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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-36005
RETAILMENOT, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
 
 
26-0159761
(State or other Jurisdiction of
Incorporation or Organization)
 
 
 
(IRS Employer
Identification Number)
301 Congress Avenue, Suite 700
Austin, Texas 78701
(512) 777-2970
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
G. Cotter Cunningham
Chief Executive Officer
301 Congress Avenue, Suite 700
Austin, Texas 78701
(512) 777-2970
(Address, including zip code, and telephone number, including area code, of Agent for service)
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, as amended, or the Exchange Act, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
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 the definitions 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
 
ý
 
 
 
 
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  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 48,358,395 shares of Series 1 Common Stock, $0.001 par value per share as of April 21, 2017.


Table of Contents

RETAILMENOT, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
RETAILMENOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 
 
 
As of March 31, 2017
 
As of December 31, 2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
224,933

 
$
216,858

Accounts receivable (net of allowance for doubtful accounts of $4,020 and $3,589 at March 31, 2017 and December 31, 2016, respectively)
 
46,249

 
66,424

Inventory, net
 
14,776

 
9,529

Prepaids and other current assets, net
 
9,950

 
10,485

Total current assets
 
295,908

 
303,296

Property and equipment, net
 
24,858

 
24,800

Intangible assets, net
 
52,619

 
55,046

Goodwill
 
191,167

 
190,882

Other assets, net
 
7,798

 
7,983

Total assets
 
$
572,350

 
$
582,007

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
5,530

 
$
9,372

Accrued compensation and benefits
 
7,360

 
13,104

Accrued expenses and other current liabilities
 
6,708

 
5,104

Income taxes payable
 
6,737

 
7,564

Current maturities of long term debt
 
10,000

 
10,000

Total current liabilities
 
36,335

 
45,144

Deferred income tax liability
 
3,062

 
1,027

Long term debt
 
48,722

 
51,106

Other noncurrent liabilities
 
9,733

 
9,121

Total liabilities
 
97,852

 
106,398

Commitments and contingencies
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock: $0.001 par value, 10,000,000 shares authorized; zero shares issued and outstanding as of March 31, 2017 and December 31, 2016
 

 

Series 1 common stock: $0.001 par value, 150,000,000 shares authorized; 48,299,247 and 47,855,964 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively
 
48

 
48

Series 2 common stock: $0.001 par value, 6,107,494 shares authorized; zero shares issued and outstanding as of March 31, 2017 and December 31, 2016
 

 

Additional paid-in capital
 
484,259

 
480,333

Accumulated other comprehensive loss
 
(7,314
)
 
(7,810
)
Retained earnings (accumulated deficit)
 
(2,495
)
 
3,038

Total stockholders’ equity
 
474,498

 
475,609

Total liabilities and stockholders’ equity
 
$
572,350

 
$
582,007

See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.

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RETAILMENOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Net revenues
 
$
69,614

 
$
54,649

Cost of net revenues
 
22,320

 
5,200

Gross profit
 
47,294

 
49,449

Operating expenses:
 
 
 
 
Product development
 
13,957

 
12,611

Sales and marketing
 
20,390

 
23,325

General and administrative
 
11,405

 
10,226

Amortization of purchased intangible assets
 
2,472

 
1,954

Other operating expenses
 
2,090

 
832

Total operating expenses
 
50,314

 
48,948

Income (loss) from operations
 
(3,020
)
 
501

Other income (expense):
 
 
 
 
Interest expense, net
 
(580
)
 
(600
)
Other income, net
 
88

 
122

Income (loss) before income taxes
 
(3,512
)
 
23

Provision for income taxes
 
(270
)
 
(59
)
Net loss
 
$
(3,782
)
 
$
(36
)
Net loss per share:
 
 
 
 
Basic
 
$
(0.08
)
 
$
0.00

Diluted
 
$
(0.08
)
 
$
0.00

Weighted average number of common shares used in computing net loss per share:
 
 
 
 
Basic
 
48,059

 
49,188

Diluted
 
48,059

 
49,188

See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.


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RETAILMENOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Net loss
 
$
(3,782
)
 
$
(36
)
Other comprehensive income, net of tax:
 
 
 
 
Foreign currency translation adjustments
 
496

 
611

Comprehensive income (loss)
 
$
(3,286
)
 
$
575

See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.


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RETAILMENOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(3,782
)
 
$
(36
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
5,000

 
3,950

Stock-based compensation expense
 
6,243

 
6,582

Deferred income tax expense
 
706

 
2,229

Non-cash interest expense
 
116

 
102

Impairment of assets
 
900

 
834

Amortization of deferred compensation
 
1,165

 

Other non-cash gains, net
 
(1
)
 
(1,524
)
Provision for doubtful accounts receivable
 
726

 
149

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
19,645

 
23,552

Inventory
 
(5,247
)
 

Prepaid expenses and other current assets, net
 
156

 
(2,116
)
Accounts payable
 
(3,298
)
 
(2,924
)
Accrued expenses and other current liabilities
 
(5,728
)
 
(5,577
)
Other noncurrent assets and liabilities
 
269

 
1,149

Net cash provided by operating activities
 
16,870

 
26,370

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(3,530
)
 
(2,155
)
Purchase of other assets
 

 
(42
)
Proceeds from sale of property and equipment
 
35

 
2

Net cash used in investing activities
 
(3,495
)
 
(2,195
)
Cash flows from financing activities:
 
 
 
 
Payments on notes payable
 
(2,500
)
 
(2,500
)
Tax payments related to net share settlement of equity awards, net of proceeds from issuance of common stock
 
(2,021
)
 
(1,051
)
Payments for repurchase of common stock
 
(925
)
 
(23,770
)
Net cash used in financing activities
 
(5,446
)
 
(27,321
)
Effect of foreign currency exchange rate on cash
 
146

 
286

Change in cash and cash equivalents
 
8,075

 
(2,860
)
Cash and cash equivalents, beginning of period
 
216,858

 
259,769

Cash and cash equivalents, end of period
 
$
224,933

 
$
256,909

Supplemental disclosure of cash flow information
 
 
 
 
Interest payments
 
$
623

 
$
340

Income tax payments, net of refunds
 
$
579

 
$
4,539

See the accompanying notes, which are an integral part of these Condensed Consolidated Financial Statements.

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RETAILMENOT, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
1. Description of Business
We operate a leading savings destination, both online and in-store. We operate under the RetailMeNot brand in the U.S. and portions of the European Union, VoucherCodes in the U.K. and Poulpeo and Ma-Reduc in France. We also operate our discounted gift card marketplace under the RetailMeNot and GiftcardZen brands in the U.S. Our websites, mobile applications, email newsletters and alerts and social media presence enable consumers to search for, discover and redeem relevant digital offers, including discounted digital and physical gift cards, from merchants, including retailers, restaurants and brands. Our marketplace features digital offers across multiple product categories, including clothing and shoes; electronics; health and beauty; home and office; travel, food and entertainment; and personal and business services. We believe our investments in digital offer content quality, product innovation and direct paid merchant relationships allow us to offer a compelling experience to consumers looking to save money, whether online or in-store.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
As used in this report, the terms “we,” “the Company,” “us” or “our” refer to RetailMeNot, Inc. and its wholly-owned subsidiaries. The condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and Securities and Exchange Commission, or SEC, requirements for interim financial statements. All significant intercompany transactions and balances have been eliminated.
The accompanying interim unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments and those items discussed in these notes, necessary for a fair presentation. Certain information and disclosures normally included in the notes to the annual consolidated financial statements prepared in accordance with GAAP have been omitted from these interim condensed consolidated financial statements pursuant to the rules and regulations of the SEC. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes for the fiscal year ended December 31, 2016, which are included in our Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other period.
Significant Estimates and Judgments
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net revenues and expenses during the reporting periods. These estimates and assumptions could have a material effect on our future results of operations and financial position. Significant items subject to our estimates and assumptions include stock-based compensation, income taxes, valuation of acquired goodwill and intangible assets, allowance for doubtful accounts, revenue returns reserve, the best estimate of selling prices associated with our multiple element revenue arrangements, unrecognized tax benefits, acquisition-related contingent liabilities, the useful lives of property and equipment and intangible assets, deferred compensation arrangements and the fair value of derivative assets and liabilities. As a result, actual amounts could differ from those presented herein.
Business Segment
To align with a change in how our chief operating decision maker, or CODM, who is our Chief Executive Officer, or CEO, evaluates business performance, we added Gift Card as a separate reportable segment during the second quarter of 2016. The change in segment evaluation and disclosure was made concurrent with the purchase of GiftcardZen Inc, a secondary marketplace for gift cards, on April 5, 2016. As a result, we now have two operating and reporting segments. Our Gift Card segment consists of our marketplace for gift cards, and our Core segment consists of all other products and services that are related to our marketplace for digital offers. Our CEO allocates resources and assesses performance of the business and other activities at the reportable segment level.
Cash and Cash Equivalents
All highly-liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents.

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Accounts Receivable, Net
Accounts receivable, net primarily represent amounts due from paid merchants, generally through various performance marketing networks, for commissions earned on consumer purchases and amounts due for advertising. We record an allowance for doubtful accounts in an amount equal to the estimated probable losses net of recoveries, which are based on an analysis of historical bad debt, current receivables aging and expected future write-offs of uncollectible accounts, as well as an assessment of specific identifiable accounts considered at risk or uncollectible. Accounts receivable are written off against the allowance for doubtful accounts when it is determined that the receivable is uncollectible.
Inventory, Net
Inventory, net consists of the costs to acquire gift cards from consumers and businesses for listing on our secondary marketplace, and is valued using the specific identification method, net of reserves for slow moving inventory and inventory shrinkage due to book-to-physical adjustments.
Property and Equipment, Net
Property and equipment, net includes assets such as furniture and fixtures, leasehold improvements, computer hardware, office and telephone equipment and certain capitalized internally developed software and website development costs. We record property and equipment at cost less accumulated depreciation and amortization, using the straight-line method. Ordinary maintenance and repairs are charged to expense, while expenditures that extend the physical or economic life of the assets are capitalized. Property and equipment are depreciated over their estimated economic lives, which range from three to ten years, using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the lease term. We perform reviews for the impairment of property and equipment when management believes events or circumstances indicate the carrying amount of an asset may not be recoverable.
Capitalized Internally Developed Software and Website Development Costs
We incur costs related to software and website development, including purchased software and internally developed software. We expense costs in the planning and evaluation stage of internally developed software and website development, as incurred. We capitalize costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. We cease capitalizing and begin depreciating costs when the project is substantially complete and/or the software is ready for use. Capitalized internally developed software and website development costs are included within property and equipment, net in our consolidated balance sheets and depreciated over their estimated useful lives, which range from two to three years.
During the first quarter of 2017 and 2016, we noted circumstances that indicated the carrying amount of internally developed software and website development costs related to certain projects might not be recoverable. As a result, we performed a review for impairment of the costs associated with these projects, and have recognized $0.9 million and $0.8 million of impairment expense within other operating expenses in our consolidated statement of operations during the three months ended March 31, 2017 and 2016, respectively.
Goodwill and Other Intangible Assets
Goodwill arises from business combinations and is measured as the excess of the cost of the business acquired over the sum of the acquisition-date fair values of tangible and identifiable intangible assets acquired, less any liabilities assumed.
We evaluate goodwill for impairment annually on October 1, during the fourth quarter of each year, or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. Events or circumstances that could trigger an impairment test include, but are not limited to, a significant adverse change in the business climate or in legal factors, an adverse action or assessment by a regulator, a loss of key personnel, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, significant underperformance relative to operating performance indicators, a significant decline in market capitalization and significant changes in competition.
We evaluate the recoverability of goodwill using a two-step impairment process tested at the reporting unit level. In the first step, the fair value for the reporting unit is compared to our book value including goodwill. If the fair value is less than the book value, a second step is performed that compares the implied fair value of goodwill to the book value of the goodwill. The fair value for the implied goodwill is determined based on the difference between the fair value of the reporting segment and the net fair value of the identifiable assets and liabilities excluding goodwill. If the implied fair value of the goodwill is less than the book value, the difference is recognized as an impairment charge in the consolidated statements of operations. We did

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not record any goodwill impairment charges during the three months ended March 31, 2017 and the year ended December 31, 2016.
Identifiable intangible assets consist of acquired customer intangible assets, marketing-related intangible assets, contract-based intangible assets, and technology-based intangible assets. Intangible assets with definite lives are amortized over their estimated useful lives on a straight-line basis. See Note 4, “Goodwill and Other Intangible Assets”. The method of amortization applied represents our best estimate of the distribution of the economic value of the identifiable intangible assets. The factors we consider in determining the useful lives of identifiable intangible assets included the extent to which expected future cash flows would be affected by our intent and ability to retain use of these assets.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of intangible assets may not be recoverable. 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. When such events occur, we compare the carrying amounts of the assets to their undiscounted cash flows. If this comparison indicates that there is impairment, the amount of the impairment is calculated as the difference between the carrying value and the fair value.
Revenue Recognition
With respect to our Core segment, which consists of our marketplace for digital offers (excluding gift cards), we recognize revenue when persuasive evidence of an arrangement exists, services have been rendered, the fee to the paid merchant, defined as a merchant with which we have a contract, is fixed or determinable and collectability of the resulting receivable is reasonably assured. For commission revenues, which represent the substantial majority of our Core segment net revenues, revenue recognition generally occurs when a consumer, having visited one of our websites and clicked on a digital offer for a paid merchant makes a purchase with such paid merchant, and completion of the order is reported to us by such paid merchant, either directly or through a performance marketing network. The reporting by the paid merchant includes the amount of commissions the paid merchant has calculated as owing to us. Certain paid merchants do not provide reporting until a commission payment is made. In those cases, which have historically not been significant, we record commission revenues on a cash basis. For advertising revenues, revenue recognition occurs when we display a paid merchant’s advertisements on our websites or mobile applications. Rates for advertising are typically negotiated with individual paid merchants. Payments for advertising may be made directly by paid merchants or through performance marketing networks.
We also generate revenues in our Gift Card segment, the substantial majority of which are derived from the sale of previously owned gift cards and the remainder of which are derived from the sale of gift cards obtained from merchants. We generally purchase gift cards at a discount to face value and resell them to consumers and businesses through our online marketplace at a markup to our cost, while still at a discount to face value. For gift card revenues, revenue recognition occurs when the cards are sent to the purchaser.
Multiple Element Arrangements. When we enter into revenue arrangements with certain paid merchants that are comprised of multiple deliverables, inclusive of the promotion of digital offers and advertising, we allocate consideration to all deliverables based on the relative selling price method in accordance with the selling price hierarchy. The objective of the hierarchy is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis and requires the use of: (1) vendor-specific objective evidence, or VSOE, if available; (2) third-party evidence, or TPE, if VSOE is not available; and (3) a best estimate of the selling price, or BESP, if neither VSOE nor TPE is available.
VSOE. We determine VSOE based on our historical pricing and discounting practices for the specific service when sold separately. In determining VSOE, we require that a substantial majority of the stand-alone selling prices for these services fall within a reasonably narrow pricing range. We have not historically sold our services within a reasonably narrow pricing range. As a result, we have not been able to establish VSOE.
TPE. When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of services cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services’ selling prices are on a stand-alone basis. As a result, we have not been able to establish selling price based on TPE.
BESP. When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a stand-alone basis. BESP is generally used to allocate the selling price to deliverables in our multiple element arrangements. We determine BESP for deliverables by considering multiple factors including, but not limited to, prices we charge for similar offerings, market conditions, competitive landscape and pricing practices. We limit the amount of allocable

