility in our stock price.

Corporate Information

Yodle, Inc. was originally incorporated under the laws of the State of Delaware under the name Natpal, Inc. in March 2005. We changed our name to Yodle, Inc. in July 2007.

Our principal executive office is located at 50 West 23rd Street, Suite 401, New York, NY 10010. Our telephone number is (212) 542-5400. Our website address is www.yodle.com. Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this prospectus.

The Yodle logo and names Yodle® and Centermark and other trademarks or service marks of Yodle, Inc. appearing in this prospectus are the property of Yodle, Inc. and its consolidated subsidiaries. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for your convenience, trade names, trademarks and service marks contained in this prospectus may appear without the “®” or “” symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to those trade names, trademarks and service marks.

 

 

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THE OFFERING

 

Common stock offered by Yodle

                shares

 

Common stock offered by the selling stockholders

                shares

 

Total common stock offered

                shares

 

Total common stock to be outstanding after this offering

                shares

 

Over-allotment option offered by                   

                shares

 

Use of proceeds

The principal purposes of this offering are to create a public market for our common stock and to facilitate our future access to the public equity markets, as well as to obtain additional capital. We intend to use a portion of the net proceeds from this offering to repay (1) $             million of indebtedness outstanding under our existing credit facilities and (2) a $6.2 million deferred payment obligation. We intend to use the remainder of the net proceeds for general corporate purposes. In addition, we may use a portion of the proceeds from this offering for acquisitions of complementary businesses, technologies or other assets, although we do not currently have any plans for any acquisitions. We will not receive any of the proceeds from the sale of shares to be offered by the selling stockholders. See the section of this prospectus titled “Use of Proceeds.”

 

Risk factors

See the section of this prospectus titled “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed                 Symbol

“YO”

The number of shares of our common stock that will be outstanding after this offering is based on the number of shares outstanding as of May 31, 2014, and excludes:

 

    21,929,642 shares of common stock issuable upon the exercise of options outstanding as of May 31, 2014, at a weighted-average exercise price of $1.5648 per share;

 

                    shares of our common stock reserved for future issuance pursuant to our equity incentive plans, including (1)                 shares pursuant to our 2014 Equity Incentive Plan, or 2014 Plan, (2)                 shares pursuant to our 2014 Employee Stock Purchase Plan, or 2014 ESPP, each of which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year and (3) 1,170,473 shares of our common stock reserved for issuance under our 2007 Equity Incentive Plan, or the 2007 Plan, which shares will be added to the shares reserved under the 2014 Plan upon its effectiveness;

 

    1,242,829 shares of common stock issuable upon the exercise of certain preferred stock warrants that were outstanding as of May 31, 2014, at a weighted-average exercise price of $0.9937 per share; and

 

    200,553 shares of common stock issuable upon the exercise of certain common stock warrants that were outstanding as of May 31, 2014, at a weighted-average exercise price of $1.1676 per share.

 

 

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Unless otherwise indicated, this prospectus reflects and assumes the following:

 

    a     -for-     reverse stock split of our common stock expected to be completed prior to the completion of this offering;

 

    the reclassification of 1,242,829 shares of preferred stock issuable upon the exercise of outstanding preferred stock warrants immediately prior to the completion of this offering into 1,242,829 shares of common stock issuable upon the exercise of such warrants, which reclassification is expected to occur automatically immediately prior to the completion of this offering;

 

    the automatic net exercise of preferred stock warrants to purchase 1,537,917 shares of our common stock at an exercise price of $1.4045 per share, which will occur immediately prior to the completion of this offering, as described in the section titled ‘‘Description of Capital Stock—Warrants,’’ which we refer to as the automatic preferred stock warrant exercise;

 

    the automatic conversion of 82,650,815 outstanding shares of our preferred stock into an aggregate of                 shares of our common stock, which will occur automatically immediately prior to the completion of this offering (assuming a conversion ratio equal to                 common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus);

 

    the filing and effectiveness of our certificate of incorporation in Delaware and the adoption of our bylaws, each of which will occur immediately prior to the completion of this offering;

 

    no exercise of outstanding options, common stock warrants or preferred stock warrants (other than the automatic preferred stock warrant exercise) after May 31, 2014; and

 

    no exercise by the underwriters of their over-allotment option.

Series F Conversion Ratio

The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series F preferred stock depends on the initial public offering price of our common stock. The terms of our Series F preferred stock provide that the ratio at which each share of this series of preferred stock automatically converts into shares of our common stock in connection with this offering will increase if the initial public offering price is below $             per share, which would result in additional shares of our common stock being issued upon conversion of our Series F preferred stock immediately prior to the closing of this offering. Based upon the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series F preferred stock will convert into an aggregate of approximately                 shares of our common stock immediately prior to the completion of this offering.

For illustrative purposes only, the table below shows the number of shares of our common stock that would be issuable upon conversion of the Series F preferred stock at various initial public offering prices, as well as the total number of outstanding shares of our common stock as a result:

 

Assumed Public Offering Price
per Share

   Series F Preferred
Stock Conversion

Ratio
   Shares of Common
Stock Issuable upon
Conversion of Series F
Preferred Stock
   Total Shares of
Common Stock Outstanding
After this Offering
        
        
        
        
        

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth a summary of our consolidated financial and other data for, and as of the periods ended on, the dates indicated. The consolidated statements of operations and comprehensive loss data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The condensed consolidated statements of operations and comprehensive income (loss) data for the three months ended March 31, 2013 and March 31, 2014 and the condensed consolidated balance sheet data as of March 31, 2014 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited interim condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for the fair presentation of the financial information set forth in those statements included elsewhere in this prospectus.

When you read this summary consolidated financial and other data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as the sections of this prospectus titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of the results that may be expected for any future period.

 

    Year Ended December 31,     Three Months
Ended March 31,
 
    2011     2012     2013     2013     2014  
    (in thousands, except per share and customer data)  
          (unaudited)  

Consolidated Statements of Operations Data:

         

Revenues

  $ 87,584      $ 132,321      $ 161,863      $ 35,202      $ 45,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

         

Cost of revenues (exclusive of depreciation and amortization shown separately below)(1)

    33,876        42,760        53,843        11,925        14,446   

Selling and marketing(1)

    36,318        51,623        64,605        14,076        18,628   

Technology and product development(1)

    10,157        14,977        20,346        4,568        5,660   

General and administrative(1)

    15,305        19,591        29,271        6,085        8,349   

Depreciation and amortization

    2,328        3,721        6,419        1,248        1,845   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    97,984        132,672        174,484        37,902        48,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,400     (351     (12,621     (2,700     (3,182

Interest expense and other

    (7,074     (4,690     (2,912     (440     (2,660
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (17,474     (5,041     (15,533     (3,140     (5,842

(Benefit) provision for income taxes

    (2,035     387        (5,131     (5,327     103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

  $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to common stockholders(2)

         

Basic

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net (loss) income per share attributable to common stockholders(2)

         

Basic

    31,955        32,573        35,743        34,279        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    31,955        32,573        35,743        46,876        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Pro forma weighted-average shares used to compute pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Other Financial and Other Data (unaudited):

         

Number of Customers(4)

    27,200        29,300        42,000        33,800        44,800   

Adjusted EBITDA(5)

  $ (5,899   $ 6,236      $ 1,819      $ 286      $ 378   

 

 

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     As of
December 31,
2013
    As of March 31, 2014
       Actual     Pro forma as
adjusted(6)
     (in thousands)
           (unaudited)

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 12,345      $ 10,274     

Working capital (deficit)(7)

     (27,325     (32,721  

Total assets

     93,729        93,663     

Long-term debt, including current portion(8)

     29,609        30,228     

Total liabilities

     74,456        75,825     

Convertible preferred stock

     62,411        65,159     

Total stockholders’ (deficit) equity

     (43,138     (47,321  

 

(1)   Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Three Months
Ended March 31,
 
     2011      2012      2013      2013      2014  
     (in thousands)  
            (unaudited)  

Cost of revenues

   $ 15       $ 17       $ 15       $ 4       $ 10   

Selling and marketing

     422         577         780         241         237   

Technology and product development

     235         445         675         159         218   

General and administrative

     1,160         1,827         1,161         521         214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,866       $ 2,631       $ 925       $ 679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See note 15 to our unaudited interim condensed consolidated financial statements and note 21 to our consolidated financial statements for an explanation of the calculations of our actual basic and diluted net (loss) income per share attributable to common stockholders.

 

(3) Pro forma basic and diluted net (loss) income per share attributable to common stockholders represents net (loss) income and comprehensive (loss) income divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares of common stock outstanding reflects (a) the automatic preferred stock warrant exercise and (b) the conversion of preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the issuance date or the first day of the relevant period (assuming a conversion ratio equal to                 common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus). See the section “—The Offering” above for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

 

(4) We calculate the number of customers at the end of each fiscal year as the number of unique customers with a subscription to one or more of our platform products and customers of our Yodle Ads product, rounded down to the nearest hundred. We consider as separate customers each location of a brand network that uses one of our more of our products. In cases where our customers have subscriptions to our platform obtained through resellers, we include those customers in our customer count.

 

(5) We define Adjusted EBITDA as our net (loss) income and our comprehensive (loss) income plus (minus): interest expense and other, (benefit) provision for income taxes and depreciation and amortization expense, adjusted to eliminate the impact of stock-based compensation expense, which is a non-cash item, and the effect of charges related to business combination and asset acquisition. Please see footnote (5) to the table of the section of this prospectus titled “Selected Consolidated Financial and Other Data” for more information and for a reconciliation of Adjusted EBITDA to net (loss) income and our comprehensive (loss) income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States of America, or GAAP.

 

(6) Reflects on a pro forma as adjusted basis (a) the conversion described in footnote (3)(b) above, (b) the reclassification of our preferred stock warrant liabilities to additional paid-in capital upon the automatic conversion of certain of our preferred stock warrants into warrants exercisable for our common stock, which will occur automatically upon the completion of this offering, (c) the automatic preferred stock warrant exercise, (d) our sale of                 shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (e) a $             million deemed dividend on our Series F preferred stock, as described in “Capitalization,” and (f) the application of $             million of the net proceeds of this offering to repay indebtedness outstanding under our existing credit facilities and $6.2 million of the net proceeds of this offering to satisfy certain of our deferred payment obligations, as described in “Use of Proceeds.”

 

 

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    The pro forma as adjusted information presented in the summary balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity on a pro forma as adjusted basis by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each increase or decrease of             in the number of shares offered by us would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by approximately $             million, assuming that the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

 

(7)   Working capital (deficit) includes all current assets less all current liabilities.

 

(8)   Includes current and long-term portions of bank loan, current and long-term portions of subordinated debt and deferred consideration. As of March 31, 2014, it also included $4.8 million in accrued expenses and other current liabilities and $0.3 million in other liabilities, long-term portion, which includes deferred payments of $4.5 million related to our acquisition of Lighthouse Practice Management classified as accrued compensation expense and $0.6 million related to our asset acquisition from New Service, LLC. As of December 31, 2013, it also included the cash portion of contingent consideration in business combination and $4.0 million in long-term portion of other liabilities, but excluded the fair value attributable to 869,565 shares of Series E preferred stock payable as non-cash earn-out consideration. Amounts are disclosed at full payment value and do not reflect reductions for fair value adjustments that are reflected on the balance sheet.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. Any of the following risks could materially and adversely affect our business, financial condition, results of operations and future growth prospects. As a result, the market price of our common stock could decline and you could lose some or all of your investment.

Risks Related to Our Business and Our Industry

We have a short operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We were founded in 2005, and our first product was a search engine marketing, or SEM, optimization bidding engine, which we typically sold in conjunction with building a website for our customers. We have since expanded our product offerings to address a broad array of digital marketing needs of local businesses, which we define as non-employer firms and businesses with up to 99 employees. Our short history, evolving strategy and operations in a new and developing market make it difficult to effectively assess our future prospects. You should, therefore, consider our future prospects in light of the challenges and uncertainties that we face, including, among other things:

 

    that our business has grown rapidly, and we only recently expanded from an SEM, website building and SEO company to a company offering a broad suite of marketing products to local businesses and brand networks;

 

    that it may not be possible to discern fully the trends that we are subject to based on our limited operating history in a new and developing market;

 

    increased competition and the offering of new products and solutions by our competitors;

 

    our ability to retain and increase sales to existing customers and attract new customers on a cost-effective basis;

 

    our ability to monitor and comply with evolving regulations affecting our business or our customers’ businesses;

 

    our ability to meet our customers’ evolving needs and expectations; and

 

    our ability to manage, measure and demonstrate the effectiveness of our platform and to continue to develop or acquire new products and technologies that are appealing to our customers.

These factors and others may make it difficult to evaluate our current business and future prospects. Failure to adequately address any of the challenges above could adversely affect our business and, as a result, our revenues and results of operations.

We have incurred significant operating losses in the past, and we may not be able to generate sufficient revenue to achieve or maintain profitability.

Since our inception, we have incurred significant operating losses, and, as of March 31, 2014, we had an accumulated deficit of approximately $84.5 million. Although our revenues have grown rapidly, increasing from $87.6 million in 2011 to $161.9 million in 2013, we have experienced net losses of $15.4 million, $5.4 million and $10.4 million in 2011, 2012 and 2013, respectively. For the three months ended March 31, 2014, we had revenues of $45.7 million and net losses of $5.9 million. In addition, we may not be able

 

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to continue our historical growth rate and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. We also expect our costs to increase in future periods as we continue to expend substantial financial resources on:

 

    sales and marketing;

 

    customer service;

 

    product and feature development;

 

    our technology infrastructure;

 

    domestic expansion efforts;

 

    strategic opportunities, including commercial relationships and acquisitions;

 

    ongoing compliance efforts in connection with new and evolving regulatory requirements; and

 

    general and administration functions, including legal and accounting expenses related to being a public company.

These investments may not result in increased revenue or growth of our business. If we are unable to maintain adequate revenue growth and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.

Our products are sold on a short-term basis, and if subscription renewal or customer retention rates decrease or we do not accurately predict these rates, our future revenue and operating results may be harmed.

Typically, subscriptions to Marketing Essentials and related modules of our platform (including predecessor products) range from three- to 12-month initial subscription terms. Historically, these contracts have generally been extended on a month-to-month basis after the initial subscription term. After the initial subscription term, our customers can cancel their subscription at any time with little or no penalty. Subscriptions to our Centermark product, which we introduced in December 2013, typically have 12-month initial subscription terms or longer; however, some of these agreements are subject to termination if we do not achieve certain criteria. Typically, subscriptions to our Lighthouse product are for month-to-month subscription terms. In addition, sales of our Yodle Ads media product are generally on a short-term basis. As a result, we may have limited visibility into our future revenue streams, our revenues could quickly decelerate and we may not accurately forecast our future revenue streams or our subscription renewal or customer retention rates. If we fail to project accurately and/or our revenues decline, our operating results would be harmed and our stock price may decline.

Historically, we have experienced a high turnover rate in our customer base, especially within the first year of launching a customer. We believe there are a variety of factors which may result in increases in our turnover rate or fluctuations in our revenue. These factors include:

 

    customer satisfaction with our products;

 

    our customers’ perceived value of our products and their return on investment, or ROI;

 

    changes to pricing, including in connection with expanding our offerings;

 

    the number of our products used by our customers;

 

    decreased spending by our customers on advertising and marketing generally, and on digital marketing in particular;

 

    cessation of our customers’ businesses, as small- and medium-sized local businesses have historically experienced high failure rates;

 

    increased competition in the local business digital marketing environment;

 

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    the products and prices offered by us and our competitors;

 

    the evolving use of technology-based marketing solutions by local businesses; and

 

    the overall economic environment in the United States and its impact on local businesses.

If our customers do not renew their subscriptions or if they decrease the amount they spend with us, our revenue could decline and our operating results could suffer. In particular, if our Centermark customers do not renew their subscriptions or we do not renew our relationship with any of our resellers, we would likely lose a large number of customers at once, which could cause our revenue to decline and our operating results to suffer.

Many of our products are new and if we are unsuccessful at marketing our products to local businesses, we may not be able to achieve our growth and business objectives.

We introduced Marketing Essentials in the first quarter of 2014 as an integrated product to address the broad array of marketing needs of local businesses, and we introduced Centermark in December 2013 to address the marketing needs of brand networks. We have designed our products to address how our customers engage with and expand their relationships with consumers. For example, we have recently launched many of our mobile and social functionalities, as well as photo management, email automation, review management and offer management. Historically, and prior to expanding our product offerings, we focused our efforts on SEO and SEM activities. Because our growth strategy involves marketing our products to local businesses for use across a broader spectrum of our customers’ marketing objectives, such as retention, outreach and appointment automation, our ability to grow our business and increase our revenues will depend on our ability to successfully market our products and solutions to existing and prospective customers.

In addition, some of our newer products, such as Lighthouse, our business practice automation product, require integration into a customer’s practice management system, or PMS, or other customer relationship management or point of sale systems. While we have successfully integrated into a number of PMSs available in the marketplace, some of the PMSs, or other customer relationship management or point of sale systems, providers may not allow us to integrate into their systems or may charge a fee for this integration. Therefore, we may not be able to integrate with all PMSs, or other customer relationship management or point of sale systems, on terms that are reasonable to us, or at all. If we face significant challenges in integrating into widely used or newly adopted and popular PMSs, or other customer relationship management or point of sale systems, our ability to market our business practice automation product to our existing customers and prospective customers would be impaired, which could have a material adverse effect on our growth and business objectives.

We need to continue to make significant investments in product development and enhance our ability to demonstrate measurable benefits of the use of our products for our customers. Further, we may need to make significant additional investments in sales, marketing and customer service to educate the market on the benefits of our products. However, we have limited experience marketing our products to address the broader array of marketing and customer management objectives. Therefore, if we are unable to successfully market our products and local businesses do not adopt our products to pursue those objectives, our business will suffer.

Our future success will depend in part on our ability to expand into new industry verticals.

As we market our products to a wider group of potential customers outside of our current primary industry verticals, legal and professional, dental and medical and contractor and other home services, we will need to adapt and effectively market our products. We have limited experience with businesses within industry verticals which we have recently expanded into and businesses that are outside of the industry verticals we have historically focused on. Our success in expanding our products to businesses in new industry verticals and verticals into which we have recently expanded will depend on various factors, including our ability to:

 

    design products that are attractive to businesses in these industries and integrate new products and features into our platform;

 

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    tailor our products to enable our customers to comply with rules and regulations applicable to businesses in these industries, including potential professional licensing requirements and/or advertising and marketing restrictions;

 

    hire personnel with relevant industry vertical experience to lead sales, marketing, customer service and product development teams; and

 

    accumulate sufficient data sets relevant for those industry verticals to ensure that we can deliver efficient and effective offerings within that industry.

In particular, Lighthouse depends on our customers gathering sufficient data from their clients, customers or patients and having necessary consents from those clients, customers or patients in order for them to be contacted. Local businesses within certain industry verticals may not keep digital records of operational activities, such as appointments, which may make it more challenging for us to sell to these businesses, as we would not have access to the data on which our product relies. In addition, our appointment automation tool that is part of Lighthouse involves making telephone calls and sending text messages, which requires consent from the recipients of those calls and messages that may be challenging for a local business to obtain.

Because our business model depends, in part, on developing a highly standardized and scalable digital marketing solution for local businesses, we may face challenges in adapting our products to account for the needs of potential customers in new industry verticals, including due to the diverse ways in which they manage their clients, customers or patients and the broad array of potentially applicable licensing and regulatory regimes. If we are unable to successfully adapt or market our products to appeal to businesses in industries other than the verticals we have historically focused on, we may not be able to achieve our growth or business objectives. Further, as we expand our customer base and products into new industry verticals, we may be unable to maintain our current customer retention rates.

We purchase a majority of our media from Google, and our business could be adversely affected if Google takes actions that are adverse to our interests. Similar actions from Yahoo!, Microsoft and other media providers could adversely affect our business to a lesser degree.

A significant portion of our cost of revenues is composed of net traffic acquisition costs for the purchase of media, and a majority of the media we purchase is from Google. Google accounts for a large majority of all U.S. Internet searches, and Google’s share in foreign markets is often even greater. As a result, we expect that our media revenue will continue to depend on purchases from Google. This dependence makes us vulnerable to actions that Google may take to change the manner in which it sells AdWords, as described below, or conducts its business on a number of levels:

 

    Google can change the terms and conditions upon which it does business with us. Google can act unilaterally to change the terms and conditions for our purchase of media or the purchase of Google products, and Google has done so in the past. For example, Google requires us to disclose to customers of our Yodle Ads product the cost of our media purchases from Google, and recently requested that we increase the prominence of such disclosure. Failure to adequately comply with such requests could cause Google to remove certain benefits that we rely on for our business, such as free access to its application programming interfaces, or APIs, and our ability to benefit from its rebate programs described below, which could have a material adverse impact on our business and results of operations. Future changes by Google to the terms and conditions upon which we purchase media could materially and adversely affect our business.

 

    Competitive risk. Google offers its products directly to local businesses through an online self-service option. Google enjoys substantial competitive advantages over us, such as substantially greater financial, technical and other resources. In addition, Google continues to launch products that are targeted directly at local businesses, which Google does not always make available to third parties. While we cannot assess at this time the effect of Google offering such products directly to local businesses, the prices charged by Google for direct service are lower than the prices we charge for the same media. As a result, we must convince our customers of the added value or performance of our products.

 

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    Technology risk. Our technology platform interacts with Google through publicly available APIs. If Google were to discontinue or change the availability of all or a portion of these APIs to us, we may have to change our technology, incur additional costs or discontinue certain products that we currently offer our customers. Any of these changes could adversely affect our ability to provide effective digital marketing and reporting solutions to our customers. In addition, Google may decide to charge us for the right to use its APIs, which would adversely impact our results of operations absent any change in our pricing to our customers.

 

    Rebate/Incentive risk. Google retains broad authority with respect to its rebate programs and has, from time to time, canceled certain of its rebate programs. In January 2014, we entered into a revised agreement with Google that, among other things, provides us with certain performance bonuses if we meet certain advertiser spend targets and other requirements. If we fail to meet those requirements, and as a result do not qualify for the rebates, our operating results would be harmed. Our agreement with Google expires in January 2016 and is subject to broad mutual termination rights. We may not be able to renew our agreement with Google on favorable terms, or at all. Termination of this agreement, or our failure to meet the requirements to earn the applicable rebates, would negatively affect our cost of revenues.

In addition, any new developments or rumors of developments regarding Google’s business practices that affect the local online advertising industry may create perceptions with our customers or investors that our ability to compete has been impaired.

The above risks also apply to other publishers from whom we purchase media, including Yahoo! and Microsoft, which together with Google, accounted for approximately 89% of our traffic acquisition costs in 2013. Similar actions from Yahoo! and Microsoft would also have adverse effects on our operating results, the impact of which we believe would most likely be in proportion to their market share relative to Google’s.

If our SEO strategies fail to help our customers get discovered more easily in unpaid search results, our business could be adversely affected.

Our success depends in part on our ability to help our customers’ websites and contact information get discovered more easily in unpaid Internet search results on search engines like Google, Yahoo! and Bing. Algorithms are used by these search engines to determine search result listings and the order of such listings displayed in response to specific searches. Accordingly, our products help our customers to be discovered more easily in organic search engine results, making it more likely that search engine users will visit our customers’ websites. This is commonly referred to as search engine optimization, or SEO. However, there can be no assurance that our SEO efforts on behalf of our customers will succeed in improving the discoverability of their content. Google in particular is the most significant source of traffic to our customers’ websites. Therefore, it is important for us to maintain an effective SEO strategy so that our local business customers maintain a prominent presence in Google search results for queries regarding their businesses.

In addition, search engines frequently change the criteria that determine the order in which their search results are displayed, and our SEO efforts on behalf of our customers will be unsuccessful if we do not effectively respond to those changes on a timely basis. Therefore, if we are unable to respond effectively to changes made by search engine providers in their algorithms and other processes, our customers may experience substantial decreases in traffic to their websites. This may lead to a decrease in the perceived value of our products, which could result in our inability to acquire new customers, the loss of existing customers, a decrease in revenues and a material adverse effect on our results of operations.

Our revenue growth will be adversely affected if we cannot continue to successfully retain, hire, train and manage qualified personnel, especially those in sales and marketing.

Our ability to successfully pursue our growth strategy and to further penetrate our target markets will depend on our ability to attract, retain and motivate our personnel, especially those in sales and marketing. We

 

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face intense competition for these employees from numerous technology, software, advertising, media and other companies, and we cannot ensure that we will be able to attract, integrate or retain additional qualified employees in the future. In addition, as we target new industry verticals, we may need to attract sales personnel who are familiar with the relevant industry vertical. We believe that there is significant competition for these employees with the sales skills that we require, and that qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some geographical areas. For example, our competitors may be able to attract and retain more qualified personnel by offering more competitive compensation packages. If we are unable to attract new employees and retain our current employees, we may not be able to develop, maintain and adequately market our products at the same levels as our competitors and we may, therefore, lose customers and market share. Our failure to attract and retain personnel, especially those in sales and marketing for which we have historically had a high turnover rate, could have an adverse effect on our ability to execute our business objectives and, as a result, our ability to compete could decrease, our operating results could suffer and our revenues could decrease.

In addition, due in part to the high standards of performance we expect from our sales personnel, we have historically experienced relatively high turnover in such personnel. Therefore, our ability to achieve significant revenue growth in the future will depend, in large part, on our success in identifying, recruiting, training and retaining sufficient numbers of qualified sales personnel. Even if we are able to identify and recruit a sufficient number of new hires, those new hires will require significant training before they achieve full productivity. Newly hired customer development personnel may not become productive as quickly as we would like, or at all, thus representing increased operating costs and lost opportunities which in turn could adversely affect our business, financial condition and results of operations. Therefore, if we are not successful in recruiting and training our customer development personnel and streamlining our sales and business development processes with customers to cost-effectively grow our customer base, our ability to grow our business and our results of operation could be adversely affected.

Providing technology-based marketing products to local businesses is an evolving market that may not grow as quickly as we anticipate, or at all.

Our products and the market for our products are relatively new. We believe our future success depends on our ability to offer an integrated and comprehensive suite of cost-effective digital marketing products to local businesses. Although we expect continued demand in the local business market for such products, it is possible that the rate of growth may not meet our expectations, or that the market may not grow at all, either of which could adversely affect our business.

The value of our products is predicated upon the assumption that an online and mobile presence, acquisition and retention marketing and the ability to connect and interact with consumers online and on mobile devices are, and will continue to be, important and valuable strategies for local businesses to enhance their abilities to establish, grow, manage and market their businesses. If this assumption is incorrect, or if local businesses do not, or perceive that they do not, derive sufficient value from our products, then our ability to retain existing customers, attract new customers to our products and grow our revenues could be adversely affected.

We must keep up with rapid and ongoing technological change to remain competitive in a rapidly evolving industry.

