Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising in the ordinary course of business, including those related to claims of infringement of third party patents and other intellectual property. Management believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material impact on our consolidated financial position, results of operations or cash flows.
On April 26, 2017, Louis Scarantino, alleging himself to be a stockholder of the Company, filed a purported stockholder class action complaint against the Company and others in connection with the Merger Agreement and the transactions contemplated thereby. For additional information regarding the complaint, see Note 11 “Subsequent Events” to the condensed consolidated financial statements included in this Quarterly Report.
Item 1A. Risk Factors
Our business, prospects, financial condition or operating results could be materially adversely affected by any of the risks and uncertainties described below, as well as other risks not currently known to us or that are currently considered immaterial. The trading price of our Series 1 common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes.
Risks Related to Our Business
The announcement and pendency of our agreement to be acquired by Harland Clarke Holdings Corp. could have an adverse effect on our business.
On April 10, 2017, we entered into the Merger Agreement with HCH and R Acquisition Sub, Inc., or the Purchaser. In accordance with the Merger Agreement, the Purchaser will acquire all issued and outstanding shares of Series 1 common stock at a purchase price of
$11.60
per share pursuant to a tender offer and second step merger process. The Merger Agreement provides that, under the terms and subject to the conditions set forth in the Merger Agreement, the Purchaser will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of HCH. As a result of the Merger, the Company will become a privately held company.
Uncertainty about the effect of the Merger on our employees, paid merchants and consumers may have an adverse effect on our business and operations that may be material to us. Our employees may experience uncertainty about their roles following the merger. There can be no assurance we will be able to attract and retain key talent, including senior management, to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business and operations. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the Merger, which could materially adversely affect our business and operations.
Our paid merchants and consumers may experience uncertainty associated with the Merger, including with respect to concerns about possible changes to our marketplace, digital offers or policies, and current or future business relationships with us. Uncertainty may cause consumers to refrain from using our marketplace, and paid merchants may seek to change existing business relationships with us, which could result in an adverse effect on our business, operations and financial position in a way that may be material to us.
The failure to complete the merger with Harland Clarke Holdings could adversely affect our business.
Completion of the Merger with HCH is subject to several conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the tender of a majority of the issued and outstanding shares of our Series 1 common stock by our stockholders, the expiration or termination of applicable waiting periods under antitrust and competition laws, and other regulatory reviews and waiting periods. If the Merger or a similar transaction is not completed, the share price of our common stock will likely drop because the current market price of our common stock reflects, at least in part, an assumption that the Merger will be completed at the announced offer price of
$11.60
per share. In addition, under circumstances specified in the Merger Agreement, we may be required to pay a termination fee of
$18.0 million
in the event the Merger is not consummated. Further, a failure to complete the Merger may result in negative publicity and a negative impression of us in the investment community.
Any disruption to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our paid merchants and consumers, could continue or accelerate in the event of a failure to complete the Merger. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.
Litigation in connection with the Merger Agreement may be costly, prevent consummation of the Merger, divert management’s attention and otherwise materially harm our business.
Regardless of the outcome of any current or future litigation related to the Merger Agreement and the transactions it contemplates, such litigation may be time-consuming and expensive and may distract our management from running the day-to-day operations of our business. The litigation costs and diversion of management’s attention and resources to address the claims and counterclaims in any litigation related to the Merger Agreement and the transactions it contemplates may materially adversely affect our business, financial condition and/or operating results. Furthermore, if the Merger is not consummated as a result of litigation, the trading price of our Series 1 common stock will likely drop because the current market price of our Series 1 common stock reflects, at least in part, an assumption that the Merger will be completed at the announced offer price of
$11.60
per share. If the Merger is not consummated, for any reason, litigation could be filed in connection with the failure to consummate the Merger. Any litigation related to the Merger may result in negative publicity or an unfavorable impression of us, which could negatively impact the trading price of our Series 1 common stock, impair our ability to recruit or retain employees, damage our relationships with merchants, or otherwise materially harm our operations and financial performance.
The Merger Agreement imposes restrictions on the operation of our business prior to closing, which could adversely affect our business.
Pursuant to the terms of the Merger Agreement, we are subject to certain restrictions on the conduct of our business, including the ability in certain cases to enter into contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures, until the merger becomes effective or the Merger Agreement is terminated. These restrictions may prevent us from taking actions with respect to our business that we may consider advantageous and result in our inability to respond effectively to competitive pressures and industry developments, and may otherwise harm our business and operations.
Traffic to certain of our desktop websites has declined year-over-year. If we are unable to continue to attract visitors to our websites from search engines, then consumer traffic to our websites could continue to decrease. That decrease has negatively impacted, and could in the future, negatively impact commissions earned based on purchases generated for our paid merchants through our marketplace, and therefore adversely impact our ability to maintain or grow our online transaction net revenues and profitability.
We generate consumer traffic to our websites using various methods, including search engine marketing, or SEM, search engine optimization, or SEO, email campaigns and social media referrals. Our net revenues and profitability are dependent upon generalized demand for the digital offers we provide and upon our continued ability to use a combination of these methods to generate consumer traffic to our websites in a cost-efficient manner. We have experienced and continue to experience fluctuations in search result rankings for a number of our websites. We have also experienced a year-over-year decline in the number of visits to our desktop websites. There can be no assurances that we will be able to grow or maintain current levels of consumer traffic as a whole or with respect to either our desktop or mobile websites.
Our SEM and SEO techniques have been developed to work with existing search algorithms utilized by the major search engines. However, major search engines frequently modify their search algorithms. Changes in these algorithms can cause our websites to receive less favorable placements, which could reduce the number of users who visit our websites. We may be unable to modify our SEM and SEO strategies in response to any future search algorithm changes made by the major search engines, which could require a change in the strategy we use to generate consumer traffic to our websites. In addition, websites must comply with search engine guidelines and policies. These guidelines and policies are complex and may change at any time. If we fail to follow such guidelines and policies properly, search engines may rank our content lower in search results or could remove our content altogether from their indices. If we fail to understand and comply with these guidelines, our SEO strategy may become unsuccessful.
In some instances, search engines may change their displays or rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. For example, a major search engine currently promotes its product-listing advertisements adjacent to its search results, has increased the number of paid search results on mobile websites for certain keywords reducing visibility of organic search results and made certain other changes, each of which could reduce traffic to our websites. Given the large volume of search-driven traffic to our websites and the
importance of the placement and display of results of a user’s search, similar actions in the future could have a negative effect on our business and results of operations.
If we are listed less prominently or fail to appear in search result listings for any reason, it is likely that the number of visitors to our websites will decline. Any such decline in consumer traffic to our websites could adversely impact the commission earned based on the number of purchases we generate for our paid merchants, which could in turn adversely affect our online transaction net revenues and our profitability. We continue to see fluctuations in our traffic based on combination of factors, including search engine algorithm changes. We may not be able to replace this traffic with the same volume of visitors or in the same cost-effective manner from other channels, such as direct, SEM, display advertising, e-mail or social media, or at all. An attempt to replace this traffic through other channels may require us to increase our sales and marketing expenditures, which would adversely affect our operating results and which additional net revenues may not offset.
Although consumer traffic to our mobile applications is not reliant on search results, growth in mobile device usage may not decrease our overall reliance on search results if mobile users use our mobile websites rather than our mobile applications. In fact, growth in mobile device usage may exacerbate the risks associated with how and where our websites are displayed in search results because mobile device screens are smaller than desktop computer screens and therefore display fewer search results.
Consumers are increasingly using mobile devices to access our content and if we are unsuccessful in expanding the capabilities of our digital offer solutions for our mobile platforms to allow us to generate net revenues as effectively as our desktop platforms, our online transaction net revenues could decline.
Web usage and the consumption of digital content are increasingly shifting to mobile platforms, typically smartphones and mobile watches. In the
three
months ended
March 31, 2017
and in fiscal
2016
, visits to our mobile websites represented approximately
49%
and 46%, respectively, of the total visits to our websites, and we expect the percentage of these visits to continue to grow. Industry-wide solutions to monetize digital offer content effectively on these platforms are at an early stage of development. Further, the rate at which we monetize digital offer content on our mobile websites and applications is significantly lower than the corresponding rate on our desktop websites.
The growth of revenues derived from our mobile websites and applications depends in part on retailer deployment of mobile websites and applications that are designed to remove friction from the consumer shopping experience. The growth of this portion of our business also depends in part on our ability to deliver compelling solutions to consumers and merchants both online and for use in-store through these new mobile marketing channels. Our success on mobile platforms will be dependent on our interoperability with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our functionality or give preferential treatment to competitive services could adversely affect usage of our services through mobile devices.
Further, to deliver high quality mobile offerings, it is important that our solutions integrate with a range of other mobile technologies, systems, networks and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks or standards. For example, some merchants today do not recognize affiliate tracking links on their mobile websites or applications, and affiliate tracking links on mobile websites or applications may not function to allow merchants’ sales to be attributed to us. Further, consumers may click on a digital offer displayed on our mobile websites or in our mobile applications, but execute a purchase using that digital offer on a different platform, such as on the merchant’s desktop website (a circumstance known as cross device switching), which may result in those merchant sales not being attributed to us. As a result, in each such case, we may not receive commission revenues when a consumer executes a purchase on the merchant’s platform after clicking through a digital offer displayed on our mobile websites or in our mobile applications. If merchants fail to recognize affiliate tracking links on their mobile websites or applications, or affiliate tracking links on mobile websites or applications do not function to allow merchants’ sales to be attributed to us and our mobile traffic continues to represent a significant percentage of our consumer traffic, or increases, our business could be harmed and our operating results could be adversely affected.
If we fail to develop mobile applications and mobile websites that effectively address consumer and merchant needs, or if we are not able to implement strategies that allow us to monetize mobile platforms and other emerging platforms, our ability to grow mobile online transaction net revenues and in-store net revenues will be constrained, and our business, financial condition and operating results would be adversely affected.
If merchants alter the way they attribute credit to publishers in their performance marketing programs, our online transaction net revenues could decline and our operating results would be adversely affected.
Merchants often advertise and market digital offers through performance marketing programs, a type of performance-based marketing in which a merchant rewards one or more publishers such as us for each visitor or customer generated by the publisher’s own marketing efforts. When a consumer executes a purchase on a merchant’s website as a result of a performance marketing program, most performance marketing conversion tracking tools credit the most recent link or ad clicked by the consumer prior to that purchase. This practice is generally known as “last-click attribution.” We generate the substantial majority of our online transaction net revenues through transactions for which we receive last-click attribution. In recent years, some merchants have sought, and in some cases adopted, alternatives to last-click attribution. These alternatives are primarily “first-click attribution,” which credits the first link or ad clicked by a consumer prior to executing a purchase, or “multichannel attribution,” which applies weighted values to each of a merchant’s advertisements and tracks how each of those advertisements contributed to a purchase. If merchants widely adopt first-click attribution, multichannel attribution or otherwise alter the ways they attribute credit for purchases to us, and if we are unable to adapt our business practices to such alterations, our online transaction net revenues could decline and our business, financial condition and operating results could be adversely affected.
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenues, financial results and business may be significantly harmed.
The size of our user base and our users’ level of engagement are important to our success. Our financial performance has and will continue to be significantly determined by our success in adding, retaining, and engaging our users. If consumers do not perceive our products to be useful, we may not be able to attract or retain users or otherwise maintain or increase the frequency of their engagement. We have experienced a year-over-year reduction in our active user base and there is no guarantee that we will not experience further erosion in that user base or of user engagement levels. Any number of factors could potentially negatively affect user retention, growth and engagement, including if:
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users increasingly engage with other products or services through which they obtain digital offers;
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we fail to introduce new products or services that users find engaging or if we introduce new products or services that are not favorably received;
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we are unable to obtain digital offers that consumers find useful, particularly with respect to offers for our in-store solution which is still in its early stages and for which a broad source of supply has not been established;
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we are unable to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
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merchants fail to deploy mobile websites and applications that reduce friction in the consumer shopping experience;
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we are unable to ensure that users are presented with content that is useful and relevant to them;
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users perceive that the quality of digital offers available through our marketplace has decreased;
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our mobile applications fail to be prominently featured in iOS and Android application stores; or
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there are decreases in user sentiment about the quality or usefulness of our products or offers or concerns related to privacy, security or other factors.
