QUOTIENT TECHNOLOGY INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included elsewhere in this annual report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in "Risk Factors" and "Special Note Regarding Forward-Looking Statements."
Overview
Quotient Technology Inc. is an industry leading digital marketing company, providing technology and services that power integrated digital promotions and media programs for consumer packaged goods ("CPG"s) brands and retailers. These programs are delivered across our network, including our flagship consumer brand Coupons.com and our retail partners' properties. This network provides Quotient with proprietary and licensed data, including online behavior, purchase intent, and retailers' in-store point-of-sale ("POS") shopper data, to target shoppers with the most relevant digital promotions and ads. We also deliver digital promotions and media programs to third party publishing properties outside of our network. Customers and partners use Quotient to influence shoppers via digital channels, integrate marketing and merchandising programs, and leverage shopper data and insights to drive measurable sales results. For our retail partners, we provide a digital platform, Retailer iQ, to directly engage with shoppers across their websites, mobile, ecommerce, and social channels. This platform is generally co-branded or white-labeled through retailers' savings or loyalty programs and uses shopper data to deliver relevant digital promotions from brand marketers and retailers to shoppers. Our network is made up of three constituencies: over 2,000 brands from approximately 700 CPGs; retail partners across multiple classes of trade such as grocery retailers, drug, dollar, club, and mass merchandise channels; and consumers visiting our websites, mobile properties, social channels, as well as those of our CPG and retailer partners.
We primarily generate revenue by providing digital promotions and media programs to our customers and partners.
We generate revenue from promotion campaigns, in which CPGs pay us to deliver promotions to consumers through our network of publishers and retail partners. Using shopper data from our retail partners and our proprietary data and audience segments, we deliver targeted and/or personalized digital promotions to shoppers through our network, including our websites and mobile apps, as well as those of our publishers, retailers and other third-party properties. Each time a promotion is activated through our platform or, in some cases, redeemed, we are generally paid a fee. Activation of a digital promotion can include: saving it to a retailer loyalty account or printing it for physical redemption at a retailer. Campaigns are targeted to shoppers, and measured based on performance attributable to retail purchases in near real time. As our business evolves, we will continue to experiment with different pricing models and fee arrangements with CPGs and retailers, which may impact how we monetize transactions. For example, we are continuing to experiment with ROI-based pricing strategies and service packages, some of which require us to receive fees upon redemption of digital promotions rather than activation, as further discussed below in "Risk Factors".
Promotion revenues also include our Specialty Retail business, in which specialty stores including clothing, electronics, home improvement and many others offer coupon codes that we distribute. Each time a consumer makes a purchase using a coupon code, a transaction occurs and a distribution fee is generally paid to us.
We also generate revenues from digital media in which CPGs, retailers, and
advertising agencies, use our platform to deliver digital advertising. Using
shopper data from our retail partners and our proprietary data and audience
segments, we target audiences with digital ad campaigns. These ads are delivered
to shoppers through our network, including our websites and mobile apps, as well
as those of our publishers, retailers and other third-party properties.
Campaigns are measured based on optimization and performance, attributing
digital ad campaigns to retail purchases in near real time. Media solutions we
offer include display, targeted, social influencer, retail search and sponsored
products, and audiences. A growing portion of our media campaigns are purchased
as an integrated campaign which combines media advertising and promotions in a
single campaign. Our media solutions help serve our customers and partners'
needs as they shift more of their marketing dollars to digital channels that can
be measured based on campaign performance and attributable sales. In 2019 we
purchased Ubimo, a data and media activation platform to strengthen our media
solution and accelerate the development of a self-service media platform.
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We generally pay a distribution fee to retailers and publishers for activation
or redemption of a digital promotion, for media campaigns, and for use of data
for targeting or measurement. We also pay a fee to third-party publishers for
traffic acquisition, which consists of delivering campaigns on certain networks
or properties. These distribution and third-party service fees are included in
our cost of revenues. See Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Non-GAAP Financial Measure and Key
Operating Metrics" for more information.
Our operating expenses may increase in the future as we continue to (1) invest
in (i) research and development to enhance our platform and investments in newer
product offerings; (ii) sales and marketing to acquire new CPG and retailer
customers and increase revenues from our existing customers; and; (iii)
corporate infrastructure; (2) amortize expenses related to intangibles assets
associated with acquisitions and other strategic acquisitions and partnerships;
and (3) remeasure contingent consideration related to acquisitions.
For 2019, 2018 and 2017, our revenues were $436.2 million , $387.0 million , and
$322.1 million , respectively. Our net loss for 2019, 2018 and 2017 was $37.1
million , $28.3 million , and $15.1 million , respectively.
Seasonality
Some of the Company's products experience seasonal sales and buying patterns mirroring those in the CPG, retail, advertising, and e-commerce markets, including media buying patterns, back-to-school and holiday campaigns, where demand increases during the second half of the Company's fiscal year. Seasonality may also be affected by CPG annual budget cycles, as some large CPGs have fiscal years ending in June. We believe that this seasonality pattern has affected, and will continue to affect, our business and the associated revenues during the first half and second half of our fiscal year. We recognized 54% of our annual revenue during the second half of 2019, 2018 and 2017, for each respective period.
Non-GAAP Financial Measure and Key Operating Metrics
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA"), a non-GAAP financial measure, is a key metric used by our
management and our Board of Directors to understand and evaluate our core
operating performance and trends, to prepare and approve our annual budget, to
develop short and long-term operational plans, and to determine bonus payouts.
In particular, we believe that the exclusion of certain income and expenses in
calculating Adjusted EBITDA can provide a useful measure for period-to-period
comparisons of our core business. Additionally, Adjusted EBITDA is a key
financial metric used by the compensation committee of our Board of Directors in
connection with the determination of compensation for our executive officers.
Accordingly, we believe that Adjusted EBITDA provides useful information to
investors and others in understanding and evaluating our operating results in
the same manner as our management and Board of Directors.
Adjusted EBITDA excludes non-cash charges, such as depreciation, amortization
and stock-based compensation, because such non-cash expenses in any specific
period may not directly correlate to the underlying performance of our business
operations and can vary significantly between periods. Additionally, it excludes
the effects of interest expense, income taxes, other (income) expense net,
change in fair value of escrowed shares and contingent consideration, net,
impairment charges for capitalized software development costs, charges related
to Enterprise Resource Planning ("ERP") software implementation costs, certain
acquisition related costs and restructuring charges. We exclude certain items
because we believe that these costs (benefits) do not reflect expected future
operating expenses. Additionally, certain items are inconsistent in amounts and
frequency, making it difficult to contribute to a meaningful evaluation of our
current or past operating performance.
