ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other
information in this periodic report. If any of such risks actually occur, our business, operating results or financial condition could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or
part of your investment.
Risks Related to Our Business and Industry
We operate in an emerging industry and have a relatively new business model, which makes it difficult to evaluate our business and prospects.
We derive nearly all of our revenue from the sale of online marketing and media services, which is an emerging industry that has
undergone rapid and dramatic changes in its relatively short history and which is characterized by rapidly-changing Internet media, evolving industry standards, regulatory uncertainty, and changing user and client demands. As a result, we face risks
and uncertainties such as but not limited to:
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our emerging industry and relatively new business model;
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changes in the economic condition, market dynamics, regulatory or legislative environment affecting our business or our clients businesses;
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our dependence on Internet search companies to attract Internet visitors;
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our ability to accurately forecast our operating results and appropriately plan our expenses;
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our ability to compete in our industry;
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our ability to develop our websites to allow Internet visitors to access our websites through mobile devices;
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our ability to develop new services and enhancements and features to meet new demands from our clients; and
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our ability to successfully challenge regulatory audit, investigations or alleged noncompliance with laws.
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If we are unable to address these risks, our business, results of operations and prospects could suffer.
We depend on two market verticals for a majority of our revenue. Negative changes in the economic condition, market dynamics or regulatory environment
in these verticals have caused, and may continue to cause, our revenue to decline and our business and growth to suffer.
To date,
we have generated a large majority of our revenue from clients in our education and financial services client verticals. We expect that a majority of our revenue, at least in the near term, will continue to be generated from clients in our education
and financial services client verticals. Changes in the market conditions or the regulatory environment in these two highly-regulated client verticals have negatively impacted, and may continue to negatively impact, our clients businesses,
marketing practices and budgets and, therefore, our financial results.
Our and our clients businesses are subject to many regulatory
requirements. Current or future regulations could have a material adverse effect on our business, results of operations and financial condition.
Our business is subject to many laws and regulatory requirements, including Federal, state, and local laws and regulations regarding
unsolicited commercial email, telemarketing, user privacy, search engines, Internet tracking technologies, direct marketing, data security, data privacy, pricing, sweepstakes, promotions, intellectual property ownership and infringement, trade
secrets, export of encryption technology, acceptable content and quality of goods, and taxation, among others. Each of our education, financial services and other client verticals is also subject to various laws and regulations, and our marketing
activities on behalf of our clients are regulated. Many of these laws are frequently changing, and keeping our business in compliance with or bringing our business into compliance with new laws may be costly, affect our revenue and harm our
financial results. Violations or alleged violations of laws by
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us, our third party publishers or clients could result in liability for damages, fines, criminal prosecution, unfavorable publicity, and restrictions on our ability to operate any of which could
have a material adverse effect on our business, results of operations and financial condition. In addition, new laws or regulations or changes in enforcement of existing laws or regulations applicable to our clients could affect the activities or
strategies of our clients and, therefore, lead to reductions in their level of business with us.
For example, the Federal Communications
Commission recently amended the Telephone Consumer Protection Act that affects telemarketing calls. Certain provisions of the regulations became effective in July 2012, and additional regulations requiring prior express written consent for certain
types of telephonic communications became effective in October 2013. Our efforts to comply with the TCPA has had a relatively small negative effect on traffic conversion rates. However, depending on future traffic and product mix, it could
potentially have a material effect on our revenue and profitability. Additionally, we generate leads from which consumers provide a wireless number, and in turn a significant amount of revenue comes from calls made by our internal call centers as
well as by third-party call centers. We also purchase a portion of our lead data from third-party publishers and cannot guarantee that these third parties will comply with the regulations. Any failure by us or the third-party publishers on which we
rely on for telemarketing, email marketing and other lead generation activities to adhere to or successfully implement appropriate processes and procedures in response to existing regulations and changing regulatory requirements could result in
legal liability or damage our reputation in the marketplace, either of which could have a material adverse effect on our business, results of operations and financial condition. Furthermore, our clients may make business decisions based on their own
experiences with the TCPA regardless of our products, and the changes we implemented to comply with the new regulations. These decisions may negatively affect our revenue or profitability.
From time to time, we are subject to audits, inquiries, investigations, claims of non-compliance and lawsuits by Federal and state
governmental agencies, regulatory agencies, attorneys general, and other governmental or regulatory bodies, any of whom may allege violations of legal requirements. For example, in June 2012, we entered into an Assurance of Voluntary Compliance
agreement following a civil investigation into certain of our marketing practices related to our education client vertical that was conducted by the attorneys general of a number of states. If the results of any future investigations, audits,
inquiries, claims or litigation are unfavorable to us, we may be required to pay monetary fines or penalties or have restrictions placed on our business, which could materially adversely affect our business, financial condition, results of
operations, and cash flows.
We depend on third-party website publishers for a significant portion of our visitors. Any decline in the supply of
media available through these websites or increase in the price of this media could cause our revenue to decline or our cost to reach visitors to increase.