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If we are unable to maintain or increase our user base and user engagement, our revenues and financial results may be adversely affected. Any decrease in user retention, growth or engagement could render our marketplace less attractive to merchants, which is likely to have a material and adverse impact on our revenues, business, financial condition and results of operations. If our desktop website traffic continues to decline and if our mobile website traffic growth rate continues to slow, or to decline, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and associated monetization in order to maintain our current revenues or drive revenue growth.
If we are unable to retain our existing paid merchants, expand our business with existing paid merchants or attract new paid merchants and consumers, our net revenues could decline.
Our ability to continue to grow our net revenues will depend in large part on expanding our business with existing paid merchants and attracting new paid merchants. The number of our current paid merchants may not expand beyond our existing base and may decline. Even for our largest paid merchants, the amount they pay us is typically only a small fraction of their overall advertising budget. Merchants may view their spend with us as experimental, particularly with respect to our in-store solution and digital rebates, and may either reduce or terminate their spend with us if they determine a superior alternative
for generating sales. In addition, merchants may determine that distributing digital offers through our platform results in undesirably broad distribution of their digital offers or otherwise does not provide a compelling value proposition. Some merchants have demanded that we remove digital offers relating to their products or services from our marketplace, and we anticipate that some merchants will do so in the future. If we are unable to negotiate favorable terms with current or new paid merchants in the future, including the commission rates they pay us, our operating results will be adversely affected.
The sales process for our in-store solution varies from that of our online business. Specifically, the sales cycle for merchants considering adopting the solution for the first time tends to be longer on a comparative basis than with respect to offers on other portions of our marketplace. That sales process can involve establishing new direct relationships with merchants as they may fund in-store offers from different budgets than those reserved for publishers participating in performance marketing programs with the same merchants. For these and other reasons, it may be comparatively more difficult to expand the number of merchants using the in-store portion of our marketplace.
While we enter into agreements with certain paid merchants that may be performed over a period of one year or longer, paid merchants generally do not enter into long-term obligations with us requiring them to use our solutions. Paid merchants’ contracts with us, with few exceptions, are cancelable upon short or no notice and without penalty. We cannot be sure that our paid merchants will continue to use our solutions or that we will be able to replace merchants that do not renew their campaigns with new ones generating comparable revenues.
If we are unable to attract new consumers and maintain or increase consumer traffic to our websites and use of our mobile applications, new paid merchants may choose not to use, and existing paid merchants may not continue to use, our solutions for their promotional campaigns, and our volume of new digital offer inventory may suffer as the perceived usefulness of our marketplace declines. If our existing paid merchants do not continue to use our solutions for their promotional campaigns, or if we are unable to attract and expand the amount of business we do with new paid merchants, our revenues will decrease and our operating results will be adversely affected.
The market in which we participate is intensely competitive, and we may not be able to compete successfully.
The market for digital offer solutions is highly competitive, fragmented and rapidly changing. Our competition for traffic from consumers seeking to save money on online or in-store purchases includes digital offer websites and mobile applications, cash-back, loyalty and discounted gift card websites and mobile applications, merchants, search engines, social networks, comparison shopping websites, newspapers and direct mail campaigns. Our competition for merchant marketing spend includes digital offer websites and mobile applications, search engines and social networks that compete for online advertising spend and television, magazines and newspapers that compete for offline advertising spend. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our profitability. We also expect competition in e-commerce generally, and digital offer solutions in particular, to continue to increase because there are no significant barriers to entry. A substantial number of digital offer websites and mobile applications, including those that attempt to replicate all or a portion of our business model, have emerged globally. Additional sources of competition include the following:
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Other businesses that provide digital offers similar to ours as an add-on to their core business. For example, Groupon, Living Social, Coupons.com and Facebook now provide digital offers, and Google, Facebook and PayPal are now providing digital offers for in-store purchases.
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Website, mobile applications and credit card issuers that provide cash-back rebates or offers based on the use of a particular credit card at certain merchants, including eBates.
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Various companies that offer discounted gift cards, including Raise, Cardcash and Cardpool.
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Traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies that provide coupons and discounts on products and services.
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Other websites and mobile applications that serve niche markets and interests.
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Our success depends on the breadth, depth, quality and reliability of our digital offer selection, as well as our continued innovation and ability to provide features that make our marketplace useful and appealing to consumers. If we are unable to develop quality features that consumers want to use, then consumers may become dissatisfied with our marketplace and elect to use the offerings of one of our competitors, which could adversely affect our operating results.
Certain of our larger actual or potential competitors may have the resources to significantly change the nature of the digital offer industry to their advantage, which could materially disadvantage us. For example, a major search engine now displays product-listing advertisements above the organic search results returned by its search engine in response to user
searches and has increased the number of paid search results on mobile websites for certain keywords reducing visibility of organic search results, each of which may reduce the amount of traffic to our websites. Additionally, potential competitors such as PayPal, Facebook, Instagram, Snapchat, and Twitter have widely adopted industry platforms, which they could leverage to distribute digital offers that could be disadvantageous to our competitive position.
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive consumer bases and deeper relationships, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies, develop deeper merchant relationships or offer services at lower prices. Any of these developments would make it more difficult for us to sell our solutions and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expense or the loss of market share.
In the traditional coupon landscape, our primary competitors for advertising spend include publishers of printed coupons. Many of these competitors have significant consumer reach, well-developed merchant relationships, and much larger financial resources and longer operating histories than we have.
We also directly and indirectly compete with merchants for consumer traffic. Many merchants market and provide their own digital offers directly to consumers using their own websites, email newsletter and alerts, mobile applications, social media presence and other distribution channels. Our paid merchants could be more successful than we are at marketing their own digital offers or could decide to terminate their relationship with us because they no longer want to pay us to compete against them.
We may also face competition from companies we do not yet know about. If existing or new companies develop, market or resell competitive digital offer solutions, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.
We are highly dependent on performance marketing networks as intermediaries to operate our Core segment. Factors adversely affecting our relationships with performance marketing networks, or the termination of our relationships with these networks, may adversely affect our ability to attract and retain business and our operating results.
The majority of our net revenues come from commissions earned for promoting digital offers on behalf of paid merchants. Often, the commissions we earn are tracked and paid by performance marketing networks. For 2016, 94.3% of the net revenues from our Core operating segment came from paid merchants that pay us through performance marketing networks, primarily Commission Junction and LinkShare. Performance marketing networks provide merchants with affiliate tracking links for attributing revenues to publishers like us and the ability to distribute digital offer content to multiple publishers. We do not have exclusive relationships with performance marketing networks. They do not enter into long-term commitments with us to allow us to use their solutions, and their contracts with us are cancelable upon short or no notice and without penalty.
Our sales could be adversely impacted by industry changes relating to the use of performance marketing networks. For example, if paid merchants seek to bring the distribution of their digital offer content in-house rather than using a performance marketing network, we would need to develop relationships with more paid merchants directly, which we might not be able to do and which could increase our sales, marketing and product development expenses. Additionally, we face challenges associated with consumers’ increasing use of mobile devices to complete their online purchases. For example, many paid merchants currently do not recognize affiliate tracking links on their mobile websites or applications, and tracking mechanisms on mobile websites or applications may not function to allow paid merchants to properly attribute sales to us. As a result, we may not receive commission revenues when a consumer makes a purchase from their mobile device on a paid merchant’s mobile website after clicking through a digital offer displayed on one of our websites or mobile applications if the paid merchant’s mobile monetization mechanisms are not enabled.
Moreover, as a result of dealing primarily with performance marketing networks, we have less of a direct relationship with paid merchants than would be the case if we dealt directly with paid merchants. The presence of performance marketing networks as intermediaries between us and paid merchants creates a challenge to building our own brand awareness and affinity with paid merchants. Additionally, in the event that our relationship with a performance marketing network were to terminate, our mechanism for receiving payments from the paid merchants we service through that network would terminate, which could materially and adversely impact our net revenues. Additionally, paid merchants may fail to pay the performance
marketing networks the fees the paid merchants owe, which is a prerequisite to us receiving our commissions from the networks.
Some performance marketing networks that we work with could be considered our competitors because they also offer some components of our solution, including publishing digital offers, on their own properties. If a performance marketing network further develops its own properties with digital offer capabilities or limits our access to its network for the purposes of driving revenue to its own properties, our ability to compete effectively could be significantly compromised and our business and operating results could be adversely affected.
If we are not able to maintain a positive perception of the content available through our marketplace, and maintain and enhance our RetailMeNot brand and the brands associated with each of our other websites and mobile applications, our reputation and business may suffer.
A decrease in the quality of the digital offers available through our marketplace could harm our reputation and damage our ability to attract and retain consumers and paid merchants, which could adversely affect our business. Additionally, maintaining and enhancing our RetailMeNot brand and the brands of each of our other websites and mobile applications is critical to our ability to attract new paid merchants and consumers to our marketplace, generate net revenues and successfully introduce new solutions. We may not be able to successfully build our RetailMeNot brand in the U.S. or the E.U. without losing some or all of the value associated with, or decreasing the effectiveness of, our other brands. We expect that the promotion of all our brands will require us to make substantial investments. As our market has become and continues to become more competitive, these branding initiatives have in the past been, and may in the future, be increasingly difficult and expensive. The successful promotion of our brands will depend largely on our marketing and public relations efforts. If we do not successfully maintain and enhance our brands, we could lose consumer traffic to our marketplace, which could, in turn, cause paid merchants to terminate or reduce the extent of their relationship with us. Our brand promotion activities may not be successful or may not yield net revenues sufficient to offset this cost, which could adversely affect our reputation and business.
Our Core segment business model largely depends upon digital offer inventory that we do not own or otherwise generally control, and the failure to maintain sufficient inventory or quality of the digital offers available in our marketplace may adversely affect our perceived value by consumers and merchants.
The success of our marketplace with respect to our Core segment depends on our ability to provide consumers with the digital offers they seek. A substantial majority of our revenues in the Core segment come from arrangements in which we are paid by merchants to promote their digital offers. Additionally, as much as one-third of the digital offers (excluding gift cards) on our websites are submitted by users. Therefore, we do not own or control the inventory of traditional digital offer content upon which our business depends. Because a large number of our digital offers are submitted by users, our efforts to ensure the quality and reliability of those digital offers are critical to our success. From time to time consumers submit complaints that our digital offers are invalid or expired. If our algorithms and automated processes for validating and sorting user-submitted digital offers are ineffective, or if our representatives responsible for manual review and curation of user-submitted digital offers are unable to effectively select and sort the digital offers that are reliable and most appealing to our users, we may be unable meet the needs of consumers and our operating results may be adversely affected.
Merchants have a variety of channels through which to promote their products and services. If these merchants elect to promote their offers and discounts through other channels, offer less compelling offers or discounts or not to promote offers or discounts at all, or if our competitors are willing to accept lower commissions than we are to promote these digital offers, our ability to obtain content may be impeded and our business, financial condition and operating results will be adversely affected. Similarly, if users do not contribute digital offers to our websites, or if they contribute digital offers that are not attractive or reliable, the digital offer inventory in our marketplace may decrease or become less valuable to consumers. If we cannot maintain sufficient digital offer inventory in our marketplace, consumers may perceive our marketplace as less relevant, consumer traffic to our websites and use of our mobile applications would decline and, as a result, our business, financial condition and operating results would be adversely affected.
Our sources of inventory for gift cards are concentrated, which can cause us not to have access to inventory sufficient to meet consumer demand for such digital offers or our own financial projections for our Gift Card segment.
The success of our gift card marketplace depends in large part upon our relationships with suppliers of gift cards. We have significant concentration of gift card supply. For example, during 2016, five of GiftcardZen Inc’s suppliers of gift cards accounted for approximately 47% of its total supply. This concentration of suppliers and consolidation within the industry could increase the bargaining power of our suppliers and increase the cost of our inventory.
Our relationships with gift card suppliers are generally not for long terms and, with few exceptions, are cancelable upon short or no notice and without penalty. We cannot be sure that our gift card suppliers will continue to provide us with the volume of cards we need to maintain our business on commercially reasonable terms, or at all. We may also have difficulty locating additional new sources of gift card supply that will be needed to grow our business. Our operating results could be materially and adversely affected if one of our gift card suppliers terminates, fails to renew or fails to renew on similar or more favorable terms, its agreement with us. Additionally, if our suppliers provide us with invalid, fraudulent or expired gift cards, our ability to recover the cost of those cards may be limited.
