quot-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-36331

 

Quotient Technology Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

77-0485123

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

400 Logue Avenue, Mountain View, California

 

94043

(Address of Principal Executive Offices)

 

(Zip Code)

(650) 605-4600

(Registrant’s Telephone Number, Including Area Code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of July 30, 2018, the registrant had 95,109,423 shares of common stock outstanding.

 

 

 


QUOTIENT TECHNOLOGY INC.

INDEX

REPORT ON

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

 

PART I FINANCIAL INFORMATION

 

Item 1 Financial Statements (unaudited):

  

3

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017

  

3

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017

  

4

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017

  

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017

  

6

 

Notes to Condensed Consolidated Financial Statements

  

7

 

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

23

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk

  

34

 

Item 4 Controls and Procedures

  

34

 

PART II OTHER INFORMATION

 

Item 1—Legal Proceedings

  

36

 

Item 1A—Risk Factors

  

36

 

Item 2—Unregistered Sales of Equity Securities and Use of Proceeds

  

64

 

Item 3—Defaults Upon Senior Securities

  

64

 

Item 4—Mine Safety Disclosures

  

64

 

Item 5—Other Information

  

64

 

Item 6—Exhibits

  

64

 

SIGNATURES

  

66

 

 

2


PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

 

QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

June 30,

2018

 

 

December 31,

2017

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

307,836

 

 

$

334,635

 

Short-term investments

 

 

50,175

 

 

 

59,902

 

Accounts receivable, net of allowance for doubtful accounts of $768 and $786

   at June 30, 2018 and December 31, 2017, respectively

 

 

95,659

 

 

 

81,189

 

Prepaid expenses and other current assets

 

 

10,275

 

 

 

8,737

 

Total current assets

 

 

463,945

 

 

 

484,463

 

Property and equipment, net

 

 

15,205

 

 

 

16,610

 

Intangible assets, net

 

 

64,080

 

 

 

46,490

 

Goodwill

 

 

102,665

 

 

 

80,506

 

Other assets

 

 

1,612

 

 

 

1,006

 

Total assets

 

$

647,507

 

 

$

629,075

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,978

 

 

$

6,090

 

Accrued compensation and benefits

 

 

9,601

 

 

 

13,914

 

Other current liabilities

 

 

41,351

 

 

 

35,538

 

Deferred revenues

 

 

8,520

 

 

 

6,276

 

Contingent consideration related to acquisitions

 

 

24,500

 

 

 

18,500

 

Total current liabilities

 

 

87,950

 

 

 

80,318

 

Other non-current liabilities

 

 

3,404

 

 

 

3,205

 

Convertible senior notes, net

 

 

150,704

 

 

 

145,821

 

Contingent consideration related to acquisitions

 

 

14,582

 

 

 

 

Deferred tax liabilities

 

 

1,871

 

 

 

1,690

 

Total liabilities

 

 

258,511

 

 

 

231,034

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.00001 par value—10,000,000 shares authorized and

   no shares issued or outstanding at June 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.00001 par value—250,000,000 shares authorized;

   95,020,958 and 93,199,718 shares issued and outstanding at

   June 30, 2018 and December 31, 2017, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

696,104

 

 

 

686,025

 

Accumulated other comprehensive loss

 

 

(818

)

 

 

(700

)

Accumulated deficit

 

 

(306,291

)

 

 

(287,285

)

Total stockholders’ equity

 

 

388,996

 

 

 

398,041

 

Total liabilities and stockholders’ equity

 

$

647,507

 

 

$

629,075

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3


QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

89,545

 

 

$

74,493

 

 

$

176,311

 

 

$

147,072

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

47,769

 

 

 

30,021

 

 

 

88,222

 

 

 

59,233

 

Sales and marketing

 

 

20,530

 

 

 

21,617

 

 

 

44,360

 

 

 

45,454

 

Research and development

 

 

12,122

 

 

 

12,774

 

 

 

24,748

 

 

 

25,894

 

General and administrative

 

 

11,528

 

 

 

11,803

 

 

 

22,920

 

 

 

23,696

 

Change in fair value of escrowed shares and contingent

   consideration, net

 

 

 

 

 

3,900

 

 

 

7,350

 

 

 

1,315

 

Total costs and expenses

 

 

91,949

 

 

 

80,115

 

 

 

187,600

 

 

 

155,592

 

Loss from operations

 

 

(2,404

)

 

 

(5,622

)

 

 

(11,289

)

 

 

(8,520

)

Interest expense

 

 

(3,326

)

 

 

 

 

 

(6,634

)

 

 

 

Other income (expense), net

 

 

1,270

 

 

 

134

 

 

 

2,208

 

 

 

261

 

Loss before income taxes

 

 

(4,460

)

 

 

(5,488

)

 

 

(15,715

)

 

 

(8,259

)

Provision for income taxes

 

 

200

 

 

 

270

 

 

 

302

 

 

 

173

 

Net loss

 

$

(4,660

)

 

$

(5,758

)

 

$

(16,017

)

 

$

(8,432

)

Net loss per share, basic and diluted

 

$

(0.05

)

 

$

(0.06

)

 

$

(0.17

)

 

$

(0.10

)

Weighted-average number of common shares used in

   computing net loss per share, basic and diluted

 

 

93,643

 

 

 

88,985

 

 

 

93,180

 

 

 

88,242

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

4


QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(4,660

)

 

$

(5,758

)

 

$

(16,017

)

 

$

(8,432

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(96

)

 

 

7

 

 

 

(118

)

 

 

48

 

Comprehensive loss

 

$

(4,756

)

 

$

(5,751

)

 

$

(16,135

)

 

$

(8,384

)

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

 

5


QUOTIENT TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(16,017

)

 

$

(8,432

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,507

 

 

 

8,677

 

Stock-based compensation

 

 

16,035

 

 

 

15,822

 

Amortization of debt discount and issuance cost

 

 

4,883

 

 

 

 

Loss on disposal of property and equipment

 

 

34

 

 

 

 

Allowance (Recovery) for doubtful accounts

 

 

49

 

 

 

(497

)

Deferred income taxes

 

 

302

 

 

 

173

 

Change in fair value of escrowed shares and contingent consideration, net

 

 

7,350

 

 

 

1,315

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(10,741

)

 

 

2,097

 

Prepaid expenses and other current assets

 

 

(1,967

)

 

 

(2,066

)

Accounts payable and other current liabilities

 

 

(3,152

)

 

 

(471

)

Accrued compensation and benefits

 

 

(4,535

)

 

 

(2,468

)

Deferred revenues

 

 

1,109

 

 

 

1,119

 

Net cash provided by operating activities

 

 

3,857

 

 

 

15,269

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,327

)

 

 

(3,166

)

Purchase of intangible assets

 

 

(6,500

)

 

 

 

Acquisitions, net of cash acquired

 

 

(20,947

)

 

 

(21,048

)

Purchases of short-term investments

 

 

(50,175

)

 

 

(59,659

)

Proceeds from maturities of short-term investment

 

 

59,902

 

 

 

94,250

 

Net cash provided by (used in) investing activities

 

 

(20,047

)

 

 

10,377

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuances of common stock under stock plans

 

 

4,515

 

 

 

3,641

 

Payments for taxes related to net share settlement of equity awards

 

 

(8,240

)

 

 

 

Repurchases of common stock

 

 

(6,734

)

 

 

 

Principal payments on promissory note and capital lease obligations

 

 

(156

)

 

 

(85

)

Net cash provided by (used in) financing activities

 

 

(10,615

)

 

 

3,556

 

Effect of exchange rates on cash and cash equivalents

 

 

6

 

 

 

18

 

Net increase (decrease) in cash and cash equivalents

 

 

(26,799

)

 

 

29,220

 

Cash and cash equivalents at beginning of period

 

 

334,635

 

 

 

106,174

 

Cash and cash equivalents at end of period

 

$

307,836

 

 

$

135,394

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

87

 

 

$

59

 

Cash paid for interest

 

 

1,901

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of shares related to Crisp acquisition

 

 

 

 

 

12,957

 

Fixed asset purchases not yet paid

 

 

708

 

 

 

277

 

Computer equipment acquired under promissory note

 

 

 

 

 

819

 

Property and equipment acquired under capital lease

 

 

 

 

 

31

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

6


QUOTIENT TECHNOLOGY INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Description of Business

Quotient Technology Inc. (together with its subsidiaries, the “Company”), is a provider of an industry leading digital marketing platform that drives sales by delivering personalized and targeted coupons and ads to shoppers at the right moment on their path to purchase. The Company has built a scaled network of consumer packaged goods (“CPG”) brands, retailers and shoppers, all digitally connected through our core platform, called Retailer iQ. Using proprietary and licensed data, including online behaviors, purchase intent, and retailers’ in-store point-of-sale (“POS”) shopper data, the Company targets shoppers with the most relevant digital coupons and ads, as well as measures campaign performance, including attribution of dollars spent on digital marketing to in-store sales. Customers and partners use the Company’s digital platform as a more effective channel to influence shoppers.

 

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

The Company’s condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2018 or for any other period.

There have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on its condensed consolidated financial statements and related notes, except for the Company adopting Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) using the modified retrospective basis which resulted in a cumulative effect adjustment of $0.1 million recorded to retained earnings as of January 1, 2018.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Company’s condensed consolidated financial statements and accompanying notes. Such management estimates include, but are not limited to, revenue recognition, collectability of accounts receivable, recoverability of non-refundable distribution fees, the valuation and useful lives of intangible assets and property and equipment, goodwill, stock-based compensation, contingent consideration and income taxes. Actual results may differ from the Company’s estimates, and such differences may be material to the accompanying condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The guidance requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. Lessees initially recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease payments over the lease term. The right-of-use asset is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs. The standard is effective for public business entities for annual reporting periods beginning after December 15, 2018, and interim periods within that reporting period, which is the first quarter of 2019 for the Company. Early adoption is permitted. ASU 2016-02 is required to be adopted using a modified retrospective approach. The Company is currently evaluating the impact of adopting this new accounting guidance on the condensed consolidated financial statements.

7


Accounting Pronouncements Adopted

Topic 606: In May 2014, FASB issued Topic 606, which supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Additionally, the standard requires reporting companies to also disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company adopted Topic 606 as of January 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior periods are not adjusted and continue to be reported in accordance with its historic superseded accounting policy under Topic 605.  

As a result of adopting the new standard, the Company recorded a net increase to retained earnings of $0.1 million as of January 1, 2018, with the impact primarily related to unbilled receivables for performance obligations that have been satisfied but no invoice has been issued. Also, under Topic 606, the Company presents sales returns reserve as a liability versus a contra-asset within accounts receivable, net of allowance for doubtful accounts on the consolidated balance sheet for fiscal year ended December 31, 2017. The impact to revenues as a result of applying Topic 606 for the three and six months ended June 30, 2018 was an increase of $0.5 million and $0.7 million, respectively.  

Topic 230: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The standard is effective for public business entities for annual reporting years beginning after December 15, 2017, and interim periods within that reporting period, which is the first quarter of 2018 for the Company. Early adoption is permitted. The Company has adopted the standard beginning on January 1, 2018, and has determined that the impact on its statements of cash flows is not material.

Revenue Recognition

The Company primarily generates revenue by providing digital promotions and media solutions to its customers and partners. Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

We determine revenue recognition through the following steps:

 

Identification of the contract, or contracts, with a customer

 

Identification of the performance obligations in the contract

 

Determination of the transaction price

 

Allocation of the transaction price to the performance obligations in the contract

 

Recognition of revenue when, or as, we satisfy a performance obligation

Promotion Revenue

The Company generates revenue from promotions, in which consumer packaged goods brands, or CPGs, pay the Company to deliver coupons to consumers through its network of publishers and retail partners. The Company generates revenues, as consumers select, activate, or redeem a coupon through its platform by either saving it to a retailer loyalty account for automatic digital redemption, or printing it for physical redemption at a retailer. Coupon pricing is generally determined on a per unit activation or per redemption basis, and are generally billed monthly. Insertion orders generally include a limit on the number of activations, or times consumers may select a coupon.

Promotion revenues also include the Company’s Specialty Retail business, in which specialty stores including clothing, electronics, home improvement and others that offer coupon codes that the Company distributes. Each time a consumer makes a purchase using a coupon code, a transaction occurs and a distribution fee is generally paid to the Company. The Company generally generates revenues when a consumer makes a purchase using a coupon code from its platform and completion of the order is reported to the Company. In the same period that it recognizes revenues for the delivery of coupon codes, it also estimates and records a reserve, based upon historical experience, to provide for end-

8


user cancelations or product returns which may not be reported until a subsequent date. The Company presents sales returns reserve as a liability effective the first quarter ended March 31, 2018 versus a contra-asset within accounts receivable, net of allowance for doubtful accounts on the consolidated balance sheet for the year ended December 31, 2017.

Media Revenue

The Company’s media services enable CPGs and retailers to distribute digital media to promote their brands and products on our websites, and mobile apps, and through a network of affiliate publishers and non-publisher third parties that display our media offerings on their websites or mobile apps. Revenue is generally recognized each time a digital media ad is displayed or each time a user clicks on the media ad displayed on the Company’s websites, mobile apps or on third party websites. Media pricing is generally determined on a per impression or per click basis and are generally billed monthly. 

Gross Versus Net Revenue Reporting

In the normal course of business and through its distribution network, the Company delivers digital coupons and media on retailers’ websites through retailers’ loyalty programs, and on the websites of digital publishers. In these situations, the Company evaluates whether it is the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, the Company reports digital promotion and media advertising revenues for campaigns placed on third party owned properties on a gross basis, that is, the amounts billed to its customers are recorded as revenues, and distribution fees paid to retailers or digital publishers are recorded as cost of revenues. The Company is the principal because it controls the digital coupon and media advertising inventory before it is transferred to its customers. The Company’s control is evidenced by its sole ability to monetize the digital coupon and media advertising inventory, being primarily responsible to its customers, having discretion in establishing pricing for the delivery of the digital coupons and media, or a combination of these.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (SSP), basis. We generally determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts and characteristics of targeted customers.  

Accounts Receivables, Net of Allowance for Doubtful Accounts

Trade and other receivables are included in accounts receivables and primarily comprised of trade receivables that are recorded at invoiced amounts and do not bear interest, net of an allowance for doubtful accounts. Other receivables included unbilled receivables related to digital promotions and media advertising contracts with customers. The Company generally does not require collateral and performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company maintains an allowance for doubtful accounts based upon the expected collectability of its accounts receivable. The allowance is determined based upon specific account identification and historical experience of uncollectable accounts. The expectation of collectability is based on the Company’s review of credit profiles of customers, contractual terms and conditions, current economic trends, and historical payment experience. When the Company determines that the amounts are uncollectible, the Company writes them off against the allowance for doubtful accounts.

Deferred Revenues

Deferred revenues consist of coupon activation fees and digital media fees that are expected to be recognized upon coupon activations, or delivery of media impressions or clicks, which generally occurs within the next twelve months. The Company records deferred revenues, including amounts which are refundable, when cash payments are received or become due in advance of the Company satisfying its performance obligations. The increase in the deferred revenue balance for the six months ended June 30, 2018 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations of $10.6 million, partially offset by $8.3 million recognized revenue.

The Company’s payment terms vary by the type and size of our customers. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

9


Disaggregated Revenue

The following table presents the Company’s revenues disaggregated by type of services (in thousands, unaudited). The majority of the Company’s revenue is generated from sales in the United States.

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017(1)

 

 

2018

 

 

2017(1)

 

Promotion

$

60,912

 

 

$

58,356

 

 

$

124,695

 

 

$

115,702

 

Media

 

28,633

 

 

 

16,137

 

 

 

51,616

 

 

 

31,370

 

Total Revenue

$

89,545

 

 

$

74,493

 

 

$

176,311

 

 

$

147,072

 

 

(1)

As noted above, prior period amounts have not been adjusted under the modified retrospective method.

 

Practical Expedients and Exemptions

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which it recognizes revenue for an amount where it has the right to invoice for services performed.

Sales Commissions

The Company generally incurs and expenses sales commissions upon recognition of revenue for related goods and services, which typically occurs within one year or less. Sales commissions earned related to revenues for initial contracts are commensurate with sales commissions related to renewal contracts. These costs are recorded within sales and marketing expenses on the condensed consolidated statements of operations.

 

3. Fair Value Measurements

The fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

10


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company’s fair value hierarchy for its financial assets and liabilities that are measured at fair value on a recurring basis are as follows (in thousands):

 

 

June 30,

2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

141,123

 

 

 

 

 

 

 

 

$

141,123

 

Certificate of deposit

 

 

 

 

10,144

 

 

 

 

 

 

10,144

 

Short-Term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

 

 

 

50,175

 

 

 

 

 

 

50,175

 

Total

$

141,123

 

 

$

60,319

 

 

$

 

 

$

201,442

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to Ahalogy acquisition (1)

 

 

 

 

 

 

 

14,582

 

 

 

14,582

 

Total

$

 

 

$

 

 

$

14,582

 

 

$

14,582

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

$

100,152

 

 

 

 

 

 

 

 

$

100,152

 

Short-Term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificate of deposit

 

 

 

 

59,902

 

 

 

 

 

 

59,902

 

Total

$

100,152

 

 

$

59,902

 

 

$

 

 

$

160,054

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to Crisp acquisition (1)

 

 

 

 

 

 

 

18,500

 

 

 

18,500

 

Total

$

 

 

$

 

 

$

18,500

 

 

$

18,500

 

 

(1)

Included in contingent consideration related to acquisitions

 

The valuation technique used to measure the fair value of money market funds included using quoted prices in active markets. The money market funds have a fixed net asset value (NAV) of $1. The valuation technique to measure the fair value of certificate of deposits included using quoted prices in active markets for similar assets.

The fair value of contingent consideration related to the acquisition of MLW Squared Inc., doing business as Ahalogy (“Ahalogy”) was estimated using an option pricing method and was based on significant inputs not observable in the market, thus classified as a Level 3 instrument. The inputs include expected achievement of certain financial metrics over the contingent consideration period, volatility and discount rate. Refer to Note 6 for further details related to the acquisition.

At December 31, 2017, the fair value of contingent consideration related to the acquisition of Crisp was estimated using an option pricing method and was based on significant inputs not observable in the market, thus classified as a Level 3 instrument. The inputs include expected achievement of certain financial metrics over the contingent consideration period, historical volatility and discount rate. Refer to Note 6 for further details related to the acquisition.