A significant portion of our revenue is attributable to visitor traffic originating from third-party publishers. In many instances, website
publishers can change the media inventory they make available to us at any time and, therefore, impact our results of operations. In addition, website publishers may place significant restrictions on our offerings. These restrictions may prohibit
advertisements from specific clients or specific industries, or restrict the use of certain creative content or formats. If a website publisher decides not to make media inventory available to us, or decides to demand a higher revenue share or
places significant restrictions on the use of such inventory, we may not be able to find media inventory from other websites that satisfy our requirements in a timely and cost-effective manner. In addition, the number of competing online marketing
service providers and advertisers that acquire inventory from websites continues to increase. Consolidation of Internet advertising networks and website publishers could eventually lead to a concentration of desirable inventory on websites or
networks owned by a small number of individuals or entities, which could limit the supply or impact the pricing of inventory available to us. For example, since 2012, our revenue has declined in our financial services client vertical primarily due
to volume declines caused by losses of available media from third-party publishers acquired by competitors, changes in search engine algorithms which reduced or eliminated traffic from some third-party publishers and increased competition for
quality media. We cannot assure you that we will be able to acquire media inventory that meets our clients performance, price and quality requirements, in which case our revenue could decline or our operating costs could increase.
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Our operating results have fluctuated in the past and may do so in the future, which makes our results of
operations difficult to predict and could cause our operating results to fall short of analysts and investors expectations.
Historically, quarterly and annual operating results have fluctuated due to changes in our business, our industry and the general economic
climate. We expect our future operating results to vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. Our fluctuating operating results could cause our performance and outlook to be below
the expectations of securities analysts and investors, causing the price of our common stock to fall. Our business is changing and evolving, and, as a result, our historical operating results may not be useful to you in predicting our future
operating results. Factors that may increase the volatility of our operating results include the following:
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changes in client volume;
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loss of or reduced demand by existing clients;
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the availability and price of quality media;
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consolidation of media sources;
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changes in search engine algorithms that affect our and our publishers websites; and
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regulatory and legislative changes.
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We depend upon Internet search providers to direct a significant
portion of the visitors to our and our third-party publishers websites. Changes in search engine algorithms have in the past and may in the future harm the websites placements in both paid and organic search result listings, which may
cause the number of visitors to our websites, our third-party publishers websites and our revenue to decline.
Our success
depends on our ability to attract online visitors to our and our third-party publishers websites and convert them into prospects for our clients in a cost-effective manner. We depend on Internet search providers to direct a substantial share
of visitors to our websites. Search providers offer two types of search results: organic and paid listings. Organic listings are displayed based solely on formulas designed by the search companies. Paid listings are displayed based on a combination
of the advertisers bid price for particular keywords and the search engines assessment of the websites relevance and quality.
Our ability to maintain or grow the number of visitors to our websites from search providers is not entirely within our control. Search
providers frequently revise their algorithms and changes in their algorithms could cause our websites to receive less favorable placements. We have experienced fluctuations in organic rankings for a number of our websites and some of our paid
listing campaigns have also been harmed by search engine algorithmic changes. Search providers could determine that our or our third-party publishers websites content is either not relevant or is of poor quality. In addition, we may fail to
optimally manage our paid listings, or our proprietary bid management technologies may fail. In any of these cases, our websites may receive less favorable placement in organic or paid listings, which would reduce the number of visitors to our sites
and have a detrimental effect on our ability to generate revenue. If visits to our websites decrease, we may need to use more costly sources to replace lost visitors, and such increased expense could adversely affect our business and profitability.
If we fail to compete effectively against other online marketing and media companies and other competitors, we could lose clients and our revenue
may decline.
The market for online marketing is intensely competitive, and we expect this competition to continue to increase in
the future both from existing competitors and, given the relatively low barriers to entry into the market, from new competitors. We compete both for clients and for limited high-quality media. We compete for clients on the basis of a number of
factors, including return on investment of clients marketing spending, price and client service.
We compete with Internet and
traditional media companies for a share of clients overall marketing budgets, including:
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online marketing or media services providers such as Education Dynamics in the education client vertical and BankRate in the financial services client vertical;
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offline and online advertising agencies;
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major Internet portals and search engine companies with advertising networks;
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other online marketing service providers, including online affiliate advertising networks and industry-specific portals or lead generation companies;
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website publishers with their own sales forces that sell their online marketing services directly to clients;
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in-house marketing groups and activities at current or potential clients;
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offline direct marketing agencies;
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mobile and social media; and
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television, radio and print companies.
