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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

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FORM 10-Q

 

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(Mark One)

 

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

 

For the quarterly period ended September 30, 2014

 

OR

 

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

 

Commission File Number: 1-36039

  

 

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YuMe, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

  

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Delaware		27-0111478
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
1204 Middlefield Road, Redwood City, CA		94063
(Address of Principal Executive Offices)		(Zip Code)

 

(650) 591-9400

(Registrant’s Telephone Number, Including Area Code)

 

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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  ☒ No ☐  

 

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files).    Yes  ☒ 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐		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  ☒

 

As of October 31, 2014, there were 33,044,651 shares of the Registrant’s common stock outstanding.

 

  

YuMe, Inc.

FORM 10-Q

Table of Contents

 

 

PART I. FINANCIAL INFORMATION		Page
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2014 and 2013	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
Signature		46

 

 

  

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

YuMe, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

		As of September 30, 2014				As of December 31, 2013
		(Unaudited)					(1)
Assets
Current assets:
Cash and cash equivalents		$	32,616			$	42,626
Marketable securities			24,907				7,295
Accounts receivable, net			54,829				65,493
Prepaid expenses and other current assets			3,249				2,572
Total current assets			115,601				117,986
Marketable securities, long-term			4,780				14,186
Property, equipment and software, net			9,245				6,610
Goodwill			3,902				3,902
Intangible assets, net			1,497				2,049
Restricted cash			292				292
Deposits and other assets			379				362
Total assets		$	135,696			$	145,387
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	6,180			$	7,722
Accrued digital media property owner costs			11,905				17,359
Accrued liabilities			12,521				12,734
Deferred revenue			154				314
Capital leases, current			85				359
Total current liabilities			30,845				38,488
Capital leases, non-current		–					22
Other long-term liabilities			118				139
Deferred tax liability			573				773
Total liabilities			31,536				39,422
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock: $0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2014 and December 31, 2013		–				–
Common stock: $0.001 par value; 200,000,000 shares authorized, 33,011,480 and 31,933,862 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively			33				32
Additional paid-in-capital			136,592				127,690
Treasury stock: 66,666 shares as of September 30, 2014 and December 31, 2013		–				–
Accumulated deficit			(32,334	)			(21,677	)
Accumulated other comprehensive loss			(131	)			(80	)
Total stockholders’ equity			104,160				105,965
Total liabilities and stockholders’ equity		$	135,696			$	145,387

 

 

(1)

Condensed consolidated balance sheet data as of December 31, 2013 was derived from audited financial statements.

 

See accompanying notes to condensed consolidated financial statements.

 

 

YuMe, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Revenue		$	42,993			$	36,157			$	120,671			$	97,089
Cost of revenue			22,674				18,968				63,535				52,179
Gross profit			20,319				17,189				57,136				44,910
Operating expenses:
Sales and marketing			16,353				11,735				47,673				32,845
Research and development			1,582				1,165				4,027				3,082
General and administrative			5,332				4,918				15,629				13,586
Total operating expenses			23,267				17,818				67,329				49,513
Loss from operations			(2,948	)			(629	)			(10,193	)			(4,603	)
Interest and other income (expense), net
Interest expense, net			(2	)			(9	)			(8	)			(41	)
Other income (expense), net			(345	)			74				(531	)			(252	)
Total interest and other income (expense), net			(347	)			65				(539	)			(293	)
Loss before income taxes			(3,295	)			(564	)			(10,732	)			(4,896	)
Income tax (expense) benefit			267				(63	)			75				(162	)
Net loss		$	(3,028	)		$	(627	)		$	(10,657	)		$	(5,058	)
Net loss per share:
Basic		$	(0.09	)		$	(0.03	)		$	(0.33	)		$	(0.49	)
Diluted		$	(0.09	)		$	(0.03	)		$	(0.33	)		$	(0.49	)
Weighted-average shares used to compute net loss per share:
Basic			32,788				21,054				32,436				10,305
Diluted			32,788				21,054				32,436				10,305

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

YuMe, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Net loss		$	(3,028	)		$	(627	)		$	(10,657	)		$	(5,058	)
Other comprehensive income (loss):
Foreign currency translation adjustments			(27	)			(20	)			(41	)			45
Change in fair value of marketable securities			(25	)		–					(10	)		–
Other comprehensive income (loss)			(52	)			(20	)			(51	)			45
Comprehensive loss		$	(3,080	)		$	(647	)		$	(10,708	)		$	(5,013	)

 

See accompanying notes to condensed consolidated financial statements.