Net loss, Adjusted EBITDA and number of transactions for each of the periods presented were as follows:
Year Ended December 31,
2019 2018 2017
(in thousands)
Net loss $ (37,057 ) $ (28,318 ) $ (15,077 )
Adjusted EBITDA 45,150 57,612 47,040
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-------------------------------------------------------------------------------- Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future, and
Adjusted EBITDA does not reflect cash capital expenditure requirements for
such replacements or for new capital expenditure requirements;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
• Adjusted EBITDA does not reflect interest and tax payments that may
represent a reduction in cash available to us;
• Adjusted EBITDA also does not include the effects of stock-based
compensation, amortization of acquired intangible assets, impairmentcharges for capitalized software development costs, charges related to ERP
software implementation costs, net change in fair value of escrowed shares
and contingent consideration, interest expense, other (income) expense,
net, provision for (benefit from) income taxes, certain acquisition related
costs and restructuring charges; and
• other companies, including companies in our industry, may calculate
Adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
A reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, for each of the periods presented is as follows:
Year Ended December 31,
2019 2018 2017
(in thousands)
Net loss $ (37,057 ) $ (28,318 ) $ (15,077 )
Adjustments:
Stock-based compensation 32,137 31,386 32,252
Depreciation, amortization and other (1) 39,107 32,262 24,391
Change in fair value of escrowed shares and contingent consideration, net 1,571 13,190 5,515 Interest expense 13,955 13,411 1,589 Other (income) expense, net (5,223 ) (4,801 ) (928 ) Provision for (benefit from) income taxes 660 482 (702 ) Total adjustments$ 82,207 $ 85,930 $ 62,117 Adjusted EBITDA$ 45,150 $ 57,612 $ 47,040
(1) For the years ended
restructuring charges of
respectively, certain acquisition related costs of
million, and
costs related to service agreements of zero,
respectively. Acquisition related costs primarily include certain bonuses
contingent upon the acquired company meeting certain financial metrics over
the contingent consideration period and diligence, accounting, and legal
expenses incurred related to certain acquisitions. Restructuring charges
relate to impairment charges for capitalized software development costs, and
severance for certain executive management changes and impacted employees.
This non-GAAP financial measure is not intended to be considered in isolation from, as substitute for, or as superior to, the corresponding financial measure prepared in accordance with GAAP. Because of these and other limitations, Adjusted EBITDA should be considered along with GAAP based financial performance measures, including various cash flow metrics, net loss, and our other GAAP financial results.
Factors Affecting Our Performance
Obtaining high quality promotions and increasing the number of CPG-authorized
activations. Our ability to grow revenue will depend upon our ability to shift
more dollars to our platform from our CPG customers, continue to obtain high
quality promotions and increase the number of CPG-authorized activations
available through our platform. If we are unable to do any of these, growth in
our revenue will be adversely affected.
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Increasing revenue from CPGs on our platform. Our ability to grow our revenue
in the future depends upon our ability to continue to increase revenues from
existing and new CPGs on our platform through national brand coupons, targeted
media and measurement, trade promotions, and increasing the number of brands
that are using our platform within each CPG.
Variability in promotional spend by CPGs. Our revenues may fluctuate due to
changes in promotional spending budgets of CPGs and retailers and the timing of
their promotional spending. Decisions by major CPGs or retailers to delay or
reduce their promotional and media spending, move campaigns, or divert spending
away from digital promotions or media could slow our revenue growth or reduce
our revenues.
Ability to scale Retail Performance Media and further integrate with
Retailers. Our ability to grow our revenues will depend upon our ability to
continue to successfully implement and scale Retailer iQ and Retail Performance
Media among retailers. If we are unable to continue to successfully maintain our
Retailer iQ and Retail Performance Media partners, or if our retail partners do
not provide sufficient support to our platforms, the growth in our revenues will
be adversely affected. Our ability to grow our revenue in the future is also
dependent upon our ability to further integrate digital promotions and media
into retailers' loyalty or POS systems and other channels so that CPGs and
retailers can more effectively engage consumers and drive their own sales.
Growth of our consumer selection and digital offerings. Our ability to grow our
revenue in the future will depend on our ability to innovate and invest in
promotion and media solutions, including Retailer iQ, Retailer Performance
Media, sponsored product search, mobile solutions for consumers, including
digital print, mobile solutions and digital promotion offerings for
specialty/franchise retail together with cash-back offers, leverage our reach to
consumers and the strength of our platform to broaden the selection and
consumers use of digital coupons as well as in-lane targeted promotions, manage
the transition from digital print coupons to digital paperless coupons as well
as the transition from desktop to mobile platforms, and invest in solutions
around our data and analytic capabilities, referred to as Quotient Analytics
Cloud and Quotient Audience Cloud, for CPGs and retailers.
International Growth and Acquisitions. Our ability to grow our revenues will
also depend on our ability to grow our operations and offerings in existing
international markets and expand our business through selective acquisitions,
similar to our acquisitions of Ahalogy, Crisp, Elevaate, SavingStar, Shopmium
and Ubimo and their integration with the core business of the Company.
Components of Our Results of Operations
Revenues
We generate revenues by delivering digital promotions, including coupons, rebates and coupon codes, and digital media through our platform. CPGs and retailers choose one or more of our offerings and are charged a fee for each selected offering. Our customers generally submit insertion orders that outline the terms and conditions of a campaign, including the channels through which the campaign will be run, the offerings for each selected channel, the type of content to be delivered, the timeframe of the campaign, the number of authorized activations and the pricing of the campaign. Substantially all of our revenues are generated from sales withinthe United States . Coupons. We generate revenues, as consumers select, activate, or redeem a coupon through our platform by either saving it to a retailer loyalty account for automatic digital redemption, or printing it for physical redemption at a retailer. Coupon setup fees relates to the creation of digital coupons and set up of the underlying campaign on our proprietary platform for tracking of related activations or redemptions. We recognize revenues related to coupon setup fees over time, proportionally, on a per transaction basis, using the number of authorized transactions per insertion order, commencing on the date of the first coupon transaction. Coupon transaction fees are generally determined on a per unit activation or per redemption basis, and are generally billed monthly. Insertion orders generally include a limit on the number of activations, or times consumers may select a coupon. Coupon Codes. We generally generate revenues when a consumer makes a purchase using a coupon code from our platform and completion of the order is reported to us. This leads to a transaction, and a distribution fee is generally paid to us. In the same period that we recognize revenues for the delivery of coupon codes, we also estimate and record a reserve, based upon historical experience, to provide for end-user cancelations or product returns which may not be reported until a subsequent date. 48
-------------------------------------------------------------------------------- Digital Media. Our media services enable CPGs and retailers to distribute digital media to promote their brands and products on our websites, and mobile apps, and through a network of affiliate publishers and non-publisher third parties that display our media offerings on their websites or mobile apps. Revenue is generally recognized each time a digital media ad is displayed or each time a user clicks on the media ad displayed on the Company's websites, mobile apps or on third party websites. Media pricing is generally determined on a per campaign, impression or per click basis and are generally billed monthly. Changes to the way we process and deliver media could affect whether revenue is recognized on a gross or net basis.