11


The following table represents the change in the contingent consideration (in thousands):

 

 

Three Months Ended

June 30, 2018

 

 

Six Months Ended

June 30, 2018

 

 

Ahalogy

 

 

Crisp

 

 

Ahalogy

 

 

Crisp

 

 

Level 3

 

 

Level 3

 

 

Level 3

 

 

Level 3

 

Balance at the beginning of period

$

 

 

$

24,500

 

 

$

 

 

$

18,500

 

Addition related to acquisition

 

14,582

 

 

 

 

 

 

14,582

 

 

 

 

Change in fair value

 

 

 

 

 

 

 

 

 

 

6,000

 

Transfers out of Level 3

 

 

 

 

(24,500

)

 

 

 

 

 

(24,500

)

Balance as of June 30, 2018

$

14,582

 

 

$

 

 

$

14,582

 

 

$

 

 

The Company recorded no gains or losses due to the change in fair value of the contingent consideration during the three months ended June 30, 2018, as compared to a charge of $6.0 million during the six months ended June 30, 2018. The change in fair value of Crisp contingent consideration is due to the achievement of certain financial metrics over the contingent consideration period. The changes in the fair value of the contingent consideration are included as a component of operations in the accompanying condensed consolidated statements of operations.

The fair value of contingent consideration related to the acquisition of Crisp Media, Inc. (“Crisp”) was determined by using actual achievement of financial metrics over the contingent consideration period during the contingent consideration period ending May 31, 2018 and no longer represents a liability subject to the fair value disclosure requirements of this section. Accordingly, the liability was transferred out of the Level 3 input category of fair value measurements at June 30, 2018.

As of December 31, 2017, the Company determined that Shopmium S.A. (“Shopmium”) did not meet its revenue and profit milestones for the years ended December 31, 2016 and 2017, during the contingent consideration measurement period and the fair value was concluded to be zero.  Accordingly, the Company determined that there was no payout required when the contingent consideration period expired on March 31, 2018.

Fair Value Measurements of Other Financial Instruments

As of June 30, 2018 and December 31, 2017, the fair value of the Company’s 1.75% convertible senior notes due 2022 was $207.0 million and $196.3 million, respectively. The fair value was determined based on a quoted price of the convertible senior notes in an over-the-counter market on the last trading day of the reporting period. Accordingly, these convertible senior notes are classified within Level 2 in the fair value hierarchy. Refer to Note 8 for additional information related to the Company’s convertible debt.

 

4. Allowance for Doubtful Accounts  

The summary of activity in the allowance for doubtful accounts is as follows (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Balance at the beginning of period

$

814

 

 

$

1,059

 

 

$

786

 

 

$

1,338

 

Additions related to acquisitions

 

 

 

 

229

 

 

 

 

 

 

229

 

Bad debt expense (recovery)

 

(46

)

 

 

(229

)

 

 

49

 

 

 

(497

)

Write-offs

 

 

 

 

(24

)

 

 

(67

)

 

 

(35

)

Balance at the end of period

$

768

 

 

$

1,035

 

 

$

768

 

 

$

1,035

 

 

 

12


5. Balance Sheet Components

Property and Equipment, Net

Property and equipment consist of the following (in thousands):

 

 

June 30,

2018

 

 

December 31,

2017

 

Software

$

38,275

 

 

$

33,198

 

Computer equipment

 

24,138

 

 

 

24,342

 

Leasehold improvements

 

7,827

 

 

 

7,905

 

Furniture and fixtures

 

2,079

 

 

 

2,107

 

Total

 

72,319

 

 

 

67,552

 

Accumulated depreciation and amortization

 

(58,246

)

 

 

(55,752

)

Projects in process

 

1,132

 

 

 

4,810

 

Property and equipment, net

$

15,205

 

 

$

16,610

 

 

Depreciation and amortization expense related to property and equipment was $1.9 million and $1.6 million for the three months ended June 30, 2018 and 2017, respectively, and $3.5 million and $3.7 million for the six months ended June 30, 2018 and 2017, respectively.

The Company capitalized internal use software development and enhancement costs of $0.7 million and $1.6 million during the three and six months ended June 30, 2018, respectively, and $1.1 million and $2.1 million during the three and six months ended June 30, 2017, respectively. During the three and six months ended June 30, 2018, the Company had $0.4 million respectively in amortization expense related to internal use software, which is included in property and equipment depreciation and amortization expense above and recorded as cost of revenues, as compared to zero and $0.6 million, respectively, during the comparable period of 2017. The unamortized capitalized development and enhancement costs were $5.6 million and $4.4 million as of June 30, 2018 and December 31, 2017, respectively.

Accrued Compensation and Benefits

Accrued compensation and benefits consist of the following (in thousands):

 

 

June 30,

2018

 

 

December 31,

2017

 

Bonus

$

4,260

 

 

$

7,212

 

Commissions

 

3,229

 

 

 

4,199

 

Vacation

 

467

 

 

 

371

 

Payroll and related expenses

 

1,645

 

 

 

2,132

 

Accrued compensation and benefits

$

9,601

 

 

$

13,914

 

 

Other Current Liabilities  

Other current liabilities consist of the following (in thousands):

 

 

June 30,

2018

 

 

December 31,

2017

 

Distribution fees

$

17,151

 

 

$

18,485

 

Marketing expenses

 

1,495

 

 

 

2,826

 

Prefunded liability

 

1,580

 

 

 

2,151

 

Traffic acquisition cost

 

3,526

 

 

 

3,040

 

Amounts owed for certain exclusive rights

 

6,500

 

 

 

 

Other

 

11,099

 

 

 

9,036

 

Other current liabilities

$

41,351

 

 

$

35,538

 

 

13


6. Acquisitions

 

Acquisition of Ahalogy

On June 1, 2018, the Company acquired all the outstanding shares of Ahalogy, an influencer marketing firm that delivers premium content across social media channels for CPG brands. The acquisition enhances the Company’s performance media solutions for CPGs and retailers, adding social media expertise and a roster of influencers.

The total preliminary acquisition consideration of $36.4 million consisted of $21.8 million in cash and contingent consideration of up to $30.0 million payable in all cash with an estimated fair value of $14.6 million as of the acquisition date. The contingent consideration payout is based on Ahalogy achieving certain financial metrics between closing through December 31, 2019, and is payable within 105 days after December 31, 2019. At the date of acquisition, the contingent consideration’s fair value of $14.6 million was determined by using an option pricing model. The fair value of the contingent consideration is remeasured every reporting period. Refer to Note 3 for the fair value of contingent consideration at June 30, 2018.

The Ahalogy acquisition provides the Company with customer relationships, vendor relationships, developed technologies and trade names. The fair value of customer relationships intangible assets was determined by using a discounted cash flow model. The fair value of vendor relationships intangible asset was determined by using a cost approach. The fair values of developed technologies and trade names intangible assets were determined by using the relief from royalty method. The excess of the consideration paid over the fair value of the net tangible assets and identifiable intangible assets acquired is recorded as goodwill. The goodwill is attributable to expected synergies from combined operations and Ahalogy’s know-how.

The Ahalogy transaction was accounted for as a business combination. Accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company expensed all transaction costs in the period in which they were incurred.

Acquisition of Crisp

On May 31, 2017, the Company acquired all of the outstanding shares of Crisp, a mobile marketing and advertising company delivering shopper marketing media campaigns for CPGs and retailers. Crisp’s mobile media expertise complements the Company’s proprietary shopper data, retail network and existing promotions and media offerings.

The total acquisition consideration of $51.9 million consisted of $24.1 million in cash, 1,177,927 shares of the Company’s common stock with a fair value of $13.0 million, or $11.00 per share, and contingent consideration of up to $24.5 million payable in cash with a fair value of $14.8 million as of the acquisition date. The contingent consideration payout is based on Crisp achieving certain financial metrics over a period of one year after closing and is payable within 105 days after May 31, 2018. At the date of acquisition, the contingent consideration’s fair value of $14.8 million was determined by using an option pricing method. The fair value of contingent consideration was remeasured every reporting period. As of May 31, 2018, the date that the contingent consideration period ended, Crisp earned the full payout of the contingent consideration by achieving certain financial metrics. Accordingly, the Company had recorded a liability of $24.5 million on the condensed consolidated balance sheet at June 30, 2018. Refer to Note 3 for the fair value of contingent consideration at June 30, 2018.

The Crisp acquisition provides the Company with customer relationships, developed technologies and trade names. The fair value of the customer relationships intangible asset was determined by using a discounted cash flow model. The fair values of developed technologies and trade names intangible assets were determined by using the relief from royalty methods. The excess of the consideration paid over the fair value of the net tangible assets and identifiable intangible assets acquired is recorded as goodwill. The goodwill is attributable to expected synergies from combined operations and Crisp’s knowhow.

The Crisp transaction was accounted for as a business combination. Accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The Company expensed all transaction costs in the period in which they were incurred.

14


The following table summarizes the preliminary acquisition consideration and the related fair values of the assets acquired and liabilities assumed (in thousands):

 

 

Purchase

Consideration

 

 

Net

Tangible

Assets

Acquired/

(Liabilities

Assumed)

 

 

Identifiable

Intangible

Assets

 

 

Goodwill

 

 

Goodwill

Deductible

for Taxes

 

(1)

Acquisition

Related

Expenses

 

Ahalogy

$

36,432

 

 

$

2,693

 

 

$

11,580

 

 

$

22,159

 

 

Not Deductible

 

$

561

 

Crisp

$

51,904

 

 

$

5,893

 

 

$

9,400

 

 

$

36,611

 

 

Not Deductible

 

$

1,504

 

 

(1)

Expensed as general and administrative

The following sets forth each component of identifiable intangible assets acquired in connection with the acquisitions (in thousands):

 

 

Ahalogy

 

 

Estimated Useful Life

(in Years)

 

 

Crisp

 

 

Estimated Useful Life

(in Years)

 

Developed technologies

$

3,100

 

 

 

4.0

 

 

$

5,000

 

 

 

4.0

 

Customer relationships

 

6,210

 

 

 

6.0

 

 

 

2,800

 

 

 

7.0

 

Trade names

 

650

 

 

 

4.0

 

 

 

1,600

 

 

 

4.0

 

Vendor relationships

 

1,620

 

 

 

2.0

 

 

 

 

 

 

 

Total identifiable intangible assets

$

11,580

 

 

 

 

 

 

$

9,400

 

 

 

 

 

7. Goodwill and Intangible Assets

 

Goodwill represents the excess of the consideration paid over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The change in the carrying value of goodwill is as follows (in thousands):

 

 

Goodwill

 

Balance as of December 31, 2017

$

80,506

 

Acquisition of Ahalogy

 

22,159

 

Balance as of June 30, 2018

$

102,665

 

15


 

During the second quarter of 2018, the Company entered into an agreement which provides the Company among other things with certain exclusive rights in exchange for $13.0 million cash consideration. The consideration, as well as capitalized transaction costs of $0.1 million, were recognized as an intangible asset and recorded as media service rights, which is being amortized on a straight-line basis over its estimated useful life in cost of revenues on the accompanying condensed consolidated statement of operations.

 

Intangible assets consist of the following (in thousands):  

 

 

June 30, 2018

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted

Average

Amortization

Period

(Years)

 

Promotion service rights

$

22,492

 

 

$

(5,738

)

 

$

16,754

 

 

 

5.6

 

Media service rights

 

19,428

 

 

 

(3,209

)

 

 

16,219

 

 

 

3.0

 

Customer relationships

 

17,871

 

 

 

(7,516

)

 

 

10,355

 

 

 

4.9

 

Developed technologies

 

15,287

 

 

 

(6,370

)

 

 

8,917

 

 

 

3.0

 

Data access rights

 

10,801

 

 

 

(3,597

)

 

 

7,204

 

 

 

3.8

 

Domain names

 

5,948

 

 

 

(4,992

)

 

 

956

 

 

 

0.9

 

Vendor relationships

 

2,510

 

 

 

(956

)

 

 

1,554

 

 

 

1.9

 

Trade names

 

2,417

 

 

 

(613

)

 

 

1,804

 

 

 

3.3

 

Patents

 

975

 

 

 

(795

)

 

 

180

 

 

 

4.0

 

Registered users

 

420

 

 

 

(283

)

 

 

137

 

 

 

1.6

 

 

$

98,149

 

 

$

(34,069

)

 

$

64,080

 

 

 

4.0

 

 

As of June 30, 2018, and December 31, 2017, the Company has a domain name with a gross value of $0.4 million with an indefinite useful life that is not subject to amortization.

 

 

December 31, 2017

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted

Average

Amortization

Period

(Years)

 

Promotion service rights

$

22,492

 

 

$

(4,252

)

 

$

18,240

 

 

 

6.1

 

Developed technologies

 

12,187

 

 

 

(5,013

)

 

 

7,174

 

 

 

3.0

 

Customer relationships

 

11,660

 

 

 

(6,547

)

 

 

5,113

 

 

 

4.3

 

Data access rights

 

10,801

 

 

 

(2,666

)

 

 

8,135

 

 

 

4.3

 

Media service rights

 

6,383

 

 

 

(1,575

)

 

 

4,808

 

 

 

4.3

 

Domain names

 

5,949

 

 

 

(4,689

)

 

 

1,260

 

 

 

1.3

 

Trade names

 

1,767

 

 

 

(401

)

 

 

1,366

 

 

 

3.4

 

Patents

 

975

 

 

 

(769

)

 

 

206

 

 

 

4.5

 

Vendor relationships

 

890

 

 

 

(890

)

 

 

 

 

 

 

Registered users

 

420

 

 

 

(232

)

 

 

188

 

 

 

2.2

 

 

$

73,524

 

 

$

(27,034

)

 

$

46,490

 

 

 

4.7

 

 

16


Amortization expense related to intangible assets subject to amortization was $4.2 million and $2.6 million during the three months ended June 30, 2018 and 2017, respectively, and $7.0 million and $5.0 million during the six months ended June 30, 2018 and 2017. Estimated future amortization expense related to intangible assets as of June 30, 2018 is as follows (in thousands):    

 

 

Total

 

2018, remaining six months

$

9,453

 

2019

 

17,705

 

2020

 

15,653

 

2021

 

10,039

 

2022

 

5,730

 

2023 and beyond

 

5,148

 

Total estimated amortization expense

$

63,728

 

 

8. Debt Obligations

2017 Convertible Senior Notes

In November 2017, the Company issued and sold $200.0 million aggregate principal amount of 1.75% convertible senior notes due 2022 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, (the “notes”). The notes are unsecured obligations of the Company and bear interest at a fixed rate of 1.75% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2018. The total net proceeds from the debt offering, after deducting transaction costs, were approximately $193.8 million.  

The conversion rate for the notes is initially 57.6037 shares of the Company’s common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $17.36 per share of common stock, subject to adjustment upon the occurrence of specified events.

Holders of the notes may convert their notes at their option at any time prior to the close of business on the business day immediately preceding September 1, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2018 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five-business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the notes on each such trading day; (3) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after September 1, 2022, holders may convert all or any portion of their notes at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election. The Company intends to settle the principal amount of the notes with cash.

The Company may not redeem the notes prior to December 5, 2020. It may redeem for cash all or any portion of the notes, at its option, on or after December 5, 2020 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than three trading days preceding the date on which it provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the notes.

If the Company undergoes a fundamental change prior to the maturity date, holders may require the Company to repurchase for cash all or any portion of their notes at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

17


In accounting for the issuance of the notes, the Company separated the notes into liability and equity components. The carrying amount of the liability component of $149.3 million was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component of $50.7 million, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the notes at an effective interest rate of 5.8%.

The Company allocated the total debt issuance costs incurred of $6.2 million to the liability and equity components of the notes in proportion to the respective values. Issuance costs attributable to the liability component of $4.6 million are being amortized to interest expense using the effective interest method over the contractual terms of the notes. Issuance costs attributable to the equity component of $1.6 million were netted with the equity component in additional paid-in capital.

The net carrying amount of the liability component of the notes recorded in convertible senior notes, net on the condensed consolidated balance sheets was as follows (in thousands):

 

 

June 30,

 

 

2018

 

Principal

$

200,000

 

Unamortized debt discount

 

(45,206

)

Unamortized debt issuance costs

 

(4,090

)

Net carrying amount of the liability component

$

150,704

 

 

The net carrying amount of the equity component of the notes recorded in additional paid-in capital on the condensed consolidated balance sheets was $49.1 million, net of debt issuance costs of $1.6 million as of June 30, 2018 and December 31, 2017.

The following table sets forth the interest expense related to the notes recognized in interest expense on the condensed consolidated statements of operations (in thousands):

 

 

Three Months Ended

June 30, 2018

 

 

Six Months Ended

June 30, 2018

 

Contractual interest expense

$

875

 

 

$

1,750

 

Amortization of debt discount

 

2,228

 

 

 

4,425

 

Amortization of debt issuance costs

 

229

 

 

 

458

 

Total interest expense related to the Notes

$

3,332

 

 

$

6,633

 

 

9. Stock-based Compensation

2013 Equity Incentive Plan

In October 2013, the Company adopted the 2013 Equity Incentive Plan (the “2013 Plan”), which became effective in March 2014 and serves as the successor to the Company’s 2006 Stock Plan (the “2006 Plan”). Pursuant to the 2013 Plan, 4,000,000 shares of common stock were initially reserved for grant, plus (1) any shares that were reserved and available for issuance under the 2006 Plan at the time the 2013 Plan became effective, (2) any shares that become available upon forfeiture or repurchase by the Company under the 2006 Plan and (3) any shares added to the 2013 Plan pursuant to the next paragraph.

Under the 2013 Plan, the Company may grant stock options, stock appreciation rights, restricted stock and restricted stock units (“RSUs”), performance shares and units to employees, directors and consultants. The shares available will be increased at the beginning of each year by the lesser of (i) 4% of outstanding common stock on the last day of the immediately preceding year, or (ii) such number determined by the Board of Directors and subject to additional restrictions relating to the maximum number of shares issuable pursuant to incentive stock options. Under the 2013 Plan, both the ISOs and NSOs are granted at a price per share not less than 100% of the fair market value on the effective date of the grant. The Board of Directors determines the vesting period for each option award on the grant date, and the options generally expire 10 years from the grant date or such shorter term as may be determined by the Board of Directors.

18


Stock Options

The fair value of each option was estimated using the Black-Scholes model on the date of grant for the periods presented using the following assumptions:

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

2017

 

 

2018

 

 

2017

 

Expected life (in years)

 

5.50 - 6.08

 

 

6.02

 

 

5.50 - 6.25

 

Risk-free interest rate

 

1.87% - 2.03%

 

 

2.66%

 

 

1.87% - 2.14%

 

Volatility

 

50%

 

 

50%

 

 

50%

 

Dividend yield

 

 

 

 

 

 

 

There were no option grants during the three months ended June 30, 2018. The weighted-average grant-date fair value of options granted was $5.57 per share during the three months ended June 30, 2017, and $6.59 and $6.34 per share during the six months ended June 30, 2018 and 2017, respectively.

 

Restricted Stock Units and Performance-Based Restricted Stock Units

The fair value of RSUs equals the market value of the Company’s common stock on the date of the grant. The RSUs are excluded from issued and outstanding shares until they are vested.