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Competition for web traffic among websites and search
engines, as well as competition with traditional media companies, has resulted and may continue to result in significant increases in media pricing, declining margins, reductions in revenue, and loss of market share. In addition, if we expand the
scope of our services, we may compete with a greater number of websites, clients and traditional media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise,
brand recognition and other areas. Internet search companies with brand recognition, such as Google, Yahoo! and Microsoft, have significant numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic that
provide a significant competitive advantage and have a significant impact on pricing for Internet advertising and web traffic. Some of these companies may offer or develop more vertically targeted products that match consumers with products and
services and, thus, compete with us more directly. The trend toward consolidation in online marketing may also affect pricing and availability of media inventory and web traffic. Many of our current and potential competitors also enjoy other
competitive advantages over us, such as longer operating histories, greater brand recognition, larger client bases, greater access to advertising inventory on high-traffic websites, and significantly greater financial, technical and marketing
resources. As a result, we may not be able to compete successfully. Competition from other marketing service providers online and offline offerings has affected and may continue to affect both volume and price, and, thus, revenue, profit
margins and profitability. If we fail to deliver results that are superior to those that other online marketing service providers deliver to clients, we could lose clients, and our revenue may decline.
Federal and state regulations governing clients in our education vertical have negatively affected, and may continue to negatively affect, our
clients businesses, marketing practices and budgets, any or all of which could have a material adverse effect on our financial results.
Historically, we have generated nearly half of our revenue from our education client vertical, and nearly all of that revenue was generated
from post-secondary educational institutions. Post-secondary educational institutions are subject to extensive Federal and state regulations, including the Higher Education Act, Department of Education regulations and individual state higher
education regulations. The regulations govern many aspects of these clients operations, including marketing and recruiting activities, as well as the schools eligibility to participate in Title IV Federal student financial aid programs,
which is the principal source of funding for many of our education clients. There have been significant changes to these regulations in the recent past, and a high level of regulatory activity and heightened legislative scrutiny is expected to
continue in the post-secondary education sector. Changes in, or new interpretations of, applicable laws, regulations, standards or policies applicable to these clients could have a material adverse effect on their accreditation, authorization to
operate in various states, or receipt of funds under Title IV programs, any of which, in turn, may harm our ability to generate revenue from these clients and our financial results.
More people are using mobile devices to access the internet. If we fail to develop our websites to keep pace with this shift in user devices, we may not
remain competitive and could lose clients or advertising inventory.
The number of people who access the Internet through mobile
devices such as smart phones and tablets has increased dramatically in the past few years, and the trend is expected to continue. Our online marketing services and content were originally designed for desktop or laptop computers. The shift from
desktop or laptop computers to mobile devices could potentially deteriorate the user experience for visitors to our websites and may make it more difficult for visitors to respond to our offerings. It may also require us to develop new offerings
specifically designed for mobile devices. Additionally, the monetization of our online marketing services and contents on these mobile devices might not be as lucrative for us compared to those on desktop and laptop computers. If we fail to develop
our websites cost effectively and improve our monetization capabilities of our mobile marketing services, we may not remain competitive and may negatively affect our business and operating results.
A substantial portion of our revenue is generated from a limited number of clients and, if we lose a major client, our revenue will decrease and our
business and prospects would be harmed.
A substantial portion of our revenue is generated from a limited number of clients. None
are 10% or more, however we have a few customers that account for a large portion of our net revenue for the quarter ended March 31, 2014. Our clients can generally terminate their contracts with us at any time, with limited prior notice or
penalty as these contracts do not contain penalty provisions for cancellations before the end of the contract term. Our clients may also reduce their level of business with us, leading to lower revenue.
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In addition, reductions in business by one or more significant clients may trigger price
reductions for our other clients for products whose prices are determined in whole or in part by client bidding or competition. Any such price reduction could result in lower revenue. We expect that a limited number of clients will continue to
account for a significant percentage of our revenue, and the loss of any one of these clients, or material reduction in their marketing spending with us, could decrease our revenue and harm our business.
We rely on our management team and other key employees, and the loss of one or more key employees could harm our business.
Our success and future growth depend upon the continued services of our management team, including Douglas Valenti, Chief Executive Officer,
and other key employees in all areas of our organization. From time to time, there may be changes in our key employees resulting from the hiring or departure of executives and employees, which could disrupt our business. We have experienced declines
in our business and a depressed stock price, making our equity and cash incentive compensation programs less attractive to current and potential key employees. If we lose the services of key employees or if we are unable to attract and retain
additional qualified employees, our business and growth could suffer.
Third-party publishers or vendors may engage in unauthorized or unlawful acts
that could subject us to significant liability or cause us to lose clients.
We generate a significant portion of our web visitors
from online media that we purchase from third-party website publishers. We also rely on third-party call centers and email marketers. Some of these third-parties are authorized to use our clients brands, subject to contractual restrictions.
Any activity by third-party publishers or vendors that clients view as potentially damaging to their brands can harm our relationship with the client and cause the client to terminate its relationship with us, resulting in a loss of revenue. In
addition, we may also face liability for any failure of our third-party publishers or vendors to comply with regulatory requirements, as further described in the risk factor beginning, Our business is subject to many regulatory requirements,
and current or future regulation could have a material adverse effect on our business, results of operations and financial condition.
