UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013March 31, 2014

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-35339




ANGIE’S LIST, INC.

(Exact name of registrant as specified in its charter)



Delaware

27-2440197

Delaware27-2440197
(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1030 E. Washington Street

Indianapolis, IN

46202

(Address of principal executive offices)

(Zip Code)

(888) 888-5478

(Registrant’s telephone number, including area code)




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  

¨

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  

¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

x

Accelerated filer

☒  

¨

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  

x

The number of shares of registrant’s common stock outstanding as of October 23, 2013 was: 58,422,542

April 21, 2014 was 58,511,677.



Table of Contents


ITEM 1.

Financial Statements

3

ITEM 1.
ITEM 2.

Management’s

11

ITEM 3.

ITEM 4.

ITEM 1.

ITEM 1A.

ITEM 2.

ITEM 3.

ITEM 4.

ITEM 5.

ITEM 6.

26



























2

Table of Contents

ITEM 1.     FINANCIAL STATEMENTS

Angie’s List, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

  

September 30,

2013

  

December 31,

2012

 
  

(Unaudited)

     

Assets

        

Cash and cash equivalents

 $41,609  $42,638 

Restricted cash

  50   50 

Short-term investments

  20,972  ��10,460 

Accounts receivable, net of allowance for doubtful accounts of $1,050 and $922 at September 30, 2013 and December 31, 2012

  10,636   7,787 

Prepaid expenses and other current assets

  15,000   19,810 

Total current assets

  88,267   80,745 

Property and equipment, net

  16,003   12,079 

Goodwill

  1,145   415 

Amortizable intangible assets, net

  3,864   2,356 

Deferred financing fees, net

  456   634 

Total assets

 $109,735  $96,229 

Liabilities and stockholders’ equity (deficit)

        

Accounts payable

 $3,814  $6,489 

Accrued liabilities

  35,481   14,058 

Deferred membership revenue

  37,563   27,627 

Deferred advertising revenue

  35,564   23,160 

Total current liabilities

  112,422   71,334 

Long-term debt, including accrued interest

  14,906   14,869 

Deferred membership revenue, noncurrent

  4,888   4,330 

Deferred advertising revenue, noncurrent

  387   214 

Deferred income taxes

  163   163 

Total liabilities

  132,766   90,910 

Commitments and contingencies (Note 9)

        

Stockholders’ equity (deficit):

        

Preferred stock, $0.001 par value: 10,000,000 shares authorized, no shares issued or outstanding at September 30, 2013 and December 31, 2012

      

Common stock, $0.001 par value: 300,000,000 shares authorized, 66,974,754 and 66,425,988 shares issued and 58,416,042 and 57,867,276 shares outstanding at September 30, 2013 and December 31, 2012, respectively

  67   66 

Additional paid-in-capital

  255,767   248,326 

Treasury stock, at cost: 8,558,712 shares of common stock at September 30, 2013 and December 31, 2012

  (23,719

)

  (23,719

)

Accumulated deficit

  (255,146

)

  (219,354

)

Total stockholders’ equity (deficit)

  (23,031

)

  5,319 

Total liabilities and stockholders’ equity (deficit)

 $109,735  $96,229 

  March 31,
2014
 December 31,
2013
  (Unaudited)  
Assets    
Cash and cash equivalents $43,654
 $34,803
Restricted cash 50
 50
Short-term investments 20,976
 21,055
Accounts receivable, net of allowance for doubtful accounts of $1,399 and $1,107 at March 31, 2014 and December 31, 2013 13,438
 12,385
Prepaid expenses and other current assets 15,732
 13,651
Total current assets 93,850
 81,944
Property, equipment and software, net 25,497
 18,657
Goodwill 1,145
 1,145
Amortizable intangible assets, net 3,461
 3,500
Deferred financing fees, net 337
 397
Total assets $124,290
 $105,643
     
Liabilities and stockholders’ deficit    
Accounts payable $9,130
 $6,838
Accrued liabilities 37,317
 21,770
Deferred membership revenue 34,230
 35,560
Deferred advertising revenue 42,976
 39,448
Current portion of obligations under leases 179
 
Total current liabilities 123,832
 103,616
Long-term debt, including accrued interest 14,930
 14,918
Deferred membership revenue, noncurrent 4,723
 4,909
Deferred advertising revenue, noncurrent 468
 521
Obligations under leases 447
 
Deferred income taxes 169
 169
Total liabilities 144,569
 124,133
Commitments and contingencies (Note 9) 
 
Stockholders’ deficit:    
Preferred stock, $0.001 par value: 10,000,000 shares authorized, no shares issued or outstanding at March 31, 2014 and December 31, 2013 
 
Common stock, $0.001 par value: 300,000,000 shares authorized, 67,070,389 and 67,014,757 shares issued and 58,511,677 and 58,456,045 shares outstanding at March 31, 2014 and December 31, 2013, respectively 67
 67
Additional paid-in-capital 259,499
 257,505
Treasury stock, at cost: 8,558,712 shares of common stock at March 31, 2014 and December 31, 2013 (23,719) (23,719)
Accumulated deficit (256,126) (252,343)
Total stockholders’ deficit (20,279) (18,490)
Total liabilities and stockholders’ deficit $124,290
 $105,643
See accompanying notes.





3

Table of Contents


Angie’s List, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2013

  

2012

  

2013

  

2012

 
  

(Unaudited)

  

(Unaudited)

 

Revenue

                

Membership

 $17,050  $12,769  $47,598  $34,036 

Service provider

  48,450   29,253   129,288   75,584 

Total revenue

  65,500   42,022   176,886   109,620 

Operating expenses

                

Operations and support

  11,016   7,140   29,418   19,631 

Selling

  23,960   16,240   65,582   42,974 

Marketing

  28,189   26,088   75,870   71,316 

Technology

  6,942   4,905   19,349   12,223 

General and administrative

  8,421   5,669   21,019   17,420 

Operating loss

  (13,028

)

  (18,020

)

  (34,352

)

  (53,944

)

Interest expense, net

  468   467   1,395   1,380 

Loss before income taxes

  (13,496

)

  (18,487

)

  (35,747

)

  (55,324

)

Income tax expense

  15      45    

Net loss

 $(13,511

)

 $(18,487

)

 $(35,792

)

 $(55,324

)

Net loss per common share—basic and diluted

 $(0.23

)

 $(0.32

)

 $(0.62

)

 $(0.96

)

Weighted average number of common shares outstanding—basic and diluted

  58,389,311   57,768,777   58,164,232   57,369,674 

  Three Months Ended 
 March 31,
  2014 2013
  (Unaudited)
Revenue    
Membership $18,300
 $14,637
Service provider 54,357
 37,534
Total revenue 72,657
 52,171
Operating expenses    
Operations and support 11,548
 8,298
Selling 26,122
 19,645
Marketing 23,481
 19,722
Product and technology 7,457
 5,595
General and administrative 7,356
 6,380
Operating loss (3,307) (7,469)
Interest expense, net 461
 463
Loss before income taxes (3,768) (7,932)
Income tax expense 15
 15
Net loss $(3,783) $(7,947)
Net loss per common share—basic and diluted $(0.06) $(0.14)
Weighted average number of common shares outstanding—basic and diluted 58,491,230
 57,948,822
See accompanying notes.


























4

Table of Contents


Angie’s List, Inc.

Consolidated Statements of Cash Flows

(in thousands)

  

Nine Months Ended September 30,

 
  

2013

  

2012

 
  

(Unaudited)

 

Operating activities

        

Net loss

 $(35,792

)

 $(55,324

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

        

Depreciation and amortization

  2,874   1,960 

Amortization of debt discount, deferred financing fees and bond premiums

  420   209 

Noncash compensation expense

  2,666   2,213 

Changes in certain assets:

        

Accounts receivable

  (2,849

)

  (3,353

)

Prepaid expenses and other current assets

  4,810   (7,994

)

Changes in certain liabilities:

        

Accounts payable

  (3,175

)

  4,152 

Accrued liabilities

  21,423   12,601 

Deferred advertising revenue

  12,577   6,540 

Deferred membership revenue

  10,494   11,199 

Net cash provided by (used in) operating activities

  13,448   (27,797

)

Investing activities

        

Restricted cash

     250 

Purchase of short-term investments

  (27,572

)

   

Sale of short-term investments

  16,855    

Acquisition of business assets

  (2,150

)

   

Property and equipment

  (5,685

)

  (2,583

)

Data acquisition costs

  (701

)

  (1,968

)

Net cash used in investing activities

  (19,253

)

  (4,301

)

Financing activities

        

Sale of common stock, net of costs

     8,627 

Proceeds from exercise of stock options

  4,776   361 

Net cash provided by financing activities

  4,776   8,988 

Net decrease in cash and cash equivalents

  (1,029

)

  (23,110

)

Cash and cash equivalents, beginning of period

  42,638   88,607 

Cash and cash equivalents, end of period

 $41,609  $65,497 

  Three Months Ended 
 March 31,
  2014 2013
  (Unaudited)
Operating activities    
Net loss $(3,783) $(7,947)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 1,220
 842
Amortization of debt discount, deferred financing fees and bond premium 106
 162
Non-cash compensation expense 1,533
 822
Changes in certain assets:    
Accounts receivable (1,053) (1,946)
Prepaid expenses and other current assets (2,081) 526
Changes in certain liabilities:    
Accounts payable 2,201
 208
Accrued liabilities 14,843
 11,374
Deferred advertising revenue 3,475
 4,883
Deferred membership revenue (1,516) 977
Net cash provided by operating activities 14,945
 9,901
     
Investing activities    
Purchase of short-term investments (2,595) (9,944)
Sale of short-term investments 2,640
 
Property, equipment and software (2,257) (1,514)
Capitalized website and software development costs (3,953) 
Intangible assets (390) (174)
Net cash used in investing activities (6,555) (11,632)
     
Financing activities    
Proceeds from exercise of stock options 461
 1,706
Net cash provided by financing activities 461
 1,706
Net increase (decrease) in cash and cash equivalents 8,851
 (25)
Cash and cash equivalents, beginning of period 34,803
 42,638
Cash and cash equivalents, end of period $43,654
 $42,613
     
Supplemental cash flow disclosures    
Capital expenditures incurred but not yet paid $974
 $
See accompanying notes.