A summary of the Company’s stock option and RSU award activity under the 2013 Plan is as follows:

 

 

 

 

 

 

RSUs Outstanding

 

 

Options Outstanding

 

 

Shares

Available

for Grant

 

 

Number of

Shares

 

 

Weighted

Average

Grant

Date Fair

Value

 

 

Number of

Shares

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Remaining

Contractual

Term (Years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Balance as of December 31, 2017

 

4,425,155

 

 

 

5,194,292

 

 

$

12.26

 

 

 

7,412,228

 

 

$

10.36

 

 

 

6.09

 

 

$

25,415

 

Increase in shares authorized

 

3,727,989

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

(801,000

)

 

 

 

 

 

 

801,000

 

 

$

13.10

 

 

 

 

 

Options exercised

 

 

 

 

 

 

 

(1,141,569

)

 

$

2.33

 

 

 

 

$

12,462

 

Options canceled or expired

 

154,884

 

 

 

 

 

 

 

(154,884

)

 

$

11.12

 

 

 

 

 

RSUs granted

 

(2,177,102

)

 

 

2,177,102

 

 

$

13.07

 

 

 

 

 

 

 

 

 

RSUs vested

 

 

 

(1,630,535

)

 

$

13.31

 

 

 

 

 

 

 

 

 

RSUs canceled or expired

 

341,929

 

 

 

(341,929

)

 

$

11.70

 

 

 

 

 

 

 

 

 

RSUs withheld for taxes

 

628,584

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2018

 

6,300,439

 

 

 

5,398,930

 

 

$

12.31

 

 

 

6,916,775

 

 

$

11.99

 

 

 

6.60

 

 

$

19,167

 

Vested and exercisable as of

   June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

4,801,448

 

 

$

12.04

 

 

 

5.66

 

 

$

16,577

 

 

The aggregate intrinsic value disclosed in the table above is based on the difference between the exercise price of the options and the fair value of the Company’s common stock.

The aggregate total fair value of options which vested was $1.6 million and $1.6 million during the three months ended June 30, 2018 and 2017, respectively, and $4.0 million and $4.0 million during the six months ended June 30, 2018 and 2017, respectively.

 

Employee Stock Purchase Plan

Eligible employees can enroll and elect to contribute up to 15% of their base compensation through payroll withholdings in each offering period which is six months in duration, subject to certain limitations. The purchase price of the stock is the lower of 85% of the fair market value on (a) the first day of the offering period or (b) the purchase date.

19


The fair value of the option feature is estimated using the Black-Scholes model for the period presented based on the following assumptions:

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Expected life (in years)

0.50

 

 

0.50

 

 

0.50

 

 

0.50

 

Risk-free interest rate

2.09%

 

 

1.04%

 

 

1.42% - 2.09%

 

 

0.62% - 1.04%

 

Volatility

40%

 

 

50%

 

 

40%

 

 

50%

 

Dividend yield

 

 

 

 

 

 

 

 

As of June 30, 2018, a total of 1,003,568 shares of common stock were issued under the 2013 Employee Stock Purchase Plan (“ESPP”), since inception of the plan. As of June 30, 2018, a total of 1,796,432 shares are available for issuance under the ESPP. The ESPP provides that the shares available thereunder will be increased at the beginning of each year by the lesser of (i) 0.5% of outstanding common stock on the last day of the immediately preceding year, (ii) 400,000 shares, or (iii) such number determined by the Board of Directors.

Stock-based Compensation Expense

The following table sets forth the total stock-based compensation expense resulting from stock options, RSUs and ESPP included in the Company’s condensed consolidated statements of operations (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenues

$

579

 

 

$

485

 

 

$

1,119

 

 

$

936

 

Sales and marketing

 

1,735

 

 

 

1,694

 

 

 

3,335

 

 

 

3,026

 

Research and development

 

1,862

 

 

 

1,985

 

 

 

3,689

 

 

 

3,996

 

General and administrative

 

4,063

 

 

 

3,902

 

 

 

7,892

 

 

 

7,864

 

Total stock-based compensation expense

$

8,239

 

 

$

8,066

 

 

$

16,035

 

 

$

15,822

 

 

As of June 30, 2018, there was $69.6 million of unrecognized stock-based compensation expense, of which $13.2 million is related to stock options and ESPP shares and $56.4 million is related to RSUs. The total unrecognized stock-based compensation expense related to stock options and ESPP as of June 30, 2018 will be amortized over a weighted-average period of 2.68 years. The total unrecognized stock-based compensation expense related to RSUs as of June 30, 2018 will be amortized over a weighted-average period of 2.78 years.

 

During the three months ended June 30, 2018 and 2017, the Company did not capitalize any stock-based compensation cost in projects in process as part of property and equipment, net. During the six months ended June 30, 2018 and 2017, the Company capitalized $0.1 million and $0.1 million of stock-based compensation cost, respectively, in process as part of property and equipment, net on the accompanying condensed consolidated balance sheets.

10. Common Stock Repurchase Programs

The Board of Directors has approved programs for the Company to repurchase shares of its common stock. During May 2018, the active repurchase program at that time expired. In April 2018, the Board of Directors authorized a one-year share repurchase program (“2018 Program”) for the Company to repurchase up to $100.0 million of its common stock from May 2018 through May 2019. During the six months ended June 30, 2018, the Company repurchased and retired 500,000 shares of its common stock for an aggregate of $6.7 million. As of June 30, 2018, $93.3 million remained available for repurchases under the 2018 Program. Stock repurchases may be made from time to time in open market transactions or privately negotiated transactions, and the Company may use a plan that is intended to meet the requirements of SEC Rule 10b5-1 to enable stock repurchases to occur during periods when the trading window would otherwise be closed. The Company may suspend, modify or terminate the 2018 Program at any time without prior notice.

11. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from

20


35% to 21%, effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has determined that the $27.7 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance of $28.4 million was a provisional amount and a reasonable estimate at December 31, 2017. The difference between the deferred tax asset and the valuation allowance is related to a deferred tax liability that was also re-measured on December 31, 2017, resulting in a provisional income tax benefit of $0.7 million. During the second quarter of 2018, the Company did not have any significant adjustments to the provisional amounts recorded during the year ended December 31, 2017. As the Company collects and prepares necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (IRS), and other standard-setting bodies, the Company may make adjustments to the provisional amounts. The accounting for the tax effects of the Tax Act will be completed later in 2018.

The Company recorded a provision for income taxes of $0.2 million and $0.3 million during the three and six months ended June 30, 2018, respectively, and a provision for income taxes of $0.3 million and $0.2 million during the three and six months ended June 30, 2017, respectively. The provision for income taxes for the three and six months ended June 30, 2018 was primarily attributable to the Company’s foreign operations and amortization of tax deductible goodwill from prior year acquisitions. The provision for income taxes for the three and six months ended June 30, 2017 was primarily attributable to a net decrease in foreign tax benefit and amortization of tax deductible goodwill from prior year acquisitions.

 

12. Net Loss Per Share

The computation of the Company’s basic and diluted net loss per share is as follows (in thousands, except per share data):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(4,660

)

 

$

(5,758

)

 

$

(16,017

)

 

$

(8,432

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares used in

   computing net loss per share, basic and diluted

 

93,643

 

 

 

88,985

 

 

 

93,180

 

 

 

88,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

$

(0.05

)

 

$

(0.06

)

 

$

(0.17

)

 

$

(0.10

)

 

The outstanding common equivalent shares excluded from the computation of the diluted net loss per share for the periods presented because including them would have been antidilutive are as follows (in thousands):

 

 

Three and Six Months Ended

June,

 

 

2018

 

 

2017

 

Stock options and ESPP

 

6,961

 

 

 

7,948

 

Restricted stock units

 

5,399

 

 

 

5,782

 

Shares held in escrow

 

1,000

 

 

 

2,000

 

Shares related to convertible senior notes

 

11,521

 

 

 

 

 

24,881

 

 

 

15,730

 

 

21


13. Commitments and Contingencies

 

Leases

As of June 30, 2018, the Company’s minimum payments under its non-cancelable operating and capital leases are as follows (in thousands):

 

 

Operating Leases

 

 

Capital Leases

 

2018, remaining six months

$

1,876

 

 

$

20

 

2019

 

3,991

 

 

 

28

 

2020

 

2,817

 

 

 

25

 

2021

 

1,512

 

 

 

2

 

2022

 

1,553

 

 

 

 

2023

 

1,575

 

 

 

 

2024 and thereafter

 

1,026

 

 

 

 

Total minimum payments

$

14,350

 

 

$

75

 

 

 

 

 

 

 

 

 

Less: Amount representing interest

 

 

 

 

 

7

 

Present value of capital lease obligations

 

 

 

 

 

68

 

Less: Current portion

 

 

 

 

 

30

 

Capital lease obligation, net of current portion

 

 

 

 

$

38

 

 

The Company leases various office facilities, including its corporate headquarters in Mountain View, California and various sales offices, under non-cancelable operating lease agreements that expire through December 2024. In the first quarter of 2018, the Company entered into a lease agreement for an office facility located in New York, New York which will expire in December 2024. In the second quarter of 2018, the Company entered into a lease agreement for an office facility located in Cincinnati, Ohio which will expire in November 2023.

 

The terms of the lease agreements provide for rental payments on a graduated basis. The Company recognizes rent expense on a straight-line basis over the lease periods. Additionally, the Company leases certain equipment under non-cancelable operating leases at its facilities and its leased data center operations.

Rent expense pursuant to all operating lease agreements was $0.9 million and $1.1 million for the three months ended June 30, 2018 and 2017, respectively, and $1.8 million and $2.2 million during the six months ended June 30, 2018, and 2017, respectively.

During the fourth quarter of 2017, the Company recorded a restructuring charge of $2.1 million related to facility exit costs, which primarily relates to future contractual lease payments, in general and administrative expense on the consolidated statements of operations. As of June 30, 2018 and December 31, 2017, the Company had a remaining restructuring accrual balance of $1.4 million and $1.9 million, respectively, included in other current liabilities and other non-current liabilities on the condensed consolidated balance sheets.

Purchase Obligations

The Company has unconditional purchase commitments which expire through 2034 in the amount of $6.1 million for marketing arrangements relating to the purchase of a 20-year suite license for a professional sports team which it uses for sales and marketing purposes.

The Company also has unconditional purchase commitments, primarily related to software license fees and marketing services, of $10.5 million as of June 30, 2018.

Promissory Note

In January 2017, the Company entered into a promissory note agreement with a lender to finance the purchase of computer equipment for $0.8 million to be paid in quarterly installments over three years. As of June 30, 2018, the Company had a remaining balance of $0.5 million under the agreement, which is included in other current liabilities and other non-current liabilities on the condensed consolidated balance sheets.

22


Indemnification

In the normal course of business, to facilitate transactions related to the Company’s operations, the Company indemnifies certain parties, including CPGs, advertising agencies, retailers and other third parties. The Company has agreed to hold certain parties harmless against losses arising from claims of intellectual property infringement or other liabilities relating to or arising from our products or services or other contractual infringement. The term of these indemnity provisions generally survive termination or expiration of the applicable agreement. To date, the Company has not recorded any liabilities related to these agreements.

Litigation

In the ordinary course of business, the Company may be involved in lawsuits, claims, investigations, and proceedings consisting of intellectual property, commercial, employment, and other matters. The Company records a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or settlement, may cause a material adverse effect on the Company’s future business, operating results, or financial condition.

The Company believes that liabilities associated with existing claims are remote, therefore the Company has not recorded any accrual for claims as of June 30, 2018 and December 31, 2017. The Company expenses legal fees in the period in which they are incurred.

 

14. Employee Benefit Plan

The Company maintains a defined-contribution plan under Section 401(k) of the Internal Revenue Code. The 401(k) plan provides retirement benefits for eligible employees. Eligible employees may elect to contribute to the 401(k) plan. The Company provides a match of up to the lesser of 3% of each employee’s annual salary or $6,000, which vests fully over four years of continuous employment. The Company’s matching contribution expense was $0.5 million and $0.3 million during the three months ended June 30, 2018 and 2017, respectively, and $1.1 million and $0.9 million during the six months ended June 30, 2018 and 2017, respectively.

 

 

15. Information About Geographic Areas

Revenues generated outside of the United States were insignificant for all periods presented. Additionally, as the Company’s assets are primarily located in the United States, information regarding geographical location is not presented, as such amounts are immaterial to these condensed consolidated financial statements taken as a whole.

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K filed on February 16, 2018 with the SEC. In addition to historical financial information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934. The forward looking statements reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences are described in “Risk Factors” set forth in our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q.

23


Overview

Quotient Technology Inc. is a provider of an industry leading digital marketing platform that drives sales by delivering personalized and targeted coupons and ads to shoppers at the right moment on their path to purchase. We built a scaled network of consumer packaged goods (“CPG”) brands, retailers and shoppers, all digitally connected through our core platform, called Retailer iQ. Using proprietary and licensed data, including online behaviors, purchase intent, and retailers’ in-store point-of-sale (“POS”) shopper data, we target shoppers with the most relevant digital coupons and ads, as well as measure campaign performance, including attribution of dollars spent on digital marketing to in-store sales. Customers and partners use our digital platform as a more effective channel to influence shoppers.

We operate our platform across a broad distribution network, reaching over approximately 60 million shoppers at critical moments in their path to purchase. Our network includes the app and website of our flagship consumer brand, Coupons.com, our other owned and operated properties, and thousands of our publisher partners. In addition, we operate Retailer iQ on a co-branded or white label basis with our retail partners, providing them a digital platform to directly engage with their shoppers across their websites, mobile, ecommerce, and social channels.

Our network is made up of three constituencies: over 2,000 brands from approximately 700 CPGs; retail partners across multiple classes of trade such as grocery retailers, drug, dollar, club, and mass merchandise channels; and consumers visiting our web, mobile properties, social channels, as well as those of our CPGs, retailers, and publishing partners.

We primarily generate revenue by providing digital coupons and media solutions to our customers and partners.

We generate revenue from promotions, in which CPGs pay us to deliver coupons to consumers through our network of publishers and retail partners. Each time a consumer activates a digital coupon on our platform or in some cases redeems a digital coupon, we are generally paid a fee. Activation of a digital coupon can include: saving it to a retailer loyalty account or printing it for physical redemption at a retailer.

As our business evolves, we will continue to experiment with different pricing models and fee arrangements with CPGs and retailers, which may impact how we monetize transactions. For example, we are continuing to experiment with pricing strategies based on return on investment, or ROI, some of which require us to receive fees upon redemption of digital coupons rather than activation, as further discussed below in “Risk Factors”. We generally pay a distribution fee to retailers or publishers when a shopper activates a digital promotion on their website or mobile app. These distribution fees are included in our cost of revenues. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – “Non-GAAP Financial Measure and Key Operating Metrics” for more information.

Promotion revenues also include our Specialty Retail business, in which specialty stores including clothing, electronics, home improvement and many others offer coupon codes that we distribute. Each time a consumer makes a purchase using a coupon code, a transaction occurs and a distribution fee is generally paid to us.

We also generate revenues from digital advertising. CPGs, advertising agencies, and retailers use our platform to deliver digital advertising. Using data on our Quotient Media Exchange (QMX) platform, we target audiences with digital ad campaigns. These ads are delivered to shoppers through our network, including our websites and mobile apps, as well as those of our publishers, retailers and other third parties.

Seasonality

Some of the Company’s products experience seasonal sales and buying patterns mirroring those in the CPG, retail, e-commerce, and advertising markets, including back-to-school and holiday campaigns, where demand increases during the second half of the Company’s fiscal year. Seasonality may also be affected by CPG annual budget cycles, as some large CPGs have fiscal years ending in June. We believe that this seasonality pattern has affected, and will continue to affect, our business and the associated revenues during the first half and second half of our fiscal year. We recognized 54%, 52% and 53% of our annual revenue during the second half of 2017, 2016 and 2015, respectively.

Second Quarter 2018 Overview

Quarterly revenues of $89.5 million in the second quarter of 2018 increased by $15.1 million, or 20%, from revenues of $74.5 million in the same period in 2017. The year over year increase in our quarterly revenues primarily related to an increase in media revenue, including incremental revenue related to the acquisitions of Crisp and Ahalogy that occurred in the second quarters of 2017 and 2018, respectively, and an increase in digital promotions driven by the continued growth of Retailer iQ.

24


Our net loss of $4.7 million in the second quarter of 2018 decreased by $1.1 million, as compared to the net loss of $5.8 million in the same period in 2017. The decrease in our net loss in the second quarter of 2018, as compared to the same period in 2017, was primarily the result of the growth in media and promotion revenues, no change in fair value of escrowed shares and contingent consideration for the Crisp acquisition during the second quarter of 2018, as compared to a charge of $3.9 million during the second quarter of 2017, and a reduction in operating expenses resulting from better expense management. This was partially offset by an increase in cost of revenues primarily due to the shift in our product mix as revenues from media continue to become a bigger proportion of revenues which has higher data and traffic acquisition costs related to offsite media on non-owned-and-operated properties as well as increase in distribution fees paid to our partners for promotions and media revenues delivered through their platform, and interest expense associated with the issuance of convertible senior notes during the fourth quarter of 2017. While we continue to make important investments in our technology and infrastructure, we remain focused on operational efficiencies and expense management.

Our operating expenses may increase in the future as we continue to (1) invest in (i) research and development to enhance our platform and investments in newer product offerings; (ii) sales and marketing to acquire new CPG and retailer customers and increase revenues from our existing customers; and; (iii) corporate infrastructure; (2) incur additional general and administrative expenses associated with being a public company, including increased legal and accounting expenses, and compliance costs associated with the Sarbanes-Oxley Act of 2002 (“SOX”); (3) amortize expenses related to intangibles assets associated with acquisitions and other strategic acquisitions and partnerships; and (4) remeasure contingent consideration related to acquisitions and changes in fair value of shares held in escrow until released.

Non-GAAP Financial Measure and Key Operating Metrics

Adjusted Earnings Before Income Taxes, Depreciation and Amortization (“Adjusted EBITDA”), a non-GAAP financial measure, is a key metric used by our management and our Board of Directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, to develop short and long-term operational plans, and to determine bonus payouts. In particular, we believe that the exclusion of certain income and expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, Adjusted EBITDA is a key financial metric used by the compensation committee of our Board of Directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.

Adjusted EBITDA excludes non-cash charges, such as depreciation, amortization and stock-based compensation, because such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations and can vary significantly between periods. Additionally, it excludes the effects of interest expense, income taxes, other (income) expense net, change in fair value of escrowed shares and contingent consideration, net, charges related to Enterprise Resource Planning (“ERP”) software implementation costs, certain acquisition related costs and restructuring charges. We exclude certain items because we believe that these costs (benefits) do not reflect expected future operating expenses. Additionally, certain items are inconsistent in amounts and frequency, making it difficult to contribute to a meaningful evaluation of our current or past operating performance.

We define a “transaction” as any action that generates revenue, directly or indirectly, including per item transaction fees, volume-based fixed fees and revenue sharing. Transactions continue to exclude retailer offers that generate no direct revenue. Transactions indirectly generate revenue when the action is not paid for on a per item basis, but is part of an agreement which generates revenue for offer services; for example, transactions after a fixed fee cap has been reached would be included in our definition. This definition of transaction does not impact the number of transactions reported in prior filings. While the number of transactions on our platform has been an important indicator of our ability to grow our revenues historically, as our business continues to evolve with the shift to digital paperless and we experiment with different pricing models to monetize transactions, we believe transaction volume on our platform can become a less predictive indicator of future operating performance.