 

 

YuMe, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

		Nine Months Ended September 30,
		2014				2013
Operating activities:
Net loss		$	(10,657	)		$	(5,058	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			3,369				3,037
Stock-based compensation			4,169				2,508
Provision for bad debts			432				346
Deferred income taxes			(198	)			(148	)
Change in fair value of preferred stock warrants		–					125
Changes in operating assets and liabilities:
Accounts receivable			10,232				347
Prepaid expenses and other current assets			(677	)			(1,286	)
Deposits and other assets			(17	)			275
Accounts payable			(1,857	)			(784	)
Accrued digital media property owner costs			(5,454	)			(3,322	)
Accrued liabilities			(213	)			2,393
Deferred revenue			(160	)			(325	)
Other liabilities			(21	)			(28	)
Net cash used in operating activities			(1,052	)			(1,920	)
Investing activities:
Purchases of property and equipment			(3,562	)			(845	)
Capitalized software development costs			(1,318	)			(1,354	)
Change in restricted cash		–					(49	)
Purchases of marketable securities			(15,416	)		–
Proceeds from maturities of marketable securities			7,200			–
Net cash used in investing activities			(13,096	)			(2,248	)
Financing activities:
Proceeds from initial public offering, net of offering costs		–					40,104
Repayments of borrowings under notes payable		–					(154	)
Repayments of borrowings under capital leases			(296	)			(468	)
Proceeds from exercise of common stock options and employee stock purchase plan			4,475				278
Net cash provided by financing activities			4,179				39,760
Effect of exchange rate changes on cash and cash equivalents			(41	)			45
Change in cash and cash equivalents			(10,010	)			35,637
Cash and cash equivalents—Beginning of period			42,626				27,909
Cash and cash equivalents—End of period		$	32,616			$	63,546
Supplemental disclosures of cash flow information
Cash paid for interest		$	8			$	42
Cash paid for income taxes		$	829			$	421
Stock-based compensation capitalized for internal-use software		$	259			$	145
Non-cash investing and financing activities
Purchases of property and equipment recorded in accounts payable		$	315			$	564
Initial public offering costs recorded in accounts payable and accrued liabilities		$	–			$	127

 

See accompanying notes to condensed consolidated financial statements.

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

1.	Organization and Description of Business

 

Organization and Nature of Operations

 

YuMe, Inc. (the “Company”) was incorporated in Delaware on December 16, 2004. The Company, including its wholly-owned subsidiaries, is a leading independent provider of digital video brand advertising solutions. The Company's proprietary technologies serve the specific needs of brand advertisers and enable them to find and target large, brand-receptive audiences across a wide range of Internet-connected devices and digital media properties. The Company's software is used by global digital media properties to monetize professionally-produced content and applications. The Company facilitates digital video advertising by dynamically matching relevant audiences available through its digital media property partners with appropriate advertising campaigns from its advertising customers.

 

The Company helps its advertising customers overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where dispersed audiences use a growing variety of Internet-connected devices to access thousands of online and mobile websites and applications. The Company delivers video advertising impressions across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. The Company's video ads run when users choose to view video content on their devices. On each video advertising impression, the Company collects dozens of data elements that it uses for its advanced audience modeling algorithms that continuously improve brand-targeting effectiveness.

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K filed pursuant to Section 13 or 15(d) of the Securities Act of 1934 with the SEC on March 27, 2014. The condensed consolidated balance sheet as of December 31, 2013, included herein was derived from the audited consolidated financial statements as of that date but does not include all disclosures required by GAAP, including notes to the financial statements.

 

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments (consisting primarily of normal recurring adjustments) necessary for the fair statement of the interim periods stated. 

 

In July 2013, the Company's board of directors and stockholders approved an amendment to the amended and restated certificate of incorporation. The amendment provided for a 1-for-6 reverse stock split of the outstanding common stock, effective July 24, 2013. Accordingly, (i) every six shares of common stock have been combined into one share of common stock, (ii) the number of shares of common stock into which each outstanding option or warrant to purchase common stock is exercisable, as the case may be, have been proportionately decreased on a 1-for-6 basis, (iii) the exercise price for each such outstanding option or warrant to purchase common stock has been proportionately increased on a 6-for-1 basis, and (iv) the conversion ratio for each share of preferred stock outstanding was proportionately reduced on a 1-for-6 basis. All of the share numbers, share prices, and exercise prices have been adjusted within these condensed consolidated financial statements, on a retroactive basis, to reflect this 1-for-6 reverse stock split. The Company paid cash in lieu of any fractional shares to which a holder of common stock would otherwise be entitled as a result of the reverse stock split.

 

On August 12, 2013, the Company closed the initial public offering (“IPO”) of its common stock pursuant to a registration statement on Form S-1. In the IPO, the Company sold 5,125,000 shares of common stock at a public offering price of $9.00 per share. Net proceeds were approximately $40.0 million, after deducting underwriting discounts and commissions of $3.2 million and offering expenses of $2.9 million. Upon the closing of the IPO, all outstanding shares of the Company’s convertible preferred stock automatically converted into 21,840,537 shares of common stock and all outstanding warrants to purchase convertible preferred stock converted into warrants to purchase 53,983 shares of common stock.

 

Basis of Consolidation

 

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

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

Certain Significant Risks and Uncertainties

 

The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, the Company believes that changes in any of the following areas could have a significant negative effect on its future financial position, results of operations, or cash flows: rates of revenue growth; traffic to and pricing with the Company's network of digital media property owners; scaling and adaptation of existing technology and network infrastructure; management of the Company's growth; new markets and international expansion; protection of the Company's brand, reputation and intellectual property; competition in the Company's markets; recruiting and retaining qualified employees and key personnel; intellectual property infringement and other claims; and changes in government regulation affecting the Company's business, among other things.

