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Angie List : LIST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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02/21/2017 | 10:14pm CET
You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this Annual Report on
Form 10-K. The following discussion contains forward-looking statements that
reflect our plans, estimates and beliefs. Although the Company believes the
assumptions on which the forward-looking statements contained herein are based
are reasonable, any of those assumptions could prove to be inaccurate. As a
result, the forward-looking statements based upon those assumptions also could
be incorrect. Risks and uncertainties may affect the accuracy of forward-looking
statements, including, without limitation, those set forth in Item 1A of this
Annual Report on Form 10-K and in other reports we file with the SEC.

Overview


We operate a national local services consumer review service and marketplace
where members can research, shop for and purchase local services for critical
needs, as well as rate and review the providers of these services across the
United States. Our ratings and reviews, which are now available to members
free-of-charge, assist our members in identifying and hiring a provider for
their local service needs, and our dynamic tools and products provide members
with multiple ways to get work done while reducing the time and effort required
to hire a service provider.

In March 2016, we unveiled a new long-term profitable growth plan featuring a
redefined product and service experience for members and service providers
alike, transforming our legacy business model by introducing a free membership
tier to provide access to our ratings and reviews at no charge. In addition to
free memberships, our new model provides consumers with revamped tiered
membership options offering an array of premium services at varying price
points. Service providers are also able to take advantage of a host of new
services and tools under our new model based on the nature and extent of the
service provider's relationship with us. Our profitable growth plan entails
three phases to be implemented over several years:

• Strengthen and Reposition the Core Business - includes redefining the

           paywall and launching premium member services, improving our consumer
           experience by scaling our new platform and optimizing the service
           provider sales organization to better monetize consumer traffic;

• Leverage the Home Services Platform - includes expanding value-added

           services provided on our platforms and improving our member and
           service provider relationships with personalized offerings; and


•          Expand to Adjacencies - includes expanding our member and service
           provider bases and developing partnerships to provide additional
           value-added services.



Our new model is designed to identify and leverage more ways to attract, engage
and ultimately monetize consumer and service provider traffic on our platforms.
As we continue to execute our long-term profitable growth plan, we are
leveraging a monetization strategy comprised of three waves. The first wave of
the strategy entails acquiring new members and improving membership engagement,
and the second wave is focused on converting our growing membership base into
service provider originations. The third wave, which is still several months
away, targets increasing service provider renewal rates and the contract value
of such renewals.

During 2016, we achieved or made progress against several key milestones
integral to the execution of our long-term profitable growth plan, including,
among other things, (1) completing the migration to our new technology platform,
(2) dropping our ratings and reviews paywall, (3) launching a new tiered
membership model, (4) implementing new service provider monetization
initiatives, including revamped presentation, certification badging and search
logic, to differentiate between advertisers and non-advertisers and (5)
optimizing marketing and operations. Our progress against our new model during
the year yielded robust membership growth and a year over year increase in the
number of participating service providers.

For the year ended December 31, 2016, we incurred a net loss of $7.9 million on
revenue of $323.3 million. While our progress with respect to the implementation
and execution of our long-term profitable growth plan did not manifest in our
financial results for the year, once fully implemented, we believe our growth
plan will enhance the value of our services and generate accelerated growth,
retention and engagement across our platforms, which we, in turn, believe will
drive increased market penetration and revenue growth. Looking ahead to 2017, we
are focused on three key priorities: 1) building products to increase member
engagement, 2) strengthening the value proposition to our service providers and
3) continuing to improve our cost structure.

In connection with the implementation of our long-term profitable growth plan,
we are taking actions to improve margins and better align our cost structure
with our growth plan, and in doing so, we reduced our headcount during the
fourth quarter of 2016. Additionally, with a focus on opportunities to further
accelerate our growth, during the fourth quarter of 2016 we announced our intent
to begin exploring strategic alternatives.

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Key Operating Metrics


In addition to the line items in our consolidated financial statements, we
regularly review a number of other operating metrics related to our membership
and service provider bases to evaluate our business, determine the allocation of
resources and make decisions regarding business strategies. We believe these
metrics are useful for investors and analysts to understand the underlying
trends in our business. However, as our business evolves, the metrics we
currently identify as critical to the evaluation of our operations and
performance may change.

The following table summarizes our key operating metrics, which are unaudited, for the years ended December 31, 2016, 2015 and 2014:

                                                           Year Ended 

December 31,

                                                    2016             2015   

2014

Total free memberships (end of period)            2,543,705                -                -
Total paid memberships (end of period)            2,550,941        3,297,395        3,041,651
Total memberships (end of period)                 5,094,646        

3,297,395 3,041,651


Gross free memberships added (in period)          2,509,146                -                -
Gross paid memberships added (in period)            348,302        1,033,222        1,242,485
Gross memberships added (in period)               2,857,448        

1,033,222 1,242,485


Average paid membership renewal rate (in                 69 %             77 %             77 %

period)


Participating service providers (end of              55,644           54,402           54,240

period)

Total service provider contract value (end     $    250,588     $    270,841     $    249,045
of period, in thousands)
Total service provider contract value          $    147,335     $    162,478     $    153,137
backlog (end of period, in thousands)



Total memberships. Total free memberships reflects the number of free members as
of the end of the period who joined subsequent to us dropping our ratings and
reviews paywall in June 2016, as well as the number of former paid members who
requested a change in membership status from paid to free over the same time
period. Total paid memberships represents the number of paid members at the end
of each period presented. Total paid memberships as of December 31, 2015 and
December 31, 2014 also included a de minimis number of complimentary memberships
in what formerly comprised our paid markets. These complimentary memberships are
no longer included in our paid membership counts and are therefore not reflected
in the paid membership totals presented in the table above as of December 31,
2016. We generally expect that there will be one membership per household and,
as such, each membership may actually represent multiple individual consumers.

Gross memberships added. Gross free memberships added represents the total
number of new free members added during the reporting period. For the year
ended December 31, 2016, this figure includes new free members added since we
dropped our ratings and reviews paywall in June 2016 but does not include former
paid members who requested a change in membership status from paid to free over
the same period. Gross paid memberships added reflects the total number of new
paid members added in the reporting period.

Average paid membership renewal rate. Average paid membership renewal rate reflects the percentage of all paid memberships expiring in the reporting period that are renewed as paid members.


Participating service providers. We include in participating service providers
the total number of service providers under contract for advertising, e-commerce
or both at the end of the period.

Total service provider contract value. We calculate service provider contract
value as the total contract value of active service provider contracts at the
end of the period. Contract value is the total payment obligation of a service
provider to us, including amounts already recognized in revenue, over the stated
term of the contract.

Total service provider contract value backlog. Service provider contract value
backlog consists of the portion of service provider contract value at the end of
the period that is not yet recognized as revenue.

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Basis of Presentation and Recent Trends


The accompanying consolidated financial statements were prepared in conformity
with accounting principles generally accepted in the United States ("U.S.
GAAP"). The consolidated financial statements include the accounts of Angie's
List, Inc. and our wholly owned subsidiaries and reflect all adjustments of a
normal recurring nature considered, in the opinion of management, necessary to
fairly report the results for the periods presented. All significant
intercompany balances and transactions were eliminated in consolidation. Except
as otherwise noted, the following discussion reflects the primary components of
our current revenue and operating expenses, which are subject to change as our
business evolves.

Revenue

Membership revenue. Our primary source of membership revenue is subscription
fees from paid members. Historically, we charge, and our members prepay, as
applicable, the full price of membership at the commencement of the
corresponding subscription period and at each renewal date, unless the member
chooses not to renew the membership before the renewal date. We record prepaid
membership fees as deferred revenue and generally recognize the fees as revenue
ratably over the term of the associated subscription, which is typically twelve
months in length.