Net loss, Adjusted EBITDA and number of transactions for each of the periods presented were as follows (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(4,660

)

 

$

(5,758

)

 

$

(16,017

)

 

$

(8,432

)

Adjusted EBITDA

 

12,868

 

 

 

12,952

 

 

 

24,748

 

 

 

20,629

 

Transactions

 

954,146

 

 

 

793,238

 

 

 

1,981,443

 

 

 

1,588,508

 

25


 

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

 

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

 

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

 

Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation;

 

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

 

Adjusted EBITDA also does not include the effects of charges related to ERP software implementation costs, change in fair value of escrowed shares and contingent consideration, net, interest expense, other (income) expense, net, income taxes, certain acquisition related costs and restructuring charges; and

 

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

A reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, for each of the periods presented is as follows (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(4,660

)

 

$

(5,758

)

 

$

(16,017

)

 

$

(8,432

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

8,239

 

 

 

8,066

 

 

 

16,035

 

 

 

15,822

 

Depreciation, amortization and other(1)

 

7,033

 

 

 

6,608

 

 

 

12,652

 

 

 

12,012

 

Change in fair value of escrowed shares and contingent

   consideration, net

 

 

 

 

3,900

 

 

 

7,350

 

 

 

1,315

 

Interest expense

 

3,326

 

 

 

 

 

 

6,634

 

 

 

 

Other (income) expense, net

 

(1,270

)

 

 

(134

)

 

 

(2,208

)

 

 

(261

)

Provision for income taxes

 

200

 

 

 

270

 

 

 

302

 

 

 

173

 

Total adjustments

$

17,528

 

 

$

18,710

 

 

$

40,765

 

 

$

29,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

$

12,868

 

 

$

12,952

 

 

$

24,748

 

 

$

20,629

 

 

(1)

For the three and six months ended June 30, 2018, Other includes certain acquisition related costs of $0.7 million for each of the respective periods, restructuring charges of $0.2 million and $1.4 million, respectively, and ERP software implementation costs related to service agreements of zero and $0.05 million, respectively. For the three and six months ended June 30, 2017, Other includes certain acquisition related costs of $0.8 million and $1.5 million, respectively, restructuring charges of $1.3 million for each of the respective periods, and ERP software implementation costs related to service agreements of $0.4 million and $0.6 million, respectively. Acquisition related costs primarily include diligence, accounting, and legal expenses incurred related to certain acquisitions and certain bonuses contingent upon the acquired company meeting certain financial metrics over the contingent consideration period. Restructuring charges relates to severance for impacted employees.

This non-GAAP financial measure is not intended to be considered in isolation from, as substitute for, or as superior to, the corresponding financial measure prepared in accordance with GAAP. Because of these and other limitations, Adjusted EBITDA should be considered along with GAAP based financial performance measures, including various cash flow metrics, net loss, and our other GAAP financial results.

Factors Affecting Our Performance

Obtaining high quality coupons and increasing the number of CPG-authorized activations.   Our ability to grow revenue will depend upon our ability to shift more dollars to our platform from our CPG customers, continue to obtain high quality coupons and increase the number of CPG-authorized activations available through our platform. If we are unable to do any of these, growth in our revenue will be adversely affected.

26


Increasing revenue from CPGs on our platform.    Our ability to grow our revenue in the future depends upon our ability to continue to increase revenues from existing CPGs on our platform through national brand coupons, targeted media and measurement, trade promotions, and increasing the number of brands that are using our platform within each CPG. As CPGs spend more on our platform, volume discounts that we offer to our existing CPGs may slow our revenue growth or reduce our revenues on a per transaction basis.

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

Ability to scale Retailer iQ and further integrate with Retailers.    Our ability to grow our revenues will depend upon our ability to continue to successfully implement and scale Retailer iQ among retailers. If we are unable to continue to successfully implement and maintain Retailer iQ, or if the implementation or marketing of Retailer iQ is delayed or it is not adopted and supported with sufficient resources by retailers, the growth in our revenues will be adversely affected. Our ability to grow our revenue in the future is also dependent upon our ability to further integrate digital promotions and media into retailers’ loyalty or point of sale systems and other channels so that CPGs and retailers can more effectively engage consumers and drive their own sales.

Growth of our consumer selection and digital offerings.    Our ability to grow our revenue in the future will depend on our ability to innovate and invest in promotion and media solutions, including Retailer iQ, Quotient Media Exchange (“QMX”), mobile solutions for consumers, including digital print, mobile solutions and digital promotion offerings for specialty/franchise retail, leverage our reach to consumers and the strength of our platform to broaden the selection and use of digital coupons by consumers, manage the transition from digital print coupons to digital paperless coupons as well as the transition from desktop to mobile platforms, and invest in emerging solutions around our data and analytic capabilities, referred to as Quotient Analytics, for CPGs and retailers.

International Growth and Acquisitions.   Our ability to grow our revenues will also depend on our ability to grow our operations and offerings in existing international markets and expand our business through selective acquisitions, similar to our acquisitions of Ahalogy, Crisp and Shopmium, a private company based in France, and their integration with the core business of the Company.

Results of Operations

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

$

89,545

 

 

 

100.0

%

 

$

74,493

 

 

 

100.0

%

 

$

176,311

 

 

 

100.0

%

 

$

147,072

 

 

 

100.0

%

Cost of revenues

 

47,769

 

 

 

53.3

%

 

 

30,021

 

 

 

40.3

%

 

 

88,222

 

 

 

50.0

%

 

 

59,233

 

 

 

40.3

%

Gross profit

 

41,776

 

 

 

46.7

%

 

 

44,472

 

 

 

59.7

%

 

 

88,089

 

 

 

50.0

%

 

 

87,839

 

 

 

59.7

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

20,530

 

 

 

22.9

%

 

 

21,617

 

 

 

29.0

%

 

 

44,360

 

 

 

25.2

%

 

 

45,454

 

 

 

30.9

%

Research and development

 

12,122

 

 

 

13.5

%

 

 

12,774

 

 

 

17.1

%

 

 

24,748

 

 

 

14.0

%

 

 

25,894

 

 

 

17.6

%

General and administrative

 

11,528

 

 

 

12.9

%

 

 

11,803

 

 

 

15.8

%

 

 

22,920

 

 

 

13.0

%

 

 

23,696

 

 

 

16.1

%

Change in fair value of escrowed

   shares and contingent

   consideration, net

 

 

 

 

(—

)%

 

 

3,900

 

 

 

5.2

%

 

 

7,350

 

 

 

4.2

%

 

 

1,315

 

 

 

0.9

%

Total operating expenses

 

44,180

 

 

 

49.3

%

 

 

50,094

 

 

 

67.2

%

 

 

99,378

 

 

 

56.4

%

 

 

96,359

 

 

 

65.5

%

Loss from operations

 

(2,404

)

 

 

(2.6

)%

 

 

(5,622

)

 

 

(7.5

)%

 

 

(11,289

)

 

 

(6.4

)%

 

 

(8,520

)

 

 

(5.8

)%

Interest expense

 

(3,326

)

 

 

(3.7

)%

 

 

 

 

 

(—

)%

 

 

(6,634

)

 

 

(3.8

)%

 

 

 

 

 

(—

)%

Other income (expense), net

 

1,270

 

 

 

1.4

%

 

 

134

 

 

 

0.2

%

 

 

2,208

 

 

 

1.3

%

 

 

261

 

 

 

0.2

%

Loss before income taxes

 

(4,460

)

 

 

(4.9

)%

 

 

(5,488

)

 

 

(7.3

)%

 

 

(15,715

)

 

 

(8.9

)%

 

 

(8,259

)

 

 

(5.6

)%

Provision for income taxes

 

200

 

 

 

0.2

%

 

 

270

 

 

 

0.4

%

 

 

302

 

 

 

0.2

%

 

 

173

 

 

 

0.1

%

Net loss

$

(4,660

)

 

 

(5.1

)%

 

$

(5,758

)

 

 

(7.7

)%

 

$

(16,017

)

 

 

(9.1

)%

 

$

(8,432

)

 

 

(5.7

)%

27


Disaggregated Revenue

The following table presents our revenues disaggregated by type of services. The majority of our revenue is generated from sales in the United States.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Promotion

$

60,912

 

 

$

58,356

 

 

$

2,556

 

 

 

4

%

 

$

124,695

 

 

$

115,702

 

 

$

8,993

 

 

 

8

%

Media

 

28,633

 

 

 

16,137

 

 

 

12,496

 

 

 

77

%

 

 

51,616

 

 

 

31,370

 

 

 

20,246

 

 

 

65

%

   Total Revenue

$

89,545

 

 

$

74,493

 

 

$

15,052

 

 

 

20

%

 

$

176,311

 

 

$

147,072

 

 

$

29,239

 

 

 

20

%

 

Comparison of the Three and Six Months Ended June 30, 2018 and 2017

Revenues

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Revenues

$

89,545

 

 

$

74,493

 

 

$

15,052

 

 

 

20

%

 

$

176,311

 

 

$

147,072

 

 

$

29,239

 

 

 

20

%

 

Revenues for the three months ended June 30, 2018 increased by $15.1 million, or 20%, as compared to the same period in 2017. The increase was primarily due to growth in media revenue, including incremental revenue related to our acquisitions of Crisp and Ahalogy in the second quarters of 2017 and 2018, respectively, and digital promotions driven by the continued growth of Retailer iQ transactions. Revenues from digital promotion transactions and digital media campaigns were 68% and 32%, respectively, of total revenues for the three months ended June 30, 2018, as compared to 78% and 22%, respectively, of total revenues during the same period in 2017. Transactions during the three months ended June 30, 2018 were approximately 1.0 billion, as compared to 793.2 million during the same period in 2017. 

 

Revenues for the six months ended June 30, 2018 increased by $29.2 million, or 20%, as compared to the same period in 2017. The increase was primarily due to growth in media revenue, including incremental revenue related to our acquisitions of Crisp and Ahalogy in the second quarters of 2017 and 2018, respectively, and digital promotions driven by the continued growth of Retailer iQ transactions. Revenues from digital promotion transactions and digital media campaigns were 71% and 29%, respectively, of total revenues for the six months ended June 30, 2018, as compared to 79% and 21%, respectively, of total revenues during the same period in 2017. Transactions during the six months ended June 30, 2018 were 2.0 billion, as compared to 1.6 billion during the same period in 2017. 

We expect revenue growth in 2018 from increased media revenues as well as promotion revenues with continued deployment of Retailer iQ and the anticipated marketing campaigns as well as adoption of our platform by consumers.

Cost of Revenues and Gross Profit

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Cost of revenues

$

47,769

 

 

$

30,021

 

 

$

17,748

 

 

 

59

%

 

$

88,222

 

 

$

59,233

 

 

$

28,989

 

 

 

49

%

Gross profit

$

41,776

 

 

$

44,472

 

 

$

(2,696

)

 

 

(6

)%

 

$

88,089

 

 

$

87,839

 

 

$

250

 

 

 

0

%

Gross margin

 

47

%

 

 

60

%

 

 

 

 

 

 

 

 

 

 

50

%

 

 

60

%

 

 

 

 

 

 

 

 

 

Cost of revenues for the three months ended June 30, 2018 increased by $17.8 million, or 59%, as compared to the same period in 2017. The increase was primarily due to an increase of $13.7 million, attributable to increased distribution fees corresponding to a greater number of Retailer iQ transactions completed through our platform, as well as higher data and traffic acquisition costs for offsite media on non-owned-and-operated properties, an increase in intangible asset amortization expense of $1.5 million related to our acquisitions including Crisp and Ahalogy as well as certain exclusivity rights acquired under strategic partnerships, an increase in data center expenses of $1.2 million, an increase in salaries and related expenses of $0.7 million, an increase in amortization expense of $0.4 million associated with our Quotient Analytics platform, an increase in other cost of revenue related expenses of $0.4 million, and an increase in stock-based compensation expense of $0.1 million, partially offset by a decrease in restructuring charges of $0.2 million.

Cost of revenues for the six months ended June 30, 2018 increased by $29.0 million, or 49%, as compared to the same period in 2017. The increase was primarily due to an increase of $22.8 million attributable to increased distribution

28


fees corresponding to a greater number of Retailer iQ transactions completed through our platform, as well as higher data and traffic acquisition costs for offsite media on non-owned-and-operated properties, an increase in data center expenses of $2.0 million, an increase in salaries and related expenses of $1.2 million, an increase in amortization expense of $1.8 million related to our acquisitions including Crisp and Ahalogy as well as certain exclusivity rights acquired under strategic partnerships, an increase in other cost of revenue related expenses of $1.1 million, an increase in amortization expense of $0.4 million associated with our Quotient Analytics platform, an increase in third-party media service fees of $0.2 million, and an increase in stock-based compensation expense of $0.2 million, partially offset by a decrease in amortization expense of $0.6 million associated with our Retailer iQ platform spend which was fully amortized in the first quarter of 2017 and a decrease in restructuring charges of $0.1 million.

Gross margin for the three and six months ended June 30, 2018 decreased to 47% and 50%, respectively, as compared to 60% during the same periods in 2017, primarily due to the continued shift in our product mix where media continues to be a bigger proportion of our revenues which has higher data and traffic acquisition costs related to offsite media on non-owned-and-operated properties as well as increase in distribution fees paid to our partners for promotions and media revenues delivered through their platform.

We expect the costs associated with distribution and third-party service fees to continue to increase in the future as we continue to expand and scale our distribution network and reach, as we continue to pursue opportunities to expand our business through selective acquisitions, we expect pressure on our gross margin as our growth strategy evolves and our product mix continues to change.

Sales and Marketing

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Sales and marketing

$

20,530

 

 

$

21,617

 

 

$

(1,087

)

 

 

(5

)%

 

$

44,360

 

 

$

45,454

 

 

$

(1,094

)

 

 

(2

)%

Percent of revenues

 

23

%

 

 

29

%

 

 

 

 

 

 

 

 

 

 

25

%

 

 

31

%

 

 

 

 

 

 

 

 

 

Sales and marketing expenses for the three months ended June 30, 2018 decreased by $1.1 million, or 5%, as compared to the same period in 2017. The decrease was primarily the result of a reduction in promotional and advertising costs of $1.7 million and a decrease in restructuring charges of $0.4 million due to severance for impacted employees, partially offset by an increase in salaries and related expenses of $1.0 million.

Sales and marketing expenses for the six months ended June 30, 2018 decreased by $1.1 million, or 2%, as compared to the same period in 2017. The decrease was primarily the result of a reduction in promotional and advertising costs of $3.4 million, partially offset by an increase in salaries and related expenses of $1.8 million, an increase in stock-based compensation expense of $0.3 million and an increase in restructuring charges of $0.2 million primarily due to severance for impacted employee.

We expect to continue to invest in sales and marketing in order to support our growth and business objectives, while continuing to optimize our investment in promotional and advertising activities.

Research and Development

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Research and development

$

12,122

 

 

$

12,774

 

 

$

(652

)

 

 

(5

)%

 

$

24,748

 

 

$

25,894

 

 

$

(1,146

)

 

 

(4

)%

Percent of revenues

 

14

%

 

 

17

%

 

 

 

 

 

 

 

 

 

 

14

%

 

 

18

%

 

 

 

 

 

 

 

 

 

Research and development expenses for the three months ended June 30, 2018 decreased by $0.7 million, or 5%, as compared to the same period in 2017. The decrease was primarily due to a decrease in salaries and related expenses of $0.7 million, a decrease in research and development support activities of $0.7 million, a decrease in restructuring charges of $0.3 million primarily related to severance for the impacted employees, a decrease in stock-based compensation expense of $0.1 million, partially offset by a decrease in capitalization of internal use software development costs of $1.1 million.

29


Research and development expenses for the six months ended June 30, 2018 decreased by $1.1 million, or 4%, as compared to the same period in 2017. The decrease was primarily due to a decrease in research and development support activities of $1.3 million, a decrease in salaries and related expenses of $1.2 million, a decrease in stock-based compensation expense of $0.3 million, partially offset by a decrease in capitalization of internal use software development costs of $1.6 million and an increase in restructuring charges of $0.1 million primarily related to severance for the impacted employees.

We believe that continued investment in technology is critical to attaining our strategic objectives. We intend to balance our investment in research and development with our continued operational and cost optimization efforts, as it provides us with the ability to invest in strategic areas, while managing growth in future periods.

General and Administrative

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

General and administrative

$

11,528

 

 

$

11,803

 

 

$

(275

)

 

 

(2

)%

 

$

22,920

 

 

$

23,696

 

 

$

(776

)

 

 

(3

)%

Percent of revenues

 

13

%

 

 

16

%

 

 

 

 

 

 

 

 

 

 

13

%

 

 

16

%

 

 

 

 

 

 

 

 

 

General and administrative expenses for the three months ended June 30, 2018 decreased by $0.3 million, or 2%, as compared to the same period in 2017. The decrease was primarily due a decrease in salaries and related expenses of $0.5 million, and a decrease in ERP software implementation costs of $0.4 million, a decrease in restructuring charges of $0.2 million primarily related to severance for the impacted employees, partially offset by an increase in third-party consultation services of $0.3 million, an increase in allowance for doubtful accounts of $0.2 million, an increase in stock-based compensation expense of $0.2 million, and an increase in acquisition related fees of $0.1 million.

General and administrative expenses for the six months ended June 30, 2018 decreased by $0.8 million, or 3%, as compared to the same period in 2017. The decrease was primarily due to a decrease in salaries and related expenses of $1.0 million, a decrease in acquisition related fees of $0.7 million, a decrease in ERP software implementation costs of $0.5 million, and a decrease in restructuring charges of $0.1 million primarily related to severance for the impacted employees, partially offset by an increase in other administrative expenses of $1.0 million, and an increase in allowance for doubtful accounts of $0.5 million.

We expect to continue to incur additional general and administrative expenses in future periods as we continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting expenses, and compliance costs associated with the Sarbanes-Oxley Act.

Change in Fair Value of Escrowed Shares and Contingent Consideration

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Change in fair value of escrowed

   shares and contingent

   consideration, net

$

 

 

$

3,900

 

 

$

(3,900

)

 

 

(100

)%

 

$

7,350

 

 

$

1,315

 

 

$

6,035

 

 

 

459

%

Percent of revenues

 

%

 

 

5

%

 

 

 

 

 

 

 

 

 

 

4

%

 

 

1

%

 

 

 

 

 

 

 

 

For the three and six months ended June 30, 2018, we recorded an expense of zero and $7.4 million, due to the changes in fair value of escrowed shares and contingent consideration. During the six months ended June 30, 2018, we recorded a loss of $1.4 million due to the increase in fair value of certain escrowed shares resulting from the increase in the Company’s stock price and a loss of $6.0 million related to the change in fair value of Crisp contingent consideration due to the increase in expected achievement of certain financial metrics over the contingent consideration period. During the second quarter of 2018, the contingent consideration period for measuring Crisp’s achievement of financial metrics has ended. 