Our industry is characterized by rapid and ongoing technological change and frequent new product introductions. Our future success will depend on our ability to adapt quickly to rapidly changing technologies and to improve the performance and reliability of our product offerings. To achieve market acceptance for our products, we must anticipate the needs of our customers and offer products that meet changing customer demands quickly and effectively. For example, application marketplaces, mobile platforms and new search engines and search methods are changing the way in which consumers find and purchase products and services

 

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from our existing and potential local business customers, including the emergence of consumer-facing booking services that allow consumers to connect directly with local businesses. While these services generally have not been available in our target industry verticals, they may become available in the future. Therefore, our existing and potential local business customers may require features and functionality that our current product offerings do not have or our products are unable to support. While we continuously seek to enhance our product offerings, as we have recently with the launch of our communication automation module and business practice automation product, such additional features may not fully address the needs of our customers and may not gain market acceptance. Moreover, the success of such new offerings may depend, in part, on our ability to timely integrate such new products into our existing customers’ PMSs, or other customer relationship management or point of sale systems. If we fail to develop products that satisfy customer preferences in a timely and cost-effective manner or if the products that we do develop and deploy fail to gain market acceptance, our existing customers may not want to pay for such additional offerings and may be less likely to renew their subscriptions for our products, and our ability to attract new customers will be harmed.

In addition, the sale of new product offerings, the value or utility of which may be different from our current product offerings or less easily understood by our customers, may require increasingly sophisticated and costly sales efforts related, in part, to additional training of our employees and education of our customers. These efforts would likely result in increased operating costs, and if not successful, our results of operations may suffer. Further, many local businesses have modest advertising budgets. Accordingly, introduction of new product offerings may adversely affect sales of our current product offerings and may not result in an increase in our customers’ aggregate spending as a result of the introduction of new product offerings.

We may not be able to continue to add new customers or retain or increase sales to our existing customers, which could adversely affect our operating results.

Our growth is dependent on our ability to further penetrate our existing industry verticals and continue to attract new customers while retaining and increasing sales of our products, including new product offerings, to our existing customers. To do so, we must convince prospective local business customers, including those who may not be familiar with the products we offer, of the benefits of our products. In addition, we must continuously educate our existing local business customers with respect to newly launched products that we may offer. Many of our target customers are more accustomed to using more traditional methods of advertising, such as newspapers or yellow pages directories. Moreover, historically we have experienced a high turnover rate in our customer base, especially within the first year of launching a customer. Growth in the demand for our products may be inhibited, and we may be unable to retain customers or sustain growth in our customer base, for a number of reasons, including, but not limited to:

 

    the quality, cost and effectiveness of our products compared to other alternatives;

 

    our failure to develop or offer new or additional products in a timely manner that keeps pace with new technologies and the evolving needs of our customers;

 

    our inability to market our products in a cost-effective manner to new customers and to increase our sales to existing customers, including due to rules and regulations applicable to customers within particular industries, changes in regulations or changes in the enforcement of existing regulations that would impair our marketing practices or require us to change our onboarding processes;

 

    our inability to offer products that are adequately integrated and customizable to meet the needs of our highly diverse and fragmented customer base;

 

    our focus on developing a standardized, scalable digital marketing solution for local businesses, which may limit our ability to successfully adapt our products to customers in industries that are subject to regulation of their marketing activities, including adapting to the ways in which they are required to manage, communicate and/or interact with their clients, customers or patients;

 

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    changes in search engine algorithms that reduce the actual or perceived value of the products we offer to our customers;

 

    the inability of our customers to differentiate our products from those of our competitors or our inability to effectively communicate the distinctions;

 

    our inability to maintain, or strengthen awareness of, our brands;

 

    our inability to enter into automatically renewing contracts with our customers or increase subscription prices;

 

    our inability to integrate into our customers’ PMSs, or other customer relationship management or point of sale systems, in order to deliver Lighthouse, our business practice automation product to these customers;

 

    our inability to demonstrate the effectiveness of our products and consistently deliver a meaningful ROI to our customers relative to offline and other digital marketing alternatives;

 

    our disclosure of costs on media purchases for our customers, which could impact our customers’ perception of the value of our solutions;

 

    customer perception that the value of our products is not commensurate with the cost of those products as a result of the feedback and transparency we provide;

 

    our customers’ unwillingness to adopt our integrated Marketing Essentials product due to their preference for a more tailored and potentially less expensive solution that meets their more limited needs;

 

    customer dissatisfaction causing our existing customers to stop utilizing our products and to stop referring prospective customers to us; and

 

    perceived or actual security, integrity, reliability, quality or compatibility problems with our platform, including related to unscheduled downtime or outages.

Any inability to grow demand for our products or sustain growth in our customer base could have a material adverse effect on our business and results of operations.

We expect to face increased competition in the digital marketing industry, which could require us to reduce our selling prices or expand the products or features that we offer. As a result of such competitive pressures, we may not be able to maintain or improve our competitive position or market share.

The market for digital marketing solutions is intensely competitive and rapidly changing, and with the emergence of new technologies and market entrants, we expect competition to intensify in the future. Our competitors include:

 

    traditional yellow pages directories, direct mail campaign providers and advertising and listings services on local newspapers, magazines, television and radio, such as Dex Media, Gannett, Hearst and YP.com;

 

    online search engines, such as Google, Yahoo! and Bing and online business directories, such as Yelp and Angie’s List;

 

    providers of digital presence offerings, such as domain name registrars, shared hosting providers and website creation and reputation management companies, including Endurance, GoDaddy, Main Street Hub, Web.com and Wix;

 

    providers of digital marketing solutions, such as search engine marketing companies and search engine optimization companies; and

 

    productivity and office management tools, such as business-class email, scheduling and practice management systems, including Constant Contact, Demandforce, MailChimp and Solutionreach.

 

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We have only recently launched our Marketing Essentials, Lighthouse and Centermark products. We are also developing other new subscription products designed to provide local businesses with additional tools to enable them to convert leads to paying consumers and to retain and transact with consumers. In each case, as we enter new markets we will encounter new competitors. Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories, exclusive relationships, substantially greater financial, technical and other resources and, in some cases, the ability to combine their digital marketing products with traditional offline media such as newspapers or yellow pages directories. These companies may use these advantages to offer products similar to ours at a lower price, develop different products to compete with our current products and respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In particular, if major Internet search companies such as Google, Yahoo! and Microsoft decide to devote greater resources to develop and market online advertising offerings directly to local businesses, greater numbers of our current and potential customers may choose to purchase online advertising services directly from these competitors, particularly if and as the ease of their self-service models increases. In addition, many of our current and potential competitors have established marketing relationships with and access to larger customer bases and are heavily investing in recruiting sales personnel, which may affect our ability to achieve our salespeople hiring targets.

As the market for local online advertising increases, we expect new competitors, business models and solutions to emerge, some of which may be superior to ours. For example, a new competitor may elect to specialize in just one industry vertical, which may give them a competitive advantage and a larger share of the market opportunity in that particular vertical. Moreover, we also believe that the marketplace for online media is more transparent than other media marketplaces. Our competitors may use information available to them to price their products at a discount to the prices that we currently offer and to identify and target our current customers. In particular, we face competitive pressure with our Yodle Ads product, which may adversely impact the margins associated with this product. If we are not able to differentiate our products and convince customers that our products are more effective than our competitors’ offerings, current and potential customers may adopt competitive products in lieu of purchasing our products and solutions, even if our digital marketing and reporting solutions are more effective than those offered by our competitors. For all of these reasons, we may not be able to compete successfully against our current and potential competitors.

If economic conditions or other factors negatively affect levels of spending by local businesses, local businesses may become unwilling or unable to subscribe to our platform or purchase media, which could adversely affect our business.

Our existing and target customers are local businesses, and our performance is subject to economic conditions and their impact on levels of spending by local businesses. These businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. Historically, economic downturns have resulted in overall reductions in spending on advertising and marketing by local businesses as local businesses often have limited discretionary funds, which they may choose to spend on other items. In particular, our products may be viewed by some of our existing and potential customers as a lower priority and those local businesses could terminate their subscription to our products. To the extent that worldwide economic conditions materially deteriorate, our existing and potential customers (including those acquired through our resellers) may elect to reduce their advertising and marketing budgets or may not be able to sustain operations generally. As a result, local businesses may become unwilling or unable to subscribe to or purchase media through our platform. Because customer purchases of discretionary items generally decline during recessionary periods and other periods in which disposable income is adversely affected, and because our customers generally subscribe to our platform on a short-term basis, our business is especially susceptible to overall economic downturns.

 

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If our mobile solutions fail to achieve widespread acceptance or if we are unable to maintain functionality for our mobile products, our business and future prospects may be adversely affected.

Consumers are increasingly accessing the Internet through devices other than personal computers, including mobile phones, smart phones and tablets. This trend has increased dramatically in the past few years and is projected to continue to increase. In response to this market demand trend, we provide our Marketing Essentials customers with a mobile-optimized website and a mobile dashboard. The mobile device market is characterized by the frequent introduction of new products and solutions, short product life cycles, evolving industry standards, continuous improvement in performance characteristics and rapid adoption of technological and product advancements. We may incur additional costs and face technical challenges adapting our mobile products to different versions of already supported operating systems, such as Android variants offered by different mobile phone manufacturers. If we are unable to offer continual improvements to our mobile products or adapt their functionalities to new and different operating systems, our mobile products, and our platform as a whole, may fail to achieve widespread acceptance. As a result, our business and future prospects may be adversely affected.

Because a significant portion of our revenues are recognized from customer subscriptions over the term of an agreement, a significant downturn in our business may not be immediately reflected in our results of operations.

We recognize a significant portion of our revenues from sales of our products over the term of our contracts, which are generally one, three, six or 12 months in length. As a result, a portion of the revenues we report each quarter is generated from contracts entered into during previous quarters. Consequently, a shortfall in demand for our products or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenues in that quarter but could negatively affect our revenues in future quarters. Accordingly, the effect of a significant downturn in our business may not be reflected in our results of operations until future periods.

If local businesses increasingly opt to perform advertising tasks on their own, their demand for our products would decrease, thereby negatively affecting our revenue.

Large Internet marketing providers such as Google, Yahoo! and Microsoft offer online advertising products through self-service platforms. As local businesses become more familiar with and experienced in interacting online, they may prefer to actively manage their own Internet presence and their demand for our products may decrease. We cannot predict the evolving experiences and preferences of local businesses and cannot assure you that we can develop our products in a manner that will suit their needs and expectations faster or more effectively than our competitors, or at all. If we are not able to do so, our results of operations would suffer.

We rely on third-party technologies and software, and if we are unable to use or integrate these technologies or software, our product development may be delayed and our operating results may be negatively impacted.

We rely on certain technologies and software that we license from third parties, including technology and software that is integrated with internally developed technology or software and used in our products. These third-party licenses may not continue to be available on commercially reasonable terms, and the technology or software may not be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to, or inability to support, maintain and enhance any such technology or software could result in increased costs or in delays or reductions in product performance until equivalent technology or software can be developed, identified, licensed and integrated, which may harm our business.

 

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We have expanded our geographic reach through relationships with third parties. If these relationships are terminated for any reason, our business and results of operations may be harmed.

We are able to reach a greater number of potential customers over a larger geographical area by working with certain third-party resellers. For example, through our arrangement with Rogers Communications Inc., or Rogers, a number of local businesses in Canada use our platform offering. The number of customers we are able to add through these relationships is dependent on the marketing efforts of these third parties over which we have little or no control. Generally, a third-party reseller accounts for a significant number of customers, and because we recognize revenue from these resellers on a net basis, the loss of any third-party reseller relationship or a significant decrease in the number of new customers generated through any such relationship could materially and adversely affect the size of our customer base, revenues and results of operations. Furthermore, our agreement with Rogers expires in December of 2018. If we are unable to maintain or replace our contractual relationship with these third-party resellers, including Rogers, or establish new contractual relationships with other third parties, we may fail to retain customers or acquire potential new customers in new geographies, we may experience delays and increased costs in adding or replacing customers that were lost and we would suffer a loss of revenue, any of which could have a material adverse effect on our business and results of operations.

If we fail to enhance our brand or our reputation is harmed, our financial condition may suffer.

We believe that developing and maintaining awareness of the Yodle brand is critical to achieving widespread acceptance of our products. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to deliver valuable products to our customers. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenues may not be immediately observable. Additionally, errors, defects, disruptions or other performance problems with our products may harm our reputation and brand and adversely affect our ability to attract new customers or retain existing customers, especially if these errors occur when we introduce new products, features or modules. If we fail to successfully promote and maintain the Yodle brand and/or our reputation is harmed, we may fail to attract sufficient new customers to maintain our growth or to retain our existing customers, which could adversely affect our business, financial condition, results of operations and future prospects.

Customer dissatisfaction with our products, complaints or negative publicity about our customer service or other business practices could adversely affect our reputation and brand.

Customer dissatisfaction with our products, customer complaints or negative publicity, including third-party publications in news or other media outlets, about our products, technology, personnel or customer service could severely diminish confidence in and the use of our products. Our products, as well as those of our competitors, are regularly reviewed, and those reviews are regularly shared, by our customers. Negative reviews, or reviews in which our competitors’ products are rated more highly than ours, could negatively affect our brand and reputation. From time to time, our customers have expressed dissatisfaction, including dissatisfaction with our customer service, our sales and billing practices and the way our products perform. If we do not handle customer complaints effectively, or otherwise adequately address customers’ concerns, our brand and reputation may suffer, we may lose our customers’ confidence and they may choose not to renew their subscriptions. Moreover, managing effective customer relationships requires significant personnel expense, which, if not managed properly, could significantly impact our operating results. As a result, complaints or negative publicity about our products or our customer service could materially and adversely impact our reputation, our brand, our ability to attract and retain customers, our business, financial condition and results of operations, and ultimately frustrate our efforts to continue to be a trusted provider of digital marketing solutions for the local business market.

 

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Our sales cycle with respect to our Centermark product can be long and unpredictable and may require considerable efforts, which could cause our operating results to fluctuate.

The sales cycle for our Centermark product, from initial contact with a potential lead to contract execution and implementation, varies widely by customer, but typically takes approximately six months. Some of our customers undertake a significant evaluation process that frequently involves not only a review of our products but also those of our competitors, which has in the past resulted in extended sales cycles. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our platform. We have no assurance that the substantial time and money spent on our sales efforts will produce sales. If sales expected from a customer are not realized in the time period expected or not realized at all, our business, operating results and financial condition could be adversely affected.

We rely on the performance of our senior management and highly skilled personnel, and if we are unable to attract, retain and motivate well-qualified employees, our business and results of operations could be harmed.

We believe our success has depended, and continues to depend, on the efforts and talents of senior management and key personnel. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition, the loss of any of our senior management or key personnel could interrupt our ability to execute our business plan, as such individuals may be difficult to replace. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business and results of operations could be harmed.

If we fail to manage our growth effectively, our business and results of operations could be harmed.

We have experienced rapid growth in our business and operations, which places substantial demands on our management and operational infrastructure. As our customer base grows and our product offerings expand, we will need to devote additional resources to improving our infrastructure and continuing to enhance its scalability in order to maintain the performance of our platform. Our need to effectively manage our operations and growth will also require that we continue to assess and improve our operational, financial and management controls, reporting systems and procedures. If we do not manage the growth of our business and operations effectively, our operations and the quality of our platform could suffer, which could harm our business and results of operations.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We believe that an important contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork, passion for our customers, and a focus on innovative and technologically advanced products. As we continue to grow, we must effectively integrate, develop and motivate a growing number of new employees. As a result, we may find it difficult to maintain important aspects of our corporate culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute our business strategy.

Recent and potential future acquisitions and investments could result in operating difficulties, divert attention of our management, dilute stockholder value and otherwise harm our financial results.

From time to time, we evaluate potential strategic acquisition or investment opportunities. We intend to selectively acquire businesses and technologies as we did with the acquisition of ProfitFuel, Inc., or ProfitFuel, in May 2011 and Lighthouse Practice Management Group, Inc., or Lighthouse Practice Management, in February

 

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2013. Any transactions that we enter into could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments carry with them a number of risks, including the following:

 

    diversion of management time and focus from operating our business to address integration challenges;

 

    implementation or remediation of controls, procedures and policies of the acquired company;

 

    coordination of product, engineering and selling and marketing functions;

 

    retention of employees from the acquired company;

 

    cultural challenges associated with integrating employees from the acquired company into our organization;

 

    integrating technologies of the acquired company into our existing systems;

 

    challenges with integrating new products or technologies into our customers’ practice or business management systems;

 

    unforeseen liabilities;

 

    additional regulatory and compliance requirements;

 

    litigation or other claims arising in connection with the acquired company; and

 

    potential negative impact on our financial results because such acquisitions may require us to incur charges and substantial debt or liabilities, may require us to amortize, write down or record impairment of amounts related to deferred compensation, goodwill and other intangible assets, or may cause adverse tax consequences, substantial depreciation or deferred compensation charges.

Our failure to address these risks or other problems encountered in connection with acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business, results of operations and financial condition.

If our products contain serious errors or defects, then we may lose revenue and market acceptance, experience increased costs, suffer reputational harm and incur costs to defend or settle claims.

Sophisticated technology platforms such as ours often contain errors or defects, such as errors in computer code or other systems errors, particularly when first introduced or when new versions or enhancements are released. Because we also rely on third parties to provide certain aspects of our products, our products may contain additional errors or defects. Our solutions operate on a cloud-based architecture and we update our products regularly while our solutions are in operation. If our upgrades are not properly implemented, the availability and functioning of our products could be impaired. Despite quality assurance measures, internal testing and beta testing by our customers, we cannot guarantee that our current and future products, including upgrades to those products, will be free of serious defects, which could result in lost revenue, refunds without a commensurate decrease in costs, delays in market acceptance, increase in costs, reputational harm and costs associated with defending or settling claims.

Because local businesses use our platform to maintain contact with their clients, customers or patients, errors, defects or other performance problems could result in damage to our customers and their businesses. They could elect not to renew, delay or withhold payments to us, or seek significant compensation from us for the losses they suffer. Although our customer agreements typically contain provisions designed to limit our exposure to certain claims, not all of our customers execute a standard customer agreement and existing or future laws or unfavorable judicial decisions could negate or diminish these limitations. Even if not successful, a claim brought against us could be time-consuming and costly and could seriously damage our reputation in the marketplace, making it harder for us to acquire and retain customers.

 

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If our security measures are breached, our platform may be perceived as not being secure, and our business and reputation could suffer.

The use of our products involves the storage and transmission of our customers’ proprietary information, as well as payment information and personal data of the clients, customers or patients of our customers. Although we employ data encryption processes, an intrusion detection system and other internal control procedures to protect such sensitive data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of third-party action, employee error or otherwise, and as a result such sensitive data becomes available to unauthorized parties, we could incur liability. In addition, most states have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data, which may lead to negative publicity and the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we may be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.

We expect a number of factors may cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

Our operating results could vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

 

    our ability to attract new customers and retain existing customers;

 

    our ability to accurately forecast revenues and appropriately plan our expenses;

 

    the effects of changes in search engine algorithms and the effectiveness of our marketing efforts on behalf of customers;

 

    the relative contributions of our media and platform products to total revenues and the contributions of sales through our Centermark platform in particular;

 

    the effects of increased competition in our business;

 

    our ability to successfully expand into new verticals;

 

    our ability to sell new products to our existing customer base;

 

    variations in our customers’ media budgets;

 

    the amount of revenue recognized by us in any period through our media product;

 

    the success of our sales and marketing efforts;

 

    our ability to keep pace with changes in technology;

 

    the impact of worldwide economic conditions, including the resulting effect on consumer spending at local businesses and the spending of local businesses on marketing and advertising generally;

 

    our relationships with third-party providers and resellers of our products;

 

    our ability to successfully manage any acquisitions of businesses, solutions or technologies;

 

    our ability to reach broader geographic markets;

 

    our ability to protect our intellectual property;

 

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    changes in government and other regulation affecting our business, as well as our customers’ businesses;

 

    chargebacks associated with refund requests by customers due to any disagreement with terms of our arrangements with them;

 

    costs associated with defending intellectual property infringement and other claims and related judgments or settlements;

 

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

 

    fluctuations in foreign exchange rates;

 

    the effects of natural or man-made catastrophic events;

 

    the effectiveness of our internal controls; and

 

    changes in our tax rates or exposure to additional tax liabilities.

Since revenue generated by our media product is recognized as local online advertising is purchased for a customer, if the entirety of that customer’s media budget is not used during a period, that remaining amount will be recorded as deferred revenue and only recognized when used. Therefore, our ability to recognize revenue for our media product will depend on our ability to use a customer’s media budget, which we may not be able to do in a consistent manner for various reasons, including seasonal trends. We believe that quarter-to-quarter comparisons of our results should not be relied upon as an indicator of future performance. As a result of such fluctuations, the price of our common stock may experience volatility.

We rely on bandwidth providers, data centers and other third parties for key aspects of the process of providing digital marketing solutions to our customers, and any failure or interruption in the services provided by these third parties could harm our ability to operate our business and damage our reputation.

We rely on third-party vendors, including data center, software-as-a-service, bandwidth and cloud computing Internet infrastructure providers to operate certain aspects of our business. Our reliance on these vendors makes us vulnerable to any disruption in the services they provide, any failure to handle current or higher volumes of use or increases in costs from these vendors. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We have experienced and expect to continue to experience interruptions and delays in service and availability for such elements. Any unexpected and material cost increases, breaches in their security affecting our data, errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services could negatively impact our relationship with our customers and adversely affect our business and results of operations, result in substantial recovery costs, expose us to liabilities to third parties and distract management from operating our business.

We increasingly rely on certain third-party vendors to perform certain aspects of our business, which could adversely affect our business.

We outsource certain functions, including portions of our sales and customer service functions to business process service providers in order to achieve cost savings and efficiencies. The failure of our third-party vendors to fulfill their obligations, and any changes we may make to the services we obtain from these vendors, may disrupt our operations and result in the loss of some or all of the cost savings and efficiencies we may have achieved through these vendors. We have recently renewed our contract with our third-party vendor in St. Lucia, which supplements our U.S.-based sales and customer service teams, for a period of three years. Our inability to renew this contract in the future, or to renew any future contract with other third-party vendors, on terms that are favorable to us may materially and adversely affect our business, financial condition and results of operations.

 

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We depend on the reliability, security, and performance of our internally developed systems and support operations, and any difficulties in maintaining these may result in interruptions in access to our products, decreased customer satisfaction, reduced revenue and increased expenditures.

Our employees are primarily responsible for developing the software and workflow processes that underlie our ability to deliver and support our products. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that impair the performance of our platform or our ability to timely deliver our products or that materially impact the efficiency or cost with which we provide our products would harm our reputation, profitability and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue. In addition, if we are unable to maintain adequate levels of access to our products or customer service, we may lose existing customers, our revenue may decrease and our results of operations may be adversely impacted.

Moreover, our failure to appropriately support our systems and operations over time could result in inefficiencies or operational failures and increased vulnerability to cyber-attacks. Cyber-attacks could include attacks impacting product availability and reliability; the exploitation of software vulnerabilities in Internet facing applications; social engineering of system administrators (tricking company employees into releasing control of their systems to a hacker); or the introduction of computer viruses or malware into our systems with a view to steal confidential or proprietary data. Cyber-attacks of increasing sophistication may be difficult to detect and could result in the theft of our intellectual property and our data or our customers’ data. In addition, we are vulnerable to unintentional errors as well as malicious actions by persons with authorized access to our systems that exceed the scope of their access rights, or unintentionally or intentionally alter parameters or otherwise interfere with the intended operations of our platform. Operational errors or failures or successful cyber-attacks would likely result in interruptions in access to our products, decreased customer satisfaction, harm to our reputation, loss of customers and increased expenditures.

We may face potential liability and expense for legal claims or proceedings related to the content stored on our platform by our customers or activities of customers on their websites.

Our platform allows our customers to create web and mobile presences for their businesses. In addition, we provide our customers with the ability to upload images to their website and syndicate them across numerous online directories. At present, we do not require that our customers post on their websites, or require their visitors to agree to, any terms of service, privacy policy, disclaimer or any other contractual documentation or policy. If our customers do not post or require agreement to the appropriate documentation and policies on their websites, or should our customers fail to take steps necessary to enjoy the benefits of certain statutory safe harbors, such as those set forth in Section 512 of the United States Copyright Act, then they may be more likely to expose themselves to liability under applicable law. It is possible that we could also be subject to liability as the host/platform for content that is posted by our customers or users of our customers’ websites. United States and international laws relating to the liability of hosts for content posted by their customers and other third parties are currently being tested and are subject to subjective interpretation by courts and regulators. Any court ruling or other governmental action that imposes liability on providers of online services for the activities of their customers and other third parties could harm our business. In the event we are required to defend against such claims, we will incur legal fees and costs which could be significant. Any liability attributed to us could adversely affect our brand, reputation, our ability to expand our customer base and our financial position. Further, not all of our customers have agreed to our standard terms and conditions, and for those that have, our indemnity from these customers may also not be fully effective as a matter of practice if any customer does not have sufficient assets, insurance or other means to fulfill that indemnity.

 

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Furthermore, our reputation and brand may be negatively affected by the actions of customers that are deemed to be hostile, offensive or inappropriate, or by customers acting under false or inauthentic identities. We do not monitor or review the appropriateness of the content of our customers’ websites, and we have little control over the activities in which our customers engage. While we retain authority to take down websites, customers could nonetheless engage in these activities. The safeguards we have in place may not be sufficient to avoid harm to our reputation and brand, especially if such hostile, offensive or inappropriate use was high profile, which could adversely affect our ability to expand our customer base, and our business and financial results.

Some of our products contain open source software, which may pose particular risks to our business.

We use open source software in our products and will use open source software in the future. From time to time, we may face claims from third parties claiming ownership of, or demanding release of, the open source software and/or derivative works that we developed using such software (which could include our proprietary source code), or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license or cease offering the implicated product unless and until we can re-engineer it to avoid infringement. This re-engineering process could require significant additional research and development resources. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business and operating results.

Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.

Our business and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events affecting us or third-party vendors we rely on. For example, a significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, operating results and financial condition. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our customers’ businesses or the economy as a whole. Our servers and those of our third-party vendors may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential customer data. We or our third-party vendors may not have sufficient protection or recovery plans in place, and our business interruption insurance may be insufficient to compensate us for losses that may occur. As we rely heavily on our servers, computer and communications systems, that of third parties and the Internet to conduct our business and provide high quality customer service, such disruptions could have an adverse effect on our business, operating results and financial condition.

We could lose customers if we or our media partners fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our customers.

One of the products that we offer is the purchase of local online advertising for our customers. As a result, we are exposed to the risk of fraudulent clicks or actions on our third-party publishers’ websites over which we have no control. We may lose customers or have to refund revenue that our customers have paid to us that was later attributed to, or suspected to be caused by, click-through fraud and that refund may not be recoverable. Click-through fraud occurs when an individual clicks on an ad displayed on a website or an automated system is used to create such clicks with little to no intent of viewing the underlying content. If fraudulent clicks are not detected, the affected customers may become dissatisfied with our campaigns, which in turn may lead to loss of customers and the related revenue.

 

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We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional capital to respond to business challenges, including the need to develop new products, enhance our existing platform, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to raise additional funds through bank credit arrangements or public or private equity, equity-linked or debt financings. Any additional equity or convertible debt financing may be dilutive to our stockholders, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Moreover, if we raise additional funds through the incurrence of indebtedness, such indebtedness will likely require current payment of interest and contain covenants that restrict our operations, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. We may not be able to obtain additional financing on terms favorable to us, or at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

Impairment of goodwill and other intangible assets would result in a decrease in our earnings.

Current accounting rules provide that goodwill and other intangible assets with indefinite useful lives may not be amortized but instead must be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We have substantial goodwill and other intangible assets, and we would be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization periods would result in a decrease in our earnings.

When we further expand our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.