During 2016, we removed our ratings and reviews paywall and introduced a free
membership tier in all markets for the first time. While we continue to offer
paid membership tiers with premium services, our paid membership base is
declining as new members are primarily joining via our free membership offering,
and existing paid members are not renewing as paid members at rates consistent
with our historical averages, thereby negatively impacting our membership
revenue.

Membership revenue accounted for 18%, 20% and 23% of total revenue for 2016,
2015 and 2014, respectively, and we expect membership revenue as a percentage of
total revenue to continue to decline in future periods due to downward pressure
on membership revenue associated with the evolution of our membership tier
offerings and pricing, and in particular, the introduction of a free membership
tier for consumers.

Service provider revenue. Our primary sources of service provider revenue are
term-based sales of advertising to service providers and our e-commerce
marketplace. Service providers generally pay for advertisements, which carry an
early termination penalty, in advance on a monthly or annual basis at the option
of the service provider. Our average advertising contract term in effect as of
December 31, 2016 was approximately one year, and the vast majority of our
service provider contracts cover a period of twelve months, providing us with a
relatively predictable revenue stream as well as an opportunity to adjust
advertising rates at renewal as we introduce new products and services or our
penetration of a given market increases.

We recognize revenue from the sale of website, mobile and call center
advertising ratably over the time period in which the advertisements run.
Revenue from the sale of advertising in the Angie's List Magazine publication is
recognized in the period in which the publication, and therefore the
advertisement, is published and distributed. Typically, we are able to charge
higher rates for advertising as service providers are able to reach a larger
base of potential customers. However, as we generally only adjust advertising
rates at the time of contract renewal, growth in service provider revenue
commonly trails increases in membership. Accordingly, as we continue to
transition our business model, and our membership continues to grow, the
anticipated corresponding increases in service provider revenue may not be
immediate, or occur at all.

Our e-commerce marketplace enables consumers to purchase services from
highly-rated service providers on our platforms. When a consumer completes an
e-commerce purchase, the transaction is processed by us, and we receive a
portion of the price paid as revenue, which is recognized on a net basis in the
period the e-commerce voucher is delivered to the purchaser. While we are not
the merchant of record with respect to these transactions, we do offer consumers
refunds in certain circumstances. Accordingly, revenue from e-commerce
transactions is recorded net of a reserve for estimated refunds. Our e-commerce
revenue generally fluctuates from period to period as offerings and monetization
strategies evolve and due to seasonality.

Service provider revenue accounted for 82%, 80% and 77% of total revenue for
2016, 2015 and 2014, respectively, and we expect service provider revenue as a
percentage of total revenue to continue to increase in future periods as we
evolve and enhance the value proposition we offer service providers and leverage
new service provider monetization strategies in connection with the removal of
our ratings and reviews paywall, notwithstanding any remaining negative impacts
related to the migration to our new technology platform.


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Operating expenses


Operations and support. Operations and support expense consists primarily of
compensation and personnel-related costs for personnel we employ to operate our
call center and provide support to our members and service providers,
expenditures associated with publishing the Angie's List Magazine and credit
card processing fees for service provider transactions, membership enrollments
and e-commerce purchases. Costs incurred with marketing research firms to enable
our members to submit reviews by telephone to enrich the content available to
our members and expand the number of service providers eligible to advertise and
offer e-commerce are also included in operations and support expense. Operations
and support expense does not include costs associated with maintaining our
website, which are included in product and technology expense. Operations and
support expense as a percentage of revenue was 13%, 16% and 17% for 2016, 2015
and 2014, respectively. During 2016, we implemented a digital content
distribution strategy wherein we increased digital delivery, and reduced print
copy distribution, of the Angie's List Magazine, and we also reduced operations
and support headcount and experienced a decrease in credit card processing fees,
all of which contributed to a year over year decline in operations and support
expense.

Selling. Selling expense consists primarily of commissions, wages and other
employee benefits for the personnel we employ to sell and renew advertising
contracts to eligible service providers and to generate offers in our e-commerce
marketplace. Contracts with first-time participating service providers generally
yield larger commissions for our sales personnel than do contract renewals. Our
sales personnel responsible for e-commerce offers and purchases typically earn
commissions based on the net revenue received from the sale of such offerings.
Selling expense also includes expenditures for sales training and
personnel-related costs for account management. Selling expense as a percentage
of revenue was 34%, 34% and 37% for 2016, 2015 and 2014, respectively. During
2016, we revised certain sales compensation plans, restructured our sales
organization, including a reduction in our sales headcount as compared to the
prior year, and experienced a decrease in service provider contract value
bookings, thereby contributing to a year over year decline in selling expense.

Marketing. Marketing expense consists primarily of national television, radio,
print and online digital advertising and now also includes the marketing
compensation and personnel-related costs and general marketing operating
expenditures that were formerly classified as general and administrative
expenses. While we continue to make investments in increasing our membership
base and expanding our market reach, we also utilize advertising to engage our
members by highlighting our e-commerce offerings and new products and services.
Accordingly, our marketing expense is not only a reflection of the cost incurred
to attract new members but also the marketing dollars we are spending to
generate traffic to and engagement on our platforms. Our marketing contracts are
typically short-term in length, and we therefore possess the ability to adjust
marketing expense in order to reduce total operating expenses and maximize cash
from operations should we begin to experience adverse trends in returns on our
marketing expenditures or wish to optimize our profitability through focused
reductions in advertising spend during any given period. Consistent with the
seasonality that characterizes our business, we generally expect marketing
expense to peak in either the second or third quarter of the year. Marketing
expense as a percentage of revenue was 20%, 24% and 31% for 2016, 2015 and 2014,
respectively. Although we continue to make investments in marketing to acquire
new memberships and drive engagement on our platforms, we reduced our marketing
expense in 2016 in order to make strategic investments in other areas of the
business.

Product and technology. Product and technology expense consists primarily of
compensation and personnel-related costs, depreciation and amortization expense
and expenditures for outsourced services related to the maintenance and support
of our product and technology platforms and infrastructure, including our
website. Product and technology expense as a percentage of revenue was 17%, 11%
and 11% for 2016, 2015 and 2014, respectively. During 2016, we increased our
product and technology headcount to execute on our technology platform migration
and product roadmap, and we also experienced an increase in depreciation and
amortization expense in connection with our new technology platform. As
utilization of the platform commenced in 2016, certain expenditures, including
internal labor, that do not represent qualifying upgrades, enhancements or new
functionality are no longer classified as capitalized website and software
development costs and are instead expensed as incurred.

General and administrative. General and administrative expense, which no longer
includes the marketing compensation and personnel-related costs and general
marketing operating expenditures that are now classified as marketing expense,
consists primarily of compensation and personnel-related costs for executive,
legal, finance and human resources personnel as well as expenditures for
outsourced services, professional fees, insurance premiums, facilities
maintenance, depreciation of buildings and improvements and other miscellaneous
corporate expenses, such as bad debt expense. General and administrative expense
as a percentage of revenue was 17%, 11% and 7% for 2016, 2015 and 2014,
respectively. These increases were driven, in part, by costs incurred for the
development and execution of our long-term profitable growth plan, optimization
of our service provider go-to-market activities and activist activity in our
stock, as well as stock-based compensation expense.