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arrangement consideration to amounts that are fixed or determinable and that are not contingent on future performance or future deliverables.
If the facts and circumstances underlying the factors we considered change or should future facts and circumstances lead us to consider additional factors, both our determination of our relative selling price under the hierarchy and our BESPs could change in future periods.
We estimate and record a reserve for commission revenues based upon actual, historical return rates as reported to us by paid merchants to provide for end-user cancellations or product returns, which may not be reported by the paid retailer or performance marketing network until a subsequent date. As such, we report commission revenues net of the estimated returns reserve. Net revenues are reported net of sales taxes, where applicable.
Our payment arrangements with paid merchants are both direct and through performance marketing networks, which act as intermediaries between the paid merchants and us. No paid merchant individually accounted for more than 10% of net revenues or accounts receivable as of and for the three months ended March 31, 2017 and 2016.
Cost of Net Revenues
Cost of net revenues is composed of direct and indirect costs incurred to generate revenue. For our Gift Card segment, these costs consist of the costs to acquire gift cards, including shipping costs. For our Core segment, these costs consist primarily of the personnel costs of our salaried operations and technology support employees and fees paid to third-party contractors engaged in the operation and maintenance of our existing websites and mobile applications. Such technology costs also include website hosting and Internet service costs. Other costs include allocated facility and general information technology costs.
Sales and Marketing Expense
Our sales and marketing expense consists primarily of personnel costs for our sales, marketing, search engine optimization, search engine marketing and business analytics employees, as well as online, brand and other marketing expenses. Our online, brand and other marketing costs include search engine fees, advertising on social networks, television and radio advertising, promotions, display advertisements, creative development fees, public relations, email campaigns, trade shows and other general marketing costs. Other costs include allocated facility and general information technology costs.
Product Development
Our product development expense consists primarily of personnel costs of our product management and software engineering teams, as well as fees paid to third-party contractors and consultants engaged in the design, development, testing and improvement of the functionality, offer content and user experience of our websites and mobile applications.
General and Administrative Expense
Our general and administrative expense represents personnel costs for employees involved in general corporate functions, including executive, finance, accounting, legal and human resources, among others. Additional costs included in general and administrative expense include professional fees for legal, audit and other consulting services, the provision for doubtful accounts receivable, travel and entertainment, charitable contributions, recruiting, allocated facility and general information technology costs and other general corporate overhead expenses.
Stock-Based Compensation Expense
Stock-based compensation expense is measured at the grant date based on the estimated fair value of the award, net of estimated forfeitures. We recognize these compensation costs on a straight-line basis over the requisite service period of the award. Forfeiture rates are estimated at grant date based on historical experience and adjusted in subsequent periods for differences in actual forfeitures from those estimates. We include stock-based compensation expense in cost of net revenues and operating expenses in our consolidated statements of operations, consistent with the respective employees’ cash compensation. We determine the fair value of stock options on the grant date using the Black-Scholes-Merton valuation model or a Monte Carlo simulation model for certain performance stock options and performance restricted stock units granted to certain executives in 2017 and 2016.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable, approximate fair value due to the instruments’ short-term maturities or,

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in the case of the long-term notes payable, based on the variable interest rate feature. We record derivative assets and liabilities at fair value.
Income Taxes
The provision for income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using the enacted tax rates that are applicable in a given year. The deferred tax assets are recorded net of a valuation allowance when, based on the available supporting evidence, we believe it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods.
The Company may be subject to income tax audits by the respective tax authorities in any or all of the jurisdictions in which the Company operates or has operated within a relevant period, including the United States, the United Kingdom, France, Germany, and the Netherlands. Significant judgment is required in determining uncertain tax positions. We utilize a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We adjust these reserves in light of changing facts and circumstances, such as the closing of an audit or the refinement of an estimate. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We include interest and penalties related to uncertain tax positions in the provision for income taxes in our consolidated statements of operations.
Foreign Currency
Our operations outside of the U.S. generally use the local currency as their functional currency. Assets and liabilities for these operations are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at average exchange rates for the period. Foreign currency translation adjustments are recorded in accumulated other comprehensive income (loss) in our consolidated statements of comprehensive income. Gains and losses from foreign currency denominated transactions are recorded in other income (expense), net in our consolidated statements of operations.
Non-Marketable Investments and Other-Than-Temporary Impairment
During 2015, we invested $4.0 million in a non-controlling minority ownership stake in a privately-held marketing technology company in the United States. The minority interest is included at cost in other assets, net, in our consolidated balance sheets. We own less than 5% of the voting equity of the investee.
We regularly evaluate the carrying value of our cost-method investment for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators we utilize to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. In the event a decline in fair value is judged to be other-than-temporary, we will record an other-than-temporary impairment charge in other operating expenses, net in our consolidated statements of operations. As the inputs utilized for our periodic impairment assessment are not based on observable market data, potential impairment charges related to our cost-method investment would be classified within Level 3 of the fair value hierarchy. To determine the fair value of this investment, we use all available financial information related to the entity, including information based on recent or pending third-party equity investments in the entity. In certain instances, a cost-method investment’s fair value is not estimated as there are no identified events or changes in the circumstances that may have a significant adverse effect on the fair value of the investment and to do so would be impractical.
Derivative Financial Instruments
Our operations outside of the U.S. expose us to various market risks that may affect our consolidated results of operations, cash flows and financial position. These market risks include, but are not limited to, fluctuations in currency exchange rates. Our primary foreign currency exposures are in Euros and British Pound Sterling. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our operations are translated from local currency into U.S. dollars upon consolidation.
We have entered into derivative instruments to hedge certain exposures to foreign currency risk on non-functional currency denominated intercompany loans and the re-measurement of certain assets and liabilities denominated in non-functional currencies in our foreign subsidiaries. We may enter into further such instruments in the future. We have not elected

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to apply hedge accounting or hedge accounting does not apply. Gains and losses resulting from a change in fair value for these derivatives are reflected in the period in which the change occurs and are recorded in other income (expense), net in our consolidated statement of operations. We did not have any foreign exchange derivative instruments outstanding as of, or for the three months ended, March 31, 2017. During the three months ended March 31, 2016, we recorded a loss of $0.3 million related to our foreign exchange derivative instruments.
We do not use financial instruments for trading or speculative purposes. Derivative instruments are recorded on the balance sheet at fair value and are short-term in duration. We are exposed to the risk that counterparties to derivative contracts may fail to meet their contractual obligations.
Recent Accounting Pronouncements
Recent Accounting Pronouncements - Recently Adopted
In March 2016, the Financial Accounting Standards Board, or FASB, issued new guidance that amends several aspects of the existing accounting standards for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. We adopted this guidance effective January 1, 2017. Under this guidance, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. We have elected to continue to estimate forfeitures. Additionally, this guidance requires that all income tax effects related to settlements of share-based payment awards be reported in earnings as an increase or decrease to income tax expense (benefit), net. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits reported in earnings during the award's vesting period. We have adopted this guidance prospectively. The impact of the adoption resulted in us recording income tax expense of $1.5 million as a component of income taxes, rather than additional paid-in capital, for the three months ended March 31, 2017 related to the excess tax deficiency on share-based payment awards that settled during the quarter. This guidance also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. We are electing to adopt this retrospectively effective January 1, 2017. The adoption of this guidance resulted in our operating cash flows for the three months ended March 31, 2016 increasing by $18 thousand. The remaining provisions of this guidance did not have a material impact on our consolidated financial statements.
In October 2016, the FASB issued new guidance that requires immediate recognition of the income tax consequences of intercompany asset transfers other than inventory. The guidance is effective for fiscal years beginning after December 15, 2017, using a modified retrospective application method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We elected to early adopt this guidance effective January 1, 2017. The adoption of this guidance resulted in a $1.8 million cumulative-effect adjustment that decreased retained earnings as of January 1, 2017.
In July 2015, the FASB issued new guidance that simplifies the measurement of inventory. The guidance requires companies to recognize inventory within scope of the standard at the lower of cost or net realizable value, thereby simplifying the current guidance under which companies must measure inventory at the lower of cost or market. We adopted this new accounting standard prospectively effective January 1, 2017. This new accounting standard did not have a significant impact on our consolidated financial statements.
Recent Accounting Pronouncements - To Be Adopted
In May 2014, the FASB issued new guidance that superseded previously existing revenue recognition requirements. The guidance provides a five-step process to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration expected in exchange for those goods and services. The guidance requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. On July 9, 2015, the FASB deferred the effective date by one year to December 15, 2017 for the first interim period within annual reporting periods beginning after that date, using either a full or modified retrospective application method. Early adoption of the standard is permitted, but not before the first interim period within annual reporting periods beginning after the original effective date of December 15, 2016. We have made progress toward completing our evaluation of the impact that potential changes from adopting the new standard will have on our net revenues and our consolidated financial statements. We expect to have our preliminary evaluation, including the selection of an adoption method, completed by the end of the first half of 2017.

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In February 2016, the FASB issued new guidance that amends the existing accounting standards for lease accounting. The guidance requires lessees to recognize assets and liabilities on their balance sheets for all leases with terms of more than twelve months. Additionally, the guidance requires new qualitative and quantitative disclosures about leasing activities. The guidance requires a modified retrospective application approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The guidance is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the effect that the adoption of this guidance will have on our consolidated financial statements.
In June 2016, the FASB issued new guidance that modifies the method of accounting for expected credit losses on certain financial instruments, including trade and other receivables, which generally will result in the earlier recognition of allowances for losses. The guidance is effective for fiscal years beginning after December 15, 2019, using a modified retrospective application method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the effect that the adoption of this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued new guidance that clarifies how certain cash receipts and payments are to be presented in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, using a retrospective application method. Early adoption is permitted. We are currently evaluating the effect that the adoption of this guidance will have on our consolidated financial statements.
 In January 2017, the FASB issued new guidance that clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for fiscal years beginning after December 15, 2017, using the prospective method. We are currently evaluating the effect that the adoption of this guidance will have on our consolidated financial statements.
In January 2017, the FASB issued new guidance simplifying subsequent goodwill measurement by eliminating Step 2 from the goodwill impairment test. The guidance requires that entities record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for fiscal years beginning after December 15, 2019, using the prospective method. Early adoption is permitted. We are currently evaluating the effect that the adoption of this guidance will have on our consolidated financial statements.
3. Acquisitions
On April 5, 2016, we acquired GiftcardZen Inc, a private company and the operator of giftcardzen.com, a secondary marketplace for gift cards, for $21.2 million of cash consideration.
The following table summarizes the allocation of the purchase price of GiftcardZen Inc, with amounts shown below at fair value at the acquisition date (in thousands): 
Cash acquired
$
500

Inventory acquired
675

Other tangible assets acquired
48

Identifiable intangible assets:
 
Customer relationships
48

Marketing-related
1,064

Contract-based
1,978

Technology-based
1,077

Goodwill
16,838

Total assets acquired
22,228

Total liabilities assumed
(999
)
Total
$
21,229

Goodwill represents the excess of the purchase price over the aggregate fair value of the net tangible and identifiable intangible assets acquired and represents the expected synergies of the transaction and the knowledge and experience of the workforce in place. The goodwill from the acquisition is not deductible for tax purposes. The acquired customer relationships intangible assets have an estimated useful life of 6 years from the date of acquisition, the acquired marketing-related intangible assets have an estimated useful life of 2 years from the date of acquisition, the acquired contract-based intangible assets have estimated useful lives that range from 3 years to 5 years from the date of acquisition and the

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acquired technology-based intangible assets have an estimated useful life of 1 year from the date of acquisition. The total weighted average amortization period for the intangibles acquired is 2.6 years.
In connection with the acquisition, we incurred approximately $0.7 million in direct acquisition costs. These costs were expensed as incurred within general and administrative expense in our consolidated statement of operations. The results of GiftcardZen Inc have been included in our consolidated results since the acquisition date of April 5, 2016.
In conjunction with the acquisition of GiftcardZen Inc, we entered into deferred compensation arrangements with a key employee of GiftcardZen Inc as well as certain other employees. These arrangements have a total value of up to $12.0 million, paid at dates between 10 and 24 months following the acquisition, contingent upon the achievement of specific performance targets and those employees' continued employment with us. We paid $4.0 million to employees related to these arrangements during the three months ended March 31, 2017. As of March 31, 2017, we expect that the remaining value of the arrangements will be approximately $5.0 million.
During the three months ended March 31, 2017, we have recognized $1.2 million of expense associated with these arrangements within other operating expenses in our consolidated statement of operations. We are accreting a liability concurrent with expense recognition assuming the employees' continued employment with RetailMeNot. As of March 31, 2017, we have recognized $1.3 million in accrued compensation and benefits and $1.9 million in other noncurrent liabilities in our consolidated balance sheets.
4. Goodwill and Other Intangible Assets
Changes in our goodwill balance for the year ended December 31, 2016 and the three months ended March 31, 2017 are summarized in the table below (in thousands):
 
 
Core
 
Gift Card
 
Total
Balance at December 31, 2015
$
174,725

 
$

 
$
174,725

Acquired in business combinations

 
16,838

 
16,838

Foreign currency translation adjustment
(681
)
 

 
(681
)
Balance at December 31, 2016
174,044

 
16,838

 
190,882

Acquired in business combinations (unaudited)

 

 

Foreign currency translation adjustment (unaudited)
285

 

 
285

Balance at March 31, 2017 (unaudited)
$
174,329

 
$
16,838

 
$
191,167

Intangible assets consisted of the following as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
Weighted-
Average
Amortization
Period
(Months)
 