While we have not historically directly marketed our products to customers in countries outside the United States, a component of our growth strategy in the long term will likely entail the further expansion of our operations and customer base internationally. Our future initiatives will involve a variety of risks, including:

 

    changes in a specific country’s or region’s political or economic conditions;

 

    regulatory requirements, taxes or trade laws that differ from those in the United States;

 

    more stringent regulations relating to communication via email, telephone or text messages, data security and the unauthorized use of, or access to, commercial and personal information;

 

    differing labor regulations, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

    challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

    difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

    increased travel, real estate, infrastructure and legal compliance costs associated with international operations;

 

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    currency exchange rate fluctuations and the resulting effect on our revenues and expenses, and the cost and risk of entering into hedging transactions if we choose to do so in the future;

 

    limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

    laws and business practices favoring local competitors or general preferences for local vendors;

 

    limited or insufficient intellectual property protection;

 

    political instability or terrorist activities;

 

    exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and

 

    adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

Our lack of experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results could suffer.

Risk Related to the Regulation of Our Business and Other Compliance Matters

Our business is subject to a variety of U.S. laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business or results of operations.

We are subject to a variety of laws in the United States, including laws, contractual obligations and standards regarding communications, telemarketing, data retention, online and credit card payments, privacy, data security, marketing, advertising, consumer protection and tax as well as anti-kickback laws, which, in each case, are frequently evolving and developing. The scope and interpretation of the laws and standards that are, or may be, applicable to us are often uncertain and may be conflicting. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. In addition, regulatory authorities and governmental bodies in the United States are considering a number of legislative and regulatory proposals concerning privacy, data protection and other matters that may be applicable to our business. It is also likely that if our business grows and evolves and our products are used in a greater number of geographies, we will become subject to laws and regulations in additional jurisdictions. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject.

In addition, while our customer agreements typically contain obligations requiring our customers to comply with applicable laws, not all of our customers execute a standard customer agreement or if our customers fail to adhere to these obligations, we may be subject to adverse publicity, and related possible inquiries, investigations, or other regulatory activities in connection with our practices or those of our customers. Therefore if we or our customers are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to change or discontinue certain products or

 

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features, which would negatively affect our business. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred to prevent or mitigate this potential liability could also harm our business and results of operations.

Government regulation of the Internet is evolving, and unfavorable changes could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as federal and state regulations and laws specifically governing the Internet. Existing and future laws and regulations may impede the growth of the Internet or online services and increase the cost of providing online services. These regulations and laws may cover user privacy, data protection and security, spyware, “do not email” lists, text message marketing, access to high speed and broadband service, mobile applications, pricing, taxation, tariffs, patents, copyrights, trademarks, trade secrets, export of encryption technology, electronic contracting, click-through fraud, acceptable content, search terms, lead generation, behavioral targeting, consumer protection and quality of products. It is not clear how existing laws governing issues such as property ownership, sales, use and other taxes, libel and personal privacy apply to the Internet and online services. Unfavorable resolution of these issues may harm our business and results of operations.

Failure to comply with communications and telemarketing laws could result in significant fines or place significant restrictions on our business.

We rely on a variety of marketing techniques, including telemarketing and email marketing for our own business and text messaging, automatic telephone dialing and email marketing as part of the communication automation and business practice automation modules of our Marketing Essentials and Lighthouse products. We also record certain telephone calls of our sales and service representatives for the purpose of service observing and of our customers as part of our marketing platform. These activities are subject to a variety of state and federal laws such as the Telephone Consumer Protection Act of 1991 (also known as the Federal Do-Not-Call law, or the TCPA), the Telemarketing Sales Rule, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (also known as the CAN-SPAM Act) and various U.S. state laws, including regarding telemarketing and telephone call recording. These laws are subject to varying interpretations by courts and governmental authorities and often require subjective interpretation. Further, over the past several years, class action lawsuits involving many of these laws have increased significantly. We cannot be certain that our or our customers’ efforts to comply with these laws will be deemed sufficient by the relevant courts and governmental authorities. Changes in these laws or the application or interpretation of these laws, or the enactment of any new state or federal laws regarding communications, marketing, solicitation, data protection or telephone call recording that may govern these activities, could adversely affect our business.

For example, the CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. The TCPA broadly regulates outbound calls, including live operator calls. Among other things, the TCPA limits the hours during which telemarketers may call consumers, restricts the use of automated telephone dialing equipment to call certain telephone numbers or send text messages unless consent has been obtained, and prohibits calling consumers at numbers that have been included on the National Do-Not-Call list. Numerous states also have state specific Do-Not-Call lists, as wells as laws regulating telemarketing and text message marketing. Further, the laws of several states prohibit the recording of any telephone call absent the consent of all parties to that call. In addition, certain of these laws include a private right of action and have been the subject of class action lawsuits, including one that we were a party to. If any of the foregoing laws or regulations significantly restricts our business, we may not be able to develop adequate alternative marketing strategies. Further, non-compliance with these laws and regulations carries significant financial penalties and the risk of class action litigation, which would adversely affect our financial performance and significantly harm our reputation and our business.

 

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We face potential liability related to the privacy and security of health-related information we receive from and/or create for our customers.

We have developed products that cater to dental and other health professionals. The privacy and security of information about the past, present, or future physical or mental health or condition of an individual is an area of significant focus in the United States because of heightened privacy concerns and the potential for significant consumer harm from the misuse of such sensitive data. We have procedures and technology in place intended to safeguard individually identifiable health information we receive from and/or create for our customers from unauthorized access or use.

The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish a set of basic national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. Notably, whereas HIPAA previously directly regulated only these covered entities, the Health Information for Economic and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the stimulus package in February 2009, and the Final HIPAA Omnibus Rule adopted in 2013, or Omnibus Rule, make certain of HIPAA’s Privacy and Security Standards also directly applicable to covered entities’ business associates. As a result, business associates are now subject to significant civil and criminal penalties for failure to comply with applicable Privacy and Security Standards. Moreover, HITECH created a new requirement that covered entities report certain breaches of unsecured, individually identifiable health information and imposes penalties on covered entities that fail to do so.

Our dental and other health professional customers may qualify as covered entities under HIPAA and provide us with, or ask us to create, individually identifiable health information in order for us to deliver our products, meaning that we qualify as a Business Associate. We have adopted a privacy policy and security policy to ensure compliance with HIPAA requirements and are working on completing the implementation of all of the requirements set forth in those policies, including entering into Business Associate Agreements, or BAAs, with our covered entity customers and conducting required training of our employees. If our practices to protect individually identifiable health information do not comply with the requirements of HIPAA and HITECH, we may be directly subject to liability. In addition, if our privacy and security practices do not comply with our contractual obligations stemming from our BAAs, we may be subject to contractual liability.

The Omnibus Rule modified the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. Thus, to the extent that we endure improper uses or disclosures of individually identifiable health information, it is more likely that such an incident will rise to the level of a reportable breach. Additionally, the Omnibus Rule changed certain requirements relating to BAAs, and thus BAAs to which we are a party may need to be updated to ensure compliance. Any liability arising from a failure to comply with the requirements of HIPAA or HITECH, to the extent such requirements are deemed to apply to our operations, or contractual obligations, could adversely affect our financial condition.

The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations. The Omnibus Rule may also be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us, as well as our customers and resellers. In addition, we are unable to predict what changes to the HIPAA Privacy Standards and Security Standards might be made in the future or how those changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations.

 

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Privacy concerns could limit our ability to leverage data about our customers and their clients, customers and patients.

In the ordinary course of business, we collect and utilize data, including personal information. We currently face certain legal obligations regarding the manner in which we treat such information. Increased regulation of data utilization practices, including self-regulation or findings under existing laws, that limit our ability to use collected data, could have an adverse effect on our business. As our business evolves, we may become subject to additional and/or more stringent legal obligations concerning our treatment of customer information. Failure to comply with these obligations could subject us to liability, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur additional expenses.

We are exposed to risks associated with credit and debit card payment processing.

We accept payments primarily through credit and debit card transactions. We are subject to a number of risks related to credit and debit card payments, including:

 

    we pay interchange and other fees, which may increase over time and could require us to either increase the prices we charge for our products or experience an increase in our costs and expenses;

 

    we rely on a third party to provide credit and debit card payment processing services, and it could disrupt our business if this vendor became unwilling or unable to provide these services to us;

 

    if we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or our fees for other credit and debit card transactions or issuers, may increase, or issuers may terminate their relationship with us; and

 

    security breaches of confidential customer information in connection with our receipt of credit and debit card information.

We store our customers’ credit and debit card information as part of the telephonic closing script for short periods of time and transmit it to our third-party payment processor. As a result, we may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’ credit or debit card information if our security or if the security of our third-party credit card payment processor is breached. We and our third-party credit card payment processor 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. If we or our third-party credit card payment processor 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, and our business and operating results could be adversely affected.

Risks Related to Our Intellectual Property

We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Third parties may assert claims of infringement of intellectual property rights in proprietary technology against us or against our customers or partners for which we may be liable or have an indemnification obligation. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from operating our business. In any patent infringement suit brought against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States,

 

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issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof.

Although third parties may offer a license to their technology, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could cause our business, financial condition and results of operations to be materially and adversely affected. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Alternatively, we may be required to develop non-infringing technology, which could necessitate significant effort and expense and ultimately may not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products or that requires us to pay substantial damages, including treble damages, if we are found to have willfully infringed such claimant’s patents or copyrights, royalties or other fees. Any of these events could seriously harm our business, financial condition and results of operations.

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

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the intellectual property laws of the United States, so that we can prevent others from using our inventions and proprietary information. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business could be adversely affected. We rely on trademark, copyright, trade secret and patent laws, confidentiality procedures and contractual provisions to protect our proprietary methods and technologies. Our patent strategy is still in its early stages. We own one registered patent and have another patent application on file with the U.S. Patent and Trademark Office. In each case, the claims eventually allowed on these or any other patent we apply for may not be sufficiently broad to protect our technology or products. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States, including the recent America Invents Act, and other national governments and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain adequate patent protection, or to prevent third parties from infringing upon or misappropriating our intellectual property.

In addition to patents, our trade secrets, general know-how and experience regarding our technology are a significant part of our intellectual property. We make assessments with respect to new technology and decide whether to apply for patents or retain and protect them as trade secrets. Unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary. We generally enter into confidentiality and/or license agreements with our employees, consultants and vendors and generally limit access to and distribution of our proprietary information. However, we cannot provide assurance that any steps taken by us will prevent misappropriation of our technology and proprietary information. Policing unauthorized use of our technology is difficult. In addition, the laws of some foreign countries may not be as protective of intellectual property rights as those of the United States, and mechanisms for enforcement of our proprietary rights in such countries may be inadequate. From time to time, legal action by us has been and may continue to be necessary to enforce our intellectual property rights, to protect our trade secrets and proprietary information, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement. Such litigation could result in substantial costs and the diversion of limited resources and could negatively affect our business, financial condition and results of operations. If we are unable to protect our proprietary rights (including aspects of our technology platform), we may find ourselves at a competitive disadvantage to others who have not incurred the same level of expense, time and effort to create and protect their intellectual property.

 

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Risks Related to this Offering and Shares of Our Common Stock

Our share price may be volatile, and you may lose some or all of your investment.

The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways, including:

 

    actual or anticipated fluctuations in our financial condition and operating results;

 

    variance in our financial performance from expectations of securities analysts;

 

    changes in the prices of our products;

 

    changes in our projected operating and financial results;

 

    changes in laws or regulations applicable to our products or marketing techniques;

 

    announcements by us or our competitors of significant business developments, acquisitions or new solutions;

 

    our involvement in any litigation;

 

    our sale of our common stock or other securities in the future;

 

    changes in senior management or key personnel;

 

    trading volume of our common stock;

 

    changes in the anticipated future size and growth rate of our market; and

 

    general economic, regulatory and market conditions.

Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

No public market for our common stock currently exists. An active public trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If our

 

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financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Our future depends in part on the interests and influence of key stockholders.

Following this offering, our directors, executive officers and holders of more than 5% of our common stock, some of whom are represented on our board of directors, together with their affiliates will beneficially own     % of the voting power of our outstanding capital stock. As a result, these stockholders will, immediately following this offering, be able to determine the outcome of matters submitted to our stockholders for approval. Some of these persons or entities may have interests that are different from yours, and this ownership could affect the value of your shares of common stock if, for example, these stockholders elect to delay, defer or prevent a change in corporate control, merger, consolidation, takeover or other business combination. This concentration of ownership may also adversely affect the market price of our common stock.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

A portion of the net proceeds from this offering will be used to repay our outstanding indebtedness, and the remaining net proceeds may be used for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies. However, we do not have any agreements or commitments for any acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used effectively. The net proceeds may be invested with a view towards long-term benefits for our stockholders and this may not increase our operating results or market value. The failure by our management to apply these funds effectively may adversely affect the return on your investment.

Future sales of our common stock in the public market could cause our share price to decline.

After this offering, there will be              shares of our common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Of our issued and outstanding shares of our common stock, all of the shares sold in this offering will be freely transferable without restrictions or further registration under the Securities Act of 1933, as amended, except for any shares acquired by our affiliates, as defined in Rule 144 under the Securities Act. The remaining              shares outstanding after this offering will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for 180 days after the date of this prospectus.

 

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Additionally, following the completion of this offering, stockholders holding approximately         % of our common stock outstanding, will, after the expiration of the lock-up periods specified above, have the right, subject to various conditions and limitations, to include their shares of our common stock in registration statements relating to our securities. If the offer and sale of these shares are registered, they will be freely tradable without restriction under the Securities Act. Shares of common stock sold under such registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. See “Description of Capital Stock—Registration Rights” and “Shares Eligible for Future Sale—Lock-Up Agreements” for a more detailed description of these registration rights and the lock-up period.

We intend to file a registration statement on Form S-8 under the Securities Act to register the total number of shares of our common stock that may be issued under our equity incentive plans. See the information under the heading “Shares Eligible for Future Sale—Form S-8 Registration Statements” for a more detailed description of the shares of common stock that will be available for future sale upon the registration and issuance of such shares, subject to any applicable vesting or lock-up period or other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with the option holders. In addition, in the future we may issue common stock or other securities if we need to raise additional capital. The number of new shares of our common stock issued in connection with raising additional capital could constitute a material portion of the then outstanding shares of our common stock.

You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.

The initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our common stock, as of March 31, 2014, immediately after this offering. Therefore, if you purchase shares of our common stock in this offering, you will suffer immediate dilution of $             per share, or $             per share if the underwriters exercise their option in full, in net tangible book value after giving effect to the sale of common stock in this offering at an assumed public offering price of $             per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus. See “Dilution.” If outstanding options to purchase our common stock are exercised in the future, you will experience additional dilution.

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

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. For so long as we remain an emerging growth company, we intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result,

 

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there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.

In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of                  and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel will need to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company,” as defined in the JOBS Act. We will be required to disclose significant changes made in our internal control procedures on a quarterly basis.

We are beginning the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.

During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is

 

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effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by                         , the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and bylaws, as will be in effect upon the completion of this offering, may have the effect of delaying or preventing a change in control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:

 

    authorize our board of directors to issue preferred stock, without further stockholder action and with voting liquidation, dividend and other rights superior to our common stock;

 

    require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, and limit the ability of our stockholders to call special meetings;

 

    establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for director nominees;

 

    establish that our board of directors is divided into three classes, with directors in each class serving three-year staggered terms;

 

    require the approval of holders of two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent or call a special meeting;

 

    prohibit cumulative voting in the election of directors; and

 

    provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your common stock in an acquisition.

 

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Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections of this prospectus titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” and or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

    our ability to retain and increase sales to existing customers and attract new customers on a cost-effective basis;

 

    our ability to market our products to local businesses and brand networks;

 

    our ability to manage, measure and demonstrate the effectiveness of our platform and to continue to develop or acquire new products and technologies that are appealing to our customers;

 

    our ability to develop or offer new or additional products in a timely manner that keeps pace with new technologies;

 

    our ability to attract, motivate and retain qualified sales personnel;

 

    the rate of growth of the local business market for our solutions;

 

    increased competition and the offering of new solutions by our competitors;

 

    our ability to effectively manage our growth;

 

    potential acquisition and integration of complementary businesses and technologies;

 

    our ability to monitor and comply with evolving regulations affecting out businesses;

 

    the overall economic environment in the United States and its impact on local businesses;

 

    our ability to maintain, or strengthen awareness of, our brand;

 

    perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions;

 

    our expected use of proceeds; and

 

    statements regarding future revenues, hiring plans, expenses, capital requirements and stock performance.

You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, or the Securities Act, do not protect any forward-looking statements that we make in connection with this offering.

 

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You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of              shares of our common stock in this offering will be approximately $             million, or approximately $             million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders, although we will bear the costs, other than underwriting discounts and commissions, associated with those sales.

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming that the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. We do not expect that a change in the initial offering price or the number of shares by these amounts would have a material effect on uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

The principal purposes of this offering are to create a public market for our common stock and to facilitate our future access to the public equity markets, as well as to obtain additional capital. We intend to use a portion of the net proceeds from this offering to repay the following borrowings and obligations:

 

    $             of indebtedness outstanding under the term loan portion of our existing credit facility with Silicon Valley Bank, which currently accrues interest at a floating per annum rate equal to 0.75% plus the “prime rate” then in effect and matures June 1, 2017. The proceeds of this term loan were used to repay in full our outstanding obligations under our 2010 term loan with Silicon Valley Bank and the cash portion of the earn-out consideration paid to shareholders of Lighthouse Practice Management.

 

    $             of indebtedness outstanding under our term loan with Rogers Communications Inc., which currently accrues interest at a rate of 5.0% per annum and matures September 9, 2017. The proceeds from this loan were used to repay in full our outstanding obligations under our 2011 term loan with Silicon Valley Bank and for general corporate purposes.

 

    $6.2 million deferred payment obligation pursuant to the Agreement and Plan of Merger entered into in connection with our acquisition of Lighthouse Practice Management in February 2013, which currently accrues interest at a rate of 8.0% per annum and becomes due upon the earlier to occur of February 28, 2015 and the closing of this offering.

We intend to use the remainder of the net proceeds for general corporate purposes. In addition, we may use a portion of the proceeds from this offering for acquisitions of complementary businesses, technologies or other assets, although we do not currently have any plans for any acquisitions. We may allocate funds from other sources to fund some or all of these activities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity” for more information regarding our existing and former credit facilities.

The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering.

 

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The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending the uses set forth above, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our common stock or any other securities. We anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of the agreements governing our credit facilities, and will continue to be limited by such restrictions to the extent any such facilities remain outstanding after this offering. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors our board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2014:

 

    on an actual basis; and

 

    on a pro forma as adjusted basis to reflect (1) the conversion of the outstanding shares of our preferred stock into common stock, which will occur automatically immediately prior to the completion of this offering, (2) the reclassification of our preferred stock warrant liabilities to additional paid-in capital upon the automatic conversion of certain of our preferred stock warrants into warrants exercisable for our common stock, which will occur automatically immediately prior to the completion of this offering, (3) the automatic preferred stock warrant exercise, (4) our sale of              shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (5) a $             million deemed dividend on our Series F preferred stock, as described below, (6) the application of $             million of the net proceeds of this offering to repay indebtedness outstanding under our existing credit facilities and $6.2 million of the net proceeds of this offering to satisfy certain of our deferred payment obligations, as described in “Use of Proceeds,” and (7) the filing of our amended and restated certificate of incorporation, which will become effective immediately prior to the completion of this offering.

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

 

     As of March 31, 2014
     Actual     Pro Forma
as Adjusted(1)
     (in thousands, except
share and per share data)
    

(unaudited)

Cash and cash equivalents

   $ 10,274     
  

 

 

   

 

Long-term debt, including current portion(2)

     30,228     

Preferred stock warrant liabilities

     5,846     

Convertible preferred stock, $0.001 par value; 85,431,561 shares authorized, 81,781,250 shares issued and outstanding, actual(3); no shares authorized, issued or outstanding, pro forma as adjusted

     65,159     

Stockholders’ (deficit) equity:

    

Preferred stock, $0.001 per share; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted

     —       

Common stock, $0.0002 par value; 155,000,000 shares authorized, 42,812,887 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma as adjusted(3)

     9     

Additional paid-in capital(3)

     37,137     

Accumulated deficit

     (84,467  
  

 

 

   

 

Total stockholders’ (deficit) equity

     (47,321  
  

 

 

   

 

Total capitalization

   $ 53,912     
  

 

 

   

 

 

(1)  

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $             million, assuming that the number of shares

 

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offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $             million, assuming that the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial offering price and other terms of this offering determined at pricing.

 

(2)   Includes current and long-term portions of bank loan, current and long-term portions of subordinated debt, deferred consideration, $4.8 million in accrued expenses and other current liabilities and $0.3 million in other liabilities, long-term portion, which includes deferred payments of $4.5 million related to our acquisition of Lighthouse Practice Management classified as accrued compensation expense and $0.6 million related to our asset acquisition from New Service, LLC. Amounts are disclosed at full payment value and do not reflect reductions for fair value adjustments that are reflected on the condensed consolidated balance sheet.

 

(3)   The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series F preferred stock depends on the initial public offering price of our common stock. The terms of our Series F preferred stock provide that the ratio at which each share of this series of preferred stock automatically converts into shares of our common stock in connection with this offering will increase if the initial public offering price is below $             per share, which would result in additional shares of our common stock being issued upon conversion of our Series F preferred stock immediately prior to the closing of this offering. Based upon the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series F preferred stock will convert into an aggregate of approximately                         shares of our common stock immediately prior to the closing of this offering. See “Prospectus Summary—The Offering” for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

The pro forma as adjusted additional paid-in capital and accumulated deficit amounts in the table above include the effects of a $             million deemed dividend for the assumed fair value of additional shares of common stock issued upon the conversion of our Series F preferred stock at the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus. See “Unaudited Pro Forma Presentation” in note 1 to our unaudited interim condensed consolidated financial statements. The deemed dividend will increase the net loss allocable to common stockholders in the calculation of pro forma basic and diluted net loss per share.

The number of shares of our common stock shown as issued and outstanding on a pro forma as adjusted basis in the table above is based on the number of shares of our common stock outstanding as of March 31, 2014 and excludes:

 

    17,574,484 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1611 per share;

 

                 shares of our common stock reserved for future issuance pursuant to our equity incentive plans, including (1)              shares pursuant to our 2014 Plan, (2)                  shares pursuant to our 2014 ESPP, each of which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year and (3) 3,419,224 shares of our common stock reserved for issuance under our 2007 Plan, which shares will be added to the shares reserved under the 2014 Plan upon its effectiveness;

 

    1,242,829 shares of common stock issuable upon the exercise of certain preferred stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $0.9937 per share; and

 

    200,553 shares of common stock issuable upon the exercise of certain common stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1676 per share.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.

The pro forma net tangible book value of our common stock as of March 31, 2014 was $             million, or $             per share, based on                     shares of common stock outstanding. Pro forma net tangible book value per share represents our total tangible assets (total assets less intangible assets) less our total liabilities, divided by the total number of shares of our outstanding common stock, after giving effect to (1) the conversion of all outstanding shares of our preferred stock into                      shares of common stock immediately prior to the closing of this offering, (2) the automatic net exercise of preferred stock warrants into                      shares of our common stock and (3) the reclassification of our preferred stock warrant liabilities to additional paid-in capital immediately prior to the closing of this offering.

After giving effect to the receipt of the net proceeds from our sale of                      shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2014 would have been $             million, or $             per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to investors purchasing common stock in this offering.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of March 31, 2014

   $                   

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     
  

 

 

    

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

     
     

 

 

 

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

      $     
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the pro forma net tangible book value, as adjusted to give effect to this offering, by $             per share and the dilution to new investors by $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease the pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $             per share and the dilution to new investors by $             per share, assuming the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

The pro forma information discussed above is illustrative only and will adjust based on the actual initial offering price and other terms of this offering determined at pricing. See “Prospectus Summary—The Offering” for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

 

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

The following table summarizes as of March 31, 2014, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased           Weighted-
average price
per share
 
        Total Consideration    
     Number    Percent     Amount      Percent    

Existing stockholders

                   $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $           100  
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

The foregoing table does not reflect the sales by existing stockholders in connection with sales made by them in this offering. Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to              shares, or         % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to              shares, or         % of the total number of shares of our common stock outstanding after this offering.

The foregoing table and calculations are based on              shares of common stock outstanding as of March 31, 2014, after giving effect to the automatic preferred stock warrant exercise and the conversion of all outstanding shares of preferred stock into an aggregate of              shares of common stock upon the closing of this offering, and excludes:

 

    17,574,484 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1611 per share;

 

                 shares of our common stock reserved for future issuance pursuant to our equity incentive plans, including (1)              shares pursuant to our 2014 Plan, (2)              shares pursuant to our 2014 ESPP, each of which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year and (2) 3,419,224 shares of our common stock reserved for issuance under our 2007 Plan, which shares will be added to the shares reserved under the 2014 Plan upon its effectiveness;

 

    1,242,829 shares of common stock issuable upon the exercise of certain preferred stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $0.9937 per share; and

 

    200,553 shares of common stock issuable upon the exercise of certain common stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1676 per share.

To the extent that options or warrants are exercised, new options or other securities are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our selected consolidated financial and other data for, and as of the periods ended on, the dates indicated. The consolidated statements of operations and comprehensive loss data for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data for the years ended December 31, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2011 are derived from our audited financial consolidated financial statements, which are not included in this prospectus. The selected condensed consolidated statements of operations and comprehensive income (loss) data for the three months ended March 31, 2013 and 2014 and the selected condensed consolidated balance sheet data as of March 31, 2014 are derived from our unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus. Our unaudited interim condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for the fair presentation of the financial information set forth in those statements including elsewhere in this prospectus. The data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any future period.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2011     2012     2013     2013     2014  
    (in thousands, except per share and customer data)  
          (unaudited)  

Consolidated Statements of Operations Data:

         

Revenues

  $ 87,584      $ 132,321      $ 161,863      $ 35,202      $ 45,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

         

Cost of revenues (exclusive of depreciation and amortization shown separately below)(1)

    33,876        42,760        53,843        11,925        14,446   

Selling and marketing(1)

    36,318        51,623        64,605        14,076        18,628   

Technology and product development(1)

    10,157        14,977        20,346        4,568        5,660   

General and administrative(1)

    15,305        19,591        29,271        6,085        8,349   

Depreciation and amortization

    2,328        3,721        6,419        1,248        1,845   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    97,984        132,672        174,484        37,902        48,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,400     (351     (12,621     (2,700     (3,182

Interest expense and other

    (7,074     (4,690     (2,912     (440     (2,660
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (17,474     (5,041     (15,533     (3,140     (5,842

(Benefit) provision for income taxes

    (2,035     387        (5,131     (5,327     103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

  $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to common stockholders(2)

         

Basic

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net (loss) income per share attributable to common stockholders(2)

         

Basic

    31,955        32,573        35,743        34,279        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    31,955        32,573        35,743        46,876        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Pro forma weighted-average shares used to compute pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Other Financial and Other Data (unaudited):

         

Number of Customers(4)

    27,200        29,300        42,000        33,800        44,800   

Adjusted EBITDA(5)

  $ (5,899   $ 6,236      $ 1,819      $ 286      $ 378   

 

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     As of December 31,     As of
March 31,
 
     2011     2012     2013     2014  
    

(in thousands)

 
                       (unaudited)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 14,606      $ 9,166      $ 12,345      $ 10,274   

Working capital (deficit)(6)

     (7,136     (20,729     (27,325     (32,721

Total assets

     67,916        66,482        93,729        93,663   

Long-term debt, including current portion(7)

     32,930        18,034        29,609        30,228   

Total liabilities

     64,070        54,513        74,456        75,825   

Convertible preferred stock

     38,515        48,733        62,411        65,159   

Total stockholders’ deficit

     (34,669     (36,764     (43,138     (47,321

 

(1)   Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2011      2012      2013      2013      2014  
    

(in thousands)

 
                          (unaudited)  

Cost of revenues

   $ 15       $ 17       $ 15       $ 4       $ 10   

Selling and marketing

     422         577         780         241         237   

Technology and product development

     235         445         675         159         218   

General and administrative

     1,160         1,827         1,161         521         214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,866       $ 2,631       $ 925       $ 679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   See note 15 to our unaudited interim condensed consolidated financial statements and note 21 to our consolidated financial statements for an explanation of the calculations of our actual basic and diluted net (loss) income per share attributable to common stockholders.