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Results of Operations


The following tables set forth our results of operations for the periods
presented in absolute dollars and as a percentage of our revenue for those
periods. The financial results below are not necessarily indicative of future
results.
                                          Year Ended December 31,
                                       2016        2015         2014

                                               (in thousands)
Revenue
Membership                          $ 58,090     $ 67,992    $  73,113
Service provider                     265,239      276,133      241,898
Total revenue                        323,329      344,125      315,011
Operating expenses
Operations and support(1)             40,293       56,074       52,760
Selling(1)                           111,046      116,027      115,210
Marketing(1)                          65,140       83,789       96,953
Product and technology(1)             55,990       36,661       34,039

General and administrative(1) 53,954 38,316 26,411 Operating income (loss)

               (3,094 )     13,258      (10,362 )
Interest expense, net                  4,720        2,971        1,203
Loss on debt extinguishment                -            -          458

Income (loss) before income taxes (7,814 ) 10,287 (12,023 ) Income tax expense

                        43           44           51
Net income (loss)                   $ (7,857 )   $ 10,243    $ (12,074 )


(1) Includes non-cash stock-based
compensation expense as follows:
Operations and support                         $       159     $       109     $        65
Selling                                              1,745             482             393
Marketing                                              372             230             205
Product and technology                               1,949             931             856
General and administrative                          10,519           7,123           6,370

Total non-cash stock-based compensation $ 14,744 $ 8,875

   $     7,889
expense


                                       Year Ended December 31,
                                      2016         2015      2014

Revenue
Membership                             18  %        20 %     23  %
Service provider                       82  %        80 %     77  %
Total revenue                         100  %       100 %    100  %
Operating expenses
Operations and support                 13  %        16 %     17  %
Selling                                34  %        34 %     37  %
Marketing                              20  %        24 %     31  %
Product and technology                 17  %        11 %     11  %
General and administrative             17  %        11 %      7  %
Operating income (loss)               (1)  %         4 %    (3)  %
Interest expense, net                   1  %         1 %      1  %
Loss on debt extinguishment             -  %         - %      -  %
Income (loss) before income taxes     (2)  %         3 %    (4)  %
Income tax expense                      -  %         - %      -  %
Net income (loss)                     (2)  %         3 %    (4)  %



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Comparison of the Years Ended December 31, 2016, 2015 and 2014


Revenue
                                          Year Ended December 31,
                                     2016          2015          2014        2016 vs. 2015     2015 vs. 2014

                                          (dollars in thousands)
Revenue
Membership                        $  58,090     $  67,992     $  73,113          (15 )%             (7 )%
Service provider                    265,239       276,133       241,898           (4 )%             14  %
Total revenue                     $ 323,329     $ 344,125     $ 315,011           (6 )%              9  %

Percentage of revenue by type
Membership                               18 %          20 %          23 %
Service provider                         82 %          80 %          77 %
Total revenue                           100 %         100 %         100 %


2016 compared to 2015. Total revenue decreased $20.8 million for 2016 as compared to 2015.


Membership revenue decreased $9.9 million for 2016 as compared to 2015,
primarily due to the year over year impact associated with a 66% decline in
gross paid memberships added, an eight percentage point decrease in the average
paid membership renewal rate and a 7% decrease in membership revenue per average
paid membership. The declines in gross paid memberships added, paid membership
renewal rates and membership revenue per average paid membership were largely
the result of our introduction of a free membership tier in all markets in June
2016 in connection with the removal of our ratings and reviews paywall. Our paid
membership base is decreasing as new members are primarily joining via our free
membership offering, and existing paid members are not renewing as paid members
at rates consistent with our historical averages, thereby negatively impacting
our membership revenue. Adjustments in the level of our advertising spend also
factored into the year over year decline in membership revenue. Our advertising
spend decreased $25.5 million in 2016 as compared to 2015, further contributing
to the aforementioned declines in gross paid memberships added and paid
membership renewal rates, and, accordingly, membership revenue.

Service provider revenue decreased $10.9 million for 2016 as compared to 2015,
due in large part to a decline in revenue from our e-commerce offerings. The
year over year decrease in e-commerce revenue was the result of declines in
e-commerce unit sales during the year, attributable to transitional challenges
associated with the implementation of our new technology platform as well as
limited new member e-commerce purchase activity. Additionally, decreases in
service provider advertising renewal rates also contributed to the decline in
service provider revenue for the year. While we experienced a 2% increase in the
number of participating service providers year over year, service provider
contract value and contract value backlog decreased by $20.3 million and $15.1
million, respectively, over the same time period, reflecting, in part, the
impact of certain disruptions associated with the migration to our new
technology platform, as well as declines in the average pricing of service
provider contracts. Typically, we are able to charge higher rates for
advertising as service providers are able to reach a larger base of potential
customers. However, as we generally only adjust advertising rates at the time of
contract renewal, and given the timing of revenue recognition, which spreads
advertising revenue over the life of each service provider contract, growth in
service provider revenue commonly trails increases in membership. Accordingly,
as we continue to transition our business model, and our membership continues to
grow, the anticipated corresponding increases in service provider revenue,
contract value and contract value backlog may not be immediate, or occur at all,
as evidenced by the fact that the significant current year growth in our total
membership base has not yet produced such increases. Further, as we expected at
the outset of our long-term profitable growth plan, service provider revenue is
lagging, and may continue to lag in the near-term, certain operating metrics.

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2015 compared to 2014. Total revenue increased $29.1 million for 2015 as compared to 2014.


Membership revenue decreased $5.1 million year over year, primarily due to
a 19% decrease in membership revenue per average paid membership for the year
ended December 31, 2015 as compared to 2014, as well as a 17% decline in gross
paid memberships added during 2015, partially offset by the impact associated
with an 8% increase in the total number of paid memberships over the same time
period. The decrease in membership revenue per average paid membership was
largely the result of reductions in average membership fees across all markets
due to tiered membership pricing. The decline in gross paid memberships added
year over year was attributable to adjustments in the level of our marketing
spend, as well as the messaging associated with that spend, in 2015 as compared
to 2014. We decreased advertising spend $15.9 million year over year while
simultaneously shifting our marketing focus from solely driving member growth to
also highlighting our e-commerce offerings and marketplace initiatives, as well
as new products and services, thus negatively impacting gross paid memberships
added, and thereby membership revenue, year over year.

Service provider revenue increased $34.2 million year over year, primarily as a
result of a 6% increase in service provider revenue per average participating
service provider as well as a year over year increase in service provider
contract value of 9%. As our penetration of a given market increases, we are
typically able to charge higher rates for advertising as service providers are
able to reach a larger base of potential customers. However, as we generally
only increase advertising rates at the time of contract renewal, increases in
service provider revenue in a given market may trail increases in market
penetration. Revenue from our e-commerce marketplace fluctuates from period to
period as offerings and monetization strategies evolve and due to seasonality.
Near-term reductions in average e-commerce take rates contributed to a
realization of slower service provider revenue growth rates in 2015 as compared
to 2014.

Operations and support
                                          Year Ended December 31,
                                     2016          2015          2014        2016 vs. 2015     2015 vs. 2014

                                          (dollars in thousands)
Operations and support            $  40,293     $  56,074     $  52,760          (28 )%              6 %
Percentage of revenue                    13 %          16 %          17 %
Non-cash stock-based              $     159     $     109     $      65
compensation expense



2016 compared to 2015. Operations and support expense decreased $15.8 million
for 2016 as compared to 2015. The most significant factors contributing to the
year over year decline in operations and support expense were a $5.5 million
reduction in compensation and personnel-related expenditures and a $5.5 million
decrease in publication costs. The reduction in compensation and
personnel-related expenditures was driven by a 31% decrease in operations and
support headcount year over year, while the decline in publication costs was the
result of our implementation of a digital content distribution strategy whereby
we increased digital distribution, and reduced print copy distribution, of
the Angie's List Magazine as compared to the prior year, generating a year over
year decrease in the costs incurred to provide the magazine to our members. A
year over year decline in credit card processing fees of $2.4 million, which was
largely attributable to lower transaction volumes across our platforms in 2016,
also contributed to the decrease in operations and support expense.