Cost of Revenues
Cost of revenues includes the costs resulting from distribution fees. If we deliver a digital promotion or media on a retailer's website or mobile apps or through its loyalty program, or the website or mobile apps of a publisher, we generally pay a distribution fee to the retailers or publisher which is included in our cost of revenues. These costs are expensed as incurred. We generally do not pay a distribution fee for a coupon or code which is offered through the website of the CPG or retailer that is offering the coupon or coupon code. From time to time, we have entered into arrangements pursuant to which we have agreed to the payment of minimum distribution or other service fees that are included in our cost of revenues. Cost of revenues also includes personnel compensation costs, depreciation and amortization expense of equipment, software and acquired intangible assets associated with revenue producing technologies, amortization of certain exclusivity rights acquired under strategic partnerships, data center costs and third-party service fees including traffic acquisition costs which consists of payments related to delivering campaigns on certain networks or sites, and purchase of third-party data. Personnel costs related to costs of revenues include salaries, bonuses, stock-based compensation and employee benefits. These costs are primarily attributable to individuals maintaining our data centers and members of our network operations group, which initiates, sets up and delivers digital promotion and media campaigns. We capitalize costs related to software that is developed or obtained for internal use. Costs incurred in connection with internal software development for revenue producing technologies are capitalized and are amortized in cost of revenues over the internal use software's useful life. The amortization of these costs begins when the internally developed software is ready for its intended use.
Operating Expenses
We classify our operating expenses primarily into three categories: sales and
marketing, research and development and general and administrative. Our
operating expenses consist primarily of personnel compensation costs and, to a
lesser extent, professional fees and facilities expense. Personnel costs for
each category of operating expenses generally include salaries, bonuses,
stock-based compensation and employee benefits.
Sales and marketing. Our sales and marketing expenses consist primarily of
personnel compensation costs (including salaries and benefits, sales
commissions, and stock-based compensation) provided to our sales and marketing
personnel, brand marketing, amortization of acquired intangible asset costs
associated with professional services, travel, trade shows and marketing
materials. We expect to continue to invest in sales and marketing in order to
support our growth and business objectives, while continuing to optimize our
investment in promotional and advertising activities.
Research and development. Our research and development expenses consist
primarily of personnel compensation costs (including salaries and benefits,
bonuses, and stock-based compensation) provided to our engineering personnel,
costs of professional services associated with the ongoing development of new
products and the enhancement of existing products; fees for design, testing,
consulting, and other related services.
We believe that continued investment in technology, as well as business process
and automation, is critical to attaining our strategic objectives. Our
investment in research and development will be balanced with our continued
operational and cost optimization efforts including headcount shift to low cost
locations, as it provides us with the ability to invest in strategic areas,
while managing growth in future periods.
General and administrative. Our general and administrative expenses consist
primarily of personnel compensation costs (including salaries and benefits,
bonuses and stock-based compensation) provided to our executives, finance,
legal, human resources, compliance and other administrative personnel, as well
as facility costs and other related overheads; accounting, tax and legal
professional services fees and other corporate expenses.
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We expect to continue to incur additional general and administrative expenses in
future periods as we continue to invest in corporate infrastructure to support
our expected growth as well as additional compliance costs associated with being
a public Company.
Change in fair value of escrowed shares and contingent consideration, net. The
change in fair value of escrowed shares relates to the acquisition of certain
exclusivity rights under a services and data agreement whereby a certain amount
of shares were issued and placed in escrow. Those shares are subject to
re-measurement until they are released from escrow. The change in fair value of
contingent consideration is due to the re-measurement contingent consideration
liabilities resulting from acquisitions based on the expected achievement of
certain financial metrics over each acquisition's respective contingent
consideration period.
Interest expense
Interest expense consists of cash coupon interest, accretion of debt discounts and issuance costs and primarily relates to our debt obligations under our convertible senior notes issued during the fourth quarter of 2017.
Other Income (Expense), Net
Other income (expense), net, includes interest income on short-term certificate of deposits and foreign currency exchange gains and losses.
Provision for (Benefit from) Income Taxes
We recorded a provision for income taxes of$0.7 million and$0.5 million for the years endedDecember 31, 2019 and 2018, respectively, and a benefit from income taxes$0.7 million for the year endedDecember 31, 2017 . The provision for income taxes for the years endedDecember 31, 2019 and 2018 was primarily the impact of the indefinite lived deferred tax liabilities related to tax deductible goodwill, change in the geographical mix of earnings in foreign jurisdictions and state taxes. The benefit from income taxes for the year endedDecember 31, 2017 was primarily attributable to the impact of the re-measurement of certain indefinite lived deferred tax liabilities related to tax deductible goodwill as a result of the Tax Act.
Results of Operations
The following tables set forth our consolidated results of operations and our
consolidated results of operations as a percentage of revenues for the periods
presented.