 

(3)   Pro forma basic and diluted net (loss) income per share attributable to common stockholders represents net (loss) income and comprehensive (loss) income divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares of common stock outstanding reflects (a) the automatic preferred stock warrant exercise and (b) the conversion of preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the issuance date or the first day of the relevant period (assuming a conversion ratio equal to                      common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus), and also reflect the issuance of shares of common stock pursuant to the automatic preferred stock warrant exercise. See the section “Prospectus Summary—The Offering” for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

 

(4)   We calculate the number of customers at the end of each fiscal year as the number of unique customers with a subscription to one or more of our platform products and customers of our Yodle Ads product, rounded down to the nearest hundred. We consider as separate customers each location of a brand network that uses one of our more of our products. In cases where our customers have subscriptions to our platform obtained through resellers, we include those customers in our customer count.

 

(5)   We define Adjusted EBITDA as our net (loss) income and comprehensive (loss) income plus (minus): interest expense and other, (benefit) provision for income taxes and depreciation and amortization expense, adjusted to eliminate the impact of stock-based compensation expense, which is a non-cash item, and the effect of charges related to business combination and asset acquisition. We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

       Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

 

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       Because of these and other limitations, you should consider Adjusted EBITDA alongside our other GAAP-based financial performance measures, net loss and our other GAAP financial results. The following table presents a reconciliation of Adjusted EBITDA to net (loss) income and comprehensive (loss) income the most directly comparable GAAP measure, for each of the periods indicated.

 

     Year Ended December 31,     Three Months
Ended March 31,
 
     2011     2012     2013     2013     2014  
     (in thousands)  

Net (loss) income and comprehensive (loss) income

   $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945

Adjustments:

          

Interest expense and other

     7,074        4,690        2,912        440        2,660   

(Benefit) provision for income taxes

     (2,035     387        (5,131     (5,327     103   

Depreciation and amortization expense

     2,328        3,721        6,419        1,248        1,845   

Charges related to business combination and asset acquisition*

     341        —          5,390        813        1,036   

Stock-based compensation expense

     1,832        2,866        2,631        925        679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net adjustments

     9,540        11,664        12,221        (1,901     6,323   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (5,899   $ 6,236      $ 1,819      $ 286      $ 378   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*   Charges related to business combination and asset acquisition consists of costs (including any related transaction costs) incurred in connection with our (a) acquisition of ProfitFuel in May 2011; (b) our acquisition of Lighthouse Practice Management in February 2013, including $4.0 million and $0.5 million of a deferred payment which was classified as compensation expense under ASC 718 for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively; and (c) our asset acquisition from New Service, LLC in February 2014.

 

(6)   Working capital (deficit) includes all current assets less all current liabilities.

 

(7)   Includes current and long-term portions of bank loan, current and long-term portions of subordinated debt and deferred consideration. As of March 31, 2014, it also included $4.8 million in accrued expenses and other current liabilities and $0.3 million in other liabilities, long-term portion, which includes deferred payments of $4.5 million related to our acquisition of Lighthouse Practice Management classified as accrued compensation expense and $0.6 million related to our asset acquisition from New Service, LLC. As of December 31, 2013, it also included the cash portion of contingent consideration in business combination and $4.0 million in long-term portion of other liabilities, but excluded the fair value attributable to 869,565 shares of Series E preferred stock payable as non-cash earn-out consideration. Amounts are disclosed at full payment value and do not reflect reductions for fair value adjustments that are reflected on the balance sheet.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes beginning on page F-1. In addition to historical information, this discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. You should read the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of the factors that could cause our actual results to differ materially from our expectations. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Overview

Yodle is a leading provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable and transparent. Our platform provides our customers with an online, mobile and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. We utilize our proprietary data assets and algorithms to increase the likelihood that consumers will find our customers and become their paying consumers. Our platform provides our customers with transparency into their marketing activities and business operations, thereby enabling them to evaluate their return on investment, or ROI. Our solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

We believe the market for our local marketing automation platform is large and underserved. According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. We currently target industry verticals that include approximately 7 million local businesses, which we define as non-employer firms and businesses with up to 99 employees. We served approximately 44,800 local businesses as of March 31, 2014.

We began operations in 2005. Over nine years of focusing on the unique and constantly evolving digital marketing needs of local businesses, we have developed a differentiated approach to addressing this large and fragmented market. We use our sophisticated technology, rigorous data collection and analytics and scalable process automation in all key aspects of our business.

Our investment in technology, automation and our process-driven approach has resulted in significant reductions in our customer acquisition and onboarding costs, which helps minimize our initial investment to bring on new customers and allows us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for our tenured customers. We calculate monthly average revenue retention as the revenue derived from tenured customers in the current month relative to the revenue derived from those same tenured customers in the prior month. We expect the revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe we have a compelling business model which is characterized by low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of tenured customers, resulting in attractive customer economics and high returns on our initial investment.

 

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We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products. Marketing Essentials is our flagship product that currently includes three modules: presence, conversion optimization and communication automation. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the needs of national franchisors and other similar businesses. Lighthouse is our business practice automation product, which automates many of our customers’ daily consumer interactions or office routines. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of our Yodle Ads media product, which automates, manages and optimizes our customers’ media spend across mobile and desktop search engines. We refer to our offerings and the packages in which we sell them as products.

Our Product History and Business Evolution

We launched our automated SEM optimization bidding engine, now called Yodle Ads, in 2007. From 2007 through 2009, we primarily grew our customer base and increased our revenues through increasing sales of our media product and the recurring revenue generated from existing customers. Starting in 2010, we began expanding our product offerings to address a broad range of digital marketing needs for local businesses. We introduced our first platform product, Yodle Organic, in 2010. Yodle Organic provided local businesses with a digital presence that was optimized for organic traffic and formed the basis of our current conversion optimization module within Marketing Essentials. We increased our platform revenues as we increased the number of sales personnel selling Yodle Organic and by generating recurring revenue from our existing platform customers. We further increased our platform revenues as a result of our acquisition of ProfitFuel in May 2011. Starting in late 2012, we increased our investment in technology and product development with the goal of increasing the pace of our innovation and product introductions.

Our current suite of products and modules is the result of ongoing, internal product development and innovation that have been supplemented by select strategic business acquisitions. In late 2012, we converted the digital presence module included in Yodle Organic into Yodle Web. We further augmented our platform offerings in February 2013 with the acquisition of Lighthouse Practice Management. This acquisition helped expand our platform offering and enabled us to offer our customers a business practice automation product, which we call Lighthouse. In December 2013, we introduced our Centermark product for brand networks. Centermark leverages modules of our Marketing Essentials product by providing a standardized source of shared data, communication and reporting to address the unique needs of brand network owners. Prior to the introduction of Centermark, we offered brand network customers products that were primarily comprised of Yodle Organic, Yodle Web and Yodle Ads.

In the first quarter of 2014, we introduced Marketing Essentials, our flagship product, which is based on our predecessor products, including Yodle Organic and Yodle Web. Marketing Essentials currently includes three modules: presence, conversion optimization and communication automation. In March 2014, we began selling our Marketing Essentials product, with its three current modules, to new customers. In April 2014, we began providing our existing Yodle Organic customers with the features or modules of our current Marketing Essentials product that were not part of their previous offering.

We intend to continue to expand the capabilities of our platform and evolve our product offerings to address the challenges local businesses face, with an emphasis on continuing to grow our platform revenue.

In 2012, we achieved positive Adjusted EBITDA and generated cash flow from operations. After attaining these business and financial milestones, we made a strategic decision to prioritize accelerating the adoption of our platform products in the marketplace with the goal of increasing our long-term revenue and customer base. As a result, in 2013, we increased our investments in technology and product development and selling and marketing, and implemented certain pricing adjustments for our products. We increased our technology and product

 

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development expenditures by 36% and increased the number of our selling and marketing personnel by 29%. Additionally, for new customers that purchased both our platform and media product, we reduced the overall subscription price for our platform product and correspondingly increased our customers’ media budgets, with the goal of increasing their ROI and our customer retention. The primary financial effects of these changes on our 2013 results were to decrease our overall and platform revenue growth rate, increase our revenue growth rate from our media product and increase our cost of revenues, which negatively impacted our Adjusted EBITDA. Given that we did not experience increases in our customer retention at levels that would make this an attractive long-term pricing strategy, we increased the price of these platform products in the second half of 2013.

Key Metrics

We review two key business metrics to help us monitor the performance of our business and that we believe are useful to understanding the underlying trends affecting our business. These key metrics are the number of our customers and Adjusted EBITDA. The following table summarizes our key business metrics for the periods set forth below.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2011     2012      2013      2013      2014  
     (unaudited)  

Number of Customers

     27,200        29,300         42,000         33,800         44,800   

Adjusted EBITDA (in thousands)

   $ (5,899   $ 6,236       $ 1,819       $ 286       $ 378   

Number of Customers

We calculate the number of customers at the end of any particular period as the number of unique customers with a subscription to one or more of our platform products and customers of our Yodle Ads product, rounded down to the nearest hundred. With limited exception, as of March 31, 2014, all of our customers subscribed to one or more of our platform products. We consider as separate customers each location of a brand network that uses one of our more of our products. In cases where businesses have subscriptions to our platform obtained through resellers, we include those businesses in our customer count. As of March 31, 2014, our customers were primarily located in the United States and Canada.

Adjusted EBITDA

Adjusted EBITDA represents our net (loss) income and comprehensive (loss) income plus (minus): interest expense and other, (benefit) provision for income taxes and depreciation and amortization expense, adjusted to eliminate the impact of stock-based compensation expense, which is a non-cash item. In addition, we exclude the effect of charges related to our acquisition of ProfitFuel in May 2011, Lighthouse Practice Management in February 2013 and our asset acquisition from New Service, LLC in February 2014. Adjusted EBITDA is a key measure used by our management to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Adjusted EBITDA is not a measure calculated in accordance with GAAP and has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Please see footnote (5) to the table in the section titled “Selected Consolidated Financial and Other Data” in this prospectus for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net (loss) income and comprehensive (loss) income, the most comparable GAAP measurement, for the years ended December 31, 2011, 2012 and 2013 and for the three months ended March 31, 2013 and 2014.

 

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Basis of Presentation

The key elements of our operating results include:

Revenues

We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products, as well as other products and modules of our local marketing automation platform that we historically sold under different product names, both on a standalone basis and packaged in combinations. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of Yodle Ads.

We sell Yodle Ads and subscriptions to our platform products primarily through our direct sales force and, to a lesser extent, through resellers. Subscriptions to Marketing Essentials and its predecessor products typically range from three- to 12-month initial subscription terms. Historically, these contracts have generally been extended on a month-to-month basis after the initial subscription term. Subscriptions to our Centermark product typically have 12-month initial subscription terms or longer. Subscriptions to our Lighthouse product are typically for month-to-month subscription terms.

Our customers typically pay a recurring monthly fixed fee for subscriptions to our platform products. For platform customers who also subscribe to our Yodle Ads media product, a portion of their monthly fee represents a monthly media budget that we establish with them at the time of their initial subscription. Our customers may adjust their monthly media budget in accordance with their needs but may not decrease their budget during the initial subscription term. Our customers typically pay their subscription fee and their media budget in advance. We record these prepayments as deferred revenue and recognize this revenue at the time our products are delivered. Revenues generated by our platform products are recognized ratably over the term during which the products are delivered. Revenues generated by our media product are recognized as local online advertising is purchased on behalf of that customer. If the entirety of the customer’s media budget is not used during the relevant period, that remaining amount will be recorded as deferred revenue and recognized when used.

We charge our resellers a fee on a per customer basis for each platform product they sell. The fees we charge our resellers are typically lower than the fees we charge our direct customers given that we incur limited selling and marketing expenses with sales made through resellers. Additionally, we collect a share of the revenue that our resellers generate from the sale of our media product. We recognize revenue in the period that we deliver our products to our resellers. Additionally, certain of our resellers have guaranteed to provide us with minimum fees, regardless of the volume of sales. Revenues derived from our resellers are included in platform revenues and are recognized on a net basis.

We expect that, over time, revenues generated by our platform products will grow more rapidly than revenues generated by our media product. However, our quarterly financial results of operations may not consistently reflect this trend given that the contribution to our revenues from our media product will likely vary more from period-to-period than revenue from our platform products.

Costs and Expenses

Our costs and expenses consist of cost of revenues, selling and marketing, technology and product development, general and administrative and depreciation and amortization expenses. Salaries, bonuses, stock-based compensation and other personnel related costs are the most significant components of each of these expense categories. We grew from 417 employees at December 31, 2010 to 1,117 employees at March 31, 2014, and we expect to continue to hire new employees in order to support our anticipated revenue growth. We include stock-based compensation expense in connection with the grant of stock options in the applicable costs and expense category based on the award recipient’s department.

 

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Cost of Revenues. Cost of revenues consists of traffic acquisition costs, net of any publisher rebates, client service account setup personnel costs including salaries, bonuses, stock-based compensation and other personnel costs, third-party costs associated with service delivery, colocation, hosting and designing websites, and credit card processing fees. No allocation of depreciation and amortization expense was made to cost of revenues.

The largest component of our cost of revenues is net traffic acquisition costs, which is only associated with our media product. Net traffic acquisition costs are the costs associated with acquiring online media for our customers from third-party publishers, primarily consisting of Google, Microsoft and Yahoo!, net of any publisher rebates. Typically, we become obligated to make payments for traffic acquisition costs in the period the advertising is delivered. Traffic acquisition costs are recognized as cost of revenues in the period in which they are incurred. From time to time, publishers may offer us rebates based on various factors, including specified advertiser count and other requirements. We record these rebates in the period in which they are earned as a reduction to the cost of revenues.

Generally, we expect our cost of revenues to increase in absolute dollars, but to remain relatively consistent as a percentage of revenues in the near term. Historically, we have experienced higher margins on our platform products as compared to our media product. In the long term, as the percentage of our total revenues attributable to our platform products increases, we expect our cost of revenues to decrease as a percentage of our total revenues.

Selling and Marketing Expense. Selling and marketing expense consists primarily of personnel costs, including salaries, bonuses, variable incentive-based compensation, stock-based compensation and other personnel costs related to sales, customer loyalty and retention, public relations, marketing, training and operations. Additional expenses in this category include travel and entertainment, advertising costs, marketing and promotional events, marketing activities, subcontracting fees and allocated overhead.

In order to grow our customer base, we expect to continue investing our resources in selling and marketing by increasing the number of sales and marketing and customer loyalty and retention personnel and expanding our marketing activities. As a result, we expect selling and marketing expense to increase in absolute dollars. However, we believe that our selling and marketing expense will decrease as a percentage of total revenues as our base of tenured customers continues to grow and represents a larger portion of our revenues.

Technology and Product Development Expense. Technology and product development expense consists primarily of personnel costs for our employees working in the development and infrastructure, information technology and product and product performance teams, including salaries, bonuses, stock-based compensation and other personnel costs. Also included are non-personnel costs such as consulting and professional fees to third-party development resources, software licensing fees and technology maintenance and other product development costs. We capitalize a portion of our technology development costs and, accordingly, include only a portion of those costs as technology and product development expense.

Our technology and product development efforts are focused on enhancing our platform and the products we offer and improving the performance of those products for our customers. We believe this investment is critical to maintaining the quality of our products and innovating to enhance our competitive position. We expect technology and product development expense to continue to increase on an absolute dollar basis and decrease as a percentage of revenue over time.

General and Administrative Expense. General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation and other personnel costs for our administrative, legal, business development, human resources, finance and accounting employees. Additional expenses included in this category are non-personnel costs, such as real estate related expenses, building and maintenance expenses, travel related expenses, subcontracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses. In addition, general and administrative expense includes compensation expenses related to our February 2013 acquisition of Lighthouse Practice Management. We expect our general and administrative expense to increase on an absolute dollar basis as we continue to support our growth and decrease as a percentage of revenue over time.

 

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We also anticipate that we will incur additional costs for personnel and professional services related to our preparation to become and operate as a public company. Such costs include increases in our finance and legal personnel, additional external legal and audit fees and expenses and costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies. We also expect to incur increased costs for directors’ and officers’ liability insurance and an enhanced investor relations function. Additionally, we intend to relocate our corporate headquarters in New York as our existing office space will not accommodate our anticipated growth in headcount and our current lease expires in April 2015. We expect that our real estate and building and maintenance expenses will increase in the near term as we expand the amount of square footage under lease. We may also incur additional expenses if we move our headquarters to a commercial space with a higher rental rate.

Depreciation and Amortization Expense. Depreciation and amortization expense primarily consists of our depreciation expense related to investments in property and equipment, amortization expense related to technology development costs and software, as well as the amortization of intangible assets originating from our acquisitions of ProfitFuel in 2011 and Lighthouse Practice Management in 2013. These acquired intangible assets included developed technology, customer relationships, domain names, non-competition agreements and trademarks and trade names.

Interest Expense and Other

Interest expense and other includes interest expense primarily consisting of interest incurred on outstanding borrowings under our debt obligations, changes in the fair value of our preferred stock warrant liabilities and interest received on our cash and cash equivalents. The fair value of our preferred stock warrant liabilities is re-measured at the end of each reporting period and any changes in fair value are recognized on our statements of operations as interest expense and other. Upon completion of this offering, other than preferred stock warrants that are subject to the automatic preferred stock warrant exercise, our preferred stock warrants will automatically, in accordance with their terms, become warrants to purchase our common stock, which will result in the reclassification of the preferred stock warrant liabilities related to these warrants to additional paid-in capital, and no further changes in fair value will be recognized in interest expense and other.

(Benefit) Provision for Income Taxes

(Benefit) provision for income taxes consists of federal and state income taxes in the United States and income taxes in a foreign jurisdiction, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards.

 

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Results of Operations

The following table sets forth our selected consolidated statements of operations data:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2011     2012     2013     2013     2014  
     (in thousands)  
                       (unaudited)  

Consolidated Statements of Operations Data:

          

Revenues

   $ 87,584      $ 132,321      $ 161,863      $ 35,202      $ 45,746   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of revenues (exclusive of depreciation and amortization shown separately below)(1)

     33,876        42,760        53,843        11,925        14,446   

Selling and marketing(1)

     36,318        51,623        64,605        14,076        18,628   

Technology and product development(1)

     10,157        14,977        20,346        4,568        5,660   

General and administrative(1)

     15,305        19,591        29,271        6,085        8,349   

Depreciation and amortization

     2,328        3,721        6,419        1,248        1,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     97,984        132,672        174,484        37,902        48,928   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,400     (351     (12,621     (2,700     (3,182

Interest expense and other

     (7,074     (4,690     (2,912     (440     (2,660
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (17,474     (5,041     (15,533     (3,140     (5,842

(Benefit) provision for income taxes

     (2,035     387        (5,131     (5,327     103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

   $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation expense as follows:

 

Cost of revenues

   $ 15       $ 17       $ 15       $ 4       $ 10   

Selling and marketing

     422         577         780         241         237   

Technology and product development

     235         445         675         159         218   

General and administrative

     1,160         1,827         1,161         521         214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,866       $ 2,631       $ 925       $ 679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table sets forth our selected consolidated statements of operations data expressed as a percentage of revenues:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
         2011             2012             2013             2013             2014      
    

(as a percentage of revenues)

 
                       (unaudited)  

Consolidated Statements of Operations Data:

          

Revenues

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of revenues (exclusive of depreciation and amortization shown separately below)

     39        32        33        34        32   

Selling and marketing

     41        39        40        40        41   

Technology and product development

     12        11        13        13        12   

General and administrative

     17        15        18        17        18   

Depreciation and amortization

     3        3        4        4        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     112        100        108        108        107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12     —          (8     (8     (7

Interest expense and other

     (8     (4     (2     (1     (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (20     (4     (10     (9     (13

(Benefit) provision for income taxes

     (2     —          (3     (15     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

     (18 )%      (4 )%      (6 )%      6     (13 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Three Months Ended March 31, 2013 and 2014

Revenues

 

     Three Months Ended
March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Platform revenues:

   $ 15,142       $ 20,549         36%   

Media revenues:

   $ 20,060       $ 25,196         26%   
  

 

 

    

 

 

    

Revenues

   $ 35,202       $ 45,746         30%   
  

 

 

    

 

 

    

Revenues for the three months ended March 31, 2014 increased $10.5 million, or 30%, compared to the same period in 2013. Platform revenues grew by $5.4 million, or 36%, and media revenues grew by $5.1 million, or 26%, for the three months ended March 31, 2014 compared to the same period in 2013. The increase in platform revenues was primarily due to a $3.1 million increase in revenues from the acceleration of sales of our Lighthouse product that we acquired in February 2013 in addition to one full quarter of revenue generated from our Lighthouse product in the three months ended March 31, 2014 compared to one month of revenue in the same period in 2013. In addition, platform revenue increased by $2.4 million as a result of a 28% increase in the number of customers subscribing to our other platform products, partially offset by lower average monthly revenue per customer from these products in the three months ended March 31, 2014 compared to the same period in 2013. The increase in media revenues was primarily attributable to an increase in the average per customer media spend of new customers who purchased our media product in addition to our platform product. This increase was primarily the result of increases of the average per customer media budget from these customers in conjunction with a corresponding decrease in their subscription price of our platform product.

 

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Cost of Revenues

     Three Months Ended
March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Cost of revenues

   $ 11,925       $ 14,446         21%   

% of revenues

     34%         32%      

The $2.5 million increase in cost of revenues for the three months ended March 31, 2014 compared to the same period in 2013 was attributable to a $1.9 million, or 22%, increase in net traffic acquisition costs from $8.5 million in the three months ended March 31, 2013 to $10.4 million in the three months ended March 31, 2014, directly resulting from our increase in media revenues. Cost of revenues directly attributable to our platform products increased by $0.4 million primarily due to the acceleration of sales of our Lighthouse product that we acquired in February 2013 in addition to recognizing one quarter of cost of revenues from our Lighthouse product in the three months ended March 31, 2014 compared to one month of costs recognized during the three months ended March 31, 2013. Costs shared across our media and platform products increased $0.2 million, driven primarily by an increase in credit card processing fees and colocation and hosting fees. Despite an increase in the number of accounts onboarded, personnel costs associated with customer service employees, which are shared across our media and platform products, remained consistent quarter over quarter as a result of our investments in technology and automation.

Selling and Marketing Expense

     Three Months Ended
March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Selling and marketing

   $ 14,076       $ 18,628         32%   

% of revenues

     40%         41%      

The $4.6 million increase in selling and marketing expense for the three months ended March 31, 2014 compared to the same period in 2013 was primarily attributable to a $3.8 million increase in salaries, variable incentive-based compensation, stock-based compensation and other personnel-related costs, as we increased the number of selling and marketing personnel to support our increased sales objectives and expanding customer base due, in part, to our acquisition of Lighthouse Practice Management. In addition, selling and marketing expense increased by $0.6 million as a result of increased third-party costs and increased marketing initiatives.

Technology and Product Development Expense

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Technology and product development

   $ 4,568       $ 5,660         24%   

% of revenues

     13%         12%      

The $1.1 million increase in technology and product development expense for the three months ended March 31, 2014 compared to the same period in 2013 was primarily attributable to a $1.0 million increase in salaries, bonuses, stock-based compensation and other personnel costs, which was largely driven by our increased investment in technology and product development personnel to support our continued efforts to develop new products and enhance our platform and existing product offerings.

General and Administrative Expense

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

General and administrative

   $ 6,085       $ 8,349         37%   

% of revenues

     17%         18%      

 

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The $2.3 million increase in general and administrative expense for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to a $1.1 million increase in salaries, stock-based compensation costs and other personnel-related costs, which was largely driven by recognizing one quarter of personnel costs from general and administrative employees associated with our acquisition of Lighthouse Practice Management in the three months ended March 31, 2014 compared to one month of these costs recognized in the same period in 2013, as well as increases in accounting, finance, human resources, legal and business development personnel to support the growth of our business. In addition, we experienced a $0.4 million increase in audit fees in preparation for a potential initial public offering and a $0.3 million increase in real estate expense and building maintenance costs as we expanded our operations in New York City and Charlotte.

Depreciation and Amortization

 

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Depreciation and amortization

   $ 1,248       $ 1,845         48%   

% of revenues

     4%         4%      

The $0.6 million increase in depreciation and amortization expense for the three months ended March 31, 2014 as compared to the same period in 2013 was primarily due to amortization of intangibles from the acquisition of Lighthouse Practice Management in February 2013.

Interest Expense and Other

 

     Three Months
Ended March 31,
    % Change
2014 vs.
2013
 
     2013     2014    
     (in thousands)        

Interest expense and other

   $ (440   $ (2,660     505%   

% of revenues

     (1 )%      (6 )%   

The $2.2 million increase in interest expense and other for the three months ended March 31, 2014 compared to the same period in 2013 was primarily driven by a $2.2 million expense related to the change in the fair value of our convertible preferred stock warrants. Interest expense related to indebtedness decreased $0.1 million from the three months ended March 31, 2013 to the same period in 2014 as a result of achieving lower interest rates on our outstanding debt, offset by higher levels of outstanding indebtedness.

(Benefit) Provision for Income Taxes

 

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013     2014     
     (in thousands)         

(Benefit) provision for income taxes

   $ (5,327   $ 103         102%   

% of revenues

     (15 )%      —        

The $5.4 million increase in our provision for income taxes for the three months ended March 31, 2014 compared to the same period in 2013 was due to a $5.3 million deferred tax benefit realized in February 2013 resulting from purchase accounting related to the acquisition of Lighthouse Practice Management.

 

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Comparison of Years Ended December 31, 2011, 2012 and 2013

Revenues

 

     Year Ended December 31,      % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011      2012      2013       
     (in thousands)               

Platform revenues

   $ 31,568       $ 58,976       $ 71,466         87     21

Media revenues

   $ 56,016       $ 73,345       $ 90,397         31     23

Revenues

   $ 87,584       $ 132,321       $ 161,863         51     22

2013 Compared to 2012

Revenues for 2013 increased $29.5 million, or 22%, compared to 2012. Platform revenues grew by $12.5 million, or 21%, from $59.0 million in 2012 to $71.5 million in 2013. Media revenues grew by $17.1 million, or 23%, from $73.3 million in 2012 to $90.4 million in 2013. The increase in platform revenues was driven by a $8.3 million increase in revenues from sales of our Lighthouse product that we acquired in February 2013 and the allocation of additional sales personnel to accelerate revenue growth from our Lighthouse product subsequent to the acquisition. We also experienced a $4.2 million increase in revenues from sales of our other platform products due to a 24% increase in the number of customers subscribing to our other platform products, partially offset by lower average monthly revenue per customer in 2013 for the predecessor to our Marketing Essentials product as a result of changes in our pricing strategy. The increase in media revenues was primarily attributable to an increase in the number of customers purchasing both our platform and media products as well as an increase in the average per customer media spend of new customers and, to a lesser extent, to large seasonal campaigns in 2013 from a franchise network and its locations.