2015 compared to 2014. Operations and support expense increased $3.3
million for 2015 as compared to 2014. This increase was due in part to a $2.0
million increase in publication costs associated with the increased circulation
of the Angie's List Magazine as we continued to expand our membership and,
concurrently, the distribution of our monthly publication during 2015.
Additionally, we experienced a $1.8 million increase in credit card processing
fees as compared to the prior year, attributable to the growing volume of
membership enrollments and service provider transactions on our platforms. These
increases were partially offset by a decrease in operations and support
outsourced service expenditures of $1.0 million, attributable to a reduction in
our utilization of external resources for certain operations and support
functions in 2015.

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Selling
                                          Year Ended December 31,
                                     2016          2015          2014        2016 vs. 2015      2015 vs. 2014

                                          (dollars in thousands)
Selling                           $ 111,046     $ 116,027     $ 115,210           (4 )%               1 %
Percentage of revenue                    34 %          34 %          37 %
Non-cash stock-based              $   1,745     $     482     $     393

compensation expense




2016 compared to 2015. Selling expense decreased $5.0 million for 2016 as
compared to 2015. The year over year decline in selling expense was, in part,
the result of a $2.8 million decrease in selling compensation and
personnel-related costs for commissions, wages and other employee benefits,
which was attributable to changes in our sales compensation plans and
organizational structure, including an 8% year over year decline in our sales
organization headcount, during the year, as well as the impact of lower service
provider contract value bookings. Prior year event costs also influenced the
year over year reduction in selling expense, contributing to decreases in 2016
to (i) travel, meals and entertainment of $1.1 million, (ii) selling-related
outsourced services of $0.6 million and (iii) service provider marketing
expenditures of $0.6 million.

2015 compared to 2014. Selling expense increased $0.8 million for 2015 as
compared to 2014, primarily attributable to costs we incurred to host a
three-day service provider conference in May 2015, which contributed to year
over year increases in selling-related outsourced services of $1.4 million and
selling-related travel, meals and entertainment of $1.1 million. Although
selling expense generally correlates with fluctuations in service provider
revenue, we experienced year over year leverage and efficiency in selling
expense as service provider revenue increased 14% for 2015 as compared to 2014,
while selling expense increased 1% over the same time period. Headcount was the
most significant factor contributing to the leverage and efficiency in selling
expense, as there was an 11% reduction in the total number of sales personnel we
employed at December 31, 2015 compared to December 31, 2014, and when coupled
with the impact of changes in our sales compensation structure during 2015,
yielded a $1.9 million decrease in selling compensation and personnel-related
costs for commissions, wages, training and other employee benefits year over
year.

Marketing
                                          Year Ended December 31,
                                     2016          2015          2014        2016 vs. 2015     2015 vs. 2014

                                          (dollars in thousands)
Marketing                         $  65,140     $  83,789     $  96,953          (22 )%            (14 )%
Percentage of revenue                    20 %          24 %          31 %
Non-cash stock-based              $     372     $     230     $     205
compensation expense



2016 compared to 2015. Marketing expense, which now includes the marketing
compensation and personnel-related costs and general marketing operating
expenditures that were formerly classified as general and administrative
expense, decreased $18.6 million for 2016 as compared to 2015. While we continue
to make investments in increasing our membership base and expanding our market
reach, we also utilize advertising to highlight our products and services and
drive engagement on our platforms. Accordingly, our marketing expense is not
only a reflection of the cost incurred to attract new members but also the
marketing dollars we are spending to generate traffic to and transactions on our
platforms. For the year ended December 31, 2016, the most significant factor
contributing to the year over year decrease in marketing expense was a $25.5
million decline in advertising spend. Although we accelerated our advertising
spend during the third quarter of 2016 to highlight our new free membership
offerings and related initiatives, the level at which we spent on advertising
was lower in 2016 than in 2015 as we purposefully reduced such costs, while
focusing on the efficiency and effectiveness of our spend, in the current year
in order to make strategic investments in other areas of the business. The year
over year decline in marketing expense associated with reductions in advertising
spend was partially offset by a $3.8 million increase in marketing-related
outsourced service expenditures, a portion of which was attributable to fees
paid to our advertising creative agency, a $1.8 million increase in marketing
compensation and personnel-related costs and a $1.6 million increase in service
provider marketing costs related to our efforts to further enhance our
relationships with service providers. Consistent with the seasonality that
characterizes our business, we generally expect marketing expense to peak in
either the second or third quarter of the year.

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2015 compared to 2014. Marketing expense, which includes the marketing
compensation and personnel-related costs and general marketing operating
expenditures that were reclassified from general and administrative expense,
decreased $13.2 million for 2015 as compared to 2014. Although we continued to
make significant investments in increasing our paid membership base and
expanding our market reach via national offline and online advertising, we
purposefully reduced our marketing spend in 2015 as compared to 2014 as we
focused on the efficiency and effectiveness of our spend while making strategic
investments in other areas of the business. In 2014, we began to shift our
marketing focus from solely driving member growth to also highlighting our
e-commerce offerings and marketplace initiatives, as well as new products and
services, and that strategy remained in place in 2015. As such, our marketing
expense for 2015 was not only a reflection of the cost incurred to obtain new
members but also the marketing dollars we spent to generate traffic to and
transactions on our platforms.

Product and technology

                                          Year Ended December 31,
                                     2016          2015          2014        2016 vs. 2015     2015 vs. 2014

                                          (dollars in thousands)
Product and technology            $  55,990     $  36,661     $  34,039            53 %              8 %
Percentage of revenue                    17 %          11 %          11 %
Non-cash stock-based              $   1,949     $     931     $     856
compensation expense



2016 compared to 2015. Product and technology expense increased $19.3 million
for 2016 as compared to 2015. The increase in product and technology expense was
largely the result of year over year increases in compensation and
personnel-related costs and depreciation and amortization expense of $8.9
million and $5.6 million, respectively. The year over year increase in product
and technology compensation and personnel-related costs was primarily
attributable to the 30% growth in our product and technology headcount
from December 31, 2015 to December 31, 2016, as we strengthened our product and
technology organizations to execute on our technology platform migration and
product roadmap, while the year over year increase in depreciation and
amortization expense was due to our new technology platform, which we placed in
service as of the end of the first quarter of 2016. Product and technology
expense was also negatively impacted by a $2.9 million increase in outsourced
services expenditures. As utilization of our new technology platform has now
commenced, certain expenditures, including internal labor, that do not represent
qualifying upgrades, enhancements or new functionality are no longer classified
as capitalized website and software development costs and are instead expensed
as incurred.

2015 compared to 2014. Product and technology expense increased $2.6
million for 2015 as compared to 2014. The increase in product and technology
expense was largely attributable to a $3.0 million year over year increase in
technology-related outsourced services, due to the maintenance and support of
our existing technology infrastructure, including our website, in order to
service our membership and service provider bases while development efforts
around our new technology platform continued throughout the year. The increase
in product and technology expense associated with outsourced service
expenditures was partially offset by the impact of the non-cash long-lived asset
impairment charges recorded in the fourth quarter in each of the two previous
years. In the fourth quarter of 2014, we recorded a $1.8 million long-lived
asset impairment charge for certain capitalized website and software development
assets, while in the fourth quarter of 2015, we recorded a $0.9 million
long-lived asset impairment charge related to certain software assets.

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General and administrative
                                          Year Ended December 31,
                                     2016          2015          2014        2016 vs. 2015     2015 vs. 2014

                                          (dollars in thousands)

General and administrative $ 53,954 $ 38,316 $ 26,411

       41 %              45 %
Percentage of revenue                    17 %          11 %           7 %
Non-cash stock-based              $  10,519     $   7,123     $   6,370
compensation expense



2016 compared to 2015. General and administrative expense, which no longer
includes the marketing compensation and personnel-related costs and general
marketing operating expenditures that are now classified as marketing expense,
increased $15.6 million for 2016 as compared to 2015. The most significant
driver of the increase in general and administrative expense year over year was
a $6.3 million increase in outsourced service expenditures and professional fees
due to third-party consulting costs incurred for, among other things, the
development and execution of our long-term profitable growth plan, optimization
of our service provider go-to-market activities and activist activity in our
stock. General and administrative expense was also negatively impacted by a $2.8
million legal settlement accrual recorded in relation to the Moore litigation
(see Note 9, "Commitments and Contingencies," in the accompanying Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K for
additional information). A $3.3 million increase in compensation and
personnel-related costs, largely attributable to stock-based compensation
expense, and a $2.3 million increase in bad debt expense, primarily related to
e-commerce receivables, also contributed to the year over year increase in
general and administrative expense. Additionally, there was a cumulative $2.2
million net benefit to general and administrative expense in 2015, related to
adjustments to a legal settlement accrual for a prior legal obligation, which
did not recur in 2016, further impacting the year over year fluctuation in
general and administrative expense.