The law is unsettled on the extent of liability that an advertiser in our position has for the activities of third-party publishers or
vendors. Recent Department of Education regulations impose strict liability on our education clients for misrepresentations made by their marketing service providers. In addition, certain of our contracts impose liability on us for the acts of our
third-party publishers or vendors. We could be subject to costly litigation and, if we are unsuccessful in defending ourselves, damages for the unauthorized or unlawful acts of third-party publishers or vendors.
We gather, transmit and store consumer personally identifiable information and unauthorized access to or accidental disclosure of this information may
cause us to incur significant expenses and may negatively affect our reputation and business.
We gather, transmit and store
consumer personally identifiable information. This information may include social security numbers, credit scores, credit card information, and financial and health information, some of which is held and managed by our third-party vendors. As a
result, we are subject to certain contractual terms, as well as Federal, state and foreign laws and regulations designed to protect personally identifiable information. Despite our implementation of security measures and controls, our computer
systems may be susceptible to electronic or physical computer break-ins, viruses and other disruptions and security breaches. In the past, we have experienced security incidents involving access to our user databases. Although, to our knowledge, no
sensitive financial or personal information has been compromised in the past, any future security incidents could result in the compromise of such data and subject us to liability. In addition, the increased use of mobile devices by our employees
increases the risk of unintentional disclosure of personally identifiable information. Any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of our network by an unauthorized party, employee
theft, misuse, or error could harm our reputation, impair our ability to attract website visitors and to attract and retain our clients, or subject us to claims or litigation arising from damages suffered by consumers, and thereby harm our business
and operating results. In addition, we could incur significant costs in complying with the multitude of state, Federal and foreign laws regarding personally identifiable information.
If we fail to continually enhance and adapt our products and services to keep pace with rapidly changing technologies and industry standards, we may not
remain competitive and could lose clients or advertising inventory.
The online media and marketing industry is characterized by
rapidly changing standards, changing technologies, frequent new product and service introductions, and changing user and client demands. The introduction of new technologies and services
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embodying new technologies and the emergence of new industry standards and practices could render our existing technologies and services obsolete and unmarketable or require unanticipated
investments in technology. We continually make enhancements and other modifications to our proprietary technologies, and these changes may contain design or performance defects that are not readily apparent. If our proprietary technologies fail to
achieve their intended purpose or are less effective than technologies used by our competitors, our business could be harmed.
Our future
success will depend in part on our ability to successfully adapt to these rapidly changing online media formats and other technologies. If we fail to adapt successfully, we could lose clients or advertising inventory.
Acquisitions and investments could complicate operations, or could result in dilution and other harmful consequences that may adversely impact our
business and results of operations.
Acquisitions have historically been an important element of our overall corporate strategy
and use of capital. Any possible future acquisitions could be material to our financial condition and results of operations. We may evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of
integrating an acquired company, business or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include:
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diversion of management time and focus from operating our business to acquisition integration challenges;
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failure to successfully further develop the acquired business or technology;
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implementation or remediation of controls, procedures and policies at the acquired company;
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integration of the acquired companys accounting, human resource, and other administrative systems, and coordination of product, engineering and sales and marketing functions;
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transition of operations, users and customers onto our existing platforms;
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failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or
prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;
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in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific
countries;
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cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire;
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liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown
liabilities; and
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litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third-parties.
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Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could
cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally.
Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities,
amortization expenses, impairment of goodwill or restructuring charges, any of which could harm our financial condition or results. Also, the anticipated benefit of many of our acquisitions may not materialize.
We rely on certain advertising agencies for the purchase of various advertising and marketing services on behalf of their clients. Such agencies may
have or develop high-risk credit profiles, which may result in credit risk to us.
A portion of our client business is sourced
through advertising agencies and, in many cases, we contract with these agencies and not directly with the underlying client. Contracting with these agencies subjects us to greater credit risk than where we contract with clients directly. In many
cases, agencies are not required to pay us unless and until they are paid by the underlying client. In addition,
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many agencies are thinly capitalized and have or may develop high-risk credit profiles. This credit risk may vary depending on the nature of an agencys aggregated client base. If an agency
became insolvent, or if an underlying client did not pay the agency, we may be required to write off account receivables as bad debt. Any such write-offs could have a materially negative effect on our results of operations for the periods in which
the write-offs occur.
We have a significant amount of debt, which may limit our ability to fund general corporate requirements and obtain
additional financing, limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic and industry conditions.
As of March 31, 2014, we had debt with a principal balance of $81.3 million. As a result of obligations associated with our debt, we may
not have sufficient liquidity:
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to respond to business opportunities, competitive developments and adverse economic conditions;
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to fund all of our costs if our revenue declines or costs increase; and
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to repay the principal balance of our debt when due.