Estimated
Useful Life
(Months)
 
March 31, 2017 (unaudited)
 
 
Gross
 
Accumulated
Amortization
 
Impairment Expense
 
Net
Customer relationships
 
180
 
72-180
 
$
15,673

 
$
(6,760
)
 
$

 
$
8,913

Marketing-related
 
152
 
24-180
 
78,692

 
(36,930
)
 

 
41,762

Contract-based
 
57
 
12-60
 
21,694

 
(19,750
)
 

 
1,944

Technology-based
 
12
 
12
 
8,684

 
(8,684
)
 

 

Total intangible assets
 
 
 
 
 
$
124,743

 
$
(72,124
)
 
$

 
$
52,619

 

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Weighted-
Average
Amortization
Period
(Months)
 
Estimated
Useful Life
(Months)
 
December 31, 2016
 
 
Gross
 
Accumulated
Amortization
 
Impairment Expense
 
Net
Customer relationships
 
180
 
72-180
 
$
15,821

 
$
(6,496
)
 
$
(153
)
 
$
9,172

Marketing-related
 
152
 
24-180
 
79,336

 
(35,270
)
 
(633
)
 
43,433

Contract-based
 
57
 
12-60
 
21,688

 
(19,513
)
 

 
2,175

Technology-based
 
12
 
12
 
8,666

 
(8,400
)
 

 
266

Total intangible assets
 
 
 
 
 
$
125,511

 
$
(69,679
)
 
$
(786
)
 
$
55,046

In December 2016, we decided to no longer support Actiepagina.nl. As a result, we determined that an impairment of unamortized intangible assets associated with Actiepagina.nl was warranted, resulting in an impairment charge of $0.8 million. We did not record any intangible asset impairment charges during the three months ended March 31, 2017.
5. Commitments and Contingencies
Operating Leases
We lease office space, including our corporate headquarters in Austin, Texas, under non-cancelable operating leases. Rent expense under these operating leases was $2.0 million and $1.7 million for the three months ended March 31, 2017 and 2016, respectively.
Legal Matters
From time to time, we may be involved in litigation relating to claims arising in the ordinary course of business. Management believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material impact on our consolidated financial position, results of operations or cash flows.
6. Stockholders’ Equity and Stock-Based Compensation
Common Stock
Our certificate of incorporation authorizes shares of stock as follows: 150,000,000 shares of Series 1 common stock, 6,107,494 shares of Series 2 common stock and 10,000,000 shares of preferred stock. The common and preferred stock have a par value of $0.001 per share. As of March 31, 2017 and December 31, 2016, 48,299,247 and 47,855,964 shares of Series 1 common stock were outstanding, respectively. As of March 31, 2017 and December 31, 2016, zero shares of preferred stock and Series 2 common stock were outstanding.
Share Repurchase
In February 2015, our board of directors authorized a share repurchase program. Under the program, we were initially authorized to repurchase shares of Series 1 common stock for an aggregate purchase price not to exceed $100 million. In February 2016, our board of directors authorized an additional $50 million under the repurchase program, bringing the total amount of the program up to $150 million. In February 2017, our board of directors authorized a one year extension of the repurchase program, which is now authorized through February 2018. During the three months ended March 31, 2017, we repurchased 32,465 shares of Series 1 common stock at an aggregate purchase price of $0.3 million, and during the year ended December 31, 2016, we repurchased 4,128,011 shares of Series 1 common stock at an aggregate purchase price of $36.8 million.
Stock-Based Compensation
In July 2013, our board of directors and stockholders approved our 2013 Equity Incentive Plan (the “2013 Plan”) and our 2013 Employee Stock Purchase Plan (the “2013 Purchase Plan”). When the 2013 Plan took effect, all shares available for grant under our 2007 Stock Plan, as amended (the “2007 Plan”), were transferred into the share pool of the 2013 Plan. Subsequent to our initial public offering, we have not granted, and will not grant in the future, any additional awards under the 2007 Plan. However, the 2007 Plan will continue to govern the terms and conditions of all outstanding equity awards granted under the 2007 Plan.

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In April 2016 in connection with our acquisition of GiftcardZen Inc, our board of directors approved the assumption of GiftcardZen Inc's existing 2012 Equity Incentive Plan (the "GCZ Plan") in accordance with NASDAQ Rule 5635, which provides that shares available under certain plans acquired in mergers or other acquisitions may be used for certain post-transaction grants of options or other equity awards.
Under our 2013 Plan and GCZ Plan, we granted stock options, restricted stock units and performance restricted stock units during the three months ended March 31, 2017. The fair value of our performance restricted stock units was estimated on the grant date using a Monte Carlo simulation.
We recorded stock-based compensation expense of $6.2 million and $6.6 million for the three months ended March 31, 2017 and 2016, respectively. We include stock-based compensation expense in cost and expenses consistent with the classification of respective employees’ cash compensation in our consolidated statements of operations. Individuals exercised 6,773 and 49,097 stock options during the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. During the three months ended March 31, 2017 and the year ended December 31, 2016 we issued 468,975 and 582,535 shares of Series 1 common stock, respectively, net of shares withheld for taxes, upon the vesting of restricted stock units.
Stock-based compensation expense for all employee share-based payment awards is based upon the grant date fair value. We recognize compensation costs, net of estimated forfeitures, on a straight-line basis over the requisite service period of the award. Forfeiture rates are estimated at grant date based on historical experience and adjusted in subsequent periods for differences in actual forfeitures from our previous estimates.  
7. Earnings (Loss) Per Share
The rights of the holders of Series 1 and Series 2 common stock are identical, except with respect to voting. Each share of Series 1 and Series 2 common stock is entitled to one vote per share; however holders of Series 2 common stock are not entitled to vote in connection with the election of the members of our board of directors. Shares of Series 2 common stock may be converted into shares of Series 1 common stock at any time at the option of the stockholder. As of March 31, 2017 and 2016, no shares of Series 2 common stock were outstanding.
The following table sets forth the computation of basic and diluted net loss per share of common stock (in thousands, except per share amounts):
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(unaudited)
Numerator
 
 
 
 
Net loss
 
$
(3,782
)
 
$
(36
)
Denominator
 
 
 
 
Weighted average common shares outstanding - basic
 
48,059

 
49,188

Dilutive effect of stock options, restricted stock units, and Employee Stock Purchase Plan shares
 

 

Weighted average common shares outstanding - diluted
 
48,059

 
49,188

Net loss per share:
 
 
 
 
Basic
 
$
(0.08
)
 
$
0.00

Diluted
 
$
(0.08
)
 
$
0.00












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The following common equivalent shares were excluded from the diluted net loss per share calculation, as their inclusion would have been anti-dilutive (in thousands):
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(unaudited)
Stock options
 
722

 
742

Restricted stock units
 
2,146

 
1,479

Employee Stock Purchase Plan shares
 
478

 

Total
 
3,346

 
2,221

8. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP set forth a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three tiers are Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop our own assumptions.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
 
 
Fair Value Measurements at March 31, 2017 (unaudited)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market deposit accounts
 
$
150,276

 
$

 
$

 
$
150,276

 
 
Fair Value Measurements at December 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market deposit accounts
 
$
150,147

 
$

 
$

 
$
150,147

Money market deposit accounts are reported in our consolidated balance sheets as cash and cash equivalents and derivative instruments are reported in our consolidated balance sheets as either accrued expenses and other current liabilities or prepaid assets and other current assets, net.
Our other financial instruments consist primarily of accounts receivable, accounts payable, accrued liabilities and notes payable. The carrying value of these assets and liabilities approximate their respective fair values as of March 31, 2017 and December 31, 2016 due to the short-term maturities, or in the case of our long term notes payable, based on the variable interest rate feature.
During the three months ended March 31, 2017 and 2016, we recorded fair value adjustments to the carrying amount of internally developed software and website development costs related to certain projects, resulting in $0.9 million and $0.8 million, respectively, of impairment expense. See Note 2, "Summary of Significant Accounting Policies." During 2016, we recorded a fair value adjustment to the identified intangible assets associated with one of our websites, Actiepagina.nl, resulting in impairment expense of $0.8 million. See Note 4, “Goodwill and Other Intangible Assets.”
9. Income Taxes
Our quarterly tax provision is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update our estimate of the annual effective tax rate, and if our estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision and our quarterly estimate of our annual effective tax rate are subject to significant variation due to several factors, including our ability to accurately predict our pre-tax income or loss in multiple jurisdictions, the impact of non-deductible stock-based compensation and deferred compensation charges, the effects of acquisitions and the integration of those acquisitions and by changes in tax laws and

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regulations. Additionally, our effective tax rate can be more or less volatile based on the amount of our pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
For the three months ended March 31, 2017, we recorded income tax expense of $0.3 million, including $1.5 million of discrete tax expense to record the tax effects of the settlement of share-based payment awards, resulting in an effective tax rate of (7.7)%. For the three months ended March 31, 2016. we recorded income tax expense of $0.1 million, resulting in an effective tax rate of 255.0%. Our quarterly effective tax rate is subject to significant volatility based on the actual amount of pre-tax income or loss we generate in the period, changes to our forecasted annual effective tax rate and the impact of discrete items arising in the quarter.
As of March 31, 2017, our forecasted annual effective tax rate estimate for the year ended December 31, 2017 differed from the statutory rate primarily due to tax charges associated with non-deductible stock-based compensation charges, non-deductible deferred compensation expenses and state taxes, which are partially offset by the benefit from U.S. federal research and development tax credits. As of March 31, 2016, our forecasted annual effective tax rate estimate for the year ended December 31, 2016 differed from the statutory rate primarily due to tax charges associated with non-deductible stock-based compensation charges and state taxes, which are partially offset by the benefit from U.S. federal research and development tax credits.
10. Segment Reporting
Our two reportable segments are Core and Gift Card. We added Gift Card as a reportable segment during the second quarter of 2016 to align with a change in how our CODM evaluates our overall business performance, concurrent with the April 5, 2016 purchase of GiftcardZen Inc, a secondary marketplace for gift cards. Our Gift Card segment consists of our marketplace for gift cards, and our Core segment consists of all other products and services that are related to our marketplace for digital offers.
Our CODM allocates resources and assesses performance of the business at the reportable segment level based primarily on net revenues and segment operating income (loss) for both segments and gross profit for our Gift Card segment. Segment operating income (loss) includes internally allocated costs of our information technology function. We do not allocate stock-based compensation expense, depreciation and amortization expense, third-party acquisition-related costs or other operating expenses to our segments, and these expenses are included in the Unallocated column in the reconciliations below. Our performance evaluation does not include segment assets.
The following tables present information by reportable operating segment, and a reconciliation of these amounts to our consolidated statements of operations, for the three month periods ended March 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended March 31, 2017 (unaudited)
 
 
Core
 
Gift Card
 
Unallocated
 
Total
Net revenues
 
$
51,750

 
$
17,864

 
$

 
$
69,614

Cost of net revenues
 
4,551

 
17,346

 
423

 
22,320

Gross profit
 
47,199

 
518

 
(423
)
 
47,294

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
9,762

 
356

 
3,839

 
13,957

Sales and marketing
 
18,415

 
695

 
1,280

 
20,390

General and administrative
 
6,421

 
984

 
4,000

 
11,405

Amortization of purchased intangible assets
 

 

 
2,472

 
2,472

Other operating expenses
 

 

 
2,090

 
2,090

Total operating expenses
 
34,598

 
2,035

 
13,681

 
50,314

Income (loss) from operations
 
$
12,601

 
$
(1,517
)
 
$
(14,104
)
 
$
(3,020
)

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Three Months Ended March 31, 2016 (unaudited)
 
 
Core
 
Gift Card
 
Unallocated
 
Total
Net revenues
 
$
54,649

 
$

 
$

 
$
54,649

Cost of net revenues
 
4,568

 

 
632

 
5,200

Gross profit
 
50,081

 

 
(632
)
 
49,449

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
9,301

 

 
3,310

 
12,611

Sales and marketing
 
21,507

 

 
1,818

 
23,325

General and administrative
 
6,984

 

 
3,242

 
10,226

Amortization of purchased intangible assets
 

 

 
1,954

 
1,954

Other operating expenses
 

 

 
832

 
832

Total operating expenses
 
37,792

 

 
11,156

 
48,948

Income (loss) from operations
 
$
12,289

 
$

 
$
(11,788
)
 
$
501

The following table presents information about the type of expenses included in the Unallocated column in the reconciliations above (in thousands):
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Depreciation expense
 
$
2,528

 
$
1,996

Stock-based compensation expense
 
6,243

 
6,582

Third party acquisition-related costs
 
771

 
424

Amortization of purchased intangible assets
 
2,472

 
1,954

Other operating expenses
 
2,090

 
832

Total Unallocated expenses
 
$
14,104

 
$
11,788

11. Subsequent Events
On April 10, 2017, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Harland Clarke Holdings Corp., or HCH, pursuant to which HCH has agreed to acquire all issued and outstanding shares of our Series 1 common stock at a purchase price of $11.60 per share (the "Merger") through a tender offer and second step merger process. Assuming timely satisfaction of all closing conditions set forth in the Merger Agreement, and upon consummation of the Merger, we will become a privately held company.
Subject to certain conditions, including the receipt of necessary regulatory approvals, receipt of a majority of our issued and outstanding shares of Series 1 common stock in the tender offer, and other customary covenants and closing conditions, we expect the transaction to close in the second quarter of 2017. For additional information related to the Merger Agreement and the Merger, refer to the tender offer statement filed on Form TO with the SEC on April 24, 2017, as amended by Amendment No. 1 to the tender offer statement on Form TO filed with the SEC on April 28, 2017 and Amendment No. 2 to the tender offer statement on Form TO filed with the SEC on May 1, 2017, the solicitation/recommendation statement filed on Form 14D-9 with the SEC on April 24, 2017, as amended by Amendment No. 1 to the solicitation/recommendation statement filed with the SEC on April 28, 2017 and Amendment No. 2 to the solicitation/recommendation statement filed with the SEC on May 1, 2017, and the full text of the Merger Agreement, which is filed herewith as Exhibit 2.1.
The Merger Agreement contains certain termination rights for us and HCH. Upon termination of the Merger Agreement under specified circumstances, such as us accepting a superior proposal, we may be required to pay HCH a termination fee of $18.0 million. Additionally, if the tender offer process is not consummated due to HCH not having received its committed financing, provided the other conditions to the tender offer are satisfied, HCH may be required to pay us a termination fee of between $25.0 million and $35.0 million, depending upon the date of the termination.
Other than transaction expenses associated with the proposed Merger of $0.8 million for the three months ended March 31, 2017, the terms of the Merger Agreement did not impact our condensed consolidated financial statements.