2015 compared to 2014. General and administrative expense, which does not
include the marketing compensation and personnel-related costs and general
marketing operating expenditures that were reclassified to marketing expense,
increased $11.9 million for 2015 as compared to 2014. The most significant
driver of the increase in general and administrative expense year over year was
a $10.2 million increase in compensation and personnel-related costs, including
$0.8 million related to non-cash stock-based compensation expense, due to the
impact of headquarters personnel added during 2015 in strategic growth areas
such as human resources, finance and project management, as well as the addition
of our new President and Chief Executive Officer in September 2015. While
general and administrative non-cash stock-based compensation expense increased
year over year, the 2015 amount was favorably impacted by approximately $1.2
million of forfeitures during the year. General and administrative expense was
also negatively impacted by a $2.3 million increase in outsourced service
expenditures, attributable to third-party consulting fees as well as costs
incurred related to the identification and hiring of our new President and Chief
Executive Officer and the development of our profitable growth plan.
Additionally, we incurred a $0.7 million non-cash long-lived asset impairment
charge to general and administrative expense during the second quarter of 2015
related to our decision not to pursue our previously announced Indianapolis
campus expansion plan. The aforementioned factors contributing to the year over
year increase in general and administrative expense were partially offset by the
impact of the adjustment of the legal settlement accrual for a prior legal
obligation, amounting to $2.2 million for the year ended December 31, 2015.

Interest expense


2016 compared to 2015. Interest expense was $4.7 million for 2016 as compared to
$3.0 million for 2015, reflecting the impact of recurring monthly interest
payments on our outstanding long-term debt and monthly interest charges for
deferred financing fee and debt discount amortization, partially offset by
capitalized interest on website and software development recorded during the
first quarter of 2016. The year over year increase in interest expense was
primarily attributable to a reduction in capitalized interest in 2016 as
compared to 2015 as we ceased capitalizing interest on website and software
development as of the end of the first quarter of 2016 in connection with the
migration to our new technology platform.

2015 compared to 2014. Interest expense was $3.0 million for 2015 as compared
to $1.2 million for 2014, reflecting the impact of recurring monthly interest
payments on our outstanding long-term debt and monthly interest charges for
deferred financing fee and debt discount amortization related to the September
2014 debt financing transaction, partially offset by capitalized interest on
website and software development.

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Liquidity and Capital Resources

General


At December 31, 2016, we had $22.4 million in cash and cash equivalents and
$16.5 million in short-term investments. Cash and cash equivalents consists of
bank deposit accounts and money market funds as well as any investments in
certificates of deposit, U.S. Treasury securities or corporate bonds with
contractual maturities of three months or less, which, at times, may exceed
federally insured limits. Short-term investments consist of certificates of
deposit, U.S. Treasury securities and corporate bonds with maturities of more
than 90 days but less than one year. To date, the carrying values of these
investments approximate their fair values, and we have incurred no material loss
in these accounts.

We have historically financed our operations through private and public sales of
equity and borrowings. Our principal sources of operating cash flows are
receipts from service provider advertising and membership fees, while our most
significant uses of cash in operating activities generally relate to
expenditures for our national advertising campaigns and commissions paid to
service provider sales personnel.

Our operating cash flows in future periods will be impacted by our level of
investment in advertising, changes in membership and service provider pricing
and monetization strategies, the impact of new products and services, the size,
composition and compensation structure for our sales organization and general
fluctuations in employee headcount, among other things. We expect positive
operating cash flows in some periods and negative operating cash flows in
others, depending on seasonality and the extent of our investments in future
growth of the business or changes to our business model.

We believe our existing cash and cash equivalents and short-term investments
will be sufficient to fund our operations for, at a minimum, the next twelve
months. Additionally, we believe our liquidity and capital resources will be
adequate to meet our long-term cash requirements, including the long-term debt
and operating lease contractual obligations highlighted herein, and there are no
known material adverse trends or uncertainties related to cash flows or capital
requirements as of December 31, 2016 that we believe will result in material
changes in our ability to meet our obligations as they become due over the next
twelve months. While we may explore additional financing sources, including
equity, equity-linked or debt financing, in the future in order to develop or
enhance our services, fund expansion, respond to competitive pressures, acquire
or invest in complementary products, businesses or technologies or lower our
cost of capital, there is no guarantee such financing will be available to us on
acceptable terms, if at all.

Summary cash flow information for the years ended December 31, 2016, 2015 and
2014 is set forth below.
                                                            Year Ended December 31,
                                                         2016         2015         2014

                                                                 (in thousands)
Net cash provided by operating activities             $  1,635     $ 26,691     $  4,629
Net cash (used in) investing activities                (11,379 )    (34,537 )    (41,152 )
Net cash provided by (used in) financing activities       (453 )        454 

41,711

Net Cash Provided By Operating Activities


Cash provided by operating activities of $1.6 million for the year ended
December 31, 2016 was achieved despite a net loss of $7.9 million, primarily due
to non-cash activity of $36.2 million during the year, including stock-based
compensation expense of $14.7 million and depreciation and amortization expense
of $13.1 million. A $2.0 million decrease in prepaid expenses and other current
assets, which was largely a byproduct of our efforts to identify operating
expense efficiencies and cost savings, as well as changes in the timing and
duration of certain prepaid contracts, also contributed to cash provided by
operating activities for 2016. The most significant use of cash in operating
activities during 2016 related to deferred revenue, which declined $18.0 million
as a result of downward pressures on both our membership and service provider
revenue streams associated with the migration to our new technology platform and
the removal of our ratings and reviews paywall during the year. Additionally, we
experienced a $3.9 million net decrease in accounts payable and accrued
liabilities year over year due, in part, to a decline in the balance of trade
accounts payable and the expected timing of payment of such costs.

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Our net income of $10.2 million for the year ended December 31, 2015 was the
most significant factor contributing to cash from operating activities of $26.7
million for the year. Operating cash flow for 2015 was also positively impacted
by $23.6 million of non-cash activity, including stock-based compensation
expense of $8.9 million, depreciation and amortization expense of $6.4 million,
bad debt expense of $5.7 million and two separate long-lived asset impairment
charges amounting to $1.6 million during the year. Additionally, a net increase
in accounts payable and accrued liabilities of $2.9 million year over year,
largely the result of increases in and the expected timing of payment of trade
accounts payable, also contributed to our operating cash flow for 2015. Uses of
cash from operations for the year included a $7.6 million fluctuation in
accounts receivable, attributable to increases in service provider billings
outstanding at year-end, as well as a $0.9 million increase in prepaid expenses
and other current assets associated with certain technology service agreements,
offset by a reduction in prepaid commissions related to a decline in the number
of sales personnel we employ and the continued evolution of our sales
compensation structure. The $1.6 million year over year net decrease in deferred
advertising and membership revenue, which was primarily the result of declines
in membership revenue associated with our realization of lower membership
revenue per paid member, also negatively impacted our operating cash flow for
the year.