For the three and six months ended June 30, 2017, we recorded losses of $3.9 million and $1.3 million, respectively, due to the changes in fair value of escrowed shares and contingent consideration. During the three months ended June 30, 2017, we recorded a loss of $3.9 million due to the increase in fair value of certain escrowed shares resulting from the increase in the Company’s stock price. During the six months ended June 30, 2017, we recorded a loss of $1.5 million

30


due to the increase in fair value of certain escrowed shares resulting from the increase in the Company’s stock price and a gain of $0.2 million due to the change in fair value of the Shopmium contingent consideration related to a decline in expected revenue and profit milestones for the year ended December 31, 2017. As of March 31, 2018, the Company determined that there was no payout required when the Shopmium contingent consideration period expired.

We expect that the change in fair value of escrowed shares will fluctuate as we continue to remeasure the fair values of shares held in escrow until they are released.  

Interest Expense and Other Income (Expense), Net

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Interest expense

$

(3,326

)

 

$

 

 

 

(3,326

)

 

 

100

%

 

$

(6,634

)

 

$

 

 

$

(6,634

)

 

 

100

%

Other income (expense), net

 

1,270

 

 

 

134

 

 

 

1,136

 

 

 

848

%

 

$

2,208

 

 

 

261

 

 

$

1,947

 

 

 

746

%

 

$

(2,056

)

 

$

134

 

 

$

(2,190

)

 

 

(1,634

)%

 

$

(4,426

)

 

$

261

 

 

$

(4,687

)

 

 

(1,796

)%

 

Interest expense for the three and six months ended June 30, 2018 increased by $3.3 million and $6.6 million, respectively, as compared to the same period in 2017, due to the convertible senior notes issued during the fourth quarter of 2017. During the three and six months ended June 30, 2018, other income (expense), net increased $1.1 million and $1.9 million, respectively, as compared to the same period in 2017 due to interest income earned on short-term certificate of deposits, net of the effect of re-measuring balances in foreign currency due to exchange rate fluctuations.

Provision for Income Taxes

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except percentages)

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

 

2018

 

 

2017

 

 

$ Change

 

 

% Change

 

Provision for income taxes

$

200

 

 

$

270

 

 

$

(70

)

 

 

(26

)%

 

$

302

 

 

$

173

 

 

$

129

 

 

 

75

%

 

The provision for income taxes of $0.2 million and $0.3 million, respectively for the three and six months ended June 30, 2018 was primarily attributable to our foreign operations and amortization of tax deductible goodwill from prior year acquisitions. The provision for income taxes of $0.3 million and $0.2 million during the three and six months ended June 30, 2017, respectively, was primarily attributable to a net decrease in foreign tax benefit and amortization of tax deductible goodwill from prior year acquisitions.

The decrease in income tax provision for the three months ended June 30, 2018, as compared to the comparable periods in 2017, was primarily attributable to a decrease in foreign operations.  The increase in income tax provision for the six months ended June 30, 2018, as compared to the comparable periods in 2017, was primarily attributable to a net increase in foreign operations.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has determined that the $27.7 million recorded in connection with the re-measurement of certain deferred tax assets and liabilities, and corresponding valuation allowance of $28.4 million was a provisional amount and a reasonable estimate at December 31, 2017. The difference between the deferred tax asset and the valuation allowance is related to a deferred tax liability that was also re-measured on December 31, 2017, resulting in a provisional income tax benefit of $0.7 million. During the second quarter of 2018, we did not have any significant adjustments to the provisional amounts recorded during the year ended December 31, 2017. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (IRS), and other standard-setting bodies, we may make adjustments to the provisional amounts. The accounting for the tax effects of the Tax Act will be completed later in 2018.

31


Liquidity and Capital Resources

To date, we have financed our operations and capital expenditures through the issuance of common stock, private sales of preferred stock, term debt financing, the issuance of convertible senior notes, exercise of stock options and cash flows from operations. As of June 30, 2018, we had $307.8 million in cash and cash equivalents and $50.2 million in short-term investments, which were held for working capital purposes. Our cash equivalents and short-term investments are comprised primarily of money market funds and certificate of deposits. As of June 30, 2018, $3.1 million of cash was held by our foreign subsidiaries. We do not presently anticipate a need to repatriate these funds for use in our domestic operations, but if we were to do so, any such repatriated cash and cash equivalents could be subject to U.S. income taxes, less any previously paid foreign income taxes.

In the near term, although we intend to continue to manage our operating expenses in line with our existing cash and available financial resources, we anticipate we will incur increased spending in future periods in order to execute our long-term business plan and to support our growth and the costs associated with being a public company. As a public company, we have incurred and expect to continue to incur significant legal, accounting, regulatory compliance and other costs that we did not incur in the periods prior to our IPO with higher increases in future periods as we continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting expenses, and compliance costs associated with SOX. In addition, we may use cash to fund acquisitions or invest in other businesses, repurchase the Company’s common stock under the publicly announced share repurchase program or incur capital expenditures including leasehold improvements or technologies.

Our Board of Directors has approved programs for us to repurchase shares of our common stock. During May 2018, the active repurchase program at that time expired. In April 2018, our Board of Directors authorized a one-year share repurchase program (“2018 Program”) for us to repurchase up to $100.0 million of our common stock from May 2018 through May 2019. During the six months ended June 30, 2018, the Company had repurchased and retired 500,000 shares of its common stock for an aggregate of $6.7 million. As of June 30, 2018, $93.3 million remained available for repurchases under the 2018 Program. Stock repurchases may be made from time to time in open market transactions or privately negotiated transactions, and the Company may use a plan that is intended to meet the requirements of SEC Rule 10b5-1 to enable stock repurchases to occur during periods when the trading window would otherwise be closed. The Company may suspend, modify or terminate the 2018 Program at any time without prior notice.

We believe our existing cash, cash equivalents and cash flow from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months following the date that this quarterly report on Form 10-Q is filed and into the foreseeable future. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.

Cash Flows

The following table summarizes our cash flows for the periods presented (in thousands):

 

 

Six Months Ended

June 30,

 

 

2018

 

 

2017

 

Net cash provided by operating activities

$

3,857

 

 

$

15,269

 

Net cash provided by (used in) investing activities

 

(20,047

)

 

 

10,377

 

Net cash provided by (used in) financing activities

 

(10,615

)

 

 

3,556

 

Effects of exchange rates on cash

 

6

 

 

 

18

 

Net increase (decrease) in cash and cash equivalents

$

(26,799

)

 

$

29,220

 

 

Operating Activities

Cash provided by operating activities is primarily influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business and the increase in our revenues. Cash provided by operating activities has typically been due to our net losses and to changes in our operating assets and liabilities.

During the six months ended June 30, 2018, net cash provided by operating activities of $3.9 million reflects our net loss of $16.0 million, adjusted for net non-cash expenses of $39.2 million, and cash used as a result of changes in

32


working capital of $19.3 million. Non-cash expenses included stock-based compensation, change in fair value of escrowed shares and contingent consideration, net, depreciation and amortization, amortization of debt discount and issuance costs, deferred income taxes, allowance for doubtful accounts, and loss on disposal of property and equipment. The uses of cash from working capital items included an increase in accounts receivable of $10.7 million, a decrease in accrued compensation and benefits of $4.5 million related to the payout of the annual bonus, a decrease in accounts payable and other current liabilities of $3.2 million due to the timing of services and payments and an increase in prepaid expenses and other current assets of $2.0 million, partially offset by an increase in deferred revenues of $1.1 million.

During the six months ended June 30, 2017, net cash provided by operating activities of $15.3 million, reflects our net loss of $8.4 million adjusted for net non-cash expenses of $25.5 million, partially offset by cash used as a result of changes in working capital of $1.8 million. Non-cash expenses included depreciation and amortization, stock-based compensation, recovery from allowance for doubtful accounts, change in the fair value of escrowed shares and contingent consideration, net, and deferred income taxes. The uses of cash from the net change in working capital items included, most notably a decrease in accrued compensation and benefits of $2.4 million related to the payout of annual bonuses, an increase in prepaid and other current assets of $2.1 million related to prepaid subscription and support fees, and a decrease in accounts payable and other current liabilities of $0.5 million due to the timing of payments, partially offset by a decrease in accounts receivable of $2.1 million due to improved collections, and an increase in deferred revenues of $1.1 million. 

Investing Activities

Purchases of property and equipment may vary from period-to-period due to the timing of the expansion of our operations, the addition of headcount and the development activities related to our future offerings. We expect to continue to invest in property and equipment and in the further development and enhancement of our software platform for the foreseeable future. In addition, from time to time, we may consider potential acquisitions that would complement our existing service offerings, enhance our technical capabilities or expand our marketing and sales presence. Any future transaction of this nature could require potentially significant amounts of capital or could require us to issue our stock and dilute existing stockholders.

During the six months ended June 30, 2018, net cash used in investing activities of $20.0 million primarily reflects the purchases of certificates of deposits of $50.2 million, net cash consideration paid for the Ahalogy acquisition of $20.9 million, partial consideration of $6.5 million paid for acquiring certain exclusive rights pursuant to a strategic partnership, purchases of property and equipment of $2.3 million which includes capitalized software development costs, and technology hardware and software to support our growth, and partially offset by proceeds from maturities of certificates of deposits of $59.9 million.

During the six months ended June 30, 2017, net cash provided by investing activities of $10.4 million, primarily reflects the proceeds from maturities of certificates of deposits of $94.3 million, partially offset by purchases of certificates of deposits of $59.7 million, net cash consideration paid for the Crisp acquisition of $21.0 million, and purchases of property and equipment of $3.2 million, which includes capitalized software development costs related to Quotient Insights, and technology hardware and software.

Financing Activities

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

During the six months ended June 30, 2018, net cash used in financing activities of $10.6 million primarily relates to payments made for shares withheld to cover the required payroll withholding taxes of $8.2 million, repurchases of common stock of $6.7 million, and payments on promissory notes and capital lease obligations of $0.2 million, partially offset by proceeds received from exercises of stock options under equity incentive plans, net of $4.5 million.

During the six months ended June 30, 2017, net cash provided by financing activities of $3.6 million primarily reflects proceeds received from exercises of stock options under stock plans, net of shares withheld to cover the required payroll withholding taxes.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2018.

33


Contractual Obligations and Commitments

Refer to Note 13 of our notes to condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for further information. There have been no significant changes outside the ordinary course of business during the three and six months ended June 30, 2018 to our commitments and contingencies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed on February 16, 2018 with the SEC.

Critical Accounting Policies and Estimates

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

There were no significant changes in our critical accounting policies and estimates during the three and six months ended June 30, 2018, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed on February 16, 2018 with the SEC, except for the Company adopting Topic 606 using the modified retrospective basis, which resulted in a cumulative effect adjustment of $0.1 million recorded to retained earnings as of January 1, 2018. Refer to Note 2 for further details related to the adoption of Topic 606.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in our condensed consolidated financial statements and accompanying notes. Such management estimates include, but are not limited to, revenue recognition, collectability of accounts receivable, recoverability of non-refundable prepayments, the valuation and useful lives of intangible assets and property and equipment, goodwill, stock-based compensation, contingent consideration and income taxes. Actual results may differ from the Company’s estimates, and such differences may be material to the accompanying condensed consolidated financial statements.

Recently Issued and Adopted Accounting Pronouncements

Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements contained in this Form 10-Q for further information.

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

During the three and six months ended June 30, 2018, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed on February 16, 2018 with the SEC for a more complete discussion on the market risks we encounter.

 

 

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2018, have concluded that our disclosure controls and procedures were effective at the reasonable assurance level and are effective to provide reasonable assurances that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

34


Changes in Internal Control over Financial Reporting

We implemented a new Enterprise Resource Planning (“ERP”) system, during the fourth quarter of 2017, for our corporate operations including general ledger, procurement, payment and reporting functions. During Q2 2018, we implemented modules for our order management and revenue recognition functions. Our ERP system is intended to provide us with enhanced transactional processing and management tools compared to our legacy system, and is intended to enhance internal controls over financial reporting. We have taken the necessary steps to monitor and maintain appropriate internal control over financial reporting during this period of system change. Additionally, we will continue to evaluate the operating effectiveness of related controls during subsequent periods.

There were no changes in our internal control over financial reporting, other than the implementation of the order management and revenue recognition functions in our ERP system, identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the second quarter of 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures or our internal controls are not designed to prevent all errors and all frauds. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

35


PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings.

For a discussion of legal proceedings, see Note 13, “Commitments and Contingencies,” of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Item 1A.

Risk Factors.

Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, results of operations, cash flows, financial conditions, and the trading price of our common stock. The risks described below are not the only risk facing us. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition, results of operations and prospects.

Risks Related to Our Business

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

We have incurred net losses of $15.1 million and $19.5 million in 2017 and 2016, respectively, and incurred net loss of $4.7 million for the three months ended June 30, 2018. We have an accumulated deficit of $306.3 million as of June 30, 2018. We anticipate that our costs and expenses will increase in the foreseeable future as we continue to invest in:

 

sales and marketing;

 

research and development, including new product development;

 

our technology infrastructure;

 

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

 

efforts to expand into new markets; and

 

strategic opportunities, including commercial relationships and acquisitions.

For example, we have incurred and expect to continue to incur expenses developing, improving, integrating, investing, marketing and maintaining our retailer platform, Retailer iQ, our data and analytics platform, Quotient Analytics, and our data-driven media solutions, Quotient Media Exchange or QMX, and we may not succeed in increasing our revenues sufficiently to offset these expenses. 

If we are unable to gain efficiencies in our operating costs, our business could be adversely impacted. We cannot be certain that we will be able to attain or maintain profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.

We may not achieve revenue growth.

We may not be able to achieve revenue growth, and we may not be able to generate sufficient revenues to achieve profitability. In addition, historically the growth rate of our business, and as a result, our revenue growth, has varied from quarter-to-quarter and year-to-year, and we expect that variability to continue. For example, some of our products experience seasonal sales and buying patterns mirroring those in the CPG, retail, and e-commerce markets, including back-to-school and holiday campaigns, where demand increases during the second half of our fiscal year, and our revenues may otherwise fluctuate due to changes in promotional spending budgets (including shopper marketing budgets) of CPGs and retailers and the timing of their promotional spending. We may not always be able to anticipate such fluctuations. Decisions by major CPGs or retailers to delay or reduce their promotional spending, or divert spending away from digital promotions, or from our platform, or changes in our fee arrangements with CPGs and retailers, could also slow our revenue growth or reduce our revenues.  Additionally, as our business evolves, we will continue to experiment with different pricing models and fee arrangements with CPGs and retailers, which may impact how we monetize transactions. For example, we are experimenting with ROI-based pricing strategies though we cannot offer any assurance on the success or adoption rate of such strategies. If we shift a greater number of our arrangements with CPGs to ROI-based pricing models, some of which require us to receive fees upon the redemption of digital coupons on our platform rather than activation as is generally done, our revenue growth and revenues could be harmed.

36


We believe that our continued revenue growth will depend on our ability to:

 

increase our share of CPG spending on overall coupon and trade promotions, increase the number of brands that are using our platform within each CPG, and increase media spend including shopper marketing on our platform;

 

adapt to changes in promotional spending budgets of CPGs and retailers and the timing of their promotional spending;

 

successfully execute our digital promotions, shopper marketing and media solutions into retailers’ in-store and point of sale systems and consumer channels;

 

deploy, execute, and continue to develop our data, measurement, and analytics solutions in support of Retailer iQ and QMX;

 

grow and maintain our retailer network through direct and indirect partnerships;

 

maintain and expand our data rights with our retailer network;

 

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

 

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

 

manage the shift from desktop to mobile devices;

 

manage the transition from digital print coupons to digital paperless coupons;

 

innovate our product offerings to retain and grow our consumer base;

 

obtain and increase the number of high quality coupons;

 

grow the number of transactions across our platform;

 

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

 

develop and implement our media strategies, including the integration and growth of Crisp;      

 

increase the awareness of our brands, and earn and build our reputation;

 

hire, integrate and retain talented personnel;

 

effectively manage scaling our operations; and

 

successfully compete with existing and new competitors.

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

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

The success of our business depends in part on our ability to increase our share of CPG spending on overall coupons and trade promotions, increase media spending on our platform, increase the number of brands that are using our platform within each CPG, increase adoption and scale of Retailer iQ, and deployment, execution, and continued development of Quotient Analytics and QMX. It also depends on (i) our ability to obtain, maintain, and expand data rights agreements with our retailer partners, (ii) our ability to further integrate our digital promotions and media solutions into retailers’ in-store and point of sale systems and consumer channels, (iii) our ability to obtain the right to distribute Retailer iQ digital promotions more broadly through our websites and mobile apps and those of our publishers, and (iv) our retail partners’ commitment in promoting our digital solutions to their customers. In addition, we must acquire new CPGs and retailers in our current customer base and add new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment venues. If CPGs and retailers do not find that offering digital promotions and media on our platform enables them to reach consumers and sufficiently increase sales with the scale and effectiveness that is compelling to them, CPGs and retailers may not increase their distribution of digital promotions and media on our platform, or they may decrease them or stop offering them altogether, and new CPGs and retailers may decide not to use our platform.

37


For example, if CPGs decide that utilizing our platform is not the right solution for them to connect with consumers, we may not be able to increase our prices or CPGs may pay us less. Likewise, if retailers decide that our platform is less effective at increasing sales to and loyalty of existing and new consumers, retailers may demand a higher percentage of the total proceeds from each digital promotion that is activated or redeemed or demand minimum guaranteed payments. Furthermore, if existing and new retailers using Retailer iQ do not find that it increases consumer engagement and loyalty, our overall success may be harmed. In addition, we expect to face increased competition, and competitors may accept lower payments from CPGs to attract and acquire new CPGs, or provide retailers and publishers a higher distribution fee than we currently offer to attract and acquire new retailers and publishers. In addition, we may experience attrition in our CPGs, retailers and publishers in the ordinary course of business resulting from several factors, including losses to competitors, changes in CPG budgets, and decisions by CPGs, retailers and publishers to offer digital coupons through their own websites or other channels without using a third-party platform such as ours or through a competitive third party network or platform, and failure to maintain distribution agreements with third party digital promotions networks and platforms. If we are unable to retain and expand our relationships with existing CPGs, retailers and publishers or if we fail to attract new CPGs, retailers and publishers to the extent sufficient to grow our business, or if too many CPGs, retailers and publishers are unwilling to offer digital coupons and media with compelling terms through our platform, we may not increase the number of high quality coupons and marketing campaigns on our platform and our revenues, gross margin and operating results will be adversely affected. 

The loss of any significant customer could materially and adversely affect our results of operations and financial condition.

Our business is exposed to risks related to customer concentration, particularly among CPGs. For the three and six months ended June 30, 2018 and the year ended December 31, 2017, no single customer accounted for more than 10% of our total revenues. For the years ended December 31, 2016 and 2015, total revenue from The Procter and Gamble Company accounted for more than 10% of our total revenues. The loss of any of our significant customers or deterioration in our relations with any of them could materially and adversely affect our results of operations and financial condition.

