Pandora 2012 Annual Report Download

Download and view the complete annual report

Please find the complete 2012 Pandora annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 132

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132

2012 Annual Report

Table of contents

  • Page 1
    2012 Annual Report

  • Page 2
    Pandora gives people music they love anytime, anywhere, through connected devices.

  • Page 3
    125,000,000+ registered users in the U.S. 900,000+ songs in the PANDORA® collection 15,000,000,000+ thumbs Source: internal data

  • Page 4
    ...2.4฀billion+฀ stations created Individual Engagement Ongoing Personalization & Discovery Real-time฀adaptation฀฀฀ of฀playlist Avg฀19+฀listening฀hours฀ ฀ per฀month฀per฀listener National & Local Advertising •฀ Display,฀audio฀and฀video฀solutions •฀ Multi...

  • Page 5
    ... year while our ad revenue grew 101% to $240 million in the same time. In fiscal 2012 we made significant progress increasing our users, expanding our market share and growing revenues to record levels, despite a wide variety of digital music initiatives launched by other companies over the course...

  • Page 6
    ... and create long-term value for our shareholders. The stronger our market leadership, the more powerful our position in the rapidly changing advertising markets of web, mobile and radio. As these markets develop, we firmly believe our position will lead to an increase in revenue and profitability...

  • Page 7
    .... More than half of all radio listening happens in the automobile, so we've invested in our auto partnerships, now numbering 23 major brands. We've greatly expanded our footprint in connected devices to allow greater ease of access to Pandora in the home. Pandora is now available on more than 450...

  • Page 8
    ... on expanding internationally over time as well. We expect to continue to invest in product and technology to enhance our playlists and further improve our user experience, in resources to expand the reach of Pandora's service across the full range of connected devices, and in our sales force to...

  • Page 9

  • Page 10

  • Page 11
    ... 2011(the last business day of the registrant's most recently completed second quarter), based on the closing price of such stock on The New York Stock Exchange on such date was approximately $955 million. This calculation excludes the shares of common stock held by executive officers, directors and...

  • Page 12
    and Exchange Commission not later than 120 days after the conclusion of the registrant's fiscal year ended January 31, 2012. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Definitive Proxy Statement is not deemed to be filed as part ...

  • Page 13
    ... Item 13 Item 14 Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of...

  • Page 14
    ... a new form of radio - one that uses intrinsic qualities of music to initially create stations and then adapts playlists in real-time based on the individual feedback of each listener. As of January 2012, we had over 125 million registered users, which we define as the total number of accounts that...

  • Page 15
    ...advertising from any device used to access our service. Pandora One allows unlimited listening time and provides access to higher quality 192 kbps audio on supported devices. In each of fiscal 2011 and 2012, subscription services and other revenue accounted for approximately 13% of our total revenue...

  • Page 16
    ... enhance connections between our mobile listeners and advertisers. "Tap-to" technology allows mobile listeners to expand banner ads, launch videos, receive advertiser emails, dial advertiser phone numbers, download applications and access links to advertiser websites, offering increased listener and...

  • Page 17
    ...data centers across the country. This network has allowed us to deliver a high quality streaming experience to a broad collection of devices at significant cost savings relative to outsourced third-party solutions. Pandora Mobile Streaming. We have designed a sophisticated system for streaming music...

  • Page 18
    ... mobile devices and consumer products. We believe that we compete favorably on these factors. For additional details on risks related to competition for listeners, please refer to the section entitled "Risk Factors." We offer our service at no cost or through a low cost subscription plan through web...

  • Page 19
    ... outlets present us with a number of competitive challenges in attracting advertisers, including large established audiences, longer operating histories, greater brand recognition and a growing presence on the internet. Content, Copyrights and Royalties To secure the rights to stream music content...

  • Page 20
    ..., we currently pay per-performance rates for streaming of sound recordings via our Pandora One subscription service that are higher than the per-performance rates for our free, non-subscription service. As a result, we may incur higher royalty expenses to SoundExchange for a listener that subscribes...

  • Page 21
    ... our business, financial condition or results of operations. We are not aware of any other proposed or pending changes to laws and regulations relating to performance royalties applicable to commercial webcasters such as us. Musical Compositions We also incur royalty expenses from our use of musical...