Year Ended December 31,
2019 2018 2017
(in thousands, except percentages)
Revenues $ 436,160 100.0 % $ 386,958 100.0 % $ 322,115 100.0 %
Cost and expenses:
Cost of revenues 263,606 60.4 % 206,230 53.3 % 140,752 43.7 %
Sales and marketing 101,244 23.2 % 90,086 23.3 % 92,833 28.8 %
Research and development 39,076 9.0 % 46,873 12.1 % 50,009 15.5 %
General and administrative 58,328 13.4 % 49,805 12.9 % 48,124 14.9 %
Change in fair value of escrowed
shares and
contingent consideration, net 1,571 0.4 % 13,190
3.4 % 5,515 1.7 %
Total costs and expenses 463,825 106.4 % 406,184 105.0 % 337,233 104.6 %
Loss from operations (27,665 ) (6.3 )% (19,226 ) (5.0 )% (15,118 ) (4.6 )%
Interest expense (13,955 ) (3.2 )% (13,411 ) (3.5 )% (1,589 ) (0.5 )%
Other income (expense), net 5,223 1.2 % 4,801 1.2 % 928 0.3 %
Loss before income taxes (36,397 ) (8.3 )% (27,836 ) (7.3 )% (15,779 ) (4.8 )%
Provision for (benefit from)
income taxes 660 0.2 % 482 0.1 % (702 ) (0.2 )%
Net loss $ (37,057 ) (8.5 )% $ (28,318 ) (7.4 )% $ (15,077 ) (4.6 )%
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Disaggregated Revenue
The following table presents the Company's revenues disaggregated by type of services. The majority of the Company's revenue is generated from sales withinthe United States . Year Ended December 31, 2018 to 2019 2017 to 2018 (in thousands, except percentages) 2019 2018 2017 $ Change % Change $ Change % Change Promotion$ 246,479 $ 245,493 $ 237,184 $ 986 0 %$ 8,309 4 % Media 189,681 141,465 84,931 48,216 34 % 56,534 67 % Total revenue$ 436,160 $ 386,958 $ 322,115 $ 49,202 13 %$ 64,843 20 % Revenues Year Ended December 31, 2018 to 2019 2017 to 2018 (in thousands, except percentages) 2019 2018 2017 $ Change % Change $ Change % Change Revenues$ 436,160 $ 386,958 $ 322,115 $ 49,202 13 %$ 64,843 20 % Revenues increased by$49.2 million , or 13%, during the year endedDecember 31, 2019 , as compared to 2018. The increase was primarily due to growth in media revenue as a result of an increase in adoption of our media product offerings. During 2019, revenues from digital promotion and media campaigns were 57% and 43% of total revenues, respectively, as compared to 63% and 37% of total revenues, respectively, for 2018. Revenues increased by$64.8 million , or 20%, during the year endedDecember 31, 2018 , as compared to the same period in 2017. The increase was primarily due to growth in media revenue, including incremental revenue related to our acquisition of Ahalogy in the second quarter of 2018, and promotions driven by the continued growth of Retailer iQ transactions. During 2018, revenues from promotion transactions and media were 63% and 37% of total revenues, respectively, as compared to 74% and 26% of total revenues, respectively, for 2017. We expect to see variability in our results quarter over quarter in the future as we continue to integrate our digital promotions and media solutions into retailers' in-store and point of sale systems and consumer channels, and as we continue to manage digital print trends. We expect revenue growth in 2020 from increased media revenues as well as promotion revenues with anticipated marketing campaigns as well as adoption of our platform by consumers. During the second half of 2020, we expect revenue to be approximately 57% of our annual revenue. Beginning the second quarter of 2020, for certain media arrangements, we will start to perform media services under the specific direction of our customers and therefore we will no longer control the media inventory before it is transferred to the customer. Accordingly, we will not be the principal in those arrangements and will recognize revenue net of certain costs resulting in reduced revenue growth.
Cost of Revenues and Gross Profit
Year Ended December 31, 2018 to 2019 2017 to 2018
(in thousands, except
percentages) 2019 2018 2017 $ Change % Change $ Change % Change
Cost of revenues $ 263,606 $ 206,230 $ 140,752 $ 57,376 28 % $ 65,478 47 %
Gross profit $ 172,554 $ 180,728 $ 181,363 $ (8,174 ) (5 )% $ (635 ) (0 )%
Gross margin 40 % 47 % 56 %
Cost of revenues for the year ended December 31, 2019 increased by $57.4
million , or 28%, as compared to the same period in 2018. The increase was
primarily due to product mix shift, as revenues from media, as a percentage of
revenue, continue to increase as compared to promotion revenue (such media
revenues have higher data and traffic acquisition costs related to offsite media
on non-owned-and-operated properties) contributing to an increase of $52.9
million in data and traffic acquisition costs for offsite media on
non-owned-and-operated properties as well as an increase in distribution fees
paid to our partners for promotions and media revenues delivered through their
platforms, an increase in amortization expense of $6.8 million related to
acquired intangible assets as well as certain exclusivity rights acquired under
strategic partnerships, an increase in compensation costs, including stock-based
compensation of $1.2 million , partially offset by a decrease in data center
expenses of $2.7 million , a decrease in restructuring charges of $0.5 million ,
and an decrease in overhead expenses related to facilities and infrastructure
support of $0.3 million .
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-------------------------------------------------------------------------------- Gross margin for the year endedDecember 31, 2019 decreased to 40% from 47%, as compared to the same period in 2018. The decrease was primarily due to the continued shift in our product mix as revenues from media, which have higher data and traffic acquisition costs related to offsite media, as a percentage of our total revenue, continue to increase compared to our promotion revenue. The decrease is also attributable to an increase in distribution fees paid to our partners for promotions and media revenues delivered through their platform, as well as an increase in amortization expense related to acquired intangible assets. Cost of revenues for the year endedDecember 31, 2018 increased by$65.5 million , or 47%, as compared to the same period in 2017. The increase was primarily due to an increase of$51.5 million in distribution fees corresponding to a greater number of Retailer iQ transactions completed through our platform, as well as higher data and traffic acquisition costs for offsite media on non-owned-and-operated properties, an increase in amortization expense of$6.6 million related to acquired intangible assets as well as certain exclusivity rights acquired under strategic partnerships, an increase in data center expenses of$2.5 million , an increase in compensation costs, including stock-based compensation of$2.8 million , an increase in overhead expenses related to facilities and infrastructure support of$1.7 million , and an increase in restructuring charges of$0.4 million . Gross margin for the year endedDecember 31, 2018 decreased to 47% from 56%, as compared to the same period in 2017. The decrease was primarily due to the continued shift in our product mix as revenues from media, which have higher data and traffic acquisition costs related to offsite media, as a percentage of our total revenue continue to increase compared to our promotion revenue. The decrease is also attributable to an increase in distribution fees paid to our partners for promotions and media revenues delivered through their platform. We expect the costs associated with distribution and third-party service fees to continue to increase in absolute dollars in the future as we continue to expand and scale our distribution network and reach. We expect gross margins as a percentage of revenue to improve over time as we make changes to the business to reduce costs, improve profitability and drive the sale of products that are more profitable. However, if we are unsuccessful at driving significant cost savings or at changing our mix of products being sold, we would expect continued pressure on our gross margin as our growth strategy evolves and our product mix continues to change. Sales and Marketing Year Ended December 31, 2018 to 2019 2017 to 2018 (in thousands, except percentages) 2019 2018 2017 $ Change % Change $ Change % Change Sales and marketing$ 101,244 $ 90,086 $ 92,833 $ 11,158 12 %$ (2,747 ) (3 )% Percent of revenues 23 % 23 % 29 % Sales and marketing expenses increased by$11.2 million , or 