 

2.	Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management's estimates.

 

Recent Pronouncements

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that provided explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance became effective on January 1, 2014 and should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company adopted this guidance prospectively in fiscal 2014 and the adoption did not impact its consolidated financial statements.

 

In May 2014, the FASB issued an accounting standard update related to revenue recognition. This new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for YuMe, Inc. beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the impact of adopting this new accounting standard update on its consolidated financial statements.

 

In June 2014, the FASB issued an accounting standard update related to stock compensation. The new guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This guidance further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting this new accounting guidance on its consolidated financial statements.

 

Concentrations and Other Risks

 

Financial instruments that subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable securities and accounts receivable. Cash and cash equivalents are deposited with six domestic and foreign highly rated financial institutions and cash equivalents are invested in highly rated money market funds. Periodically, such balances may be in excess of federally insured limits. Marketable securities consist of highly liquid corporate bonds, commercial paper and certificates of deposits that comply with the Company’s minimum credit rating policy.

 

Except for the Company’s single largest advertising agency customer noted below, credit risk with respect to accounts receivable is dispersed due to the large number of advertising customers. Collateral is not required for accounts receivable. The Company performs ongoing credit evaluations of customers’ financial condition and periodically evaluates its outstanding accounts receivable and establishes an allowance for doubtful accounts based on the Company’s historical experience, the current aging and circumstances of accounts receivable and general industry and economic conditions. Accounts receivable are written off by the Company when it has been determined that all available collection avenues have been exhausted. Historically, write-offs for uncollectible accounts have not been significant. However if circumstances change, higher than expected bad debts may result in future write-offs that are greater than the Company’s estimates.

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

One advertising agency customer accounted for 4% and 7% of the Company’s revenue for the three and nine months ended September 30, 2014, respectively, and accounted for 23% and 16% of the Company’s revenue for the three and nine months ended September 30, 2013, respectively. The same customer accounted for 4% and 17% of the Company’s accounts receivable as of September 30, 2014 and December 31, 2013, respectively.

 

The following table presents the changes in the allowance for doubtful accounts (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Allowance for doubtful accounts:
Balance – beginning of period		$	1,305			$	871			$	1,056			$	563
Provision for bad debts			183				38				432				346
Balance – end of period		$	1,488			$	909			$	1,488			$	909

 

The Company wrote-off $0.2 million of doubtful accounts as uncollectible during the three and nine months ended September 30, 2014. The Company did not write-off any doubtful accounts as uncollectible during the three and nine months ended September 30, 2013.

 

3.	Fair Value of Financial Instruments

 

The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value in the following hierarchy:

 

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

 

Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3 – Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The carrying amounts of accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.

 

Prior to the conversion of the Company’s warrant liability on August 12, 2013, its preferred stock warrants were recorded at fair value. On August 12, 2013, upon the closing of the Company’s IPO, the warrants were converted from warrants to purchase preferred stock to warrants to purchase common stock and the liability at their then fair value of $0.4 million was reclassified to additional paid-in capital. Prior to August 12, 2013, all changes in the fair value of the warrants were recorded in “Other income (expense), net” in the consolidated statements of operations. The fair value of the warrants outstanding, which were remeasured to fair value on a recurring basis at each balance sheet date, was determined using the Black-Scholes option pricing model. The Company recorded other income of $35,000 and other expense of $0.1 million in the three and nine months ended September 30, 2013, respectively, related to the fair value adjustment of its warrants.

 

Marketable securities with final maturities of at least three months but no more than 12 months from the date of purchase are classified as short-term and marketable securities with final maturities of more than one year but less than two years from the date of purchase are classified as long-term. The Company’s marketable securities are classified as available-for-sale and consist of high quality, investment grade securities from diverse issuers with predetermined minimum credit ratings. The Company values these securities based on pricing from vendors who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, the Company classifies all of its marketable securities as having Level 2 inputs. The valuation techniques used to measure the fair value of the Company’s marketable securities having Level 2 inputs were derived from market prices that are corroborated by observable market data and quoted market prices for similar instruments. 

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

The following tables present information about the Company’s money market funds and marketable securities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

 

		Fair Value Measurements as of September 30, 2014
		Level 1				Level 2				Level 3				Total
Money market funds		$	10,267			$	–			$	–			$	10,267
Marketable securities:
Corporate bonds		$	–			$	28,688			$	–			$	28,688
Commercial paper			–				999				–				999
Total marketable securities		$	–			$	29,687			$	–			$	29,687

 

 

		Fair Value Measurements as of December 31, 2013
		Level 1				Level 2				Level 3				Total
Money market funds		$	18,371			$	–			$	–			$	18,371
Marketable securities:
Corporate bonds		$	–			$	17,885			$	–			$	17,885
Commercial paper			–				2,396				–				2,396
Certificates of deposit			–				1,200				–				1,200
Total marketable securities		$	–			$	21,481			$	–			$	21,481

 

4.	Cash, Cash Equivalents and Marketable Securities

 