  • Page 22
    ... with employees, contractors, customers and partners. Customer Concentration In fiscal 2010, 2011 and 2012, Google accounted for 11.4%, 6.3% and 2.7%, respectively, of our total revenue. Pursuant to our arrangements with Google, Google acts as an online advertising agency, delivering relevant ads on...

  • Page 23
    ... file reports with the Securities and Exchange Commission ("SEC"), including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any other filings required by the SEC. We make available on our Investor Relations website, free of charge, our Annual Reports on...

  • Page 24
    ... net operating losses and, as of January 31, 2012, we had an accumulated deficit of $101.4 million. A key element of our strategy is to increase the number of listeners and listener hours to increase our market penetration. However, as our number of listener hours increases, the royalties we pay for...

  • Page 25
    ..., which currently includes delivery of display, audio and video advertising products through multiple delivery channels, including traditional computers, mobile and other connected devices, including automobiles; and coping with ad blocking technologies that have been developed and are likely to...

  • Page 26
    ... successful in maintaining or expanding our listener base and failure to do so would materially reduce our revenue and adversely affect our business, operating results and financial condition. Further, although we use our number of registered users and our number of active users as indicators of our...

  • Page 27
    ...mobile devices, automobiles and in the home. These forms of media may be purchased, downloaded and owned such as iTunes audio files, MP3s, CDs, or accessed from subscription or free online on-demand offerings by music providers such as RDIO, Spotify, and Rhapsody or content streams from other online...

  • Page 28
    ... the internet, mobile devices and consumer products. We face significant competition for listeners from companies promoting their own digital music and content online or through application stores, including several large, well-funded and seasoned participants in the digital media market. Search...

  • Page 29
    ... advances in digital media delivery and predict the problems we may encounter in developing versions of our applications for these new devices and delivery channels. It may become increasingly challenging to do so in the future. In particular, the technology used for streaming the Pandora service in...

  • Page 30
    ... By contrast, certain third party measurement service providers may calculate and report the number of listener hours using a client-based approach, which measures time elapsed during listening sessions. Measurement technologies for mobile and consumer electronic devices may be even less reliable in...

  • Page 31
    ...increase our operating costs or adversely affect our ability to retain and expand our listener base, and therefore could adversely affect our business. To secure the rights to stream musical works embodied in sound recordings over the internet, we obtain licenses from or for the benefit of copyright...

  • Page 32
    ... be forced to enter into direct licensing agreements with these publishers at rates higher than those we currently pay, or may be unable to reach agreement with these publishers at all, which could adversely affect our business, financial condition and results of operations. In May 2011, EMI Music...

  • Page 33
    ... other terms, could limit the reach of our service and its attractiveness to advertisers. Some of these mobile device makers, including Apple, are now, or may in the future become, competitors of ours, and could stop allowing or supporting access to our service through their products for competitive...

  • Page 34
    ...be unable to assert that our internal control over financial reporting is effective. In addition, our independent registered public accounting firm's audit for the years ended January 31, 2011 and 2012 included consideration of internal control over financial reporting as a basis for designing their...

  • Page 35
    ... the variability of our quarterly and annual results include our ability to retain our current listenership, build our listener base and increase listener hours; our ability to more effectively monetize mobile listener hours, particularly as the number of listener hours on mobile devices grow; our...

  • Page 36
    ... collective licensing available through performing rights organizations; the effects of increased competition in our business; our ability to keep pace with changes in technology and our competitors; interruptions in service, whether or not we are responsible for such interruptions, and any related...

  • Page 37
    ... We have registered "Pandora," "Music Genome Project" and other marks as trademarks in the United States. Nevertheless, competitors may adopt service names similar to ours, or purchase our trademarks and confusingly similar terms as keywords in internet search engine advertising programs, thereby...

  • Page 38
    ...our business, operating results and financial condition may be harmed. We may require additional capital to operate or expand our business. In addition, some of our current or future strategic initiatives, including entry into non-music content channels, such as comedy, or international markets, may...

  • Page 39
    ... other licensing alternatives currently available are not commercially viable. Currently, the licensing terms offered by rights organizations and individual copyright owners in countries outside the United States are prohibitively expensive. Addressing licensing structure and royalty rate issues in...