We experience quarterly fluctuations in our operating results due to a number of factors that make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our business is subject to seasonal fluctuations. Specifically, our net revenues are traditionally strongest in the third and fourth quarters of each year due to increases in holiday shopping. Conversely, our first and second quarter net revenues are typically lower.
Since the majority of our expenses are personnel-related and include salaries and stock-based compensation, benefits and incentive-based compensation plan expenses, we have not experienced significant seasonal fluctuations in the timing of our expenses from period to period other than increases in discretionary advertising and promotional spending during the third and fourth quarter holiday shopping period. We may continue to increase our investment in sales, engineering and product development substantially as we seek to leverage our solution to capitalize on what we see as a growing global opportunity. For the foregoing reasons or other reasons we may not anticipate, historical patterns should not be considered indicative of our future sales activity, expenditure levels or performance.
Factors that may affect our quarterly operating results include the following:
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the number and quality of the digital offers available on our websites and mobile applications;
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consumer visits to our websites and mobile applications, and purchases by consumers resulting from those visits or application sessions;
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our ability to maintain or increase the commissions and other revenues associated with consumer visits to our mobile websites or use of our mobile applications;
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the success and costs of our online advertising and marketing initiatives, including advertising costs for paid search keywords that we deem relevant to our business and advertising costs for driving consumer downloads of our mobile applications;
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the levels of compensation that merchants are willing to pay us to attract customers;
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the amount that consumers spend when they make purchases using the digital offers we provide;
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our ability to maintain and increase the number of downloads of our mobile applications by consumers not resulting directly from our advertising efforts;
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market acceptance of our current and future solutions, including our ability to retain current paid merchants, sell additional solutions to existing paid merchants and to add new paid merchants to our marketplace in multiple regions around the world;
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our ability to achieve growth rates and performance targets anticipated by us in setting our operating and capital expense budgets;
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overall levels of consumer spending;
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the budgeting cycles of our paid merchants;
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the cyclical and discretionary nature of marketing spend and any resulting changes in the number and quality of digital offers that paid merchants choose to offer;
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changes in the competitive dynamics of the digital offer industry, including consolidation among competitors, performance marketing networks or customers, and our reputation and brand strength relative to our competitors;
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the response of consumers to our digital offer content;
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our ability to control costs, including our operating expenses;
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network outages, errors in our solutions or security breaches and any associated expenses and collateral effects;
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foreign currency exchange rate fluctuations, as our foreign sales and costs are denominated in local currencies;
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interest rate fluctuations, as our senior indebtedness carries a variable interest rate;
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costs related to acquisitions or licensing of, or investments in, products, services, technologies or other businesses and our ability to integrate and manage any acquisitions successfully;
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our ability to collect amounts billed to paid merchants directly and through performance networks;
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paid merchants filing for bankruptcy protection or otherwise ceasing to operate; and
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general economic and political conditions in our domestic and international markets.
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As a result of these and other factors, we have a limited ability to forecast the amount of future net revenues and expenses, and our operating results may vary from quarter to quarter and have fallen, and may in the future fall, below our estimates or the expectations of public market analysts and investors. Fluctuations in our quarterly operating results may lead analysts to change their long-term models for valuing our common stock, cause us to face short-term liquidity issues, impact our ability to retain or attract key personnel or cause other unanticipated issues, all of which could cause our stock price to decline. As a result of the potential variations in our quarterly net revenues and operating results, we believe that quarter-to-quarter comparisons of our net revenues and operating results may not be meaningful and the results of any single quarter should not be relied upon as an indication of future performance.
Our business, product offerings, employee headcount and geographical area of operations have grown in scope and complexity in recent periods. If we fail to manage that expansion, our financial performance may suffer.
We have expanded our overall business and product offerings, consumer traffic, paid merchants, employee headcount and operations in recent periods. We increased our total number of full-time employees from 164 as of December 31, 2011 to 548 as of
March 31, 2017
. We have also established or acquired operations in other countries. In 2011, we acquired the business of VoucherCodes.co.uk, which is based in the U.K. In 2012, we acquired Bons-de-Reduction.com and Poulpeo.com, which are based in France, and relaunched Deals.com in Germany. In July 2013, we acquired Ma-Reduc.com, which is based in France. In October 2015, we decided to no longer support the Bons-de-Reduction.com brand. We redirected traffic from Bons-de-Reduction.com to Poulpeo.com. In most of these instances, we previously had no presence in these countries. We have integrated new types of digital offers on our platforms, including digital rebates and discounted gift cards in fiscal 2015. In certain instances, we are the merchant of record for sale of gift cards, which is an evolution of the role we have traditionally played with our users. On April 5, 2016, we acquired GiftcardZen Inc, a secondary marketplace for gift cards, and are working to integrate GiftcardZen Inc’s technology into our existing platform. In December 2016, we elected to cease supporting our websites in five EU countries. For various reasons, including those listed above, our business is becoming increasingly complex, especially in light of the increase in content types and our platforms, the closure of certain of our platforms, as well as the number of acquisitions we have integrated, are in the process of integrating and may in the future integrate. Our limited operating history, our reliance on multiple websites, mobile applications and brands and our expansion have placed, and will continue to place, a significant strain on our managerial, operational, product development, sales and marketing, administrative, financial and other resources.
We expect to continue to increase headcount and to hire more specialized personnel in the future. We will need to continue to hire, train and manage additional qualified website and mobile application developers, software engineers, sales staff, and product development specialists in order to improve and maintain our product offerings and technology to drive and properly manage our growth. If our new hires perform poorly, if we are unsuccessful in hiring, training, managing and integrating these new employees or if we are not successful in retaining our existing employees, our business may be harmed. Further, to accommodate our expected expansion we must add new hardware and software and improve and maintain our technology, systems and network infrastructure. Failure to effectively upgrade our technology or network infrastructure to support our expected increases in mobile traffic volume and mobile application usage could result in unanticipated system disruptions, slow response times or poor experiences for consumers. To manage the expected expansion of our operations and personnel and to support financial reporting requirements as a public company, we continue to improve our transaction processing and reporting, operational and financial systems, procedures and controls. These improvements will be particularly challenging if we acquire new operations with different back-end systems. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we are unable to manage any growth and increased complexity successfully and hire additional qualified personnel in an efficient manner, our business, financial conditions and operating results could be adversely affected.
If state revenue agencies or merchants interpret state sales and use tax click-through nexus laws to create nexus for merchants in each jurisdiction where we have employees, our net revenues could decline and our business, financial condition and operating results will be adversely affected.
Since 2008, more than a dozen states including California, New York and New Jersey passed legislation requiring retailers to collect and remit sales and use taxes on sales to their residents if the publisher that facilitated the sale is also a
resident of the state. These are commonly referred to as "click-through nexus laws." The United States Constitution as interpreted by federal and state case law, provides certain limitations on a state's ability to impose sales and use tax collection obligation on retailers located outside of a state ("remote retailers"). We believe that these limitations require a connection or "nexus," between the activities of our in-state employees and a remote retailer's ability to establish and maintain a market in the subject state before a state can require the retailer to collect tax on sales to state customers solely because of the presence of our employees in a state. The passage of click-through nexus laws has not had a material impact on our results of operations to date. Nevertheless, it is possible that one or more states in which we have employees could apply an aggressive interpretation to its click-through nexus law or that one or more retailers may believe that the mere presence of our employees in a state, regardless of any connection to the retailer's ability to establish or maintain its market in the state, may be sufficient to establish sales and use tax nexus for the retailer in the state. If such state interpretations and/or merchant beliefs were to become common, they could significantly alter the manner in which retailers pay us, cause retailers to cease paying us for sales we facilitate for that retailer in that state or cause retailers to cease using our marketplace, any of which could adversely impact our operating results. Further, if Texas were to pass similar legislation, we believe a substantial number of the paid retailers in our marketplace would cease paying us for sales we facilitate for that retailer in Texas, significantly alter the manner in which they pay us or cease using our marketplace. This would decrease our sales and our business, financial condition and operating results would be adversely affected.
If our management team or skilled employees do not remain with us in the future, our business, operating results and financial condition could be adversely affected.
We have been successful in attracting a knowledgeable and talented management team and key operating personnel. Our future success depends in large part on our ability to retain these employees and attract others. Our senior management team’s in-depth knowledge of and deep relationships with the participants in our industry are extremely valuable to us. There can be no assurance that our senior management team will remain with us in the future. There can also be no assurance that we will successfully recruit and retain qualified replacements for those who depart in the future.
Our business also requires skilled engineering, product, marketing and other personnel, who are in high demand and are often subject to competing offers. Competition for qualified employees is intense in our industry, and the loss of even a few qualified employees, or our inability to attract qualified employees, could harm our operating results and impair our ability to grow.
To attract and retain key personnel, we use various measures, including an equity incentive program, an employee stock purchase program and non-equity incentive bonuses. These measures may not be enough to attract and retain the personnel we require to operate our business effectively. We have experienced significant volatility in our stock price since our initial public offering in July 2013.We now have a number of employees who were granted stock options that have an exercise price per share that is higher than the current fair market value of our Series 1 common stock. Those employees may feel they are not sufficiently incentivized to remain at our company. Conversely, we also have employees who were granted stock options that have an exercise price per share that is lower than the current fair market value. If we are successful, these employees may choose to exercise their options and sell the shares, recognizing a substantial gain. As a result, it may be difficult for us to retain such employees. It may also be difficult to retain employees due to the continued volatility in our stock price.
Additionally, the announcement of the Merger, and expected cessation of public trading in our Series 1 common stock upon consummation of the Merger, may make it difficult for us to recruit or retain talented employees. Further, a failure to complete the Merger may result in negative publicity and a negative impression of us in the investment or technology communities, which could impair our ability to recruit or retain the talented employees we need to operate our business.
If we are unable to attract or retain our sales representatives, our ability to increase our net revenues could be negatively impacted.
Our ability to expand our business will depend, in part, on our ability to retain our current sales representatives and properly incentivize them to obtain new merchant relationships. If a significant number of our sales representatives were to leave us or join our competitors, our net revenues could be negatively impacted. In certain circumstances, we have entered into agreements with our sales representatives that contain non-compete provisions to mitigate this risk, but we may elect not to enforce our rights under those agreements, or we may need to litigate to enforce our rights under these agreements, which could be time-consuming, expensive and ineffective. A significant increase in the turnover rate among our sales representatives could also increase our recruiting costs and decrease our operating efficiency, which could lead to a decline in our net revenues and profitability.
Competition for qualified sales representatives is intense, and we may be unable to hire additional team members when we need them or at all. Any difficulties we experience in attracting additional sales representatives could have a negative impact on our ability to expand our paid merchant base and maintain or increase net revenues and could negatively affect our results of operations.
Our employee retention and hiring may be hindered by immigration restrictions, which could adversely impact our business, results of operations and financial condition.
Foreign nationals who are not U.S. citizens or permanent residents constitute an important part of our U.S. workforce, particularly in the areas of engineering, software development and business analytics. Our ability to hire and retain these workers, and their ability to remain and work in the U.S. are impacted by laws and regulations as well as by processing procedures of various government agencies. Changes in immigration laws, regulations, or procedures, including those that may be enacted by the new U.S. presidential administration or as a result of the United Kingdom’s referendum to withdraw from membership in the European Union, may adversely affect our ability to hire or retain such workers and may affect our costs of doing business and/or our ability to deliver our products and services.
Our current management team has a limited history of working together and may not be able to execute our business plan.
Certain members of our senior management team, including our General Manager, Gift Cards, Senior Vice President of Retail and Brand Solutions and Senior Vice President of Product, have only recently joined our management team or assumed their roles. As such, our current management team has worked together for only a limited period of time and has a limited track record of executing our business plan as a team. Accordingly, it is difficult to predict whether our management team, individually and collectively, will be effective in operating our business.
Our failure or the failure of third-party service providers to protect our platform and network against security breaches, or otherwise protect our confidential information, could damage our reputation and brand and substantially harm our business and operating results.
