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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 September 30, 2016
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, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
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: 48,496,686 shares of Series 1 Common Stock, $0.001 par value per share as of October 21, 2016.


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 September 30, 2016
 
As of December 31, 2015
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
235,267

 
$
259,769

Accounts receivable (net of allowance for doubtful accounts of $2,590 and $2,905 at September 30, 2016 and December 31, 2015, respectively)
 
41,169

 
67,504

Inventory, net
 
3,166

 

Prepaids and other current assets, net
 
16,368

 
9,959

Total current assets
 
295,970

 
337,232

Property and equipment, net
 
23,870

 
21,382

Intangible assets, net
 
58,627

 
61,245

Goodwill
 
192,339

 
174,725

Other assets, net
 
6,672

 
8,040

Total assets
 
$
577,478

 
$
602,624

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
6,543

 
$
8,713

Accrued compensation and benefits
 
9,548

 
10,136

Accrued expenses and other current liabilities
 
7,573

 
7,155

Income taxes payable
 
2,515

 
5,109

Current maturities of long term debt
 
10,000

 
10,000

Total current liabilities
 
36,179

 
41,113

Deferred income tax liability
 
2,960

 
1,498

Long term debt
 
53,490

 
60,872

Other noncurrent liabilities
 
9,308

 
7,752

Total liabilities
 
101,937

 
111,235

Commitments and contingencies
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock: $0.001 par value, 10,000,000 shares authorized; zero shares issued and outstanding as of September 30, 2016 and December 31, 2015
 

 

Series 1 common stock: $0.001 par value, 150,000,000 shares authorized; 48,486,470 and 51,091,393 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
 
48

 
51

Series 2 common stock: $0.001 par value, 6,107,494 shares authorized; zero shares issued and outstanding as of September 30, 2016 and December 31, 2015
 

 

Additional paid-in capital
 
480,604

 
495,151

Accumulated other comprehensive loss
 
(5,788
)
 
(4,883
)
Retained earnings
 
677

 
1,070

Total stockholders’ equity
 
475,541

 
491,389

Total liabilities and stockholders’ equity
 
$
577,478

 
$
602,624

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Net revenues
 
$
64,637

 
$
52,412

 
$
183,536

 
$
165,976

Cost of net revenues
 
18,241

 
4,511

 
38,346

 
15,033

Gross profit
 
46,396

 
47,901

 
145,190

 
150,943

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
12,967

 
13,011

 
38,578

 
39,403

Sales and marketing
 
22,744

 
21,930

 
70,234

 
66,207

General and administrative
 
9,384

 
9,625

 
30,443

 
28,907

Amortization of purchased intangible assets
 
2,496

 
2,811

 
6,969

 
8,176

Other operating expenses
 
2,040

 
754

 
5,334

 
2,282

Total operating expenses
 
49,631

 
48,131

 
151,558

 
144,975

Income (loss) from operations
 
(3,235
)
 
(230
)
 
(6,368
)
 
5,968

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense, net
 
(545
)
 
(536
)
 
(1,716
)
 
(1,449
)
Other income (expense), net
 
68

 
96

 
632

 
(301
)
Income (loss) before income taxes
 
(3,712
)
 
(670
)
 
(7,452
)
 
4,218

Benefit from (provision for) income taxes
 
3,826

 
1,013

 
7,059

 
(1,407
)
Net income (loss)
 
$
114

 
$
343

 
$
(393
)
 
$
2,811

Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.00

 
$
0.01

 
$
(0.01
)
 
$
0.05

Diluted
 
$
0.00

 
$
0.01

 
$
(0.01
)
 
$
0.05

Weighted average number of common shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
48,683

 
53,037

 
48,899

 
53,513

Diluted
 
49,867

 
53,744

 
48,899

 
54,581

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income (loss)
 
$
114

 
$
343

 
$
(393
)
 
$
2,811

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(148
)
 
(97
)
 
(905
)
 
(2,042
)
Comprehensive income (loss)
 
$
(34
)
 
$
246

 
$
(1,298
)
 
$
769

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)
 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(393
)
 
$
2,811

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization expense
 
13,238

 
12,742

Stock-based compensation expense
 
18,928

 
20,091

Deferred income tax expense
 
1,591

 
238

Excess income tax benefit from stock-based compensation
 
(135
)
 
(1,333
)
Non-cash interest expense
 
324

 
305

Impairment of assets
 
834

 

Amortization of deferred compensation
 
4,509

 
2,297

Other non-cash (gains) losses, net
 
(1,716
)
 
969

Provision for doubtful accounts receivable
 
259

 
(84
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable, net
 
25,014

 
28,242

Inventory
 
(2,433
)
 

Prepaid expenses and other current assets, net
 
(9,314
)
 
(4,946
)
Accounts payable
 
(2,478
)
 
(846
)
Accrued expenses and other current liabilities
 
(6,034
)
 