2012 Compared to 2011

Revenues for 2012 increased $44.7 million, or 51%, compared to 2011. Platform revenues grew by $27.4 million, or 87%, from $31.6 million in 2011 to $59.0 million in 2012. Media revenues grew by $17.3 million, or 31%, from $56.0 million in 2011 to $73.3 million in 2012. The increase in platform revenues was primarily driven by a 41% increase in the number of customers subscribing to our platform, resulting primarily from the additional direct sales of our platform products. In addition, this increase in platform revenue was driven by sales of platform products that we acquired in our May 2011 acquisition of ProfitFuel and the subsequent growth in sales of subscriptions to these products following the acquisition and, to a lesser extent, the increase in platform revenue driven by the commencement of our reseller relationship with Rogers in Canada. The increase in media revenues was primarily attributable to an increase in the number of customers of our media product, resulting in part from new customers purchasing our media product alongside a subscription to our platform product and sales personnel acquired as part of our acquisition of ProfitFuel transitioning from selling exclusively platform products to selling both platform and media products over the course of 2012 and, to a lesser extent, the addition of a franchise relationship with a large network of customers.

Cost of Revenues

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Cost of revenues

   $ 33,876      $ 42,760      $ 53,843        26     26

% of revenues

     39     32     33    

 

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2013 Compared to 2012

The $11.1 million increase in cost of revenues from 2012 to 2013 was attributable to a $5.7 million, or 17%, increase in net traffic acquisition costs from $32.7 million in 2012 to $38.5 million in 2013, directly resulting from our increase in media revenues in 2013. Costs directly attributable to our platform products increased by $4.4 million, including increased costs for listings management and content creation. Costs shared across our media and platform products increased $1.4 million, driven primarily by a $1.1 million increase in credit card processing fees and colocation and hosting fees. Our increase in cost of revenues was partially offset by a decrease of $0.4 million in personnel costs associated with customer service employees, which are shared across our media and platform products, as a result of our increased investment in automation.

2012 Compared to 2011

The $8.9 million increase in cost of revenues from 2011 to 2012 was primarily attributable to a $6.5 million, or 25%, increase in net traffic acquisition costs from $26.2 million in 2011 to $32.7 million in 2012, directly resulting from an increase in our media revenues in 2012. Costs directly attributable to our platform products increased by $0.5 million, including increased costs for content creation. Costs shared across both our media and platform products increased $1.6 million, including a $0.6 million increase in credit card processing fees and colocation and hosting fees. In addition, our cost of revenues increased by $0.3 million as a result of increases in personnel costs, which are shared across our media and platform products, associated with customer service employees.

Selling and Marketing Expense

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Selling and marketing

   $ 36,318      $ 51,623      $ 64,605        42     25

% of revenues

     41     39     40    

2013 Compared to 2012

The $13.0 million increase in selling and marketing expense from 2012 to 2013 was primarily attributable to a $12.4 million increase in salaries, variable incentive-based compensation, stock-based compensation and other personnel-related costs, as we increased the number of direct local sales force personnel to support our increased sales objectives. Selling and marketing expense was also impacted by a $0.6 million increase in costs related to marketing initiatives.

2012 Compared to 2011

The $15.3 million increase in selling and marketing expense from 2011 to 2012 was primarily attributable to a $14.3 million increase in salaries, variable incentive-based compensation, stock-based compensation and other personnel-related costs, as we increased the number of selling and marketing personnel to support our increased sales objectives and expanding customer base due, in part, to our acquisition of ProfitFuel. Selling and marketing expense was also impacted by a $1.0 million increase in costs related to marketing initiatives, software licenses and other selling and marketing costs.

Technology and Product Development Expense

 

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Technology and product development

   $ 10,157      $ 14,977      $ 20,346        47     36

% of revenues

     12     11     13    

 

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2013 Compared to 2012

The $5.4 million increase in technology and product development expense from 2012 to 2013 was primarily attributable to a $5.0 million increase in salaries, bonuses, stock-based compensation and other personnel costs, which was largely driven by our increased investment in technology and product development personnel to support our continued efforts to develop new products and enhance our platform and existing product offerings.

2012 Compared to 2011

The $4.8 million increase in technology and product development expense from 2011 to 2012 was primarily attributable to a $4.3 million increase in salaries, bonuses, stock-based compensation and other personnel costs, which was largely driven by our increased investment in technology and product development personnel to support our continued efforts to develop new products and enhance our platform and existing product offerings.

General and Administrative Expense

 

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

General and administrative

   $ 15,305      $ 19,591      $ 29,271        28     49

% of revenues

     17     15     18    

2013 Compared to 2012

The $9.7 million increase in general and administrative expense from 2012 to 2013 was primarily due to a one-time $4.3 million charge for compensation expense associated with the deferred cash payment and a $0.7 million charge associated with a change in fair value of the deferred consideration, in each case incurred in connection with our acquisition of Lighthouse Practice Management, a $3.1 million increase in salaries, stock-based compensation costs and other personnel-related costs, which was largely driven by an increase in the number of accounting, finance, human resources, legal and business development personnel to support the growth of our business and a $1.0 million increase in real estate expense and building maintenance costs as we expanded our existing operations in Charlotte and New York.

2012 Compared to 2011

The $4.3 million increase in general and administrative expense from 2011 to 2012 was primarily due to a $1.9 million increase in salaries, stock-based compensation costs and other personnel-related costs, which was largely driven by an increase in the number of accounting, finance, human resources and business development personnel to support the growth of our business, a $1.1 million increase in real estate expense and building maintenance costs as we expanded our operations in Austin and a $0.3 million one-time cost incurred in connection with abandoning our Boston lease.

Depreciation and Amortization Expense

 

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Depreciation and amortization

   $ 2,328      $ 3,721      $ 6,419        60     73

% of revenues

     3     3     4  

 

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2013 Compared to 2012

The $2.7 million increase in depreciation and amortization expense from 2012 to 2013 was primarily due to amortization of intangibles from the Lighthouse Practice Management acquisition in February 2013, increased depreciation and amortization expense related to our expansion in Austin in late 2012, and investments in our technology infrastructure to support our growing personnel across our offices.

2012 Compared to 2011

The $1.4 million increase in depreciation and amortization expense from 2011 to 2012 was primarily due to expense related to a full year of amortization of intangibles acquired from ProfitFuel compared to seven months of amortization in 2011, and investments in our technology infrastructure to support our growing personnel across our offices.

Interest Expense and Other

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Interest expense and other

   $ (7,074   $ (4,690   $ (2,912     34     38

% of revenues

     (8 )%      (4 )%      (2 )%     

2013 Compared to 2012

The $1.8 million decrease in interest expense and other from 2012 to 2013 was primarily due to the repayment of the ProfitFuel deferred payment in late 2012, the conversion of convertible promissory notes into equity and reduced borrowing costs as a result of financing activity.

2012 Compared to 2011

The $2.4 million decrease in interest expense and other from 2011 to 2012 was primarily due to a $5.0 million reduction in interest expense due to amortization of the beneficial conversion feature of the convertible promissory notes issued pursuant to our bridge financing, partially offset by a $1.3 million increase in interest related to loans and a $1.2 million expense related to the change in the fair value of our convertible preferred stock warrants.

(Benefit) Provision for Income Taxes

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012      2013      
     (in thousands)              

(Benefit) provision for income taxes

   $ (2,035   $ 387       $ (5,131     119     *   

% of revenues

     (2 )%      —           (3 )%     

 

* not meaningful

2013 Compared to 2012

The $5.5 million decrease in our provision for income taxes from 2012 to 2013 was primarily due to a $5.4 million deferred tax benefit realized through the acquisition of intangible assets resulting from the acquisition of Lighthouse Practice Management in February 2013.

2012 Compared to 2011

The $2.4 million increase in our provision for income taxes from 2011 to 2012 was primarily due to a $2.1 million deferred tax benefit recorded in 2011 in connection with our acquisition of ProfitFuel in May 2011.

 

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Liquidity and Capital Resources

Working Capital, Operating and Capital Expenditure Requirements

As of March 31, 2014, we had cash and cash equivalents of $10.3 million. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments. We use cash for working capital purposes, and we do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate capital requirements in investments designed to preserve the principal. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return. In 2014, we expect our capital expenditure requirements to be approximately $4.0 million to $6.0 million in the aggregate. Our future working capital, operating and capital expenditure requirements will depend on many factors, including the rate of our revenue growth, the amount and timing of our investments in personnel and capital equipment, and the timing and extent of our introduction of new products and product enhancements. We believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 months. Thereafter, we may need to raise additional funds through bank credit arrangements or public or private equity, equity-linked or debt financings to meet our future cash requirements. We may also need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products. Any additional equity financing may be dilutive to our stockholders. Moreover, if we raise additional funds through the incurrence of indebtedness, such indebtedness will likely require current payment of interest and contain covenants that restrict our operations, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity, equity-linked or debt financing on terms acceptable to us, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.

Sources of Liquidity

Since inception, we have funded our operations principally through private placements of our capital stock, issuance of debt and cash flows generated from our operations and to a lesser extent from the proceeds received from the exercise of options. We have received an aggregate of $53.7 million in net cash proceeds from the sale of our preferred stock.

In September 2013, we entered into a loan and security agreement with Rogers Communications Inc., or Rogers, to borrow $15.0 million. This facility is secured by substantially all of our assets. The security interest granted under this loan is fully subordinated to the security interest granted under our credit facility with Silicon Valley Bank, or SVB. A portion of the proceeds of this loan was used to repay in full our outstanding obligations under our 2011 term loan with SVB. This obligation has a fixed interest rate of 5.0%, which is payable monthly. Interest expense of $0.2 million related to this indebtedness was recorded in the year ending December 31, 2013. The principal and all accrued and unpaid interest under this agreement is payable at maturity, which will be September 9, 2017. We intend to use a portion of the net proceeds from this offering to repay $            million of indebtedness outstanding under our loan and security agreement with Rogers. See “Use of Proceeds.”

In December 2013, we amended and restated our existing loan and security agreement with SVB to provide for a $10.0 million term loan facility, as well as a $2.0 million revolving credit facility. As of December 31, 2013, we had approximately $3.0 million of aggregate outstanding borrowings under the term loan facility. A portion of the proceeds of our term loan facility were used to repay in full our outstanding obligations under our 2010 term loan with SVB. In March 2014, we utilized a portion of this term loan facility to repay in full the cash portion of the earn-out consideration due in connection with our acquisition of Lighthouse Practice Management, as described further in “—Contractual Obligations” below. As of March 31, 2014, we had $4.0 million of available borrowings under the term loan facility. The repayment period of our term loan facility will commence on January 2, 2015, with 30 equal monthly payments and bears interest at a per annum floating rate equal to 0.75% plus the prime rate then in effect. From January 1, 2014 to December 31, 2014, we are required to pay

 

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only interest on a monthly basis. Under the revolving credit facility, we may incur aggregate borrowings up to the lesser of $2.0 million and 80% of eligible accounts receivable. Any outstanding principal amount under the revolving credit facility and any accrued and unpaid interest must be paid at maturity in December 2015. Borrowings under our revolving credit facility accrue interest on a monthly basis at a per annum floating rate equal to 0.25% plus the prime rate then in effect. As of March 31, 2014, we had no outstanding borrowings and up to $2.0 million of available borrowing capacity under our revolving credit facility. Our SVB credit facility is secured by substantially all of our assets. We intend to use a portion of the net proceeds from this offering to repay $             of the outstanding indebtedness under the term loan facility. See “Use of Proceeds.”

Historical Cash Flows

The following table sets forth our consolidated cash flows for the periods indicated:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2011     2012     2013     2013     2014  
    

(in thousands)

 
                       (unaudited)  

Net cash provided by (used in) operating activities

   $ 6,503      $ 5,056      $ 4,129      $ 708      $ (1,624

Net cash used in investing activities

     (19,192     (4,770     (8,958     (5,398     (1,278

Net cash provided by (used in) financing activities

     18,690        (5,727     8,008        4,166        831   

Operating Activities

Net cash provided by operating activities decreased from the first three months of 2013 compared to the first three months of 2014.

For the three months ended March 31, 2014, operating activities used $1.6 million in cash, as compared to $0.7 million provided in cash for the three months ended March 31, 2013. Net cash used in operating activities in the three months ended March 31, 2014 was a result of a net loss of $5.9 million and $1.8 million of cash used as a result of changes in operating assets and liabilities (net of effect of business combinations), partially offset by $6.1 million in adjustments for non-cash items. Non-cash items included stock-based compensation expense, depreciation and amortization expense, preferred stock warrant liabilities mark-to-market loss (gain), compensation expense in connection with the acquisition of Lighthouse Practice Management, and deferred taxes. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $1.4 million decrease in accounts payable and accrued expenses and a $0.4 million increase in accounts receivable due to quarter end timing of payments as well as a $0.8 million increase in prepaid expenses due to software licensing fees and insurance prepayments, partially offset by a $1.2 million increase in deferred revenue driven by an increase in prepaid franchise contracts, media budgets, and setup fees.

For the three months ended March 31, 2013, operating activities provided $0.7 million in cash as a result of net income of $2.2 million and $0.8 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations), partially offset by $2.2 million in adjustments for non-cash items. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $0.6 million increase in accounts payable and accrued expenses due to normal fluctuations in the timing of trade payables and a $0.7 million increase in deferred revenues due to an increase in media budgets, partially offset by a $0.5 million increase in current assets.

For the year ended December 31, 2013, operating activities provided $4.1 million in cash, as compared to $5.1 million in cash for the year ended December 31, 2012. Net cash provided by operating activities in the year ended December 31, 2013 was a result of $2.8 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations) and $11.8 million in adjustments for non-cash items, partially offset by a net loss of $10.4 million. Non-cash items included stock-based compensation expense, depreciation and

 

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amortization expense, bad debt expense, accretion/amortization of warrant liabilities, debt discounts, deferred financing fees, loss on disposal of property and equipment, accrued interest on debt, deferred taxes, deferred rent and lease abandonment, and loss on early extinguishment of debt. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $3.0 million increase in accounts payable and accrued expenses due to our increase in revenue generating activities and an increase in our headcount.

For the year ended December 31, 2012, operating activities provided $5.1 million in cash, as compared to $6.5 million in cash for the year ended December 31, 2011. Net cash provided by operating activities in the year ended December 31, 2012 was a result of $1.2 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations) and $9.3 million in adjustments for non-cash items, partially offset by a net loss of $5.4 million. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $5.7 million increase in accounts payable driven by increased revenue generating activities and accrued expenses, partially offset by a $2.2 million increase in accounts receivable due to year end timing of credit card receipts, and increased sales to resellers.

For the year ended December 31, 2011, operating activities provided $6.5 million in cash as a result of $11.8 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations) and $10.1 million in adjustments for non-cash items, partially offset by a net loss of $15.4 million. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $13.7 million increase in deferred revenue driven by a $10.0 million licensing fee paid by one of our resellers.

Investing Activities

Our investing activities have consisted primarily of business combinations and the purchases of property and equipment. We have invested in property and equipment to support our headcount growth.

For the three months ended March 31, 2014, our net cash used in investing activities consisted of $0.6 million used in the purchase of property and equipment, $0.2 million used in the capitalization of technology development costs and $0.5 million used in the acquisition of capitalized software. For the three months ended March 31, 2014, net cash used in investing activities was $4.1 million lower than in the three months ended March 31, 2013 because of the cash flows associated with our acquisition of Lighthouse Practice Management in February 2013.

For the three months ended March 31, 2013, our net cash used in investing activities consisted of $5.0 million paid as part of the acquisition of Lighthouse Practice Management (net of cash acquired), $0.4 million used in the purchase of property and equipment and $0.2 million used in the capitalization of technology development costs, partially offset by a $0.1 million reduction in restricted cash as a result of the expiration of a letter of credit associated with one of our real estate leases.

For the year ended December 31, 2013, our net cash used in investing activities consisted of $3.3 million used in the purchase of property and equipment, $0.8 million used in the capitalization of technology development costs and $5.0 million paid as part of the acquisition of Lighthouse Practice Management (net of cash acquired), partially offset by a $0.1 million reduction in restricted cash as a result of the expiration of a letter of credit. Net cash used in investing activities was $4.2 million higher than in the year ended December 31, 2012, primarily because of our acquisition of Lighthouse Practice Management in 2013.

For the year ended December 31, 2012, our net cash used by investing activities consisted of $2.9 million used in the purchase of property and equipment, $0.4 million used in the capitalization of technology development costs and a $1.5 million increase in restricted cash to collateralize a letter of credit issued in connection with our Austin lease. Net cash used in investing activities was $14.4 million lower than in the year ended December 31, 2011, primarily because of the effect of our acquisition of ProfitFuel in 2011.

 

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For the year ended December 31, 2011, our net cash used in investing activities consisted of $1.2 million used in the purchase of property and equipment, $0.7 million used in the capitalization of technology development costs and $17.3 million paid as part of the business combination with ProfitFuel (net of cash acquired).

Financing Activities

Our financing activities have primarily consisted of proceeds from the issuance of convertible preferred stock and proceeds from the exercise of stock options, as well as borrowings and repayments of debt facilities.

For the three months ended March 31, 2014, our net cash provided by financing activities was $0.8 million resulting from $3.0 million in borrowings under our loan and security agreement with SVB and $0.5 million as a result of net proceeds from the issuance of convertible preferred stock and the issuance of common stock in connection with option exercises, partially offset by $2.7 million used in the payment of contingent consideration related to the acquisition of Lighthouse Practice Management.

For the three months ended March 31, 2013, our net cash provided by financing activities was $4.2 million resulting from $5.1 million as a result of net proceeds from the issuance of convertible preferred stock and the issuance of common stock in connection with option exercises, partially offset by $0.9 million in repayments, net of borrowings, related to our loan and security agreement with SVB.

For the year ended December 31, 2013, our net cash provided by financing activities was $8.0 million resulting from $1.7 million in borrowings, net of repayments, under our loan and security agreements with SVB and Rogers and $6.3 million as a result of net proceeds from the issuance of convertible preferred stock and the issuance of common stock in connection with option exercises.

For the year ended December 31, 2012, our net cash used in financing activities was $5.7 million resulting from $6.0 million in repayments, net of borrowings, primarily due to $7.5 million used to pay the deferred payment obligation incurred in connection with the ProfitFuel acquisition, partially offset by $0.3 million as a result of net proceeds from the issuance of common stock in connection with option exercises.

For the year ended December 31, 2011, our net cash provided by financing activities was $18.7 million primarily attributable to $18.4 million in borrowings, net of repayments, under our convertible promissory notes issued in connection with our bridge financing for the ProfitFuel acquisition and our loan and security agreement with SVB, as well as $0.3 million as a result of net proceeds from the issuance of common stock in connection with option exercises.

Contractual Obligations

The following table discloses aggregate information about material contractual obligations and periods in which payments were due as of December 31, 2013. Future events could cause actual payments to differ from these estimates.

 

     Less than 1
Year
     1 to 3
Years
     3 to 5
Years
     More than
5 Years
     Total  
     (in thousands)  

Long-term debt obligations(1)

   $ 5,460       $ 8,555       $ 15,594         —         $ 29,609   

Operating leases

     5,016         6,575         4,184         7,485         23,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,476       $ 15,130       $ 19,778       $ 7,485       $ 52,870   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We intend to use a portion of the net proceeds from this offering to repay $             million of our long-term debt outstanding as of December 31, 2013. See “Use of Proceeds.”

 

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The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. For a description of our financing arrangements, see “—Sources of Liquidity” above.

Long-Term Debt Obligations

Our long-term debt obligations set forth in the table above include our outstanding indebtedness to Rogers and SVB, as well as the following:

In connection with our acquisition of Lighthouse Practice Management in 2013, we incurred a deferred payment obligation of $6.2 million. This deferred payment obligation accrues interest at a rate equal to 8% per annum and will become due and payable upon the earlier of February 28, 2015 (subject to a subordination agreement with SVB) and the closing of this offering. We intend to use a portion of the net proceeds from this offering to repay this obligation in full. In connection with this acquisition, we also agreed to earn-out consideration of up to $5.0 million, based on achievement of revenue targets for the period of March 1, 2013 through February 28, 2014. On September 26, 2013, we deemed the earn-out consideration to be fully earned. The earn-out consideration, consisting of $3.0 million in cash and $2.0 million in our Series E preferred stock valued at $2.30 per share, was paid in March 2014. Upon issuance in March 2014, the Series E preferred stock had a fair value of $3.16 per share. Our long-term debt obligations exclude the portion of the earn-out consideration payable in our Series E preferred stock.

On November 18, 2011, we repurchased 3,000,000 shares of our common stock from one of our founders and issued a subordinated promissory note in the principal amount of approximately $2.5 million as payment in full for such repurchased shares. The promissory note accrues interest at a rate of 3.3% per annum and matures upon the earlier to occur of June 21, 2014 (subject to a subordination agreement with SVB) and the consummation of this offering.

On June 18, 2014, we borrowed an additional $3.0 million under our term loan facility with SVB. The proceeds of this term loan were used on June 20, 2014 to repay in full our outstanding obligations under the subordinated promissory note issued to one of our founders, as described above.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. We believe our estimates, assumptions and judgments associated with revenue recognition, business combinations, goodwill and acquired intangible assets and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our most critical accounting policies and have summarized them below. See note 2 to our consolidated financial statements included in this prospectus for a description of our other significant accounting policies.

 

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Revenue Recognition

We recognize revenue when (1) there is persuasive evidence of an agreement or arrangement, (2) services have been rendered, (3) the price to the buyer is fixed or determinable and (4) collectability is reasonably assured.

We apply ASC 605-25, Revenue Recognition—Multiple-Element Arrangements, to account for such arrangements. When an arrangement involves multiple elements and it is determined that the elements should be accounted for as separate units of accounting under ASC 605-25, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when the revenue recognition criteria for each element are met. For all offerings provided, we determine the selling price using either vendor specific objective evidence (VSOE) or, if VSOE is not available, best estimated selling price, as there is no reliable third-party evidence available. The significant factors, inputs and assumptions included in our determination are: actual selling prices, established price lists and other company-specific considerations. We regularly review the factors, inputs and assumptions that we use to determine VSOE and estimated selling price. Changes in these factors, inputs and assumptions or changes to elements in the arrangements could cause a material increase or decrease in the amount of revenue we report in a particular period.

Our primary sources of revenue are from Yodle Ads, our media offering, and sales of our platform offerings, which have historically included our Lighthouse, Yodle Organic and Yodle Web products, and now also includes Marketing Essentials and Centermark as a result of their recent introduction. We charge a recurring monthly fee for our platform products, which is recognized over the relevant month of service. For Yodle Ads, if a customer’s entire media budget is not used during the relevant period, the outstanding amount remains recorded as deferred revenue and is recognized when used. We are the principal in these transactions because we are the primary obligor, perform a significant portion of the services, set the pricing, retain credit risk and have discretion in the supplier selection. As a result, we recognize this revenue on a gross basis. We also derive revenue from set up and web design fees which are recognized over the expected customer life.

We also sell our products through resellers. We earn a per customer fee for our resellers’ sales of our platform products. We also collect a share of the revenue our resellers generate from sales of Yodle Ads. We recognize this revenue in the period we deliver our products to our resellers. Additionally, certain of our resellers have a minimum fee structure with us, regardless of the volume of their sales. Historically, our resellers have exceeded the minimum guaranteed fee. We are not the principal in these transactions because we are not the primary obligor and do not retain credit risk. As a result, we recognize this revenue on a net basis.

We have entered into a licensing agreement with a reseller who paid a $10.0 million licensing fee, which is being recognized ratably over the estimated life of this relationship, estimated to be the term of the contract, which currently ends December 31, 2018. In addition to this licensing fee, we may earn milestone payments if certain revenue targets are met by this reseller. These milestone payments, if earned, would be recognized ratably over the estimated life of this reseller relationship with a cumulative catch up recognized for the elapsed portion of such estimated life. In 2012 and 2013, we attained the first and second milestones, respectively; one additional milestone remains unearned. We also earn per customer fee revenues from this reseller on sales of our products, as well as revenues from assisting this reseller in executing its operations.

Business Combinations

When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies and historical experience. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future. These estimates are inherently uncertain and unpredictable and, if different estimates were used, the purchase price for the acquisition could be allocated to the

 

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acquired assets and liabilities differently from the allocation that we have made. Furthermore, a change in the estimated fair value of an asset or liability often has a direct impact on the amount we recognize as goodwill, an asset that is not amortized. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates and, if such events occur, we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.

Impairment of Goodwill and Acquired Intangible Assets

We test goodwill for impairment at least annually as of October 1, or more frequently if events or changes in circumstances indicate that this asset may be impaired. The analysis is done at the reporting unit level, and we have determined that we have one reporting unit. This is consistent with our one operating segment value for all years presented (see note 14 to our unaudited interim condensed consolidated financial statements and note 19 to our audited consolidated financial statements). Therefore, we use our enterprise value as our fair value.

Impairment testing for goodwill is performed utilizing either a qualitative assessment or a two-step process. If we decide that it is appropriate to perform a qualitative assessment, management first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that the fair value of the reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If we conclude that it is not more likely than not that the fair value exceeds its carrying value, management is required to perform the two-step process. If management performs the two-step process, then we estimate the fair value of the reporting unit and compare that to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and no further evaluation is necessary. If the carrying value is higher than the estimated fair value, there is an indication that impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of the reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.

Under the qualitative assessment, we consider a variety of qualitative factors, including general economic conditions, industry and market specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans, capital requirements, management and personnel issues and stock price, among others. Under the two step process, we estimate the fair value based on a number of factors, including: (1) appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction approach), (2) estimates of future growth rates, (3) estimates of our future cost structure, (4) discount rates for our estimated cash flows, (5) selection of peer group companies for the public company and the market transaction approaches, (6) required levels of working capital, (7) assumed terminal value and (8) time horizon of cash flow forecasts. Changes in these estimates and assumptions could materially affect the determination of fair value of the one reporting unit and cause an impairment of the recorded goodwill.

The determination of reporting units also requires judgment. We assess whether a reporting unit exists within a reportable segment by identifying the unit, determining whether the unit qualifies as a business under GAAP, and assessing the availability and regular review by segment management of discrete financial information for the unit. Our chief operating decision maker does not review discrete financial information below the consolidated results except for revenues, which are reviewed by media and platform. The review of revenues (and not complete operating results) is not considered to be discrete financial information and we have therefore concluded that we have one reporting unit.

We review acquired intangible assets that have finite useful lives when an event occurs indicating the potential for impairment. If any indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the acquired intangibles in question to their carrying amounts. If the undiscounted cash flows used in the tests for recoverability are less than the carrying amount of

 

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the acquired intangibles, then we determine the fair value of the acquired intangibles and recognizes an impairment loss if the carrying amount of the acquired intangibles exceeds its fair value. The impairment loss recognized is the amount by which the carrying amount of the acquired intangibles exceeds its fair value.

For all of our goodwill and acquired intangible asset impairment reviews, the assumptions and estimates used in the process are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments, and estimates we have used in our assessments are reasonable and appropriate, a material change in any of our assumptions or external factors could lead to future goodwill or acquired intangible asset impairment charges. Based upon our October 1, 2013 goodwill impairment review, we concluded that the estimated fair value of our reporting unit significantly exceeded its carrying value.