We deliver digital offers via our websites, mobile applications, email newsletter and alerts and social media presence, and we collect and maintain data about consumers, including personally identifiable information, as well as other confidential or proprietary information. We also sell gift cards and provide cash-back rebates to users. Our security measures may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our platform or that we or our third-party service providers otherwise maintain. Breaches of our security measures or those of our third-party service providers could result in unauthorized access to our platform or other systems; unauthorized access to and misappropriation of consumer information, including consumers’ personally identifiable information, or other confidential or proprietary information of ours or third parties; viruses, worms, spyware or other malware being served from our platform; deletion or modification of content or stored electronic gift cards, or the display of unauthorized content, on our websites or our mobile applications; or a denial of service or other interruption in our operations. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our size and scale, our geographic footprint and international presence, our use of open source software and technologies, the outsourcing of some of our business operations and continued threats of cyber-attacks. Although cybersecurity and the development and enhancement of controls, processes and practices designed to protect our and our third party providers’ systems, computers, software, data and networks from attack, damage or unauthorized access are a priority for us, this may not successfully protect our respective systems against all vulnerabilities, including technologies developed to bypass our security measures. In addition, outside parties may attempt to fraudulently induce employees, users or merchants to disclose sensitive information in order to gain access to our or our third party providers’ secure systems and networks.
Because techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers, we and they may be unable to anticipate these attacks or to implement adequate preventative measures. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Any actual or perceived breach of our security could damage our reputation and brand, expose us to a risk of loss or litigation and possible liability, require us to expend significant capital, technical and other resources to alleviate problems caused by such breaches and deter consumers and merchants from using our marketplace, which would harm our business, financial condition and operating results.
Interruptions or delays in service from third-party data center hosting facilities and other third parties could impair the delivery of our solutions and harm our business.
As of
March 31, 2017
, we operate our business using third-party data center hosting facilities located in California, Oregon, Virginia, the U.K., France, Ireland and the Netherlands. All of our data gathering and analytics are conducted on, and the content we deliver is processed through, servers in these facilities. We also rely on bandwidth providers, Internet service providers and mobile networks to deliver content. Any damage to, or failure of, the systems of our third-party providers could result in interruptions to our service.
Despite precautions taken at our third-party data centers, these facilities may be vulnerable to damage or interruption from break-ins, computer viruses, denial-of-service attacks, acts of terrorism, vandalism or sabotage, power loss, telecommunications failures, fires, floods, earthquakes, hurricanes, tornadoes and similar events. The occurrence of any of these events, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in loss of data, lengthy interruptions in the availability of our services and harm to our reputation and brand. While we have disaster recovery arrangements in place, they have not been tested under actual disasters or similar events.
Additionally, our third-party data center facility agreements are of limited duration, and our third-party data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If for any reason we are unable to renew our agreements with these facilities on commercially reasonable terms or if our arrangement with one or more of our data centers is terminated, we could experience additional expense in arranging for new facilities and support, and we may experience delays in the provisioning of our solutions until an agreement with another data center facility can be arranged. This shift to alternate facilities could take more than 24 hours depending on the nature of the event, which could cause significant interruptions in the delivery of our solutions and adversely affect our business and reputation. In addition, the failure of these facilities to meet our capacity requirements could result in interruptions in the availability or functionality of our solutions or impede our ability to scale our operations.
Furthermore, we depend on continuous and uninterrupted access to the Internet through third-party bandwidth providers to operate our business. If we lose the services of one or more of our bandwidth providers for any reason or if their services are disrupted, we could experience disruption in our services or we could be required to retain the services of a replacement bandwidth provider, which could increase our operating costs and harm our business and reputation.
Any errors, defects, disruptions or other performance problems with our solutions could harm our reputation and may damage our paid merchants’ businesses. Interruptions in our solutions could cause paid merchants to terminate their contracts with us, which would likely reduce our net revenues and harm our business, operating results and financial condition.
An increase in the return rate of paid merchants’ products or a change in the categories of products paid merchants choose to promote using digital offers could reduce our net revenues.
The commission revenues we receive from paid merchants are in part a function of the amount consumers purchase from paid merchants net of product returns. We do not have control over the categories or quality of products or services that our paid merchants deliver, nor do we have control over the digital offers they provide us. As a result, we rely on our historical experience for our estimate of returns. If paid merchants’ actual levels of returns are greater than the level of returns we estimate or if paid merchants elect to use digital offer content to promote products and services with a higher return rate than what we have experienced historically, our net revenues could decline. Because some categories of products tend to experience higher return rates than others, a shift in the types of goods consumers purchase using our solutions could lead to an increase in returns and our net revenues could decline. Additionally, return rates in foreign countries in which we operate are currently higher than return rates in the U.S. If we continue to expand our operations in countries with high return rates, our operating results may be negatively affected.
Regulatory, legislative or self-regulatory developments regarding Internet privacy matters could adversely affect our ability to conduct our business.
Consumer and industry groups have expressed concerns about online data collection and use by companies, which has resulted in the release of various industry self-regulatory codes of conduct and best practice guidelines that are binding for member companies and that govern, among other things, the ways in which companies can collect, use and disclose user information, how companies must give notice of these practices and what choices companies must provide to consumers regarding these practices. We are obligated in certain cases to comply with best practices or codes of conduct addressing matters, such as the online tracking of users or devices. We cannot assure you that our practices have complied, comply, or will comply fully with all such best practices or codes of conduct. Any failure, or perceived failure, by us to comply with these best
practices or codes of conduct could result in harm to our reputation, a loss in business, and proceedings or actions against us by consumers, governmental entities or others.
U.S. regulatory agencies have also placed an increased focus on online privacy matters and, in particular, on online advertising activities that utilize cookies, which are small files of non-personalized information placed on an Internet user’s computer, and other online tracking methods. Such regulatory agencies have released, or are expected to release, reports pertaining to these matters. For example, on March 26, 2012, the Federal Trade Commission, or FTC, issued a report on consumer privacy intended to articulate best practices for companies collecting and using consumer data. The report recommends companies adopt several practices that could have an impact on our business, including giving consumers notice and offering them choices about being tracked across other parties’ websites and implementing a persistent “Do Not Track” mechanism to enable consumers to choose whether to allow tracking of their online search and browsing activities, including on mobile devices. Various industry participants have worked to develop and finalize standards relating to a Do Not Track mechanism, and such standards may be implemented and adopted by industry participants at any time. We may be required or otherwise choose to adopt Do Not Track mechanisms, in which case our ability to use our existing tracking technologies and permit their use by performance marketing networks and other third parties could be impaired. This could cause our net revenues to decline and adversely affect our operating results.
U.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’ ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools. A number of bills have been proposed in the U.S. Congress in the past that contained provisions that would have regulated how companies can use cookies and other tracking technologies to collect and use information about consumers. Some of those bills also contained provisions that would have specifically regulated the collection and use of information, particularly geolocation information, from mobile devices.
Additionally, the EU has traditionally imposed more strict obligations under data privacy laws and regulations. Individual EU member countries have had discretion with respect to their interpretation and implementation of EU data privacy laws, resulting in variation of privacy standards from country to country. Legislation and regulation in the EU and some EU member states requires companies to obtain specific types of notice and consent from consumers before using cookies or other tracking technologies. To comply with these requirements, the use of cookies or other similar technologies may require the user's affirmative, opt-in consent. In October 2015, the European Court of Justice, or ECJ, ruled that the "safe harbor" framework for the transfer of certain personal information from the EU to the U.S. was invalid. The transfer of personal information from the EU to the U.S. may still take place under the Model Clauses approved by the European Commission and, following the ECJ's safe harbor decision, we put in place the Model Clauses. On July 12, 2016, the European Commission announced that it had adopted a regime to replace the safe harbor framework named the "Privacy Shield." It is currently unclear whether the Privacy Shield will be, for us, a more appropriate regime for the transfer of certain personal information from the EU to the U.S. so we continue to use the Model Clauses and monitor developments on the Privacy Shield. However, the Model Clauses may be subject to the same challenge as the safe harbor and ruled invalid in due course. If we are then required to implement the Privacy Shield, there is a risk that it may impose additional obligations in respect of the transfer of personal information from the EU to the U.S. that could force us to change our business practices or incur additional costs. Additionally, the existing data protection legal framework in the EU will be superseded by the General Data Protection Regulation, or GDPR, that will result in a greater compliance burden with respect to our operations in Europe. The GDPR package was formally adopted by both the European Parliament and the Council in April 2016 and will enter in force on May 25, 2018. Compliance with the GDPR could increase our operating costs, subject us to significant penalties for non-compliance and make it more difficult to obtain consent from consumers for our email newsletter, resulting in less consumer traffic and net revenues, our business and operating results could suffer and profitability could be adversely affected. In addition, the ECJ has found that there is a "right to be forgotten," which means that the user has a right to request his or her personal information be deleted. In deciding this case, the ECJ purported to extend jurisdictional reach over foreign Internet activities. As a result of this decision, significant new restraints may be imposed on the retention of personal data throughout the EU, which could impact the operation and growth of our business in the EU.
Other changes in global privacy laws and regulations and self-regulatory regimes may also force us to incur substantial costs or require us to change our business practices. This could compromise our ability to pursue our growth strategies effectively and may adversely affect the demand for our solutions or otherwise harm our business and financial condition. For instance, new privacy laws or regulations or changed interpretations of existing laws or regulations could require performance marketing networks or us to take additional measures to facilitate consumer privacy preferences or to limit or cease altogether the collection, use or disclosure of data. For example, one potential restriction on the use of cookies would allow a website that a consumer has elected to visit to continue to place cookies on the user’s browser without explicit consent, but would require the user’s explicit consent for a third party to place its cookies on the user’s browser. A 2010 FTC staff report
also recommends that websites offer consumers a choice about whether the owner of the website can use third parties to track the consumer’s activity for certain purposes. We are dependent on third parties, including performance marketing networks, to place cookies on browsers of users that visit our websites. If in the future we are restricted from allowing cookies, if there is a material increase in the number of users who choose to opt out or block cookies and other tracking technologies, or if performance marketing networks’ cookies or other tracking mechanisms otherwise do not function properly, our ability to generate net revenues would be significantly impaired.
Finally, we may be subject to foreign laws regulating online advertising even in jurisdictions where we do not have any physical presence to the extent a digital media content provider has advertising inventory that we manage or to the extent that we collect and use data from consumers in those jurisdictions. Such laws may vary widely around the world, making it more costly for us to comply with them. Failure to comply may harm our business and our operating results could be adversely affected.
Our gift card business could fail to achieve expected results because the purchase and sale of gift cards electronically is not attractive to consumers or if there is a decline in the attractiveness of gift cards to consumers.
The business of selling gift cards electronically over the Internet and via mobile applications is dynamic and relatively new. In particular, the market for the purchase and sale of gift cards from third parties other than the issuing merchant is in its early stages and may be slower to develop than we expect, if it develops at all. In addition, consumer demand for gift cards may stagnate or decline. Consumer perception of gift cards as impersonal gifts may become more widespread, which may deter consumers from purchasing gift cards for gifting purposes in general and reduce the supply of and demand for gift cards through our marketplace. This perception may increase to the extent that electronic gift cards become more prevalent. In addition, a move from traditional gift cards to other gifting technologies could harm our business, and a failure by us to keep pace with the rapid technological developments in the gift card industry and the greater electronic payments industry may materially and adversely affect our business, results of operations and financial condition. Moreover, during periods of economic uncertainty and decline, consumers may become increasingly concerned about the value of gift cards due to fears that content providers may become insolvent and be unable to honor gift card balances. Decline or stagnation in consumer acceptance of and demand for gift cards, or a failure of demand to grow as expected, could have a material adverse effect on our business, results of operations and financial condition.
As we expand our gift card business and develop and provide other new solutions, we may be subject to additional and unexpected regulations, which could increase our costs or otherwise harm our business.
As we expand our gift card business and develop and provide solutions that address other new market segments, we may become subject to additional laws and regulations, which could create unexpected liabilities for us, cause us to incur additional costs or restrict our operations.
We have begun to introduce new product offerings, which may be subject to regulation by federal, state and local authorities and by authorities in foreign countries. For example, unlike our other solutions, in order to facilitate product offerings such as the sale of gift cards, we, or one or more third party payment processors acting on our behalf, may acquire, store and process consumer credit card data or other personally identifiable information. The processing of such information requires compliance with the Payment Card Industry Data Security Standard, or PCI DSS. Under the PCI DSS, we are required to maintain internal controls over the use, storage and security of credit card data and other personally identifiable information to help prevent credit card fraud. Failure to comply with this standard could result in breaches of contractual obligations with our payment processors, may subject us to fines, penalties, damages and civil liability and could eventually prevent us from processing or accepting credit cards.