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On April 26, 2017, Louis Scarantino, alleging himself to be a stockholder of the Company, filed a purported stockholder class action complaint, or the Scarantino Complaint, in the United States District Court for the District of Delaware, against the Company, the Company’s Chief Executive Officer, all members of the Board, HCH and HCH’s wholly-owned acquisition subsidiary. Among other things, the Scarantino Complaint criticizes the proposed transaction price of $11.60 per share of Series 1 common stock as inadequate and alleges that the solicitation/recommendation statement filed by the Company on Schedule 14D-9 omits to state material information, rendering it false and misleading, and in violation of the Exchange Act and related regulations. The suit seeks, among other things, an order enjoining consummation of the Merger, rescission of the Merger if it has already been consummated or rescissory damages, an order directing the Company to file a solicitation statement that does not contain any untrue statement of fact and states all material facts required in order to make the statements contained therein not misleading, and an award of attorneys’ fees, experts’ fees, and expenses.



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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. You can identify these statements by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would” and similar expressions or the negative of these terms. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Factors that may cause such differences include, but are not limited to, the risks described under “Risk Factors” in this Form 10-Q and those discussed in other documents we file with the SEC.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2016 and subsequent reports on Form 8-K, which discuss our business in greater detail.
Overview
We operate a leading savings destination, connecting consumers with retailers, restaurants and brands, both online and in-store. In the year ended December 31, 2016, our marketplace featured digital offers from over 70,000 merchants, and we had contracts with more than 12,000 paid merchants. A merchant is a retailer, restaurant, or brand that sells goods or services directly to consumers. A paid merchant is a merchant that has contracted to pay us a commission for sales which we influence using digital offers made available in our marketplace and/or a merchant that has contracted to pay us to promote their digital offers or provide advertising in our marketplace. According to our internal data compiled using Google Analytics, during the trailing 12 months ended March 31, 2017, we had approximately 640 million total visits to our desktop and mobile websites. During the three months ended March 31, 2017, we averaged approximately 21.0 million mobile unique visitors per month.
Proposed Transaction with Harland Clarke Holdings
On April 10, 2017, we entered into the Merger Agreement with HCH, pursuant to which HCH has agreed to acquire all issued and outstanding shares of our Series 1 common stock at a purchase price of $11.60 per share (the "Merger") through a tender offer and second step merger process. Assuming timely satisfaction of all closing conditions set forth in the Merger Agreement, and upon consummation of the Merger, we will become a privately held company. Subject to certain conditions, including the receipt of necessary regulatory approvals, receipt of a majority of our issued and outstanding shares of Series 1 common stock in the tender offer, and other customary covenants and closing conditions, we expect the transaction to close in the second quarter of 2017. For additional information related to the Merger Agreement and the Merger, refer to the tender offer statement filed on Form TO with the SEC on April 24, 2017, as amended by Amendment No. 1 to the tender offer statement on Form TO filed with the SEC on April 28, 2017 and Amendment No. 2 to the tender offer statement on Form TO filed with the SEC on May 1, 2017, the solicitation/recommendation statement filed on Form 14D-9 with the SEC on April 24, 2017, as amended by Amendment No. 1 to the solicitation/recommendation statement filed with the SEC on April 28, 2017 and Amendment No. 2 to the solicitation/recommendation statement filed with the SEC on May 1, 2017, and the full text of the Merger Agreement, which is filed herewith as Exhibit 2.1.
Core Segment
We derive the substantial majority of our Core segment net revenues, which constitute the majority of our consolidated net revenues, from merchants that pay us directly or through third-party performance marketing networks. In some instances, the paid merchant itself provides affiliate tracking links for attribution of online sales using digital offers made available in our marketplace and pays us directly. However, in most cases, paid merchants contract with performance marketing

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networks to provide affiliate tracking links for attribution of online sales using digital offers made available in our marketplace. These paid merchants then pay the commissions we earn to the performance marketing network, which in turn pays those commissions to us. In general, our contracts with performance marketing networks govern our use of affiliate tracking links made available to us by the performance marketing network and the remittance of any commissions payable to us from paid merchants utilizing the performance marketing network. The performance marketing network with which a paid merchant contracts to provide affiliate tracking links provides us with the paid merchant’s contract terms, which must be accepted by us and the paid merchant, and which further govern our use of affiliate tracking links for such paid merchant and payment of commissions to us. Our contracts are generally short term, meaning that they can be canceled by any of the contracting parties on 30 days’ notice or less.
During the three months ended March 31, 2017 and 2016, the majority of our total net revenues were derived from commissions earned when consumers made purchases using digital offers featured on our websites and mobile applications. We expect that a majority of our net revenues in the future will continue to be derived from these commissions. Commission rates are determined through negotiations with paid merchants based on a variety of factors, including the level of exposure to consumers in our marketplace, the quality and volume of sales realized from consumers using digital offers from our marketplace and the category of products purchased using digital offers. We sell our solutions to merchants through a direct sales force.
Gift Card Segment
We also generate net revenues from our Gift Card segment, the substantial majority of which are derived from the sale of previously owned gift cards and the remainder of which are derived from the sale of gift cards obtained from merchants. We generally purchase gift cards at a discount to face value and resell them to consumers and businesses through our online marketplace at a markup to our cost, while still at a discount to face value.
On April 5, 2016, we acquired GiftcardZen Inc, a private company and the operator of giftcardzen.com, a secondary marketplace for gift cards, for approximately $21.2 million of cash consideration. In connection with the acquisition, we incurred approximately $0.7 million in direct acquisition costs.
In conjunction with the acquisition of GiftcardZen Inc, we entered into deferred compensation arrangements with a key employee of GiftcardZen Inc as well as certain other employees. These arrangements have a total value of up to $12.0 million, paid at dates between 10 and 24 months following the acquisition, contingent upon the achievement of specific performance targets and those employees' continued employment with us. We paid $4.0 million to employees related to these arrangements during the three months ended March 31, 2017. As of March 31, 2017, we expect that the remaining value of the arrangements will be approximately $5.0 million.
Consolidated Results
During the three months ended March 31, 2017, we generated net revenues of $69.6 million, representing an increase over the comparable prior year period of 27.4%. This increase is primarily attributable to a $17.9 million increase in net revenues from our Gift Card segment, offset by a $2.9 million decrease in net revenues from our Core segment.
Our net loss increased from $36 thousand for the three months ended March 31, 2016 to $3.8 million for the three months ended March 31, 2017. Adjusted EBITDA decreased from $12.3 million to $11.1 million over the comparable prior year three month period. See the information under the caption “Discussion Regarding Non-GAAP Financial Measures” below for further discussion of adjusted EBITDA, our use of this measure, the limitations of this measure as an analytical tool, and the reconciliation of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
Strategic Initiatives and Investments
We believe that featuring digital offers, including discounted gift cards, is necessary to attract visitors to our marketplace, which includes our websites, mobile applications, email, mobile alerts and social media distribution channels. In addition to increasing the number of visitors to our marketplace, we are focused on increasing the rate and frequency at which these visitors make purchases from paid merchants whose digital offers are featured in our marketplace. To meet these challenges, we are investing in product enhancements to make it easier for consumers visiting our marketplace to find the right digital offers and in expanding the types of digital offers available to consumers on our marketplace. These enhancements include increased leveraging of data to better personalize digital offers for consumers and to be a more effective channel for paid merchants to leverage our audience of users; continuing to invest in our in-store and advertising offerings; and further developing the location-based services features on our mobile applications to provide more geographically relevant digital offers. We believe these enhancements will increase consumers’ interactions with paid merchants in our marketplace, which will in turn increase the value we are able to provide to paid merchants. We are also focused on a combination of marketing strategies, including pay-per-click advertising, search engine optimization, branding campaigns and email and mobile alerts, with a goal of driving visits to our marketplace.

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We believe our mobile websites and applications currently monetize at a comparatively lower rate than our desktop websites, primarily due to the following: (1) mobile visits tend to be more exploratory in nature due to various factors, including lower purchase intent than desktop visits, difficulties in navigating from our mobile websites and applications to merchant websites and friction in the purchase process on merchants' mobile websites, (2) we do not receive sales commissions or attribution when consumers that visit our websites and mobile applications using a mobile device subsequently make a purchase by directly accessing a merchant’s website on another device, such as a desktop or tablet or in-store (a circumstance known as cross device switching) and (3) some paid merchants currently do not recognize affiliate tracking links on their mobile websites or applications, and the tracking mechanisms related to such may not function to allow proper attribution of sales to us. We intend to continue to improve monetization of our mobile websites and mobile applications through a variety of methods, including improved attribution to us of the sales that we help drive for our merchant partners, the use of pricing structures other than our traditional commission-based model (particularly with respect to advertising) and expanding food and dining content, which we believe consumers use on a more frequent basis.
Desktop online transaction net revenues decreased by 20.8% from 2014 to 2015 and 17.0% from 2015 to 2016, driven primarily by a decline in visits. However, we expect the trend of declining desktop online transaction net revenues to decelerate in future years as we improve the user experience and website performance. Advertising and in-store net revenues increased by 72.7% from 2014 to 2015 and 29.0% from 2015 to 2016, driven primarily by an increase in the average net revenues per merchant. We expect the trend of declining growth in advertising and in-store net revenues to continue given the general financial and operational difficulties prevalent amongst large retailers.
Our acquisition of GiftcardZen Inc significantly expands the gift card content available to users of our RetailMeNot.com website and mobile application, which we believe will drive more consumers to utilize and increase our ability to monetize these solutions. We expect Gift Card segment net revenues to grow substantially over the next several years, which will contribute to a decline in our consolidated gross profit margin.
Finally, we have developed and implemented certain universal software platforms to support certain of our international websites. We believe this investment will continue to allow us to more easily and rapidly expand organically in new geographic markets and integrate the systems of any additional digital offering businesses which we may acquire.

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Key Financial and Operating Metrics
We measure our business using both financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments, and assess the longer-term performance of our business. The key financial and operating metrics we use are as follows:
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands, except net revenues per visit)
Financial Metrics
 
 
 
 
Online transaction net revenues:
 
 
 
 
Desktop online transaction net revenues
 
$
32,053

 
$
38,194

Mobile online transaction net revenues
 
7,260

 
5,937

Total online transaction net revenues
 
39,313

 
44,131

Advertising and in-store net revenues
 
12,437

 
10,518

Gift card net revenues
 
17,864

 

Net revenues
 
69,614

 
54,649

 
 
 
 
 
Adjusted EBITDA
 
11,084

 
12,289

Gift Card segment gross profit
 
518

 

Core segment operating income
 
12,601

 
12,289

 
 
 
 
 
Operating Metrics
 
 
 
 
Visits:
 
 
 
 
Desktop visits
 
76,751

 
92,322

Mobile visits
 
75,049

 
69,898

Total visits
 
151,800

 
162,220

Online transaction net revenues per visit:
 
 
 
 
Desktop online transaction net revenues per visit
 
$
0.42

 
$
0.41

Mobile online transaction net revenues per visit
 
$
0.10

 
$
0.08

Total online transaction net revenues per visit
 
$
0.26

 
$
0.27

 
 
 
 
 
Mobile unique visitors
 
20,988

 
19,228

Net income (loss) is the most directly comparable financial measure, as calculated and presented in accordance with GAAP, in comparison to Adjusted EBITDA. Net loss for the three months ended March 31, 2017 and 2016 is as follows:
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Net loss
 
$
(3,782
)
 
$
(36
)
Financial Metrics
Desktop Online Transaction Net Revenues. We define desktop online transaction net revenues as amounts paid to us by paid merchants, either directly or through performance marketing networks, in the form of commissions for completed online transactions on desktop and laptop computers and tablet devices. In general, we earn a commission from a paid merchant when a consumer clicks on a digital offer for that paid merchant on one of our websites or tablet applications and then makes an online purchase from that paid merchant.
Mobile Online Transaction Net Revenues. We define mobile online transaction net revenues as amounts paid to us by paid merchants, either directly or through performance marketing networks, in the form of commissions for completed online transactions on smartphones and other mobile devices. In general, we earn a commission from a paid merchant when a

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consumer clicks on a digital offer for that paid merchant on one of our websites or mobile applications and then makes an online purchase from that paid merchant.
Online Transaction Net Revenues. We define online transaction net revenues as the total of our desktop online transaction net revenues and our mobile online transaction net revenues.
Advertising and In-store Net Revenues. We define advertising net revenues collectively as amounts paid to us by paid merchants for displaying digital offers that may be redeemed on one of our websites, as well as amounts paid to us by paid merchants for providing advertising of the paid merchant’s brand or products in our marketplace. We define in-store net revenues collectively as commission amounts earned from paid merchants when a consumer presents a digital offer to the merchant and the digital offer is scanned or a unique digital offer code is entered by the merchant at the point of sale, as well as other amounts paid to us by paid merchants for displaying digital offers on our websites and mobile applications that may be redeemed in-store.
Gift Card Net Revenues. We define gift card net revenues as amounts paid to us by consumers and businesses related to the sale of gift cards through our gift card marketplace through our websites and mobile applications, net of returns.
Net Revenues. We define net revenues as the total of our online transaction net revenues, our advertising and in-store net revenues and our gift card net revenues. We believe net revenues are an important indicator for our business because they are a reflection of the value we offer to consumers and paid merchants through our marketplace.
Adjusted EBITDA. We define this metric as net income (loss) plus depreciation, amortization of intangible assets, stock-based compensation expense, third party acquisition-related costs, other operating expenses (including asset impairment charges and compensation arrangements entered into in connection with acquisitions), net interest expense, other non-operating income and expenses and income taxes net of any foreign exchange income or expenses. We believe that the use of adjusted EBITDA is helpful in evaluating our operating performance because it excludes certain non-cash expenses, including depreciation, amortization of intangible assets and stock-based compensation expense. For further discussion regarding Adjusted EBITDA, along with a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, please see the information under the caption “Discussion Regarding Non-GAAP Financial Measures” below.
Gift Card Segment Gross Profit. We define Gift Card segment gross profit as gift card net revenues, net of returns, less our cost of net revenues for the Gift Card segment, which consists primarily of the costs to acquire gift cards, including shipping costs.
Core Segment Operating Income. We define Core segment operating income as net revenues derived from our Core segment (which consists of online transaction net revenues and advertising and in-store net revenues), less the amount of cost of net revenues, product development expense, sales and marketing expense and general and administrative expense allocated to our Core segment. Segment operating income includes internally allocated costs of our information technology function. We do not allocate stock- based compensation expense, depreciation and amortization expense, third-party acquisition-related costs or other operating expenses to our segments.
Operating Metrics
Desktop Visits. We define a desktop visit as an interaction or group of interactions that takes place on one of our websites from desktop and laptop computers and tablet devices within a given time frame as measured by Google Analytics, a product that provides digital marketing intelligence. A single visit can contain multiple page views, events, social interactions, custom variables, and e-commerce transactions. A single visitor can open multiple visits. Visits can occur on the same day, or over several days, weeks, or months. As soon as one visit ends, there is then an opportunity to start a new visit. A visit ends either through the passage of time or a campaign change, with a campaign generally meaning arrival via search engine, referring site, or campaign-tagged information. A visit ends through passage of time either after 30 minutes of inactivity or at midnight Pacific Time. A visit ends through a campaign change if a visitor arrives via one campaign or source, leaves the site, and then returns via another campaign or source. Desktop visits do not include interactions on our tablet applications.
Mobile Visits. We define a mobile visit as an interaction or group of interactions that takes place on one of our mobile websites from smartphones and other mobile devices within a given time frame as measured by Google Analytics, a product that provides digital marketing intelligence. A single visit can contain multiple page views, events, social interactions, custom variables, and e-commerce transactions. A single visitor can open multiple visits. Visits can occur on the same day, or over several days, weeks, or months. As soon as one visit ends, there is then an opportunity to start a new visit. A visit ends either through the passage of time or a campaign change, with a campaign generally meaning arrival via search engine, referring site, or campaign-tagged information. A visit ends through passage of time either after 30 minutes of inactivity or at midnight Pacific Time. A visit ends through a campaign change if a visitor arrives via one campaign or source, leaves the site, and then returns via another campaign or source. Mobile visits do not include interactions on our mobile applications.