Cash provided by operating activities in 2014 of $4.6 million was achieved
despite a net loss of $12.1 million, primarily as a result of the impact of
non-cash activity during the year. Operating cash flows were positively impacted
by stock-based compensation expense of $7.9 million, depreciation and
amortization expense of $5.6 million, bad debt expense of $5.0 million and a
non-cash long-lived asset impairment charge of $1.8 million associated with the
abandonment of certain capitalized website and software development assets.
Additionally, the change in total deferred revenue contributed to current year
cash provided by operations, amounting to $7.1 million, as we experienced year
over year increases in both the number of paid memberships and the number of
service providers participating in our advertising programs. Uses of cash from
operations included $4.4 million related to the year over year increase in
prepaid expenses and other current assets, attributable to the continued
evolution of our compensation structure for sales personnel as well as the
timing of such payments. Further, increases in service provider billings during
2014 contributed to a $7.8 million fluctuation in accounts receivable that also
negatively impacted operating cash flows.

Net Cash (Used In) Investing Activities


Our use of cash in investing activities of $11.4 million for the year ended
December 31, 2016 was primarily attributable to the total combined $18.6 million
in capital expenditures for property, equipment and software during the period,
consisting of $13.7 million in capitalized website and software development
costs related to our new technology platform as well as $4.9 million for
facilities improvements and technology hardware and software, partially offset
by $7.4 million in sales, net of purchases, of short-term investments at
maturity during 2016. While we will continue to make capital investments in our
technology platform and infrastructure in 2017, there were no material
commitments for capital expenditures in place as of December 31, 2016.

Our use of cash in investing activities of $34.5 million for 2015 was primarily
attributable to the total combined $34.3 million in capital expenditures for
property, equipment and software during the year, consisting of $25.2 million in
capitalized website and software development costs related to the development of
our new technology platform and $9.1 million for facilities improvements and
technology hardware and software.

Our use of cash in investing activities of $41.2 million in 2014 was largely
attributable to the total combined $36.9 million in capital expenditures for
property, equipment and software during the year, consisting of $20.1 million
for capitalized website and software development costs related to the
development of our new technology platform and mobile applications and $16.7
million for campus expansion and improvement efforts and upgrades and additions
to technology hardware and software. Additionally, our purchases of short-term
investments exceeded sales at maturity during the year, amounting to $3.3
million, further contributing to our use of cash in investing activities in
2014. We also spent $1.0 million during 2014 on data acquisition costs to
acquire consumer reports on service providers and to purchase a website domain
name.

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Net Cash Provided By (Used In) Financing Activities


Our use of cash in financing activities of $0.5 million for the year ended
December 31, 2016 was primarily attributable to taxes paid for net share
settlements associated with the vesting of restricted stock units and
performance awards of restricted stock units during the year, amounting to $2.5
million, partially offset by $2.0 million in proceeds from stock option
exercises. Financing cash flows were also impacted by proceeds from our employee
stock purchase plan ($0.5 million), payments on our capital lease obligation
($0.2 million) and the first of three equal annual installments for a fee
payable to our lender in connection with the completion of the second amendment
to the financing agreement during 2016 ($0.2 million).

Net cash provided by financing activities of $0.5 million for 2015 was attributable to proceeds from exercises of employee stock options during the year, partially offset by payments on our capital lease obligation.


Net cash provided by financing activities of $41.7 million in 2014 was largely
attributable to the debt refinancing transaction completed in September of 2014,
which yielded gross proceeds of $60.0 million. The debt proceeds were offset by
a $15.0 million cash outflow related to the retirement of our previous debt
facility, cash paid for financing costs of $2.0 million and fees paid to the
lender of $1.2 million. Financing cash flows were also impacted by an additional
$0.5 million in contingent consideration that was paid out during 2014 to
satisfy our final obligation under the 2013 BrightNest acquisition, which was
due and payable on the one-year anniversary of the closing of the transaction.

Debt Obligations


On September 26, 2014, we entered into an $85.0 million financing agreement,
comprised of a $60.0 million term loan and a $25.0 million delayed draw term
loan, to provide increased financial flexibility for investments in growth while
simultaneously reducing our interest rate.

On June 10, 2016, we entered into a first amendment to the financing agreement
which, among other things, (i) extended the commencement of our quarterly
repayment obligations under the term loan from September 30, 2016 to September
30, 2017; (ii) revised the financial covenants for minimum consolidated EBITDA,
as defined in the financing agreement, for periods ending after June 30, 2016;
(iii) revised the financial covenant related to minimum required liquidity from
$10.0 million to $30.0 million; (iv) removed the financial covenant related to
minimum membership revenue for periods ending after March 31, 2016; and (v)
modified the basis for the calculation of the applicable interest rate.

On November 1, 2016, we entered into a second amendment to the financing
agreement which, among other things, (i) added a new financial covenant related
to consolidated active service provider contract value beginning with the period
ending December 31, 2016; (ii) revised the financial covenants for minimum
consolidated EBITDA, as defined in the financing agreement and subsequently
modified under the second amendment, for periods ending after September 30,
2016; (iii) revised the financial covenant related to minimum required
liquidity; (iv) modified the basis for the calculation of the applicable
interest rate; (v) modified the dates under which the prepayment premium is
applicable; and (vi) modified certain terms related to the delayed draw term
loan. Additionally, the second amendment set forth a $0.6 million fee to be paid
by us to the lender, in three equal annual installments, in connection with the
execution of the amendment, and this fee was capitalized along with the existing
unamortized fees paid to lender contra liability and is being amortized to
interest expense over the remaining term of the financing agreement.

The financing agreement requires monthly interest payments on the first business
day of each month until maturity on any principal amounts outstanding under
either debt facility. In accordance with the second amendment to the financing
agreement, if our consolidated EBITDA for the trailing four consecutive fiscal
quarters is less than $20.0 million or our qualified cash, as defined in the
financing agreement, is less than $20.0 million as of the applicable period end,
amounts outstanding under the financing agreement bear interest at a per annum
rate, at our option, equal to (i) the LIBOR rate for the interest period in
effect, subject to a floor of 0.5%, plus 9.50% or (ii) the reference rate, which
is based on the prime rate as published by the Wall Street Journal, subject to a
floor of 3.25%, plus 8.50%. If our qualified cash is greater than $20.0 million,
and our consolidated EBITDA for the trailing four consecutive fiscal quarters
is:

•          greater than $20.0 million but less than $25.0 million, the applicable
           LIBOR interest rate is 8.5%, and the applicable reference interest
           rate is 7.5%;

• greater than $25.0 million but less than $30.0 million, the applicable

           LIBOR interest rate is 7.5%, and the applicable reference interest
           rate is 6.5%; or


•          greater than $30.0 million, the applicable LIBOR interest rate is
           6.5%, and the applicable reference interest rate is 5.5%.



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The financing agreement obligates us to make quarterly principal payments on the
term loan of $0.8 million on the last day of each calendar quarter, commencing
with the quarter ending September 30, 2017, and to repay the remaining balance
of the term loan at maturity. We are required to make principal payments on the
outstanding balance of the delayed draw term loan equal to 1.25% of the amount
of such loan funded at or prior to the last day of each calendar quarter and to
repay the remaining outstanding balance of the delayed draw term loan at
maturity. From the effective date of the financing agreement through September
26, 2017, we are also required to pay a commitment fee equal to 0.75% per annum
of the unborrowed amounts of the delayed draw term loan.