(10,061
)
Other noncurrent assets and liabilities
 
1,210

 
1,833

Net cash provided by operating activities
 
43,404

 
52,258

Cash flows from investing activities:
 
 
 
 
Payments for acquisitions of businesses, net of cash acquired
 
(20,968
)
 

Purchase of property and equipment
 
(9,212
)
 
(8,741
)
Purchase of other assets
 
(44
)
 
(4,302
)
Purchase of non-marketable investment
 

 
(4,000
)
Proceeds from sale of property and equipment
 
22

 
14

Net cash used in investing activities
 
(30,202
)
 
(17,029
)
Cash flows from financing activities:
 
 
 
 
Proceeds from notes payable, net of issuance costs
 

 
29,950

Payments on notes payable
 
(7,500
)
 
(5,000
)
Proceeds from issuance of common stock, net of tax payments related to net share settlement of equity awards
 
(1,569
)
 
4,330

Excess income tax benefit from stock-based compensation
 
135

 
1,333

Payments for repurchase of common stock
 
(28,434
)
 
(38,808
)
Payments of principal on capital lease arrangements
 
(67
)
 
(7
)
Net cash used in financing activities
 
(37,435
)
 
(8,202
)
Effect of foreign currency exchange rate on cash
 
(269
)
 
(804
)
Change in cash and cash equivalents
 
(24,502
)
 
26,223

Cash and cash equivalents, beginning of period
 
259,769

 
244,482

Cash and cash equivalents, end of period
 
$
235,267

 
$
270,705

Supplemental disclosure of cash flow information
 
 
 
 
Interest payments
 
$
1,817

 
$
1,110

Income tax payments, net of refunds
 
$
5,419

 
$
12,417

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 digital savings destination connecting consumers with retailers, restaurants and brands, 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 Giftcard Zen 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 retailers 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 retailer 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, 2015, which are included in our Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 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 multiple element revenue arrangement, 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 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 chief operating decision maker, or CODM, is our Chief Executive Officer, or CEO. 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 retailers, 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 five 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. Capitalized internally developed software and website development costs are depreciated over their estimated useful lives, which range from two to three years. 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.
During the first quarter of 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 $0.8 million of impairment expense within other operating expenses in our consolidated statement of operations during the nine months ended September 30, 2016.
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 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 our 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 sole 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 not record any goodwill impairment charges during the three and nine months ended September 30, 2016 and the year ended December 31, 2015.
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 or accelerated 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, including the period of time that would capture 90% or more of the assets value on a perpetuity basis.

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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. We did not record any intangible asset impairment charges during the three and nine months ended September 30, 2016. During the year ended December 31, 2015, we recorded an intangible assets impairment charge of $2.3 million associated with Bons-de-Reduction.com, a French website we stopped supporting in October 2015.
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 retailer, defined as a retailer 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 retailer makes a purchase with such paid retailer, and completion of the order is reported to us by such paid retailer, either directly or through a performance marketing network. The reporting by the paid retailer includes the amount of commissions the paid retailer has calculated as owing to us. Certain paid retailers 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 retailer’s advertisements on our websites or mobile applications. Rates for advertising are typically negotiated with individual retailers with which we have contracts. Payments for advertising may be made directly by retailers 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 retailers 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 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.

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We estimate and record a reserve for commission revenues based upon actual, historical return rates as reported to us by paid retailers 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 retailers are both direct and through performance marketing networks, which act as intermediaries between the paid retailers and us. No paid retailer individually accounted for more than 10% of net revenues or accounts receivable as of and for the three and nine months ended September 30, 2016 and 2015.
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 performance stock options granted to certain executives in 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, 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

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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 the second quarter of 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 20% 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 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 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. During the three and nine months ended September 30, 2016, we recorded a gain of $0.3 million and a gain of $0.5 million, respectively, related to our foreign exchange derivative instruments. During the three and nine months ended September 30, 2015, we recorded a gain of less than $0.1 million and a gain of $0.6 million, respectively, related to our foreign exchange derivative instruments. We did not have any foreign exchange derivative instruments outstanding as of September 30, 2016. The fair value and notional amount of the foreign exchange derivative instrument that was outstanding as of December 31, 2015 were $0.0 million and $6.3 million, respectively.