We did not record any impairments of goodwill for the years ended December 31, 2011, 2012 or 2013.

Stock-Based Compensation

We account for stock-based compensation awards issued to our employees and directors in accordance with authoritative guidance on stock compensation. We measure stock-based compensation expense at the grant date based on the estimated fair value of the award and recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock option awards. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables.

The Black-Scholes-Merton option-pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based awards. Our assumptions are as follows:

 

    Fair Value of Our Common Stock. Because our common stock is not publicly traded, we must estimate the fair value of our common stock, as discussed under “—Common Stock Valuations” below.

 

    Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method which is based on the average of the time-to-vesting and the contractual life of the options.

 

    Expected Volatility. The expected volatility is derived from the historical stock volatilities of comparable publicly listed peers over a period approximately equal to the expected term of the awards because we have limited information on the volatility of our common stock since we have no trading history. When selecting the peers to be used in the volatility calculation, we considered the size, operational and economic similarities to our principal business operation.

 

    Risk Free Interest Rate. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero-coupon U.S. Treasury notes with maturities equal to the option’s expected term.

 

    Expected Dividend Yield. The expected dividend yield was assumed to be zero as we have not paid and do not anticipate paying dividends.

In addition to the assumptions used in the Black-Scholes-Merton option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected term and forfeiture rate utilized for our stock-based compensation calculations on a prospective basis. If any of the assumptions used in the Black-Scholes-Merton model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

 

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We recorded stock-based compensation expense of $1.8 million, $2.9 million, $2.6 million and $0.7 million in 2011, 2012, 2013 and the three months ended March 31, 2014, respectively. We expect to continue to grant stock options and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

As of March 31, 2014, we had approximately $5.1 million of total unrecognized compensation expense, net of related forfeiture estimates, which we expect to recognize over a weighted-average period of 3.61 years.

The following table presents the assumptions used to estimate the fair value of options granted during the periods presented:

 

     Year-Ended December 31,      Three Months
Ended
March 31,
 
     2011      2012      2013      2014  

Risk-free interest rate (%)

     1.05 - 2.40         0.88 -1.24         1.02 - 2.02         1.78 - 1.84   

Expected term (in years)

     5.50 - 6.20         5.80 -6.30         5.55 - 6.32         6.03 - 6.08   

Expected dividend yield (%)

     —           —           —           —     

Expected volatility (%)

     53.68 - 64.90         52.31 - 53.84         52.34 - 56.71         56.86 - 56.89   

Common Stock Valuations

The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we used in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

    contemporaneous valuations performed by an independent third-party valuation firm as of February 28, 2013, June 30, 2013, September 30, 2013, December 31, 2013 and March 31, 2014;

 

    the prices, rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

    secondary sales of our common stock;

 

    our operating and financial performance;

 

    our business plans and financial forecasts;

 

    the market performance of publicly traded companies in the same or similar industry;

 

    the likelihood of achieving an exit event, such as an initial public offering or a strategic merger or acquisition of the company;

 

    general U.S. market conditions; and

 

    the illiquidity of the common stock underlying stock options.

 

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The following table summarizes information for all stock awards since January 1, 2013:

 

Grant Date

   Shares Underlying
Options
     Exercise Price Per
Share
     Estimated
Common
Stock Fair Value
Per Share at Grant Date
     Option Fair
Value Per Share
at Grant Date
 

May 14, 2013

     2,708,500       $ 1.64       $ 1.64       $ 0.82   

July 27, 2013

     113,000       $ 1.64       $ 1.64       $ 0.84   

August 30, 2013

     400,000       $ 1.75       $ 1.75       $ 0.96   

September 16, 2013

     215,000       $ 1.75       $ 1.75       $ 0.94   

October 4, 2013

     78,000       $ 1.75       $ 1.75       $ 0.94   

October 8, 2013

     2,846,850       $ 1.75       $ 1.75       $ 0.95   

November 14, 2013

     180,000       $ 1.75       $ 1.75       $ 0.94   

December 11, 2013

     45,000       $ 2.01       $ 2.01       $ 1.05   

December 16, 2013

     44,000       $ 2.01       $ 2.01       $ 1.08   

February 4, 2014

     415,000       $ 2.01       $ 2.25       $ 1.29   

February 5, 2014

     997,000       $ 2.01       $ 2.25       $ 1.29   

May 28, 2014

     440,000       $ 2.96       $
2.96
  
   $ 1.86   
May 29, 2014      851,600       $ 2.96       $ 2.96       $ 1.85   
May 30, 2014      3,580,000       $ 2.96       $ 2.96       $ 1.87   

In determining the estimated fair value of our common stock underlying our option grants, our board of directors, with the assistance of management and a third-party valuation firm, used various methods to estimate the enterprise value of our company including: (1) the probability weighted expected return method, or PWERM, (2) the company transaction method, (3) the multi-period discounting method and (4) the discounted cash flow method.

The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the rights of each share class. PWERM estimates the common stock value to our stockholders under possible future scenarios. The value per share under each scenario is then probability weighted and the resulting weighted values per share are summed to determine the fair value per share of our common stock. Over time, as we achieve certain company-related milestones, the probability of each scenario is evaluated and adjusted accordingly.

The company transaction method seeks valuation guidance from actual transactions in the market. This methodology utilizes the most recent negotiated arm’s-length transactions involving the sale or transfer of our stock or equity interests.

The multi-period discounting approach values the business based on the future benefits that will accrue to it, with the value of future benefits discounted back to a present value at a discount rate equal to the company’s cost of capital.

 

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The discounted cash flow method is based on the premise that our enterprise value as of the respective valuation date is equal to the projected future free cash flows and expected terminal value of our business, discounted by a required rate of return that investors would demand given the risks of ownership and the risks associated with achieving the stream of projected future free cash flows. The following table outlines the enterprise value methodologies we utilized on the relevant valuation dates:

 

  Valuation Date

   Enterprise Value Method

  February 28, 2013

   PWERM and Company Transaction

  June 30, 2013

   PWERM and Multi-period Discounting

  September 30, 2013

   PWERM, Discounted Cash Flow and Company Transaction

  December 31, 2013

   PWERM, Discounted Cash Flow and Company Transaction

  March 31, 2014

   PWERM and Company Transaction

In determining the estimated fair value of our common stock, our board of directors also considered the fact that our common stock is not freely tradable in the public market. The estimated fair value of our common stock at each grant date reflects a discount for lack of marketability partially based on the anticipated likelihood and timing of a future liquidity event. The increase in equity value of the company from the February 28, 2013 valuation to the June 30, 2013 valuation reflects the decrease in the estimated time to liquidity. The increase in the equity value of the company from the June 30, 2013 valuation to the September 30, 2013 valuation was primarily due to our continued performance to plan and the increased likelihood of an initial public offering transaction. The increase in equity value of the company from the September 30, 2013 valuation to the December 31, 2013 valuation and from the December 31, 2013 valuation to the March 31, 2014 valuation, was in each case primarily due to our continued progress toward a potential initial public offering transaction. Following the closing of this offering, the fair value of our common stock will be determined based on the closing price of our common stock on the                    . The difference between the estimated common stock fair value and exercise price per share on the February 2014 option grants is captured within the option fair value per share and has been recognized as a component of compensation expense.

Based upon an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover of this prospectus, the intrinsic value of all outstanding options as of March 31, 2014 was $                 million of which approximately $                 million related to vested options and approximately $                 million related to unvested options.

Qualitative and Quantitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates, as well as, to a lesser extent, foreign exchange rates and inflation.

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. We are subject to interest rate risk in connection with potential borrowings available under our loan and security agreement with SVB. Borrowings under the revolving portion of our SVB facility bear interest at a floating rate equal to 0.25% plus the prime rate, and borrowings under the term loan portion of our SVB facility bear interest at a floating rate equal to 0.75% plus the prime rate. As of December 31, 2013, the interest rates applicable to the revolving and term loan portions of our SVB facility were 3.5% and 4.0%, respectively. Increases in the prime rate would increase the amount of interest payable on any borrowings outstanding under our SVB facility. Through the date of this prospectus, there are no outstanding borrowings under the revolving portion of our SVB facility. As of December 31, 2013, an increase or decrease in the interest rate on the term loan portion of our SVB facility by 100 basis points would increase or decrease our interest expense by $30,000, respectively.

 

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Foreign Currency Exchange Risk

Substantially all of our revenues and operating expenses are denominated in U.S. dollars. As a result, we do not believe that our exposure to foreign currency exchange risk is material to our business, financial condition or results of operations. In 2013, approximately 1.0% of our revenues were exposed to fluctuations in the exchange rate with respect to the Canadian dollar. If a significant portion of our revenues and operating expenses were to become denominated in currencies other than U.S. dollars, we may not be able to effectively manage this risk, and our business, financial condition and results of operations could be adversely affected.

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.

Recently Issued Accounting Guidance

In 2012, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2012-02, which provides guidance and amendments related to testing indefinite-lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. We adopted this standard on January 1, 2013, and the adoption did not have a material impact on our consolidated financial statements.

In July 2013, FASB issued ASU No. 2013-11, which requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU was effective for us beginning January 1, 2014. We are evaluating the potential impact of this adoption on our consolidated financial statements.

In May 2014, FASB issued ASU No. 2014-09, which supersedes the revenue recognition requirements in ASC 605. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU is effective for us for reporting periods beginning after December 15, 2016. We are evaluating the potential impact of this adoption on our consolidated financial statements.

Emerging Growth Company Status

Section 107 of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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BUSINESS

Overview

Yodle is a leading provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable and transparent. Our platform provides our customers with an online, mobile and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. We utilize our proprietary data assets and algorithms to increase the likelihood that consumers will find our customers and become their paying consumers. Our platform provides our customers with transparency into their marketing activities and business operations, thereby enabling them to evaluate their return on investment, or ROI. Our solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

Consumers are increasingly changing the way they discover and interact with local businesses, shifting away from traditional media such as yellow pages directories, newspapers, radio and television, and interactions in person and over the telephone, to various digital resources, including desktop and mobile search, online directories, review sites, email and other mobile applications. As a result, businesses are challenged to navigate and manage an increasingly complex marketing landscape. Businesses need a comprehensive digital presence that includes a professional quality website that is easily discoverable and optimized for mobile devices, exposure on leading online directories and ratings and reviews sites, and tools to communicate with customers via email, text messages and social media. Large enterprises address this complexity by using sophisticated third-party software solutions that are expensive and require significant internal expertise to manage. However, local businesses generally lack the resources and expertise to access the benefits of enterprise-level solutions. Instead, they are left to choose from a number of disparate point solutions that only address a limited set of their challenges, are not integrated and require local businesses to pay for and manage multiple vendors.

We have built our company to serve the unique, complex and constantly evolving digital marketing needs of local businesses. We believe the market for our local marketing automation platform is large and underserved. According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. We currently target industry verticals with approximately 7 million local businesses, the largest categories of which include legal and professional, dental and medical and contractor and other home services. We served approximately 44,800 local businesses as of March 31, 2014. In addition, AMI-Partners, an independent market research firm, estimates that there are approximately 74 million local businesses globally. While we believe this provides us with further opportunities to grow over the long term, our focus in the near term is growing our business in the United States and Canada.

Over nine years of focusing on the unique and constantly evolving digital marketing needs of local businesses, we have developed a differentiated approach to addressing this large and fragmented market. We use our sophisticated technology, rigorous data collection and analytics and scalable process automation in all key aspects of our business. Our solutions are highly integrated and optimized using our proprietary algorithms and the data assets we have built by tracking billions of consumer interactions. We have also developed highly automated customer onboarding and service processes for all of our products that enable us to rapidly create and launch the digital presence of our customers. We also offer some customization for our brand network customers that enables them to tailor our products for their specific business objectives.

We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products. Marketing Essentials is our flagship product that includes three modules: presence, conversion optimization and communication automation. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the needs of national franchisors and other similar businesses. Lighthouse is our business practice automation product, which automates many of our customers’ daily

 

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consumer interactions or office routines. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of our Yodle Ads media product, which automates, manages and optimizes our customers’ media spend across mobile and desktop search engines. We refer to our offerings and the packages in which we sell them as products.

Our ability to efficiently acquire local business customers and effectively address their needs by leveraging our technology platform and data assets has enabled us to grow rapidly. We generated revenue of $87.6 million, and $161.9 million, in 2011 and 2013, respectively, representing a compound annual growth rate of 36%. Over this same period, our cost of revenues as a percentage of revenues has decreased from 39% in 2011 to 33% in 2013 while our net loss has decreased from $15.4 million to $10.4 million. For the three months ended March 31, 2014, we had revenues of $45.7 million and net losses of $5.9 million. The number of customers subscribing to our platform offerings increased from approximately 6,000 as of December 31, 2009 to approximately 44,800 as of March 31, 2014.

Our Industry

The way consumers discover and interact with local businesses is changing rapidly

Consumers have historically discovered local businesses though traditional media—such as yellow pages directories, newspapers, radio and television—and interacted with businesses in person and over the telephone. Today, consumers rely on a wide array of digital resources, including desktop and mobile web search, online directories, ratings and reviews sites, email and other mobile applications, to discover, research and engage with local businesses. As a result, consumers increasingly expect local businesses to be readily discoverable and accessible online and to maintain a digital presence that includes:

 

    A professional-quality website that is easily discoverable. In order to attract and engage potential consumers, a local business must have a website that is optimized for discovery and that provides accurate and relevant information about the business and its products or services. Despite this growing expectation, according to a survey we commissioned and conducted by Research Now, as of June 2013, more than half of local businesses in the United States did not have a website.

 

    Readily accessible information that is easy to use on mobile devices. Consumers are increasingly relying on their mobile devices to inform their decisions about what products and services to buy and where to buy them. According to BIA/Kelsey, a local media research and advisory service company, more than 50% of local search will occur on mobile devices by 2015. However, according to a survey we commissioned and conducted by Research Now, as of June 2013, approximately 90% of local businesses in the United States did not have a website that was optimized for use on mobile devices.

 

    Online reviews and an active social media presence that inform purchase decisions. According to a survey conducted by the Ipsos Open Thinking Exchange, an independent research company, 78% of U.S. consumers’ purchasing decisions are impacted by online reviews. However, according to a survey we commissioned, conducted by Research Now, as of December 2013, approximately 87% of local business owners in the United States did not ask consumers for online reviews. In addition, according to a survey conducted by Market Force, a customer intelligence company, 78% of U.S. consumers’ purchasing decisions are impacted by the posts made by businesses they follow on social media. We have found that most local businesses do not maintain an active presence on widely-used social media platforms.

 

    Tools that enable digital interaction with consumers. Consumers increasingly expect to interact with businesses digitally. For example, consumers expect to communicate with businesses through email and to be able to book and manage appointments and reservations electronically through the Internet and via email or text messages on mobile devices. Despite these changes in consumer behavior, most local businesses do not adequately address these demands for digital communications because they lack the requisite resources to do so.

 

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Creating and managing a digital presence is increasingly complex

As consumers increasingly use online and mobile channels to discover and interact with businesses, and as new technologies and trends emerge, businesses need to keep pace. As their digital presence and activities expand, businesses are faced with the increasingly complicated and time-consuming task of managing information on their own sites, across dozens of online directories and numerous social media platforms, in order to:

 

    keep their content up-to-date and relevant;

 

    maintain the consistency and accuracy of their business information and content;

 

    optimize their discoverability in search results from leading search engines; and

 

    optimize their website for ease of use on mobile devices.

Additionally, businesses are increasingly seeking to communicate with consumers via email, text messages and social media and allow consumers to book appointments and make reservations electronically.

Local businesses generally lack the resources to create and manage a comprehensive digital presence

Large enterprises address these challenges by using sophisticated third-party software solutions that are expensive and require significant internal expertise to manage. However, local businesses generally lack the resources and expertise to employ enterprise-level software solutions to address their digital marketing needs. Instead, local businesses are left to choose from a number of vendors that have developed a disparate set of point solutions. These point solutions, while more affordable than the enterprise software alternatives, only address a limited set of the challenges faced by local businesses. As a result, we believe that most local business owners are seeking a comprehensive solution that addresses their unique challenges, which include:

 

    Lack of marketing sophistication and technical expertise. Local businesses typically do not have dedicated marketing resources or IT personnel. As a result, many local business owners are often not aware of the tools and technologies that exist in the marketplace and typically lack the expertise to effectively deploy and manage these tools and technologies themselves. Further, the digital landscape is dynamic and rapidly changing, making it even more difficult for local businesses to keep pace with the latest trends and technologies.

 

    Lack of time. Local business owners typically do not have the time to seek out and assemble multiple point solutions to build, manage and optimize their digital presence, marketing activities and customer interactions.

 

    Limited budget. Local businesses typically have a limited budget for marketing and technology solutions. They seek to spend these limited resources with partners that can provide them with significant and measurable value at an affordable price.

 

    Limited visibility into performance. As local businesses embrace digital marketing, they seek clear evidence that their marketing expenditures are effective and validated by a demonstrable ROI.

Brand networks face additional, unique challenges

Many national franchisors, manufacturers and multi-location businesses operate networks of individually-operated franchises, dealerships and offices that sell products or provide services at a local level. We refer to these businesses as brand networks. We believe that the challenges faced by individual locations within a brand network are very similar to those of independent local businesses. In addition, brand network owners have additional unique challenges that include ensuring that individual network locations have a robust local digital presence that is consistent with their brand identity and facilitating their individual locations to maximize their investments in local marketing solutions in order to increase sales across the network. To accomplish this, a brand network owner requires clear visibility and analytics into the performance of its marketing programs across its network and an ability to enable the individual locations within its network to achieve the brand network owner’s marketing objectives.

 

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Our market opportunity

According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. Moreover, AMI-Partners, an independent market research firm, estimates that there are approximately 74 million local businesses worldwide. Local businesses operate in many different industry verticals. We estimate that there are approximately 7 million local businesses in the United States operating in the industry verticals we currently address, the largest categories of which include legal and professional, dental and medical and contractor and other home services.

Local businesses are increasingly purchasing cloud-based technologies and services to operate and grow. According to a report by Parallels, a hosting and cloud services company, small- and medium-sized businesses, or SMBs, in the United States spent $8.5 billion in 2013 on cloud services related to web presence, web applications and business applications, and are expected to spend $15.1 billion in 2017. Moreover, despite the rapid shift of consumer behavior to digital channels, the majority of local marketing is still spent on traditional, offline channels. According to BIA/Kelsey, businesses spent approximately $105 billion on traditional local advertising in 2013. However, as consumer behavior continues to shift, local marketing is expected to shift to digital channels. BIA/Kelsey estimates that spending on local digital advertising will increase from $28 billion in 2013 to $53 billion in 2018.

Our Solution

We provide a comprehensive, cloud-based marketing automation platform for local businesses that makes marketing easy, affordable and transparent. We are seeking to transform the way that local businesses create and manage their online and mobile presence, and how they attract and engage with consumers. Our platform helps local businesses navigate the rapidly evolving, technically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing in-house marketing or IT expertise. Because our platform is built to solve the marketing needs of a local business owner, we refer to it as their “CMO in a box.”

Our cloud-based marketing automation platform provides local businesses with the following key benefits:

 

    Comprehensive, intuitive and easy-to-use platform for attracting and engaging consumers. Our comprehensive, intuitive and easy-to-use local marketing automation platform provides the essential features that local businesses need to attract, manage and retain consumers. Through our platform, we provide a local business with a mobile, online and social digital presence that is algorithmically optimized to increase the likelihood that consumers will find and transact with them. We further automate the syndication of our customers’ business listings, description and photo content to approximately 50 online directories to ensure a consistent, professional and up-to-date presence across the Internet. We also provide our customers with the ability to easily communicate with their existing or prospective clients through social media platform management, email, text message and digital post cards. For customers who seek greater exposure for their business, we automate the buying of local online advertising. In addition, we integrate with some customers’ operational systems such as office management, scheduling or billing. For these customers, we are able to automate many of their daily client interactions or office routines. We have bundled these products into an integrated and easy-to-use platform, thereby liberating a local business from the confusion and complexity of deciding which point solutions to utilize and avoiding the expense and challenges of managing multiple vendors. Because our products are integrated into a common platform and are designed to work together, our solution provides a local business owner with an enhanced experience and better performance.

 

    Increased revenues from new and existing consumers. Our platform is designed to help our customers to efficiently acquire and retain consumers, as well as improve the effectiveness of their marketing efforts and help them meet their marketing and business objectives.

 

   

Mobile solutions optimized for consumers and local business owners. We optimize our customers’ websites for use on mobile devices in order to make their websites easier for consumers to discover and use. In addition, our mobile dashboard allows our customers to monitor performance metrics and manage their

 

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content from their mobile devices, which enhances the local business owner’s ability to work remotely. For example, our customers can upload photos and collect online reviews from their mobile devices.

 

    Transparency. Our platform allows our customers to easily monitor and manage their digital presence and marketing activities through a unified dashboard. We present relevant, real-time performance metrics, such as website visitor tracking and conversion, which enable our customers to better understand and evaluate their ROI. Moreover, when our platform is integrated into our customers’ operational systems, we also provide visibility into actual revenue generated through the use of our solution, thereby further validating our customers’ ROI.

 

    Affordable pricing. Based on data from BIA/Kelsey, we believe the average SMB spends approximately $400 per month on marketing. We are focused on providing affordable solutions that deliver effective results to local businesses. We have generally priced our flagship product, Marketing Essentials, including all three of its current modules, at less than $300 per month since its introduction in March 2014. We believe, based on publicly available market pricing information, that re-creating the functionality of our Marketing Essentials product by purchasing multiple point solutions would cost a local business at least twice that amount.

We also address the unique requirements of brand networks with our Centermark product, which leverages the core capabilities of our platform by providing a standardized source of shared data, communication and reporting to address the unique needs of brand network owners. Centermark enables brand network owners to extend many of the same benefits enjoyed by our local business customers to the individual locations in their network. Additionally, Centermark incorporates powerful communication, monitoring, analytics and call to action tools, which help brand network owners increase the value of their networks by:

 

    increasing the likelihood that individual locations are discovered by consumers;

 

    encouraging individual locations to spend more on marketing with the goal of generating additional revenue across their network;

 

    driving higher brand consistency across the network; and

 

    providing access to actionable business intelligence by giving them visibility into the marketing performance of the network.

Our Competitive Strengths

As a core part of our strategy, we have developed a differentiated business model for providing comprehensive, easy-to-use and affordable solutions to our customers and have also developed the capability to acquire, onboard and service our customers in a highly efficient manner. Sophisticated technology, rigorous data collection and analytics and scalable process automation are the foundation of our approach. They are key aspects of every part of our business and enable our competitive strengths. These competitive strengths include:

 

    Comprehensive, integrated and easy-to-use platform. Our local marketing automation platform provides local business owners with a comprehensive suite of digital marketing capabilities designed to meet all of their essential online and mobile marketing and engagement needs. The breadth, depth and highly integrated nature of our platform offer significant advantages to our customers who would otherwise be required to aggregate multiple point solutions at a higher cost, with greater complexity and without the performance benefits of being designed to work together. We have also designed our platform to be intuitive and easy-to-use, resulting in its rapid adoption and usage. We believe that these attributes provide our customers with superior value and performance.

 

   

Proprietary data assets. Over our nine-year operating history, we have built a large repository of data, based on tracking billions of consumer interactions, including online and mobile website visits, phone calls and emails and online search results. We utilize this data to algorithmically optimize our customers’ online and mobile content, email campaigns, website and ad copy templates, and keywords for SEO and

 

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SEM purposes. We believe our proprietary data assets allow us to more effectively measure and improve the marketing performance of websites, digital advertising and communications for our customers. For example, our customers’ website conversion rate, which we calculate on an aggregate basis as the number of phone calls or emails received by our customers divided by the number of visits to our customers’ websites, has increased by 84% over the four years ended December 31, 2013.

 

    Powerful data-driven network effects. As we continue to add more local business customers to our platform, we are able to collect and analyze more data about our customers’ business operations and the performance of our digital marketing solutions. As the richness and depth of our data is enhanced, we are able to improve the performance of our platform and ultimately drive higher value to our current and future customers by further improving their marketing ROI. For example, from 2009 to 2013, we decreased our direct customers’ average price per lead, which we define as the aggregate amount of revenue derived from them divided by the aggregate number of leads we generated for them, by 48%. We believe this network effect provides a substantial competitive advantage over our existing and potential competitors.

 

    Vertical expertise. The value we bring to our customers in specific verticals grows as we add more customers in those verticals and develop additional expertise in gathering data and optimizing marketing performance using that data. We currently target local businesses in the following key categories of industry verticals: legal and professional, dental and medical and contractor and other home services. As we grow our presence in these industry verticals and integrate and become operationally embedded with business management systems in these industry verticals, we are able to provide further benefits to our customers. For example, from 2009 to 2013, we decreased the average price per lead for new dental customers that we acquired directly by 50% in their first 90 days as our customers. We believe that our scale, data advantage and operational integration in specific verticals provide us with a competitive advantage in gathering data and optimizing marketing performance and business operations for our customers in those industry verticals.

 

    Low customer acquisition costs. Our highly automated, technology- and data-driven approach to sales promotes efficiency and scalability in our business model and enables us to efficiently acquire customers. We have developed a proprietary prospect database of over 11 million unique business profiles. We have also developed proprietary analytics and sales force automation technology, which helps us determine the most effective sales strategy for each prospective customer, other than a prospective brand network customer. Between 2011 and 2013, we reduced our average cost to acquire a customer while at the same time more than doubling the headcount of our sales force.

 

    Rapid and scalable customer onboarding and service driven by process automation. We have made technology investments in process automation that allows us to scale rapidly and onboard customers of all of our products without adding significant incremental costs or impacting the level of quality. For example, despite an increase in the number of customers onboarded in the first three months of 2014 compared to the same period in 2013, personnel costs associated with employees responsible for onboarding customers remained consistent as a result of our investments in technology and automation. Moreover, we launch the digital presence of 99% of our customers sold through our inside sales channel within one business day of sale with limited involvement from our personnel. We also offer some customization for our brand network customers that enables them to tailor our products for their specific business objectives. Although we have designed our products to be highly intuitive, we provide our customers access to our highly responsive, technology-enabled customer service team.

 

   

Track record of innovation. We believe that we have a strong track record of innovation in the local digital marketing industry, identifying and interpreting emerging technology and trends on behalf of our customers to enable them to benefit from our innovation. For example, we recognized the potential impact of mobile and social trends on local businesses early on and we integrated mobile-enabled solutions and social management tools seamlessly into our platform. For our innovative work in mobile, CIO Magazine named Yodle as one of the top 100 companies around the world exemplifying the highest level of operational and strategic excellence in information technology. In addition, we believe we were

 

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the first to directly address the unique marketing challenges of brand networks by creating our Centermark product. Our focus on innovation allows us to quickly adapt to the evolving landscape and provide our customers with valuable solutions, often before they identify a need for such solutions.

Our competitive strengths result in what we believe is an attractive business model. Our low customer acquisition and onboarding costs minimize our initial investment to bring on new customers and allow us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for our tenured customers. We expect the revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe that our low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of our tenured customers results in a business model that generates attractive customer economics and high returns on our initial investment.

Our Growth Strategy

We believe that we are in the very early stages of a large and long-term business opportunity. Our growth strategy for pursuing this opportunity includes the following key components:

 

    Further penetrate our existing industry verticals. We believe the market for our local marketing automation platform is large and underserved. Of the estimated 28 million local businesses in the United States, we currently target industry verticals that include approximately 7 million local businesses. We served approximately 44,800 customers as of March 31, 2014. We plan to further penetrate these verticals by leveraging our existing sales infrastructure, investing in our direct sales teams and expanding our sales through partnerships with resellers.