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Our debt obligations may also impair our
ability to obtain additional financing, if needed. Our indebtedness is secured by substantially all of our assets, leaving us with limited collateral for additional financing. Moreover, the terms of our indebtedness restrict our ability to take
certain actions, including the incurrence of additional indebtedness, certain mergers and acquisitions, investments, asset sales, dividends, and stock repurchases. In addition, even if we are able to raise needed equity financing, we are required to
use a portion of the net proceeds of certain types of equity financings to repay the outstanding balance of our term loan. A failure to pay interest or indebtedness when due could result in a variety of adverse consequences, including the
acceleration of our indebtedness. In such a situation, it is unlikely that we would be able to fulfill our obligations under our credit facility or repay the accelerated indebtedness or otherwise cover our costs.
Damage to our reputation could harm our business, financial condition and results of operations.
Our business is dependent on attracting a large number of visitors to our and our third-party publishers websites and providing leads,
clicks, calls, and customers to our clients, which depends in part on our reputation within the industry and with our clients. There are companies within our industry that regularly engage in activities that others may view as unlawful or
inappropriate. These activities by third-parties, such as spyware or deceptive promotions, may be seen as characteristic of participants in our industry and, therefore, may harm the reputation of all participants in our industry, including us.
Our ability to attract potential consumers and, thereby, clients also depends in part on consumers receiving competitive levels of customer
service, responsiveness and prices from our lead purchasers. If lead purchasers do not provide competitive levels of service to consumers, our reputation and our ability to attract clients and consumers could be harmed.
In addition, from time to time, we may be subject to investigations, inquiries or litigation by various regulators, which may harm our
reputation regardless of the outcome of any such action. For example, in 2012, we responded to a civil investigation conducted by the attorneys general of a number of states into certain of our marketing and business practices resulting in us
entering into an Assurance of Voluntary Compliance agreement. Negative perceptions of our business may result in additional regulation, enforcement actions by the government and increased litigation, any of which may affect our business and result
in lower revenue.
Any damage to our reputation, including from publicity from legal proceedings against us or companies that work within
our industry, governmental proceedings, consumer class action litigation, or the disclosure of information security breaches or private information misuse, could adversely affect our business, financial condition and results of operations.
If we do not effectively manage any future growth, our operating performance will suffer and we may lose clients.
We have historically experienced growth in our operations and operating locations. This growth placed, and any future growth will continue to
place, significant demands on our management and our operational and financial infrastructure. Growth, if any, may make it more difficult for us to accomplish the following:
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successfully scale our technology to accommodate a larger business and integrate acquisitions;
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maintain our standing with key vendors, including Internet search companies and third-party website publishers;
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maintain our client service standards; and
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develop and improve our operational, financial and management controls and maintain adequate reporting systems and procedures.
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Our future success depends in part on the efficient performance of our software and technology infrastructure. As the numbers of websites and
Internet users increase, our technology infrastructure may not be able to meet the increased demand. Unexpected constraints on our technology infrastructure could lead to slower website response times or system failures and adversely affect the
availability of websites and the level of user responses received, which could result in the loss of clients or revenue or harm to our business and results of operations.
In addition, our personnel, systems, procedures, and controls may be inadequate to support our future operations if we return to growth. The
improvements required to manage growth may require us to make significant expenditures, expand, train and manage our employee base, and reallocate valuable management resources. If we fail to effectively manage future growth, our operating
performance will suffer, and we may lose clients, key vendors and key personnel.
Interruption or failure of our information technology and
communications systems could impair our ability to effectively deliver our services, which could cause us to lose clients and harm our operating results.
Our delivery of marketing and media services depends on the continuing operation of our technology infrastructure and systems. Any damage to
or failure of our systems could result in interruptions in our ability to deliver offerings quickly and accurately or process visitors responses emanating from our various web presences. Interruptions in our service could reduce our revenue
and profits, and our reputation could be damaged if people believe our systems are unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, break-ins, hardware or
software failures, telecommunications failures, computer viruses or other attempts to harm our systems, and similar events. If we or third-party data centers that we utilize were to experience a major power outage, we would have to rely on back-up
generators. These back-up generators may not operate properly through a major power outage and their fuel supply could also be inadequate during a major power outage or disruptive event. Furthermore, we do not currently have backup generators at our
Foster City, California headquarters. Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from back-up generators. This could give rise to obligations to
certain of our clients which could have an adverse effect on our results for the period of time in which any disruption of utility services to us occurs.
Our primary data center is at a third-party co-location center in San Francisco, California. All of the critical components of the system
are redundant and we have a backup data center in Las Vegas, Nevada. We have implemented these backup systems and redundancies to minimize the risk associated with earthquakes, fire, power loss, telecommunications failure, and other events beyond
our control; however, these backup systems may fail or not be adequate to prevent losses.
Any unscheduled interruption in our service
would result in an immediate loss of revenue. If we experience frequent or persistent system failures, the attractiveness of our technologies and services to clients and website publishers could be permanently harmed. The steps we have taken to
increase the reliability and redundancy of our systems are expensive, reduce our operating margin and may not be successful in reducing the frequency or duration of unscheduled interruptions.
We rely on call centers, Internet and data center providers, and other third-parties for key aspects of the process of providing services to our
clients, and any failure or interruption in the services and products provided by these third-parties could harm our business.