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Visits. We define visits as the total of our desktop visits and mobile visits. We view visits to our websites as a key indicator of our brand awareness among consumers and whether we are providing consumers with useful products and features, thereby increasing their usage of our marketplace. We believe that a higher level of usage may contribute to an increase in our net revenues and exclusive digital offers as paid merchants will have exposure to a larger potential customer base.
Desktop Online Transaction Net Revenues Per Visit. We define desktop online transaction net revenues per visit as desktop online transaction net revenues for the period divided by desktop visits for the period.
Mobile Online Transaction Net Revenues Per Visit. We define mobile online transaction net revenues per visit as mobile online transaction net revenues for the period divided by mobile visits for the period.
Online Transaction Net Revenues Per Visit. We define online transaction net revenues per visit as online transaction net revenues for the period divided by visits for the period.
Mobile Unique Visitors. This amount represents the average number of monthly mobile unique visitors for the three month periods ended March 31, 2017 and 2016. We define each of the following as a mobile unique visitor: (i) the first time a specific mobile device accesses one of our mobile applications during a calendar month, and (ii) the first time a specific mobile device accesses one of our mobile websites using a specific web browser during a calendar month. If a mobile device accesses more than one of our mobile websites or mobile applications in a single calendar month, the first access to each such mobile website or mobile application is counted as a mobile unique visitor, as they are tracked separately for each mobile domain. We measure mobile unique visitors with a combination of internal data sources and Google Analytics data.
We view mobile unique visitors as a key indicator of the size of our mobile audience as well as our brand awareness among consumers and usage of our mobile solutions, which we expect to be important as users increasingly rely on their mobile devices.
Discussion Regarding Non-GAAP Financial Measures
To provide investors with additional information regarding our financial results, we have disclosed in the tables above and elsewhere in this Quarterly Report on Form 10-Q adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our operating performance for the following reasons:
 
our management uses adjusted EBITDA in conjunction with GAAP financial measures as part of our assessment of our business and in communications with our board of directors concerning our financial performance;
our management and board of directors use adjusted EBITDA in establishing budgets, operational goals and as an element in determining executive compensation;
adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations that could otherwise be masked by the effect of the expenses that we exclude in this non-GAAP financial measure and facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results;
securities analysts use a measure similar to our adjusted EBITDA as a supplemental measure to evaluate the overall operating performance and comparison of companies, and we include adjusted EBITDA in our investor and analyst presentations; and
adjusted EBITDA excludes non-cash charges, such as depreciation, amortization and stock-based compensation, because such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations and can vary significantly between periods.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
 
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
adjusted EBITDA excludes stock-based compensation expense which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and is an important part of our employees’ compensation;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

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adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.
The following table presents a reconciliation of adjusted EBITDA to net income (loss) for each of the periods indicated: 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Reconciliation of Adjusted EBITDA:
 
 
 
 
Net loss
 
$
(3,782
)
 
$
(36
)
Depreciation and amortization
 
5,000

 
3,950

Stock-based compensation expense
 
6,243

 
6,582

Third party acquisition-related costs
 
771

 
424

Other operating expenses
 
2,090

 
832

Interest expense, net
 
580

 
600

Other income, net
 
(88
)
 
(122
)
Provision for income taxes
 
270

 
59

Adjusted EBITDA
 
$
11,084

 
$
12,289

The following tables present depreciation expense and stock-based compensation expense as included in the various lines of our consolidated statements of operations:
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Depreciation Expense:
 
 
 
 
Cost of net revenues
 
$
18

 
$
137

Product development
 
1,419

 
1,214

Sales and marketing
 
21

 
341

General and administrative
 
1,070

 
304

Total depreciation expense
 
$
2,528

 
$
1,996

 
 
 
 
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Stock-Based Compensation Expense:
 
 
 
 
Cost of net revenues
 
$
405

 
$
495

Product development
 
2,420

 
2,096

Sales and marketing
 
1,259

 
1,477

General and administrative
 
2,159

 
2,514

Total stock-based compensation expense
 
$
6,243

 
$
6,582


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Key Components of Our Results of Operations
Net Revenues
The substantial majority of our net revenues from our Core segment, which constitute the majority of our consolidated net revenues, consists of commissions we receive from paid merchants, either directly or through performance marketing networks. In general, we earn commissions from a paid merchant when a consumer makes a purchase online from that paid merchant after clicking on a digital offer for that paid merchant on one of our websites or mobile applications. We also earn revenues from our in-store product, which include commissions earned from a paid merchant when a consumer presents a digital offer to the paid merchant in-store and the digital offer is scanned or a unique digital offer code is entered by the paid merchant at the point of sale, and amounts paid to us by paid merchants for displaying digital offers that may be redeemed in-store on our websites or mobile applications.
We provide performance marketing solutions under contracts with paid merchants, which generally provide for commission payments to be facilitated by performance marketing networks. Commission rates are typically negotiated with individual paid merchants. Our commission rates vary based on a variety of factors, including the paid merchant, the level of exposure to consumers in our marketplace, the quality and volume of sales realized from consumers using digital offers in our marketplace and the category of products purchased using digital offers. We recognize commission revenues when we receive confirmation that a consumer has completed a purchase transaction with a paid merchant, as reported to us through a performance marketing network, or in some cases, by the paid merchant directly. When a digital offer applies only to specific items, the discount to the consumer will be applied only to those specific items, but our commission is generally based on the aggregate purchase price of all items purchased at that time by the consumer.
Commission revenues are reported net of a reserve for estimated returns. We estimate returns based on our actual historical returns experience; these returns have not been significant. We expect that the majority of our net revenues in the future will continue to be derived from commissions.
We also earn advertising revenues from advertising in our marketplace. Rates for advertising are typically negotiated with individual paid merchants. Payments for advertising may be made directly by these paid merchants or through performance marketing networks.
Net revenues from our Gift Card segment are generated through the sale of discounted gift cards to consumers and businesses online, net of returns.
Costs and Expenses
We classify our costs and expenses into six categories: cost of net revenues, product development, sales and marketing, general and administrative, amortization of purchased intangible assets and other operating expenses. We allocate our personnel, facilities and general information technology, or IT, costs, which include IT and facilities-related personnel costs, rent, depreciation and other general costs, to all of the above categories of operating expenses, other than amortization of purchased intangibles and other operating expenses.
We expect personnel costs will be higher in 2017 compared to 2016 as a result of our plan to increase personnel in 2017 as we continue to invest in our business. Personnel costs for employees include salaries and amounts earned under variable compensation plans, payroll taxes, benefits, stock-based compensation expense, costs associated with recruiting new employees, travel costs and other employee-related costs.
Cost of Net Revenues
Our cost of net revenues consists of direct and indirect costs incurred to generate net revenues. For our Gift Card segment, these costs consist primarily of the costs to acquire gift cards. For our Core segment, these costs consist primarily of the personnel costs of our site operations and website technical support employees; fees paid to third-party contractors engaged in the operation and maintenance of our websites and mobile applications; depreciation; and website hosting and Internet service costs. We expect our cost of net revenues to increase significantly in 2017 primarily due to the costs to acquire gift cards following our purchase of GiftcardZen Inc.
Product Development
Our product development expense consists primarily of personnel costs of our product management and software engineering teams, as well as fees paid to third-party contractors and consultants engaged in the design, development, testing and improvement of the functionality and user experience of our websites and mobile applications. We intend to continue to invest to develop new features and products for our websites and mobile applications. We expect these additional investments to cause our product development expense to increase in 2017.

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Sales and Marketing
Our sales and marketing expense consists primarily of personnel costs of our sales, marketing, SEO and business analytics employees, as well as online and other advertising expenditures, branding programs and other marketing expenses. Our advertising, branding programs and other marketing costs include paid search advertising fees, online display advertising, including social networking sites, television advertising, creative development fees, public relations, email campaigns, trade show costs, sweepstakes and promotions and other general marketing costs. We intend to focus our sales and marketing efforts in 2017 on driving consumer traffic to our websites, encouraging downloads of our mobile applications, strengthening our relationships with paid merchants and increasing the overall awareness of our brand. We expect our sales and marketing expense to decrease in 2017.
General and Administrative
Our general and administrative expense consists primarily of the personnel costs of our general corporate functions, including executive, finance, accounting, legal and human resources. Other costs included in general and administrative include professional fees for legal, audit and other consulting services, travel and entertainment, charitable contributions, provision for doubtful accounts receivable and other general corporate overhead expenses. We expect our general and administrative expense to remain relatively flat in 2017, but expect increased costs associated with our entry into the Merger Agreement with HCH and Purchaser and the transactions contemplated by the Merger Agreement.
Amortization of Purchased Intangibles
We have recorded identifiable intangible assets in conjunction with our various acquisitions, and are amortizing those assets over their estimated useful lives. We perform impairment testing of goodwill annually on October 1 of each year and, in the case of intangibles with definite lives, whenever events or circumstances indicate that impairment may have occurred. We expect our amortization expense to decrease in 2017. However, changes in our amortization expenses will depend upon the level of our future acquisition activity.
Other Operating Expenses
Other operating expenses for the three months ended March 31, 2017 consist primarily of amortization expense related to deferred compensation arrangements with employees of GiftcardZen Inc. We acquired GiftcardZen Inc on April 5, 2016 and entered into arrangements with a total value of up to $12.0 million, paid to a key employee and certain other employees at dates between 10 and 24 months following the acquisition, contingent upon the achievement of specific performance targets and those employees' continued employment with us. We paid $4.0 million to employees related to these arrangements during the three months ended March 31, 2017. As of March 31, 2017, we expect that the remaining value of the arrangements will be approximately $5.0 million.
During the first quarter of 2017 and 2016, we noted circumstances that indicated the carrying amount of internally developed software and website development costs related to certain projects might not be recoverable. As a result, we performed a review for impairment of the costs associated with these projects, and have recognized $0.9 million and $0.8 million of impairment expense within other operating expenses in our consolidated statement of operations during the three months ended March 31, 2017 and 2016, respectively.
We expect other operating expenses to decrease in 2017 as a result of the completion during the first quarter of 2017 of certain of our deferred compensation arrangements with the employees of GiftcardZen Inc.
Other Income (Expense)
Amounts included in other income (expense) include interest income earned on our available cash and cash equivalents, interest expense incurred in connection with our long term debt and the amortization of deferred financing costs. We also include in other income (expense), net foreign currency exchange gains and losses, as well as gains and losses related to our foreign exchange derivative instruments. Changes in these amounts will depend to some extent upon the level of our future borrowing activity and movements in foreign currency.
Income Tax Expense
Our provision for income taxes for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, which are taken into account in the relevant period. We update our estimate of the annual effective tax rate each quarter, and make a cumulative adjustment if our estimated tax rate changes.
Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn in those jurisdictions, tax credits, state taxes and non-deductible expenses, such as deferred compensation, acquisition costs and stock-based compensation that will not generate tax benefits. Our mix of foreign versus

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U.S. income, our ability to generate tax credits and our incurrence of any non-deductible expenses will likely cause our effective tax rate to fluctuate in the future. Our effective tax rate is also affected by discrete items that may occur in any given period, but are not consistent from period to period. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.


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Results of Operations
The following table presents our historical operating results for the periods indicated. The period-to-period comparisons of financial results are not necessarily indicative of future results.
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
Net revenues
 
$
69,614

 
$
54,649

Cost of net revenues
 
22,320

 
5,200

Gross profit
 
47,294

 
49,449

Operating expenses:
 
 
 
 
Product development
 
13,957

 
12,611

Sales and marketing
 
20,390

 
23,325

General and administrative
 
11,405

 
10,226

Amortization of purchased intangible assets
 
2,472

 
1,954

Other operating expenses
 
2,090

 
832

Total operating expenses
 
50,314

 
48,948

Income (loss) from operations
 
(3,020
)
 
501

Other income (expense):
 
 
 
 
Interest expense, net
 
(580
)
 
(600
)
Other income, net
 
88

 
122

Income (loss) before income taxes
 
(3,512
)
 
23

Provision for income taxes
 
(270
)
 
(59
)
Net loss
 
$
(3,782
)
 
$
(36
)
 
 
 
 
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
Consolidated Statements of Operations Data as Percentage of Net Revenues:
 
 
 
 
Net revenues
 
100.0
 %
 
100.0
 %
Cost of net revenues
 
32.1

 
9.5

Gross profit
 
67.9

 
90.5

Operating expenses:
 
 
 
 
Product development
 
20.0

 
23.1

Sales and marketing
 
29.3

 
42.7

General and administrative
 
16.4

 
18.7

Amortization of purchased intangible assets
 
3.6

 
3.6

Other operating expenses
 
2.9

 
1.5

Total operating expenses
 
72.2

 
89.6

Income (loss) from operations
 
(4.3
)
 
0.9

Other income (expense):
 
 
 
 
Interest expense, net
 
(0.8
)
 
(1.1
)
Other income, net
 
0.1

 
0.2

Income (loss) before income taxes
 
(5.0
)
 

Provision for income taxes
 
(0.4
)
 
(0.1
)
Net loss
 
(5.4
)%
 
(0.1
)%

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Net Revenues
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Net Revenues by Source:
 
 
 
 
Desktop online transaction
 
$
32,053

 
$
38,194

Mobile online transaction
 
7,260

 
5,937

Total online transaction
 
39,313

 
44,131

Advertising and in-store
 
12,437

 
10,518

Gift card
 
17,864

 

Total net revenues
 
$
69,614

 
$
54,649

Percentage of Net Revenues by Source:
 
 
 
 
Desktop online transaction
 
46.0
%
 
69.9
%
Mobile online transaction
 
10.5

 
10.9

Total online transaction
 
56.5

 
80.8

Advertising and in-store
 
17.8

 
19.2

Gift card
 
25.7

 

Total percentage of net revenues
 
100.0
%
 
100.0
%
Net Revenues by Geography:
 
 
 
 
U.S.
 