12%, during the year endedDecember 31, 2019 , as compared to the same period in 2018. The increase was primarily the result of an increase in compensation costs of$11.4 million related to acquisitions and hiring additional employees to support our growth and business objectives, an increase in intangible asset amortization expense of$2.3 million related to our acquisitions, partially offset by reduced spending in promotional and advertising costs of$1.2 million resulting from our expense management efforts, a decrease in restructuring charges of$1.0 million related to severance for impacted employees, and a decrease in facilities expense of$0.3 million . Sales and marketing expenses decreased by$2.7 million , or 3%, during the year endedDecember 31, 2018 , as compared to the same period in 2017. The decrease was primarily the result of reduced spending in promotional and advertising costs of$9.8 million resulting from our expense management efforts, partially offset by an increase in compensation costs of$4.6 million from acquisitions and hiring additional employees to support our growth and business objectives, an increase in intangible asset amortization expense of$1.0 million related to our acquisitions, an increase in facilities expense of$0.9 million , and an increase in restructuring charges of$0.6 million due to severance for impacted employees. Research and Development Year Ended December 31, 2018 to 2019 2017 to 2018 (in thousands, except percentages) 2019 2018 2017 $ Change % Change $ Change % Change Research and development$ 39,076 $ 46,873 $ 50,009 $ (7,797 ) (17 )%$ (3,136 ) (6 )% Percent of revenues 9 % 12 % 16 % 52
-------------------------------------------------------------------------------- Research and development expenses decreased by$7.8 million , or 17%, during the year endedDecember 31, 2019 , as compared to the same period in 2018. The decrease was primarily due to an increase in capitalization of internal use software development costs of$3.2 million , a decrease in compensation costs of$2.0 million as we continue to scale in lower cost geographical areas, a decrease in overhead expenses related to facilities and infrastructure support of$1.5 million , and a decrease in restructuring charges of$1.3 million primarily related to severance for the impacted employees. During the year endedDecember 31, 2019 , we capitalized internal use software development costs of$4.2 million , as compared to$1.0 million during the year endedDecember 31, 2018 . As we continue to invest in our products and customer offerings to develop new product functionality, the higher capitalization of costs will result in lower research and development expenses. Research and development expenses decreased by$3.1 million , or 6%, during the year endedDecember 31, 2018 , as compared to the same period in 2017. The decrease was primarily due to a decrease in compensation costs of$4.1 million , a decrease in research and development support activities of$1.5 million , and a decrease in overhead expenses related to facilities and infrastructure support of$1.2 million , partially offset by a reduction in capitalization of internal use software development costs of$2.8 million , and an increase in restructuring charges of$0.9 million primarily related to severance for the impacted employees. During the year endedDecember 31, 2018 , we capitalized internal use software development costs of$1.0 million , as compared to$3.8 million during the year endedDecember 31, 2017 . General and Administrative Year Ended December 31, 2018 to 2019 2017 to 2018 (in thousands, except percentages) 2019 2018 2017 $ Change
% Change $ Change % Change
General and administrative
17 % $ 1,681 3 %
Percent of revenues 13 % 13 % 15 %
General and administrative expenses increased by $8.5 million , or 17%, during
the year ended December 31, 2019 , as compared to the same period in 2018. The
increase was primarily due to an increase in compensation costs of $3.3 million
from acquisitions and hiring additional employees to support our growth and
business objectives, an increase in restructuring charges of $2.7 million
related to the impairment of capitalized software development costs associated
with a non-strategic product and severance for certain executive management
changes, an increase in other administrative expenses of $1.2 million , an
increase in allowance for doubtful accounts of $0.7 million and an increase in
acquisition related charges of $0.6 million .
General and administrative expenses increased by $1.7 million , or 3%, during the
year ended December 31, 2018 , as compared to the same period in 2017. The
increase was primarily due to an increase in professional service fees of $1.7
million due to increased compliance costs associated with the Sarbanes-Oxley
Act, the change in expense related to the allowance for doubtful accounts of
$1.2 million , and an increase in acquisition related charges of $0.9 million ,
partially offset by a decrease in ERP cloud-based software implementation costs
of $1.2 million , and a decrease in restructuring charges of $0.9 million
primarily related to facility exit costs and severance for the impacted
employees.
Change in Fair Value of Escrowed Shares and Contingent Consideration, Net
Year Ended December 31, 2018 to 2019 2017 to 2018
(in thousands, except
percentages) 2019 2018 2017 $ Change % Change $ Change % Change
Change in fair value of
escrowed
shares and contingent
consideration, net $ 1,571 $ 13,190 $ 5,515 $ (11,619 ) (88 )% $ 7,675 139 %
During the year ended December 31, 2019 , we recorded a charge of $1.6 million
related to the remeasurement of both Elevaate's and Ahalogy's contingent
consideration, due to the increase in expected achievement of certain financial
metrics over the contingent consideration period, as discussed in Note 3 (Fair
Value Measurements).
During the year ended December 31, 2018 , we recorded a charge of $14.3 million
related to the remeasurement of both Ahalogy's and Crisp's contingent
consideration, due to the increase in expected achievement of certain financial
metrics over the contingent consideration period, as discussed in Note 3 (Fair
Value Measurements), partially offset by a gain of $1.1 million related to
certain escrowed shares resulting from a decrease in the Company's stock price
as discussed in Note 7 (Goodwill and Intangible Assets). The period for
measuring Crisp's contingent consideration ended during the second quarter of
2018 and the final amount of contingent consideration was paid out to the
Sellers of Crisp during the third quarter of 2018.
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During the year ended December 31, 2017 , we recorded a loss of $3.7 million
primarily due to the change in fair value of Crisp contingent consideration
related to the increase in expected achievement of certain financial metrics
over the contingent consideration period, and a loss of $2.0 million due to the
decrease in fair value of certain escrowed shares related to a decrease in the
Company's stock price.
Interest Expense and Other Income (Expense), Net
Year Ended December 31, 2018 to 2019 2017 to 2018
(in thousands, except
percentages) 2019 2018 2017 $ Change % Change $ Change % Change
Interest expense $ (13,955 ) $ (13,411 ) $ (1,589 ) $ (544 ) 4 % $ (11,822 ) 744 %
Other income (expense),
net 5,223 4,801 928 422 9 % 3,873 417 %
$ (8,732 ) $ (8,610 ) $ (661 ) $ (122 ) 1 % $ (7,949 ) 1,203 %
Interest expense is related to the convertible senior notes issued during the fourth quarter of 2017, promissory note and finance lease obligations.
Other income (expense), net consists primarily of interest income on short-term certificate of deposits andU.S. Treasury Bills held as cash equivalents. The increase in other income (expense), net during the year endedDecember 31, 2019 , as compared to the same period in 2018, was due to interest income earned onU.S. Treasury Bills held as cash equivalents, net of the effect of re-measuring balances in foreign currency due to exchange rate fluctuations. The increase in other income (expense), net during the year endedDecember 31, 2018 as compared to the same period in 2017, was due to interest income earned on short-term certificate of deposits andU.S. Treasury Bills held as cash equivalents, net of the effect of re-measuring balances in foreign currency due to exchange rate fluctuations.