 

    Increase the number of customers that are operationally integrated with our platform. We believe that Lighthouse, our business practice automation product, and Centermark provide us with a unique opportunity to become operationally integrated with our customers. We intend to expand the adoption of Lighthouse and Centermark by increasing the number of salespeople selling these products and increasing the number of industry verticals that we are targeting with our Lighthouse product. For example, we recently expanded our Lighthouse product to chiropractic practices as a newly supported industry vertical. By integrating into a customer’s systems, we are able to automate many daily consumer interactions or office routines, leading to improved operational efficiency and business results. As a result of this integration, we enjoy higher customer retention and are able to more accurately measure the benefits of our other products.

 

    Expand our distribution channels. To accelerate our market penetration, we intend to pursue opportunities to sell our products through organizations that already have relationships with local businesses. Leveraging our Centermark product, we intend to increasingly pursue opportunities with brand network owners and to penetrate their networks of local businesses. In addition, we intend to selectively partner with resellers who sell our products to quickly and cost-efficiently reach a larger number of local businesses. For example, in Canada we work with Rogers, a leading Canadian communications and media company, which has enabled us to expand our addressable market.

 

   

Expand into new industry verticals and geographies. We intend to further penetrate the more than 28 million local businesses throughout the United States. We see significant opportunity in continuing to expand our footprint beyond our current industry verticals across a broad spectrum of local businesses. We recently began penetrating several new verticals, including mortgage brokers, accounting and tax professionals and chiropractor services. In addition, we believe that the global market of approximately

 

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74 million local businesses provides us with further growth opportunities over the long term, however, our focus in the near term is growing our business in the United States and Canada.

 

    Continue to introduce new products and enhance the functionality of our platform. We plan to continue to take advantage of our culture of innovation to introduce new products, continually develop new functionality for our platform and address the latest marketing opportunities and challenges facing local businesses. We will endeavor to sell these new products to both existing and new customers, which we expect will yield an increase in revenue and improved customer retention as the breadth and depth of our platform expands.

 

    Pursue selective strategic acquisitions. We intend to selectively acquire businesses that can provide us with complementary technologies and products as we did in February 2013 with the acquisition of Lighthouse Practice Management. In addition, we plan to evaluate opportunities that will provide us with access to new customers, industry verticals or geographies.

Our Products

The products we offer through our platform currently include: Marketing Essentials, Lighthouse, Yodle Ads and Centermark. Marketing Essentials, our flagship product, currently includes three modules: presence, conversion optimization and communication automation. Lighthouse provides business practice automation for those customers where we have integrated into their business management systems. Yodle Ads automates, manages and optimizes the buying of local online advertising for customers who seek greater exposure for their business. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the unique needs of brand network owners. We refer to our offerings and the packages in which we sell them as products.

LOGO

Over the last nine years, we have expanded our product offerings to address a broad range of digital marketing needs for local businesses. Our current suite of products and modules is the result of ongoing, internal

 

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product development and innovation that we have supplemented with strategic business acquisitions. Prior to introducing Marketing Essentials in the first quarter of 2014, we offered the presence and conversion optimization modules under different product names. In early 2014, we introduced the communication automation module. Our acquisition of Lighthouse Practice Management in February 2013 helped expand our platform through the addition of our business practice automation product, which we call Lighthouse. In December 2013, we introduced our Centermark product for brand networks owners. We intend to continue to expand the capabilities of our platform and evolve our product offerings to address the challenges local businesses face, with an emphasis on growing our platform revenue.

Marketing Essentials

Marketing Essentials provides local business owners with a comprehensive suite of easy-to-use products that includes establishing an online, mobile, desktop and social presence, as well as powerful tools to attract, manage and retain consumers. The three key modules currently included in our Marketing Essentials product are:

    Presence Module. Our presence module includes a website, mobile-optimized website and business Facebook and Google+ pages. We develop this presence using algorithmically optimized and relevant content designed to increase the likelihood that visitors will find and transact with our customers. In addition, this module includes a mobile and desktop dashboard that allows our customers to monitor consumer interaction with their digital presence.

    Conversion Optimization Module. In order to improve the discoverability of our customers’ digital presence and the conversion of website visitors into paying consumers, we optimize their digital presence through a number of strategies, including listings and photo syndication, review management and SEO automation. We automate the syndication of our customers’ business listings, description and photo content to approximately 50 online directories. This ensures a consistent, professional and up-to-date presence across the Internet to drive more visitors to our customers’ websites. We regularly test new content and format permutations in order to improve website conversion rates. Last year, for example, we tracked over 50 million visits to our customers’ websites and used that data to continually improve the layouts and features of our website templates to increase conversion rates. We also provide local businesses with the ability to easily collect, manage, respond to and syndicate consumer reviews to their website and Facebook pages through their desktops or mobile devices. Finally, we optimize the performance of our customers’ websites by using our proprietary SEO algorithms and automation tools to monitor our customers’ performance and adopt methodologies that are designed to yield better results consistent with search engine best practices.

    Communication Automation Module. We provide our customers with the ability to easily communicate with and provide offers to their existing or prospective clients through social media platforms and email.

 

    Social Media Platform Management. To simplify social engagement for a local business, we provide social management tools with which a customer’s social media presence is consolidated into and managed from a single, simple interface. This feature is fully integrated into our other product features such as email automation, offer management, review management and photo syndication. Therefore, any relevant additions to a customer’s content repositories are automatically syndicated to social media platforms, enabling the customer to improve social engagement with its consumers.

 

    Email Campaign Automation. We provide our customers with the ability to conduct highly customized email campaigns. Our platform leverages our proprietary algorithms, performance data and deep knowledge across our industry verticals to provide our customers with suggestions on email automation parameters such as message content, timing and frequency.

 

   

Offer Management. We provide our local business customers with the ability to use offers to attract new, and engage existing, clients via multiple channels such as websites, online directories, email,

 

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social outlets and postcards. Our scale and access to large volumes of offer performance data enables us to also provide our customers with specific and concrete offer suggestions to drive better results.

Lighthouse

For local businesses that utilize business management systems with which we can integrate, we offer a business practice automation product called Lighthouse. This product automates many of our customers’ daily consumer interactions or office routines, leading to improved operational efficiency and business results. For example, one feature of the Lighthouse product is appointment automation, which improves appointment attendance rates by sending email, postcard, phone or text message reminders to the consumer about an upcoming appointment.

Yodle Ads

We complement our Marketing Essentials product with Yodle Ads, our online advertising product. Yodle Ads automates, manages and optimizes our customers’ media spend across mobile and desktop search engines such as Google, Yahoo! and Bing, as well as other relevant consumer sites. Yodle Ads is sold with Marketing Essentials in an integrated package called Yodle Max. We leverage our significant data assets, along with proprietary predictive modeling and machine-learning algorithms, to make optimal and automated media allocations and bidding decisions on behalf of our customers. In addition, if we are integrated with a customer’s business management system, we can access transaction data to further optimize their media spend and demonstrate their ROI.

Centermark

Our Centermark product is designed for brand networks and is intended to meet the unique challenges of brand network owners. Centermark leverages our Marketing Essentials product by providing functionality relevant to brand network owners, including:

Business Intelligence and Compliance. We provide brand network owners with real-time information about the marketing activity of their individual network locations. Centermark also allows the brand network owner to monitor and optimize marketing performance across the network. This includes the ability to take immediate action to prompt individual locations to adhere to the brand network owner’s marketing guidelines, visibility into the digital brand strength of the brand network in comparison to its competition and detailed information for each network location, including lead type and conversion information.

Network Adoption Portal. Through our network adoption portal, we enable the brand network owner to customize communications to each of its locations about the potential value of our solutions. In addition, the brand network owner can make digital marketing recommendations to the locations and facilitate the network location in executing on the recommended digital marketing strategy.

Customer Case Studies

Plumber, Indiana

This recently established family plumbing business quickly needed to grow awareness in its local community. The company wanted a better website and to be found online by potential consumers searching for local plumbers on their mobile devices. The business also wanted to build credibility by being able to easily collect and showcase customer reviews online.

Yodle has made marketing easy and effective for this customer in that we have:

 

    created a highly professional and effective digital presence;

 

    built a robust reviews section on its website that highlighted five star ratings (out of a possible five stars) from 10 satisfied customers in less than three weeks; and

 

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    generated approximately 20 quality phone calls and emails over just one month, with half of them resulting in jobs.

As of March 31, 2014, we had approximately 4,500 plumbing, heating and air conditioning contractors as customers, of the approximately 226,500 local plumbing, heating and air-conditioning contractor businesses in the United States, according to the most recent U.S. Census Bureau data.

Landscaper, Kentucky

This local landscaping business was relying on word of mouth marketing, and was also doing its own marketing, to maintain and grow its customer base. The company found this approach was not generating a sufficient quantity or quality of jobs. It needed an affordable solution to increase awareness of the business. The company required a more impactful website and a fully optimized desktop and mobile digital presence.

Yodle has greatly enhanced the local presence and customer reach for this customer in that we have:

 

    obtained first page ranking for the business for more than 550 keywords on major search engines;

 

    helped to dramatically increase sales over the last year—including a corporate contract worth over $35,000; and

 

    helped secure more profitable accounts, like lakeside vacation homes that require year-round maintenance.

As of March 31, 2014, we had approximately 1,200 landscapers as customers, of the approximately 459,600 local landscaping service businesses in the United States, according to the most recent U.S. Census Bureau data.

Lawyer, Virginia

This sole practitioner needed to grow his client base. He recognized the importance of being found on the Web and had tried numerous digital marketing companies. However, none of them delivered meaningful results. His practice needed an effective solution for establishing a strong digital presence and generating new clients.

Yodle has accomplished these objectives for this customer in that we have:

 

    generated an average of more than 90 phone calls and emails per month;

 

    delivered high quality leads that have resulted in an attractive return on his marketing investment; and

 

    achieved immediate results during the latter part of the calendar year—a previously difficult time for him to bring in new clients.

As of March 31, 2014, we had approximately 3,400 lawyers as customers, of the approximately 165,000 local lawyers’ offices in the United States, according to the most recent U.S. Census Bureau data.

Dental Practice, Pennsylvania

This dental practice’s front desk staff was spending a significant amount of its time calling patients to remind them about their appointments and improve their appointment show rate. However, the majority of patients did not like to receive these phone calls. The dental practice needed a business practice automation solution to improve efficiencies and patient communications as well as improve their appointment show rate.

Yodle’s Lighthouse product automated our customer’s appointment management and reminder system and had a positive impact on the practice by:

 

    freeing up front desk employees to assist patients that are in the office and to spend time on other responsibilities;

 

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    delivering an improved show rate for patients that had not canceled more than 24 hours prior to their scheduled appointment, typically attaining a rate of 95%; and

 

    improving relationships with most patients who like receiving appointment reminders via text message or email.

As of March 31, 2014, we had approximately 6,400 dentists as customers, of the approximately 166,500 local dentists’ offices in the United States, according to the most recent U.S. Census Bureau data.

Miracle-Ear

Miracle-Ear, the national hearing solutions brand network, had limited insight into the marketing performance across its independent franchise system of over 1,200 locations. The network also had a limited and inconsistent digital marketing presence consisting of just a corporate website and a handful of landing pages. The brand network owner wanted to develop a strong and cohesive digital marketing presence across all locations, which also needed to be optimized for mobile devices.

Yodle’s solutions have enabled Miracle-Ear to:

 

    develop a consistent, coordinated brand and marketing effort across all locations;

 

    launch over 1,200 integrated desktop and mobile websites in 60 days, along with maps and directory listing optimization;

 

    accurately measure the effectiveness of marketing campaigns across the network’s locations; and

 

    help potential consumers more easily find locations, resulting in the network and its franchisees delivering hearing solutions to more people and increased sales.

Sales and Marketing

We sell subscriptions to our platform products, and sell our Yodle Ads product, through three primary channels, including:

 

    Inside Sales: We have approximately 500 inside sales representatives who use our proprietary data, processes and technology to acquire customers throughout the U.S. cost effectively.

 

    Enterprise Sales: We have an enterprise sales team that focuses on brand network owners and their corporate marketing departments. This team also works with brand network owners to promote the purchase of our products by individual network locations.

 

    Resellers: We have entered into relationships with resellers for the sale and distribution of our marketing automation products. Our resellers distribute these products under their brand name, otherwise referred to as white-label resellers, as well as under the Yodle brand. Our strategy to partner with white-label resellers allows us to expedite our penetration of the market using the sales forces of large partners to help distribute our product under their brand. The largest of these partnerships is with Rogers, who distributes our products in Canada.

Our inside sales are enabled by our proprietary and sophisticated customer prospecting system. It consists of a proprietary prospect database, a lead scoring algorithm and a sales representative lead distribution toolset. We generate leads by collecting information about local businesses from various sources. We enhance these records with a broad set of data inputs to evaluate a prospect’s lead score, which is our measure of the prospect’s likelihood of becoming a customer. We then apply statistical response modeling to predict the ideal time and the ideal sales representative to call a particular prospect, as well as the optimal suite of products. Once we score the leads, we distribute them to a specific sales representative at the correct time through our automated assignment tool.

Our compensation system for sales representatives is integrated into our system, which adjusts sales commissions in real time based on certain actions taken by the sales representative. With these variables, we are aligning the incentives for the sales representatives to maximize certain outcomes favorable to us, such as profit

 

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or penetration of certain markets. This sophisticated system enables a highly dynamic sales approach whereby each individual representative has the latitude to make an assessment of his or her skills and comparative advantage versus other representatives and puts their effort where they can maximize outcomes for themselves, while also driving favorable outcomes for us.

Competition

The local digital marketing landscape is highly fragmented, intensely competitive and constantly evolving. With the introduction of new technologies and market entrants, we expect the competitive environment to remain intense going forward. Our competitors include:

 

    traditional yellow pages directories, direct mail campaign providers, and advertising and listings services on local newspapers, magazines, television and radio, such as Dex Media, Gannett, Hearst and YP.com;

 

    online search engines, such as, Google, Yahoo! and Bing and online business directories, such as, Yelp and Angie’s List;

 

    providers of digital presence offerings, such as domain name registrars, shared hosting providers and website creation and reputation management companies, including Endurance, GoDaddy, Main Street Hub, Web.com and Wix;

 

    providers of digital marketing solutions, such as search engine marketing companies and search engine optimization companies; and

 

    productivity and office management tools, such as email, scheduling and practice management systems, including Constant Contact, Demandforce, MailChimp and Solutionreach.

We compete on the basis of a number of factors, including:

 

    brand name, reputation and customer satisfaction;

 

    cost-effective customer acquisition;

 

    scope, scalability, flexibility and compatibility of offerings;

 

    ease of implementation, use and maintenance;

 

    pricing and effectiveness of solutions;

 

    breadth of sales organization; and

 

    reliability and security.

We believe that we compete favorably with respect to all of these factors and that we are well positioned as a leading provider of cloud-based marketing automation solutions for local businesses.

Our Technology

Our development strategy is to leverage proprietary data and technology to empower our internal sales, customer service, marketing and financial teams to efficiently run our business. We aim to deliver value to our customers through rapid turnaround cycles, typically releasing new features at least once per week. Our methodology allows us to respond quickly to changing circumstances, as well as produce accurate delivery estimates for our software release dates.

We utilize a combination of hosted and cloud-based providers to maintain our service delivery infrastructure. Our hosted infrastructure is based in third-party colocation facilities in New York, New York and Phoenix, Arizona. The dual location design provides both load balancing capabilities as well as the ability to manage disaster recovery. The two locations are tied to all of our offices via dual telecommunications providers with redundant Internet Protocol backbones, local loop and network facilities. We also utilize Amazon Web Services for some aspects of our file storage and computational needs.

We have a technology and product development team that builds and maintains the technologies to support our business and is focused on product research, development, optimization and innovation. Our technology team is comprised of individuals with experience in web development, server development, system integration, system

 

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design, data management, statistical analysis and mathematical algorithms. Our technology personnel focus primarily on developing new applications, evolving our product and service offerings, maintenance, and quality assurance. Our research and development team includes a group dedicated to user experience and interface design.

Our technology and product development expense was $10.2 million in 2011, $15.0 million in 2012, $20.3 million in 2013 and $5.7 million in the three months ended March 31, 2014.

Intellectual Property

Our intellectual property rights are a key component of our success. We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. We generally require employees, consultants, publishers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property. We also generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights.

Intellectual property laws, together with our efforts to protect our proprietary rights, provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology. Further, agreements with our employees and consultants may be breached, and we may not have adequate remedies to redress any breach. Further, to the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Finally, our trade secrets may otherwise become known or be independently discovered by competitors and unauthorized parties may attempt to copy aspects of our solution or obtain and use information that we regard as proprietary.

As of March 31, 2014, we held one issued U.S. patent, which expires in September 2030. We also own and use registered and unregistered trademarks on or in connection with our products and services. In addition, we have also registered numerous internet domain names.

Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the technology industry have extensive patent portfolios. From time to time, third parties have asserted copyright, trademark and other intellectual property rights against us or our customers. Litigation and associated expenses may be necessary to enforce our proprietary rights.

Government Regulation

This section describes the key laws, regulations and industry standards that affect our business. Some of the aspects described below affect us directly. Other aspects do not apply to us directly, but may have a significant effect on the way our resellers and customers can operate. The regulatory environment in which we or our customers operate, particularly in the areas of privacy, data security, marketing, advertising and healthcare, are often complex and relatively new. As such, they are subject to varying interpretations by courts and governmental authorities and often require subjective interpretation. We cannot be certain that our efforts, or our customers’ efforts, to comply with these laws and regulations will be deemed sufficient by the relevant governmental authorities. In addition, the use of consumer information and health information are areas on which the public, legislators and regulators are currently focused. It is possible that the laws, regulations and industry standards that affect our business will change in the future, and we are not able to predict the effect that future changes will have on our business. Although our customer agreements typically contain obligations requiring our

 

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customers to comply with applicable laws, not all of our customers execute a standard customer agreement or if our customers fail to adhere to these obligations, we may be subject to adverse publicity, and related possible inquiries, investigations, or other regulatory activities in connection with our practices or those of our customers.

Privacy. Our collection, storage and use of information regarding our customers’ clients, customers or patients is governed by various U.S. federal and state laws, regulations and standards, as well as comparable Canadian laws and regulations. Enforcement by regulators, including the FTC, State Attorneys General and comparable Canadian authorities, impose notice, choice, security and access requirements with respect to such information. The standards are subject to interpretation by courts and other governmental authorities. A determination by a governmental agency, court or other governmental authority that any of our practices do not meet local standards or regulations could result in liability and adversely affect our business. In addition, inquiries or proceedings involving data protection may be expensive or time consuming, and their outcome is uncertain.

Marketing and Advertising. Our and our customers’ marketing and advertising practices are governed by a variety of federal and state laws and regulations. In addition, a variety of industry groups have developed voluntary codes of conduct related to marketing and advertising, particularly online advertising, which have developed into best practices. The applicable laws and regulations include the United States Telephone Consumer Protection Act, or TCPA, which broadly regulates outbound calls, including live operator calls, and restricts the use of automated telephone dialing equipment to call certain telephone numbers unless prior express consent has been obtained. The TCPA also prohibits companies from initiating telephone solicitations to consumers on the national Do-Not-Call list, and restricts the hours when such messages may be sent. Violations of the TCPA can result in statutory damages of $500 per violation (i.e., for each individual text message). U.S. state laws impose additional regulations on telephone calls and text messages and many states also include their own Do-Not-Call lists. Failure to comply with the TCPA in our marketing efforts, or the failure or inability of our customers to obtain necessary consents for the messaging features of our products, may damage our reputation, subject us to liability and require us to change certain of our product offerings. In addition, our and our customers’ email marketing is governed by the CAN-SPAM Act, which regulates commercial e-mails. The CAN-SPAM Act provides a right on the part of the recipient to request the sender to stop sending messages, and establishes penalties for the sending of e-mail messages that are intended to deceive the recipient as to source or content. Recipients must be furnished with an electronic method of informing the sender of the recipient’s decision to not receive further commercial e-mails. In addition, we face the risk that an action could be brought against us under various state spam laws, which are not entirely preempted by CAN-SPAM. An action alleging our or our customers’ failure to comply with CAN-SPAM or a state spam law and the adverse publicity associated with any such action could result in loss of customers or failure to bring on new customers. The TCPA, CAN-SPAM Act, related laws and industry codes of conduct are subject to varying interpretations by courts, governmental authorities and the advertising and marketing industry and often require subjective interpretation. We cannot be certain that our and our customers’ efforts to comply with these laws will be deemed sufficient by the relevant parties.

HIPAA Privacy Standards and Security Standards. The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish a set of basic national privacy and security standards for the protection of certain individually identifiable health information by health plans, healthcare clearinghouses and healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. The Health Information for Economic and Clinical Health Act of 2009, or HITECH, makes certain of HIPAA’s privacy and security standards also directly applicable to covered entities’ business associates. As a result, business associates are now subject to significant civil and criminal penalties for failure to comply with applicable privacy and security rule requirements. Moreover, HITECH creates a new requirement to report certain breaches of unsecured, individually identifiable health information and imposes penalties on entities that fail to do so. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. HIPAA and HITECH will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our customers and resellers. If our data practices do

 

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not comply with the requirements of HIPAA or HITECH, we may be directly subject to liability under HIPAA or HITECH. Any liability from failure to comply with the requirements of HIPAA or HITECH, to the extent such requirements are deemed to apply to our operations, or contractual obligations, could adversely affect our financial condition. The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations.

Data Protection Regulation. Many states have passed laws regulating the actions that a business must take if it experiences a data breach. A handful of other states have passed data security laws regulating the administrative, technical and physical safeguards that businesses must take in connection with the storage, transmission and disposal of consumer information. Congress has also contemplated federal legislation relating to data breaches and HITECH requires breaches of certain unsecured, individually identifiable health information to be reported. In the past, the FTC has prosecuted some data breach cases as unfair and deceptive acts or practices under the FTC Act and State Attorneys General are focused on data security. We intend to continue to protect all customer data and to comply with all applicable laws regarding the protection of customer data. If we have a data security breach and we don’t comply with applicable laws, it could create liability for us, damage our reputation and result in a loss of customers.

Credit Card Protections. We collect credit card data in processing the fees paid to us by our customers. Several major credit card companies have formed the Payment Card Industry Council, or PCI Council, in order to establish and implement security standards for companies that transmit, store or process credit card data. The PCI Council has created the Payment Card Industry Data Security Standard, or PCI DSS. Though the PCI DSS is not law, merchants using PCI Council members to process transactions are required to comply with the PCI DSS, with associated fines and penalties for non-compliance. Further, elements of the PCI DSS have begun to emerge as law in some states, and we expect the trend to continue as to additional laws and restrictions in collecting and using credit card information. We engage a third-party credit card processor to store our customers’ credit card data and process our customers’ credit card payments.

Telephone Call Recording Laws. We are subject to laws affecting telephone call recording. Under the federal Wiretap Act, and most state laws, at least one party taking part in a call must be notified if the call is being recorded; therefore, one of the parties to a telephone call may record the conversation. However, the law of twelve states (i.e., California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania and Washington) require that all parties consent when one party wants to record a telephone conversation. These laws are subject to varying interpretations by courts and governmental authorities and often require subjective interpretation. We cannot be certain that our efforts to comply with these laws will be deemed sufficient by the relevant courts and governmental authorities. Volitions of the Wiretap Act, as well as state telephone call recording laws, can result in significant fines and criminal sanctions, may damage our reputation and require us to change certain of our product offerings.

Anti-Kickback Laws. There are federal and state laws that govern patient referrals, physician financial relationships and inducements to healthcare providers and patients. The federal healthcare program’s anti-kickback law prohibits any person or entity from offering, paying, soliciting or receiving anything of value, directly or indirectly, for the referral of patients covered by Medicare, Medicaid and other federal healthcare programs. Many states also have similar fee splitting laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. The laws in this area are broad and we may not be able to determine how the laws will be applied to our business practices. Any determination by a state or federal regulatory agency that any of our practices violate any of these laws could subject us to liability and require us to change some portions of our business.

Employees

As of March 31, 2014, we had 1,117 employees. Substantially all of these employees are located in the United States. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

 

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Facilities

Our principal offices occupy approximately 47,000 square feet of leased office space in New York, New York pursuant to a lease agreement that expires in 2015. We also lease offices in Atlanta, Georgia; Austin, Texas; Charlotte, North Carolina and Scottsdale, Arizona.

Legal Proceedings

From time to time we are involved in legal proceedings or subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth the names, ages and positions of our directors and executive officers as of June 15, 2014:

 

Name

   Age     

Position

Executive Officers:

     

Court Cunningham

     45       Chief Executive Officer, President and Director

Michael Gordon

     44       Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary

Erin Brockman

     39       Chief Human Resources Officer

Eric Raab

     53       Chief Information Officer

Fred Voccola

     39       General Manager, Yodle for Brand Networks

Paul Bascobert

     50       President of Local

Directors:

     

Michael Adler(1)

     50       Director

Rick Faulk(1)

     64       Director

Tom Mawhinney

     46       Director

David Rubin

     45       Director

Rob Stavis(2)

     51       Director

Andreas Stavropoulos(2)

     44       Director

 

(1)   Member of the audit committee. Mr. Adler serves as the chairman of the audit committee.
(2)   Member of the compensation committee. Mr. Stavis serves as the chairman of the compensation committee.

Executive Officers

Court Cunningham joined Yodle in April 2007 and has served as our Chief Executive Officer and a member of our board of directors since May 2007. Prior to joining Yodle, Mr. Cunningham held the position of Chief Operating Officer at Community Connect, a niche social networking company, from April 2005 to April 2007. Prior to Community Connect, Mr. Cunningham served as Senior Vice President & General Manager of the Marketing Automation group at DoubleClick. Mr. Cunningham holds a B.A. in English from Princeton University and an M.B.A. from Harvard Business School. We believe that Mr. Cunningham’s extensive knowledge of our business and operations, as well as his consumer marketing, product development and business development experience, allow him to make valuable contributions to our board of directors.

Michael Gordon has served as our Chief Financial Officer since May 2009 and as our Chief Operating Officer since March 2014. Prior to joining Yodle, Mr. Gordon was a Managing Director in the Media and Telecom investment banking group at Merrill Lynch, Pierce, Fenner and Smith Incorporated where he worked from 1996 to 2009. Previously, Mr. Gordon worked in brand management at Procter & Gamble. Since March 2013, Mr. Gordon has served on the board of directors of Tracx Systems, Ltd., a privately-held company that focuses on social media management software. He also serves on the board of directors of Share Our Strength, a non-profit, anti-hunger organization. Mr. Gordon holds an A.B. from Harvard College and an M.B.A. from Harvard Business School.

Erin Brockman joined Yodle in June 2009 as Vice President of Client Services, served as our Senior Vice President of Client Services from February 2012 through May 2014 and, since June 2014, has served as our Chief Human Resources Officer. Prior to joining Yodle, Ms. Brockman worked at Yahoo! from February 2002 to May 2009, where she most recently served as the Vice President of Operations and Customer Service. Prior to Yahoo!, Ms. Brockman served in management positions at HotJobs, GotSchool Market and Kozmo.com. She started her career in Change Management consulting at Accenture. Ms. Brockman holds a B.S. in Industrial and Labor Relations from Cornell University.