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

As consumer demand for digital coupons has increased, promotion spending has shifted from traditional coupons through traditional channels, such as newspapers and direct mail, to digital coupons. However, it is difficult to predict whether the pace of transition from traditional to digital coupons will continue at the same rate and whether the growth of the digital promotions market will continue. If a retailer decides not to accept digital paperless coupons or a CPG reduces their spend in digital promotions, our business could be harmed. In order to expand our business, we must appeal to and attract consumers who historically have used traditional promotions to purchase goods or may prefer alternatives to our offerings, such as those of our competitors. If the demand for digital coupons does not continue to grow as we expect, or if we fail to successfully address this demand, our business will be harmed. For example, the growth of our revenues will require increasing the number of brands that are using our platform within each CPG and further integrating such digital promotions with Retailer iQ. If our projections regarding the adoption and usage of Retailer iQ by retailers, CPGs and consumers, do not occur or are slower than expected, our business, financial condition, results of operations and prospects will be harmed. A variety of factors could slow the success of Retailer iQ generally, including insufficient time, resources or funds committed by retailers to the implementation and promotion of Retailer iQ, a retailer’s decision to delay or forego launching or marketing Retailer iQ, our inability to obtain sufficient data rights to maximize the functionality of Retailer iQ, Quotient Analytics, or QMX, our inability to monetize enhanced Retailer iQ functionality, and our inability to efficiently integrate Retailer iQ with a retailer’s system. Even if we are successful in driving the adoption and usage of Retailer iQ by retailers, CPGs and consumers, if Retailer iQ fee arrangements or transaction volumes, or the mix of offers, change or do not meet our projections, our revenues may be harmed. We expect that the market will evolve in ways which may be difficult to predict. It is also possible that digital coupon offerings generally could lose favor with CPGs, retailers or consumers. In the event of these or any other changes to the market, our continued success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics. In addition, we will need to continue to grow demand for our digital promotions platform by CPGs, retailers and consumers, including through continued innovation and implementation of new initiatives associated with the digital coupons. For example, if consumer demand for our software-free print solution, cash-back receipt scanning solution, or our mobile application does not grow as we expect, our business may be harmed. If we are unable to grow or successfully respond to changes in the digital promotions market, our business could be harmed and our results of operations could be negatively impacted. For example, we are seeing a shift from digital paper coupons to digital paperless coupons. Our revenues may be harmed if we are unable to manage this transition and the growth of digital paperless coupons is slower than the decline in digital print coupons.

38


We depend in part on data-rights agreements with our retailer partners to power a range of products and the termination of such agreements or the failure to obtain additional data rights can severely impact our revenue and growth.

Retailer iQ, Quotient Analytics and QMX are powered in part by data we obtain from our retailer partners.  Our access to this data is governed by data-rights agreements with some of our retail partners.  These data-rights agreements have complex rules and are required to be renewed periodically.  If we fail to secure additional data rights, to renew expiring data-rights agreements, if we are found to be in violation of any of our obligations under these agreements, or if retailers lose their data rights, we could lose access to retailer data.  Without retailer data, Retailer IQ, Quotient Analytics, QMX and our targeted media offerings would be less valuable to our CPG customers and retail partners.

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

Historically, our revenue growth has varied from quarter-to-quarter and year-to-year, and we expect that variability to continue. In addition, our operating costs and expenses have fluctuated in the past, and we anticipate that our costs and expenses will increase over time as we continue to invest in growing our business and incur additional costs of being a public company. Our operating results could vary significantly from quarter-to-quarter and year-to-year as a result of these and other factors, many of which are outside of our control, and as a result we have a limited ability to forecast the amount of future revenues and expenses, which may adversely affect our ability to predict financial results accurately, and we expect our operating results to vary from quarter-to-quarter, which may cause results to 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 and the trading price of the convertible senior notes to decline. As a result of the potential variations in our quarterly revenues and operating results, we believe that quarter-to-quarter comparisons of our revenues and operating results may not be meaningful and the results of any one quarter or historical patterns should not be considered indicative of our future sales activity, expenditure levels or performance.

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

 

our ability to grow our revenues by increasing our share of CPG spending and the number of brands using our platform, including Retailer iQ, increasing media spending on our platform, further integrating with our retailers, adding new CPGs and retailers to our network and growing our current consumer base and expanding into new industry segments such as convenience, specialty/franchise retail, restaurants and entertainment;

 

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

 

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

 

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

 

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

 

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

 

our ability to obtain and increase the number of high quality coupons;

 

our ability to grow and maintain our relationships with retailers, including our ability to negotiate favorable data rights agreements with retailers;

 

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

 

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

 

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

39


 

our ability to manage our growth, including scaling Retailer iQ, deploying and developing Quotient Analytics, and growing QMX;

 

the success of our sales and marketing efforts;

 

the costs of acquiring new companies which we anticipate will help us grow our business;

 

the costs of successfully integrating acquired companies and employees into our operations, including costs related to the integration of Ahalogy;

 

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

 

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

 

the attraction and retention of qualified employees and key personnel, which can be affected by changes in U.S. immigration policies;

 

the effectiveness of our internal controls;

 

increased legal, accounting and compliance costs associated with Section 404 of SOX as we do not expect to retain our “emerging growth company” status under the Jumpstart Our Business Startup Act of 2012, or the JOBS Act; and

 

changes in accounting rules, tax laws or interpretations thereof.

The effects of these factors individually or in combination could cause our quarterly and annual operating results to fluctuate, and affect our ability to forecast those results and our ability to achieve those forecasts. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of our investors or financial analysts for any period. In addition, we may release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, based on predictions of our management, which are necessarily uncertain in nature. Our guidance may vary materially from actual results. If our revenue or operating results, or the rate of growth of our revenue or operating results, fall below the expectations of our investors or financial analysts, or below any forecasts or guidance we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met our own or other publicly stated revenue or earnings forecasts. Our failure to meet our own or other publicly stated revenue or earnings forecasts, or even when we meet our own forecasts but fall short of analyst or investor expectations, could cause our stock price to decline and expose us to costly lawsuits, including securities class action suits. Such litigation against us could impose substantial costs and divert our management’s attention and resources.

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

When we deliver a digital coupon on a retailer’s website or mobile app or through its loyalty program, or the website or mobile app of a publisher, or through our Retailer iQ platform, and the consumer takes certain actions, we pay a distribution fee to the retailer or other publisher, which, in some cases may be prepaid prior to being incurred. Such fees have increased as a percentage of our revenues in recent periods. If such fees as a percentage of our revenues continue to increase, our cost of revenues as a percentage of revenues could increase and our operating results would be adversely affected. Additionally, if the adoption and usage of Retailer iQ does not meet projections, certain prepaid distribution fees with some of the retailers will not be recoverable and the distribution fee will increase as a percentage of revenue. During the third quarter of 2016, we recorded a one-time charge associated with certain distribution fees under an arrangement with a retailer partner that were deemed unrecoverable. We considered various factors in our assessment including our historical experience with the transaction volumes through the retailer and comparative retailers, ongoing communications with the retailer to increase its marketing efforts to promote the digital platform, as well as the projected revenues, and associated revenue share payments. Accordingly, during the third quarter of 2016, we recognized a loss of $7.4 million related to such distribution fee arrangement. At June 30, 2018, and December 31, 2017, we had no prepaid non-refundable payments with our Retailer iQ partners.

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Our gross margins are dependent on many factors, some of which are not directly controlled by us.

The factors potentially affecting our gross margins include:

 

our product mix since we have significant variations in our gross margin among products. Any substantial change in product mix could change our gross margin,

 

evolving fee arrangements, because as we continue to scale customers on Retailer iQ we will continue to experiment with various fee arrangements (including volume based fees) which might have an impact on our gross margins;

 

success of our pricing strategies, including our ROI-based pricing strategy; and

 

pricing and acceptance of higher-margin new products.

For instance, during the past 12 months we have seen pressure on our gross margin which we principally attribute to the factors described above and we expect this pressure to continue as our growth strategy evolve and our product mix continues to change.

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

We must continue to maintain and expand the use by consumers of digital coupons in order to increase the attractiveness of our platform to CPGs and retailers and to increase revenues and achieve profitability. If consumers do not perceive that we offer a broad selection of relevant and high quality digital coupons, or that the usage of digital coupons is easy and convenient through our platform, we may not be able to attract or retain consumers on our platform. For instance, we are retiring our coupon printing software and if consumers who use that software do not move to our upgraded print solution or other products or their transition to our other products is slower than anticipated, our revenues could be adversely affected. Further, if there is increased competition for the trade promotions and marketing budgets of CPGs and retailers, the result could be increased pricing pressure. If we are unable to maintain and expand the use by consumers of digital coupons on our platform, including through our software-free print solution, updated Coupons.com mobile application and mobile cash back application, or if we do not do so to a greater extent than our competitors, CPGs may find that offering digital promotions on our platform does not reach consumers with the scale and effectiveness that is compelling to them. Likewise, if retailers find that using our platform, including Retailer iQ, does not increase sales of the promoted products and consumer loyalty to the retailer to the extent they expect, then the revenues we generate may not increase to the extent we expect or may decrease. Any of these would adversely affect our operating results.

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

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

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

Web usage and the consumption of digital content are increasingly shifting from desktop to mobile platforms such as smartphones. The growth of our business depends in part on our ability to drive engagement, activation and shopping behavior for our retailers and CPGs through these new mobile 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, ease of convenience or that give preferential treatment to competitive services could adversely affect usage of our services through mobile devices.

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Further, to deliver high quality mobile offerings, it is important that our platform integrates 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. If we fail to achieve success with our mobile applications and mobile website, or if we otherwise fail to deliver effective solutions to CPGs and retailers for mobile platforms and other emerging platforms, our ability to monetize these growth opportunities will be constrained, and our business, financial condition and operating results would be adversely affected.

Our success on mobile platforms will also be dependent on our ability to develop features or products that will make our mobile platform attractive to, and drive engagement by, consumers. For example, we launched an updated Coupons.com mobile application in January 2017 providing enhanced functionality and features; however, there is no guarantee that consumers will adopt our mobile application or that it will result in increased engagement. If we fail to develop such features or products after investing in their development, our ability to monetize these growth opportunities will be constrained, and our business, financial condition and operating results may be adversely affected.

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

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

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

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

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

 

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

 

providers of digital coupons such as Valassis’ Redplum.com, Catalina Marketing Corporation’s Cellfire, News America Marketing’s SmartSource., Inmar, You Technology, and companies that offer coupon codes such as RetailMeNot, Inc., Groupon, Inc., Exponential Interactive, Inc.’s TechBargains.com, Savings.com, Inc and Ebates Performance Marketing, Inc., companies that offer cash back solutions such as iBotta, Inc., and News America Marketing’s Checkout 51, and companies providing other e-commerce based services that allow consumers to obtain direct or indirect discounts on purchases;

 

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

 

companies offering online and marketing services to retailers and CPGs, such as MyWebGrocer, Inc. and Flipp Corp.; and

 

companies offering media services, such as Triad Media Inc., Valassis Digital and News America Marketing.

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

 

scale and effectiveness of reach in connecting CPGs and retailers to consumers in a digital manner, through web, mobile and other online properties;

 

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

 

platform security, scalability, reliability and availability;

 

number of channels by which a company engages with consumers;

 

integration of products and solutions;

 

rapid deployment of products and services for customers;

 

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

 

ability to deliver high quality and increasing number of digital coupons that are widely available and easy to use in consumers’ preferred form;

 

integration with retailer applications and point of sales systems;

 

brand recognition and reputation;

 

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

 

breadth and expertise of the Company’s sales organization.

We are subject to competition from large, well-established companies which have significantly greater financial, marketing and other resources than we do and have offerings that compete with our platform or may choose to offer digital promotions as an add-on to their core business on their own or in partnership with one of our competitors that would directly compete with ours. Many of our larger actual and potential competitors have the resources to significantly change the nature of the digital promotions industry to their advantage, which could materially disadvantage us. For example, Google, Yahoo!, Microsoft and Facebook and online retailers such as Amazon have highly trafficked industry platforms which they have leveraged, or could leverage, to distribute digital coupons or other digital promotions that could negatively affect our business. In addition, these potential competitors may be able to respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to attract more consumers and, as a result, more CPGs and retailers, or generate revenues more effectively than we do. Our competitors may offer digital coupons that are similar to the digital coupons we offer or that achieve greater market acceptance than those we offer. We are also subject to competition from smaller companies that launch similar or new products and services that we do not offer and that could gain market acceptance.

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Our success depends on the effectiveness of our platform in connecting CPGs and retailers with consumers and with attracting consumer use of the digital coupons delivered through our platform. To the extent we fail to provide digital coupons for high quality, relevant products, or otherwise fail to successfully reach consumers on their mobile device or elsewhere, consumers may become dissatisfied with our platform and decide not to use our digital coupons and elect to use the digital coupons distributed by one of our competitors. As a result of these factors, our CPGs and retailers may not receive the benefits they expect, and CPGs may use the offerings of one of our competitors, and retailers may elect to handle coupons themselves or exclude us from integrating with their in-store and point of sale systems or consumer channels, and our operating results would be adversely affected. Similarly, if retailers elect to use a competitive distribution network or platform, and we do not have, or fail to maintain, an agreement to distribute content through that network or platform, CPGs may elect to provide digital coupons directly to that network or platform, instead of through our platform. If retailers and CPGs require our platform to integrate with competitive offerings instead of using our products, we could lose some of our competitive advantage and our business could be harmed.

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

We also directly and indirectly compete with retailers for consumer traffic. Many retailers market and offer their own digital coupons directly to consumers using their own websites, email newsletters and alerts, mobile applications and social media channels. Additionally, some retailers also market and offer their own digital coupons directly to consumers using our platform for which we earn no revenue.  Our retailers could be more successful than we are at marketing their own digital coupons and could decide to terminate their relationship with us.

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

The success and scale of Retailer iQ depends, in part, on the level of commitment and support by retailers.  

If retailers do not commit sufficient time, resources and funds towards the marketing of their digital promotions and programs on Retailer iQ, the growth and scale of Retailer iQ and its penetration into the consumer market will be adversely affected. Further, the successful implementation of Retailer iQ requires integration with a retailer’s point of sales system, loyalty programs and consumer channels. These integration efforts require time and effort from both the retailer and ourselves, which also involves our working with third-party systems and solutions, some of whom may be our competitors. We may not be able to integrate and launch Retailer iQ with a retailer’s systems in a timely and efficient manner. If we are unable to successfully implement Retailer iQ, which includes increased consumer adoption of Retailer iQ, or it is not adopted, marketed and supported with sufficient resources by retailers, the success and scale of Retailer iQ will be adversely affected, impacting the recoverability of certain prepaid non-refundable payments with some of our retail partners and our revenues and business may suffer.

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

We expect to evaluate and consider a wide array of potential strategic transactions, including acquisitions and dispositions of businesses, joint ventures, technologies, services, products and other assets and strategic investments. At any given time, we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. We have limited experience managing acquisitions and integrating acquired businesses and our ability to successfully integrate acquisitions is unproven. The process of integrating any acquired business may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:

 

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;

 

failure of an acquired company to achieve anticipated revenue, earnings, cash flows or other desired technological and business goals;

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effectiveness of our due diligence review and our ability to evaluate the results of such due diligence, which are dependent upon the accuracy and completeness of statements and disclosures made by the acquired company;

 

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

 

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

 

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

 

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

 

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

 

in certain instances, the ability to exert control of acquired businesses that include earnout provisions in the agreements relating to such acquisitions or the potential obligation to fund an earnout for, or other obligations related to, a product that has not met expectations;

 

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

 

write-offs or charges related to acquired assets or goodwill; and

 

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

For example, we have acquired businesses whose technologies are new to us and with which we did not have significant experience. We have made and are making investments of resources to support such acquisitions, which will result in ongoing operating expenses and may divert resources and management attention from other areas of our business. We cannot assure you that these investments and the integration of these acquisitions will be successful. If we fail to successfully integrate the companies we acquire, we may not realize the benefits expected from the transaction and our business may be harmed.

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

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

We have significantly expanded our operations and anticipate expanding further to pursue our growth strategy. Such expansion increases the complexity of our business and places significant demands on our management, operations, technical performance, financial resources and internal control over financial reporting functions. Continued growth could strain our ability to deliver digital coupons and media on our platform, develop and improve our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Failure to manage our expansion may limit our growth, damage our reputation and negatively affect our financial performance and harm our business.

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

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

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and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and operating results could be adversely affected.

Providing our products and services to our CPGs, retailers and consumers is costly and we expect our expenses to continue to increase in the future as we grow our business with existing and new CPGs and retailers and develop new products and services that require enhancements to our technology infrastructure. In addition, our operating expenses, such as our sales, marketing and engineering expenses are expected to continue to grow to support our anticipated future growth. As a result of the requirements of being a public company we incur significant legal, accounting and other expenses. Our expenses may grow faster than our revenues, and our expenses may be greater than we anticipate. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.

If we do not effectively grow and train our sales and media teams, we may be unable to grow our business with CPGs and retailers and our business will be adversely affected.

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

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

We market our services and products directly to CPGs and retailers. New CPG and retailer relationships typically take time to obtain and finalize. A significant time period may pass between selection of our services and products by key decision-makers and the signing of a contract. The length of time between the initial sales call and the realization of a final contract is difficult to predict. As a result, it is difficult to predict when we will obtain new CPGs and retailers and when performance and delivery of services will be initiated with these potential CPGs and retailers. As part of our sales cycle, we may incur significant expenses before executing a definitive agreement with a prospective CPG or retailer and before we are able to generate any revenues from such agreement. If conditions in the marketplace generally or with a specific prospective CPG or retailer change negatively, it is possible that no definitive agreement will be executed, and we will be unable to recover any expenses incurred before a definitive agreement is executed, which would in turn have an adverse effect on our business, financial condition and results of operations.

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

We deliver digital coupons via our platform, including over our websites and mobile applications, as well as through those of our CPGs and retailers and our publishers and other third parties. Our reputation and ability to acquire, retain and serve CPGs and retailers, as well as consumers who use digital coupons or view media on our platform are dependent upon the reliable performance of our platform. As the number of our CPG customers, retailers and consumers and the number of digital promotions and information shared through our platform continue to grow, we will need an increasing amount of network capacity and computing power. Our technology infrastructure is hosted across two data centers in co-location facilities in California and Nevada. In addition, we use two other co-location facilities in California and Virginia to host our Retailer iQ platform. We have spent and expect to continue to spend substantial amounts in our data centers and equipment and related network infrastructure to handle the traffic on our platform. The operation of these systems is expensive and complex and could result in operational failures. In the event that the number of transactions or the amount of traffic on our platform grows more quickly than anticipated, we may be required to incur significant additional costs. Interruptions in these systems or service disruptions, whether due to system failures, computer viruses, malware, ransomware, denial of service attacks, attempts to degrade or disrupt services, or physical or electronic break-ins, could

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affect the security or availability of our websites and platform, and prevent CPGs, retailers or consumers from accessing our platform. A substantial portion of our network infrastructure is hosted by third-party providers. Any disruption in these services or any failure of these providers to handle existing or increased traffic could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. If we do not maintain or expand our network infrastructure successfully or if we experience operational failures, we could lose current and potential CPGs, retailers and consumers, which could harm our operating results and financial condition.