Transactions involving digital rebates, the sale of gift cards, and/or the purchase of gift cards may require us to comply with numerous state, federal and international laws and regulations including federal anti-money laundering laws and regulations, the Bank Secrecy Act (BSA), anti-terrorist financing laws, and anti-bribery and corrupt practice laws and regulations, federal economic sanctions laws overseen by the Office of Foreign Assets Control, federal and state consumer protection laws and regulations, state unclaimed property (escheat) laws and money transmitter licensing requirements and foreign jurisdiction payment services industry laws and regulations. We have limited experience operating our business in accordance with these specific laws and regulations. Furthermore, if in the U.S. we are determined to be subject to the BSA, then enforcement of the BSA and other anti-money laundering and terrorist financing prevention laws or more onerous regulation could increase our or our distribution partners' compliance costs or require changes in, or place limits upon, the products and services we offer, which in turn could have a material adverse effect on our business, results of operations and financial condition. Additionally, abuse of the prepaid gift cards sold in our marketplace for purposes of financing sanctioned countries, funding terrorists, or for use in bribery or corruption or other criminal activity could cause reputational or other harm
that could have a material adverse effect on our business. If we fail to comply with any of these laws or regulations, our business, results of operations and financial condition could be adversely affected.
From time to time, we may be notified of or otherwise become aware of additional laws and regulations that governmental organizations or others may claim should be applicable to our business. Our failure to anticipate the application of these laws and regulations accurately, or other failure to comply, could create liability for us, result in adverse publicity or cause us to alter our business practices, which could cause our net revenues to decrease, our costs to increase or our business otherwise to be harmed.
Fraudulent and other illegal activity involving our gift card business could lead to reputational and financial harm to us or our partners and reduce the use and acceptance of our gift card products and services.
Purchases and sales of gift cards, and particularly the purchase and sale of gift cards acquired from third parties, including consumers, rather than directly or indirectly from the issuing merchant, increase our exposure to various types of fraud committed by third parties or by our own employees. Fraud could include the sale to us of gift cards that do not contain the purported balance or the purchase of gift cards from us using stolen credit cards or other payment methods. Additionally, our gift card business subjects us to additional fraud risks associated with "merchandise credits." Merchandise credits function much like a prepaid gift card once issued. Such credits may result from organized retail theft, typically in the form of returns of stolen or fraudulently obtained goods by organized groups of professional shoplifters, or "boosters," who then convert such goods into merchandise credits, which are sometimes then exchanged for cash. To the extent that issuing merchants, or Issuers, view the exchange of merchandise credits by our gift card business as contrary to their efforts to reduce organized retail crime, our relationships with those Issuers may be adversely affected. Issuers may also change their merchandise credit practices in a way that hurts our business. The monetary and other impacts of any criminal investigations into activities by our customers and our ongoing risk management actions may remain unknown for a substantial period of time. Our failure to anticipate, prevent or discover fraud related to gift cards, could create liability for us, result in adverse publicity or cause us to alter our business practices, any of which could cause our net revenues to decrease, our costs to increase, or our business, results of operations and financial condition to be adversely affected.
If gift card terms and conditions purporting to restrict transfer to subsequent purchasers are enforceable, our supply of gift cards would be reduced and our operating results would be materially and adversely affected.
The inventory in our gift card segment includes discounted gift cards purchased from parties who are not the issuing merchant. In certain instances, the terms and conditions of such gift cards purport to restrict transfers from the original purchaser to a third party. We do not believe such restrictions are generally enforceable as drafted. If such restrictions were enforced or found to be enforceable they could reduce the availability of discounted gift cards for purchase from third party transferees. This would in turn significantly reduce the volume of gift cards available for purchase and would leave us with insufficient supply to maintain or grow our business at expected levels. Our operating results would be materially and adversely affected if our supply of discounted gift cards were reduced by contractual restrictions on transfers.
Changes in consumer sentiment or laws, rules or regulations regarding the use of cookies and other tracking technologies, advertising blocking software and other privacy matters could have a material adverse effect on our ability to generate net revenues and could adversely affect our ability to collect proprietary data on consumer shopping behavior.
Consumers may become increasingly resistant to the collection, use and sharing of information online, including information used to deliver advertising and to attribute credit to publishers such as us in performance marketing programs, and take steps to prevent such collection, use and sharing of information. For example, consumer complaints and/or lawsuits regarding online advertising or the use of cookies or other tracking technologies in general and our practices specifically could adversely impact our business.
Consumers can currently opt out of the placement or use of most cookies for online advertising purposes by either deleting or disabling cookies on their browsers, visiting websites that allow consumers to place an opt-out cookie on their browsers, which instructs participating entities not to use certain data about consumers’ online activity for the delivery of targeted advertising, or by downloading browser plug-ins and other tools that can be set to: identify cookies and other tracking technologies used on websites; prevent websites from placing third-party cookies and other tracking technologies on the user’s browser; or block the delivery of online advertisements on websites and applications.
Various software tools and applications have been developed that can block advertisements from a user’s screen or allow users to shift the location in which advertising appears on webpages or opt out of display, search and internet-based advertising entirely. In particular, Apple recently updated its mobile operating system to permit these technologies to work in
its mobile Safari browser. In addition, changes in device and software features could make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies. In particular, the default settings of consumer devices and software may be set to prevent the placement of cookies unless the user actively elects to allow them. For example, Apple’s Safari browser currently has a default setting under which third-party cookies are not accepted, and users must activate a browser setting to enable cookies to be set. On February 22, 2012, the Digital Advertising Alliance announced that its members will work to add browser-based header signals to the set of tools by which consumers can express their preferences not to be tracked online. As discussed above, a 2010 FTC report on consumer privacy calls for the development and implementation of a persistent Do Not Track mechanism that enable consumers to choose whether to allow the tracking of their online search and browsing activities. Various industry participants have worked to develop and finalize standards relating to a Do Not Track mechanism, and such standards may be implemented and adopted by industry participants at any time.
We are dependent on performance marketing networks or in some instances, paid merchants, to place cookies on browsers of users that visit our websites or to use other tracking mechanisms to allow paid merchant sales through our marketplace to be attributed to us, and if we are restricted from allowing these or if they do not function in a manner that allows paid merchant sales through our marketplace to be attributed to us, our ability to generate net revenues would be significantly impaired. In particular, if consumer sentiment regarding privacy issues or the development and deployment of new browser solutions or other Do Not Track mechanisms results in a material increase in the number of users who choose to opt out or block cookies and other tracking technologies or who are otherwise using browsers where they need to, and fail to, configure the browser to accept cookies, or otherwise results in cookies or other tracking technologies not functioning properly, our ability to conduct our business, operating results and financial condition would be adversely affected.
In addition to this change in consumer preferences, if merchants perceive significant negative consumer reaction to targeted online advertising or the tracking of consumers’ online activities, they may determine that such advertising or tracking has the potential to negatively impact their brand. In that case, advertisers may limit or stop the use of our solutions, and our operating results and financial condition would be adversely affected.
Our business practices with respect to privacy, data and consumer protection could give rise to liabilities or reputational harm as a result of governmental regulation, legal obligations or industry standards relating to privacy, data and consumer protection.
Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect. In addition, certain laws impose restrictions on communications with persons by email, SMS text messages and other means of delivery. We are also subject to legal obligations concerning privacy, data and consumer protection such as the terms of our privacy policies and our privacy and data-related agreements with third parties. Our contracts with the paid merchants and performance marketing networks with which we exchange data, for example, govern our respective rights to use such data. We strive to comply with all applicable laws, regulations, self-regulatory requirements and legal obligations relating to privacy, data and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. For example, several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. We cannot assure you that our practices have complied, comply, or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with federal, state or international laws or regulations, including laws and regulations regulating privacy, data, marketing communications or consumer protection, our own privacy policies and practices, or other policies, self-regulatory requirements or legal obligations could result in harm to our reputation, a loss in business, and proceedings or actions against us by governmental entities, consumers, merchants or others. Additionally, if third parties we work with violate applicable laws, our policies or other privacy-related obligations, such violations may also put our users’ information at risk and could in turn have an adverse effect on our business. If, for example, third parties cease to provide us with consumer data that assists in our targeted advertising to consumers, due to governmental regulation or other reasons, our business could be negatively impacted.
Government regulation of the Internet, e-commerce and mobile commerce is evolving, and unfavorable changes or failure by us to comply with these laws and regulations could substantially harm our business and results of operations.
We are subject to general business regulations and laws specifically governing the Internet, e-commerce and mobile commerce, or m-commerce, in a number of jurisdictions around the world. Existing and future regulations and laws could impede the growth of the Internet, e-commerce, m-commerce or other online services. These regulations and laws may involve taxation, tariffs, privacy and data security, anti-spam, data protection, content, copyrights, distribution, electronic contracts, electronic communications, money laundering, electronic payments and consumer protection. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet as the vast majority of these laws and regulations were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet, e-commerce or m-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet, e-commerce or m-commerce may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot assure you that our practices have complied, comply or will in the future comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business, and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant resources in defense of these proceedings, distract our management, increase our costs of doing business, and cause consumers and paid merchants to decrease their use of our marketplace, and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of noncompliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our websites and mobile applications or may even attempt to completely block access to our marketplace. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected and we may not be able to maintain or grow our net revenues as anticipated.
If use of the Internet and mobile applications as a medium of commerce does not continue to grow, or contracts, our business may suffer.
The business of selling goods and services over the Internet and via mobile applications, and the use of digital offers (including gift cards) in those transactions, is dynamic and relatively new. Concerns about fraud, privacy and other challenges may discourage additional consumers from adopting the Internet and mobile applications as a medium of commerce. Acquiring new customers for our marketplace and increasing consumer traffic may become more difficult and costly than it has been in the past, particularly in markets where our marketplace has been available for some time. In order to increase consumer traffic to our websites and increase use of our mobile applications, we must appeal to consumers who historically have used traditional means of commerce to purchase goods and services and may prefer alternatives to our websites and mobile applications, such as the merchant’s own website or mobile application. In addition, consumers may not be accustomed to using one of our mobile applications to access digital offers (including gift cards) that can be used by the consumer while in a retail store or restaurant. If these consumers prove to be less active than consumers who are already providing traffic to our websites or using our mobile applications, or we are unable to gain efficiencies in our operating costs, including our cost of increasing consumer traffic to our websites or increasing the number of mobile application sessions, our business could be adversely impacted. Furthermore, to the extent that weak economic conditions cause consumer spending to decline or cause our customers and potential customers to freeze or reduce their marketing budgets, particularly in the online retail market, demand for our solutions may be negatively affected.
We may face liability for, and may be subject to claims related to, inaccurate or outdated content or digital offers provided to us, or content or digital offers provided to us without permission, which could require us to pay significant damages, may be extremely costly to defend even if decided in our favor and could limit our ability to operate.
The information on our websites and mobile applications that is provided by performance marketing networks and merchants and collected from third parties relates to digital offers from merchants. We are exposed to the risk that some of this content or digital offers may contain inaccurate or outdated information about retailer products or services or the discounts thereon, or digital offers that are not made available or intended to be made available to all consumers. This could cause consumers and merchants to lose confidence in the information or digital offers provided on our platform or become dissatisfied with our platform and result in lawsuits being filed against us.
In addition, we currently face and may in the future be exposed to potential liability relating to information that is published or made available through our marketplace, including information generated by us, user-generated content and proprietary information of third parties. This content may expose us to claims related to trademark and copyright infringement and other intellectual property rights, rights of privacy, defamation, fraud, negligence, breach of contract, tortious interference, unfairness, deceptiveness, false or misleading advertising, personal injury torts, noncompliance with state or federal laws relating to digital offers or other theories based on the nature and content of the information. The laws relating to the liability of service providers for activities of their users is currently unsettled both within the U.S. and internationally, although risks related to these types of lawsuits may be enhanced in certain jurisdictions outside the U.S. where our protection from liability for third-party actions is more unclear and where we may be less protected under local laws than we are in the U.S.
Such claims or lawsuits currently and could in the future divert the time and attention of management and technical personnel away from our business and result in significant costs to investigate and defend, regardless of the merits of the
claims. Such potential claims and lawsuits could also result in significant damages if we are found liable. The scope and amount of our insurance may not adequately protect us against these types of damages. Additionally, as a result of such claims, we have elected and may in the future elect or be compelled to remove valuable content from our websites or mobile applications, which could decrease the usefulness of our platform for consumers and result in less traffic to our websites and less usage of our mobile applications. If any of these events occur, our business and financial results could be adversely affected.