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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 April 2015, the Financial Accounting Standards Board, or FASB, issued new guidance clarifying whether a customer should account for a cloud computing arrangement as an acquisition of a software license or as a service arrangement by providing characteristics that a cloud computing arrangement must have in order to be accounted for as a software license acquisition. The guidance allows either retrospective or prospective application and is effective for fiscal years beginning after December 15, 2015. The adoption of this guidance in the first quarter of 2016 did not have a material impact on our consolidated financial statements.
In April 2015, the FASB issued new guidance that amends the balance sheet presentation of debt issuance costs. The guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. The guidance requires retrospective application and is effective for fiscal years beginning after December 15, 2015. The adoption of this guidance in the first quarter of 2016 resulted in a reclassification of $1.6 million of debt issuance costs associated with our long-term debt as of December 31, 2015 from other assets, net to long term debt in our consolidated financial statements.
In November 2015, the FASB issued new guidance that amends the balance sheet presentation for deferred tax assets and liabilities. The guidance requires that all deferred tax assets and liabilities, and any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance allows either retrospective or prospective application and is effective for fiscal years beginning after December 15, 2016. The early adoption of this guidance in the first quarter of 2016, using retrospective application, resulted in a reclassification as of December 31, 2015 that consisted of a $3.9 million decrease in current deferred tax assets, included within prepaids and other current assets, net, a $0.9 million increase in noncurrent deferred tax assets, included within other assets, net, and a $3.0 million decrease in deferred tax liability—noncurrent.
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 are currently evaluating which of the two retrospective application methods we will use and the effect that the adoption of this guidance will have on our consolidated financial statements.
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 March 2016, the 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. The guidance is effective for fiscal years beginning after December 15, 2016, using either a prospective or 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 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

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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 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. 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 $21.5 million of cash consideration.
The following table summarizes the preliminary 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
17,077

Total assets acquired
22,467

Total liabilities assumed
(999
)
Total
$
21,468

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 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.
The preliminary allocation is based on estimates, assumptions, and valuations that have not progressed to a stage where there is sufficient information to make a definitive allocation.  Accordingly, the allocation will remain preliminary until we have all information to finalize the allocation of the purchase price. In connection with the acquisition, we incurred approximately $0.5 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, to be 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 RetailMeNot.
During the nine months ended September 30, 2016, we have recognized $4.5 million of expense associated with these arrangements within other operating expenses in our consolidated statement of operations. We are accreting a liability

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concurrent with expense recognition assuming the employees' continued employment with RetailMeNot. As of September 30, 2016, we have recognized $3.0 million in accrued compensation and benefits and $1.5 million in other noncurrent liabilities in our consolidated balance sheets.
4. Goodwill and Other Intangible Assets
During the nine months ended September 30, 2016, we preliminarily recognized $17.1 million of goodwill generated by our acquisition of GiftcardZen Inc. The recognized goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. We have allocated the goodwill from our GiftcardZen Inc acquisition to our Gift Card segment, which was added as a separate reportable segment during the second quarter of 2016. See Note 10, “Segment Reporting,” for a description of our segments.
Changes in our goodwill balance for the year ended December 31, 2015 and the nine months ended September 30, 2016 are summarized in the table below (in thousands):
 
 
Core
 
Gift Card
 
Total
Balance at December 31, 2014
$
176,927

 
$

 
$
176,927

Acquired in business combinations

 

 

Foreign currency translation adjustment
(2,202
)
 

 
(2,202
)
Balance at December 31, 2015
174,725

 

 
174,725

Acquired in business combinations (unaudited)

 
17,077

 
17,077

Foreign currency translation adjustment (unaudited)
537

 

 
537

Balance at September 30, 2016 (unaudited)
$
175,262

 
$
17,077

 
$
192,339

Intangible assets consisted of the following as of September 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
 
Weighted-
Average
Amortization
Period
(Months)
 
Estimated
Useful Life
(Months)
 
September 30, 2016 (unaudited)
 
 
Gross
 
Accumulated
Amortization
 
Impairment Expense
 
Net
Customer relationships
 
180
 
72-180
 
$
15,898

 
$
(6,293
)
 
$

 
$
9,605

Marketing-related
 
152
 
24-180
 
79,960

 
(33,876
)
 

 
46,084

Contract-based
 
57
 
12-60
 
21,715

 
(19,309
)
 

 
2,406

Technology-based
 
12
 
12
 
8,758

 
(8,226
)
 

 
532

Total intangible assets
 
 
 
 
 
$
126,331

 
$
(67,704
)
 
$

 
$
58,627

 
 
 
Weighted-
Average
Amortization
Period
(Months)
 
Estimated
Useful Life
(Months)
 
December 31, 2015
 
 
Gross
 
Accumulated
Amortization
 
Impairment Expense
 
Net
Customer relationships
 
180
 
180
 
$
16,082

 
$
(5,496
)
 
$
(243
)
 
$
10,343

Marketing-related
 
154
 
48-180
 
80,745

 
(28,755
)
 
(2,068
)
 
49,922

Contract-based
 
58
 
12-60
 
19,755

 
(18,746
)
 
(29
)
 
980

Technology-based
 
12
 
12
 
7,643

 
(7,643
)
 

 

Total intangible assets
 
 
 
 
 
$
124,225

 
$
(60,640
)
 
$
(2,340
)
 
$
61,245

In October 2015, we decided to no longer support the Bons-de-Reduction.com brand. We have redirected traffic from Bons-de-Reduction.com to Poulpeo.com, and do not expect Bons-de-Reduction.com to provide additional income. As a result, we determined that a complete impairment of the remaining unamortized intangible assets associated with Bons-de-Reduction.com was warranted, resulting in an impairment charge of $2.3 million. We did not record any intangible asset impairment charges during the nine months ended September 30, 2016.