The Company’s cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase. The Company has cash and cash equivalents held on its behalf by a third party of $0.2 million as of September 30, 2014 and December 31, 2013. Short- and long-term marketable securities are comprised of highly liquid available-for-sale financial instruments (primarily corporate bonds, commercial paper and certificates of deposit) with final maturities of at least three months but no more than 24 months from the date of purchase. The cost, gross unrealized gains and losses and fair value of the Company’s marketable securities consisted of the following as of September 30, 2014 and December 31, 2013 (in thousands):

 

		Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 30, 2014:
Cash		$	22,349			$	—			$	—			$	22,349
Cash equivalents:
Money market funds			10,267				—				—				10,267
Total cash and cash equivalents			32,616				—				—				32,616
Marketable securities:
Corporate bonds			28,705				5				(22	)			28,688
Commercial paper			999				—				—				999
Total marketable securities			29,704				5				(22	)			29,687
Total cash, cash equivalents and marketable securities		$	62,320			$	5			$	(22	)		$	62,303

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

		Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2013:
Cash		$	24,255			$	—			$	—			$	24,255
Cash equivalents:
Money market funds			18,371				—				—				18,371
Total cash and cash equivalents			42,626				—				—				42,626
Marketable securities:
Corporate bonds			17,892				3				(10	)			17,885
Commercial paper			2,396				—				—				2,396
Certificates of deposit			1,200				—				—				1,200
Total marketable securities			21,488				3				(10	)			21,481
Total cash, cash equivalents and marketable securities		$	64,114			$	3			$	(10	)		$	64,107

 

Unrealized gains and losses, net of taxes, are included in “Accumulated other comprehensive loss,” which is reflected as a separate component of stockholders’ equity on the condensed consolidated balance sheets.

 

5.	Goodwill and Intangible Assets

 

The intangible assets detail for the periods presented (dollars in thousands):

 

		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Weighted-Average Remaining Life (years)
September 30, 2014:
Developed technology		$	2,950			$	(1,487	)		$	1,463				2.3
Customer relationships			104				(70	)			34				1.7
Non-compete agreement			53				(53	)			-				-
		$	3,107			$	(1,610	)		$	1,497
December 31, 2013:
Developed technology		$	2,950			$	(951	)		$	1,999				2.7
Customer relationships			104				(54	)			50				2.4
Non-compete agreement			53				(53	)			-				-
		$	3,107			$	(1,058	)		$	2,049

 

Amortization expense was $0.2 million for both the three-month periods ended September 30, 2014 and 2013, and was $0.6 million for both the nine-month periods ended September 30, 2014 and 2013. Amortization expense related to developed technology is included as a component of “Cost of revenue” in the condensed consolidated statements of operations. Goodwill remained unchanged at $3.9 million as of September 30, 2014 and December 31, 2013.

 

6.	Commitments and Contingencies

 

Leases

 

The Company leases office facilities under various non-cancelable operating leases that expire through August 2024. Rent expense under operating leases totaled $0.8 million and $1.9 million for the three and nine months ended September 30, 2014, respectively, and totaled $0.5 million and $1.6 million for the three and nine months ended September 30, 2013, respectively. In addition, the Company leases certain equipment and computers under capital lease arrangements that expire at various dates through September 2015.

 

Purchase Commitments

 

During the normal course of business, to secure adequate ad inventory and impressions for its sales arrangements, the Company enters into agreements with digital media property owners that require the purchase of a minimum number of impressions on a monthly or quarterly basis. Purchase commitments as of September 30, 2014 expire on various dates through December 2014.

 

Legal Proceedings

 

From time to time the Company may be a party to various litigation matters incidental to the conduct of its business. There is no pending or threatened legal proceeding to which the Company is currently a party that, in management’s opinion, is likely to have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, or cash flows.

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

Indemnification Agreements

 

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.

 

While matters may arise as a result of claims under the indemnification agreements disclosed above, the Company, at this time, is not aware of claims under indemnification arrangements that could have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, or cash flows.

 

7.	Stockholders’ Equity

 

Initial Public Offering

 

On August 12, 2013, the Company closed its IPO in which it sold 5,125,000 shares of common stock at a public offering price of $9.00 per share. The aggregate offering price for shares sold in the offering was approximately $46.1 million. Net proceeds were approximately $40.0 million, after deducting underwriting discounts and commissions of $3.2 million and offering expenses of $2.9 million.

 

Preferred Stock

 

In association with our IPO, our board of directors authorized the Company to issue up to 20,000,000 shares of preferred stock, par value $0.001 per share. As of September 30, 2014 and December 31, 2013, no shares of preferred stock were outstanding.

 

Common Stock

 

Immediately following the closing of the IPO, the Company’s certificate of incorporation was amended to authorize 20,000,000 shares of undesignated preferred stock and 200,000,000 shares of common stock.

 

As of September 30, 2014 and December 31, 2013, there were 33,011,480 and 31,933,862 shares of common stock issued and outstanding, respectively.

 

The following table summarizes common stock activity:

 

		Number of Shares
Outstanding at December 31, 2013			31,933,862
Common stock issued in association with option exercises			761,872
Common stock issued in association with restricted stock lapsing			422
Common stock issued in association with employee stock purchase plan			315,324
Outstanding at September 30, 2014			33,011,480

 

Treasury Stock

 

As of September 30, 2014 and December 31, 2013, the Company had 66,666 shares of treasury stock related to the acquisition of Crowd Science, Inc. Treasury stock is carried at cost and could be re-issued if the Company determined to do so.