  • Page 40
    ... and competitive risks. Expansion of our operations into delivery of non-music content stations involves numerous risks and challenges, including increased capital requirements, new competitors and the need to develop new strategic relationships. For example, in May 2011, we started streaming spoken...

  • Page 41
    ..., including "cookies" and related technologies, to help us manage and track our listeners' interactions with our service and deliver relevant advertising. Various federal and state laws and regulations govern the collection, use, retention, sharing and security of the data we receive from and about...

  • Page 42
    ... higher credit card-related costs, each of which could adversely affect our business, financial condition and results of operations. If we are unable to maintain our chargeback rate or refund rates at acceptable levels, credit card and debit card companies may increase our transaction fees...

  • Page 43
    ...reliability of the related infrastructure. Because our service is designed primarily to work over the internet, our revenue growth depends on our listeners' low cost, high-speed access to the internet, as well as the continued maintenance and development of the internet infrastructure, including the...

  • Page 44
    ...or growth in use of the internet, including laws limiting internet neutrality, could decrease listener demand for our service offerings and increase our cost of doing business. Future regulations, or changes in laws and regulations or their existing interpretations or applications, could also hinder...

  • Page 45
    ... performance of the equity markets; the number of shares of our common stock publicly owned and available for trading; threatened or actual litigation; changes in laws or regulations relating to our service; any major change in our board of directors or management; publication of research reports...

  • Page 46
    ..., or make projections that exceed our actual results, our stock price and trading volume could decline. The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If securities or industry analysts who...

  • Page 47
    ... or alternative space will be available on commercially reasonable terms to accommodate our foreseeable future operations. ITEM 3. LEGAL PROCEEDINGS The material set forth in Note 5 of Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K is incorporated...

  • Page 48
    ... FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is traded on The New York Stock Exchange (the "NYSE") under the symbol "P." The following table sets forth the range of high and low sales prices on the NYSE of...

  • Page 49
    ... Total Return Among Pandora Media, Inc., New York Stock Exchange Composite Index, Global X Social Media Index and SPDR Morgan Stanley Technology MTK Index Recent Sales of Unregistered Securities Between February 1, 2011 and July 6, 2011 (the date of the filing of our registration statement...

  • Page 50
    ... & Company, L.L.C., Stifel, Nicolaus & Company, Incorporated and Wells Fargo Securities, LLC. Following the sale of the shares in connection with the closing of the IPO, the offering terminated. As a result of the offering, including the underwriters' over-allotment option, we received total net...

  • Page 51
    ... 2011 (in thousands, except per share data) 2012 Statement of Operations Data: Revenue: Advertising Subscription services and other Total revenue Costs and expenses: (1) Cost of revenue (1) Product development (1) Marketing and sales (1) General and administrative Content acquisition Total costs...

  • Page 52
    ...) 2011 2012 Cost of revenue Product development Marketing and sales General and administrative Total stock-based compensation (2) (3) (4) $ $ 10 44 158 71 283 $ $ 14 54 188 77 333 $ $ 18 125 225 109 477 $ $ 85 329 549 492 1,455 $ $ 582 1,638 4,866 2,101 9,187 Comparative data is...

  • Page 53
    ... radio - one that uses intrinsic qualities of music to initially create stations and then adapts playlists in real-time based on the individual feedback of each listener. In January 2012, we had over 125 million registered users, which we define as the total number of accounts that have been created...

  • Page 54
    ... national brands. To successfully sell audio ads, we may have to convince a substantial base of local advertisers of the benefits of advertising on the Pandora service. In fiscal 2011 and 2012, we substantially increased our expenditures for product development, marketing and sales and general and...

  • Page 55
    .... The number of active users may overstate the number of unique individuals who actively use our service within a month as one individual may register for, and use, multiple accounts. The tables below set forth our listener hours for fiscal 2010, 2011 and 2012 and our active users as of the end of...

  • Page 56
    ... premium version of the Pandora service for $36 per year or, on some devices, $4 per month, which currently includes an ad free environment and, on devices that support it, higher quality audio. We receive the full amount of the subscription payment at the time of sale; however, subscription revenue...

  • Page 57
    ...to invest in corporate infrastructure, including adding personnel and systems to our finance and administrative functions. We also expect to incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs and compliance costs...