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

Our success depends in part on our ability to attract consumers through unpaid Internet search results on search engines like Google, Yahoo! and Bing. The number of consumers we attract to our websites from search engines is due in large part to how and where our websites rank in unpaid search results. These rankings can be affected by a number of factors, many of which are not in our direct control, and they may change frequently. For example, major search engines frequently modify their ranking algorithms, methodologies or design layouts. As a result, links to our websites may not be prominent enough to drive traffic to our websites or we may receive less favorable placement which could reduce traffic to our website, and we may not know how or otherwise be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate fluctuations in the future. For example, the search result rankings of our websites have fallen relative to the same time last year. In addition, websites must comply with search engine guidelines and policies. These guidelines and policies are complex and may change at any time. If we fail to follow such guidelines and policies properly, search engines may rank our content lower in search results or could remove our content altogether from their index. Moreover, the use of voice recognition technology, such as Alexa, Google Assistant or Siri, may drive traffic away from search engines, which could reduce traffic to our website. Any reduction in the number of consumers directed to our websites could reduce the effectiveness of our coupon codes for specialty retailers and digital promotions for CPGs and retailers and could adversely impact our business and results of operations. It could also reduce our ability to sell media advertising on our sites, which would negatively impact revenues and harm our business.

If we fail to continue to obtain and increase the number of high quality coupons through our platform, our revenue growth or our revenues may be harmed.

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

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

Our business is in part dependent upon electronic messaging. We provide emails, mobile alerts and other messages to consumers informing them of the digital coupons on our websites, and we believe these communications help generate a significant portion of our revenues. We also use electronic messaging, in part, as part of the consumer sign-up and verification process. Because electronic messaging services are important to our business, if we are unable to successfully deliver electronic messages to consumers, if there are legal restrictions on delivering these messages to consumers, or if consumers do not or cannot open our messages, our revenues and profitability could be adversely affected. Changes in how webmail applications or other email management tools organize and prioritize email may result in our emails being delivered or routed to 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 taken by third parties that block, impose restrictions on or charge for the delivery of electronic 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.

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Changes in laws or regulations, or changes in interpretations of existing laws or regulations, including the Telephone Consumer Protection Act, or the TCPA in the United States and laws regarding commercial electronic messaging in other jurisdictions, that would limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications could also adversely impact our business. For example, the Federal Communications Commission amended certain of its regulations under the TCPA in recent years in a manner that could increase our exposure to liability for certain types of telephonic communication with customers, including but not limited to text messages to mobile phones. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. Given the enormous number of communications we send to consumers, a determination that there have been violations of the TCPA or other communications-based statutes could expose us to significant damage awards that could, individually or in the aggregate, materially harm our business. Moreover, even if we prevail, such litigation against us could impose substantial costs and divert our management’s attention and resources.

We also rely on social networking messaging services to send communications. Changes to these social networking services’ terms of use or terms of service that limit promotional communications, 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 reductions in the use of or engagement with social networking services by customers and potential customers could also harm our business.

We rely on a third-party service for the delivery of daily emails and other forms of electronic communication, and delay or errors in the delivery of such emails or other messaging we send may occur and be beyond our control, which could damage our reputation or harm our business, financial condition and operating results. If we were unable to use our current electronic messaging services, alternate services are available; however, we believe our sales could be impacted for some period as we transition to a new provider, and the new provider may be unable to provide equivalent or satisfactory electronic messaging service. Any disruption or restriction on the distribution of our electronic messages, termination or disruption of our relationship with our messaging service providers, including our third-party service that delivers our daily emails, or any increase in our costs associated with our email and other messaging activities could harm our business.

We are dependent on technology systems and electronic communications networks that are supplied and managed by third parties, which could result in our inability to prevent or respond to disruptions in our services.

Our ability to provide services to consumers depends on our ability to communicate with CPGs, retailers and customers through the public Internet and electronic networks that are owned and operated by third parties. Our products and services also depend on the ability of our users to access the public Internet. In addition, in order to provide services promptly, our computer equipment and network servers must be functional 24 hours per day, which requires access to telecommunications facilities managed by third parties and the availability of electricity, which we do not control. A severe disruption of one or more of these networks, including as a result of utility or third-party system interruptions, could impair our ability to process information, which could impede our ability to provide digital promotions to consumers, harm our reputation, result in a loss of customers or CPGs and retailers and adversely affect our business and operating results.

If our security measures or information we collect and maintain is compromised or publicly exposed, CPGs, retailers and consumers may curtail or stop using our platform.

We collect and maintain data about consumers, including personally identifiable information, as well as other confidential or proprietary information. Like all businesses that use computer systems and the Internet, our security measures, and those of our third-party service providers, may not detect or prevent all attempts to gain access to our systems, denial-of-service attacks, viruses, malicious software including malware and ransomware, break-ins, phishing attacks, social engineering, human error, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our systems or solutions or that we or our third-party service providers otherwise maintain, including payment systems, any of which could lead to interruptions, delays, or website shutdowns, causing loss of critical data or the unauthorized disclosure or use of personally identifiable or other confidential information, or subject us to fines or higher transaction fees or limit or result in the termination of our access to certain payment methods. If we experience compromises to our security that result in performance or availability problems, the complete shutdown of one or more of our websites and mobile applications or the loss or unauthorized access to or disclosure of confidential information, CPGs, retailers, and consumers may lose trust and confidence in us and decrease their use of our platform or stop using our platform entirely.

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Because the techniques used to obtain unauthorized access are often sophisticated and change frequently, neither we nor third-party service providers can guarantee that our systems will not be breached. In addition, consumer information including email addresses, phone numbers and data on consumer usage of our websites and mobile applications could be hacked, hijacked, altered or otherwise claimed or controlled by unauthorized persons. Security breaches can also occur as a result of nontechnical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships. Any or all of these issues, or the perception that any of them has occurred, even if inaccurate, could negatively impact our reputation and our ability to attract and retain CPGs and retailers as well as consumers or could reduce the frequency with which our platform is used, cause existing or potential CPG or retailer customers to cancel their contracts or subject us to third-party lawsuits, regulatory fines or other action or liability, and harm our business and results of operations.

Remediation of any potential cyber security breach may involve significant time, resources, and expenses, which may result in potential regulatory inquiries, litigation or other investigations, and can affect our financial and operational condition.  

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

Digital coupons are issued in the form of redeemable coupons or coupon codes with unique identifiers. It is possible that third parties may create counterfeit digital coupons or coupon codes or exceed print or use limits in order to fraudulently or improperly claim discounts or credits for redemption. It is possible that individuals will circumvent our anti-fraud systems using increasingly sophisticated methods or methods that our anti-fraud systems are not able to counteract. Further, we may not detect any of these unauthorized activities in a timely manner. Third parties who succeed in circumventing our anti-fraud systems may sell the fraudulent or fraudulently obtained digital coupons on social networks, which would damage our brand and relationships with CPGs and harm our business. Legal measures we take or attempt to take against these third parties may be costly and may not be ultimately successful. In addition, our service could be subject to employee fraud or other internal security breaches, and we may be required to reimburse CPGs and retailers for any funds stolen or revenues lost as a result of such breaches. Our CPGs and retailers could also request reimbursement, or stop using digital coupons, if they are affected by buyer fraud or other types of fraud. We may incur significant losses from fraud and counterfeit digital coupons. If our anti-fraud technical and legal measures do not succeed, our business may suffer.

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

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

 

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

 

we may not receive revenue if consumers make purchases from their mobile devices as many retailers currently do not recognize affiliate tracking links on their mobile-optimized websites or applications, and tracking mechanisms on mobile websites or applications may not function to allow retailers to properly attribute sales to us;

 

we may not generate revenue if consumers use mobile devices for shopping research but make purchases using coupon codes found on our sites in ways where we do not get credit;

 

refund rates for products delivered on merchant sites may be greater than we estimate;

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

 

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

 

we primarily rely, in connection with our search engine marketing business, on a small number of brand partners that work with us in non-exclusive arrangements, the loss of which could adversely affect our coupon codes business;

 

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

 

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

 

performance marketing networks may compete with us.

While coupon codes from specialty retailers represent a declining portion of our business, any of these risks could adversely affect our revenues in this area.

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

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

If the use of third-party cookies is rejected by Internet users, restricted by third parties outside of our control, or otherwise subject to unfavorable regulation, our performance could decline and we could lose customers and revenue.

We use small text files (referred to as "cookies"), placed through an Internet browser on an Internet user's computer which corresponds to a data set that we keep on our servers, to gather important data to help deliver our solution. Certain of our cookies, including those that we predominantly use in delivering our solution, are known as "third-party" cookies because they are delivered where we do not have a direct relationship with the Internet user. Our cookies collect anonymous information, such as when an Internet user views an advertisement, clicks on an advertisement, or visits one of our advertisers' websites. On mobile devices, we may also obtain location based information about the user's device through our cookies. We use these cookies to achieve our customers' campaign goals, to ensure that the same Internet user does not unintentionally see the same media too frequently, to report aggregate information to our customers regarding the performance of their digital promotions and marketing campaigns, and to detect and prevent fraudulent activity throughout our network. We also use data from cookies to help us decide whether and how much to bid on an opportunity to place an advertisement in a certain Internet location and at a given time in front of a particular Internet user. A lack of data associated with or obtained from cookies may significantly detract from our ability to make decisions about which inventory to purchase for an advertiser's campaign and may undermine the effectiveness of our solution and harm our business.

Cookies may easily be deleted or blocked by Internet users. All of the most commonly used Internet browsers (including Chrome, Firefox, Internet Explorer, and Safari) allow Internet users to prevent cookies from being accepted by their browsers. Internet users can also delete cookies from their computers at any time. Some Internet users also download "ad blocking" software that prevents cookies from being stored on a user's computer. If more Internet users adopt these settings or delete their cookies more frequently than they currently do, our business could be harmed. In addition, the Safari and Firefox browsers blocks third-party cookies by default, and other browsers may do so in the future. Unless such default settings in browsers were altered by Internet users to permit the placement of third-party cookies, we would be able to set fewer of our cookies in users’ browsers, which could adversely affect our business. In addition,

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companies such as Google have publicly disclosed their intention to move away from cookies to another form of persistent unique identifier, or ID, to identify individual Internet users or Internet-connected devices in the bidding process on advertising exchanges. If companies do not use shared IDs across the entire ecosystem, this could have a negative impact on our ability to find the same anonymous user across different web properties, and reduce the effectiveness of our solution.

In addition, in the European Union, or EU, Directive 2009/136/EC, commonly referred to as the "Cookie Directive," directs EU member states to ensure that accessing information on an Internet user's computer, such as through a cookie, is allowed only if the Internet user has appropriately given his or her consent. Additionally, an e-Privacy Regulation, which would replace the Cookie Directive with requirements that would be stricter in certain respects, apply directly to activities within the EU, and would impose stricter requirements and additional penalties for noncompliance, has been proposed, although at this time it is unclear whether it will be approved or when its requirements would be effective. We may experience challenges in obtaining appropriate consent to our use of cookies from consumers within the EU, which may affect our operating results and business in European markets, and we may not be able to develop or implement additional tools that compensate for the lack of data associated with cookies. Moreover, even if we are able to do so, such additional tools may be subject to further regulation, time consuming to develop or costly to obtain, and less effective than our current use of cookies.  

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

We are subject to a variety of federal, state and international laws, regulations and industry standards regarding privacy, data protection, data security, marketing and consumer protection, which address the collection, storing, sharing, using, processing, disclosure and protection of data relating to individuals, as well as the tracking of consumer behavior and other consumer data. We are also subject to laws, regulations and industry standards relating to endorsements and influencer marketing. Many of these laws, regulations and industry standards are changing and may be subject to differing interpretations, costly to comply with or inconsistent among countries and jurisdictions. For example, the Federal Trade Commission, or the FTC, expects companies like ours to comply with guidelines issued under the Federal Trade Commission Act that govern the collection, use, disclosure, and storage of consumer information, and establish principles relating to notice, consent, access and data integrity and security. The laws and regulations in many foreign countries relating to privacy, data protection, data security, marketing and consumer protection often are more restrictive than in the United States, and may in some cases be interpreted to have a greater scope. Additionally, the laws, regulations and industry standards, both foreign and domestic, relating to privacy, data protection, data security, marketing and consumer protection are dynamic and may be expanded or replaced by new laws, regulations or industry standards. We believe our policies and practices comply in all material respects with applicable privacy, data protection, data security, marketing and consumer protection guidelines, laws and regulations. However, if our belief is incorrect, or if these guidelines, laws or regulations or their interpretation change or new legislation or regulations are enacted, we may be compelled to provide additional disclosures to our consumers, obtain additional consents from our consumers before collecting, using, or disclosing their information or implement new safeguards to help our consumers manage our use of their information, among other changes.

Various industry standards on privacy have been developed and are expected to continue to develop, which may be adopted by industry participants at any time. We are subject to the terms of our privacy policies and obligations to third parties relating to privacy, data protection and data security, including contractual obligations relating to privacy rights, data protection, data use and data security measures. Certain of our solutions, including Retailer iQ and Quotient Analytics, depend in part on our ability to use data that we obtain in connection with our offerings, and our ability to use this data may be subject to restrictions in our commercial agreements and subject to the privacy policies of the entities that provide us with this data. Our failure to adhere to these third-party restrictions on data use may result in claims, proceedings or actions against us by our business counterparties or other parties, or other liabilities, including loss of business, reputational damage, and remediation costs, which could adversely affect our business.

We strive to comply with applicable laws, policies, contractual and other legal obligations and certain applicable industry standards of conduct relating to privacy, data security, data protection, marketing and consumer protection. However, these obligations and standards of conduct often are complex and difficult to comply with fully, and it is possible that these obligations and standards of conduct may be interpreted and applied in new ways and/or in a manner that is inconsistent with each other or that new laws, regulations or other obligations may be enacted. It is possible that our practices may be argued or held to conflict with applicable laws, policies, contractual or other legal obligations, or applicable industry standards of conduct relating to privacy, data security, data protection, marketing or consumer

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protection. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, FTC, other regulatory requirements or orders or other federal, state or, as we continue to expand internationally, international privacy, data security, data protection, marketing or consumer protection-related laws, regulations, contractual obligations or self-regulatory principles or other industry standards could result in claims, proceedings or actions against us by governmental entities or others or other liabilities or could result in a loss of consumers using our digital coupons or loss of CPGs and retailers. Any of these circumstances could adversely affect our business. Further, if third parties we work with violate applicable laws, our policies or other privacy-related obligations, such violations may also put our consumers’ information at risk and could in turn have an adverse effect on our business.

With respect to personal data transfers from the European Economic Area, or EEA, we have previously relied on compliance with the U.S.-EU and U.S.-Swiss Safe Harbor Frameworks as agreed to and set forth by the U.S. Department of Commerce, and the EU and Switzerland, which legitimized the transfer of personally identifiable information by U.S. companies doing business in Europe from the EEA and Switzerland to the U.S. In October 2015, a decision of the Court of Justice of the European Union, or CECJ, deemed the U.S.-EU Safe Harbor Framework an invalid method of compliance with restrictions set forth in the Data Protection Directive (and member states’ implementations thereof) regarding the transfer of data outside of the EEA. U.S. and EU authorities reached a political agreement in February 2016 regarding a new means for legitimizing personal data transfers from the EEA to the U.S., the EU-U.S. Privacy Shield. It is unclear, however whether the EU-U.S. Privacy Shield will serve as an appropriate means for us to legitimize personal data transfers from the EEA and Switzerland to the U.S. We have engaged in certain actions in an effort to legitimize our transfers of personal data from Europe to the U.S., and we anticipate engaging in additional activities in an effort to do so going forward. We may continue to be unsuccessful in establishing legitimate means of transferring all personal data from Europe to the U.S., we may experience reluctance or refusal by European consumers, retailers or CPGs to continue to use our solutions due to the potential risk exposure to such individuals and organizations as a result of the CECJ’s ruling, and we and our CPG and retailer partners are at risk of enforcement actions taken by an European data protection authority until we ensure that all applicable data transfers to us from the EEA and Switzerland are legitimized. In addition, legislators in the EU recently adopted the General Data Protection Regulation, or GDPR, which became effective in May 2018 and supersedes the 1995 EU Data Protection Directive, and include more stringent operational requirements for processors and controllers of personal data, including payment card information, and impose significant penalties for non-compliance of up to the greater of €20 million or 4% of global annual revenues. Additionally, in June 2016, United Kingdom voters approved an exit from the EU, commonly referred to as “Brexit,” which could also lead to further legislative and regulatory changes. In March 2017, the United Kingdom began the process to leave the EU by April 2019.  A Data Protection Bill has been introduced to the United Kingdom’s House of Lords that proposes to substantially implement the GDPR.  Nevertheless, the Data Protection Bill must complete the legislative process, so it remains unclear what modifications will be made to the final legislation. We may incur liabilities, expenses, costs, and other operational losses when the GDPR and the UK Data Protection Bill are effective and in connection with any measures we take to comply with them.

We expect that there will continue to be new proposed laws, regulations and industry standards concerning privacy, data protection and information security in the United States and other jurisdictions, and we cannot yet determine the impact such future laws, regulations and standards may have on our business. For instance, with the increased focus on the use of data for advertising, the anticipation and expectation of future laws, regulations, standards and other obligations could impact us and our existing and potential business partners and delay certain business partnerships or deals until there is greater certainty. In addition, as we expand our data analytics and other data related product offerings there may be increased scrutiny on our use of data and we may be subject to new and unexpected regulations. Future laws, regulations, standards and other obligations could, for example, impair our ability to collect or use information that we utilize to provide targeted digital promotions and media to consumers, CPGs and retailers, thereby impairing our ability to maintain and grow our total customers and increase revenues. Future restrictions on the collection, use, sharing or disclosure of our users’ data or additional requirements for express or implied consent of users for the use and disclosure of such information could require us to modify our solutions, possibly in a material manner, and could limit our ability to develop new solutions and features. Any such new laws, regulations, other legal obligations or industry standards, or any changed interpretation of existing laws, regulations or other standards may require us to incur additional costs and restrict our business operations.  If our measures fail to comply with current or future laws, regulations, policies, legal obligations or industry standards relating to privacy, data protection, data security, marketing or consumer protection, we may be subject to litigation, regulatory investigations, fines or other liabilities, as well as negative publicity and a potential loss of business. Moreover, if future laws, regulations, other legal obligations or industry standards, or any changed interpretations of the foregoing limit our users’, CPGs’ or retailers’ ability to use and share personally identifiable information or our ability to store, process and share personally identifiable information or other data, demand for our solutions could decrease, our costs could increase, our revenue growth could slow, and our business, financial condition and operating results could be harmed.