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5. Commitments and Contingencies
Operating Leases
We lease office space, including our corporate headquarters in Austin, Texas, under non-cancellable operating leases. Rent expense under these operating leases was $2.0 million and $1.5 million for the three months ended September 30, 2016 and 2015, respectively, and $5.6 million and $4.5 million for the nine months ended September 30, 2016 and 2015, respectively.
Legal Matters
From time to time, we may be involved in litigation relating to claims arising in the ordinary course of business, including litigation 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.
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 September 30, 2016 and December 31, 2015, 48,486,470 and 51,091,393 shares of Series 1 common stock were outstanding, respectively. As of September 30, 2016 and December 31, 2015, 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. The repurchase program is authorized through February 2017. During the nine months ended September 30, 2016, we repurchased 3,276,153 shares of Series 1 common stock at an aggregate purchase price of $29.0 million, and during the year ended December 31, 2015, we repurchased 4,323,000 shares of Series 1 common stock at an aggregate purchase price of $52.8 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.
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, performance stock options and performance restricted stock units during the nine months ended September 30, 2016. The fair value of our market-based performance stock options was estimated on the grant date using a Monte Carlo simulation. The fair value of our performance restricted stock units was estimated based on the fair market value of our stock on the grant date and the number of restricted stock units we expect to vest based on our estimate of the achievement of the underlying performance conditions.
We recorded stock-based compensation expense of $6.3 million and $6.7 million for the three months ended September 30, 2016 and 2015, respectively, and $18.9 million and $20.1 million for the nine months ended September 30, 2016 and 2015, 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 49,034 and 687,880 stock options during the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively.

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During the nine months ended September 30, 2016 and the year ended December 31, 2015 we issued 490,549 and 269,236 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 September 30, 2016 and 2015, no shares of Series 2 common stock were outstanding.
The following table sets forth the computation of basic and diluted net income (loss) per share of common stock (in thousands, except per share amounts):
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited)
Numerator
 
 
 
 
 
 
 
 
Net income (loss)
 
$
114

 
$
343

 
$
(393
)
 
$
2,811

Denominator
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
48,683

 
53,037

 
48,899

 
53,513

Dilutive effect of stock options, restricted stock units, and Employee Stock Purchase Plan shares
 
1,184

 
707

 

 
1,068

Weighted average common shares outstanding - diluted
 
49,867

 
53,744

 
48,899

 
54,581

Net income (loss) per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.00

 
$
0.01

 
$
(0.01
)
 
$
0.05

Diluted
 
$
0.00

 
$
0.01

 
$
(0.01
)
 
$
0.05


The following common equivalent shares were excluded from the diluted net income (loss) per share calculation, as their inclusion would have been anti-dilutive (in thousands):
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited)
Stock options
 
3,325

 
3,122

 
822

 
2,921

Restricted stock units
 
1,851

 
2,359

 
1,958

 
811

Employee Stock Purchase Plan shares
 

 
419

 

 
402

Total
 
5,176

 
5,900

 
2,780

 
4,134

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.


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Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
 
 
Fair Value Measurements at September 30, 2016 (unaudited)
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market deposit accounts
 
$
145,944

 
$

 
$

 
$
145,944

 
 
Fair Value Measurements at December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Money market deposit accounts
 
$
160,566

 
$

 
$

 
$
160,566

Foreign exchange contract
 
$

 
$
19

 
$

 
$
19

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.
The fair value of our derivative instruments has been determined using pricing models that take into account the underlying contract terms, as well as all applicable inputs, such as currency rates. We did not have any foreign exchange derivative instruments outstanding as of September 30, 2016. The derivative instrument had a fair value of $0.0 million as of December 31, 2015.
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 September 30, 2016 and December 31, 2015 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 nine months ended September 30, 2016, we recorded a fair value adjustment to the carrying amount of internally developed software and website development costs related to certain projects, resulting in $0.8 million of impairment expense. See Note 2, “Summary of Significant Accounting Policies.” During the year ended December 31, 2015, we recorded a fair value adjustment to the identified intangible assets associated with one of our websites, Bons-de-Reduction.com, resulting in $2.3 million of impairment expense. 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 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 September 30, 2016 and 2015, we recorded income tax benefits of $3.8 million and $1.0 million, respectively, resulting in an effective tax rate of 103.1% and 151.2%, respectively. For the nine months ended September 30, 2016 and 2015, we recorded an income tax benefit of $7.1 million and expense of $1.4 million, respectively, resulting in an effective tax rate of 94.7% and 33.4%, respectively. 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 September 30, 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, 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 September 30, 2015, our forecasted annual effective tax rate estimate for the year ended December 31, 2015 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 was partially offset by the effect of different statutory tax rates in foreign jurisdictions and the benefit of disqualifying dispositions of incentive stock options.