We
rely on internal and third-party call centers as well as third-party vendors, including data center and Internet providers. Notwithstanding disaster recovery and business continuity plans and precautions instituted to protect our clients and us from
events that could interrupt delivery of services, there is no guarantee that such interruptions would not result in a prolonged interruption in our ability to provide services to our clients. Any temporary or permanent interruption in the services
provided by our call centers or third-party providers could significantly harm our business.
In addition, any financial or other
difficulties our third-party providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over our third-party vendors, which increases our vulnerability to
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problems with the services they provide. We license technology and related databases from third-parties to facilitate analysis and storage of data and delivery of offerings. We have experienced
interruptions and delays in service and availability for data centers, bandwidth and other technologies in the past. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and services could
adversely affect our business and could expose us to liabilities to third-parties.
We may need additional capital in the future to meet our
financial obligations and to pursue our business objectives. Additional capital may not be available or may not be available on favorable terms and our business and financial condition could therefore be adversely affected.
While we anticipate that our existing cash and cash equivalents, together with availability under our credit facility and cash from
operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet
various objectives, including developing future technologies and services, increasing working capital, acquiring businesses, and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. In
addition, pursuant to the terms of our credit facility, we are required to use a portion of the net proceeds of certain equity financings to repay the outstanding balance of our term loan. Lack of sufficient capital resources could significantly
limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not
available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.
Our quarterly revenue and operating results may fluctuate significantly from quarter to quarter due to seasonal fluctuations in advertising spending.
In addition to other factors that cause our operating results to fluctuate, results are also subject to significant seasonal
fluctuation. In particular, our quarters ending December 31 (our second fiscal quarter) are typically characterized by seasonal weakness. In our second fiscal quarters, there is generally lower availability of lead supply from some forms of
media during the holiday period on a cost effective basis and some of our clients have lower budgets. In our quarters ending March 31 (our third fiscal quarter), this trend generally reverses with better lead availability and often new budgets
at the beginning of the year for our clients with fiscal years ending December 31.
If the market for online marketing services fails to
continue to develop, our success may be limited, and our revenue may decrease.
The online marketing services market is relatively
new and rapidly evolving, and it uses different measurements than traditional media to gauge its effectiveness. Some of our current or potential clients have little or no experience using the Internet for advertising and marketing purposes and have
allocated only limited portions of their advertising and marketing budgets to the Internet. The adoption of online marketing, particularly by those entities that have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and evaluating new advertising and marketing technologies and services. In particular, we are dependent on our clients adoption of new metrics to measure the success of
online marketing campaigns. We may also experience resistance from traditional advertising agencies who may be advising our clients. We cannot assure you that the market for online marketing services will continue to grow. If the market for online
marketing services fails to continue to develop or develops more slowly than we anticipate, the success of our business may be limited, and our revenue may decrease.
If we do not adequately protect our intellectual property rights, our competitive position and business may suffer.
Our ability to compete effectively depends upon our proprietary systems and technology. We rely on patent, trade secret, trademark and
copyright law, confidentiality agreements, and technical measures to protect our proprietary rights. We enter into confidentiality agreements with our employees, consultants, independent contractors, advisors, client vendors, and publishers. These
agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our services or obtaining and using our proprietary information. Further, these agreements may not provide an
adequate remedy in the event of unauthorized disclosures or uses, and we cannot assure you that our rights under such agreements will be enforceable. Effective patent, trade secret, copyright, and trademark protection may not be available in all
countries where we currently operate or in which we may operate in the future. Some of our systems and technologies are not covered by any copyright, patent or patent application. We cannot guarantee that: (i) our intellectual property rights
will provide competitive advantages to us; (ii) our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will be
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effective; (iii) our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; (iv) any of the patent,
trademark, copyright, trade secret or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; (v) competitors will not design around our protected
systems and technology; or (vi) that we will not lose the ability to assert our intellectual property rights against others.
We have
from time to time become aware of third-parties who we believe may have infringed our intellectual property rights. Such infringement or infringement of which we are not yet aware could reduce our competitive advantages and cause us to lose clients,
third-party website publishers or could otherwise harm our business. Policing unauthorized use of our proprietary rights can be difficult and costly. Litigation, while it may be necessary to enforce or protect our intellectual property rights, could
result in substantial costs and diversion of resources and management attention and could adversely affect our business, even if we are successful on the merits. In addition, others may independently discover trade secrets and proprietary
information, and in such cases we could not assert any trade secret rights against such parties.
Third-parties may sue us for intellectual property
infringement, which, even if unsuccessful, could require us to expend significant costs to defend or settle.
We cannot be certain
that our internally developed or acquired systems and technologies do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third-parties and may
be subject to claims of infringement if such parties do not possess the necessary intellectual property rights to the products they license to us.