Our business could suffer if the jurisdictions in which we operate change the way in which they regulate user-generated content.
Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices related to user-generated content and that requires changes to these practices or the design of our platform or solutions. For example, 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 against third parties, 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. If immunities currently afforded to websites that publish user-generated content are limited, we may be compelled to remove content from our platform that we would otherwise publish or restrict the types of businesses that we can promote digital offer content for, among other changes. Such changes in law could increase our operating costs and make it more difficult for consumers to use our platform, resulting in less consumer traffic and net revenues, and our business and operating results could suffer.
The growth of e-commerce in the U.S. could suffer if the federal government implements new regulations that obligate merchants, or permit states to obligate merchants, to collect sales taxes from consumers on certain e-commerce transactions, which would adversely affect our growth.
Legislation introduced in the U.S. Senate as S. 698 in March 2015 would grant states the authority to require out-of-state merchants to collect and remit sales taxes. The adoption of remote sales tax collection legislation would result in the imposition of sales taxes and additional costs associated with complex sales tax collection, remittance and audit compliance requirements on many of our merchants, which would make selling online or through mobile applications less attractive for these merchants. Additionally, the introduction of new or increased taxes applicable to online transactions could make online purchases less attractive to consumers relative to in-store retail purchases. These changes could substantially impair the growth of e-commerce in the U.S., and could diminish our opportunity to derive financial benefit from our activities in the U.S.
We may be sued by third parties for infringement or other violation of their intellectual property or proprietary rights.
Internet, advertising and e-commerce companies frequently are subject to litigation based on allegations of infringement, misappropriation, dilution or other violations of intellectual property rights. Some Internet, advertising and e-commerce companies, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us.
Third parties have asserted, and may in the future assert, that we have infringed, misappropriated or otherwise violated their intellectual property rights.
For instance, the use of our technology to provide our solutions could be challenged by claims that such use infringes, dilutes, misappropriates or otherwise violates the intellectual property rights of a third party. In addition, we currently face and may in the future be exposed to claims that content published or made available through our websites or mobile applications violates third-party intellectual property rights. For example, merchants and other third parties frequently have complained that their trademarks, copyrights or other intellectual property are being used on our websites or mobile applications without their permission and in violation of their rights or in violation of laws or regulations.
As we face increasing competition and as a public company, the possibility of intellectual property rights claims against us grows. Such claims and litigation may involve patent holding companies or other adverse intellectual property rights holders who have no relevant product revenue, and therefore our own pending patents and other intellectual property rights may provide little or no deterrence to these rights holders in bringing intellectual property rights claims against us. There may be intellectual property rights held by others, including issued or pending patents and trademarks, that cover significant aspects of our technologies, content, branding or business methods, and we cannot assure that we are not infringing or violating, and have not violated or infringed, any third-party intellectual property rights or that we will not be held to have done so or be accused of doing so in the future.
Any claim that we have violated intellectual property or other proprietary rights of third parties, with or without merit, and whether or not it results in litigation, is settled out of court or is determined in our favor, could be time-consuming and costly to address and resolve, and could divert the time and attention of management and technical personnel from our business. Furthermore, an adverse outcome of a dispute may result in an injunction and could require us to pay substantial monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property rights. Any settlement or adverse judgment resulting from such a claim could require us to enter into a licensing agreement to continue using the technology, content or other intellectual property that is the subject of the claim; restrict or prohibit our use of such technology, content or other intellectual property; require us to expend significant resources to redesign our technology or solutions; and require us to indemnify third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. There also can be no assurance that we would be able to develop or license suitable alternative technology, content or other intellectual property to permit us to continue offering the affected technology, content or services to our customers. Any of these events could harm our business, operating results and financial condition.
Failure to protect or enforce our intellectual property rights could harm our business and results of operations.
We pursue the registration of our patentable technology, domain names, trademarks and service marks in the U.S. and in certain jurisdictions abroad. We also strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We typically enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, we may not be successful in executing these agreements with every party who has access to our confidential information or contributes to the development of our technology or intellectual property rights. Those agreements that we do execute may be breached, and we may not have adequate remedies for any such breach. These contractual arrangements and the other steps we have taken to protect our intellectual property rights may not prevent the misappropriation or disclosure of our proprietary information nor deter independent development of similar technology or intellectual property by others.
Effective trade secret, patent, copyright, trademark and domain name protection is expensive to obtain, develop and maintain, both in terms of initial and ongoing registration or prosecution requirements and expenses and the costs of defending our rights. We are seeking to protect our patentable technology, trademarks and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming. We have seven patents issued, three patent applications that have been allowed and 101 pending patent applications. We do not know whether any of our pending patent applications will result in the issuance of additional patents or whether the examination process will require us to narrow our claims or we may otherwise be unable to obtain patent protection for the technology covered in our pending patent applications. Our patents, trademarks and other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Moreover, any issued patents may not provide us with a competitive advantage and, as with any technology, competitors may be able to develop similar or superior technologies to our own, now or in the future.
Additionally, in the U.S., several significant developments in the intellectual property industry, including the continued effect of the Leahy-Smith America Invents Act of 2011 (including several new means by which challenges of patents may be effected) and the Supreme Court holding in the Alice Corp. v. CLS Bank International case, which called into question the patentability of computer software, may negatively impact our ability to obtain patents or enforce patent rights. For example, the claims of our patent applications may fail to issue, or if they do issue, may subsequently be challenged or invalidated, based on these developments.
Monitoring unauthorized use of the content on our websites and mobile applications, and our other intellectual property and technology, is difficult and costly. Our efforts to protect our proprietary rights and intellectual property may not have been and may not be adequate to prevent their misappropriation or misuse. Third parties from time to time copy content or other intellectual property or technology from our solutions without authorization and seek to use it for their own benefit. We generally seek to address such unauthorized copying or use, but we have not always been successful in stopping all unauthorized use of our content or other intellectual property or technology, and may not be successful in doing so in the future. Further, we may not have been and may not be able to detect unauthorized use of our technology or intellectual property, or to take appropriate steps to enforce our intellectual property rights. Our competitors may also independently develop similar technology. Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our solutions or technology are hosted or available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights may be inadequate. Further, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights
are uncertain. The laws in the U.S. and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property rights could result in competitors offering solutions that incorporate our most technologically advanced features, which could reduce demand for our solutions.
We may find it necessary or appropriate to initiate claims or litigation to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of intellectual property rights claimed by others. Litigation is inherently uncertain and any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property, our business and operating results may be harmed.
The United Kingdom electorate voted in favor of a U.K. exit from the E.U. in a referendum, which could adversely impact our business, results of operations and financial condition.
The United Kingdom, or U.K., government held an in-or-out referendum on the U.K.’s membership in the European Union, or E.U., in June 2016, which resulted in the electorate voting in favor of a U.K. exit from the E.U., or Brexit. It is expected that a process of negotiation will now determine the future terms of the U.K.’s relationship with the E.U. We have operations and employees in offices in the U.K. and elsewhere in the E.U., and conduct business throughout Europe. Depending on the terms of Brexit, we could face new regulatory costs and challenges in operating our U.K and E.U. businesses. For instance, the U.K. could lose access to the single E.U. market and to the benefits of the trade regimes negotiated by the E.U. on behalf of its members. A decline in trade or general economic slowdown could affect the prospects of our U.K. or other European businesses. Additionally, currency exchange rates in the British pound and the Euro with respect to each other and with respect to the U.S. dollar have already been affected by Brexit. Because a material portion of our revenues are derived from our U.K. and E.U. operations, and because those revenues can be sensitive to foreign currency exchange rates, particularly with respect to the U.S. dollar, the British pound and the Euro, future exchange rate fluctuations could negatively impact our business. Any adjustments we are required make to our business and operations as a result of Brexit could result in significant expense and distraction to management. Any of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.
We are subject to international business uncertainties that could adversely affect our operations and operating results.
Our net revenues from operations outside the U.S. comprised
20.1%
and 20.6% of our Core operating segment net revenues in the
three months ended March 31, 2017
and in fiscal year 2016, respectively. We operate international websites marketing to residents of Canada, France and the U.K. We currently have operations in the U.K. and France. We intend to maintain or expand our existing operations in or to these countries and may establish a presence in additional countries to grow our international sales. Operating in foreign countries requires significant resources and management attention, and we have limited experience entering new geographic markets. In addition, the varying commercial and Internet infrastructure in other countries may make it difficult for us to replicate our business model. In many countries, we compete with local companies that have more experience in their respective markets than we do, and we may not benefit from first-to-market advantages. To achieve widespread acceptance in new countries and markets, we must continue to tailor our solutions and business model to the unique circumstances of such countries and markets, which can be difficult and costly. Failure to adapt practices and models effectively to each country into which we expand could slow our international growth. We cannot assure you that our international efforts will be successful. International sales and operations may be subject to risks such as:
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competition with local or foreign companies operating in or entering the same markets;
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the suitability, compatibility and successful implementation of the shared information technology infrastructure that we have developed to power our marketplace in certain of our international markets;
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the cost and resources required to localize our solutions, while maintaining paid merchant and consumer satisfaction such that our marketplace will continue to attract high quality paid merchants;
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difficulties in staffing and managing foreign operations due to distance, time zones, language and cultural differences;
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higher product return rates;
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burdens of complying with a wide variety of laws and regulations, including regulation of digital offer terms, Internet services, privacy and data protection, bulk emailing and anti-competition regulations, which may limit or prevent us from offering of our solutions in some jurisdictions or limit our ability to enforce contractual obligations;
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exposure to markets where there is a concentration of merchants and those merchants individually or collectively exercise their market power to negotiate lower commissions or cease to monetize with us entirely;
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adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;
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political and economic instability;
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terrorist activities and natural disasters;
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differing employment practices and laws and labor disruptions;
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technology compatibility;
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credit risk and higher levels of payment fraud;
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increased financial accounting and reporting burdens and complexities and difficulties in implementing and maintaining adequate internal controls;
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slower adoption of the Internet as an advertising, broadcast and commerce medium in certain of those markets as compared to the U.S.;
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lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;
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preference for local vendors; and
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different or lesser degrees of intellectual property protection.
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In addition, the U.S. has in the past proposed, and is currently evaluating, changes to the corporate tax structure that would include taxation of offshore earnings of U.S. businesses. If this were to occur, our effective tax rates would likely increase. Further, we are subject to U.S. and foreign legislation, such as the Foreign Corrupt Practices Act and the U.K. Bribery Act. While we maintain high standards of ethical conduct, our policies, training and monitoring of compliance with applicable anti-corruption laws are at an early stage of development. If any of our employees or agents were to violate these laws in the conduct of our business, we could be subject to substantial penalties and our reputation could be impaired.
These factors could have an adverse effect on our net revenues from advertisers located outside the U.S. and, consequently, on our business and operating results.
We may be unable to continue the use of our domain names, or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brands, trademarks or service marks.
We have registered domain names for our websites that we use in our business. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration, or any other cause, we may be forced to market our solutions under a new domain name, which could cause us substantial harm, or to incur significant expense in order to purchase rights to the domain name in question. In addition, our competitors and others could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered in the U.S. and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brands, trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management’s attention.
ICANN (the Internet Corporation for Assigned Names and Numbers), the international authority over top-level domain names, has been increasing the number of generic top-level domains, or “TLDs.” This may allow companies or individuals to create new web addresses that appear to the right of the “dot” in a web address, beyond such long-standing TLDs as “.com,” “.org” and “.gov.” ICANN may also add additional TLDs in the future. As a result, we may be unable to maintain exclusive rights to all potentially relevant or desirable domain names in the United States or in other countries in which we operate, which may harm our business. Furthermore, attempts may be made by third parties to register our trademarks as new TLDs or as domain names within new TLDs, and we may be required to enforce our rights against such registration attempts, which could result in significant expense and the diversion of management’s attention.
The consumer traffic to our websites and mobile applications may decline and our business may suffer if other companies copy information from our marketplace and publish or aggregate it with other information for their own benefit.