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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, who is our CEO, 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 and nine month periods ended September 30, 2016 and 2015 (in thousands):
 
 
Three Months Ended September 30, 2016 (unaudited)
 
 
Core
 
Gift Card
 
Unallocated
 
Total
Net revenues
 
$
50,455

 
$
14,182

 
$

 
$
64,637

Cost of net revenues
 
4,488

 
13,313

 
440

 
18,241

Gross profit
 
45,967

 
869

 
(440
)
 
46,396

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
9,554

 
291

 
3,122

 
12,967

Sales and marketing
 
21,019

 
439

 
1,286

 
22,744

General and administrative
 
5,036

 
668

 
3,680

 
9,384

Amortization of purchased intangible assets
 

 

 
2,496

 
2,496

Other operating expenses
 

 

 
2,040

 
2,040

Total operating expenses
 
35,609

 
1,398

 
12,624

 
49,631

Income (loss) from operations
 
$
10,358

 
$
(529
)
 
$
(13,064
)
 
$
(3,235
)
 
 
Three Months Ended September 30, 2015 (unaudited)
 
 
Core
 
Gift Card
 
Unallocated
 
Total
Net revenues
 
$
52,412

 
$

 
$

 
$
52,412

Cost of net revenues
 
3,856

 

 
655

 
4,511

Gross profit
 
48,556

 

 
(655
)
 
47,901

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
9,902

 

 
3,109

 
13,011

Sales and marketing
 
19,870

 

 
2,060

 
21,930

General and administrative
 
6,963

 

 
2,662

 
9,625

Amortization of purchased intangible assets
 

 

 
2,811

 
2,811

Other operating expenses
 

 

 
754

 
754

Total operating expenses
 
36,735

 

 
11,396

 
48,131

Income (loss) from operations
 
$
11,821

 
$

 
$
(12,051
)
 
$
(230
)

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Nine Months Ended September 30, 2016 (unaudited)
 
 
Core
 
Gift Card
 
Unallocated
 
Total
Net revenues
 
$
158,613

 
$
24,923

 
$

 
$
183,536

Cost of net revenues
 
13,443

 
23,240

 
1,663

 
38,346

Gross profit
 
145,170

 
1,683

 
(1,663
)
 
145,190

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
28,401

 
545

 
9,632

 
38,578

Sales and marketing
 
64,912

 
794

 
4,528

 
70,234

General and administrative
 
19,399

 
1,182

 
9,862

 
30,443

Amortization of purchased intangible assets
 

 

 
6,969

 
6,969

Other operating expenses
 

 

 
5,334

 
5,334

Total operating expenses
 
112,712

 
2,521

 
36,325

 
151,558

Income (loss) from operations
 
$
32,458

 
$
(838
)
 
$
(37,988
)
 
$
(6,368
)
 
 
Nine Months Ended September 30, 2015 (unaudited)
 
 
Core
 
Gift Card
 
Unallocated
 
Total
Net revenues
 
$
165,976

 
$

 
$

 
$
165,976

Cost of net revenues
 
13,007

 

 
2,026

 
15,033

Gross profit
 
152,969

 

 
(2,026
)
 
150,943

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
30,506

 

 
8,897

 
39,403

Sales and marketing
 
60,562

 

 
5,645

 
66,207

General and administrative
 
20,763

 

 
8,144

 
28,907

Amortization of purchased intangible assets
 

 

 
8,176

 
8,176

Other operating expenses
 

 

 
2,282

 
2,282

Total operating expenses
 
111,831

 

 
33,144

 
144,975

Income (loss) from operations
 
$
41,138

 
$

 
$
(35,170
)
 
$
5,968

The following table presents information about the type of expenses included in the Unallocated column in the reconciliations above (in thousands):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Depreciation expense
 
$
2,235

 
$
1,752

 
$
6,269

 
$
4,566

Stock-based compensation expense
 
6,293

 
6,734

 
18,928

 
20,091

Third party acquisition-related costs
 

 

 
488

 
55

Amortization of purchased intangible assets
 
2,496

 
2,811

 
6,969

 
8,176

Other operating expenses
 
2,040

 
754

 
5,334

 
2,282

Total Unallocated expenses
 
$
13,064

 
$
12,051

 
$
37,988

 
$
35,170



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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, 2015 and subsequent reports on Form 8-K, which discuss our business in greater detail.
Overview
We operate a leading digital savings destination, connecting consumers with retailers, restaurants and brands, online and in-store. In the year ended December 31, 2015, our marketplace featured digital offers from over 70,000 retailers and brands, and we had contracts with more than 12,000 retailers. According to our internal data compiled using Google Analytics, during the trailing 12 months ended September 30, 2016, we had approximately 675 million total visits to our desktop and mobile websites. During the three months ended September 30, 2016, we averaged approximately 19.2 million mobile unique visitors per month.
Core Segment
We derive the substantial majority of our Core segment net revenues, which constitute the majority of our consolidated net revenues, from retailers, restaurants or brands that pay us directly or through third-party performance marketing networks. A retailer is a merchant that sells goods or services directly to consumers. A paid retailer is a retailer, restaurant or brand that has contracted to pay us a commission for sales which we influence using digital offers made available in our marketplace and/or a retailer, restaurant or brand that has contracted to pay us to promote their digital offers or provide advertising in our marketplace. In some instances, the paid retailer 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 retailers contract with performance marketing networks to provide affiliate tracking links for attribution of online sales using digital offers made available in our marketplace. These paid retailers 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 retailers utilizing the performance marketing network. The performance marketing network with which a paid retailer contracts to provide affiliate tracking links provides us with the paid retailer’s contract terms, which must be accepted by us and the paid retailer, and which further govern our use of affiliate tracking links for such paid retailer 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 and nine months ended September 30, 2016 and 2015, the majority of our 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 retailers based on a variety of factors, including the level of