We may prepay the amounts outstanding under the financing agreement at any time
and are required to prepay the loans with (i) the net proceeds of certain asset
sales, issuances of debt or equity, and certain casualty events, and (ii) up to
50% of consolidated excess cash flow, as defined in the financing agreement, for
each fiscal year during the term of the financing agreement, commencing with the
year ended December 31, 2015. We did not have excess cash flow as of
December 31, 2016. As specified by the second amendment to the financing
agreement, we must pay a 1% premium on prepayments made on or before November 1,
2017, subject to certain exceptions set forth in the financing agreement. Our
obligations under the financing agreement are guaranteed by each of our
subsidiaries and are secured by first priority security interests in all of
their respective assets and a pledge of the equity interests of our
subsidiaries. The term loan and the delayed draw term loan mature on September
26, 2019. As of December 31, 2016, we had $57.6 million in outstanding
borrowings under the term loan, net of unamortized deferred financing fees of
$1.1 million and unamortized fees paid to the lender of $1.3 million, both of
which are being amortized into interest expense over the term of the financing
agreement, and availability of $25.0 million under the delayed draw term loan.

The financing agreement contains various restrictive covenants, including
restrictions on our ability to dispose of assets, make acquisitions or
investments, incur debt or liens, make distributions to stockholders or
repurchase outstanding stock, enter into related-party transactions and make
capital expenditures, other than upon satisfaction of the conditions set forth
in the financing agreement. We are also required to comply with certain
financial covenants, including minimum consolidated EBITDA, as defined in the
financing agreement and subsequently modified under the second amendment,
minimum liquidity, minimum consolidated active service provider contract value
and maximum consolidated capital expenditures. Upon an event of default, which
includes certain customary events such as, among other things, a failure to make
required payments when due, a failure to comply with covenants, certain
bankruptcy and insolvency events, defaults under other material indebtedness or
a change in control, the lenders may accelerate amounts outstanding, terminate
the agreement and foreclose on all collateral. We were in compliance with all
financial and non-financial covenants at December 31, 2016.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet activities, other than long-term non-cancellable operating leases as described herein, nor do we maintain any off-balance sheet interests in variable interest entities, special-purpose entities or other structured finance entities.

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Contractual Obligations

In the normal course of business, we enter into long-term contractual obligations and commitments, primarily related to debt obligations and non-cancellable operating leases. As of December 31, 2016, our material contractual obligations consisted of long-term debt comprised of a $60.0 million term loan scheduled to mature on September 26, 2019 and long-term non-cancellable operating leases expiring through 2021, as set forth in the table below.

                                                  Less than                                        More than
                                     Total         1 Year         2-3 Years       4-5 Years         5 Years
Long-term debt obligations,       $  73,781     $     6,733     $    67,048     $         -     $           -
including interest(1)
Operating lease obligations(2)        7,112           2,134           4,234             744                 -

Total contractual obligations $ 80,893 $ 8,867 $ 71,282

     $       744     $           -



(1) Represents principal and estimated interest payments to be made over the

remaining term of our long-term debt obligation issued in September 2014 and

subsequently amended in June and November 2016. In connection with the second

amendment to the financing agreement completed in November 2016, the basis

for the calculation of the applicable interest rate was modified such that

the rate is now contingent upon our performance in relation to certain

predetermined qualified cash and consolidated EBITDA thresholds. As such, we

utilized an estimate of the applicable interest rate in effect following the

release of our financial results for the period ended December 31, 2016,

8.75%, in determining the estimated interest payments included in the

long-term debt obligation amounts presented in the table above. See Note 8,

"Debt and Credit Arrangements," in the accompanying Notes to Consolidated

Financial Statements included in Item 8 of this Form 10-K for additional

    information.



(2) Represents future payments due under long-term non-cancellable operating

leases expiring through 2021. See Note 9, "Commitments and Contingencies," in

the accompanying Notes to Consolidated Financial Statements included in Item

8 of this Form 10-K for additional information.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue, 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 we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.


We believe the following critical accounting policies represent areas that
entail significant management judgment or estimates in the preparation of our
consolidated financial statements. For a complete summary of the accounting
policies we deem to be significant, see Note 1, "Description of Business, Basis
of Presentation and Summary of Significant Accounting Policies," in the
accompanying Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K.

Capitalized Website and Software Development Costs


As of December 31, 2016 and 2015, our gross capitalized website and software
development costs amounted to $60.8 million and $47.9 million, respectively. In
accordance with authoritative guidance, we begin to capitalize website and
software development costs for internal use when planning and design efforts are
successfully completed and development is ready to commence. Costs incurred
during planning and design, together with costs incurred for training and
maintenance, are expensed as incurred and recorded in product and technology
expense within the consolidated statements of operations. We place capitalized
website and software development assets into service and commence
depreciation/amortization when the applicable project or asset is substantially
complete and ready for its intended use. Once placed into service, we capitalize
qualifying costs of specified upgrades or enhancements to capitalized website
and software development assets when the upgrade or enhancement will result in
additional functionality.


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We capitalize internal labor costs, including compensation, benefits and payroll
taxes, incurred for certain capitalized website and software development
projects related to our technology platform. Our policy with respect to
capitalized internal labor stipulates that labor costs for employees working on
eligible internal use capital projects are capitalized as part of the historical
cost of the project when the impact, as compared to expensing such labor costs,
is material. As of December 31, 2016 and 2015, cumulative internal labor costs
amounting to $17.6 million and $11.1 million, respectively, were recorded as
capitalized website and software development costs and included in the balance
of property, equipment and software reflected in the consolidated balance
sheets.

We also capitalized a portion of the interest on funds borrowed in relation to
the development of our technology platform. Our policy with respect to
capitalized interest specifies that interest costs on eligible long-term
internal use capital projects are capitalized as part of the historical cost of
the project when the impact, as compared to expensing such interest costs, is
material. For the year ended December 31, 2016, total interest costs incurred
amounted to $5.6 million, of which $0.9 million was recorded as capitalized
website and software development costs. For the year ended December 31, 2015,
total interest costs incurred amounted to $5.1 million, of which $2.2 million
was recorded as capitalized website and software development costs. For the year
ended December 31, 2014, total interest costs incurred amounted to $2.6 million,
of which $1.4 million was recorded as capitalized website and software
development costs.

Stock-Based Compensation


Determining the fair value of an employee share-based payment award requires
significant judgment. All share-based payments to employees, including grants of
stock options, restricted stock units ("RSUs") and performance awards of
restricted stock units ("PRSUs"), are measured based on the grant date fair
value of the awards, with the resulting expense generally recognized on a
straight-line basis, subject to certain limited exceptions, over the period
during which the employee is required to perform service in exchange for the
award.

We estimate the fair value of stock option awards using the Black-Scholes
option-pricing model. The determination of the fair value of a stock option
award on the date of grant using the Black-Scholes option-pricing model is
impacted by our stock price on the grant date as well as assumptions regarding a
number of complex and subjective variables. These variables include our expected
stock price volatility over the expected term of the award, actual and projected
employee share-based payment award exercise behaviors, the risk-free interest
rate for the expected term of the award and expected dividends.

The following table summarizes the weighted-average grant date fair value and
the weighted-average assumptions utilized to estimate the fair value of stock
options granted during 2016 and 2015:
                                           2016       2015
Dividend yield                                0 %        0 %
Volatility                                 64.6 %     53.1 %
Risk-free interest rate                    1.26 %     1.48 %
Expected term, in years                    5.00       5.00

Weighted-average grant date fair value $ 4.76 $ 2.95




We utilize an expected dividend yield of zero based on the fact that we do not
have a history or current expectation of paying cash dividends on our stock. The
risk-free interest rate is based on yields of U.S. Treasury securities with a
maturity similar to the estimated expected term of the stock options. The
expected term represents the period of time the stock options are expected to be
outstanding based on our historical experience. Prior to 2016, the expected
volatility assumption was estimated based on historical volatilities for
publicly traded common stock of comparable peer companies with similarities in
size, lines of business, market capitalization, revenue or financial leverage
over the estimated expected life of the stock options. As we believe there is
now sufficient historical data available with respect to the volatility of our
common stock, effective January 1, 2016, we began utilizing our own historical
volatility data for the volatility input to our calculation of the estimated
fair value of stock option awards, which yielded an increase to the
weighted-average volatility assumption year over year.