 

5

Table of Contents


Angie’s List, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

(in thousands, except share and per share data)


1. Summary of Significant Accounting Policies

Nature of Operations and Reorganization

Angie’s List, Inc. (collectively with its wholly owned subsidiaries, the “Company”) operates a consumer-driven service for its members to research, hire, rate and review local professionals for critical needs, such as home, health care and automotive services. Ratings and reviews, which are available only to the Company’s members, help its members to find the best provider for their local service needs. Membership subscriptions are sold on a monthly, annual and multi-year basis. The consumer rating network “Angie’s List” is maintained and updated based on member feedback. The Company also sells advertising in its monthly publication, on its website and through its call center to service providers that meet certain rating criteria. In addition, the Company's e-commerce offerings provide its members the opportunity to purchase services directly from the Company from service providers that are rated on its website. The Company’s services are provided in metropolitan areas located across the continental United States.

The accompanying unaudited Consolidated Financial Statements have beenwere prepared in conformity with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes necessary for fair presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. Operating results from interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The Company is subject to seasonal patterns that generally affect its business. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, but management does not believe such differences will materially affect Angie’s List, Inc.’s financial position or results of operations. The Consolidated Financial Statements reflect all adjustments considered, in the opinion of management, necessary to fairly present the results for the periods. Such adjustments are of a normal recurring nature.

For further information, including the Company’s significant accounting policies, refer to the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2012.2013. As used herein, the terms “Angie’s List”, “Company”, “we”, “our” and “us” mean Angie’s List, Inc. and its consolidated subsidiaries.

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company manages its business on the basis of one operating segment.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have beenare eliminated in consolidation.


6


Revenue Recognition and Deferred Revenue

The Company recognizes revenue when all of the following conditions are met: there is persuasive evidence of an arrangement;arrangement, the service has been provided to the customer;customer, the collection of the fees is reasonably assured;assured, and the amount of fees to be paid by the customer is fixed or determinable.


Membership Revenue
 
6

Membership Revenue

Revenue from the sale of membership subscriptions is recognized ratably over the term of the associated subscription.

At the time a member joins, the Company may receive a one-time nonrefundable enrollment fee. Enrollment fees are deferred and recognized on a straight-line basis over an estimated average membership life of 7680 months for annual or multi-year members and 1513 months for monthly members, which is based on historical membership experience. The Company reviews the estimated average membership life on an annual basis, or more frequently if circumstances change. Changes in member behavior, performance, competition and economic conditions may cause attrition levels to change, which could impact the estimated average membership life.

Service Provider Revenue

Revenue from the sale of advertising in the Company’s publication is recognized in the month in which the Company’s monthly publication is published and distributed. Revenue from the sale of website and call center advertising is recognized ratably over the time period the advertisements run. Revenue from e-commerce vouchers is recognized on a net basis when the voucher has beenis delivered to the purchaser. The Company’sWhile the Company is not the merchant of record with respect to its customers for these transactions, it does offer customers refunds in certain circumstances. Revenue from e-commerce revenue was $6,472 and $3,806transactions is recorded net of a reserve for estimated refunds. During the three months ended September 30,March 31, 2014 and 2013, our e-commerce revenue represented $6,258 and 2012, respectively,$4,661 of total service provider revenue, respectively.

Deferred Revenue

Deferred revenue includes the unamortized portion of revenue associated with membership and $16,090 and $11,008advertising fees for which the nine months ended September 30, 2013 and 2012, respectively.

Company received payment in advance of services or advertising to be provided.


2. Net Loss Per Common Share

Basic and diluted net loss per common share is computed by dividing consolidated net loss by the weighted average number of common shares outstanding for the period.

Basic and diluted net loss per common share was $(0.06) and $(0.14) for the three months ended March 31, 2014 and 2013, respectively.

The following potentialpotentially dilutive equity securities are not included in the diluted net loss per common share calculation becauseas they would have had an antidilutive effect:

  

September 30, 2013

  

September 30, 2012

 

Stock options

  2,980,233   2,794,562 

Warrants

     88,240 

  March 31, 2014 March 31, 2013
Stock options 4,761,665
 3,530,831

7


3. Fair Value Measurements

Whenever possible, quoted prices in active markets are used to determine the fair value of our financial instruments. Our financial instruments are not held for trading or other speculative purposes. The estimated fair value of financial instruments has beenwas determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Fair Value Hierarchy

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820,Fair Value Measurement Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards, defined and established a framework for measuring fair value and expandsexpanded disclosures about fair value measurements for financial assets and liabilities that are adjusted to fair value on a recurring basis and/or financial assets and liabilities that are measured at fair value on a nonrecurringnon-recurring basis which have beenthat were adjusted to fair value during the period. In accordance with ASC 820, we have categorized our financial assets and liabilities that are adjusted to fair value,based on the priority of the inputs to the valuation technique, following the three-level fair value hierarchy prescribed by ASC 820, as follows:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.

Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3: Unobservable inputs that are used when little or no market data is available.


Valuation Techniques
 
7

Valuation Techniques

The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy on the basis of valuations using quoted market prices. BecauseAs many fixed income securities do not trade daily, fair values are often derived using recent trades of securities with similar features and characteristics. When recent trades are not available, pricing models are used to determine these prices. These models calculate fair values by discounting future cash flows at estimated market interest rates. Such market rates are derived by calculating the appropriate spreads over comparable U.S. Treasury securities, based on the credit quality, industry and structure of the asset. Typical inputs and assumptions to pricing models include, but are not limited to, a combination of benchmark yields, reported trades, issuer spreads, liquidity, benchmark securities, bids, offers, reference data, and industry and economic events. The Company’s fixed income corporate bond investments and certificates of deposit with fixed maturities are valued using recent trades or pricing models and are therefore classified inwithin Level 2.

2 of the fair value hierarchy.


Recurring Fair Value Measurements
There were no movements between fair value measurement levels of the Company’s cash equivalents and short-term investments during 2013. There2014, and there were no material unrealized gains or losses as of September 30, 2013March 31, 2014 or December 31, 2012.  2013.  


8

Table of Contents

The following tables summarize the financial instruments of the companyCompany at fair value based on the fair value hierarchy for each class of instrument as of September 30, 2013March 31, 2014 and December 31, 2012:

      

Fair Value Measurement at September 30, 2013 Using

 
  

Carrying

Value at

September 30,

2013

  

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

                

Money market funds

 $696  $696  $  $ 

Investments:

                

Certificates of deposit

  10,430      10,416    

Corporate bonds

  10,542      10,538    

Total assets

 $21,668  $696  $20,954  $ 

      

Fair Value Measurement at December 31, 2012 Using

 
  

Carrying

Value at

December 31,

2012

  

Quoted Prices in

Active Markets

for Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

                

Money market funds

 $1,183  $1,183  $  $ 

Investments:

                

Certificates of deposit

  2,640      2,639    

Corporate bonds

  7,820      7,816    

Total assets

 $11,643  $1,183  $10,455  $ 

2013:

    Fair Value Measurement at March 31, 2014 Using
  Carrying Value at March 31, 2014 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents:        
Money market funds $721
 $721
 $
 $
Investments:        
Certificates of deposit 13,705
 
 13,694
 
Corporate bonds 7,271
 
 7,270
 
Total assets $21,697
 $721
 $20,964
 $
    Fair Value Measurement at December 31, 2013 Using
  Carrying Value at December 31, 2013 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Cash equivalents:        
Money market funds $655
 $655
 $
 $
Investments:        
Certificates of deposit 13,750
 
 13,734
 
Corporate bonds 7,305
 
 7,303
 
Total assets $21,710
 $655
 $21,037
 $
The carrying amount of the term loan approximates its fair value, using level twoLevel 2 inputs, becauseas this borrowing bears interest at a variable (market) rate at September 30, 2013March 31, 2014 and December 31, 2012.

2013.
8

Non-Recurring Fair Value Measurements

The Company has certain assets that are measured at fair value on a non-recurring basis under circumstances and events, including those described in Note 6, Goodwill and Amortizable Intangible Assets, that are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value.

Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition. Refer to Note 6 for the fair values of assets acquired and liabilities assumed in connection with the prior year acquisition of substantially all the assets of SmartHabitat (“BrightNest”).

The carrying amounts of accounts receivable and accounts payable reported in the consolidated balance sheets approximate fair value.