Provision for (benefit from) Income Taxes
Year Ended December 31, 2018 to 2019 2017 to 2018
(in thousands, except
percentages) 2019 2018 2017 $ Change % Change $ Change % Change
Provision for (benefit
from) income
taxes $ 660 $ 482 $ (702 ) $ 178 37 % $ 1,184 (169 )%
The provision for income taxes of $0.7 million for the year ended December 31,
2019 was primarily attributable to the impact of the indefinite lived deferred
tax liabilities related to tax deductible goodwill, change in the geographical
mix of earnings in foreign jurisdictions and state taxes.
The provision for income taxes of $0.5 million for the year ended December 31,
2018 was primarily attributable to the impact of the indefinite lived deferred
tax liabilities related to tax deductible goodwill, change in the geographical
mix of earnings in foreign jurisdictions and state taxes.
The income tax benefit of $0.7 million for the year ended December 31, 2017 was
primarily attributable to the impact of the re-measurement of certain indefinite
lived deferred tax liabilities related to tax deductible goodwill recorded on
our consolidated balance sheets due to the Tax Act enacted December 22, 2017 .
Liquidity and Capital Resources
We have financed our operations and capital expenditures primarily through the issuance of convertible senior notes and cash flows from operations. As ofDecember 31, 2019 , our principal source of liquidity were cash and cash equivalents of$224.8 million , which were held for working capital purposes. Our cash equivalents are comprised primarily of money market funds andU.S. Treasury Bills. In the near term, although we intend to continue to manage our operating expenses in line with our existing cash and available financial resources, we anticipate we will incur increased spending in future periods in order to execute our long-term business plan and to support our growth to fund our operating expenses. We have incurred and expect to continue to incur legal, accounting, regulatory compliance and other costs in future periods as we continue to invest in corporate infrastructure. In addition, we may use cash to fund acquisitions or invest in other business, repurchase the Company's common stock under the publicly announced share repurchase program or incur capital expenditures including leasehold improvements or technologies. 54 -------------------------------------------------------------------------------- Our Board of Directors has approved programs for us to repurchase shares of our common stock. DuringMay 2019 , the 2018 repurchase program (the "2018 Program") expired. InApril 2019 , our Board of Directors authorized a one-year share repurchase program ("May 2019 Program") for us to repurchase up to$60.0 million of our common stock fromMay 2019 throughMay 2020 . InAugust 2019 , our Board of Directors authorized a one-year share repurchase program (the "August 2019 Program") for us to repurchase up to$50.0 million of our common stock fromAugust 2019 throughAugust 2020 . Stock repurchases may be made from time to time in open market transactions or privately negotiated transactions, and we may use a plan that is intended to meet the requirements of SEC Rule 10b5-1 to enable stock repurchases to occur during periods when the trading window would otherwise be closed. During the year endedDecember 31, 2019 , we repurchased and retired 8,088,993 shares of our common stock for an aggregate value of$85.5 million under the 2018 Program and theMay 2019 Program. As ofDecember 31, 2019 ,$50.0 million remained available for repurchase under theAugust 2019 Program. We accounted for the retirement of treasury stock by allocating the excess repurchase price over par value of the repurchased shares between additional paid-in capital and accumulated deficit. When the repurchase price of the shares repurchased is greater than the original issue proceeds, the excess is charged to accumulated deficit. We believe our existing cash, cash equivalents and cash flow from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. In the event additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Year Ended December 31,
2019 2018 2017
Cash flows provided by operating activities
$ 48,457 Cash flows used in investing activities (16,824 ) (21,119 ) (18,253 ) Cash flows (used in) provided by financing activities (92,235 ) (33,558 ) 198,276 Effects of exchange rates on cash (23 ) 22 (19 ) Net (decrease) increase in cash and cash equivalents$ (77,264 ) $ (32,607 ) $ 228,461 Operating Activities Cash provided by operating activities is primarily influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business and the increase in our revenues. Cash provided by operating activities has typically been the result of net losses offset by non-cash charges such as stock-based compensation, depreciation and amortization as well as the amortization of debt discount and issuance costs. Operating cash flows are also impacted by the net changes in working capital. During 2019, net cash provided by operating activities of$31.8 million reflects our net loss of$37.1 million , adjusted for net non-cash expenses of$83.4 million , and cash used as a result of changes in working capital of$14.5 million . Non-cash expenses included depreciation and amortization, stock-based compensation, amortization of debt discount and issuance costs, allowance for doubtful accounts, deferred income taxes, net change in fair value of contingent consideration, impairment of capitalized software development costs, and other non-cash expenses, including amortization of right-of-use asset and loss on disposal of property and equipment. The primary uses of cash from working capital items included an increase in prepaid expenses and other current assets of$11.2 million related to prepaid subscription and support fees, an increase in accounts receivable of$7.1 million , partially offset by an increase in accrued compensation and benefits of$1.6 million , and increase in deferred revenues of$2.2 million . During 2018, net cash provided by operating activities of$22.1 million reflects our net loss of$28.3 million , adjusted for net non-cash expenses of$81.8 million , and cash provided as a result of changes in working capital of$31.4 million . Non-cash expenses included stock-based compensation, change in the fair value of escrowed shares and contingent consideration, net, depreciation and amortization, restructuring charge related to facility exist costs, amortization of debt discount and issuance costs, deferred income taxes, allowance for doubtful accounts, and loss on disposal of property and equipment. The uses of cash from working capital items included an increase in accounts receivable of$26.0 million , payments for Crisp contingent consideration of$9.7 million related to the changes in fair value over the contingent consideration period, a decrease in accrued compensation and benefits of$1.3 million , and an increase in prepaid expenses and other current assets of$0.9 million related to prepaid subscription and support fees, partially offset by an increase in accounts payable and other current liabilities of$6.5 million due to timing of services and payments. 55
-------------------------------------------------------------------------------- During 2017, net cash provided by operating activities of$48.5 million reflects our net loss of$15.1 million , adjusted for net non-cash expenses of$57.6 million , and cash provided as a result of changes in working capital of$6.0 million . Non-cash expenses included stock-based compensation, depreciation and amortization, change in the fair value of escrowed shares and contingent consideration, restructuring charge related to facility exit costs, amortization of debt issuance costs, loss on disposal of property and equipment, deferred income taxes and recovery from allowance for doubtful accounts. The cash from the net change in working capital items included, most notably an increase in accounts payable and other current liabilities of$12.8 million and an increase in accrued compensation and benefits of$0.7 million , partially offset by an increase in accounts receivable of$4.4 million due to timing of invoicing and collections, an increase in prepaid expenses and other current assets of$2.5 million related to prepaid subscription and support fees, and a decrease in deferred revenue of$0.6 million .