  • Page 58
    ... Ended January 31, 2010 2011 2012 Revenue: Advertising Subscription services and other Total revenue Costs and expenses: (1) Cost of revenue (1) Product and development (1) Marketing and sales (1) General and administrative Content acquisition Total costs and expenses Income (loss) from operations...

  • Page 59
    Cost of revenue Product development Marketing and sales General and administrative 47 0.0% 0.2 0.4 0.2 0.1% 0.2 0.4 0.4 0.2% 0.6 1.8 0.8

  • Page 60
    ... by higher listener hours and higher spending on campaigns by our advertisers. Subscription services and other revenue increased $13.4 million due to a 63% increase in the number of Pandora One subscribers. Cost and Expenses Cost of Revenue Fiscal Year Ended January 31, FY 2010 to FY 2011 2012 (in...

  • Page 61
    ... marketing and sales expenses increased $2.4 million related to higher customer acquisition and advertising effectiveness survey costs and higher spending for public relations activities. General and Administrative Fiscal Year Ended January 31, FY 2010 to FY 2011 2012 (in thousands) $ Change FY 2011...

  • Page 62
    ... reflecting higher royalty payments driven by a higher volume of listener hours, higher royalty rates due to scheduled rate increases and higher revenue. Other Income (Expense) Fiscal Year Ended January 31, FY 2010 to FY 2011 2012 (in thousands) $ Change FY 2011 to FY 2012 $ Change 2010 2011...

  • Page 63
    ... 13, 2011, we entered into a $30 million credit facility with a syndicate of financial institutions. The amount of borrowings available under the credit facility at any time is based on our monthly accounts receivable balance at such time, and the amounts borrowed are collateralized by our personal...

  • Page 64
    ... of $23.0 million related to higher advertising sales. Cash inflows from changes in operating assets and liabilities included an increase in deferred revenue of $9.8 million primarily related to an increase in customers purchasing subscriptions for Pandora One and an increase in accrued royalties of...

  • Page 65
    ... of each calendar year due to the holiday season, and in the first quarter of each calendar year due to increased use of media-streaming devices received as gifts during the holiday season. We may also experience higher advertising sales during the fourth quarter of each calendar year due to greater...

  • Page 66
    ... data summarized in these reports. Subscription Services and Other Revenue Subscription revenue is generated through the sale of a premium version of the Pandora service which currently includes higher audio quality and advertisement-free access. Subscription revenue is recognized on a straight-line...

  • Page 67
    ... accounts receivable based upon historical loss patterns, the number of days billings are past due and an evaluation of the potential risk of loss associated with delinquent accounts. Stock-Based Compensation We measure stock-based compensation expenses for employees at the grant date fair value...

  • Page 68
    ...-income marketable securities have maturities of less than six months, but do carry some degree of interest rate risk and may have their fair market values adversely impacted by higher interest rates. We do not believe that a hypothetical 10% increase in interest rates as of January 31, 2012 would...

  • Page 69
    ... FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PANDORA MEDIA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. Consolidated Balance Sheets as of January 31, 2011 and 2012 Consolidated Statements of Operations for the fiscal years ended January 31, 2010, 2011 and 2012 Consolidated Statements...

  • Page 70
    ... Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Pandora Media, Inc. We have audited the accompanying consolidated balance sheets of Pandora Media, Inc. as of January 31, 2011 and 2012, and the related consolidated statements of operations, redeemable...

  • Page 71
    Table of Contents Pandora Media, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts) As of As of January 31, January 31, 2012 2011 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of $503 and $590 at ...

  • Page 72
    ... Pandora Media, Inc. Consolidated Statements of Operations (In thousands, except per share amounts) Fiscal Year Ended January 31, 2010 2011 2012 Revenue: Advertising Subscription services and other Total revenue Costs and expenses: Cost of revenue Product development Marketing and sales General...

  • Page 73
    Table of Contents Pandora Media, Inc. Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) (In thousands, except share amounts) Redeemable Convertible Preferred Stock Accumulated Total Other Stockholders' Comprehensive Equity Additional Income ...

  • Page 74
    ... Changes in assets and liabilities: Accounts receivable Prepaid expenses and other assets Accounts payable and accrued liabilities Accrued royalties Accrued compensation Deferred revenue Reimbursement of cost of leasehold improvements Net cash provided by (used in) operating activities Investing...