From time to time, other companies copy information or content from our marketplace or email channels, through website scraping, robots or other means, and publish or aggregate it with other information for their own benefit. When third parties copy, publish or aggregate content from our platform, it makes them more competitive, and decreases the likelihood that consumers will visit our websites or use our mobile applications to search and discover the information they seek, which could negatively affect our business, results of operations and financial condition. We may not be able to detect such third-party conduct in a timely manner or at all and, even if we are able to identify these situations, we may not be able to prevent them and have not always been able to prevent them in the past. In some cases, particularly in the case of websites operating outside
of the U.S., our available remedies may be inadequate to protect us against such practices. In addition, we may be required to expend significant financial or other resources to successfully enforce our rights.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, violation of law and other losses.
Our agreements with paid merchants, performance marketing networks and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, sales taxes due as a result of our activities within a state or other liabilities relating to or arising from our products, services or other contractual obligations, including noncompliance with any laws, regulations, self-regulatory requirements or other legal obligations relating to privacy, data protection and consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business. Any such proceeding or action, and any related indemnification obligation, could hurt our reputation, force us to incur significant expenses in defense of these proceedings, distract our management, increase our costs of doing business and cause consumers and paid merchants to decrease their use of our marketplace, and may result in substantial monetary liability. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement.
We rely on information technology to operate our business and maintain competitiveness, and any failure to adapt to technological developments or industry trends could harm our business.
We depend on the use of information technologies and systems. As our operations grow, we must continuously improve and upgrade our systems and infrastructure while maintaining or improving the reliability and integrity of our infrastructure. Our future success also depends on our ability to adapt our systems and infrastructure to meet rapidly evolving consumer trends and demands while continuing to improve the performance, features and reliability of our solutions in response to competitive services and product offerings. The emergence of alternative platforms such as smartphones and tablets and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in technology. New developments in other areas, such as cloud computing, could also make it easier for competition to enter our markets due to lower up-front technology costs. In addition, we may not be able to maintain our existing systems or replace or introduce new technologies and systems as quickly as we would like or in a cost-effective manner.
Some of our solutions contain open source software, which may pose particular risks to our proprietary software and solutions.
We use open source software in our solutions and will use open source software in the future. Some licenses governing our use of open source software contain requirements that we make available source code for modifications or derivative works we create based upon the open source software, and that we license such modifications or derivative works under the terms of a particular open source license or other license granting third parties certain rights of further use. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in certain manners. Although we monitor our use of open source software, we cannot assure you that all open source software is reviewed prior to use in our solutions, that our developers have not incorporated open source software into our solutions, or that they will not do so in the future. Additionally, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our solutions. In addition, the terms of open source software licenses may require us to provide software that we develop using such open source software to others on unfavorable license terms. As a result of our current or future use of open source software, we may face claims or litigation, be required to release our proprietary source code, pay damages for breach of contract, re-engineer our solutions, discontinue making our solutions available in the event re-engineering cannot be accomplished on a timely basis or take other remedial action. Any such re-engineering or other remedial efforts could require significant additional research and development resources, and we may not be able to successfully complete any such re-engineering or other remedial efforts. Further, in addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business, financial condition and operating results.
We may be unable to identify suitable candidates for strategic transactions, effectively integrate newly acquired businesses or technology, or achieve expected operating results from acquisitions or other strategic transactions.
Part of our growth strategy is to increase our net revenues and improve our operating results through the acquisition of, or entry into other strategic transactions such as partnerships with similar or complementary businesses. There can be no assurance that suitable candidates for acquisitions or other strategic transactions will be identified or, if suitable candidates are identified, that strategic transactions can be completed on acceptable terms, if at all.
Since our inception, we have completed numerous acquisitions and other strategic transactions, and we may continue to enter into strategic transactions in the future. Our success will depend in part on our ability to identify, negotiate, and complete strategic transactions and integrate acquired businesses or technology and, if necessary, satisfactory debt or equity financing to fund those transactions. As is the case with our current debt facility, if we finance a strategic transaction with debt financing, we will incur interest expense and may have to comply with financing covenants or secure the debt obligations with our assets. Mergers and acquisitions and other strategic transactions are inherently risky, and any transactions we complete may not be successful. Any strategic transactions we undertake in the future would involve numerous risks, any of which could have an adverse effect on our business, financial condition or operating results, including the following:
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use of cash resources and incurrence of debt and contingent liabilities in funding strategic transactions, which may limit our operational flexibility and other potential uses of our cash, including stock repurchases, dividend payments and retirement of outstanding indebtedness;
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expected and unexpected costs incurred in identifying and pursuing strategic transactions and performing due diligence regarding potential strategic transactions that may or may not be successful;
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failure of the acquired company to achieve anticipated consumer traffic, revenue, earnings, cash flows or other desired financial, operational or technological goals;
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our responsibility for the liabilities of the businesses we acquire, including the assumption of liabilities that were not disclosed to us or that exceed our estimates;
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difficulties in integrating and managing the combined operations, technologies and solutions;
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failure to identify all of the problems, liabilities or other shortcomings or challenges of a counterparty to a strategic transaction or an acquired company, including issues related to intellectual property, solution quality or architecture, inventory quality or sufficiency, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues;
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diversion of management’s attention or other resources from our existing business;
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inability to maintain the key business relationships and the reputations of the businesses we acquire;
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difficulties in assigning or transferring technology or intellectual property licensed by acquired companies from third parties to us or our subsidiaries;
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uncertainty of entry into markets in which we have limited or no prior experience or in which competitors have stronger market positions;
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our dependence on unfamiliar merchants or performance marketing networks of the companies we acquire;
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insufficient incremental revenue to offset our increased expenses associated with strategic transactions;
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our inability to maintain internal standards, controls, procedures and policies;
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challenges in integrating and auditing the financial statements of acquired companies that have not historically prepared financial statements in accordance with U.S. generally accepted accounting principles;
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impairment of goodwill or other intangible assets such as trademarks or other intellectual property arising from acquisitions;
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amortization of expenses related to acquired intangible assets and other adverse accounting consequences;
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potential loss of key employees from the companies we acquire, as has occurred after previous acquisitions;
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dilution of our stockholders’ ownership interests if we finance all or a portion of the purchase price of any strategic transactions by issuing equity; and
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litigation or other claims from the counterparty to the strategic transaction, including claims from former stockholders, claims related to intellectual property infringement or other matters or various commercial or tort claims.
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Further, we rely heavily on the representations and warranties provided to us by counterparties to strategic transactions, including the sellers of acquired companies and assets, including as they relate to creation of, ownership of and
rights in intellectual property, existence of open source code, existence of encumbrances and operating restrictions and compliance with laws and contractual requirements. If any of these representations and warranties is inaccurate or breached, such inaccuracy or breach could result in costly litigation and assessment of liability for which there may not be adequate recourse against such sellers, in part due to contractual time limitations and limitations of liability.
We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our Series 1 common stock.
As of
March 31, 2017
, we have an aggregate of 87,926,984 shares of Series 1 common stock authorized but unissued and not reserved for issuance under our stock option plans or otherwise. We may issue all of these shares without any action or approval by our stockholders, subject to certain limitations of the NASDAQ Global Select Market. We may require additional capital from equity or debt financing in the future in order to take advantage of strategic opportunities, or to support our existing business. We may not be able to secure timely additional financing on favorable terms, or at all. Further, a failure to complete the Merger on its announced terms may result in negative publicity and a negative impression of us in the investment community, which could impair our ability to raise additional capital on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility, including our ability to issue or repurchase equity, develop new or enhanced existing products, complete acquisitions or otherwise take advantage of business opportunities. If we raise additional funds or finance acquisitions through further issuances of equity, convertible debt securities or other securities convertible into equity, you and our other stockholders could suffer significant dilution in your percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our Series 1 common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
Our business relies in part on email and other messaging, and any technical, legal or other restrictions on the sending of emails or messages or an inability to timely deliver such communications could harm our business.
Our business is in part dependent upon email and other messaging. We provide emails and mobile alerts and other messages to consumers informing them of the offers on our websites and mobile applications, and these communications help generate a portion of our net revenues. We also use email to deliver electronic gift cards to consumers. Because of the importance of email and other messaging services to our business, if we are unable to successfully deliver emails or other messages to consumers, if there are legal restrictions on delivering these messages to consumers, or if consumers do not open our emails or messages, our net revenues and profitability could be adversely affected. Changes in how webmail applications organize and prioritize email may result in our emails being delivered in a less prominent location in a consumer’s inbox or viewed as “spam” by consumers and may reduce the likelihood of that consumer opening our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also harm our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to consumers. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications would also adversely impact our business. We also rely on social networking messaging services to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by consumers could harm our business.
We rely on third-party services for the delivery of emails and other messages, and delays or errors in the delivery of such emails or other messaging we send have occurred and may in the future occur and be beyond our control, which could result in damage to our reputation or harm our revenues, business, financial condition and operating results. If we were unable to use our current email service or other messaging services, alternate services are available; however, we believe our results could be impacted for some period if we transition to a new provider. Any disruption or restriction on the distribution of our emails or other messages, termination or disruption of our relationship with our messaging service providers, including our third-party services that deliver our emails and other messages, or any increase in our costs associated with our email and other messaging activities could harm our business.
We receive important services from third-party vendors, and replacing them would be difficult and disruptive to our business.
We rely on third-party vendors to provide certain services relating to our business and it would be difficult to replace some of our third-party vendors in a timely manner, in particular, Amazon Web Services, our third party payment
processor and our third party fraud detection providers, in a timely manner if they were unwilling or unable to provide us with these services in the future, and consequently our business and operations could be adversely affected. If we are required to replace a vendor, we may not be able to do so on acceptable terms, or at all. Also, to the extent that any third-party vendor fails to deliver services, either in a timely, satisfactory manner, or at all, our business, results of operations and financial condition could be materially and adversely affected.
We may have exposure to greater than anticipated tax liabilities.
We are subject to taxes in the United States (federal and state) and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, by our inability to achieve the intended tax consequences of our recent corporate restructuring of our European operations, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. As we operate in numerous taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied.
We also are subject to audits by both U.S. federal and state and foreign tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies, within the U.S. or internationally, could adversely impact our financial condition and results of operations.
The current administration has made public statements indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed new legislation. Recent changes to U.S. tax laws, including limitations on the ability of taxpayers to claim and utilize foreign tax credits and the deferral of certain tax deductions until earnings outside of the U.S. are repatriated to the U.S., as well as changes to U.S. tax laws that may be enacted in the future, could impact the tax treatment of our foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the U.S. We are also subject to the taxation regimes of numerous foreign jurisdictions where our subsidiaries are organized or operate. Due to economic and political conditions, tax rates and policies in the U.S. or internationally may be subject to significant change. For example, effective April 1, 2015, the U.K. enacted a new taxing regime known as the diverted profits tax, which aims to counteract arrangements by corporate multinationals that result in the erosion of the U.K. tax base and that could increase our effective tax rate in that jurisdiction. As we expand our international business activities, any changes in the U.S. or foreign taxation of such activities may increase our worldwide effective tax rate and, in turn, adversely impact our financial condition and results of operations.
We rely on performance marketing networks and paid merchants to determine the amount payable to us accurately. If their reports are inaccurate or delayed, our operating results could be harmed and we could experience fluctuations in our performance.
Our performance marketing networks and paid merchants typically pay us on a monthly basis based upon sales generated from digital offers. We rely on our performance marketing networks and paid merchants to report accurately and in a timely manner the amount of commission revenues earned by us. We calculate our net revenues, prepare our financial reports, projections and budgets and direct our advertising, marketing and other operating efforts based in part on reports we receive from our performance marketing networks and paid merchants. It is difficult for us to determine independently whether our performance marketing networks or paid merchants are reporting all revenue data due to us. We have occasionally experienced instances of incomplete or delayed reports from our performance marketing networks and paid merchants, and we generally do not have the contractual right to audit our performance marketing networks or paid merchants. We have also experienced instances where payments may not be made by paid merchants through performance marketing networks, which can increase
the likelihood that accounts receivable will be written off as uncollectible. To the extent that our performance marketing networks or paid merchants fail to report accurately the amount of net revenues payable to us in a timely manner or at all, we will not recognize and collect net revenues to which we are entitled, which could harm our operating results. If we are allowed to audit a performance marketing network or paid merchant and do so, or if we otherwise dispute the accuracy of a revenue report a performance marketing network or paid merchant has delivered to us, our recognition of net revenues to which we may ultimately be entitled could be delayed. Conversely, if a performance marketing network or paid merchant delivers a report overstating the amount of net revenues earned by us in one period and attempts to reverse the overpayment in a subsequent period, whether by seeking a refund from us or reducing a future payment due to us, our recognition of revenue could be overstated. Any such delay or overstatement in our revenue recognition could harm our business and operating results.