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

Shares Reserved for Future Issuance

 

As of September 30, 2014 and December 31, 2013, the Company has reserved the following shares of common stock for future issuance:

 

	As of September 30, 2014		As of December 31, 2013
Common stock reserved:
Common stock options	5,060,632		5,713,106
Restricted stock units	988,100		38,124
Warrants to purchase common stock	24,838		24,838
Shares available for future issuance under the 2013 Plan	1,431,913		936,131
Employee stock purchase plan	504,014		500,000
	8,009,497		7,212,199

 

Equity Incentive Plans

 

The Company’s 2004 Stock Plan (the “2004 Plan”), authorized the Company to grant restricted stock awards or stock options to employees, directors and consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of fair market value for non-statutory options. Option vesting schedules were determined by the board of directors at the time of issuance and they generally vest at 25% on the first anniversary of the grant (or the employment or service commencement date) and monthly over the next 36 months. Options generally expire ten years from the date of grant unless the optionee is a 10% stockholder, in which case the term will be five years from the date of grant. Unvested options exercised are subject to the Company’s repurchase right. Upon the effective date of the registration statement related to the Company’s IPO, the 2004 Plan was amended to cease the grant of any additional awards thereunder, although the Company will continue to issue common stock upon the exercise of stock options previously granted under the 2004 Plan.

 

In July 2013, the Company adopted a 2013 Equity Incentive Plan (the “2013 Plan”) which became effective on August 6, 2013. The 2013 Plan serves as the successor equity compensation plan to the 2004 Plan. The 2013 Plan terminates on July 23, 2023. The 2013 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation rights, performance stock awards, restricted stock units and stock bonus awards to employees, directors and consultants. Stock options granted must be at prices not less than 100% of the fair market value at date of grant. Option vesting schedules are determined by the Company at the time of issuance and they generally vest at 25% on the first anniversary of the grant (or the employment or service commencement date) and monthly over the next 36 months. Options generally expire ten years from the date of grant unless the optionee is a 10% stockholder, in which case the term will be five years from the date of grant. Unvested options exercised are subject to the Company’s repurchase right. The Company originally reserved 2,000,000 shares of its common stock for issuance under the 2013 Plan, and shares reserved for issuance increase January 1 of each year by the lesser of (i) 5% of the number of shares issued and outstanding on December 31 immediately prior to the date of increase or (ii) such number of shares as may be determined by the board of directors. On January 1, 2014, shares reserved for issuance under the 2013 Plan increased by 1,596,693.

 

Prior to the IPO, the fair value of the common stock underlying the Company’s stock options was determined by the Company’s board of directors, which intended all options granted to be exercisable at a price per share not less than the per-share fair value of the Company’s common stock underlying those options on the date of grant. The valuations of the Company’s common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions the Company used in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, the Company’s board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the Company’s common stock as of the date of each option grant. Subsequent to the IPO, the fair value of the common stock underlying the Company’s stock options is the closing price of the Company’s stock as of the grant date.

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

The following table summarizes option award activity:

 

		Number of Shares (in thousands)				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Life (years)				Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2013			5,713			$	5.53				7.31			$	13,704
Granted			630			$	5.49
Exercised			(762	)		$	3.77
Cancelled and forfeited			(520	)		$	7.48
Balance at September 30, 2014			5,061			$	5.59				7.34			$	3,398
Vested and exercisable as of September 30, 2014			2,803			$	4.35				6.25			$	3,259
Vested as of September 30, 2014 and expected to vest thereafter (1)			4,693			$	5.45				7.22			$	3,388

 

(1)

Options expected to vest reflect an estimated forfeiture rate.

 

The weighted average grant date fair value of options granted was $3.61 and $3.80 for the three and nine months ended September 30, 2014, respectively, and the weighted average grant date fair value of options granted was $6.41 and $5.89 for the three and nine months ended September 30, 2013, respectively. The aggregate intrinsic value represents the difference between the market value of the Company’s common stock and the exercise price of outstanding in-the-money options. The total intrinsic value of options exercised was approximately $0.3 million and $1.9 million for the three and nine months ended September 30, 2014, and was $0.9 million and $1.3 million for the three and nine months ended September 30, 2013, respectively.

 

The following table summarizes restricted stock unit activity:

		Number of Shares (in thousands)				Weighted Average Fair Value at Grant				Weighted Average Remaining Contractual Life (years)				Aggregate Intrinsic Value (1) (in thousands)
Balance at December 31, 2013			38			$	8.15				2.13			$	284
Granted			1,051			$	6.02
Released			(1	)		$	7.24
Forfeited			(100	)		$	6.01
Balance at September 30, 2014			988			$	6.10				1.48			$	4,941

 

(1)

The intrinsic value of RSUs is based on the Company’s closing stock price as reported by the New York Stock Exchange on September 30, 2014.