4. Prepaid and other current assets

Other Current Assets

Prepaid expenses and other current assets were comprised of the following:

  

September 30,

2013

  

December 31,

2012

 

Prepaid and deferred commissions

 $10,495  $17,215 

Other

  4,505   2,595 

Total prepaid expenses and other current assets

 $15,000  $19,810 

  March 31,
2014
 December 31,
2013
Prepaid and deferred commissions $9,768
 $9,395
Other 5,964
 4,256
Total prepaid expenses and other current assets $15,732
 $13,651

9


5. Property, Equipment and Equipment

Software

Property, equipment and equipmentsoftware was comprised of the following:

  

September 30,

2013

  

December 31,

2012

 

Furniture and equipment

 $7,404  $5,929 

Land

  1,464   1,401 

Buildings and improvements

  8,234   6,417 

Software

  3,568   1,949 
   20,670   15,696 

Less accumulated depreciation

  (4,667

)

  (3,617

)

  $16,003  $12,079 

  March 31,
2014
 December 31,
2013
Furniture and equipment $9,728
 $7,965
Land 1,464
 1,464
Buildings and improvements 9,546
 8,711
Software 2,735
 2,629
Capitalized website and software development costs 8,247
 3,320
  31,720
 24,089
Less accumulated depreciation (6,223) (5,432)
  $25,497
 $18,657

6. Goodwill and Amortizable Intangible Assets

The Company has goodwill as well as certain amortizable intangible assets consisting of data acquisition costs, a member list, content, core technology and other intangible assets related to the purchase of a website domain name. The goodwill and amortizable intangible asset balances reflect the goodwill, member list, content and core technology acquired during the August 2, 2013 acquisition of substantially all the assets of BrightNest for a purchase price of $2,650, inclusive of $1,920 in acquired intangible assets and goodwill of $730. The purchase price consisted of $2,150 in cash paid at closing and an additional $500 that is payable on the one-year anniversary of the closing, subject to certain performance criteria of BrightNest employees hired by the Company on the acquisition date. Revenues and expenses related to BrightNest, which are not material, are included in the consolidated results of operations from the date of acquisition.

Amortization on the intangible assets is computed using the straight-line method over the estimated lives of the assets. Amortizable intangible assets at March 31, 2014 and December 31, 2013 are as follows:

 Cost Accumulated Amortization Net Amortization Period (in years)
March 31, 2014       
Member list$1,670
 $186
 $1,484
 6.0
Content140
 31
 $109
 3.0
Core technology110
 24
 $86
 3.0
Data acquisition costs3,386
 1,896
 $1,490
 3.0
Other intangible assets300
 8
 $292
 3.0
 $5,606
 $2,145
 $3,461
  

 Cost Accumulated Amortization Net Amortization Period (in years)
December 31, 2013       
Member list$1,670
 $122
 $1,548
 6.0
Content140
 12
 $128
 3.0
Core technology110
 16
 $94
 3.0
Data acquisition costs3,296
 1,566
 $1,730
 3.0
 $5,216
 $1,716
 $3,500
  

The Company’s recorded goodwill balance at March 31, 2014 and December 31, 2013 was $1,145.



10


7. Accrued liabilities

Liabilities

Accrued liabilities were comprised of the following:

  

September 30,

2013

  

December 31,

2012

 

Accrued sales commissions

 $2,474  $4,342 

Sales and use tax

  2,841   2,130 

Accrued compensation

  5,960   2,246 

Uninvoiced accounts payable

  17,985   2,372 

Other

  6,221   2,968 

Total accrued liabilities

 $35,481  $14,058 

7.

  March 31,
2014
 December 31,
2013
Accrued sales commissions $2,243
 $2,570
Sales and use tax 3,368
 3,158
Accrued compensation 5,821
 5,229
Uninvoiced accounts payable 16,617
 2,977
Legal accrual 4,000
 4,000
Other 5,268
 3,836
Total accrued liabilities $37,317
 $21,770
8. Debt and Credit Arrangements

On August 31, 2011, the Company entered into a loan and security agreement that providesprovided for a $15,000 term loan and a $15,000 revolving credit facility. The term loan bears interest at a per annum rate equal to the greater of (i) the current cash interest rate of LIBOR plus 10% or (ii) 10.5%, and requires monthly interest-only payments until maturity in August 2015. The revolving credit facility requires monthly interest-only payments on advances, which bear interest at a per annum rate equal to LIBOR plus 5%. In addition, when less than 50% of the revolving credit facility is drawn, the Company is required to pay a non-usage charge of 0.50% per annum of the average unused portion of the credit facility. The term loan provides for penalties for early prepayment. The term loan and revolving credit facility provide for additional interest upon an event of default and are secured by substantially all of the Company’s assets. As of September 30, 2013March 31, 2014 and December 31, 2012,2013, the Company had $15,000$14,930 and $14,918, respectively, in outstanding borrowings under the term loan and available credit of $15,000 under the revolving credit facility.

The loan and security agreement contains various restrictive covenants, including restrictions on the Company’s ability to dispose of assets, make acquisitions or investments, incur debt or liens, make distributions to stockholders or enter into certain types of related party transactions. The Company is also required to comply with certain financial covenants, including a minimum asset coverage ratio, and non-financial covenants. Upon an event of default, which includes a material adverse change, the lenders may accelerate amounts outstanding, terminate the agreement and foreclose on all collateral. The Company was in compliance with all financial and non-financial covenants at September 30, 2013March 31, 2014 and December 31, 2012.

2013.


11
9

8. Acquisition

On August 2, 2013 Angie's List acquired substantially all of the assets of SmartHabitat, Inc. (“BrightNest”) for a purchase price of $2,650. The purchase price consists of $2,150 in cash paid at closing and an additional $500 which is payable on the one-year anniversary of the closing, subject to certain performance criteria of BrightNest employees hired by the Company on the acquisition date. The acquisition of the BrightNest assets adds a user-friendly front end and personalized member experience with expanded content offerings, and enhanced technologies. Revenues and expenses related to BrightNest, which were not material for the period ended September 30, 2013, are included in the consolidated results of operations from the date of acquisition.

The following table summarizes the purchase price allocation based on the preliminary fair values of the assets acquired at the date of acquisition:

  

Fair Value Allocation

  

Weighted Average Amortization Period

(in years)

 

Acquired intangible assets:

        

Member list

 $1,670   6.0 

Content

  140   3.0 

Core technology

  110   3.0 
  

1,920

   5.6 

Goodwill

  730     

Total assets acquired

 $2,650     

Goodwill recognized from the acquisition primarily relates to the expected contributions of BrightNest to the overall Company strategy in addition to synergies and acquired workforce, which are not separable from goodwill.


9. Commitments and Contingencies

Legal Matters

From time to time, the Company has or may become party to litigation incident to the ordinary course of business. The Company assesses the likelihood of any adverse judgments or outcomes with respect to these matters and determines loss contingency assessments on a gross basis after assessing the probability of incurrence of a loss and whether a loss is reasonably estimable. In addition, the Company considers other relevant factors that could impact its 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. The Company’s reserves may change in the future due to new developments or changes in strategy in handling these matters. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these matters listed below will not have a material adverse effect on its business, consolidated financial position, results of operations, or cash flows. Regardless of the outcome, litigation can have an adverseadversely impact on the Company because ofdue to defense and settlement costs, diversion of management resources, and other factors.

A

Fritzinger v. Angie’s List, Inc. On August 14, 2012, a lawsuit seeking class action status Fritzinger v. Angie’s List, was filed against the Company on August 14, 2012 in the U.S. District Court for the Southern District of Indiana (the “Court”). After the Court granted the Company’s partial Motion to Dismiss plaintiff’s deception claims, theThe lawsuit currently alleges claims forof breach of contract and unjust enrichment. Plaintiffenrichment, alleging that the Company automatically renews membership fees at a higher rate than customers are led to believe, breaching their membership agreements. On April 17, 2014, the Court issued its Order granting Preliminary Approval of the Parties' Proposed Settlement and set a final approval hearing date for September 17, 2014. The Company recorded a $4,000 legal accrual related to the settlement at December 31, 2013, and for the three months ended March 31, 2014, the Company believes this amount represents the best estimate of the Company’s ultimate liability with respect to this litigation. Any difference between the amount recorded and the actual final court-approved settlement is not expected to have a material impact on our financial condition or results of operations.   

Baron v. Angie’s List, Inc., et al. On December 23, 2013, a class action complaint was filed her Brief in Support of her Amended Motion for Class Certification, which requests certification of two classes ofthe Court, naming the Company and various current and former directors and officers as defendants and alleging that the defendants violated Section 10(b) of the Securities Act of 1934 (the “Exchange Act”) by making material misstatements in and omitting material information from the Company’s public disclosures concerning the Company’s business prospects. The complaint further alleges that the defendants violated Section 20(a) of the Exchange Act by virtue of their positions as control persons. The plaintiff has requested unspecified damages, interest, and costs, as well as ancillary relief. On January 23, 2014, the Court entered a scheduling order pursuant to which, upon appointment as lead plaintiff, the plaintiff has sixty days with which to file a consolidated complaint or stand on the current complaint. Pursuant to that order, the Company’s response to that complaint is due sixty days thereafter.
Bartolone v. Angie’s List, members, dating fromInc., et al. On January 1, 2009 through present, who meet either (1) members whose membership were renewed at9, 2014, a fee that exceededclass action complaint was filed in the lowest prevailing new-member feeCourt, naming the same defendants, asserting the same claims, and asking for the corresponding membership product; same relief as sought in Baron, described above. On January 29, 2014, the Court entered a scheduling order identical to the order entered in Baron.
Baron and (2) members: (a) who were in a market that has been convertedBartolone are collectively referred to “paid health” status, (b) whose memberships predated that market’s conversion to “paid health” status, and (c) whose memberships were automatically renewed in an “Angie’s List Bundle” membership upon their first renewal following their market’s conversion to “paid health” status.  The plaintiff seeks compensatory damages and an award of treble damages, attorneys’ fees and costs.as the “Stockholder Class Action.” The Company believes this suitthat the Stockholder Class Action is without merit and continuesintends to vigorously defend itself vigorously in this matter.

against it.
 
10Korda v. William S. Oesterle, et al. On January 3, 2014, a derivative complaint was filed in the Court on behalf of the Company, naming the Company’s Board of Directors and various current or former officers as individual defendants and the Company as a nominal defendant. The plaintiff asserts a breach of fiduciary duty claim against the individual defendants based on their alleged knowledge that the Company’s public statements during 2013 concerning the Company’s business prospects were misleading. The plaintiff asserts a breach of fiduciary duty claim against certain individual defendants based on their sales of Angie’s List common stock between December 2012 and December 2013. The plaintiff asks for unspecified amounts in damages, interest, and costs, as well as ancillary relief. The parties have agreed to a stay of the action pending a ruling on the complaint in the Stockholder Class Action, described above.