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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 retailers, restaurants and brands 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 retailers and restaurants. 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 $21.5 million of cash consideration. In connection with the acquisition, we incurred approximately $0.5 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, to be 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 RetailMeNot.
Consolidated Results
During the three and nine months ended September 30, 2016, we generated net revenues of $64.6 million and $183.5 million, respectively, representing increases over the comparable prior year periods of 23.3% and 10.6%, respectively. Excluding net revenues from our Gift Card segment, which are primarily composed of net revenues from GiftcardZen Inc, net revenues for the three and nine months ended September 30, 2016 declined by 3.7% and 4.4%, respectively, as compared to the comparable prior year three and nine month periods.
Net income (loss) changed from income of $0.3 million and income of $2.8 million for the three and nine months ended September 30, 2015, respectively, to income of $0.1 million and a loss of $0.4 million for the three and nine months ended September 30, 2016, respectively. Adjusted EBITDA decreased from $11.8 million and $41.1 million to $9.8 million and $31.6 million over the comparable prior year three and nine month periods, respectively. 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 retailers whose digital offers are featured in our marketplace. To meet these challenges, we are 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 as well as increasing the exposure of the digital offer category. We are also investing in product enhancements to make it easier for consumers visiting our marketplace to search and find the right digital offers and in expanding the types of digital offers available to consumers on our marketplace. We believe these enhancements will increase consumers’ interactions with retailers, restaurants and brands in our marketplace, which will in turn increase the value we are able to provide to paid retailers.
We intend to achieve future success by continuing to focus on improving the monetization of our mobile websites and mobile applications, which generally monetize at a lower rate than desktop traffic. We believe the comparatively lower rate of monetization primarily results from the following: (1) mobile visits tend to be more exploratory in nature, due to lower purchase intent than desktop visits, difficulties in navigating from our mobile websites and applications to retailer websites and friction in the purchase process on retailers' 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 retailer’s website on another device, such as a desktop or tablet or in-store (a circumstance known as cross device switching) and (3) some retailers 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 introduce new methods of monetizing our consumer traffic, particularly the traffic to our mobile websites and applications, through a variety of methods, including improved attribution to us of the sales that we help drive for our retail, restaurant and brand 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.

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We also intend to enhance the monetization of our websites and mobile applications by making product improvements that appeal to both consumers and retailers. These enhancements include increased leveraging of data to better personalize digital offers for consumers and to be a more effective channel for paid retailers 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.
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.
Finally, we have developed and implemented certain universal software platforms to support 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.
We believe that these significant investments will enable us to achieve future success and improve the quality, consistency and monetization of our marketplace.

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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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands, except net revenues per visit)
Financial Metrics
 
 
 
 
 
 
 
 
Online transaction net revenues:
 
 
 
 
 
 
 
 
Desktop online transaction net revenues
 
$
29,877

 
$
35,791

 
$
102,600

 
$
121,498

Mobile online transaction net revenues
 
5,515

 
4,871

 
17,273

 
15,383

Total online transaction net revenues
 
35,392

 
40,662

 
119,873

 
136,881

Advertising and in-store net revenues
 
15,063

 
11,750

 
38,740

 
29,095

Gift card net revenues
 
14,182

 

 
24,923

 

Net revenues
 
64,637

 
52,412

 
183,536

 
165,976

 
 
 
 
 
 
 
 
 
Adjusted EBITDA
 
9,829

 
11,821

 
31,620

 
41,138

Gift Card segment gross profit
 
869

 

 
1,683

 

Core segment operating income
 
10,358

 
11,821

 
32,458

 
41,138

 
 
 
 
 
 
 
 
 
Operating Metrics
 
 
 
 
 
 
 
 
Visits:
 
 
 
 
 
 
 
 
Desktop visits
 
77,137

 
92,522

 
253,733

 
298,910

Mobile visits
 
68,912

 
67,180

 
206,580

 
204,678

Total visits
 
146,049

 
159,702

 
460,313

 
503,588

Online transaction net revenues per visit:
 
 
 
 
 
 
 