We obtain the revenue reporting information from our performance marketing networks using a variety of methods, including the use of file transfer protocol file feeds, various application programming interfaces provided by the performance marketing networks and manual downloads of data from the performance marketing networks’ web portals. The use of any of these methods, in isolation, inherently subjects us to lower levels of internal control over revenue data, which could result in a misstatement of our net revenues. We have automated the process for collecting a substantial portion of the data necessary to record our net revenues. We currently augment this automated data collection process with manual validation of data from certain of the performance marketing networks’ web portals to help minimize risk of error. However, our validation methods may evolve over time. We cannot guarantee our ability to detect all errors in the data obtained automatically, which could affect our ability to accurately report our net revenues.
If we are unable to comply with all covenants of our current and future debt arrangements, and if our lenders fail to waive any violation of those covenants by us, we could be subject to substantial penalties, which would impair our ability to operate and adversely affect our operating results.
We currently have a term debt facility that provides us with cash, which we use to fund our operations and which requires us to comply with a number of restrictive covenants. We may enter into other debt arrangements in the future, which may contain similar or additional restrictive covenants. We are currently subject to covenants related to minimum trailing twelve-month EBITDA levels, a total debt to EBITDA ratio, a senior secured debt to EBITDA ratio, and a fixed charge coverage ratio (each as more fully described in our second amended and restated revolving credit and term loan agreement), and the defense of our intellectual and other property, among others. We may become subject to additional covenants in connection with future debt arrangements. As the margin profile of our business evolves, compliance with certain of these covenants and in particular minimum trailing twelve month EBITDA levels could become difficult to maintain. If we are unable to comply with one or more covenants applicable to us and our lenders are unwilling to waive our noncompliance, our lenders may have the right to terminate their commitments to lend to us, cause all amounts outstanding to become due and payable immediately, sell certain of our assets which are collateral for our obligations upon the satisfaction of certain conditions and take other measures which may impair our operations. If funds under our loan arrangements become unavailable or if we are forced unexpectedly to repay amounts outstanding under our loan arrangements, our assets and cash flow may be insufficient to make such repayments or may leave us with insufficient funds to continue our operations as planned and would have a material adverse effect on our business.
If we cannot maintain our corporate culture, we could lose the innovation, teamwork and focus that contribute to our business.
We believe that a critical component of our success has been our corporate culture, which we believe fosters innovation, encourages teamwork, cultivates creativity and promotes focus on execution. We have invested and continue to invest substantial time, energy and resources in building a highly collaborative team that works together effectively in an environment designed to promote openness, honesty, mutual respect and the pursuit of common goals. As we continue to develop the infrastructure of a public company, we may find it difficult to maintain these valuable aspects of our corporate culture and to attract competent personnel who are willing to embrace our culture. Additionally, the announcement of the Merger and the subsequent anticipated integration with HCH may result in negative publicity or a changed impression of us and our culture, which could impair our ability to recruit or retain the talented employees we need to operate our business. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain personnel, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
We are subject to currency exchange risk in connection with our international business operations and are exposed to interest rate risk.
Cash inflows and outflows in our international operations are typically denominated in currencies other than the U.S. dollar, which is our functional currency for financial reporting purposes. For the
three months ended March 31, 2017
and
for fiscal year
2016
, approximately
20.1%
and 20.6%, respectively, of our Core operating segment net revenues were denominated in such foreign currencies. In addition, certain intercompany indebtedness between us and a foreign subsidiary is Euro denominated. Our reliance on and exposure to foreign currencies subjects our financial results to fluctuations in currency exchange rates and changes in the proportion of our net revenues and expenses attributable to each of our foreign locations. For example, we recognized a foreign exchange gain of $0.1 million and a foreign exchange gain of $0.3 million in the
three months ended March 31, 2017
and in fiscal year
2016
, respectively. In addition, we expect our exposure to fluctuations in foreign exchange rates to increase as we expand our business in existing and new international markets and when the exchange rates strengthen or weaken against the U.S. dollar. We began entering into hedging arrangements related to certain exposures to foreign currency risk in December 2014, and we expect to continue to enter into hedging arrangements in the future in order to manage our exposure to foreign currency fluctuations, but such activity may not completely eliminate fluctuations in our operating results. Foreign currency exchange rate fluctuations have adversely impacted our profitability and may continue to do so in the future.
In addition, we face exposure to fluctuations in interest rates for amounts outstanding under our credit facility, which may increase our borrowing costs, adversely impacting our profitability.
Our balance sheet includes significant amounts of goodwill and intangible assets. We may be required to record a significant charge to earnings if our goodwill or amortizable intangible assets become impaired.
As a result of our acquisitions, a significant portion of our total assets consists of goodwill and intangible assets. Combined, goodwill and intangible assets, net of accumulated amortization, accounted for approximately
42.6%
and
42.3%
of the total assets on our consolidated balance sheets as of
March 31, 2017
and
December 31, 2016
, respectively. We may not realize the full value of our intangible assets and goodwill. We are required under GAAP to review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. The events and circumstances we consider include the business climate, legal factors, operating performance indicators and competition. In 2016, we recorded a charge against earnings of $0.8 million for impairment of our amortizable intangible assets and in the future we may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined. This could adversely impact our results of operations.
Risks Related to Ownership of Our Common Stock
Our stock price is highly volatile.
The trading price of our common stock has been, and is likely to continue to be, highly volatile. Since shares of our common stock were sold in our initial public offering in July 2013 at a price of $21.00 per share, the reported high and low sales prices of our Series 1 common stock has ranged from $5.52 to $48.73 per share through
March 31, 2017
. The trading price of our stock has been and is likely to continue to be subject to wide fluctuations in response to various factors, including the risk factors described in this section and elsewhere in this Quarterly Report on Form 10-Q, and other factors beyond our control. Factors affecting the trading price of our common stock include:
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our entry into the Merger Agreement with HCH and Purchaser, and market reactions to that agreement and the proposed transactions thereunder;
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variations in our actual or projected operating results or the operating results of similar companies;
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periodic changes to search engine algorithms that lead to actual or perceived decreases in traffic to our websites;
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announcements of technological innovations, new services or service enhancements and strategic alliances or agreements by us or by our competitors;
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marketing and advertising initiatives by us or our competitors;
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the gain or loss of paid merchant relationships;
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threatened or actual litigation;
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major changes in our management;
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recruitment or departure of key personnel;
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changes in the estimates of our operating results or changes in recommendations by any securities analysts that follow our Series 1 common stock;
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market conditions in our industry, the industries of our customers and the economy as a whole;
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the overall performance of the equity markets;
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sales of shares of our Series 1 common stock in the open market, or tender of shares of our Series 1 common stock in connection with the transactions contemplated by the Merger Agreement between us, HCH and Purchaser, by existing stockholders, including our directors and executive officers and their affiliates;
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the concentration of ownership of outstanding shares of our Series 1 common stock;
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our share repurchase program;
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volatility in our stock price, which may lead to higher stock-based compensation expense under applicable accounting standards;
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reaction to our press releases or other public announcements and filings with the SEC;
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rumors and market speculation involving us or other companies in our industry;
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raising additional capital from any equity or debt financing in the future; and
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adoption or modification of regulations, policies, procedures or programs applicable to our business
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In addition, the stock market in general and the market for e-commerce companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may harm the market price of our Series 1 common stock regardless of our actual operating performance. Each of these factors, among others, could adversely affect your investment in our Series 1 common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management’s attention.
Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
As of
April 21, 2017
we had
48,358,395
shares of common stock outstanding. Shares beneficially owned by our affiliates and employees are subject to volume and other restrictions under Rules 144 and 701 under the Securities Act of 1933, as amended, or the Securities Act, various vesting agreements, our insider trading policy and any applicable 10b5-1 trading plan.
In addition, we have registered 18,873,761 shares of Series 1 common stock that we have issued and may issue under our equity plans, 5,099,992 shares of which were issued and outstanding as of
March 31, 2017
. These shares can be freely sold in the public market upon issuance, subject in some cases to volume and other restrictions under Rules 144 and 701 under the Securities Act, and various vesting agreements. In addition, some of our employees, including some of our named executive officers, have entered into 10b5-1 trading plans regarding sales of shares of our Series 1 common stock. If any of these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
As of
April 21, 2017
, holders of approximately 15.1% of our common stock were entitled to rights with respect to the registration of these shares under the Securities Act. If we register their shares of common stock, these stockholders could sell those shares in the public market without being subject to the volume and other restrictions of Rule 144 and Rule 701.
Our responsibilities as a public company may cause us to incur significant costs, divert management’s attention and affect our ability to attract and retain qualified board members and executives.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, including the requirements of Section 404, as well as rules and regulations subsequently implemented by the SEC, the Public Company Accounting Oversight Board and the NASDAQ Global Select Market. Compliance with these public company requirements has made some activities more time-consuming. It has also increased our legal and financial compliance costs and demand on our systems and resources. For example, we have created new board committees and adopted new internal controls and disclosure controls and procedures. In addition, we have incurred and will continue to incur incremental expenses
associated with our SEC reporting requirements. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our auditors identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect us, our reputation or investor perceptions of us. Advocacy efforts by stockholders and third parties may also prompt additional changes in governance and reporting requirements, which could further increase our costs. It also may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
In addition, changing laws, regulations and standards relating to public disclosure and corporate governance are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to our disclosures and to our governance practices. We have invested, and intend to continue to invest, resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention away from activities that generate revenue and help grow our business.
If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us.
Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are subject to Section 404 of the Sarbanes-Oxley Act, which requires annual management assessment of the effectiveness of our internal control over financial reporting. If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, harm our ability to operate our business, and reduce the trading price of our stock.
We cannot guarantee that we will repurchase additional shares of our common stock pursuant to our ongoing share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.
In February 2015, our board of directors authorized a share repurchase program. Under the program, we were initially authorized to repurchase shares of Series 1 common stock for an aggregate purchase price not to exceed
$100 million
. In February 2016, our board of directors authorized an additional
$50 million
under the repurchase program, bringing the total amount of the program up to
$150 million
. In February 2017 our board of directors authorized a one year extension of the repurchase program, which is now authorized through
February 2018
. During the
three
months ended
March 31, 2017
, we repurchased
32,465
shares of Series 1 common stock at an aggregate purchase price of
$0.3 million
. Up to
$60.1 million
of the
$150 million
authorization remains available as of
March 31, 2017
.
Although the Board has authorized the share repurchase program, the share repurchase program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. The timing and amount of repurchases, if any, will depend upon several factors, including market and business conditions, the trading price of our Series 1 common stock and the nature of other investment opportunities. The repurchase program may be limited, suspended or discontinued at any time without prior notice. In addition, repurchases of our Series 1 common stock pursuant to our share repurchase program could affect the market price of our Series 1 common stock or increase its volatility. For example, the existence of a share repurchase program could cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program has increased our level of long-term debt and reduced our cash reserves, and those reserves may be reduced further in the future, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our Series 1 common stock has declined, and may in the future decline, below the levels at which we repurchase shares of stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so and short-term stock price fluctuations could reduce the program’s effectiveness.
If securities or industry analysts do not continue to publish research or publish unfavorable or misleading research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. In 2016, several securities analysts ceased coverage of our company and several analysts downgraded their ratings on or lowered their price targets for our Series 1 common stock. If other analysts who cover us downgrade our stock, reduce their price targets or publish other unfavorable or misleading research about our business, our stock price would likely decline. If additional analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the market for our stock and demand for our stock could decrease, which could cause our stock price or trading volume to decline.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our Series 1 common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the stockholder becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our certificate of incorporation and bylaws:
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authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to defend against a takeover attempt;
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establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;
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require that directors only be removed from office for cause and only upon a supermajority stockholder vote;
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provide that vacancies on the board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;
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prevent stockholders from calling special meetings; and
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prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders.
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We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our Series 1 common stock appreciates.
We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Any payment of future dividends will be at the discretion of our board of directors, subject to compliance with certain covenants contained in our credit facility, which limit our ability to pay dividends, and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our board of directors may deem relevant. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our Series 1 common stock appreciates and you sell your shares at a profit.