12


ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains statements that constitute “forward-looking statements” within the following discussionmeaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and analysisSection 21E of our financial conditionthe Securities Exchange Act of 1934, each as amended. All statements other than statements of historical fact, including statements regarding market and industry prospects and future results of operations in conjunction with our consolidatedor financial statements and the notes thereto included elsewhereposition, made in this report. The following discussion containsForm 10-Q are forward-looking. In many cases, you can identify forward-looking statements that reflectby terminology, such as “may”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of such terms and other comparable terminology. The forward-looking information may include, among other information, statements concerning our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates, financial results, our plans estimates and beliefs. Our actualobjectives for future operations, growth initiatives or strategies, or the expected outcome or impact of pending or threatened litigation. There may also be other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results couldmay differ materially from those discussed in the forward-looking statements as a result of various factors, many of which are beyond the Company’s control.

The Company has based these forward-looking statements on its current expectations and projections about future events. Although the Company believes that 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. Factors that could causeSome, but not all, of these risks are listed in Item 1A. of Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in Item 1A of Part II of this Form 10-Q.

The Company undertakes no obligation to publicly update or contribute to these differences include those discussed below and elsewhere in this report, particularly in the “Risk Factors” section.

revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

We operate a consumer-driven service for our members to research, hire, rate, review and reviewpurchase local professionalsservices for critical needs, such as home, health care and automotive services. Our ratings and reviews, which are available only to our members, help our members find the best provider for their local service needs. We had approximately 2.42.6 million paid memberships at September 30, 2013.March 31, 2014. We allow local service providers who are highly rated by our members to advertise discounts and other promotions to our members.

We generate revenue from both our members and our service providers. We derive membership revenue from subscription fees and, in certain cases, non-refundablenonrefundable initiation fees for monthly, annual and multi-year memberships. These fees are typically are charged in advance andadvance. Subscription fees are recognized ratably over the subscription period, and initiation fees are recognized ratably over the expected life of the membership, respectively.membership. As of September 30, 2013,March 31, 2014, approximately 93%94% of our total membership base had purchased annual or multi-year memberships. These subscription fees represent a significant source of working capital and provide a relatively predictable revenue stream.

We derive service provider revenue principally from term-based sales of advertising to local service providers. Our members grade local service providers on an “A” to “F” scale, and we invite local service providers with an average grade of “B” or better and at least two reviews submitted in the last three years to advertise to our members through any or all of our website, email promotions, monthly magazine and call center. Service provider contracts can be prepaid or invoiced monthly at the option of the service provider and carry an early termination penalty. We recognize service provider revenue for these contracts ratably over the period in which an advertising campaign is run. We are expanding our service provider sales force to continuepersonnel to drive increased service provider revenue. Our high service provider renewal raterates, both in number of service providers renewing and as a percentage of initial contract value renewed, hashave provided us with a relatively predictable revenue stream.

In addition to traditional advertising on our website and publications, our e-commerce solutions offer our members the opportunity to purchase services through us from service providers that arerated highly rated on our website. These offerings are available through both email promotions and through postings on our website. When the member purchases a service, the transaction is processed through Angie’s List. The member then can work directly with the service provider to schedule the service. These e-commerce offerings provide our members a discount and an easier way to fulfill their service needs.



13


To establish a new market, we begin by offering free memberships and actively soliciting members’ reviews of local service providers. As the number of members and the number of reviews of service providers grow,grows, we begin charging membership fees and offering advertising opportunities to eligible local service providers. Historically, we have begunbegin to convert most markets to paid membership status within 24 months after launch.

Increasing new paid memberships is oura key growth strategy. Increased penetration in a market results in more member reviews of local service providers, which increases the value of our service to consumers and drives further membership growth in that market. Increased penetration in a market also drives increased advertising sales to service providers and supports higher advertising rates as the pool of members actively seeking to hire service providers grows. However, our ability to increase advertising rates tends to lag increased penetration of our markets due to our inability to increase rates under existing service provider contracts prior to renewal. Our primary strategy for new member acquisition is national offline and online advertising. Our marketing expense increases in the second and third quarters of the year, typically peaking in the third quarter, as we increase our investment in advertising to attract consumers during the periods when we have found they are most actively seeking Angie’s List services.

We have completed


As described further in the “Market Cohort Analysis” herein, we believe that our transition toestimated penetration rate and average revenue per market will increase as markets mature, and over the new compensation structure for our sales force responsible for new advertising originations wherebylong term, we pay commissions to our employees as cash is collected from our service providers ratherbelieve that these increased revenues will more than upfront at booking, as we had done historically. We have seen a reduction in our prepaid expenses and therefore we have experienced a positive impact onoffset our operating cash flows, as it allowed us to grow newly originated service provider revenue on a primarily self-funded basis.expenses. In 2013,addition, our prepaid expenses related to commissions decreased while service provider revenue increased, which contributed to our ability to generate positive operating cash flows of $13.4 million for the nine months ended September 30, 2013 compared to negative operating cash flows of $27.8 million in the prior year period. 

On August 2, 2013 we acquired substantially all of the assets of SmartHabitat, Inc. (“BrightNest”) for a purchase price of $2.7 million. The purchase price consists of $2.2 million in cash paid at closing and an additional $0.5 million whichadvertising spending is payable on the one-year anniversary of the closing, subject to certain performance criteria of BrightNest employees hired by usfocused on the acquisition date. Theof new members, rather than the maintenance of existing members. Given that our advertising contracts are typically short-term, we can rapidly adjust marketing expense and thus decrease total operating expenses to reduce cash used in operations or generate cash and profits from operations should we begin to experience adverse trends in marketing cost per paid membership acquisition or wish to optimize for profitability at the expense of rapid growth. We believe that our high membership renewal rates and “word of mouth” referrals from existing members, combined with effective purchasing of lower volumes of advertising and increasing utilization of search engine optimization, or SEO, would enable us to maintain and potentially grow the BrightNest assets addssize of our paid membership base at a user-friendly front end and personalized member experience with expanded content offerings, and enhanced technologies. Revenues and expenses related to BrightNest, which were not material for the period ended September 30, 2013, are included in the consolidated resultslower level of operations from the dateoverall advertising spending. 



14

Table of acquisition.


Market Cohort Analysis

To analyze our progress in executing our expansion plan, we compile certain financial and operating data regarding markets we have entered, grouped by the years in which the markets transitioned to paid membership status. The table below summarizes this data for the twelve month period ended September 30, 2013March 31, 2014 by the following cohorts.each respective cohort. The pre-2003 cohort includes our ten most established markets where we initially built out our business model. The markets in this cohort include several mid-sized urban markets in the Midwest as well as Chicago and Boston. The 2003-20072003 through 2007 cohort includes the first major subset of markets, including many of our largest potential markets, which we targeted in our national expansion strategy. The markets in this cohortthese older cohorts have begun to achievegenerally achieved penetration rates that allow us to transition beyond introductory membership and advertising rates. The 2008-2010 and post-2010 cohorts include markets that have most recently converted to paid status and that still haveutilize predominantly introductorylower membership and advertising rates. Therates as the markets in these cohorts generally are smaller markets that we entered to fill out our national presence.

Cohort

 

# of

Markets

  

Avg.

Revenue/

Market(1)

  

Membership

Revenue/Paid

Membership(2)

  

Service

Provider

Revenue/Paid

Membership(3) 

  

Avg.

Marketing

Expense/

Market(4) 

  

Total Paid

Memberships(5)

  

Estimated

Penetration

Rate(6)

  

Annual

Membership

Growth

Rate(7)

 

Pre-2003

 

 

10

 

 

$

5,933,585

 

 

$

39.05

 

 

$

110.62

 

 

$

1,285,741

 

 

 

454,016

 

 

 

10.7

%

 

 

34

%

2003-2007

 

 

35

 

 

 

3,965,746

 

 

 

34.20

 

 

 

92.42

 

 

 

1,352,104

 

 

 

1,293,550

 

 

 

8.3

%

 

 

44

%

2008-2010

 

 

103

 

 

 

220,786

 

 

 

16.28

 

 

 

32.40

 

 

 

187,168

 

 

 

550,209

 

 

 

8.6

%

 

 

43

%

Post 2010

  

96

   

20,885

   

12.07

   

22.49

   

55,460

   

81,092

   

4.6

%

  

*

 

Total

  

244

                   

2,378,867

         



Cohort
# of
Markets

Average
Revenue/
Market (1)

Membership
Revenue/Paid
Membership(2)

Service
Provider
Revenue/Paid
Membership(3) 

Average
Marketing
Expense/
Market (4) 
Total Paid
Memberships(5)
Estimated
Penetration
Rate (6)
Annual
Membership
Growth
Rate (7)
Pre-2003
10

$6,662,119

$38.54

$113.63

$1,375,876
493,817
12.6%29%
2003-2007
35

4,766,477

33.79

100.09

1,456,256
1,427,873
9.8%34%
2008-2010
103

285,235

17.02

38.37

198,781
606,325
10.4%33%
Post 2010
105

29,693

12.65

28.39

57,530
100,689
5.9%97%
Total
253

 
 
 
 2,628,704
  

 *

Not meaningful

(1)

(1)Average revenue per market is calculated by dividing the revenue recognized for the markets in a given cohort by the number of markets in the cohort at period end.

(2)

(2)Membership revenue per paid membership is calculated as our membership revenue in the cohort divided by the average number of paid memberships in the cohort. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort.

(3)

(3)Service provider revenue per paid membership is calculated as service provider revenue in the cohort divided by the average number of paid memberships in the cohort.