  • Page 75
    ... of Presentation Pandora Media, Inc. (the "Company" or "Pandora") provides an internet radio service in the United States, offering a personalized experience for each of its listeners. The Company has developed a form of radio that uses intrinsic qualities of music to initially create stations that...

  • Page 76
    ... Chief Executive Officer, manages the Company's operations on a consolidated basis for purposes of allocating resources. When evaluating the Company's financial performance, the CODM reviews separate revenue information for the Company's advertising, subscription services and other offerings, while...

  • Page 77
    ... does not set the pricing, and does not establish or maintain the relationship with the advertisers. Subscription and Other Revenue. The Company generates subscription services revenue through the sale of access to a premium version of Pandora internet radio, or Pandora One. Subscription revenue is...

  • Page 78
    ... increase or decrease in the amount of revenue that the Company reports in a particular period. The Company recognizes the relative fair value of the media placements or ad services as they are delivered assuming all other revenue recognition criteria are met. Concentration of Credit Risk Financial...

  • Page 79
    ... the date of purchase as cash equivalents. The Company's short-term investments consist of commercial paper, corporate debt securities and U.S. agency notes. These investments are classified as available-for-sale securities and are carried at fair value with the unrealized gains and losses reported...

  • Page 80
    ...Costs related to design or maintenance of internal-use software are expensed as incurred. The Company evaluates the costs incurred during the application development stage of website development to determine whether the costs meet the criteria for capitalization. Costs related to preliminary project...

  • Page 81
    ... facilities-related expenses and costs associated with supporting consumer connected-device manufacturers in implementing its service in their products. The Company incurs product development expenses primarily for improvements to its website, the Pandora app, development of new advertising products...

  • Page 82
    ... of Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued General and Administrative General and administrative expenses include employee and employee-related costs consisting of salaries and benefits for finance, accounting, legal, internal information technology and...

  • Page 83
    ... arrangements. In May 2011, the FASB issued ASU 2011-04 regarding ASC Topic 820 "Fair Value Measurement." This ASU updates accounting guidance to clarify how to measure fair value to align the guidance surrounding Fair Value Measurement within GAAP and International Financial Reporting Standards. In...

  • Page 84
    ...Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued In December 2011, the FASB issued ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update...

  • Page 85
    .... No such investments were held as of January 31, 2011. As of January 31, 2012 Adjusted Cost Unrealized Unrealized Gains Losses (in thousands) Fair Value Money market funds Commercial paper Corporate debt securities U.S. agency notes Total cash equivalents and marketable securities $ $ 31,614...

  • Page 86
    ...Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued The unrealized losses on our available-for-sale securities were primarily a result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. As of January 31, 2012, the Company...

  • Page 87
    ... date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. When determining fair value, whenever possible the Company uses observable market data, and relies on unobservable inputs only when observable market data is not available...

  • Page 88
    ... Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued The fair value of these financial assets and liabilities was determined using the following inputs at January 31, 2011 and 2012: Fair Value Measurement Using Quoted Prices in Active Markets for Identical Instruments (Level...

  • Page 89
    Table of Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued The following table provides a roll-forward of the fair value of the preferred stock warrants categorized as Level 3 for the years ended January 31, 2011 and 2012 (in thousands): Balance at January 31, 2010...

  • Page 90
    ...of Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued 5. Commitments and Contingencies Leases The Company conducts its operations using leased office facilities in various locations. The following is a schedule of future minimum lease payments under operating leases...

  • Page 91
    ... filed against Pandora in the U.S. District Court for the Northern District of California, alleging that it, along with other defendant corporations, unlawfully accessed and transmitted personally identifiable information of the plaintiffs in connection with their use of iPhone and iPad applications...

  • Page 92
    ...was filed against Pandora in the United States District Court for the Northern District of California alleging that it unlawfully accessed and transmitted personally identifiable information of the plaintiffs in connection with their use of the Company's Android mobile application. In September 2011...

  • Page 93
    Table of Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued 6. Income Taxes The provision for income tax expense consists of the following: Fiscal Year Ended January 31, 2010 2011 (in thousands) 2012 Current Federal State and local Total current income tax expense ...

  • Page 94
    ... tax laws. We estimate that approximately $1.7 million of our federal and approximately $2.1 million of our state net operating losses will expire unused due to the limitation in Section 382 of the Code. During the fiscal year ended January 31, 2012 the Company's valuation allowance increased by...