 
Desktop online transaction net revenues per visit
 
$
0.39

 
$
0.39

 
$
0.40

 
$
0.41

Mobile online transaction net revenues per visit
 
$
0.08

 
$
0.07

 
$
0.08

 
$
0.08

Total online transaction net revenues per visit
 
$
0.24

 
$
0.25

 
$
0.26

 
$
0.27

 
 
 
 
 
 
 
 
 
Mobile unique visitors
 
19,161

 
18,596

 
19,161

 
18,596


Net income (loss) is the most directly comparable financial measure, as calculated and presented in accordance with GAAP, in comparison to Adjusted EBITDA. Net income (loss) for the three and nine months ended September 30, 2016 and 2015 is as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Net income (loss)
 
$
114

 
$
343

 
$
(393
)
 
$
2,811

Financial Metrics
Desktop Online Transaction Net Revenues. We define desktop online transaction net revenues as amounts paid to us by paid retailers, 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 retailer when a consumer clicks on a digital offer for that paid retailer on one of our websites or tablet applications and then makes an online purchase from that paid retailer.
Mobile Online Transaction Net Revenues. We define mobile online transaction net revenues as amounts paid to us by paid retailers, either directly or through performance marketing networks, in the form of commissions for completed online

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transactions on smartphones and other mobile devices. In general, we earn a commission from a paid retailer when a consumer clicks on a digital offer for that paid retailer on one of our websites or mobile applications and then makes an online purchase from that paid retailer.
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 retailers for displaying digital offers that may be redeemed on one of our websites, as well as amounts paid to us by paid retailers for providing advertising of the paid retailer’s brand or products in our marketplace. We define in-store net revenues collectively as commission amounts earned from paid retailers when a consumer presents a digital offer to the retailer and the digital offer is scanned or a unique digital offer code is entered by the retailer at the point of sale, as well as other amounts paid to us by paid retailers 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 retailers 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 less our cost of net revenues for the Gift Card segment, which consists primarily of the costs to acquire gift cards, including shipping costs and adjustments for chargebacks.
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 retailers, restaurants and brands 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 September 30, 2016 and 2015. 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Reconciliation of Adjusted EBITDA:
 
 
 
 
 
 
 
 
Net income (loss)
 
$
114

 
$
343

 
$
(393
)
 
$
2,811

Depreciation and amortization
 
4,731

 
4,563

 
13,238

 
12,742

Stock-based compensation expense
 
6,293

 
6,734

 
18,928

 
20,091

Third party acquisition-related costs
 

 

 
488

 
55

Other operating expenses
 
2,040

 
754

 
5,334

 
2,282

Interest expense, net
 
545

 
536

 
1,716

 
1,449

Other (income) expense, net
 
(68
)
 
(96
)
 
(632
)
 
301

(Benefit from) provision for income taxes
 
(3,826
)
 
(1,013
)
 
(7,059
)
 
1,407

Adjusted EBITDA
 
$
9,829

 
$
11,821

 
$
31,620

 
$
41,138

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Depreciation Expense:
 
 
 
 
 
 
 
 
Cost of net revenues
 
$
16

 
$
131

 
$
299

 
$
383

Product development
 
1,085

 
975

 
3,566

 
2,430

Sales and marketing
 
21

 
351

 
686

 
989

General and administrative
 
1,113

 
295

 
1,718

 
764

Total depreciation expense
 
$
2,235

 
$
1,752

 
$
6,269

 
$
4,566

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Stock-Based Compensation Expense:
 
 
 
 
 
 
 
 
Cost of net revenues
 
$
424

 
$
524

 
$
1,364

 
$
1,643

Product development
 
2,037

 
2,134

 
6,066

 
6,467

Sales and marketing
 
1,265

 
1,709

 
3,842

 
4,656

General and administrative
 
2,567

 
2,367

 
7,656

 
7,325

Total stock-based compensation expense
 
$
6,293

 
$
6,734

 
$
18,928

 
$
20,091


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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 retailers, either directly or through performance marketing networks. In general, we earn commissions from a paid retailer when a consumer makes a purchase online from that paid retailer after clicking on a digital offer for that paid retailer on one of our websites or mobile applications. We also earn revenues from our in-store product, which include commissions earned from a retailer when a consumer presents a digital offer to the retailer in-store and the digital offer is scanned or a unique digital offer code is entered by the retailer at the point of sale, and amounts paid to us by retailers for displaying digital offers that may be redeemed in-store on our websites or mobile applications.
We provide performance marketing solutions under contracts with retailers, which generally provide for commission payments to be facilitated by performance marketing networks. Commission rates are typically negotiated with individual paid retailers. Our commission rates vary based on a variety of factors, including the retailer, 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 retailer, as reported to us through a performance marketing network, or in some cases, by the retailer 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 retailers. Payments for advertising may be made directly by these retailers 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 2016, both in absolute dollars and as a percentage of net revenues, when compared to 2015 as a result of our plan to increase personnel in 2016 as we continue to invest in our business and our April 5, 2016 acquisition of GiftcardZen Inc. 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 in both absolute dollars and as a percentage of net revenues in 2016 due to the costs to acquire gift cards following our purchase of GiftcardZen Inc, and as we continue to build our infrastructure to support our business across multiple markets, endeavor to improve offer diversity and quality and increase the number and amount of consumer purchases resulting from visits to our websites and from use of our mobile applications.
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 have increased