We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort.

(4)

(4)Average marketing expense per market is calculated first by allocating marketing expense to each cohort based on the percentage of our total target demographic for all markets in sucheach cohort, as determined by third-party data, and then dividing the allocated cohort marketing expense by the number of markets in the cohort at period end. We calculate this average per market to facilitate comparisons among cohorts, but it is not intended to represent typical characteristics of actual markets within the cohort. According to a September 2013March 2014 demographic study by Merkle Inc. that we commissioned, there were approximately 3129 million households in the United States in our target demographic, which consists of homeowners aged 35 to 64 with an annual household income of at least $75,000. Approximately 2826 million of these households were in our markets. The average number of households per market in our target demographic target was 425,000, 445,000,390,000, 410,000, 60,000 and 20,000 for the pre-2003, 2003-2007, 2008-2010 and post-2010 cohorts, respectively.

(5)

(5)Includes total paid memberships as of September 30, 2013.March 31, 2014. Total paid memberships in each cohort includes a de minimis number of complimentary memberships in our paid markets for the period presented. All revenue and paid memberships relating to locations that were not identified as part of a specific market are included in the 2008-2010 cohort.

(6)

(6)Estimated penetration rate is calculated by dividing the number of paid memberships in a given cohort as of September 30, 2013March 31, 2014 by the number of households meeting our target demographic criteria in suchthat cohort.

(7)

(7)Annual membership growth rate is the rate of increase in the total number of paid memberships in the cohort between September 30, 2013March 31, 2014 and September 30, 2012.

2013.



15
12


Our average revenue per market membershipand total revenue per paid membership and service provider revenue per paid membershiphave generally increaseincreased with the maturity and corresponding increased penetration of our markets. However,markets in prior periods. In the future, we expect total revenue per paid membership to fluctuate from period to period, and inreflecting the period presented as we recorded declining total revenue per paid membership overall. This decline reflects rapid membership growth in less penetrated markets where the average membership and service provider revenue per paid membership is lower than in more penetrated markets. In addition, the decline reflects a lag intiming of our ability to leverage increased penetration in a market into increasedadjust advertising rates asgiven our advertising contract terms and membership pricing innovations designed to drive increased penetration. For example:

Our average advertising contract term is typically more than one year, and we are only able to increase rates for a given participating service provider upon contract renewal.

We also have adopted As such, there is a dynamic pricing modellag in 78our ability to leverage increased penetration in a market into increased advertising rates;


Increasingly, we are seeing members opt for annual memberships, and as such, the percentage of our maturemembership base on monthly memberships has declined. While we believe annual memberships are more beneficial to members and promote high renewal rates, these memberships generate lower proceeds than monthly memberships on an annualized basis; and

On average across all markets, we are utilizing lower membership pricing than historically used in order to offer membersdrive deeper penetration via enhanced membership growth and to increase service provider participation.

Our most important growth strategy remains driving membership growth, which creates the opportunitynetwork effects of a more valuable service for consumers and a more attractive commercial platform for service providers. We intend to purchase only those segments of Angie’s List that are most relevant to them, which includes the original Angie’s List, which covers 396 categories, including home, lawn, car and pets, Angie’s List Health & Wellness or Angie’s List Classic Cars. These segments continue to be offered in all other marketsevaluate and adopt innovative pricing and packaging strategies, such as a single bundle. We anticipate unbundling our offerings in more of our markets as market penetration increases and the number and categories of local service providers reviewed by members in such markets grow. We believe thisdeeply reduced membership pricing, model will enable us to offer a betterdeliver compelling value proposition to our members and preserve cross-selling opportunities as members’ needs evolve.thereby support membership growth and retention. Although we expect that this strategythese overall dynamics have caused and may result in lower average membership fees per paid membership overall, we believe the new members generated by this pricing model should ultimately produce increased service provider revenue per paid membership. Additionally, whilecontinue to cause membership revenue per paid membership has declinedto decline sequentially in recent periodssome of our cohorts, we believe that the increase in our more mature cohortsmembership base is critical for continuing to produce the overall growth in part as a result of this dynamic pricing model,average revenue per market, service provider revenue per paid membership and total revenue per paid membership have generally continued to increase across all cohorts. In our pre-2003 cohort, service provider revenue per paid membership typically have declined slightly in the second and third quarter over the preceding quarter, due to seasonal increases in the number of paid memberships.


As a market matures, our penetration rate typically increases. Historically, while the absolute number of paid members may grow faster in large markets, our small and medium markets have often achievedachieve greater penetration over a shorter time period than our larger markets. We believe that a principal reason for our lower penetration rates in large markets is the manner in which we market Angie’s List to our target demographic in such markets. We have chosen to spend 100%the majority of our marketing dollars on national advertising. Weadvertising, and we believe that this advertising strategy provides us the most cost effective and efficient manner of acquiring new paid memberships. However, advertising nationally means we deliver the same volume of advertising regardless of the size of the market. Since each market differs in terms of the number of advertising outlets available, the impact of our spending on national advertising varies across markets. In our experience, smaller markets typically haveprovide fewer advertising outlets than larger markets. WeTherefore, we believe the same volume of advertising in a smaller market is more effective in building brand awareness and generating new memberships than in larger markets. We expect to continue to see lower relative penetration rates in our larger markets for these reasons. BecauseAs several of these larger markets are in the 2003-2007 cohort, over time our penetration rate in this cohort may lag other cohorts.



16


Key Operating Metrics

In addition to the line items in our 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 information on these metrics is useful for investors and analysts to understand the underlying trends in our business. The following table summarizes our key operating metrics, which are unaudited, for the three and nine months ended September 30, 2013March 31, 2014 and 2012:

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2013

  

2012

  

2013

  

2012

 

Total paid memberships (end of period)

  2,378,867   1,656,768   2,378,867   1,656,768 

Gross paid memberships added (in period)

  371,318   341,522   993,556   862,014 

Marketing cost per paid membership acquisition (in period)

 $76  $76  $76  $83 

First-year membership renewal rate (in period)

  75

%

  76

%

  75

%

  76

%

Average membership renewal rate (in period)

  78

%

  78

%

  78

%

  78

%

Participating service providers (end of period)

  44,876   33,209   44,876   33,209 

Total service provider contract value (end of period, in thousands)

 $181,975  $119,091  $181,975  $119,091 

2013

  Three Months Ended March 31, 
  2014 2013 
Total paid memberships (end of period) 2,628,704
 1,951,774
 
Gross paid memberships added (in period) 286,626
 274,896
 
Marketing cost per paid membership acquisition (in period) $82
 $72
 
First-year membership renewal rate (in period) 73% 73% 
Average membership renewal rate (in period) 76% 75% 
Participating service providers (end of period) 49,370
 39,265
 
Total service provider contract value (end of period, in thousands) $211,635
 $150,262
 
Total paid memberships.Total paid memberships reflects the number of paid memberships at the end of each period presented. Total paid memberships also includes a de minimis number of complimentary memberships in our paid markets for theall periods presented. We generally expect that there will be one membership per household and, as such, each membership may actually represent multiple individual consumers.

Gross paid memberships added. Gross paid memberships added reflects the total number of new paid memberships added in a reporting period. Gross paid memberships added increased substantially in each period presented, which we believe has beenwas driven by our increasingcontinually significant investment in national advertising and, to a lesser extent, by “word of mouth” referrals from our existing members.

13

Marketing cost per paid membership acquisition. We calculate marketing cost per paid membership acquisition in a reporting period as marketing expense divided by gross paid memberships added in that period. BecauseAs we advertise in national media, somea portion of our marketing expenseexpenditures also increasesincrease the number of unpaid memberships. On a comparative basis, marketing cost per paid membership acquisition can reflect our success in generating new paid memberships through our SEO efforts, “word of mouth” referrals and experimentation and adjustments to our marketing expense to focus on more effective advertising outlets for membership acquisition. We typically haveincur higher marketing expense and marketing cost per paid membership acquisition in the second and third quarters of the year in order to attract consumers during the periods when we have found they are most actively seeking Angie’s List services. As such, marketing cost per paid membership also tends to be higher in these periods, particularly in the second and third quarters as we ramp up spending to build brand awareness. Our marketing expense and marketing cost per paid membership acquisition is normally reduced in the fourth quarter, reflecting reduced consumer activity in the service sector and higher advertising rates generally due to holiday promotional activity.

Membership renewal rates. First-year membership renewal rate reflects the percentage of paid memberships expiring in the reporting period after the first year of membership that are renewed. Average membership renewal rate reflects the percentage of all paid memberships expiring in the reporting period that are renewed. Renewal rates do not include monthly memberships, which comprised approximately 7%6% of our total membership base as of September 30, 2013.March 31, 2014. Given the correlation between increased penetration and higher total revenue per paid membership, we view first-year membership renewal rate and average membership renewal rate as key indicators of expected operating results in future periods.

Participating service providers. We include in participating service providers the total number of service providers under contract for advertising 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.

In addition, we track contract value backlog as a key metric. Contract value backlog consists of the portion of service provider contract value at the stated date which hasis not yet been recognized as revenue. At September 30, 2013March 31, 2014 and 20122013, our contract value backlog was $114.3$132.1 million and $74.9$95.1 million, respectively.


17
14


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 period-to-period comparison of financial results is not necessarily indicative of future results.