RSUs are measured based on the fair market value of the underlying stock on the
date of grant and typically vest over a period of four years from the date of
grant. Once vested, shares will generally either be issued net of the applicable
tax withholding requirements to be paid by us on behalf of employees, or a
portion of the shares issued will subsequently be sold by employees to satisfy
the tax obligations created by the vesting of RSUs.

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The PRSUs granted during 2015 to Scott A. Durchslag, our President and Chief
Executive Officer, are market condition performance share-based payment awards
that are earned and vest in separate tranches, contingent upon our achievement
of certain predetermined stock price targets. We estimated the fair value of the
PRSUs granted to Mr. Durchslag as of the date of grant using a Monte Carlo
option-pricing simulation model, and we are recognizing stock-based compensation
expense over the requisite service period of the award. Key inputs to the
valuation included the fair market value of our underlying stock on the grant
date, our expected stock price volatility over the expected term of the award
and the risk-free interest rate for the expected term of the award. The PRSUs
granted during 2016 to our executive officers and other members of our senior
leadership team are subject to our performance with respect to certain
predetermined performance conditions over a defined performance period. These
share-based payment awards were measured based on the fair market value of the
underlying stock on the date of grant, and we are recognizing stock-based
compensation expense, if any, over the vesting period based on the projected
probability of achievement of the performance conditions as of the end of each
reporting period during the performance period. As necessary, we may
periodically adjust the recognition of such expense in response to changes in
our forecasts with respect to the performance conditions. Once vested, shares
earned under PRSU awards will generally either be issued net of the applicable
tax withholding requirements to be paid by us on behalf of employees, or a
portion of the shares issued will subsequently be sold by employees to satisfy
the tax obligations created by the vesting of PRSUs.

In connection with our adoption of Accounting Standards Update 2016-09 (see Note
1, "Description of Business, Basis of Presentation and Summary of Significant
Accounting Policies," in the accompanying Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K for additional information)
during 2016, we elected to begin accounting for forfeitures of share-based
payment awards as they occur in lieu of the previous practice of estimating the
number of awards expected to be forfeited and adjusting the estimate when it was
no longer probable that the corresponding service condition would be fulfilled.

The assumptions utilized in calculating the fair value of employee share-based
payment awards represent our best estimates at the time of grant, but such
estimates involve inherent uncertainties and the application of judgment. If
actual results differ from our estimates, or we determine it is necessary to
utilize different assumptions with respect to the valuation of share-based
payment awards, our stock-based compensation expense could be materially
different in the future.

Loss Contingencies


We are involved, from time to time, in various lawsuits, claims, investigations
and other legal and regulatory proceedings, both as a plaintiff and as a
defendant, related to our business and operations. Certain of these matters
include speculative claims for substantial or indeterminate amounts of damages.
We evaluate the likelihood of any judgments or outcomes with respect to these
matters and determine loss contingency assessments on a gross basis after
considering the probability of incurrence of a loss and whether a loss is
reasonably estimable. In addition, we consider other relevant factors that could
impact our ability to reasonably estimate a loss. A determination of the amount
of reserves required, if any, for these contingencies is made after analyzing
each matter. Our reserves may change in the future due to new developments or
changes in strategy in handling these matters. We record a liability when we
believe it is both probable that a loss has been incurred and the amount can be
reasonably estimated. If we determine a loss is possible and a range of loss can
be reasonably estimated, we disclose the range of the possible loss in the Notes
to Consolidated Financial Statements.

Significant judgment is required to determine probability or possibility, as
well as the estimated amount, as applicable, of a loss contingency. On at least
a quarterly basis, as necessary, we review and evaluate developments with
respect to our legal matters that could impact the amount of an associated
liability previously accrued as well as the related ranges of possible losses
disclosed and make adjustments and changes as appropriate. For example, during
the first quarter of 2016, we recorded a $3.5 million contingent legal liability
for the Moore litigation and related cases in connection with the settlement of
this matter, representing our best estimate of the costs to be incurred as of
that date. Each quarter thereafter, we reviewed the activity and any new
developments under the Moore settlement to determine if an adjustment to the
contingent liability previously recorded was necessary, and during the fourth
quarter of 2016, our evaluation yielded a conclusion that such an adjustment was
needed following completion of the election period for settlement class members,
resulting in a $0.7 million reduction to our accrual for this matter, bringing
our best estimate of loss to $2.8 million as of December 31, 2016.

As the outcome of litigation is inherently uncertain, if one or more legal matters are resolved against us for amounts in excess of our expectations, our business or consolidated financial statements could be materially adversely affected.

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Income Taxes


We are subject to corporate federal and state income taxes in the United States
at prevailing corporate rates. Income taxes are accounted for under the asset
and liability method. Under this method, we accrue income taxes payable or
refundable and recognize deferred tax assets and liabilities based on
differences between the book and tax basis of assets and liabilities. We measure
deferred tax assets and liabilities using enacted rates in effect for the years
in which the differences are expected to reverse and recognize the effect of a
change in enacted rates in the period of enactment. Significant judgment is
required in evaluating our uncertain tax positions, as applicable, and
determining our provision for income taxes and recording the related income tax
assets and liabilities.

After determining the total amount of deferred tax assets, we determine whether
it is more likely than not that some portion of the deferred tax assets will not
be realized. If we conclude that a deferred tax asset is not likely to be
realized, a valuation allowance is established against that asset to record it
at its expected realizable value. As of December 31, 2016, we recorded a full
valuation allowance on our deferred tax assets. We generated a pre-tax book net
loss of $7.8 million for the year ended December 31, 2016, and aside from the
year ended December 31, 2015, we have incurred a pre-tax book net loss in each
year since our inception. Further, we had accumulated deficits of $262.0 million
and $254.2 million as of December 31, 2016 and December 31, 2015, respectively.
We are also in a three-year cumulative pre-tax net loss position, amounting to
$9.6 million, and when considered in the context of future reversals of existing
taxable temporary differences, projected future taxable income and tax planning
strategies, we believe there is significant negative evidence justifying the
presence of a valuation allowance. We periodically review deferred tax assets
for recoverability, and should there be a change in our ability to recover
deferred tax assets, the tax provision would be adjusted in the period in which
the assessment changed.

We establish assets and liabilities for uncertain positions taken or expected to
be taken in income tax returns using a more-likely-than-not recognition
threshold, and we include in income tax expense any interest and penalties
related to uncertain tax positions. We recognize the financial statement benefit
of a tax position only after determining the relevant tax authority would more
likely than not sustain the position following an audit. We concluded that we
have no unrecognized tax benefits to be recorded for the year ended December 31,
2016.

Our effective tax rate has historically varied from the statutory rate,
primarily due to the tax impact of state income taxes, stock-based compensation
expense, research and development credits and the valuation allowance. Our
future provision for income taxes could be adversely impacted by adjustments to
the valuation of our deferred tax assets or liabilities, including the valuation
allowance, or changes in tax laws, regulations or accounting principles and
interpretations. We are subject to examination of our income tax returns by tax
authorities in the United States, and we regularly assess the likelihood of
adverse outcomes resulting from these examinations in determining the adequacy
of our provision for income taxes.

Recent Accounting Pronouncements

For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 1, "Description of Business, Basis of Presentation and Summary of Significant Accounting Policies," in the accompanying Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

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Financials ($)
Sales 2017 299 M
EBIT 2017 -0,04 M
Net income 2017 -5,19 M
Debt 2017 -
Yield 2017 -
P/E ratio 2017 -
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Capi. / Sales 2017 1,14x
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Capitalization 341 M
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Mean consensus OUTPERFORM
Number of Analysts 8
Average target price 7,38 $
Spread / Average Target 28%
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NameTitle
Scott Durchslag President, CEO & Class I Director
Thomas R. Evans Chairman
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