  • Page 95
    ... of financial institutions. The amount of borrowings available under the credit facility at any time is based on the Company's monthly accounts receivable balance at such time, and the amounts borrowed are collateralized by the Company's personal property (including such accounts receivable but...

  • Page 96
    ... terms. For stock option grants the exercise price is determined by the Plan Administrator, but generally may not be less than 100% of the fair market value of the common stock subject to the option on the date of grant. Given the absence of a public trading market prior to the IPO, the Company...

  • Page 97
    ... terms. The risk free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. The Company currently has no history or expectation of paying cash dividends on its common stock. Common Stock Each share...

  • Page 98
    ... the difference between the exercise price and the fair value of common stock at each period end for all in the money options outstanding based on the fair value per share of common stock of $0.17, $3.14 and $13.19 as of January 31, 2010, 2011 and 2012, respectively. Options expected to vest...

  • Page 99
    ...month. Using the BlackScholes option pricing model, the initial grant date fair value of these options was determined to be $60,000. As of January 31, 2012, $0.1 million compensation cost has been recognized related to these options due to the remeasured fair value at the reporting date. Stock-based...

  • Page 100
    ... non-employee stock-based awards for fiscal 2010, 2011 and 2012 was as follows: Fiscal Year Ended January 31, 2010 2011 (in thousands) 2012 Stock-based compensation expenses: Cost of revenue Product development Marketing and sales General and administrative Total stock-based compensation, recorded...

  • Page 101
    Table of Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued 9. Redeemable Convertible Preferred Stock Redeemable Convertible Series F Preferred Stock During the fiscal year ended January 31, 2010, the Company issued 45,833,082 shares of redeemable convertible Series...

  • Page 102
    ... Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued The following is a summary of the rights and preferences of the classes of redeemable convertible preferred stock as of the closing date of the Company's IPO: Dividends. The holders of shares of the Company's redeemable...

  • Page 103
    ... share by the applicable conversion price per share at the time of conversion. The following table sets forth the original issue price, conversion price and conversion rate per share in effect for each series of redeemable convertible preferred stock as of the date of the Company's IPO: Issue Price...

  • Page 104
    Table of Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued Redemption Rights. The Company's Series G and Series F were redeemable on a pari passu basis at any time after the fifth anniversary of the date upon which any shares of Series G were first issued upon the ...

  • Page 105
    ... ended January 31, 2010 and 2011 represent accretion of the redemption value of the redeemable convertible preferred stock using the interest method. The holders of the Series B, C, D, E, F and G were entitled to receive a per share redemption amount plus interest calculated from the issuance date...

  • Page 106
    ... same for each year presented as the inclusion of all potential common shares outstanding would have been anti-dilutive. The following table sets forth the computation of historical basic and diluted net loss per share. Fiscal Year Ended January 31, 2010 2011 (in thousands) 2012 Numerator Net loss...

  • Page 107
    Table of Contents Pandora Media, Inc. Notes to Consolidated Financial Statements - Continued Net loss was increased by the cumulative dividends payable upon conversion or liquidation of redeemable convertible preferred shares earned during the period to arrive at net loss attributable to common ...

  • Page 108
    ... Quarterly Financial Data (unaudited) Three Months Ended April 30, 2010 July 31, 2010 Oct 31, Jan 31, April 30, July 31, 2010 2011 2011 2011 (in thousands, except per share data) Oct 31, 2011 Jan 31, 2012 Total revenue Costs and expenses: Cost of revenue Product development Marketing and sales...

  • Page 109
    ... internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies. Changes in Internal Control over Financial Reporting During the fiscal year ended January 31, 2012...

  • Page 110
    ... statement to be filed with the SEC in connection with our 2012 annual meeting of stockholders (the "Proxy Statement") entitled "Election of Class I Directors" and "Management." Information required by this Item regarding our corporate governance, including our audit committee and code of business...

  • Page 111
    ... included as part of this Annual Report on Form 10-K. 1. Index to Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of January 31, 2011 and 2012 Consolidated Statements of Operations for the fiscal years ended January 31, 2010, 2011, and 2012...