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2013

  

2012

  

2013

  

2012

 
  

(dollars in thousands)

  

(dollars in thousands)

 

Revenue

                

Membership

 $17,050  $12,769  $47,598  $34,036 

Service provider

  48,450   29,253   129,288   75,584 

Total revenue

  65,500   42,022   176,886   109,620 

Operating expenses

                

Operations and support(1)

  11,016   7,140   29,418   19,631 

Selling(1)

  23,960   16,240   65,582   42,974 

Marketing

  28,189   26,088   75,870   71,316 

Technology(1)

  6,942   4,905   19,349   12,223 

General and administrative(1)

  8,421   5,669   21,019   17,420 

Operating loss

  (13,028

)

  (18,020

)

  (34,352

)

  (53,944

)

Interest expense, net

  468   467   1,395   1,380 

Net loss before income taxes

 $(13,496

)

 $(18,487

)

 $(35,747

)

 $(55,324

)

Income tax expense

  15      45    

Net loss

 $(13,511

)

 $(18,487

)

 $(35,792

)

 $(55,324

)

  Three Months Ended March 31, 
  2014 2013 
  (dollars in thousands) 
Revenue     
Membership $18,300
 $14,637
 
Service provider 54,357
 37,534
 
Total revenue 72,657
 52,171
 
Operating expenses     
Operations and support(1) 11,548
 8,298
 
Selling(1) 26,122
 19,645
 
Marketing 23,481
 19,722
 
Product and technology(1) 7,457
 5,595
 
General and administrative(1) 7,356
 6,380
 
Operating loss (3,307) (7,469) 
Interest expense, net 461
 463
 
Loss before income taxes $(3,768) $(7,932) 
Income tax expense 15
 15
 
Net loss $(3,783) $(7,947) 

(1)

(1)Includes non-cash stock-based compensation as follows:

Operations and support

 $19  $  $52  $ 

Selling

  50     $101  $ 

Technology

  (418)  225  $(55) $563 

General and administrative

  1,025   545   2,568   1,650 
                 
  $676  $770  $2,666  $2,213 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2013

  

2012

  

2013

  

2012

 

Revenue

                

Membership

  26

%

  30

%

  27

%

  31

%

Service provider

  74   70   73   69 

Total revenue

  100

%

  100

%

  100

%

  100

%

Operating expenses

                

Operations and support

  17   17   17   18 

Selling

  36   39   37   39 

Marketing

  43   62   43   65 

Technology

  11   12   11   11 

General and administrative

  13   13   12   16 

Operating loss

  (20

)

  (43

)

  (20

)

  (49

)

Interest expense, net

  1   1   1   1 

Net loss before income taxes

  (21

)

  (44

)

  (21

)

  (50

)

Income tax expense

            

Net loss

  (21

)%

  (44

)%

  (21

)%

  (50

)%

Operations and support $13
 $16
 
Selling 104
 25
 
Product and technology 209
 215
 
General and administrative 1,207
 566
 
  $1,533
 $822
 
 

15
18


  Three Months Ended March 31, 
  2014 2013 
Revenue
 
  
Membership
25 %
28 % 
Service provider
75

72
 
Total revenue
100 %
100 % 
Operating expenses
 
  
Operations and support
16

16
 
Selling
36

38
 
Marketing
32

38
 
Product and technology
10

10
 
General and administrative
10

12
 
Operating loss
(4)
(14) 
Interest expense, net
1

1
 
Loss before income taxes
(5)
(15) 
Income tax expense



 
Net loss
(5)%
(15)% 

Comparison of the three months ended September 30,March 31, 2014 and 2013 and 2012

Revenue

  

Three Months Ended

September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Revenue

            

Membership

 $17,050  $12,769   34

%

Service provider

  48,450   29,253   66

%

Total revenue

 $65,500  $42,022   56

%

             

Percentage of revenue by type

            

Membership

  26

%

  30

%

    

Service provider

  74

%

  70

%

    

Total revenue

  100

%

  100

%

    

Total paid memberships (end of period)

  2,378,867   1,656,768   44

%

Gross paid memberships added (in period)

  371,318   341,522   9

%

Participating service providers (end of period)

  44,876   33,209   35

%

  Three Months Ended March 31,  
  2014 2013 % Change
  (dollars in thousands)  
Revenue      
Membership $18,300
 $14,637
 25%
Service provider 54,357
 37,534
 45%
Total revenue $72,657
 $52,171
 39%
Percentage of revenue by type      
Membership 25% 28%  
Service provider 75% 72%  
Total revenue 100% 100%  
       
Total paid memberships (end of period) 2,628,704
 1,951,774
 35%
Gross paid memberships added (in period) 286,626
 274,896
 4%
Participating service providers (end of period) 49,370
 39,265
 26%
Total revenue increased $23.5$20.5 million for the three months ended September 30, 2013March 31, 2014 as compared to the three months ended September 30, 2012.

March 31, 2013.

Membership revenue increased $4.3$3.7 million, primarily due to a 44%35% increase in the total number of paid memberships, partially offset by a 9%7% decrease in membership revenue per paid membership in the three months ended September 30, 2013.March 31, 2014. The decrease in average membership revenue per paid membership resulted primarily from growth in paid memberships in less penetrated markets where average membership fees per paid membership are lower. ThisIn addition, we reduced new membership fees, on average, across all markets in the current year as compared to the prior year, which further contributed to the year over year decline also reflected the effect of allowing members in our more penetrated markets to purchase only those segments of Angie’s List that are most relevant to them at a loweraverage membership rate than applicable for the full service. We offer only bundled memberships to members in less penetrated markets.revenue per paid membership. The decrease in membership revenue per paid membership in the three months ended September 30, 2013March 31, 2014 also resulted from an increase from 90%92% to 93%94% of total memberships constituting annual and multi-year memberships.memberships year over year. Consumers pay more per month for a monthly membership than for an annual membership. Therefore, in periods in which our percentage of memberships shifts to more annual and multi-year memberships, our membership revenue per paid membership decreases.


19


Service provider revenue increased $19.2$16.8 million to 74%75% of total revenue, primarily as a result of a 35%26% increase in the number of local service providers participating in our advertising programs and a 10%15% increase in the average service provider contract value.revenue per participating service provider. Service provider revenue primarily consists of revenue from advertising contracts with service providers. 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 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. E-commerce revenue of $6.4$6.3 million and $3.8$4.7 million is also included in service provider revenue infor the three months ended September 30,March 31, 2014 and 2013, and 2012, respectively. Our e-commerce revenue is generated by our Angie’s List Big Deal and Storefront offerings. We expect the revenue contribution from these offerings to fluctuate from period to period as the offerings evolve and due to seasonality.

16

Operations and support

  

Three Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Operations and support

 $11,016  $7,140   54

%

Percentage of revenue

  17

%

  17

%

    

  Three Months Ended March 31,  
  2014 2013 % Change
  (dollars in thousands)  
Operations and support $11,548
 $8,298
 39%
Percentage of revenue 16% 16%  
Operations and support expense increased $3.9$3.3 million for the three months ended September 30, 2013March 31, 2014 compared to the three months ended September 30, 2012.March 31, 2013. This increase was due in part to a $1.8$1.5 million increase in call centeroperations and support personnel-related costs as compared to the prior year period as we increased our headcount to meet the needs ofservice our membersgrowing member and service providers. In addition, there was a $1.4provider base. Additionally, we incurred an approximately $1.0 million increase in publicationpublication-related costs as weassociated with the increased the circulation of ourthe Angie’s List Magazine and andue to the continued expansion of our membership base. There was also a $0.3 million increase in credit card processing fees for increased memberyear over year attributable to the growing volume of membership enrollment and service provider transactions. We expect operations and support expense to continue to increase in absolute dollars as we grow our membership and service provider bases.

Operations and support expense remained consistentconstant as a percentage of revenue. We expectrevenue primarily due to the fact that the year over year growth in total revenue approximated the increase in operations and support to remain relatively consistent as a percent of revenue in future periods.

expense over the same time period.

Selling
  Three Months Ended March 31,  
  2014 2013 % Change
  (dollars in thousands)  
Selling $26,122
 $19,645
 33%
Percentage of revenue 36% 38%  
Non-cash stock-based compensation $104
 $25
  
 Selling

  

Three Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Selling

 $23,960  $16,240   48

%

Percentage of revenue

  36

%

  39

%

    

Selling expense increased $7.7$6.5 million for the three months ended September 30, 2013March 31, 2014 compared to the three months ended September 30, 2012. ServiceMarch 31, 2013. This increase is largely attributable to growth in service provider revenue, which increased 66%45% over the same period in the prior year. WeAdditionally, we increased the number of our sales personnel and management responsible for originating new advertising contracts and generating e-commerce offeringstransactions by 32%55% to 732 and881. We also increased the number of our sales personnel and management responsible for contract renewals by 49%54% to 186237 from the end of the prior year period.

March 31, 2013. Selling expense as a percentage of revenue decreased to 36% for the three months ended September 30, 2013 as compared toMarch 31, 2014 from 38% for the three months ended September 30, 2012March 31, 2013, primarily as a result of our transition to a new compensation structure for our sales force.personnel. As selling expense primarily consists of commissions, we generally expect it to fluctuate with service provider revenue and the composition of that revenue over time.










20


Marketing
  Three Months Ended March 31,  
  2014 2013 % Change
  (dollars in thousands)  
Marketing $23,481
 $19,722
 19%
Percentage of revenue 32% 38%  
Gross paid memberships added in the period 286,626
 274,896
 4%
Marketing cost per paid membership acquisition $82
 $72
  
Marketing

  

Three Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Marketing

 $28,189  $26,088   8

%

Percentage of revenue

  43

%

  62

%

    

Gross paid memberships added in the period

  371,318   341,522   9

%

Marketing cost per paid membership acquisition

 $76  $76     

Marketing expense increased $2.1$3.8 million for the three months ended September 30, 2013March 31, 2014 compared to the three months ended September 30, 2012,March 31, 2013 due to a plannedan increase in national advertising to acquire new members.

