Pandora 2012 Annual Report Download - page 40

Table of Contents
Expansion of our operations into non-music content, including our recent launch of comedy, subjects us to additional business, legal, financial 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 word comedy
content, for which the underlying literary works are not currently entitled to eligibility for licensing by any performing rights organization for the United
States. Rather, pursuant to industry-wide custom and practice, this content is performed absent a specific license from any such performing rights
organization. Further, growth into this new area may require changes to our existing business model and cost structure, modifications to our infrastructure and
exposure to new regulatory and legal risks, any of which may require expertise in which we have little or no experience. There is no guarantee that we will be
able to generate sufficient revenue from advertising sales associated with comedy content to offset the costs of maintaining comedy stations. For example,
many of the mainstream advertisers that choose to place ads on our music stations may choose not to advertise on our comedy stations because of the
sometimes explicit nature of comedy content. Further, we have established a reputation as an online music provider and our ability to gain acceptance and
listenership for comedy content stations, and thus our ability to attract advertisers on comedy stations, is not certain. Failure to obtain or retain rights to
comedy content on acceptable terms, or at all, to successfully monetize and generate revenues from such content, or to effectively manage the numerous risks
and challenges associated with such expansion could adversely affect our revenues and profitability. To the extent we choose, in the future, to offer additional
types of content beyond music and comedy, such as news, talk and sports programming, we will be subject to many of these same risks.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
At January 31, 2012, we had federal net operating loss carryforwards of approximately $100.4 million and tax credit carryforwards of approximately
$1.3 million. At January 31, 2012, we had state net operating loss carryforwards of approximately $107.9 million and tax credit carryforwards of
approximately of $2.8 million. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an
"ownership change," the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes, such as research tax
credits, to offset its post-change income may be limited. In general, an "ownership change" will occur if there is a cumulative change in our ownership by "5-
percent shareholders" that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. As a result of prior
equity issuances and other transactions in our stock, we have previously experienced "ownership changes" under section 382 of the Code and comparable
state tax laws. We may also experience ownership changes in the future as a result of future transactions in our stock. As a result, if we earn net taxable
income, our ability to use our pre-change net operating loss carryforwards or other pre-change tax attributes to offset United States federal and state taxable
income is subject to limitations.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute crucially to our business.
We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork, cultivates
creativity and promotes focus on execution. We have invested substantial time, energy and resources in building a highly collaborative team that works
together effectively in a non-hierarchical environment designed to promote openness, honesty, mutual respect and pursuit of common goals. As we continue
to develop the infrastructure of a public company and grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to
preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and
effectively focus on and pursue our corporate objectives.
Federal, state and industry regulations as well as self-regulation related to privacy and data security concerns pose the threat of lawsuits and other
liability, require us to expend significant resources, and may hinder our ability and our advertisers' ability to deliver relevant advertising.
We collect and utilize demographic and other information, including personally identifiable information, from and about our listeners as they interact
with our service. For example, to register for a Pandora account, our listeners must provide the following information: age, gender, zip code and e-mail
address. Listeners must also provide their
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