In addition, we have in the past, and may in the future, be subject to legal proceedings and claims that we have infringed the patents or
other intellectual property rights of third-parties. These claims sometimes involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own intellectual property rights, if any, may
therefore provide little or no deterrence. For example, in December 2012, Internet Patents Corporation (IPC) filed a patent infringement lawsuit against us in the Northern District of California alleging that some of our websites
infringe a patent held by IPC. IPC is a non-practicing entity that relies on asserting its patents as its primary source of revenue. In addition, third-parties have asserted and may in the future assert intellectual property infringement claims
against our clients, and we have agreed in certain circumstances to indemnify and defend against such claims. Any intellectual property-related infringement claims, whether or not meritorious and regardless of the outcome of the litigation, could
result in costly litigation and could divert management resources and attention. Should we be found liable for infringement, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages,
or limit or curtail our systems and technologies. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and increase our costs.
Additionally, the laws relating to use of trademarks on the Internet are unsettled, particularly as they apply to search engine
functionality. For example, other Internet marketing and search companies have been sued for trademark infringement and other intellectual property-related claims for displaying ads or search results in response to user queries that include
trademarked terms. The outcomes of these lawsuits have differed from jurisdiction to jurisdiction. We may be subject to trademark infringement, unfair competition, misappropriation or other intellectual property-related claims which could be costly
to defend and result in substantial damages or otherwise limit or curtail our activities, and therefore adversely affect our business or prospects.
Limitations on our ability to collect and use data derived from user activities could significantly diminish the value of our services and have an
adverse effect on our ability to generate revenue.
When a user visits our websites, we use technologies, including
cookies, to collect information such as the users IP address and the users past responses to our offerings. We access and analyze this information in order to determine the effectiveness of a marketing campaign and to
determine how to modify the campaign. The use of cookies is the subject of litigation, regulatory scrutiny and industry self-regulatory activities, including the discussion of do-not-track technologies and guidelines.
Additionally, users are able to block or delete cookies from their browser. Periodically, certain of our clients and publishers seek to
prohibit or limit our collection or use of this data. Interruptions, failures or defects in our data collection systems, as well as privacy concerns regarding the collection of user data, could also limit our ability to analyze data from our
clients marketing campaigns. This risk is heightened when we deliver marketing services to clients in the financial services client vertical. If our access to data is limited in the future, we may be unable to provide effective technologies
and services to clients and we may lose clients and revenue.
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If we fail to maintain proper and effective internal controls, our ability to produce accurate financial
statements on a timely basis could be impaired, which would adversely affect our ability to operate our business.
Our management
is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes
in accordance with U.S. generally accepted accounting principles. We may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting will not
prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. All control systems have inherent
limitations, and, accordingly, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable to maintain proper
and effective internal controls, we may not be able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action.
As a creator and a distributor of Internet content, we face potential liability and expenses for legal claims based on the nature and content of the
materials that we create or distribute. If we are required to pay damages or expenses in connection with these legal claims, our operating results and business may be harmed.
We display original content and third-party content on our websites and in our marketing messages. As a result, we face potential liability
based on a variety of theories, including defamation, negligence, deceptive advertising (including Department of Education regulations regarding misrepresentation in education marketing), copyright or trademark infringement. We are also exposed to
risk that content provided by third-parties is inaccurate or misleading, and for material posted to our websites by users and other third-parties. These claims, whether brought in the United States or abroad, could divert management time and
attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. In addition, if we become subject to these types of claims and are not successful in our defense, we may be forced
to pay substantial damages.
We face additional risks in conducting business in international markets.
We have entered into certain international markets and may enter into additional international markets in the future. We have limited
experience in marketing, selling and supporting our services outside of the United States, and we may not be successful in introducing or marketing our services abroad. There are risks and challenges inherent in conducting business in international
markets, such as:
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adapting our technologies and services to foreign clients preferences and customs;
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successfully navigating foreign laws and regulations, including marketing, privacy regulations, employment and labor regulations;
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changes in foreign political and economic conditions;
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tariffs and other trade barriers, fluctuations in currency exchange rates and potentially adverse tax consequences;
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language barriers or cultural differences;
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reduced or limited protection for intellectual property rights in foreign jurisdictions;
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difficulties and costs in staffing, managing or overseeing foreign operations;
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education of potential clients who may not be familiar with online marketing;
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challenges in collecting accounts receivables; and
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successfully interpreting and complying with the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws, particularly when operating in countries with varying degrees of governmental corruption.
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If we are unable to successfully expand and market our services abroad, our business and future
growth may be harmed, and we may incur costs that may not lead to future revenue.
We recognized an impairment in the carrying value of goodwill.
Additional such charges in the future could negatively affect our operating results and financial condition.
We continue to have
a substantial amount of goodwill and purchased intangible assets on our balance sheet as a result of historical acquisitions. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and
liabilities as of the acquisition date. The carrying value of intangible assets with identifiable useful lives represents the fair value of relationships, content, domain names, acquired technology, among others, as of the acquisition date, and are
amortized based on their economic lives. Goodwill expected to contribute indefinitely to our cash flows is not amortized, but must be evaluated for impairment at least annually. If the carrying value exceeds current fair value as determined based on
the discounted future cash flows of the related business, the goodwill or intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include adverse
changes in the regulatory environment, a reduced market capitalization or other factors leading to reduction in expected long-term growth or profitability.