 

Employee Stock Purchase Plan

 

In July 2013, the Company adopted a 2013 Employee Stock Purchase Plan (the “2013 Purchase Plan”) that became effective on August 6, 2013. The 2013 Purchase Plan is designed to enable eligible employees to periodically purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period. Purchases are accomplished through participation in discrete offering periods. The 2013 Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. The Company originally reserved 500,000 shares of its common stock for issuance under the 2013 Purchase Plan and shares reserved for issuance increase January 1 of each year by the lesser of (i) a number of shares equal to 1% of the total number of outstanding shares of common stock on December 31 immediately prior to the date of increase or (ii) such number of shares as may be determined by the board of directors. On January 1, 2014, shares reserved for issuance under the 2013 Purchase Plan increased by 319,338. A total of 315,324 shares were purchased by employees under the Company’s ESPP for the nine months ended September 30, 2014. There were no shares purchased by employees under the 2013 Purchase Plan for the twelve months ended December 31, 2013.

 

The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights were as follows:

 

	Three Months Ended September 30, 2014		Three Months Ended September 30, 2013		Nine Months Ended September 30, 2014		Nine Months Ended September 30, 2013
Expected term (years)	0.50		0.48		0.50		0.48
Volatility	80%		80%		80%		80%
Risk-free interest rate	0.36%		0.08%		0.22%		0.08%
Dividend yield	—		—		—		—

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

Stock-Based Compensation

 

The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation including the expected term (weighted-average period of time that the options granted are expected to be outstanding), volatility of the Company’s common stock, a risk-free interest rate, expected dividends, and the estimated forfeitures of unvested stock options.

 

To the extent actual results differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. The Company uses the simplified calculation of expected life, and volatility is based on an average of the historical volatilities of the common stock of a group of entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Expected forfeitures are based on the Company’s historical experience. The Company currently has no history or expectation of paying cash dividends on common stock.

 

The fair value of option grants is determined using the Black-Scholes option valuation model with the following assumptions:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Expected term (years)			6.00			5.51 – 6.08					6.00			5.51 – 6.12
Volatility			80	%			80	%			80	%			80	%
Risk-free interest rate			1.95	%			1.50% - 1.72	%			1.89% - 2.02	%			1.02% - 1.72	%
Dividend yield			—				—				—				—

 

The following table summarizes the effects of stock-based compensation related to vesting stock-based awards included in the Company’s accompanying condensed consolidated statements of operations (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Cost of revenue		$	98			$	46			$	245			$	107
Sales and marketing			794				503				2,022				1,186
Research and development (1)			158				86				351				223
General and administrative			635				537				1,551				992
Total employee stock-based compensation		$	1,685			$	1,172			$	4,169			$	2,508

 

(1)

Excludes $83,000 and $259,000 for the three and nine months ended September 30, 2014, respectively, and $68,000 and $145,000 for the three and nine months ended September 30, 2013, respectively, that was capitalized as part of internal-use software development costs.

 

401(k) Plan

 

The Company’s 401(k) Plan (the “401(k) Plan”) is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit of $17,500 for calendar years 2013 and 2014. The Company began matching employee’s contributions in April 2014. The Company will match 50% of each participating employee’s contributions up to a maximum of 6% of each employee’s eligible earnings with an annual maximum match of $2,500 per employee per year.

 

8.	Net Loss per Share

 

Basic and diluted net loss per common share is presented in conformity with the two-class method required for participating securities. Immediately prior to the closing of the Company’s IPO in August 2013, all shares of outstanding convertible preferred stock automatically converted into shares of the Company’s common stock. Prior to the conversion of the convertible preferred stock, holders of Series A-1, Series A-2, Series B, Series C, Series D and Series D-1 convertible preferred stock were entitled to receive noncumulative dividends when and if declared at the annual rate of 8% ($0.10500, $0.20130, $0.54760, $0.28592, $1.00496 and $1.31370 per share per annum, respectively) payable prior, and in preference to, any dividends on any shares of the Company’s common stock. In the event a dividend was paid on common stock, the holders of Series A-1, Series A-2, Series B, Series C, Series D and Series D-1 convertible preferred stock were entitled to a proportionate share of any such dividend as if they were holders of common stock (on an as-if converted basis). The holders of convertible preferred stock did not have a contractual obligation to share in the losses of the Company, accordingly, basic and diluted net income (loss) per share has not been computed using the two class method.

 

 

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

Under the two-class method, net income (loss) attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income (loss) less current period convertible preferred stock non-cumulative dividends, between common stock and convertible preferred stock. In computing diluted net income (loss), undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. Basic net income (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding, including potential dilutive common shares assuming the dilutive effect of outstanding stock options using the treasury stock method.