Marketing expense as a percentage of revenue decreased from the prior year period due to total revenue increasing at a greater rate than marketing expense increased in absolute dollars. Our marketing cost per paid membership acquisition remained consistent.increased from $72 for the three months ended March 31, 2013 to $82 for the three months ended March 31, 2014 due to the fact that marketing expenditures increased by approximately 19% year over year, while gross paid memberships added during the period only increased by 4% over the same time period. Consistent with the seasonality that characterizes our business, our marketing expense and marketing cost per paid membership acquisition typically peak in the second orand third quarters of the year.


Product and technology
  Three Months Ended March 31,  
  2014 2013 % Change
  (dollars in thousands)  
Product and technology $7,457
 $5,595
 33%
Percentage of revenue 10% 10%  
Non-cash stock-based compensation $209
 $215
  
 
17

Technology

  

Three Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Technology

 $6,942  $4,905   42

%

Percentage of revenue

  11

%

  12

%

    

Non-cash stock-based compensation

 $(418) $225     

TechnologyProduct and technology expense increased $2.0$1.9 million for the three months ended September 30, 2013March 31, 2014 compared to the three months ended September 30, 2012.March 31, 2013. The increase in product and technology expense was primarily attributable to a $1.0$0.8 million increase in technology-related outside consulting and professional fees and a $0.5 million increase in personnel-related costs as well as costs incurred to continue to develop our technology platform and service our growing base of members and service providers. This increase is partially offset by a decrease in non-cash stock based compensation due to forfeitures in the current period. We expect product and technology expense, to continuewhich includes costs associated with new product development as well as maintenance of our website, to increase in absolute dollars in future periods as we continue to develop our technology platform and service our growing base of members and service providers.

Technology Product and technology expense as a percentage of revenue was consistent compared to the prior year period. Weperiod, and we expect technology expensethis trend to continue to remain relatively consistent as a percentage of revenue.

moving forward.

General and administrative

  

Three Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

General and administrative

 $8,421  $5,669   49

%

Percentage of revenue

  13

%

  13

%

    

Non-cash stock-based compensation

 $1,025  $545     

  Three Months Ended March 31,  
  2014 2013 % Change
  (dollars in thousands)  
General and administrative $7,356
 $6,380
 15%
Percentage of revenue 10% 12%  
Non-cash stock-based compensation $1,207
 $566
  
General and administrative expense increased $2.8$1.0 million for the three months ended September 30, 2013March 31, 2014 compared to the three months ended September 30, 2012.  This increase is primarilyMarch 31, 2013. The most significant drivers behind the result of increasesfluctuation in personnel, professional and other consulting fees, product development, and general business costs to support the growth of the company.  We expect general and administrative expense toyear over year were a $0.6 million increase in absolute dollarsgeneral and administrative non-cash stock-based compensation expense, a $0.5 million increase in future periodsgeneral office expenditures such as we supportutilities and telephone expense attributable to the expansion and upgrading of our growing organization. 

office facilities, and a $0.3 million increase in personnel-related base compensation costs, all of which was offset by a $0.5 million decrease in bad dept expense year over year. General and administrative expense as a percentage of revenue has remained relatively consistent. Becausedecreased due to the aforementioned year over year increase in total revenue and our realization of the reasons stated above,economies of scale. Moving forward, we expect general and administrative expense as a percentage of revenue to increase inremain consistent from one period to the near term.

next.


21


Interest expense
18

Comparison ofInterest expense was approximately $0.5 million for both the ninethree months ended September 30, 2013March 31, 2014 and 2012

Revenue

  

Nine Months Ended

September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Revenue

            

Membership

 $47,598  $34,036   40

%

Service provider

  129,288   75,584   71

%

Total revenue

 $176,886  $109,620   61

%

             

Percentage of revenue by type

            

Membership

  27

%

  31

%

    

Service provider

  73

%

  69

%

    

Total revenue

  100

%

  100

%

    

Total paid memberships (end of period)

  2,378,867   1,656,768   44

%

Gross paid memberships added (in period)

  993,556   862,014   15

%

Participating service providers (end of period)

  44,876   33,209   35

%

Total revenue increased $67.3 million for the ninethree months ended September 30,March 31, 2013 as compared to the nine months ended September 30, 2012.

Membership revenue increased $13.6 million primarily due to a 44% increase in the total number of paid memberships, partially offset by a 8% decrease in membership revenue per paid membership in the nine months ended September 30, 2013. The decrease in membership revenue per paid membership resulted primarily from growth in paid memberships in less penetrated markets where average membership fees per paid membership are lower. This decline also reflected the effect of allowing members in our more penetrated markets to purchase only those segments of Angie’s List that are most relevant to them at a lower membership rate than applicable for the full service. The decrease in membership revenue per paid membership in the nine months ended September 30, 2013 also resulted from an increase from 90% to 93% of total memberships constituting annual and multi-year memberships.

Service provider revenue increased $53.7 million to 73% of total revenue primarily as a result of a 35% increase in the number of local service providers participating in our advertising programs and an 8% increase in the average service provider contract value. Service provider revenue primarily consists of revenue from advertising contracts with service providers. E-commerce revenue of $16.1 million and $11.0 million is included in service provider revenue in the nine months ended September 30, 2013 and 2012, respectively.

Operations and supportoutstanding debt remained constant.

  

Nine Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Operations and support

 $29,418  $19,631   50

%

Percentage of revenue

  17

%

  18

%

    

Operations and support expense increased $9.8 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. This increase was due in part to a $4.3 million increase in call center costs as compared to the prior year period as a result of increased headcount. In addition, there was a $3.5 million increase in publication costs as we increased the circulation of ourAngie’s List Magazine and $1.7 million increase in credit card processing fees for member enrollment and service provider transactions.


19

Selling

  

Nine Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Selling

 $65,582  $42,974   53

%

Percentage of revenue

  37

%

  39

%

    

Selling expense increased $22.6 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Service provider revenue increased 71% over the same period in the prior year.

Selling expense as a percentage of revenue decreased for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012 primarily as a result of our transition to a new compensation structure for our sales force.

Marketing

  

Nine Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Marketing

 $75,870  $71,316   6

%

Percentage of revenue

  43

%

  65

%

    

Gross paid memberships added in the period

  993,556   862,014   15

%

Marketing cost per paid membership acquisition

 $76  $83     

Marketing expense increased $4.6 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012, due to a planned increase in national advertising to acquire new members.

Marketing expense as a percentage of revenue decreased from the prior year period due to total revenue increasing at a greater rate than marketing expense increased in absolute dollars.

Technology

  

Nine Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

Technology

 $19,349  $12,223   58

%

Percentage of revenue

  11

%

  11

%

    

Non-cash stock-based compensation

 $(55) $563     

Technology expense increased $7.1 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase in technology expense was primarily attributable to a $4.0 million increase in personnel-related costs as well as costs incurred to continue to develop our technology platform and service our growing base of members and service providers. This is partially offset by a decrease in non-cash stock based compensation related to forfeitures which occurred in the current period.

Technology expense as a percent of revenue remained consistent compared with the prior year period.

20

General and administrative

  

Nine Months Ended September 30,

     
  

2013

  

2012

  

% Change

 
  

(dollars in thousands)

     

General and administrative

 $21,019  $17,420   21

%

Percentage of revenue

  12

%

  16

%

    

Non-cash stock-based compensation

 $2,568  $1,650     

General and administrative expense increased $3.6 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.  The increase is the result of bad debt expense recorded in the current year to date period related to uncollectible receivables, increase in headcount and an increase in outside consulting and professional services fees. This is partially offset by non-recurring costs incurred of $0.7 million for fees related to the follow-on sale of common stock in May 2012 that was not present in the current year.

General and administrative expense as a percentage of revenue decreased primarily due to the increase in revenue and our realization of economies of scale as well as the one time charge in the prior year for the follow-on sale of common stock offering that was not repeated in the current year period.

21

Liquidity and Capital Resources

General

At September 30, 2013,March 31, 2014, we had $41.6$43.7 million in cash and cash equivalents and $21.0 million in short-term investments. Cash and cash equivalents consists of bank deposit accounts and money market funds with contractual maturities of three months or less, which, at times, may exceed federally insured limits. Short termShort-term investments consist of corporate bonds and certificates of deposit with maturities of more than 90 days but less than one year.  To date, the carrying value of these investments approximate their fair values, and we have experiencedincurred no loss in these accounts.

Summary cash flow information for the ninethree months ended September 30,March 31, 2014 and 2013 and 2012 is set forth below.

  

Nine Months Ended September 30,

 
  

2013

  

2012

 
  

(in thousands)

 

Net cash provided by (used in) operating activities

 $13,448  $(27,797

)

Net cash used in investing activities

  (19,253

)

  (4,301

)

Net cash provided by financing activities

  4,776   8,988 

  Three Months Ended March 31,
  2014 2013
  (in thousands)
Net cash provided by operating activities $14,945
 $9,901
Net cash used in investing activities (6,555) (11,632)
Net cash provided by financing activities 461
 1,706
Net Cash Provided by (Used in) Operating Activities

Our operating cash flows will continue to be affected principally by the extent to which we continue to pursue our growth strategy, including investing in national advertising, changes in price per average paid membership, the expansion of our sales forcepersonnel to originate service provider contracts, investing in technology personnel and associated compensation structure,equipment, and other increases in headcount to grow our business. Our largest source of operating cash flows is cash collections from our members and service providers. 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.