$
59,232

 
$
42,484

International
 
10,382

 
12,165

Total net revenues
 
$
69,614

 
$
54,649

Percentage of Net Revenues by Geography:
 
 
 
 
U.S.
 
85.1
%
 
77.7
%
International
 
14.9

 
22.3

Total percentage of net revenues
 
100.0
%
 
100.0
%
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. Net revenues increased by $15.0 million, or 27.4%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.
The overall increase in net revenues was driven by $17.9 million of gift card net revenues. In addition, our advertising and in-store net revenues grew by $1.9 million, or 18.2%, and our mobile online transaction net revenues grew by $1.3 million, or 22.3%. The growth in our advertising and in-store net revenues was primarily due to the efforts of our direct sales force as well as improvements to the usability and functionality enhancements of our in-store product. The growth in our mobile online transaction net revenues was primarily driven by improved monetization resulting from an increase in the percentage of visits that resulted in a paid transaction, in addition to a 7.4% increase in visits to our mobile websites. In total, these increases were partially offset by a $6.1 million, or 16.1%, decrease in desktop online transaction net revenues. The decrease in our desktop online transaction net revenues was primarily caused by a 16.9% decrease in the total volume of visits to our desktop websites and deterioration in the average commission rate paid to us, which was partially offset by improved monetization driven by an increase in the percentage of visits that resulted in a paid transaction.







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Cost of Net Revenues
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Cost of net revenues
 
$
22,320

 
$
5,200

Percentage of net revenues
 
32.1
%
 
9.5
%
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. For the three months ended March 31, 2017, cost of net revenues increased by $17.1 million, or 329.2%, compared to the three months ended March 31, 2016. This increase was primarily attributable to $17.3 million of cost of net revenues related to our Gift Card segment, which was introduced subsequent to the prior year comparable period. The increase was partially offset by a $0.3 million decrease in personnel costs.
Product Development
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Product development
 
$
13,957

 
$
12,611

Percentage of net revenues
 
20.0
%
 
23.1
%
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. For the three months ended March 31, 2017, product development expense increased by $1.3 million, or 10.7%, compared to the three months ended March 31, 2016. This increase was primarily due to a $1.5 million increase in personnel costs related to our Gift Card segment.
Sales and Marketing
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Sales and marketing
 
$
20,390

 
$
23,325

Percentage of net revenues
 
29.3
%
 
42.7
%
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. For the three months ended March 31, 2017, sales and marketing expense decreased by $2.9 million, or 12.6%, compared to the three months ended March 31, 2016. This decrease was primarily attributable to a $2.7 million decrease in online, brand and other marketing expenses.
General and Administrative
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
General and administrative
 
$
11,405

 
$
10,226

Percentage of net revenues
 
16.4
%
 
18.7
%
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. For the three months ended March 31, 2017, general and administrative expense increased by $1.2 million, or 11.5%, compared to the three months ended March 31, 2016. This increase was primarily attributable to a $0.8 million increase in professional services expenses, primarily related to the Merger and a $0.6 million increase in our provision for doubtful accounts.

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Amortization of Purchased Intangible Assets
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Amortization of purchased intangible assets
 
$
2,472

 
$
1,954

Percentage of net revenues
 
3.6
%
 
3.6
%
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. For the three months ended March 31, 2017, amortization of purchased intangible assets increased by $0.5 million, or 26.5%, compared to the three months ended March 31, 2016. The increase in amortization expense was primarily due to amortization expense related to intangible assets we have recorded in the current quarter in conjunction with our acquisition of GiftcardZen Inc.
Other Operating Expenses
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Impairment of assets
 
$
900

 
$
834

Deferred compensation
 
1,165

 

Asset disposal loss (gain)
 
25

 
(2
)
Total other operating expenses
 
$
2,090

 
$
832

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. During the three months ended March 31, 2017, we recognized $1.2 million in deferred compensation expense related to our April 5, 2016 acquisition of GiftcardZen Inc.
During the first three months ended March 31, 2017 and 2016, we noted circumstances that indicated the carrying amount of internally developed software and website development costs related to certain projects might not be recoverable. As a result, we performed a review for impairment of the costs associated with these projects, and recognized $0.9 million and $0.8 million, respectively, of impairment expense.
Other Income (Expense)
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Interest expense, net
 
$
(580
)
 
$
(600
)
Other income, net
 
88

 
122

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. Interest expense, net remained relatively flat for three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The impact of an increase in the average interest rate on our senior debt facility was offset by a decrease in our average outstanding debt over the comparable periods. Other income, net remained relatively flat for the comparable periods as well, due to a minimal change in our net foreign currency exchange gain.





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Income Taxes
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Provision for income taxes
 
$
(270
)
 
$
(59
)
Percentage of net revenues
 
(0.4
)%
 
(0.1
)%
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. For interim periods, we determine the provision for income taxes by applying an estimate of the annual effective tax rate for the full fiscal year to pre-tax income or loss for the interim reporting period, with adjustments for discrete items. For the three months ended March 31, 2017 we recorded income tax expense of $0.3 million, including $1.5 million of discrete tax expense to record the tax effects of the settlement of share-based payment awards, on a pre-tax loss of $3.5 million, resulting in an effective tax rate of (7.7)%. For the three months ended March 31, 2016, we recorded income tax expense of $59 thousand on pre-tax income of $23 thousand, resulting in an effective tax rate of 255.0%.
Our effective tax rates for the current and prior year quarter-to-date periods were subject to significant variation due to several factors, including variability in our pre-tax income (loss) throughout the year, the mix of jurisdictions to which they relate, changes in tax laws and regulations and the impact of non-deductible expenses and discrete items.
As of March 31, 2017, our forecasted annual effective tax rate estimate for the year ended December 31, 2017 differed from the statutory rate primarily due to non-deductible stock-based compensation charges, non-deductible deferred compensation expenses and state taxes, which are partially offset by the benefit from U.S. federal research and development tax credits. As of March 31, 2016, our forecasted annual effective tax rate estimate for the year ended December 31, 2016 differed from the statutory rate primarily due to non-deductible stock-based compensation charges and state taxes, which are partially offset by the benefit from U.S. federal research and development tax credits.
Segment Results
Our two reportable segments are Core and Gift Card. We added Gift Card as a reportable segment during the second quarter of 2016 to align with a change in how our CODM evaluates business performance, concurrent with our April 5, 2016 purchase of GiftcardZen Inc, a secondary marketplace for gift cards. Our Gift Card segment consists of our marketplace for gift cards, and our Core segment consists of all other products and services that are related to our marketplace for digital offers.
Our CODM allocates resources and assesses performance of the business at the reportable segment level based primarily on net revenues and segment operating income (loss) for both segments and gross profit for the Gift Card segment. Segment operating income (loss) includes internally allocated costs of our information technology function. We do not allocate stock-based compensation expense, depreciation and amortization, third-party acquisition-related costs or other operating expenses to our segments. Our performance evaluation does not include segment assets.
For detailed financial information regarding our reportable operating segments, including a reconciliation of segment results to our consolidated results, see Note 10 “Segment Reporting” to the condensed consolidated financial statements included in this Quarterly Report.











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The following tables present information by reportable operating segment for the three month periods ended March 31, 2017 and 2016:
Core Segment
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Net revenues
 
$
51,750

 
$
54,649

Cost of net revenues
 
4,551

 
4,568

Gross profit
 
47,199

 
50,081

Operating expenses
 
34,598

 
37,792

Segment operating income
 
$
12,601

 
$
12,289

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016. Net revenues from the Core segment decreased by $2.9 million, or 5.3%, for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The decrease was due primarily to a $6.1 million, or 16.1%, decrease in desktop online transaction net revenues. The decrease in our desktop online transaction net revenues was primarily caused by a 16.9% decrease in the total volume of visits to our desktop websites and deterioration in the average commission rate paid to us, which was partially offset by improved monetization driven by an increase in the percentage of visits that resulted in a paid transaction. This decrease was partially offset by a $1.9 million, or 18.2%, increase in our advertising and in-store net revenues and a $1.3 million, or 22.3%, increase in mobile online transaction net revenues. The growth in our advertising and in-store net revenues was primarily due to the efforts of our direct sales force as well as improvements to the usability and functionality enhancements of our in-store product. The growth in our mobile online transaction net revenues was primarily driven by improved monetization resulting from an increase in the percentage of visits that resulted in a paid transaction, in addition to a 7.4% increase in visits to our mobile websites.
Income from operations for the Core segment increased by $0.3 million, or 2.5%, for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The increase was due primarily to $3.2 million, or 8.5%, decrease in operating expenses, partially offset by the $2.9 million decrease in net revenues discussed above.
Gift Card Segment
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(dollars in thousands)
Net revenues
 
$
17,864

 
$

Cost of net revenues
 
17,346

 

Gross profit
 
518

 

Operating expenses
 
2,035

 

Segment operating loss
 
$
(1,517
)
 
$

We created our Gift Card segment during the second quarter of 2016, concurrent with our April 5, 2016 purchase of GiftcardZen Inc, a secondary marketplace for gift cards. As such, a comparison to prior year comparable periods is not available for the Gift Card segment.
Seasonality and Quarterly Results
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, including seasonal factors and economic cycles that influence consumer purchasing of retail products. Historically, we have experienced the highest levels of visitors to our websites and mobile applications and net revenues in the fourth quarter of the year, which coincides with the winter holiday season in the U.S. and Europe. During the fourth quarter of 2016, we generated net revenues of $96.9 million, which represented 34.5% of our net revenues for 2016. Further, net revenues from our advertising and in-store

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products are more heavily weighted to the fourth quarter of the year. As net revenues from this part of our business grow as a percentage of net revenues of our Core segment, for example to 24.0% from 19.2% of such net revenues for the three months ended March 31, 2017 and 2016, respectively, our seasonality may increase. We do not yet have sufficient operating history with respect to our Gift Card segment to forecast its seasonality.
Our investments have led to uneven quarterly operating results due to increases in personnel costs, brand marketing, product and technology enhancements and the impact of strategic projects. The return on these investments is generally achieved in future periods and, as a result, these investments can adversely impact near term results.
Our business is directly affected by the behavior of consumers. Economic conditions and competitive pressures can impact, both positively and negatively, the types of digital offers featured on our websites and mobile applications and the rates at which consumers utilize them. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.
Liquidity and Capital Resources
Since our inception, we have funded our operations and acquisitions primarily through private placements of our preferred stock, the issuance of equity securities through our initial public offering and follow-on public offering, bank borrowings and cash flows from operations. We generated positive cash flows from operations for the three months ended March 31, 2017 and 2016. As of March 31, 2017, we had $224.9 million in cash and cash equivalents, compared to $216.9 million at December 31, 2016. At March 31, 2017, certain of our foreign subsidiaries held approximately $17.6 million of our cash and cash equivalents. If these assets were distributed to the U.S., we might be subject to additional U.S. taxes in certain circumstances, subject to an adjustment for foreign tax credits, and foreign withholding taxes. We have not provided for these taxes because we consider these assets to be permanently reinvested in our foreign subsidiaries. We have no plans or intentions to repatriate cumulative earnings of our foreign subsidiaries through March 31, 2017.
The following table summarizes our cash flows for the periods indicated:
 
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
(in thousands)
Net cash provided by operating activities
 
$
16,870

 
$
26,370

Net cash used in investing activities
 
(3,495
)
 
(2,195
)
Net cash used in financing activities
 
(5,446
)
 
(27,321
)
Effect of foreign currency exchange rate on cash
 
146

 
286

Change in cash and cash equivalents
 
8,075

 
(2,860
)
Cash and cash equivalents, beginning of period
 
216,858

 
259,769

Cash and cash equivalents, end of period
 
$
224,933

 
$
256,909

Net Cash Provided by Operating Activities
Cash provided by operating activities primarily consists of our net loss adjusted for certain non-cash items and the effect of changes in operating assets and liabilities. Net cash provided by operating activities was $16.9 million and $26.4 million during the three months ended March 31, 2017 and 2016, respectively.
During the three months ended March 31, 2017, cash flows from operating activities were primarily generated through adjustments to our net loss of $3.8 million, including the impact of depreciation and amortization expense of $5.0 million, stock-based compensation expense of $6.2 million, amortization of deferred compensation of $1.2 million, asset impairment expense of $0.9 million, deferred income tax expense of $0.7 million and $5.8 million from changes in cash flows associated with operating assets and liabilities. The changes in cash flows associated with operating assets and liabilities were primarily driven by a decrease in accounts receivable of $19.6 million due to a seasonal decrease in net revenues following the fourth quarter, which was partially offset by other changes in operating assets and liabilities of $13.8 million.
During the three months ended March 31, 2016, cash flows from operating activities were primarily generated through adjustments to our net loss of $0.0 million, including the impact of depreciation and amortization expense of $4.0 million, stock-based compensation expense of $6.6 million, asset impairment expense of $0.8 million and $14.1 million from changes in cash flows associated with operating assets and liabilities. The changes in cash flows associated with operating assets and liabilities were primarily driven by a decrease in accounts receivable of $23.6 million due to a seasonal decrease in