Goodwill impairment analysis and measurement is a process that requires significant judgment. Our stock price and any estimated control
premium are factors affecting the assessment of the fair value of our underlying reporting units for purposes of performing any goodwill impairment assessment. For example, our public market capitalization sustained a decline after December 31,
2012 to a value below the net book carrying value of our equity, triggering the need for a goodwill impairment analysis. As a result of our goodwill impairment analysis, we recorded a goodwill impairment charge of $92.4 million in the second quarter
of fiscal year 2013.
It is possible that another material change could occur in the future. We will continue to conduct impairment
analyses of our goodwill on an annual basis, unless indicators of possible impairment arise that would cause a triggering event, and we would be required to take additional impairment charges in the future if any recoverability assessments reflect
estimated fair values that are less than our recorded values. Further impairment charges with respect to our goodwill could have a material adverse effect on our results of operations and financial condition.
We could lose clients if we fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our clients.
We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party publishers websites, which could lead the
clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and related revenue. Click-through fraud occurs when an individual clicks on an ad displayed on a website or an automated system is used to create such clicks
with the intent of generating the revenue share payment to the publisher rather than to view the underlying content. Action fraud occurs when online forms are completed with false or fictitious information in an effort to increase a publishers
compensable actions. From time to time, we have experienced fraudulent clicks or actions. We do not charge our clients for fraudulent clicks or actions when they are detected, and such fraudulent activities could negatively affect our profitability
or harm our reputation. If fraudulent clicks or actions are not detected, the affected clients may experience a reduced return on their investment in our marketing programs, which could lead the clients to become dissatisfied with our campaigns, and
in turn, lead to loss of clients and the related revenue. Additionally, we have, from time to time, had to, and in the future may have to, terminate relationships with publishers who we believed to have engaged in fraud. Termination of such
relationships entails a loss of revenue associated with the legitimate actions or clicks generated by such publishers.
Risks Related to the Ownership
of Our Common Stock
Our stock price has been volatile, and you may not be able to resell shares of our common stock at or above the price you
paid.
The trading price of our common stock has been volatile since our initial public offering and may continue to be subject to
wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this Risk Factors section of this periodic report and others such as:
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our ability to return to growth and to manage any such growth effectively;
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changes in earnings estimates or recommendations by securities analysts;
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announcements about our revenue, earnings or other financial results that are not in line with analyst expectations;
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our ability to find, develop or retain high quality targeted media on a cost effective basis;
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relatively low trading volume in our stock creates inherent volatility regardless of factors related to our business performance or prospects;
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the sale of, or indication of the intent to sell, substantial amounts of our common stock by our directors, officers or substantial shareholders;
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announcements by us or our competitors of new services, significant contracts, commercial relationships, acquisitions or capital commitments;
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our commencement of, or involvement in, litigation; and
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negative publicity about us, our industry, our clients or our clients industries.
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In
recent years, the stock market in general, and the market for technology and Internet-based companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall
market and the market price of a particular companys securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion
of our managements attention and resources.
If securities or industry analysts do not publish research or reports about our business, or if
they issue an adverse opinion regarding our stock, our stock price and trading volume could decline.
The trading market for our
common stock is influenced by the research and reports that industry or securities analysts publish about us, our business or the industries or businesses of our clients. If any of the analysts issue an adverse opinion regarding our stock or if our
actual results do not meet analyst estimates, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which
in turn could cause our stock price or trading volume to decline.
Our directors and executive officers and their respective affiliates have
substantial influence over us and could delay or prevent a change in corporate control.
As of March 31, 2014, our directors
and executive officers, together with their affiliates, beneficially owned approximately 25% of our outstanding common stock. As a result, these stockholders, acting together, have substantial influence over the outcome of matters submitted to our
stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have significant influence over the management and
affairs of our company. Accordingly, this concentration of ownership may have the effect of:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
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Provisions in our charter documents under Delaware law and in contractual obligations could discourage a takeover that stockholders may consider
favorable and may lead to entrenchment of management.
Our amended and restated certificate of incorporation and bylaws contain
provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions include:
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a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;
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no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from
being able to fill vacancies on our board of directors;
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the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval,
which could be used to significantly dilute the ownership of a hostile acquirer;
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a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
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the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer or the board of directors, which may delay the ability of our stockholders
to force consideration of a proposal or to take action, including the removal of directors; and
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advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders meeting, which may discourage or
deter a potential acquiror from conducting a solicitation of proxies to elect the acquirors own slate of directors or otherwise attempting to obtain control of us.
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We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a
business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on
appreciation in the price of our common stock.
We currently have not and do not intend to declare and pay dividends on our common
stock for in the near term. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends
on your common stock in the near term.
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