 

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

 

Net Loss per Share Attributable to Common Stockholders		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Numerator:
Net loss		$	(3,028	)		$	(627	)		$	(10,657	)		$	(5,058	)
Denominator:
Weighted-average shares used in computing net loss per share:
Basic			32,788				21,054				32,436				10,305
Weighted-average effect of potentially dilutive shares:
Stock options			—				—				—				—
Restricted stock units			—				—				—				—
Convertible preferred stock warrants			—				—				—				—
Convertible common stock warrants			—				—				—				—
Diluted			32,788				21,054				32,436				10,305
Net loss per share:
Basic		$	(0.09	)		$	(0.03	)		$	(0.33	)		$	(0.49	)
Diluted		$	(0.09	)		$	(0.03	)		$	(0.33	)		$	(0.49	)

 

The following weighted-average equity shares were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Stock options			3,478				1,792				3,344				1,792
Restricted stock units			142				—				87				—
Convertible preferred stock warrants			—				—				—				—
Convertible common stock warrants			19				—				20				—
Employee stock purchase plan			42				—				30				—

 

9.	Related Party Transactions

 

During the three and nine months ended September 30, 2014, the Company recorded costs for a digital media property owner that was also an investor in the Company's Series D-1 convertible preferred stock, of $0.2 million and $0.9 million, respectively, associated with the acquisition of ad inventory. During the three and nine months ended September 30, 2013, the Company recorded costs for this digital media property owner of $0.3 million and $0.8 million, respectively. At September 30, 2014 and December 31, 2013, the Company had $44,000 and $0.4 million, respectively, for this related party included in accrued digital media property owner costs in the accompanying condensed consolidated financial statements. The Company believes that its transactions with related parties are carried out on an arm's-length basis on terms that are consistent with similar transactions with other vendors.

 

  

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

 

10.

Segments

 

The Company considers operating segments to be components of the Company in which separate financial information is available that is reviewed regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in evaluating performance. The chief operating decision maker for the Company is the Chief Executive Officer who reviews financial information at a consolidated level for purposes of allocating resources and evaluating financial performance. The Company has only one business activity and one operating and reporting segment. There are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated level. The following table summarizes total revenue generated through sales personnel employed in their respective locations (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Domestic		$	36,710			$	32,146			$	102,611			$	87,307
Foreign			6,283				4,011				18,060				9,782
Total revenue		$	42,993			$	36,157			$	120,671			$	97,089

 

The Company’s long-lived assets are primarily located in the United States.

 

 

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

 

You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and related notes thereto and the Management’s Discussion and Analysis and Results of Operations for the year ended December 31, 2013 appearing in our Annual Report on Form 10-K filed with the SEC on March 27, 2014.

 

Forward Looking Information

 

This Quarterly Report on Form 10-Q including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The statements that are not purely historical fact are forward-looking statements and are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A of this Quarterly Report on Form 10Q. Furthermore, such forward-looking statements speak only as of the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Unless expressly indicated or the context requires otherwise, the terms “YuMe,” “Company,” “Registrant,” “we,” “us” and “our” in this document refer to YuMe, Inc., and, where appropriate, its wholly-owned subsidiaries.

 

Overview

 

We are a leading independent provider of digital video advertising solutions that are purpose-built for large brand advertisers, advertising agencies, and digital media properties. Through a sophisticated platform of proprietary embedded software, data science and machine learning algorithms, we deliver TV-scale video advertising campaigns to relevant, brand-receptive digital audiences. We aggregate these audiences across a wide range of Internet-connected devices by providing global digital media properties with software that monetizes their professionally produced content and applications with our advertising campaigns. Our industry leadership is reflected in our wide audience reach, large customer base, and scale in data derived from our large embedded software base.

 

For our network of advertising customers, we overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where audiences use an increasing variety of Internet-connected devices to access thousands of online and mobile websites and applications. Our solutions deliver video advertising campaigns seamlessly across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. In addition, our platform optimizes campaign results to metrics that are relevant to brand advertisers, such as brand awareness, message recall, brand favorability and purchase intent.

 

For our global digital media property owners, we offer software that delivers digital video advertisements to their audiences. We access data from this software and we apply our data science capabilities to target those audiences that will be relevant to particular advertisers. In combination, these capabilities allow us to deliver ads to audiences that we expect to be receptive to specific brand messages, while driving better monetization for digital media property owners.

 

We generate revenue primarily by delivering digital video advertisements on Internet-connected devices. Our ads run when users choose to view video content on their devices. Advertising customers submit ad insertion orders to us and we fulfill those orders by delivering their digital video advertisements to audiences available through digital media properties, a process that we refer to as an advertising campaign. We are typically paid on a cost per thousand basis (“CPM”), of which we generally pay digital media properties a negotiated percentage. Our customers primarily consist of large global brands and their advertising agencies. In the three and nine months ended September 30, 2014, our customers included 65 and 77, respectively, of the top 100 U.S. advertisers as ranked by Advertising Age magazine in 2013 (“the AdAge 100”), such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald's.

 

The core of our business relies on our sophisticated platform that encompasses customized embedded software, advertising management, and data science capabilities. Our YuMe SDKs are embedded by our digital media property owners and collect dozens of data elements that we use for our advanced audience modeling algorithms that continuously improve our ability to optimize campaigns around key brand metrics. Our Placement Quality Index (“PQI”) inventory scoring system leverages our YuMe SDK and other data sources through algorithms to assess the quality of ad placements and optimize placements to maximize brand advertising results. In addition, our Audience Amplifier machine-learning tool uses those brand results in its correlative data models to find audiences that we expect to be receptive to specific brand messages.