 

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Eric Raab has served as our Chief Information Officer since April 2013. Prior to joining Yodle, he was Chief Technology Officer at M5 Networks from July 2010 to March 2013. Prior to M5 Networks, Mr. Raab served as Chief Technology Officer of Line2 for Toktumi, Inc. from November 2008 to July 2010. He was also Vice President of Engineering and Operations at Teleplace, Inc. in 2008 and Chief Technology Officer and Vice President of Engineering at Epana Networks, Inc. from April 2003 to January 2008. Mr. Raab has also served as Chief Executive Officer of AIG Telecom and in the capacity of Chief Technology Officer at IDT Corporation, a telecommunications carrier based in Newark, New Jersey. Earlier in his career, Mr. Raab developed atomic, optical and computer technologies for AT&T Bell Labs. Mr. Raab holds a B.A. in Physics and Mathematics from Columbia University and a Ph.D. in Atomic and Molecular Physics from MIT.

Fred Voccola has served as our General Manager, Yodle for Brand Networks since April 2013. Prior to joining Yodle, Mr. Voccola served as the President of Nolio, Inc., an enterprise software company, from 2012 to 2013, when Nolio was acquired by Computer Associates (NYSE: CA). Prior to Nolio, from 2008 to 2012, Mr. Voccola co-founded and served as the President and Chief Executive Officer of Trust Technology Corp. In 2012, Trust Technology Corp. was sold to FGI Finance. Earlier, Mr. Voccola co-founded and served as Chief Operating Officer of Identify Software from 2001 to 2006, when Identify Software was acquired by BMC Software. Mr. Voccola then served as Vice President of Worldwide Sales and Services at BMC Software until 2008. Prior to Identify Software, Mr. Voccola served in various management and executive roles at Intira, which was sold to Divine Systems, and Prism Solutions, which was sold to Ardent Software/Informix/IBM. Mr. Voccola holds a B.S. in Finance from the Carroll School of Management at Boston College.

Paul Bascobert has served as our President of Local since May 2014. Prior to joining Yodle, Mr. Bascobert worked at Bloomberg LP from 2009 to 2014, where he served as Chief Operating Officer of Bloomberg Media Group since 2011 and President of Bloomberg Businessweek since 2009. Prior to Bloomberg, Mr. Bascobert served as Chief Marketing Officer of Dow Jones & Co. from 2007 to 2009 and as Senior Vice President of Operations from 2006 to 2007. Earlier in his career, Mr. Bascobert served as Executive Vice President of Braun Consulting and as Co-Founder and Partner of Vertex Partners, which was acquired by Braun Consulting in 1998. Mr. Bascobert holds a B.S. in Electrical Engineering from Kettering University and an M.B.A. from The Wharton School of the University of Pennsylvania.

Directors

Michael Adler has served as a member of our board of directors since November 2012. He joined SquareTrade as their Chief Financial Officer in November 2012. Prior to joining SquareTrade, Mr. Adler was the Executive Vice President and Chief Financial Officer of Expedia Inc. from April 2006 to September 2011. Before that, he held several roles at IAC/InterActiveCorp from April 2001 to March 2006, including SVP of Financial Planning and Analysis. While at IAC/InterActiveCorp he also served as the Chief Executive Officer and Chairman of the third party e-commerce platform provider, Styleclick, Inc. Previously, Mr. Adler held senior positions at SchoolSports (now known as ESPN Rise) and Cheyenne Software, an enterprise storage software company. Earlier in his career, Mr. Adler practiced corporate law with Feldman, Waldman & Kline in San Francisco. Mr. Adler holds a B.S. in Economics from The Wharton School of the University of Pennsylvania and a J.D. from the University of Pennsylvania Law School. We believe that Mr. Adler’s extensive experience in accounting, financial management and operations management allows him to make valuable contributions to our board of directors.

Rick Faulk has served as a member of our board of directors since July 2008. Mr. Faulk has been the Chief Executive Officer of Intronis since March 2013. Prior to Intronis, Mr. Faulk was General Manager for the Campaigner® brand at j2 Global® from 2012 to 2013. Prior to j2 Global®, Mr. Faulk was President and Chief Executive Officer of Landslide Technologies from 2010 to 2012, and he was President and Chief Executive Officer of Mzinga from 2007 to 2009. He also served as Chief Marketing Officer for WebEx Communications and President of WebEx Small Business. Prior to WebEx, he was Chief Executive Officer of Intranets.com. Mr. Faulk holds a degree in Business Administration from Bowling Green State University. We believe that Mr. Faulk’s experience with executive management, sales and marketing at SaaS and technology companies allows him to make valuable contributions to our board of directors.

 

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Tom Mawhinney has served as a member of our board of directors since January 2010. Mr. Mawhinney joined Jafco Ventures as a general partner in 2003. Prior to joining Jafco, Mr. Mawhinney worked with Canaan Partners, an early-stage venture capital firm, from 2001 to 2003. Earlier in his career, Mr. Mawhinney co-founded and served as President and Chief Operating Officer of North Systems, a venture-backed software company, and worked at Summit Partners, a venture capital firm. Mr. Mawhinney holds a B.A. from Harvard College and an M.B.A. from the Stanford Graduate School of Business. We believe that Mr. Mawhinney’s deep roots in the technology industry as both a venture capitalist and an operating executive allow him to make valuable contributions to our board of directors.

David Rubin joined Yodle in May 2011, served as our Chief Revenue Officer from May 2012 through May 2014 and, since June 2014, has served as a strategic advisor and member of our board of directors. Mr. Rubin was previously Chief Executive Officer of ProfitFuel from November 2002 to May 2011, and joined Yodle as part of our acquisition of ProfitFuel in May 2011. Prior to ProfitFuel, Mr. Rubin was founder and Chief Executive Officer of HomeCity, an online real estate brokerage firm, from February 2000 to November 2002. Before founding HomeCity, Mr. Rubin served as Vice President of New Services Development at Intraware, and prior to its acquisition by Intraware, as founder and Chief Executive Officer of BITSource. We believe that Mr. Rubin’s strong background in operations management and his comprehensive understanding of our business will allow him to make valuable contributions to our board of directors.

Rob Stavis has served as a member of our board of directors since November 2011, and first served on our board of directors from November 2006 to November 2007. Mr. Stavis has been a partner at Bessemer Venture Partners, a venture capital firm, since 2000. Prior to joining Bessemer, Mr. Stavis was an independent private equity investor. Earlier in his career, he served in various positions at Salomon Smith Barney, including as co-head of global arbitrage trading. Mr. Stavis also serves on the board of directors of 2U, Inc., an education technology company. Mr. Stavis holds a B.A.S. in Engineering from the University of Pennsylvania’s School of Engineering and Applied Sciences and a B.S. in Economics from The Wharton School of the University of Pennsylvania. We believe Mr. Stavis’s experience, both investing in the emerging software technology industry and serving as a board member for numerous private companies, allows him to make valuable contributions to our board of directors.

Andreas Stavropoulos has served as a member of our board of directors since November 2007. Mr. Stavropoulos has been a partner at DFJ, a venture capital firm, since 2000. Prior to joining DFJ, he was at McKinsey & Company from 1997 to 1999. Earlier in his career, he worked at Cornerstone Research, a financial and economic consulting firm. Mr. Stavropoulos holds a B.A. in Computer Science, summa cum laude from Harvard College, an M.S. in Computer Science from Harvard University and an M.B.A. with high distinction from Harvard Business School. We believe Mr. Stavropoulos’s extensive experience in the fields of consulting and finance allows him to make valuable contributions to our board of directors.

Family Relationships

There are no family relationships among any of our directors or executive officers.

Board Composition

Our board of directors currently consists of six members. Each director is currently elected to the board of directors for a one-year term, to serve until the election and qualification of a successor director at our annual meeting of stockholders, or until the director’s earlier removal, resignation or death.

All of our directors currently serve on the board of directors pursuant to the voting provisions of an amended and restated voting agreement between us and several of our stockholders. This agreement will terminate upon the completion of this offering, after which there will be no further contractual obligations regarding the election of our directors. See the section titled “Related Party Transactions” for a description of this agreement.

 

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In accordance with our certificate of incorporation, which will become effective immediately prior to completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:

 

    Class I, which will consist of Court Cunningham, Andreas Stavropoulos and Michael Adler, and whose term will expire at our first annual meeting of stockholders to be held after the completion of this offering;

 

    Class II, which will consist of Rick Faulk and Rob Stavis, and whose term will expire at our second annual meeting of stockholders to be held after the completion of this offering; and

 

    Class III, which will consist of Tom Mawhinney and David Rubin, and whose term will expire at our third annual meeting of stockholders to be held after the completion of this offering.

Our bylaws, which will become effective upon completion of this offering, will provide that the authorized number of directors may be changed only by resolution approved by a majority of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.

Director Independence

Our board of directors has undertaken a review of the independence of the directors and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based upon information requested from and provided by each director concerning such director’s background, employment and affiliations, including family relationships, our board of directors determined that Messrs. Adler, Faulk, Mawhinney, Stavis and Stavropoulos, representing five of our six directors, are “independent directors” as defined under applicable stock exchange rules and Messrs. Adler, Faulk and Mawhinney meet the independence requirements contemplated by Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances that our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director and the transactions involving them described in the section of this prospectus titled “Certain Relationships and Related Party Transactions.”

Board Committees

Our board of directors has established an audit committee and a compensation committee and intends to form a nominating and corporate governance committee in connection with this offering, each of which has the composition and responsibilities described below. From time to time, the board may establish other committees to facilitate the management of our business.

Audit Committee

Our audit committee consists of three directors, Messrs. Adler, Faulk and Mawhinney. The composition of our audit committee meets the requirements for independence under current                  listing standards and SEC rules and regulations. Each member of our audit committee meets the financial literacy requirements of the                  listing standards. Mr. Adler is the chairman of the audit committee and our board of directors has determined that

 

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Mr. Adler is an audit committee “financial expert” as defined by Item 407(d) of Regulation S-K under the Securities Act. The principal duties and responsibilities of our audit committee include, among other things:

 

    selecting a qualified firm to serve as the independent registered public accounting firm to audit our consolidated financial statements;

 

    helping to ensure the independence and performance of the independent registered public accounting firm;

 

    discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

 

    developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

    reviewing our policies on risk assessment and risk management;

 

    reviewing related party transactions;

 

    reviewing and monitoring accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements;

 

    obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and

 

    approving (or, as permitted, pre-approving) all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.

Our audit committee will operate under a written charter, to be effective immediately prior to the completion of this offering that satisfies the applicable rules of the SEC and the listing standards of                 .

Compensation Committee

Our compensation committee consists of two directors, Messrs. Stavis and Stavropoulos, each of whom is a non-employee member of our board of directors as defined in Rule 16b-3 under the Exchange Act and an outside director as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, or the Code. Mr. Stavis is the chairman of the compensation committee. The composition of our compensation committee meets the requirements for independence under current                 listing standards and SEC rules and regulations. The principal duties and responsibilities of our compensation committee include, among other things:

 

    reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers;

 

    reviewing and recommending to our board of directors the compensation of our directors;

 

    reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers;

 

    administering our stock and equity incentive plans;

 

    reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans; and

 

    reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy.

Our compensation committee will operate under a written charter, to be effective immediately prior to the completion of this offering, that satisfies the applicable rules of the SEC and the listing standards of the                 .

 

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Nominating and Corporate Governance Committee

The nominating and corporate governance committee, which will be established prior to the completion of this offering, will consist of two directors, Messrs. Stavis and Stavropoulos. Mr. Stavis is the chairman of the nominating and corporate governance committee. The composition of our nominating and governance committee meets the requirements for independence under current                 listing standards and SEC rules and regulations. The nominating and corporate governance committee’s responsibilities include, among other things:

 

    identifying, evaluating and selecting, or recommending that our board of directors approve, nominees for election to our board of directors and its committees;

 

    evaluating the performance of our board of directors and of individual directors;

 

    considering and making recommendations to our board of directors regarding the composition of our board of directors and its committees;

 

    reviewing developments in corporate governance practices;

 

    evaluating the adequacy of our corporate governance practices and reporting;

 

    developing and making recommendations to our board of directors regarding corporate governance guidelines and matters; and

 

    overseeing an annual evaluation of the board’s performance.

Our nominating and governance committee will operate under a written charter, to be effective immediately prior to the completion of this offering, that satisfies the applicable rules of the SEC and the listing standards of the                 .

Code of Business Conduct and Ethics

In connection with this offering, we intend to adopt a Code of Business Conduct and Ethics, or the Code of Conduct, applicable to all of our employees, executive officers and directors. Following the completion of this offering, the Code of Conduct will be available on our website at www.yodle.com. The nominating and corporate governance committee of our board of directors will be responsible for overseeing the Code of Conduct and must approve any waivers of the Code of Conduct for employees, executive officers and directors. We expect that any amendments to the Code of Conduct, or any waivers of its requirements, will be disclosed on our website. Information contained in or accessible through our website does not constitute a part of, and is not incorporated into, this prospectus.

Compensation Committee Interlocks and Insider Participation

Our compensation committee currently consists of Messrs. Stavis and Stavropoulos, each of whom has served on the compensation committee during the last year. Neither of these committee members has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. We are a party to certain transactions with entities affiliated with Bessemer Venture Partners and Draper Fisher Jurvetson, as described in the section titled “Certain Relationships and Related Party Transactions.”

Non-Employee Director Compensation

Historically, we have provided a combination of cash and equity-based compensation to our independent directors who are not employees or affiliated with our venture capital investors for the time and effort necessary to serve as a member of our board of directors. Accordingly, Messrs. Adler and Faulk have been granted equity-

 

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based compensation in connection with their service. We granted options to each upon joining our board of directors and to Mr. Faulk from time to time thereafter, subject in each case to monthly vesting over two years.

Other than the cash compensation and option grants referenced above, our directors are not currently entitled to receive any compensation in connection with their service on our board of directors, except for reimbursement of direct expenses incurred in connection with attending meetings of the board or committees thereof.

We expect that our board of directors will adopt a director compensation policy for non-employee directors to be effective upon the closing of this offering.

2013 Director Compensation Table

The following table sets forth information regarding the compensation earned for service on our board of directors during the year ended December 31, 2013 by our directors who were not also our employees. Court Cunningham, our Chief Executive Officer, is also a director, but does not receive any additional compensation for his service as a director. Mr. Cunningham’s compensation as an executive officer is set forth in the section of this prospectus titled “Executive and Director Compensation—2013 Summary Compensation Table.”

 

Name

   Fees
Earned or
Paid in
Cash ($)
     Option
Awards

($)(1)(2)
     All Other
Compensation
($)(3)
     Total
($)
 

Michael Adler

     16,000         —           2,488         18,488   

Rick Faulk

     8,000         41,525         3,044         52,569   

Tom Mawhinney

     —           —           23,942         23,942   

Rob Stavis

     —           —           —           —     

Andreas Stavropoulos

     —           —           4,256         4,256   

 

(1)   This column reflects the full grant date fair value for options granted during the year as measured pursuant to Accounting Standards Codification, or ASC, Topic 718 as stock-based compensation in our financial statements. Unlike the calculations contained in our financial statements, this calculation does not give effect to any estimate of forfeitures related to service-based vesting, but assumes that the director will perform the requisite service for the award to vest in full. The assumptions we used in valuing options are described in note 15 to our consolidated financial statements included in this prospectus.

 

(2)   The table below shows the aggregate number of option awards outstanding for each of our non-employee directors as of December 31, 2013:

 

Name    Options Awards
(#)
 

Michael Adler

     40,000 (a) 

Rick Faulk

     120,000 (b) 

Tom Mawhinney

     —     

Rob Stavis

     —     

Andreas Stavropoulos

     —     

 

  (a) Includes 21,671 shares underlying options exercisable as of December 31, 2013. The remainder of the shares underlying Mr. Adler’s options vest in equal monthly installments over the next 11 months.
  (b) Includes 80,000 shares underlying options exercisable as of December 31, 2013. The remainder of the shares underlying Mr. Faulk’s options vest in equal monthly installments over the next 24 months.

 

(3)   Includes airfare, hotel and transportation expenses to attend meetings of our board of directors and, with respect to Mr. Mawhinney, includes $20,735 of airfare, $2,331 of hotel and $876 of transportation expenses.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

2013 Summary Compensation Table

The following table sets forth information regarding compensation earned during the year ended December 31, 2013 by our named executive officers, which include our principal executive officer and the next two most highly compensated executive officers for 2013.

 

Name and Principal Position

   Salary ($)      Option
Awards ($)(1)
     Non-Equity
Incentive Plan
Compensation ($)(2)
     Total ($)  

Court Cunningham

Chief Executive Officer

     388,550         913,437         236,455         1,538,442   

Eric Raab

Chief Information Officer

     177,273         626,826         52,400         856,498   

Fred Voccola

General Manager, Yodle for Brand Networks

     164,489         530,631         133,497         828,616   

 

(1)   This column reflects the full grant date fair value for options granted during the year as measured pursuant to ASC Topic 718 as stock-based compensation in our consolidated financial statements. Unlike the calculations contained in our financial statements, this calculation does not give effect to any estimate of forfeitures related to service-based vesting, but assumes that the named executive officer will perform the requisite service for the award to vest in full. The assumptions we used in valuing options are described in note 15 to our consolidated financial statements included in this prospectus.
(2)   See “—Employment Arrangements—Bonus Plans” below for a description of the material terms of the plan pursuant to which this compensation was awarded.

Outstanding Equity Awards at December 31, 2013

The following table provides information about outstanding stock options held by each of our named executive officers at December 31, 2013. Our named executive officers did not hold any restricted stock or other stock awards as of December 31, 2013.

 

            Number of Securities
Underlying Unexercised

Options (#)
              

Name

   Option
Grant Date
     Exercisable(1)      Unexercisable     Option
Exercise

Price ($)
     Option
Expiration
Date
 

Court Cunningham

    
 
 

 

06/06/07
07/24/09
03/12/12

10/08/13

  
  
  

  

    
 
 
 
45,342
500,000
208,333
—  
  
  
  
  
    

 

 

 

—  

—  

291,667

950,000

  

  

(2) 

(2) 

   
 
 
 
0.06
0.38
0.95
1.75
  
  
  
  
    
 
 
 
06/05/17
07/23/19
03/11/22
10/07/23
  
  
  
  

Eric Raab

    
 
05/14/13
10/08/13
  
  
    

 

—  

—  

  

  

    

 

600,000

100,000

(2) 

(2) 

   
 
1.64
1.75
  
  
    
 
05/13/23
10/07/23
  
  

Fred Voccola

     05/14/13         —           600,000 (2)      1.64         05/13/23   

 

(1)   These stock options were fully vested as of March 31, 2014.
(2)   These stock options vest over a five-year period: 20% of the shares underlying the options vest on the first anniversary of the option grant date, and the remainder of the shares underlying the option vest in equal monthly installments over the next 48 months.

Employment Arrangements

The initial terms and conditions of employment for each of our named executive officers are set forth in employee offer letters. These offer letters provide for accelerated vesting of specified equity awards following an acquisition and following termination within a specified period of time following an acquisition. Each letter also provides for 90 days’ notice of termination without cause or severance equal to 90 days’ of the employee’s base salary in lieu thereof. Each of our named executive officers is an at-will employee.

 

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The amount and terms of these benefits reflect the negotiations of each of our named executive officers with us. We consider these severance and change in control benefits critical to attracting and retaining high caliber executives. We believe that appropriately structured severance benefits, including accelerated vesting provisions, minimize the distractions and reduce the risk that an executive voluntarily terminates his or her employment with us during times of uncertainty, such as before an acquisition is completed. We believe that our existing arrangements allow each named executive officer to focus on continuing normal business operations and, for change in control benefits, on the success of a potential business combination, rather than on how business decisions that may be in the best interest of our stockholders will impact his or her own financial security.

The following table sets forth the current base salaries and fiscal year 2014 bonus targets of, and a summary of the material severance and acquisition arrangements with, our named executive officers:

 

Named Executive Officer

  

Fiscal Year 2014 Salary and
Bonus Target

  

Severance and Acquisition Benefits

Court Cunningham

   Salary: $391,400;
2014 Bonus Plan Target: $313,120
   Severance: If we terminate Mr. Cunningham’s employment for any reason other than for cause, then in lieu of three months’ notice, we may pay him three months of his base salary.
      Acquisition: If Mr. Cunningham is employed by Yodle immediately prior to the closing of a change of control transaction and, within one year, Mr. Cunningham’s employment is terminated without cause or Mr. Cunningham terminates his employment for good reason, then all unvested shares underlying his options will vest.

Eric Raab

   Salary: $240,000;
2014 Bonus Plan Target: $72,000
   Severance: If we terminate Mr. Raab’s employment for any reason other than for cause, then in lieu of three months’ notice, we may pay him three months of his base salary.
      Acquisition: If Mr. Raab is employed by Yodle immediately prior to the closing of a change of control transaction and, within one year, Mr. Raab’s employment is terminated without cause or Mr. Raab terminates his employment for good reason, then all unvested shares underlying his options will vest.

Fred Voccola

  

Salary: $225,000;
2014 Bonus Plan Target: $99,990

Brand Network Bonus Plan Target: $100,000

   Severance: If we terminate Mr. Voccola’s employment for any reason other than for cause, then in lieu of three months’ notice, we may pay him three months of his base salary.
      Acquisition: If Mr. Voccola is employed by Yodle immediately prior to the closing of a change of control transaction and, within one year, Mr. Voccola’s employment is terminated without cause or Mr. Voccola terminates his employment for good reason, then all unvested shares underlying his options will vest.

The definitions of “cause,” “good reason” and “change of control transaction” referenced above are defined in the individual offer letters with each of the named executive officers, respectively, or the applicable equity incentive plan under which the stock option was granted.

 

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Bonus Plans

Each of our named executive officers was or is, as the case may be, eligible to participate in our 2013 and 2014 bonus plans. The bonus plans are designed to incentivize and reward outstanding individual achievement, subject to the performance of Yodle. Bonuses under the 2013 bonus plan were measured semi-annually on June 30, 2013 and December 31, 2013 and paid on August 15, 2013 and February 15, 2014. Bonuses under the 2014 bonus plan will be measured annually on December 31, 2014 and paid on February 15, 2015, with a portion to be paid on August 15, 2014 based on performance through June 30, 2014. The annual target for the 2014 bonus plan is a percentage of each eligible employee’s base salary (prorated for any portion of a bonus period if the employee joined Yodle during the bonus period), 100% of which, in the case of our named executive officers, is subject to the achievement of certain corporate objectives, including revenue growth and Adjusted EBITDA targets.

Mr. Voccola is also eligible to earn an additional bonus under our General Manager, Yodle for Brand Networks Bonus Plan. This plan is designed to incentivize and reward achievement of revenue and contribution margin targets. Bonuses under this plan are measured semi-annually on June 30 and December 31 and paid 45 days thereafter. The semi-annual target is $50,000, subject to manager discretion.

Equity Incentive Plans

2014 Equity Incentive Plan

We expect that our board of directors will adopt and our stockholders will approve prior to the closing of this offering our 2014 Equity Incentive Plan, or our 2014 Plan. We do not expect to utilize our 2014 Plan until after the closing of this offering, at which point no further grants will be made under our 2007 Plan, as described below in the section of this prospectus titled “2007 Equity Incentive Plan.” No awards have been granted and no shares of our common stock have been issued under our 2014 Plan.

Stock Awards. The 2014 Plan will provide for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation (collectively, stock awards). Additionally, the 2014 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants.

Share Reserve. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2014 Plan after the 2014 Plan becomes effective is the sum of (1)                 shares, (2) the number of shares reserved for issuance under our 2007 Plan at the time our 2014 Plan becomes effective, and (3) any shares subject to stock options or other stock awards granted under our 2007 Plan that would have otherwise returned to our 2007 Plan (such as upon the expiration or termination of a stock award prior to vesting). Additionally, the number of shares of our common stock reserved for issuance under our 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2015 (assuming the 2014 Plan becomes effective before such date) and continuing through and including January 1, 2023, by         % of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. The maximum number of shares that may be issued upon the exercise of incentive stock options under our 2014 Plan is                      shares.

No person may be granted stock awards covering more than                 shares of our common stock under our 2014 Plan during any calendar year pursuant to stock options, stock appreciation rights and other stock awards whose value is determined by reference to an increase over an exercise or strike price of at least 100% of the fair market value on the date the stock award is granted. Additionally, no person may be granted in a calendar year a performance stock award covering more than             shares or a performance cash award having a maximum value in excess of $            . Such limitations are designed to help assure that any deductions to which

 

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we would otherwise be entitled with respect to such awards will not be subject to the $1.0 million limitation on the income tax deductibility of compensation paid to any covered executive officer imposed by Section 162(m) of the Code.

If a stock award granted under the 2014 Plan expires or otherwise terminates without being exercised in full, or is settled in cash, the shares of our common stock not acquired pursuant to the stock award again will become available for subsequent issuance under the 2014 Plan. In addition, the following types of shares under the 2014 Plan may become available for the grant of new stock awards under the 2014 Plan: (1) shares that are forfeited to or repurchased by us prior to becoming fully vested; (2) shares withheld to satisfy income or employment withholding taxes; or (3) shares used to pay the exercise or purchase price of a stock award. Shares issued under the 2014 Plan may be previously unissued shares or reacquired shares bought by us on the open market. As of the date hereof, no awards have been granted and no shares of our common stock have been issued under the 2014 Plan.

Administration. Our board of directors, or a duly authorized committee thereof, has the authority to administer the 2014 Plan. Our board of directors may also delegate to one or more of our officers the authority to (1) designate employees (other than other officers) to be recipients of certain stock awards, and (2) determine the number of shares of common stock to be subject to such stock awards. Subject to the terms of the 2014 Plan, our board of directors or the authorized committee, referred to herein as the plan administrator, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting schedule applicable to a stock award. Subject to the limitations set forth below, the plan administrator will also determine the exercise price, strike price or purchase price of awards granted and the types of consideration to be paid for the award.

The plan administrator has the authority to modify outstanding awards under our 2014 Plan. Subject to the terms of our 2014 Plan, the plan administrator has the authority to reduce the exercise, purchase or strike price of any outstanding stock award, cancel any outstanding stock award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the consent of any adversely affected participant.

Stock Options. Incentive and nonstatutory stock options are granted pursuant to stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for a stock option, within the terms and conditions of the 2014 Plan, provided that the exercise price of a stock option generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Options granted under the 2014 Plan vest at the rate specified by the plan administrator.

The plan administrator determines the term of stock options granted under the 2014 Plan, up to a maximum of 10 years. Unless the terms of an option holder’s stock option agreement provide otherwise, if an option holder’s service relationship with us, or any of our affiliates, ceases for any reason other than disability, death or cause, the option holder may generally exercise any vested options for a period of three months following the cessation of service. The option term may be extended in the event that exercise of the option following such a termination of service is prohibited by applicable securities laws or our insider trading policy. If an option holder’s service relationship with us or any of our affiliates ceases due to disability or death, or an option holder dies within a certain period following cessation of service, the option holder or a beneficiary may generally exercise any vested options for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, options generally terminate immediately. In no event may an option be exercised beyond the expiration of its term.

Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (1) cash, check, bank draft or money order, (2) proceeds from a broker-assisted exercise, (3) the tender of shares of our common stock previously owned by the option holder, (4) a net exercise of the option if it is an nonqualified stock option, and (5) other legal consideration approved by the plan administrator.