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investments in our software engineering resources in the current fiscal year 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 absolute dollars in 2016, but we expect product development expenses to decrease as a percentage of net revenues due primarily to an increase in forecasted net revenues associated with our current year acquisition of GiftcardZen Inc.
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 have increased our sales and marketing efforts thus far in 2016 to drive consumer traffic to our websites, encourage downloads of, and engagement with, our mobile applications, strengthen our relationships with retailers and restaurants and increase the overall awareness of our brand, all with a focus on the ROI of our spend. While we will continue to have the same focus in the fourth quarter, we expect our sales and marketing expense to decline both in absolute dollars and as a percentage of net revenues in 2016.
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 increase in absolute dollars in 2016, but we expect general and administrative expense to decrease as a percentage of net revenues due primarily to an increase in forecasted net revenues associated with our current year acquisition of GiftcardZen Inc.
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 expenses to decline both in absolute dollars and as a percentage of net revenues in 2016.
Other Operating Expenses
Other operating expenses for the three and nine months ended September 30, 2016 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, to be 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 RetailMeNot.
During the first quarter of 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 $0.8 million of impairment expense within other operating expenses.
Other operating expenses for the three and nine months ended September 30, 2015 consisted primarily of amortization expense related to deferred compensation agreements with the selling stockholders of YSL Ventures, Inc. In 2013, we acquired YSL Ventures, Inc. and entered into $6.2 million in deferred compensation agreements with the selling stockholders of the business, $3.1 million of which was paid in October 2014, and the remaining $3.1 million of which was paid in equal quarterly installments over the following year, concluding in October 2015. The deferred compensation was due and payable contingent upon the continued employment of the selling stockholders, and as a result, we amortized the associated expense over the term of the compensation arrangements with the sellers.
We expect other operating expenses to increase in absolute dollars and as a percentage of net revenues in 2016 as a result of our deferred compensation arrangements with 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

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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 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.
During the first quarter of 2014, we implemented a global corporate restructuring plan involving our non-U.S. entities to streamline our non-U.S. operations. The impact of this restructuring has resulted in and may continue to result in volatility in our provision for income taxes and our effective tax rate.


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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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
Net revenues
 
$
64,637

 
$
52,412

 
$
183,536

 
$
165,976

Cost of net revenues
 
18,241

 
4,511

 
38,346

 
15,033

Gross profit
 
46,396

 
47,901

 
145,190

 
150,943

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
12,967

 
13,011

 
38,578

 
39,403

Sales and marketing
 
22,744

 
21,930

 
70,234

 
66,207

General and administrative
 
9,384

 
9,625

 
30,443

 
28,907

Amortization of purchased intangible assets
 
2,496

 
2,811

 
6,969

 
8,176

Other operating expenses
 
2,040

 
754

 
5,334

 
2,282

Total operating expenses
 
49,631

 
48,131

 
151,558

 
144,975

Income (loss) from operations
 
(3,235
)
 
(230
)
 
(6,368
)
 
5,968

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense, net
 
(545
)
 
(536
)
 
(1,716
)
 
(1,449
)
Other income (expense), net
 
68

 
96

 
632

 
(301
)
Income (loss) before income taxes
 
(3,712
)
 
(670
)
 
(7,452
)
 
4,218

Benefit from (provision for) income taxes
 
3,826

 
1,013

 
7,059

 
(1,407
)
Net income (loss)
 
$
114

 
$
343

 
$
(393
)
 
$
2,811

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Consolidated Statements of Operations Data as Percentage of Net Revenues:
 
 
 
 
 
 
 
 
Net revenues
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of net revenues
 
28.2

 
8.6

 
20.9

 
9.1

Gross profit
 
71.8

 
91.4

 
79.1

 
90.9

Operating expenses:
 
 
 
 
 
 
 
 
Product development
 
20.1

 
24.8

 
21.0

 
23.7

Sales and marketing
 
35.2

 
41.8

 
38.3

 
39.9

General and administrative
 
14.5

 
18.4

 
16.6

 
17.4

Amortization of purchased intangible assets
 
3.9

 
5.4

 
3.8

 
4.9

Other operating expenses
 
3.1

 
1.4

 
2.9

 
1.4

Total operating expenses
 
76.8

 
91.8

 
82.6

 
87.3

Income (loss) from operations
 
(5.0
)
 
(0.4
)
 
(3.5
)
 
3.6

Other income (expense):
 
 
 
 
 
 
 
 
Interest expense, net
 
(0.8
)
 
(1.0
)
 
(0.9
)
 
(0.9
)
Other income (expense), net
 
0.1

 
0.1

 
0.3

 
(0.2
)
Income (loss) before income taxes
 
(5.7
)
 
(1.3