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net revenues following the fourth quarter, which was partially offset by other changes in operating assets and liabilities of $9.5 million.
Net Cash Used in Investing Activities
Our primary investing activities for the periods presented consisted of a business acquisition and purchases of property and equipment and other assets. Net cash used in investing activities was $3.5 million and $2.2 million during the three months ended March 31, 2017 and 2016, respectively. Our investing activities during these periods were primarily comprised of purchase of computer equipment and software, office furniture and fixtures, leasehold improvements, certain capitalized internally developed software and website development costs and domain names. As we expand our business, we intend to purchase additional technology resources and invest in our operating facilities.
Net Cash Provided by Financing Activities
Our primary financing activities for the periods presented consisted of the repurchase of our Series 1 common stock, repayments of our senior debt and share based payment activity. Net cash used in financing activities was $5.4 million and $27.3 million in the three months ended March 31, 2017 and 2016, respectively.
During the three months ended March 31, 2017, we used $2.5 million to repay a portion of our senior debt, $2.0 million to pay taxes related to net share settlement of equity awards and $0.9 million to repurchase our Series 1 common stock.
During the three months ended March 31, 2016, we used $23.8 million to repurchase our Series 1 common stock, $2.5 million to repay a portion of our senior debt and $1.1 million to pay taxes related to net share settlement of equity awards.
Capital Resources
We believe that our existing cash and cash equivalents and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. As of March 31, 2017, we had $60.0 million in long term debt outstanding, $10.0 million of which is classified as current maturities, and $77.1 million available for borrowing under our revolving credit facility.
In February 2015, our board of directors authorized a two-year share repurchase program. Under the program, we were initially authorized to repurchase shares of Series 1 common stock for an aggregate purchase price not to exceed $100 million. In February 2016, our board of directors authorized an additional $50 million under the repurchase program, bringing the total amount of the program up to $150 million. In February 2017, our board approved an extension of the share repurchase program for another year. The repurchase program is now authorized through February 2018. During the three months ended March 31, 2017, we repurchased 32,465 shares of Series 1 common stock at an aggregate purchase price of $0.3 million. Since the plan's inception, we have repurchased 8,483,476 shares of Series 1 common stock at an aggregate purchase price of $89.9 million.
On April 10, 2017, we entered into the Merger Agreement with HCH, pursuant to which HCH has agreed to acquire all issued and outstanding shares of our Series 1 common stock at a purchase price of $11.60 per share through a tender offer and second step merger process. We have agreed to various customary covenants and agreements including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. In addition, without the consent of HCH, we may not take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including acquiring businesses or incurring capital expenditures above specified thresholds, issuing additional debt facilities and repurchasing outstanding RetailMeNot stock, subject to certain limited exceptions. We do not believe these restrictions will prevent us from meeting our long term debt obligations, ongoing costs of operations or capital expenditure requirements for the next 12 months.
The Merger Agreement contains certain termination rights for RetailMeNot and HCH. Upon termination of the Merger Agreement under specified circumstances, such as RetailMeNot accepting a superior proposal, we may be required to pay HCH a termination fee of $18.0 million. Additionally, if the tender offer process is not consummated due to HCH not having received its committed financing, provided the other conditions to the tender offer are satisfied, HCH may be required to pay us a termination fee of between $25.0 million and $35.0 million, depending upon the date of termination.
Our future capital requirements will depend on many factors, including our rate of net revenues growth, the expansion of our marketing and sales initiatives, the timing and extent of spending to support product development efforts, the timing of introductions of new products and services and enhancements to existing products and services, potential acquisitions, repurchases of our common stock and the continuing market acceptance of our products and services. We may need to raise additional capital through future debt or equity financing to the extent necessary to fund such activities. Additional financing may not be available at all or on terms favorable to us. We may enter into arrangements in the future with respect to investments in, or acquisitions of, similar or complementary businesses, products, services or technologies, which could also require us to seek additional debt or equity financing.

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Contractual Obligations
There were no material changes to our commitments under contractual obligations as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
Off-Balance Sheet Arrangements
For the three months ended March 31, 2017, we did not, and we do not currently, have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires estimates, judgments and assumptions that affect the reported amounts and classifications of assets and liabilities, net revenues and expenses and the related disclosures of contingent liabilities in our consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the following critical accounting policies and estimates:
business combinations and the recoverability of goodwill and long-lived intangible assets;
revenue recognition;
stock-based compensation; and
income taxes
We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. See Note 2 “Summary of Significant Accounting Policies” to the condensed consolidated financial statements included in this Quarterly Report. Of those policies, we believe that the accounting policies enumerated above involve the greatest degree of complexity and exercise of judgment by our management. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2016 for a detailed description of our critical accounting policies that involve significant management judgment.
We evaluate our estimates, judgments and assumptions on an ongoing basis, and while we believe that our estimates, judgments and assumptions are reasonable, they are based upon information available at the time. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have both U.S. and international operations, and we are exposed to market risks in the ordinary course of our business, including the effect of foreign currency fluctuations, interest rate changes and inflation. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.
Foreign Currency Exchange Risk
We transact business in various currencies other than the U.S. dollar, principally the British pound sterling and the Euro, which exposes us to foreign currency risk. Net revenues and related expenses generated from our international operations are denominated in the functional currencies of the corresponding country. The functional currency of each of our non-U.S. subsidiaries that either operate or support these markets is generally the same as the corresponding local currency. For the three months ended March 31, 2017 and 2016, approximately 14.9% and 22.3%, respectively, of our net revenues were denominated in such foreign currencies.
We have entered into derivative instruments to hedge certain exposures to foreign currency risk on non-functional currency denominated intercompany loans and the re-measurement of certain assets and liabilities denominated in non-functional currencies in our foreign subsidiaries, but did not enter into any derivative financial instruments for trading or speculative purposes. Although we have experienced and will continue to experience fluctuations in our net income (loss) as a result of the consolidation of our international operations due to transaction gains (losses) related to revaluing certain cash balances and trade accounts receivable that are denominated in currencies other than the U.S. dollar, we believe such a change will not have a material impact on our results of operations.
We assess our market risk based on changes in foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in currency rates. We use a current market pricing model to assess the changes in the value of the U.S. dollar on foreign currency denominated monetary assets and liabilities.

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The primary assumption used in these models is a hypothetical 10% weakening or strengthening of the U.S. dollar against all of our currency exposures as of March 31, 2017, assuming instantaneous and parallel shifts in exchange rates. As of March 31, 2017, our working capital surplus (defined as current assets less current liabilities) subject to foreign currency translation risk was $22.8 million. The potential decrease in net current assets from a hypothetical 10.0% adverse change in quoted foreign currency exchange rates would be $2.3 million. This compares to a working capital surplus subject to foreign currency translation risk of $25.4 million as of December 31, 2016, for which a hypothetical 10% adverse change would have resulted in a potential decrease in net current assets of $2.5 million.
Interest Rate Risk
As of March 31, 2017, we had total notes payable of $60.0 million, consisting of variable interest rate debt based on 3-month LIBOR. Our variable interest rate debt is subject to interest rate risk, because our interest payments will fluctuate with movements in the underlying 3-month LIBOR rate. A 100 basis point change in LIBOR rates would result in an increase in our interest expense of $0.6 million for the next 12 months based on current outstanding borrowings.
Our exposure to market risk on our cash and cash equivalents for changes in interest rates is limited because nearly all of our cash and cash equivalents have a short-term maturity and are used primarily for working capital purposes.
Impact of Inflation
We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material effect on our business, financial condition or results of operations in the three months ended March 31, 2017.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2017, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three month period covered by this Quarterly Report on Form 10-Q, which were identified in connection with management’s evaluation required by Rules 13a-15(d) and 15d-15(d) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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Part II
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising in the ordinary course of business, including those related to claims of infringement of third party patents and other intellectual property. Management believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material impact on our consolidated financial position, results of operations or cash flows.
On April 26, 2017, Louis Scarantino, alleging himself to be a stockholder of the Company, filed a purported stockholder class action complaint against the Company and others in connection with the Merger Agreement and the transactions contemplated thereby.  For additional information regarding the complaint, see Note 11 “Subsequent Events” to the condensed consolidated financial statements included in this Quarterly Report.
Item 1A. Risk Factors
Our business, prospects, financial condition or operating results could be materially adversely affected by any of the risks and uncertainties described below, as well as other risks not currently known to us or that are currently considered immaterial. The trading price of our Series 1 common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes.
Risks Related to Our Business
The announcement and pendency of our agreement to be acquired by Harland Clarke Holdings Corp. could have an adverse effect on our business.
On April 10, 2017, we entered into the Merger Agreement with HCH and R Acquisition Sub, Inc., or the Purchaser. In accordance with the Merger Agreement, the Purchaser will acquire all issued and outstanding shares of Series 1 common stock at a purchase price of $11.60 per share pursuant to a tender offer and second step merger process. The Merger Agreement provides that, under the terms and subject to the conditions set forth in the Merger Agreement, the Purchaser will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of HCH. As a result of the Merger, the Company will become a privately held company.
Uncertainty about the effect of the Merger on our employees, paid merchants and consumers may have an adverse effect on our business and operations that may be material to us. Our employees may experience uncertainty about their roles following the merger. There can be no assurance we will be able to attract and retain key talent, including senior management, to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business and operations. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the Merger, which could materially adversely affect our business and operations.
Our paid merchants and consumers may experience uncertainty associated with the Merger, including with respect to concerns about possible changes to our marketplace, digital offers or policies, and current or future business relationships with us. Uncertainty may cause consumers to refrain from using our marketplace, and paid merchants may seek to change existing business relationships with us, which could result in an adverse effect on our business, operations and financial position in a way that may be material to us.
The failure to complete the merger with Harland Clarke Holdings could adversely affect our business.
Completion of the Merger with HCH is subject to several conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the tender of a majority of the issued and outstanding shares of our Series 1 common stock by our stockholders, the expiration or termination of applicable waiting periods under antitrust and competition laws, and other regulatory reviews and waiting periods. If the Merger or a similar transaction is not completed, the share price of our common stock will likely drop because the current market price of our common stock reflects, at least in part, an assumption that the Merger will be completed at the announced offer price of $11.60 per share. In addition, under circumstances specified in the Merger Agreement, we may be required to pay a termination fee of $18.0 million in the event the Merger is not consummated. Further, a failure to complete the Merger may result in negative publicity and a negative impression of us in the investment community.

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Any disruption to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our paid merchants and consumers, could continue or accelerate in the event of a failure to complete the Merger. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.
Litigation in connection with the Merger Agreement may be costly, prevent consummation of the Merger, divert management’s attention and otherwise materially harm our business.
Regardless of the outcome of any current or future litigation related to the Merger Agreement and the transactions it contemplates, such litigation may be time-consuming and expensive and may distract our management from running the day-to-day operations of our business. The litigation costs and diversion of management’s attention and resources to address the claims and counterclaims in any litigation related to the Merger Agreement and the transactions it contemplates may materially adversely affect our business, financial condition and/or operating results. Furthermore, if the Merger is not consummated as a result of litigation, the trading price of our Series 1 common stock will likely drop because the current market price of our Series 1 common stock reflects, at least in part, an assumption that the Merger will be completed at the announced offer price of $11.60 per share. If the Merger is not consummated, for any reason, litigation could be filed in connection with the failure to consummate the Merger. Any litigation related to the Merger may result in negative publicity or an unfavorable impression of us, which could negatively impact the trading price of our Series 1 common stock, impair our ability to recruit or retain employees, damage our relationships with merchants, or otherwise materially harm our operations and financial performance.
The Merger Agreement imposes restrictions on the operation of our business prior to closing, which could adversely affect our business.
Pursuant to the terms of the Merger Agreement, we are subject to certain restrictions on the conduct of our business, including the ability in certain cases to enter into contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures, until the merger becomes effective or the Merger Agreement is terminated. These restrictions may prevent us from taking actions with respect to our business that we may consider advantageous and result in our inability to respond effectively to competitive pressures and industry developments, and may otherwise harm our business and operations.
Traffic to certain of our desktop websites has declined year-over-year. If we are unable to continue to attract visitors to our websites from search engines, then consumer traffic to our websites could continue to decrease. That decrease has negatively impacted, and could in the future, negatively impact commissions earned based on purchases generated for our paid merchants through our marketplace, and therefore adversely impact our ability to maintain or grow our online transaction net revenues and profitability.
We generate consumer traffic to our websites using various methods, including search engine marketing, or SEM, search engine optimization, or SEO, email campaigns and social media referrals. Our net revenues and profitability are dependent upon generalized demand for the digital offers we provide and upon our continued ability to use a combination of these methods to generate consumer traffic to our websites in a cost-efficient manner. We have experienced and continue to experience fluctuations in search result rankings for a number of our websites. We have also experienced a year-over-year decline in the number of visits to our desktop websites. There can be no assurances that we will be able to grow or maintain current levels of consumer traffic as a whole or with respect to either our desktop or mobile websites.
Our SEM and SEO techniques have been developed to work with existing search algorithms utilized by the major search engines. However, major search engines frequently modify their search algorithms. Changes in these algorithms can cause our websites to receive less favorable placements, which could reduce the number of users who visit our websites. We may be unable to modify our SEM and SEO strategies in response to any future search algorithm changes made by the major search engines, which could require a change in the strategy we use to generate consumer traffic to our websites. In addition, websites must comply with search engine guidelines and policies. These guidelines and policies are complex and may change at any time. If we fail to follow such guidelines and policies properly, search engines may rank our content lower in search results or could remove our content altogether from their indices. If we fail to understand and comply with these guidelines, our SEO strategy may become unsuccessful.
In some instances, search engines may change their displays or rankings in order to promote their own competing products or services or the products or services of one or more of our competitors. For example, a major search engine currently promotes its product-listing advertisements adjacent to its search results, has increased the number of paid search results on mobile websites for certain keywords reducing visibility of organic search results and made certain other changes, each of which could reduce traffic to our websites. Given the large volume of search-driven traffic to our websites and the

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importance of the placement and display of results of a user’s search, similar actions in the future could have a negative effect on our business and results of operations.