Investing Activities
Historically, investing cash flows have been comprised primarily of the purchase and sale of short-term investments as well as the investment in acquisitions and the purchase of intangible assets. We also invest in purchases of property and equipment which may vary from period-to-period due to the timing of the expansion of our operations, the addition of headcount and the development activities related to our future offerings. We expect to continue to invest in property and equipment and in the further development and enhancement of our software platform for the foreseeable future. In addition, from time to time, we may consider potential acquisitions that would complement our existing service offerings, enhance our technical capabilities or expand our marketing and sales presence. Any future transaction of this nature could require potentially significant amounts of capital or could require us to issue our stock and dilute existing stockholders. During 2019, net cash used in investing activities of$16.8 million reflects cash payments made to acquire certain exclusive rights pursuant to strategic partnership agreements of$14.8 million that were entered into during 2018. In addition, we paid$13.7 million , net of cash acquired, for the acquisition of Ubimo, and the purchase of property and equipment of$9.0 million , which includes capitalized software development costs, and technology hardware and software to support our growth, partially offset by proceeds from the maturities of certificates of deposits of$20.7 million . During 2018, net cash used in investing activities of$21.1 million reflects the cash consideration paid of$33.7 million , net of cash acquired, for the acquisitions of Ahalogy, Elevaate, and SavingStar, payments of$20.5 million to acquire certain exclusive rights pursuant to strategic partnership agreements, purchases of certificates of deposits of$75.1 million , purchases of property and equipment of$6.1 million , which includes capitalized software development costs, and technology hardware and software to support our growth, partially offset by proceeds from the maturities of certificates of deposits of$114.3 million . During 2017, net cash used in investing activities of$18.2 million reflects the purchases of certificates of deposits of$114.2 million , net cash consideration paid for the Crisp acquisition of$21.0 million , purchases of property, equipment and intangible assets of$6.5 million , which includes capitalized software development costs related to Quotient Analytics, and technology hardware and software to support our growth, partially offset by proceeds from the maturities of certificates of deposits of$123.5 million .
Financing Activities
Our financing activities have historically consisted primarily of cash flow from the borrowing on our convertible senior notes, repurchases of common stock, payments made for shares withheld to cover payroll withholding taxes and the issuance of shares of common stock upon the exercise of stock options. During 2019, net cash used in financing activities of$92.2 million reflects repurchases of common stock of$87.1 million , payments made for shares withheld to cover the required payroll withholding taxes of$9.8 million , and payments on promissory note and finance lease obligations of$0.3 million , partially offset by proceeds received from exercises of stock options under equity incentive plans and ESPP, net of$5.0 million . During 2018, net cash used in financing activities of$33.6 million reflects the payments for Crisp contingent consideration of$14.8 million (initially measured and included as part of purchase consideration on the date of acquisition and disclosed as a liability on the consolidated balance sheets), repurchases of common stock of$14.3 million , payments made for shares withheld to cover the required payroll withholding taxes of$11.7 million , and payments on promissory note and finance lease obligations of$0.3 million , partially offset by proceeds received from exercises of stock options under equity incentive plans and ESPP, net of$7.5 million . 56
-------------------------------------------------------------------------------- During 2017, net cash provided by financing activities of$198.3 million reflects the issuance of$200.0 million principal amount of convertible senior notes due 2022, net of issuance costs of$6.2 million , proceeds received from exercises of stock options under stock plans of$8.8 million , partially offset by payments for taxes related to shares withheld to cover the required payroll withholding taxes for the settlement of equity awards of$4.0 million , and payments on promissory note and finance lease obligations of$0.3 million .
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Contractual Obligations
The following table summarizes our future minimum payments under contractual
commitments as of
Payments Due by Period
Less Than More Than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Convertible senior notes (1) $ 200,000 $ - $ 200,000 $ - $ -
Interest obligations (2) 10,208 3,500 6,708 - -
Operating leases (3) 11,637 3,836 4,121 3,124 556
Purchase obligations (4) 43,295 17,174 21,377 1,116 3,628
Total $ 265,140 $ 24,510 $ 232,206 $ 4,240 $ 4,184 (1) Represents aggregate principal amount of the convertible senior notes,
without the effect of associated discounts.
(2) Represents the estimated interest obligation for our outstanding convertible
senior notes that is payable in cash.
(3) We lease various office facilities, including our corporate headquarters in
agreements that expire through
agreements provide for rental payments on a graduated basis.
(4) We have an unconditional purchase commitment for the years 2019 to 2034 in
the amount of
purchase of a 20-year suite license for a professional sports team which we
use for sales and marketing purposes. We have unconditional purchase
commitments, primarily related to distribution fees, ongoing software license
fees and marketing services, of
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with business combinations, goodwill and intangible assets, convertible senior notes, revenue recognition, stock-based compensation and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our consolidated financial statements.
Business Combinations
We account for acquisitions of entities that include inputs and processes and
have the ability to create outputs as business combinations. Under the
acquisition method of accounting, the total consideration is allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values at the acquisition dates. The excess of the
consideration transferred over those fair values is recorded as goodwill. During
the measurement period, which may be up to one year from the acquisition date,
we may record adjustments to the assets acquired and liabilities assumed with
the corresponding offset to goodwill.
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In determining the fair value of assets acquired and liabilities assumed in a
business combination, we use recognized valuation methods, including the income
approach, market approach and cost approach, and apply present value modeling.
Our significant estimates in the income, market or cost approach include
identifying business factors such as size, growth, profitability, risk and
return on investment and assessing comparable net revenues and operating income
multiples in estimating the fair value. We also make certain assumptions
specific to present value modeling valuation techniques which include
risk-adjusted discount rates, rates of increase in operating expenses,
weighted-average cost of capital, long-term growth rate assumptions and the
future effective income tax rates.
The valuations of our acquired businesses have been performed by valuation
specialists under our management's supervision. We believe that the estimated
fair value assigned to the assets acquired and liabilities assumed are based on
reasonable assumptions and estimates that marketplace participants would use.
However, such assumptions are inherently uncertain and actual results could
differ from those estimates. Future changes in our assumptions or the
interrelationship of those assumptions may negatively impact future valuations.
In future measurements of fair value, adverse changes in discounted cash flow
assumptions could result in an impairment of goodwill or intangible assets that
would require a non-cash charge to the consolidated statements of operations and
may have a material effect on our financial condition and operating results.