Cash provided by operating activities for the ninethree months ended September 30, 2013March 31, 2014 of $13.4$14.9 million was achieved despite a net loss of $35.8$3.8 million. Our cash provided by operating activities was attributable to a deferred advertising revenue increase of $23.1$3.5 million as a result of an increase in both the number of our paid memberships and in the number of service providers participating in our advertising programs and a $17.0 million net increase in accounts payable and accrued liabilities primarily related to increases in accrued marketing expenses ($11.2 million increase), accrued e-commerce ($1.1 million increase), accrued base payroll ($1.1 million increase) and general accounts payable ($2.3 million increase) and the expected timing of payment of these balances. In addition, our net loss was adjusted for $2.8 million of non-cash expenses, which included $1.5 million of stock-based compensation expense, $1.2 million of depreciation and amortization, and $0.1 million attributable to the amortization of debt discount, deferred financing fees and the bond premium. Uses of cash included a $1.1 million increase in accounts receivable attributable to an $18.2increase in service provider billings, a $2.1 million increase in prepaid expenses and other current assets and a $1.5 million decrease in deferred membership revenue.

Cash provided by operating activities for the three months ended March 31, 2013 of $9.9 million was achieved despite a net loss of $7.9 million. Our progress towards a new compensation structure for our sales force responsible for new advertising originations contributed to our ability to generate positive cash flows for the first quarter of the previous year. Our cash provided by operating activities was also attributable to an $11.6 million net increase in accounts payable and accrued liabilities, primarily related to increases in accrued marketing expenses and accrued unpaid commissions and deferred revenue increased by $5.9 million as a result of an increase in both the timingnumber of paymentour paid memberships and the number of these balances, and a decreaseservice providers participating in prepaid expenses of $4.8 million primarily attributable to our change in compensation structure for our sales force responsible for new advertising originations.programs. In addition, our net loss was adjusted for $6.0$1.8 million of non-cash expenses, which included $2.7$0.8 million of stock-based compensation expense, $2.9 million of depreciation and amortization, and $0.4 million attributable to the amortization of debt discount and deferred financing fees.   Uses of cash included a $2.8 million increase in accounts receivable attributable to an increase in service provider billings.

Our use of cash in operating activities for the nine months ended September 30, 2012 was primarily attributable to our net loss of $55.3 million, reflecting continued investments in national advertising, an increase in our sales personnel, our increased investment in technology as we increased engineering headcount, as well as other headcount increases and other expenses to grow our business. This net loss was adjusted for $4.4 million of non-cash expenses, which included $2.2 million of stock-based compensation expense, $2.0$0.8 million of depreciation and amortization, and $0.2 million attributable to the amortization of debt discount and deferred financing fees. Additional usesUses of cash included a $8.0$1.9 million increase in prepaid expenses primarily as a result of the timing of payment of commissions to our sales personnel and an increase in accounts receivable of $3.4 million attributable to an increase in service provider billings. These uses





22


Net Cash Used in Investing Activities


Our use of cash in investing activities in the ninethree months ended September 30,March 31, 2014 was largely attributable to the total combined $6.2 million in property, equipment and software related spend during the period, consisting of $2.3 million for facilities and information technology hardware and software and nearly $4.0 million for capitalized website and software development costs, as we continue to make significant upgrades to our web and mobile platforms and implement new information technology infrastructure to support our growth. We also spent approximately $0.4 million during the quarter on data acquisition to acquire consumer reports on service providers and to purchase a website domain name.

 Our use of cash in investing activities in the three months ended March 31, 2013 was attributable to the purchases netpurchase of sales of $10.7$9.9 million in investments in corporate bonds commercial paper and certificates of deposit with maturities between ninety days and one year, $5.7$1.5 million for facilities and information technology hardware and software $2.2 million for the purchase of BrightNest assets in August 2013 and $0.7$0.2 million for data acquisition to acquire consumer reports on service providers.

 
22

Our use of cash in investing activities in the nine months ended September 30, 2012 was attributable to $2.6 million in information technology investments and $2.0 million for data acquisition, consisting primarily of consumer reviews on service providers. These uses of cash were offset in part by a decrease in restricted cash of $0.3 million during the period, which had previously been established as a reserve required under our credit card agreements.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the ninethree months ended September 30,March 31, 2014 and 2013 consisted solely of proceeds from the exercise of employee stock options.

Net cash provided by financing activities for the nine months ended September 30, 2012 consisted of proceeds from the sale of common stock of $8.6 million, net of underwriting discounts, commissions, fees and expenses, and $0.4 million in proceeds from the exercise of employee stock options.

Debt Obligations

On August 31, 2011, we entered into a loan and security agreement that providesprovided for a $15.0 million term loan and a $15.0 million revolving credit facility. AsThe term loan bears interest at a per annum rate equal to the greater of September 30, 2013,(i) the current cash interest rate of LIBOR plus 10% or (ii) 10.5%, and requires monthly interest-only payments until maturity in August 2015. The revolving credit facility requires monthly interest-only payments on advances, which bear interest at a per annum rate equal to LIBOR plus 5%. In addition, when less than 50% of the revolving credit facility is drawn, the Company is required to pay a non-usage charge of 0.50% per annum of the average unused portion of the credit facility. The term loan provides for penalties for early prepayment. The term loan and revolving credit facility provide for additional interest upon an event of default and are secured by substantially all of the Company’s assets.As of March 31, 2014, we had $15.0$14.9 million in outstanding borrowings under the term loan and available credit of $15.0 million under the revolving credit facility.

The loan and security 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 our stockholders or enter into certain types of related party transactions. We are also required to comply with certain financial covenants, including a minimum asset coverage ratio, and non-financial covenants. Upon an event of default, which includes a material adverse change, 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 September 30, 2013.

March 31, 2014.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet activities. We do not havehold any off-balance sheet interest in variable interest entities, which include special purpose entities and other structured finance entities.

Contractual Obligations

Our contractual obligations relate primarily to debt obligations, and non-cancellable operating leases. There have beenleases and a capital lease. Other than the execution of a new capital lease obligation during the quarter, there were no significant changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.

2013.

Critical Accounting Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect 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 that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have beenwere no material changes to our critical accounting policies and estimates from those described in our Annual Report on Form 10-K for the year ended December 31, 2012.

2013.


23


ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have beenwere no material changes in our exposure to market risk since the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2012.2013. Please refer to Part II, Item 7A. Quantitative and Qualitative DisclosureDisclosures about Market Risk included in our Annual Report on Form 10-K for our fiscal year ended December 31, 20122013 for a more complete discussion of the market risks we encounter.


ITEM  4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Based on their evaluation at the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2013.

March 31, 2014.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



24

Table of Contents


PART II – OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS


Information pertaining to legal proceedings can be found in “Item 1. Financial Statements—Note 8.9. Commitments and Contingencies” of this Quarterly Report on Form 10-Q, and is incorporated by reference herein.


ITEM 1A.RISK FACTORS


Investing in our common stock involves a high degree of risk. In addition to the other information set forth in this Quarterly Report on Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2012.2013. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may become important factors that may materially affect our business, financial condition and future results. The trading price of our common stock could decline due to any of these risks or uncertainties, and you may lose all or part orof your investment.


ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


On November 17, 2011, our registration statement on Form S-1 (File No. 333-176503) was declared effective for our initial public offering. There have been no changes regarding the use of proceeds from our initial public offering from the disclosure in our final prospectus filed with the SEC pursuant to Rule 424(b).

ITEM 3.DEFAULTS UPON SENIOR SECURITIES


Not applicable.


ITEM 4.MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.OTHER INFORMATION

None.

25

None.

ITEM  6.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

 

 

  Incorporated by Reference

 

 

Exhibit

No.

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

 

Filing

Date

 

Filed

Herewith

10.1

 

Offer Letter with Thomas R. Fox dated August 20, 2013

 

8-K

 001-35339

 

10.1

 

8/21/2013

  
             

31.01

 

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

31.02

 

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

32.01

 

Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

32.02

 

Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

101

 

Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for the Nine Months ended September 30, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2013 and 2012 and (iv) Notes to Consolidated Financial Statements

 

  

 

  

 

  

 

  

 

            X

 
26
Incorporated by Reference
Exhibit
No.
Exhibit DescriptionFormFile No.Exhibit
Filing
Date
Filed
Herewith
31.01Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley ActX
31.02Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley ActX
32.01Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*X
32.02Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*X
101Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the Three Months ended March 31, 2014 and 2013, (iii) Consolidated Statements of Cash Flows for the Three Months ended March 31, 2014 and 2013 and (iv) Notes to Consolidated Financial StatementsX
* Furnished, not filed.

25


SIGNATURES
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on OctoberApril 24, 2013.

2014.

ANGIE’S LIST, INC.

By:

/s/    THOMAS R. FOX        

Name:Thomas R. Fox

Name:

Title:

Thomas R. Fox

Title:

Chief Financial Officer

(Duly Authorized Officer and

Principal Financial and

Accounting Officer)











26


EXHIBIT INDEX
 


Incorporated by Reference

Exhibit
No.

Exhibit Description
Form
File No.
Exhibit
Filing
Date

Filed
Herewith
31.01
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act




X
31.02
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act




X
32.01
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*




X
32.02
Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act*




X
101
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the Three Months ended March 31, 2014 and 2013, (iii) Consolidated Statements of Cash Flows for the Three Months ended March 31, 2014 and 2013 and (iv) Notes to Consolidated Financial Statements




X
* Furnished, not filed.

27

EXHIBIT INDEX

 

 

 

 

  Incorporated by Reference

 

 

Exhibit

No.

 

Exhibit Description

 

Form

 

File No.

 

Exhibit

 

Filing

Date

 

Filed

Herewith

10.1

 

Offer Letter with Thomas R. Fox dated August 20, 2013

 

8-K

 001-35339

 

10.1

 

8/21/2013

  
             

31.01

 

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

31.02

 

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

32.01

 

Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

32.02

 

Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

  

 

  

 

  

 

  

 

            X

  

 

  

 

  

 

  

 

  

 

  

 

  

101

 

Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for the Nine Months ended September 30, 2013 and 2012, (iii) Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2013 and 2012 and (iv) Notes to Consolidated Financial Statements

 

  

 

  

 

  

 

  

 

            X

 28