If we are listed less prominently or fail to appear in search result listings for any reason, it is likely that the number of visitors to our websites will decline. Any such decline in consumer traffic to our websites could adversely impact the commission earned based on the number of purchases we generate for our paid merchants, which could in turn adversely affect our online transaction net revenues and our profitability. We continue to see fluctuations in our traffic based on combination of factors, including search engine algorithm changes. We may not be able to replace this traffic with the same volume of visitors or in the same cost-effective manner from other channels, such as direct, SEM, display advertising, e-mail or social media, or at all. An attempt to replace this traffic through other channels may require us to increase our sales and marketing expenditures, which would adversely affect our operating results and which additional net revenues may not offset.
Although consumer traffic to our mobile applications is not reliant on search results, growth in mobile device usage may not decrease our overall reliance on search results if mobile users use our mobile websites rather than our mobile applications. In fact, growth in mobile device usage may exacerbate the risks associated with how and where our websites are displayed in search results because mobile device screens are smaller than desktop computer screens and therefore display fewer search results.
Consumers are increasingly using mobile devices to access our content and if we are unsuccessful in expanding the capabilities of our digital offer solutions for our mobile platforms to allow us to generate net revenues as effectively as our desktop platforms, our online transaction net revenues could decline.
Web usage and the consumption of digital content are increasingly shifting to mobile platforms, typically smartphones and mobile watches. In the three months ended March 31, 2017 and in fiscal 2016, visits to our mobile websites represented approximately 49% and 46%, respectively, of the total visits to our websites, and we expect the percentage of these visits to continue to grow. Industry-wide solutions to monetize digital offer content effectively on these platforms are at an early stage of development. Further, the rate at which we monetize digital offer content on our mobile websites and applications is significantly lower than the corresponding rate on our desktop websites.
The growth of revenues derived from our mobile websites and applications depends in part on retailer deployment of mobile websites and applications that are designed to remove friction from the consumer shopping experience. The growth of this portion of our business also depends in part on our ability to deliver compelling solutions to consumers and merchants both online and for use in-store through these new mobile marketing channels. Our success on mobile platforms will be dependent on our interoperability with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade our functionality or give preferential treatment to competitive services could adversely affect usage of our services through mobile devices.
Further, to deliver high quality mobile offerings, it is important that our solutions integrate with a range of other mobile technologies, systems, networks and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks or standards. For example, some merchants today do not recognize affiliate tracking links on their mobile websites or applications, and affiliate tracking links on mobile websites or applications may not function to allow merchants’ sales to be attributed to us. Further, consumers may click on a digital offer displayed on our mobile websites or in our mobile applications, but execute a purchase using that digital offer on a different platform, such as on the merchant’s desktop website (a circumstance known as cross device switching), which may result in those merchant sales not being attributed to us. As a result, in each such case, we may not receive commission revenues when a consumer executes a purchase on the merchant’s platform after clicking through a digital offer displayed on our mobile websites or in our mobile applications. If merchants fail to recognize affiliate tracking links on their mobile websites or applications, or affiliate tracking links on mobile websites or applications do not function to allow merchants’ sales to be attributed to us and our mobile traffic continues to represent a significant percentage of our consumer traffic, or increases, our business could be harmed and our operating results could be adversely affected.
If we fail to develop mobile applications and mobile websites that effectively address consumer and merchant needs, or if we are not able to implement strategies that allow us to monetize mobile platforms and other emerging platforms, our ability to grow mobile online transaction net revenues and in-store net revenues will be constrained, and our business, financial condition and operating results would be adversely affected.


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If merchants alter the way they attribute credit to publishers in their performance marketing programs, our online transaction net revenues could decline and our operating results would be adversely affected.
Merchants often advertise and market digital offers through performance marketing programs, a type of performance-based marketing in which a merchant rewards one or more publishers such as us for each visitor or customer generated by the publisher’s own marketing efforts. When a consumer executes a purchase on a merchant’s website as a result of a performance marketing program, most performance marketing conversion tracking tools credit the most recent link or ad clicked by the consumer prior to that purchase. This practice is generally known as “last-click attribution.” We generate the substantial majority of our online transaction net revenues through transactions for which we receive last-click attribution. In recent years, some merchants have sought, and in some cases adopted, alternatives to last-click attribution. These alternatives are primarily “first-click attribution,” which credits the first link or ad clicked by a consumer prior to executing a purchase, or “multichannel attribution,” which applies weighted values to each of a merchant’s advertisements and tracks how each of those advertisements contributed to a purchase. If merchants widely adopt first-click attribution, multichannel attribution or otherwise alter the ways they attribute credit for purchases to us, and if we are unable to adapt our business practices to such alterations, our online transaction net revenues could decline and our business, financial condition and operating results could be adversely affected.
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenues, financial results and business may be significantly harmed.
The size of our user base and our users’ level of engagement are important to our success. Our financial performance has and will continue to be significantly determined by our success in adding, retaining, and engaging our users. If consumers do not perceive our products to be useful, we may not be able to attract or retain users or otherwise maintain or increase the frequency of their engagement. We have experienced a year-over-year reduction in our active user base and there is no guarantee that we will not experience further erosion in that user base or of user engagement levels. Any number of factors could potentially negatively affect user retention, growth and engagement, including if:
users increasingly engage with other products or services through which they obtain digital offers;
we fail to introduce new products or services that users find engaging or if we introduce new products or services that are not favorably received;
we are unable to obtain digital offers that consumers find useful, particularly with respect to offers for our in-store solution which is still in its early stages and for which a broad source of supply has not been established;
we are unable to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
merchants fail to deploy mobile websites and applications that reduce friction in the consumer shopping experience;
we are unable to ensure that users are presented with content that is useful and relevant to them;
users perceive that the quality of digital offers available through our marketplace has decreased;
our mobile applications fail to be prominently featured in iOS and Android application stores; or
there are decreases in user sentiment about the quality or usefulness of our products or offers or concerns related to privacy, security or other factors.
If we are unable to maintain or increase our user base and user engagement, our revenues and financial results may be adversely affected. Any decrease in user retention, growth or engagement could render our marketplace less attractive to merchants, which is likely to have a material and adverse impact on our revenues, business, financial condition and results of operations. If our desktop website traffic continues to decline and if our mobile website traffic growth rate continues to slow, or to decline, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and associated monetization in order to maintain our current revenues or drive revenue growth.
If we are unable to retain our existing paid merchants, expand our business with existing paid merchants or attract new paid merchants and consumers, our net revenues could decline.
Our ability to continue to grow our net revenues will depend in large part on expanding our business with existing paid merchants and attracting new paid merchants. The number of our current paid merchants may not expand beyond our existing base and may decline. Even for our largest paid merchants, the amount they pay us is typically only a small fraction of their overall advertising budget. Merchants may view their spend with us as experimental, particularly with respect to our in-store solution and digital rebates, and may either reduce or terminate their spend with us if they determine a superior alternative

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for generating sales. In addition, merchants may determine that distributing digital offers through our platform results in undesirably broad distribution of their digital offers or otherwise does not provide a compelling value proposition. Some merchants have demanded that we remove digital offers relating to their products or services from our marketplace, and we anticipate that some merchants will do so in the future. If we are unable to negotiate favorable terms with current or new paid merchants in the future, including the commission rates they pay us, our operating results will be adversely affected.
The sales process for our in-store solution varies from that of our online business. Specifically, the sales cycle for merchants considering adopting the solution for the first time tends to be longer on a comparative basis than with respect to offers on other portions of our marketplace. That sales process can involve establishing new direct relationships with merchants as they may fund in-store offers from different budgets than those reserved for publishers participating in performance marketing programs with the same merchants. For these and other reasons, it may be comparatively more difficult to expand the number of merchants using the in-store portion of our marketplace.
While we enter into agreements with certain paid merchants that may be performed over a period of one year or longer, paid merchants generally do not enter into long-term obligations with us requiring them to use our solutions. Paid merchants’ contracts with us, with few exceptions, are cancelable upon short or no notice and without penalty. We cannot be sure that our paid merchants will continue to use our solutions or that we will be able to replace merchants that do not renew their campaigns with new ones generating comparable revenues.
If we are unable to attract new consumers and maintain or increase consumer traffic to our websites and use of our mobile applications, new paid merchants may choose not to use, and existing paid merchants may not continue to use, our solutions for their promotional campaigns, and our volume of new digital offer inventory may suffer as the perceived usefulness of our marketplace declines. If our existing paid merchants do not continue to use our solutions for their promotional campaigns, or if we are unable to attract and expand the amount of business we do with new paid merchants, our revenues will decrease and our operating results will be adversely affected.
The market in which we participate is intensely competitive, and we may not be able to compete successfully.
The market for digital offer solutions is highly competitive, fragmented and rapidly changing. Our competition for traffic from consumers seeking to save money on online or in-store purchases includes digital offer websites and mobile applications, cash-back, loyalty and discounted gift card websites and mobile applications, merchants, search engines, social networks, comparison shopping websites, newspapers and direct mail campaigns. Our competition for merchant marketing spend includes digital offer websites and mobile applications, search engines and social networks that compete for online advertising spend and television, magazines and newspapers that compete for offline advertising spend. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our profitability. We also expect competition in e-commerce generally, and digital offer solutions in particular, to continue to increase because there are no significant barriers to entry. A substantial number of digital offer websites and mobile applications, including those that attempt to replicate all or a portion of our business model, have emerged globally. Additional sources of competition include the following:
Other businesses that provide digital offers similar to ours as an add-on to their core business. For example, Groupon, Living Social, Coupons.com and Facebook now provide digital offers, and Google, Facebook and PayPal are now providing digital offers for in-store purchases.
Website, mobile applications and credit card issuers that provide cash-back rebates or offers based on the use of a particular credit card at certain merchants, including eBates.
Various companies that offer discounted gift cards, including Raise, Cardcash and Cardpool.
Traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies that provide coupons and discounts on products and services.
Other websites and mobile applications that serve niche markets and interests.
Our success depends on the breadth, depth, quality and reliability of our digital offer selection, as well as our continued innovation and ability to provide features that make our marketplace useful and appealing to consumers. If we are unable to develop quality features that consumers want to use, then consumers may become dissatisfied with our marketplace and elect to use the offerings of one of our competitors, which could adversely affect our operating results.
Certain of our larger actual or potential competitors may have the resources to significantly change the nature of the digital offer industry to their advantage, which could materially disadvantage us. For example, a major search engine now displays product-listing advertisements above the organic search results returned by its search engine in response to user

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searches and has increased the number of paid search results on mobile websites for certain keywords reducing visibility of organic search results, each of which may reduce the amount of traffic to our websites. Additionally, potential competitors such as PayPal, Facebook, Instagram, Snapchat, and Twitter have widely adopted industry platforms, which they could leverage to distribute digital offers that could be disadvantageous to our competitive position.
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive consumer bases and deeper relationships, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies, develop deeper merchant relationships or offer services at lower prices. Any of these developments would make it more difficult for us to sell our solutions and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expense or the loss of market share.
In the traditional coupon landscape, our primary competitors for advertising spend include publishers of printed coupons. Many of these competitors have significant consumer reach, well-developed merchant relationships, and much larger financial resources and longer operating histories than we have.
We also directly and indirectly compete with merchants for consumer traffic. Many merchants market and provide their own digital offers directly to consumers using their own websites, email newsletter and alerts, mobile applications, social media presence and other distribution channels. Our paid merchants could be more successful than we are at marketing their own digital offers or could decide to terminate their relationship with us because they no longer want to pay us to compete against them.
We may also face competition from companies we do not yet know about. If existing or new companies develop, market or resell competitive digital offer solutions, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.
We are highly dependent on performance marketing networks as intermediaries to operate our Core segment. Factors adversely affecting our relationships with performance marketing networks, or the termination of our relationships with these networks, may adversely affect our ability to attract and retain business and our operating results.
The majority of our net revenues come from commissions earned for promoting digital offers on behalf of paid merchants. Often, the commissions we earn are tracked and paid by performance marketing networks. For 2016, 94.3% of the net revenues from our Core operating segment came from paid merchants that pay us through performance marketing networks, primarily Commission Junction and LinkShare. Performance marketing networks provide merchants with affiliate tracking links for attributing revenues to publishers like us and the ability to distribute digital offer content to multiple publishers. We do not have exclusive relationships with performance marketing networks. They do not enter into long-term commitments with us to allow us to use their solutions, and their contracts with us are cancelable upon short or no notice and without penalty.
Our sales could be adversely impacted by industry changes relating to the use of performance marketing networks. For example, if paid merchants seek to bring the distribution of their digital offer content in-house rather than using a performance marketing network, we would need to develop relationships with more paid merchants directly, which we might not be able to do and which could increase our sales, marketing and product development expenses. Additionally, we face challenges associated with consumers’ increasing use of mobile devices to complete their online purchases. For example, many paid merchants currently do not recognize affiliate tracking links on their mobile websites or applications, and tracking mechanisms on mobile websites or applications may not function to allow paid merchants to properly attribute sales to us. As a result, we may not receive commission revenues when a consumer makes a purchase from their mobile device on a paid merchant’s mobile website after clicking through a digital offer displayed on one of our websites or mobile applications if the paid merchant’s mobile monetization mechanisms are not enabled.
Moreover, as a result of dealing primarily with performance marketing networks, we have less of a direct relationship with paid merchants than would be the case if we dealt directly with paid merchants. The presence of performance marketing networks as intermediaries between us and paid merchants creates a challenge to building our own brand awareness and affinity with paid merchants. Additionally, in the event that our relationship with a performance marketing network were to terminate, our mechanism for receiving payments from the paid merchants we service through that network would terminate, which could materially and adversely impact our net revenues. Additionally, paid merchants may fail to pay the performance

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marketing networks the fees the paid merchants owe, which is a prerequisite to us receiving our commissions from the networks.
Some performance marketing networks that we work with could be considered our competitors because they also offer some components of our solution, including publishing digital offers, on their own properties. If a performance marketing network further develops its own properties with digital offer capabilities or limits our access to its network for the purposes of driving revenue to its own properties, our ability to compete effectively could be significantly compromised and our business and operating results could be adversely affected.

If we are not able to maintain a positive perception of the content available through our marketplace, and maintain and enhance our RetailMeNot brand and the brands associated with each of our other websites and mobile applications, our reputation and business may suffer.
A decrease in the quality of the digital offers available through our marketplace could harm our reputation and damage our ability to attract and retain consumers and paid merchants, which could adversely affect our business. Additionally, maintaining and enhancing our RetailMeNot brand and the brands of each of our other websites and mobile applications is critical to our ability to attract new paid merchants and consumers to our marketplace, generate net revenues and successfully introduce new solutions. We may not be able to successfully build our RetailMeNot brand in the U.S. or the E.U. without losing some or all of the value associated with, or decreasing the effectiveness of, our other brands. We expect that the promotion of all our brands will require us to make substantial investments. As our market has become and continues to become more competitive, these branding initiatives have in the past been, and may in the future, be increasingly difficult and expensive. The successful promotion of our brands will depend largely on our marketing and public relations efforts. If we do not successfully maintain and enhance our brands, we could lose consumer traffic to our marketplace, which co