Acquisition related costs are not considered part of the consideration, and are
expensed as general and administrative expense as incurred. Contingent
consideration, if any is measured at fair value initially on the acquisition
date as well as subsequently at the end of each reporting period, typically
based on the expected achievement of certain financial metrics, until settlement
at the end of the assessment period.
Goodwill is tested for impairment at least annually, and more frequently upon the occurrence of certain events that may indicate that the carrying value of goodwill may not be recoverable. Events or circumstances that could trigger an impairment test include, but are not limited to, a significant adverse change in the business climate or in legal factors, an adverse action or assessment by a regulator, a loss of key personnel, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, significant underperformance relative to operating performance indicators, a significant decline in market capitalization and significant changes in competition. We complete our annual impairment test during the fourth quarter of each year, at the reporting unit level, which is at the company level as a whole, since we operate in one single reporting segment. Intangible assets with a finite life are amortized over their estimated useful lives. 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.
Recoverability of assets to be held and used is measured first by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, an impairment loss would be recognized for an amount by which the carrying amount of the asset exceeds the fair value of the asset.
Convertible Senior Notes
In accounting for the issuance of the notes, we separated the notes into
liability and equity components. The carrying amount of the liability component
was calculated by measuring the fair value of a similar liability that does not
have an associated convertible feature. The carrying amount of the equity
component representing the conversion option was determined by deducting the
fair value of the liability component from the par value of the notes as a
whole. This difference represents a debt discount that is amortized to interest
expense over the terms of the notes. The equity component is not remeasured as
long as it continues to meet the conditions for equity classification. In
accounting for the issuance costs related to the notes, we allocated the total
amount incurred to the liability and equity components. Issuance costs
attributable to the liability components are being amortized to expense over the
contractual term of the notes, and issuance costs attributable to the equity
component were netted with the equity component in additional paid-in capital.
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Revenue Recognition
We primarily generate revenue by providing digital promotions and media solutions to our customers and partners. Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition through the following steps:
• Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price
• Allocation of the transaction price to the performance obligations in the
contract
• Recognition of revenue when, or as, we satisfy a performance obligation
Promotion Revenue We generate revenue from promotions, in which consumer packaged goods brands, or CPGs, pay us to deliver coupons to consumers through our network of publishers and retail partners. We generate revenues, as consumers select, activate, or redeem a coupon through our platform by either saving it to a retailer loyalty account for automatic digital redemption, or printing it for physical redemption at a retailer. The pricing for promotion arrangements generally includes both coupon setup fees and coupon transaction fees. Coupon setup fees are related to the creation of digital coupons and set up of the underlying campaign on our proprietary platform for tracking of related activations or redemptions. We recognize revenues related to coupon setup fees over time, proportionally, on a per transaction basis, using the number of authorized transactions per insertion order, commencing on the date of the first coupon transaction. Coupon transaction fees are generally determined on a per unit activation or per redemption basis, and are generally billed monthly. Insertion orders generally include a limit on the number of activations, or times consumers may select a coupon. Promotion revenues also include our Specialty Retail business, in which specialty stores including clothing, electronics, home improvement and others, offer coupon codes that we distribute. Each time a consumer makes a purchase using a coupon code, a transaction occurs and a distribution fee is generally paid to us. We generally generate revenues when a consumer makes a purchase using a coupon code from our platform and completion of the order is reported to us. In the same period that we recognize revenues for the delivery of coupon codes, we also estimate and record a reserve, based upon historical experience, to provide for end-user cancelations or product returns which may not be reported until a subsequent date. We present sales returns reserve as a liability within other current liabilities on the consolidated balance sheet for the year endedDecember 31, 2019 .
Media Revenue
Our media services enable CPGs and retailers to distribute digital media ads to promote their brands and products on our websites, and mobile apps, and through a network of affiliate publishers and non-publisher third parties that display our media offerings on their websites or mobile apps. Revenue is generally recognized each time a digital media ad is displayed or each time a user clicks on the media ad displayed on our websites, mobile apps or on third-party websites. Media pricing is generally determined on a per campaign, impression or per click basis and are generally billed monthly.
Gross versus Net Revenue Reporting
In the normal course of business and through our distribution network, we
deliver digital coupons and media on retailers' websites through retailers'
loyalty programs, and on the websites of digital publishers. In these
situations, we evaluate whether we are the principal (i.e., report revenues on a
gross basis) or agent (i.e., report revenues on a net basis). Generally, we
report digital promotion and media advertising revenues for campaigns placed on
third-party owned properties on a gross basis, that is, the amounts billed to
our customers are recorded as revenues, and distribution fees paid to retailers
or digital publishers are recorded as cost of revenues. We are the principal
because we control the digital coupon and media advertising inventory before it
is transferred to our customers. Our control is evidenced by our sole ability to
monetize the digital coupon and media advertising inventory, being primarily
responsible to our customers, having discretion in establishing pricing for the
delivery of the digital coupons and media, or a combination of these. Beginning
the second quarter of 2020, for certain media arrangements, we will start to
perform media services under the specific direction of our customers and
therefore we will no longer control the media inventory before it is transferred
to the customer. Accordingly, we will not be the principal in those arrangements
and will recognize revenue net of certain costs resulting in reduced revenue
growth.
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Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price, basis. We determine the best estimate of the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts and characteristics of targeted customers.
Stock-based Compensation
We account for stock-based compensation using the fair value method, which requires us to measure the stock-based compensation based on the grant-date fair value of the awards and recognize the compensation expense over the requisite service period. We account for forfeitures as they occur. The fair value of each stock option award is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of RSUs equals the market value of our common stock on the date of grant. Our option-pricing model requires the input of highly subjective assumptions, the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock.
Income Taxes
We account for our income taxes using the liability method. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. In evaluating our ability to recover our deferred tax assets we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in past fiscal years, and our forecast of future taxable income in the jurisdictions. We have placed a valuation allowance on theU.S. deferred tax assets and certain non-U.S. deferred tax assets, because realization of these tax benefits through future taxable income does not meet the more-likely-than-not threshold. We account for uncertainty in income taxes using 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 that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. TheU.S. recently enacted significant tax reform, and certain provisions of the new law may adversely affect us. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in theEuropean Union , as well as a number of other countries and organizations such as theOrganization for Economic Cooperation and Development , are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. IfU.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.
Recently Issued Accounting Pronouncements
See Part II, Item 8. Consolidated Financial Statements and Supplementary
Data, Note 2, Summary of Significant Accounting Policies, of Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K, for a full
description of recent accounting pronouncements, including the actual and
expected dates of adoption and estimated effects on our consolidated results of
operations and financial condition, which is incorporated herein by reference.
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