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

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

We may not be able to adequately protect our intellectual property rights

We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success.

We strive to protect our intellectual property rights in a number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We strive to protect our intellectual property rights by relying on federal, state and common law rights, contractual restrictions as well as rights provided under foreign laws. These laws are subject to change at any time and could further restrict our ability to protect our intellectual property rights.

We also may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.

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. Also, from time to time, we make our intellectual property rights available to others under license agreements. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation or disclosure of our proprietary information, infringement of our intellectual property rights or deter independent development of similar technologies by others and may not provide an adequate remedy in the event of such misappropriation or infringement. Third parties that license our proprietary rights also may take actions that diminish the value of our proprietary rights or reputation.

Obtaining and maintaining effective intellectual property rights is expensive, including the costs of defending our rights. Even where we have such rights, they may be later found to be unenforceable or have a limited scope of enforceability. We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Litigation may be necessary to enforce our intellectual property rights, protect our respective trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.

We may be accused of infringing intellectual property rights of third parties.

Other parties may claim that we infringe their proprietary rights. We are, have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the intellectual property rights of third parties. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us, or the payment of damages, including to satisfy indemnification obligations. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain or utilize on terms that are favorable to us, or at all, licenses or other rights with respect to intellectual property we do not own. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.

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

We may lose significant brand equity in our “Coupons.com” domain name, our “Quotient.com” domain name, and other valuable domain names. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew an applicable registration, or any other cause, we may be forced to market our products under new domain names, which could cause us substantial harm, or to incur significant expense in order to purchase rights to the domain names in question. In addition, our competitors and others could attempt to capitalize on our brand recognition by using domain names similar to ours. We also may not be able to acquire or maintain appropriate domain names or trademarks in all countries in which we do business.  Domain names similar to ours have been registered in the United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management’s attention and harm our business.

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

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

Unfavorable publicity or consumer perception of our websites, platform, practices or service offerings, or the offerings of our CPGs and retailers, could adversely affect our reputation, resulting in difficulties in recruiting, decreased revenues and a negative impact on the number of CPGs and retailers we feature and our user base, the loyalty of our consumers and the number and variety of digital coupons we offer. As a result, our business could be harmed.  

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

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

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

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

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

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

 

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

 

the cost and resources required to localize our platform;

 

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

 

differences in how trade promotion spending is allocated;

 

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

 

technology compatibility;

 

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

 

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

 

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

 

higher product return rates;

 

seasonal reductions in business activity;

 

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

 

political and economic instability.

Changes in the U.S. taxation of international activities may increase our worldwide effective tax rate and harm our financial condition and results of operations. The taxing authorities of the jurisdictions in which we plan to operate may challenge our methodologies for valuing developed technology or intercompany arrangements, including our transfer pricing, or determine that the manner in which we operate our business does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and harm our financial position and results of operations. Significant judgment will be required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there will be many transactions and calculations for which the ultimate tax determination is uncertain. As we expand our business to operate in numerous taxing jurisdictions, the application of tax laws may be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. It is not uncommon for taxing authorities in different countries to have conflicting views. In addition, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. In the United States, legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017, which included a number of changes, such as a reduction in the corporate tax rate, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 and provided for the transition of U.S. international taxation from a worldwide tax system to a territorial system. These changes, or future changes in tax laws applicable to us, could materially increase our future income tax expense.

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

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

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

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

As we become a more mature company, we may find our recruiting and retention efforts more challenging. We are seeking to continue to hire a significant number of personnel, including certain key management personnel. We may be limited in our ability to recruit global talent by U.S. immigration laws, including those related to H1-B visas. The demand for H1-B visas to fill highly-skilled IT and computer science jobs is greater than the number of H-1B visas available each year; for the U.S. government’s 2018 fiscal year, the U.S. issued 85,000 H-1B visas out of 199,000 requests.  In addition, the regulatory environment related to immigration under the current presidential administration may increase the likelihood that immigration laws may be modified to further limit the availability of H1-B visas. If a new or revised visa program is implemented, it may impact our ability to recruit, hire and retain qualified skilled personnel, which could adversely impact our business, operating results and financial condition. If we do not succeed in attracting, hiring and integrating qualified personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.

Changes to financial accounting standards or the SEC’s rules and regulations may affect our results of operations and cause us to change our business practices.

We prepare our financial statements to conform to generally accepted accounting principles in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, in February 2016, the Financial Accounting Standards Board issued a new standard, Topic 842, which will require us to record most of our leases on our balance sheets beginning in our first quarter of fiscal year 2019.  

We are currently or could be exposed in the future to fluctuations in currency exchange rates and interest rates.

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

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Our use of and reliance on international research and development resources and operations may expose us to unanticipated costs or events

We have research and development centers in India and France.  We expect to increase our headcount, development, and operations activity in India. There is no assurance that our reliance upon international research and development resources and operations will enable us to achieve our research and development and operational goals or greater resource efficiency. Further, our international research and development and operations efforts involve significant risks, including:

 

difficulty hiring and retaining appropriate personnel due to intense competition for such resources and resulting wage inflation in the cities where our research and development activities and operations are located;

 

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

 

exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, and similar applicable laws and regulations in other jurisdictions;

 

the knowledge transfer related to our technology and resulting exposure to misappropriation of intellectual property or information that is proprietary to us, our customers and other third parties;

 

heightened exposure to change in the economic, security and political conditions in the countries where our research and development activities and operations are located;

 

fluctuations in currency exchange rates and regulatory compliance in the countries where our research and development activities and operations are located;

 

delays and inefficiencies caused by geographical separation of our international research and development activities and operations and other challenges inherent to efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs; and

 

interruptions to our operations in the countries where our research and development activities and operations are located as a result of floods and other natural catastrophic events as well as other events beyond our control such as power disruptions or terrorism.

Difficulties resulting from the factors above could increase our research and development or operational expenses, delay the introduction of new products, or impact our product quality, the occurrence of any of which could adversely affect our business and operating results.

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

Our headquarters is located in Mountain View, California. Our current technology infrastructure is hosted across two data centers in co-location facilities in California and Nevada. In addition, we use two other co-location facilities in California and Virginia to host our Retailer iQ platform. Our services, operations and the data centers from which we provide our services are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. A significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, financial condition and results of operations and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism could cause disruptions to the Internet, our business or the economy as a whole. We may not have sufficient protection or recovery plans in certain circumstances, such as natural disasters affecting areas where data centers upon which we rely are located, and our business interruption insurance may be insufficient to compensate us for losses that may occur. Such disruptions could negatively impact our ability to run our websites, which could harm our business.

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

Our management team has limited experience managing a publicly-traded company and limited experience complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that will be subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require

57


substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely impact our business operations.

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

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

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

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, and similar state law provisions, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. If our existing NOLs are subject to limitations arising from ownership changes, our ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, also could result in an ownership change under Section 382 of the Code. There is also a risk that our NOLs could expire, or otherwise be unavailable to offset future income tax liabilities due to changes in the law, including regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons. In addition, the Tax Act includes changes to the U.S. federal corporate income tax rate, and our net operating loss carryforwards and other deferred tax assets will be revalued at the newly enacted rate. We do not expect this to have a material impact on our financials because we currently maintain a full valuation allowance on our U.S. deferred tax assets. For these reasons, we may not be able to utilize all of our NOLs, even if we attain profitability.

State and foreign laws regulating money transmission could impact our mobile shopping and receipt scanning cash-back application platform.

Many states and certain foreign jurisdictions impose license and registration obligations on those companies engaged in the business of money transmission, with varying definitions of what constitutes money transmission. If our mobile shopping and receipt scanning cash-back platform were to subject us to any applicable state or foreign laws, it could subject us to increased compliance costs and delay our ability to offer this product in certain jurisdictions pending receipt of any necessary licenses or registrations. If we need to make product and operational changes in light of these laws, the growth and adoption of this product may be adversely impacted and our revenues may be harmed.

Risks Related to Our Convertible Senior Notes

We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future growth, business needs and development plans.

In November 2017, we issued and sold $200 million aggregate principal amount of convertible senior notes (the “notes”).  Our leveraged capital structure could have negative consequences, including, but not limited to, the following:

 

we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions;

 

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited;

 

a substantial portion of our cash flow from operations in the future may be required for the payment of the principal amount of our existing indebtedness when it becomes due; and

 

we may elect to make cash payments upon any conversion of the convertible notes, which would reduce our cash on hand.

Our ability to meet our payment obligations under our notes depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, and regulatory factors as well as other factors that are beyond our control. There can be no assurance that our business will generate cash flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to meet our debt payment obligations and to fund other liquidity needs. If we are unable to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to

58


raise additional capital. If we were unable to implement one or more of these alternatives, we may be unable to meet our debt payment obligations, which could have a material adverse effect on our business, results of operations, or financial condition.

The conditional conversion feature of the notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the notes is triggered, holders of the notes will be entitled to convert their notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity. In addition, even if holders of notes do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The accounting method for convertible debt securities that may be settled in cash, such as the notes, could have a material effect on our reported financial results.

Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (“ASC 470-20”), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the notes. As a result, we will be required to record a greater amount of non-cash interest expense as a result of the amortization of the discounted carrying value of the notes to their face amount over the term of the notes. We will report larger net losses (or lower net income) in our financial results because ASC 470-20 will require interest to include both the amortization of the debt discount and the instrument’s nonconvertible coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the notes.

The Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The effect of which is that the shares issuable upon conversion of such notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the notes, then our diluted earnings per share could be adversely affected.

Conversion of our notes will dilute the ownership interest of existing stockholders and may depress the price of our common stock.

The conversion of some or all of our notes, if such conversion occurs, will dilute the ownership interests of then-existing stockholders to the extent we deliver shares upon conversion of any of the notes.  Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.  In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could be used to satisfy short positions, or anticipated conversion of the notes into shares of our common stock could depress the price of our common stock.

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Risks Related to Ownership of our Common Stock

The market price of our common stock has been, and is likely to continue to be, subject to wide fluctuations and could subject us to litigation.

The price of our common stock may change in response to variations in our operating results and also may change in response to other factors, including factors specific to technology companies, many of which are beyond our control. As a result, our stock price may experience significant volatility. Among other factors that could affect our stock price are:

 

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

 

actual or anticipated changes or fluctuations in our results of operations;

 

whether our results of operations meet the expectations of securities analysts or investors;

 

addition or loss of significant customers;

 

price and volume fluctuations in the overall stock market from time to time;

 

fluctuations in the trading volume of our shares or the size of our public float;

 

success of competitive products or services;

 

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

 

disputes or other developments related to proprietary rights, including patents, litigation matters or our ability to obtain intellectual property protection for our technologies;

 

announcements relating to litigation;

 

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

 

reports, guidance and ratings issued by securities or industry analysts;

 

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

 

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

 

our entry into new markets;

 

regulatory developments in the United States or foreign countries;

 

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

 

changes in accounting principles.

If any of the foregoing occurs, it could cause our stock price or trading volume to decline. In addition, the stock market in general has experienced substantial price and volume volatility that is often seemingly unrelated to the operating results of any particular companies. Moreover, if the market for technology stocks or the stock market in general experiences uneven investor confidence, the market price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The market price for our stock might also decline in reaction to events that affect other companies within, or outside, our industry, even if these events do not directly affect us. Some companies that have experienced volatility in the trading price of their stock have been subject of securities litigation. If we are the subject of such litigation, it could result in substantial costs and a diversion of management’s attention and resources.

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

Sales of a substantial number of shares of our common stock in the public market could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We have approximately 95,020,958 shares of common stock outstanding as of June 30, 2018, assuming no exercise of our outstanding options or vesting of our outstanding RSUs.

Our equity incentive plans allow us to issue, among other things, stock options, restricted stock and restricted stock units and we have filed a registration statement under the Securities Act to cover the issuance of shares upon the exercise or vesting of awards granted under those plans.

60


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

Our executive officers, directors and owners of 5% or more of our outstanding common stock together beneficially own approximately 50% of our outstanding common stock, based on the number of shares outstanding as of June 30, 2018. These stockholders therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated control limits your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. This ownership could affect the value of your shares of common stock.

Our stock repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.

Our Board of Directors has approved share repurchase programs for us to repurchase shares of our stock. During May 2018, the active repurchase program at that time expired. In April 2018, our Board of Directors authorized a one-year share repurchase program (“2018 Program”) for us to repurchase up to $100.0 million of our common stock from May 2018 through May 2019. During the six months ended June 30, 2018, we repurchased and retired 500,000 shares of our common stock for an aggregate of $6.7 million. As of June 30, 2018, $93.3 million remained available for repurchases under the 2018 Program. Stock repurchases may be made from time to time in open market transactions or privately negotiated transactions, and we may use a plan that is intended to meet the requirements of SEC Rule 10b5-1 to enable stock repurchases to occur during periods when the trading window would otherwise be closed. We may suspend, modify or terminate the 2018 Program at any time without prior notice. Repurchases pursuant to our stock repurchase program could affect the price of our common stock and increase its volatility. The existence of our stock repurchase program could also cause the price of our common stock to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our common stock. Additionally, repurchases under our stock repurchase program will diminish our cash reserves, which could impact our ability to further develop our technology, access and/or retrofit additional facilities and service our indebtedness. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased such shares. Any failure to repurchase shares after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our stock price. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.

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

As a public company, we are subject to the reporting requirements of the Exchange Act, SOX, and the rules and regulations of the New York Stock Exchange, or the NYSE. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs and significant management oversight. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports we will file with the SEC under Section 404 of SOX. In the event that we are not able to demonstrate compliance with Section 404 of SOX, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

61


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

Our independent registered public accounting firm will be required to audit the effectiveness of our internal control over financial reporting when we cease to be an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, effective December 31, 2018. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it concludes that our internal control over financial reporting is not effective.

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

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

We are an “emerging growth company”, as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of SOX (“Section 404”), reduced financial disclosure obligations, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. We may take advantage of these provisions for up to five years or such earlier time that we are no longer an “emerging growth company.” We may choose to take advantage of some but not all of these reduced reporting burdens. If we take advantage of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different than you might get from other public companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We will lose our status as an “emerging growth company” at the end of this fiscal year, and may incur increased legal, accounting and compliance costs associated with Section 404.

Effective December 31, 2018, we will no longer be an “emerging growth company,” and the reduced disclosure requirements applicable to “emerging growth companies” will no longer apply, which will increase our costs as a result of being a public company and demands on management.

 

Effective December 31, 2018 we will lose our status as an “emerging growth company” as defined in the JOBS Act.   As such, we will incur significant additional expenses that we did not previously incur in complying with the Sarbanes-Oxley Act and rules implemented by the SEC.  Once we are no longer an “emerging growth company, the cost of compliance with Section 404 will require us to incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional corporate governance practices and comply with reporting requirements.  Moreover, if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

Furthermore, investor perceptions of our company may suffer if, in the future, material weaknesses are found, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating results and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial

62


reporting or financial results and could result in an adverse opinion on internal control from our independent registered public accounting firm.

 

In addition, we have previously taken advantage of the JOBS Act reduced disclosure requirements applicable to "emerging growth companies" regarding executive compensation and exemptions from the requirements of holding advisory say-on-pay votes on executive compensation. Once we lose “emerging growth company” status, we will no longer be eligible for such reduced disclosure requirements and exemptions and as such, we will be required to hold a say-on-pay vote and a say-on-frequency vote at our 2019 annual meeting of stockholders. As a result, we expect that our future loss of “emerging growth company” status will require additional attention from management and will result in increased costs to us, which could include higher legal fees, accounting fees and fees associated with investor relations activities, among others.

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

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

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

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

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

Provisions in our certificate of incorporation and by-laws may have the effect of delaying or preventing a change of control or changes in our management. Amongst other things, these provisions:

 

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

 

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

 

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

 

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

 

prevent stockholders from calling special meetings; and

 

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

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

 

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

 

Period

 

Total

Number of

Shares Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number

of Shares

Purchased as Part

of Publicly

Announced Program (1)

 

 

Approximate Dollar

Value of Shares

that May Yet

Be Purchased Under

the Program (1)

 

April 1 - April 30, 2018

 

 

 

 

$

 

 

 

 

 

$

100,000,000

 

May 1 - May 31, 2018

 

 

500,000

 

 

 

13.46

 

 

 

500,000

 

 

 

93,270,000

 

June 1 - June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

93,270,000

 

Total

 

 

500,000

 

 

$

 

 

 

500,000

 

 

$

93,270,000

 

 

(1)

In April 2017, the Company’s Board of Directors authorized the 2017 Program to repurchase up to $50.0 million of the Company’s common stock. The 2017 Program expired in May 2018 with an unused balance of $50.0 million. In April 2018, the Company’s Board of Directors authorized the 2018 Program to repurchase up to $100.0 million of the Company’s common stock for a one-year duration from May 2018 through May 2019. During the six months ended June 30, 2018, the Company repurchased and retired 500,000 shares of its common stock for an aggregate of $6.7 million. As of June 30, 2018, $93.3 million remained available repurchases under the 2018 Program.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

Not applicable.

Item 6.

Exhibits.

The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

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Exhibit Index

 

 

 

 

 

 

Incorporated by Reference

 

Number

 

Exhibit Title

 

Form

 

 

File No.

 

Exhibit

 

Filing

Date

 

 

Filed

Herewith

 

 

    3.1

 

 

Amended and Restated Certificate of Incorporation of the Registrant, as amended effective October 20, 2015.

 

 

10-K

 

 

 

001-36331

 

3.1

 

 

03/11/16

 

 

 

 

 

 

    3.2

 

 

Amended and Restated Bylaws of the Registrant.

 

 

8-K

 

 

 

001-36331

 

3.2

 

 

10/06/15

 

 

 

 

 

 

    4.1

 

 

Form of Registrant’s Common Stock Certificate.

 

 

S-1/A

 

 

 

333-193692

 

4.1

 

 

02/25/14

 

 

 

 

 

 

    4.2

 

 

Eighth Amended and Restated Investors’ Rights Agreement among the Registrant and certain holders of its capital stock, dated June 1, 2011.

 

 

S-1

 

 

 

333-193692

 

4.2

 

 

01/31/14

 

 

 

 

 

 

  31.1

 

 

Certification of Principal Executive pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

  31.2

 

 

Certificate of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

  32.1*

 

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

  32.2*

 

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

101.INS

 

 

XBRL Instance Document.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

101.SCH

 

 

XBRL Taxonomy Extension Schema Document.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

101.CAL

 

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

101.DEF

 

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

101.LAB

 

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

101.PRE

 

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*

 

The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Quotient under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

65


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

QUOTIENT TECHNOLOGY INC.

 

 

 

 

 

Dated: August 3, 2018

 

By:

 

/s/ Mir Aamir

 

 

 

 

Mir Aamir

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

Dated: August 3, 2018

 

By:

 

/s/ Ronald Fior

 

 

 

 

Ronald Fior

 

 

 

 

Chief Financial Officer

 

 

 

 

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

66