  • Page 112
    ... Stock Unit Agreement under the 2011 Equity Incentive Plan 10.18†Amended Executive Severance and Change in Control Policy 23.01 Consent of independent registered public accounting firm 24.01 Power of Attorney (included on signature page of this Annual Report on Form 10-K) 31.01 Certification...

  • Page 113
    ... and Stockholders' Deficit for the fiscal years ended January 31, 2012, 2011 and 2010, (iv) Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2012, 2011 and 2010 and (v) Notes to Consolidated Financial Statements. †Indicates management contract or compensatory plan. 101

  • Page 114
    ... 15(d) 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 March 16, 2012. PANDORA MEDIA, INC. /s/ Joseph Kennedy By: Name: Joseph Kennedy Title: Chief Executive Officer, President and Chairman...

  • Page 115
    ..., place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and...

  • Page 116
    ...21, LP and Pandora Media, Inc., dated April 13, 2010 Second Amendment to Lease between CIM/Oakland Center 21, LP and Pandora Media, Inc., dated June 16, 2010 Web Site Performance Agreement by and between Broadcast Music, Inc. and Savage Beast Technologies, Inc., dated June 30, 2005 License Agreement...

  • Page 117
    ... of Restricted Stock Unit Agreement under the 2011 Equity Incentive Plan 10-Q 10.18†Amended Executive Severance and Change in Control Policy 23.01 Consent of independent registered public accounting firm 24.01 Power of Attorney (included on signature page of this Annual Report on Form 10-K) 31.01...

  • Page 118
    ... and Change of Control Plan (the "Policy") is to specify the compensation and benefits payable in connection with certain termination events for Eligible Officers. The purpose of the Policy is to provide for the payment of severance benefits to Eligible Officers of Pandora Media Inc. (the "Company...

  • Page 119
    ...unused vacation, in accordance with applicable law: (i) a cash payment equal to the number of Severance Months (as defined below) times such Eligible Officer's monthly base salary in effect on the Termination Date, paid in a lump sum within 10 business days following the effectiveness of the Release...

  • Page 120
    ... of (A) the number of Severance Months (as defined below) times such Eligible Officer's monthly base salary in effect on the Termination Date and (B) such Eligible Officer's annual target bonus prorated to the Termination Date, paid in a lump sum within 10 business days following the effectiveness...

  • Page 121
    ... defined in Section 422 of the Code) outstanding as of the date of such eligibility by providing written notice to the th General Counsel of the Company by such 30 day. Section 6. Definitions. For purposes of this Policy: (i) "Committee" means the Board of Directors or the Compensation Committee of...

  • Page 122
    ...of employment" shall mean separation from service as an employee within the meaning of Section 409A(a)(2)(A)(i) of the Code and Treasury Regulation Section 1.409A-1(h). (iv) The Company makes no representation or warranty and shall have no liability to the Eligible Officer or any other person if any...

  • Page 123
    ... application of Sections 280G and 4999 of the Code. The Company and such Eligible Officer shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this provision. The Company shall bear all costs the Accountants...

  • Page 124
    ...by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Eligible Officer, mailed notices shall be addressed to him or her at the home address or facsimile number shown on the Company's corporate records, unless a different address or facsimile number is...

  • Page 125
    ... a right to receive payments from the Company under the Policy such right shall be no greater than the right of any unsecured general creditor of the Company. (i) Governing Law. This Policy is intended to be governed by and will be construed in accordance with the laws of the State of California. 8

  • Page 126
    ...and 2011 Equity Incentive Plan of Pandora Media, Inc. of our report dated March 16, 2012, with respect to the consolidated financial statements of Pandora Media, Inc. included in this Annual Report (Form 10-K) for the year ended January 31, 2012. /s/ Ernst & Young LLP San Francisco, California March...

  • Page 127
    ... end of the period covered by this report, based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 128
    ... end of the period covered by this report, based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 129
    ...OF 2002 The certification set forth below is being submitted in connection with this Annual Report on Form 10-K for the fiscal year ended January 31, 2012 (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and...

  • Page 130

  • Page 131
    ...฀Revenue฀Officer Delida Costin General฀Counsel Jessica Steel Executive฀Vice฀President฀of฀Business฀ and฀Corporate฀Development Simon Fleming-Wood Chief฀Marketing฀Officer For฀further฀information฀about฀Pandora฀Media฀Inc.,฀contact: Investor฀Relations฀Pandora...

  • Page 132