 

 

Over our nine-year operating history we have amassed a vast amount of data derived from our large software installed base of YuMe SDKs that are embedded in online and mobile websites and entertainment applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices. This allows us to deliver television-like ads, enhanced and customized for each specific device type, and collect valuable advertisement viewership data. We collect billions of data points each year from ad impressions we deliver. As we grow our audience and advertiser footprint, we are able to collect even more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions and driving additional adoption.

 

In July 2013, our board of directors and stockholders approved an amendment to our then current amended and restated certificate of incorporation. The amendment provided for a 1-for-6 reverse stock split of the outstanding common stock, effective July 24, 2013. Accordingly, (i) every six shares of common stock have been combined into one share of common stock, (ii) the number of shares of common stock into which each outstanding option or warrant to purchase common stock is exercisable, as the case may be, have been proportionately decreased on a 1-for-6 basis, (iii) the exercise price for each such outstanding option or warrant to purchase common stock has been proportionately increased on a 6-for-1 basis, and (iv) the conversion ratio for each share of preferred stock outstanding was proportionately reduced on a 1-for-6 basis. All of the share numbers, share prices, and exercise prices have been adjusted within our consolidated financial statements, on a retroactive basis, to reflect this 1-for-6 reverse stock split. We paid cash in lieu of any fractional shares to which a holder of common stock would otherwise be entitled as a result of the reverse stock split.

 

On August 12, 2013, we closed the IPO of our common stock. In the IPO, we sold 5,125,000 shares of our common stock at a public offering price of $9.00 per share. Net proceeds were approximately $40.0 million, after deducting underwriting discounts and commissions of $3.2 million and offering expenses of $2.9 million. Upon the closing of the IPO, all outstanding shares of our convertible preferred stock automatically converted into 21,840,537 shares of common stock and all outstanding warrants to purchase convertible preferred stock converted into warrants to purchase 53,983 shares of our common stock.

 

Critical Accounting Policies and Estimates

 

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated 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.

 

We believe that the assumptions and estimates associated with revenue recognition, website and internal-use software development costs, business combinations, income taxes and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

 

For further information on all of our critical accounting policies and estimates, refer to our 2013 Annual Report on Form 10-K filed with Securities and Exchange Commission on March 27, 2014.

 

Recent Pronouncements

 

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that provided explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward or a tax credit carryforward exists. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance became effective on January 1, 2014 and should be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company adopted this guidance prospectively in fiscal 2014 and the adoption did not impact its consolidated financial statements.

 

In May 2014, the FASB issued an accounting standard update related to revenue recognition. This new guidance will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for YuMe, Inc. beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the impact of adopting this new accounting standard update on its consolidated financial statements.

 

 

In June 2014, the FASB issued an accounting standard update related to stock compensation. The new guidance requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This guidance further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company is evaluating the impact, if any, of adopting this new accounting guidance on its consolidated financial statements.

 

Results of Operations

 

The following tables set forth our results of operations for the periods presented as a percentage of revenue for those periods (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results. These tables include all adjustments, consisting only of normal recurring adjustments that we consider for the fair statement of our consolidated financial position and operating results for the quarters presented. Seasonality has caused, and is likely to continue to cause fluctuations in our quarterly results.

 

		Three Months Ended September 30,																Nine Months Ended September 30,
		2014								2013								2014								2013
		(dollars in thousands)
Condensed Consolidated Statements of Operations Data:
Revenue		$	42,993				100.0	%		$	36,157				100.0	%		$	120,671				100.0	%		$	97,089				100.0	%
Cost of revenue			22,674				52.7				18,968				52.5				63,535				52.7				52,179				53.7
Gross profit			20,319				47.3				17,189				47.5				57,136				47.3				44,910				46.3
Operating expenses
Sales and marketing			16,353				38.0				11,735				32.5				47,673				39.5				32,845				33.8
Research and development			1,582				3.7				1,165				3.2				4,027				3.3				3,082				3.2
General and administrative			5,332				12.4				4,918				13.6				15,629				13.0				13,586				14.0
Total operating expenses			23,267				54.1				17,818				49.3				67,329				55.8				49,513				51.0
Loss from operations			(2,948	)			(6.9	)			(629	)			(1.7	)			(10,193	)			(8.4	)			(4,603	)			(4.7	)
Loss before income taxes			(3,295	)			(7.7	)			(564	)			(1.6	)			(10,732	)			(8.9	)			(4,896	)			(5.0	)
Net loss		$	(3,028	)			(7.0	)%		$	(627	)			(1.7	)%		$	(10,657	)			(8.8	)%		$	(5,058	)			(5.2	)%

 

Revenue

 

We principally derive revenue from advertising solutions priced on a CPM basis and measured by the number of advertising impressions delivered on digital media properties. A substantial majority of our contracts with customers take the form of ad insertion orders placed by advertising agencies on behalf of their brand advertiser clients, which are typically one to three months in duration. Occasionally, we enter into longer term contracts with customers.

 

We count direct advertising customers in accordance with the following principles: we count (i) each advertiser, not the advertising agencies through which its ad insertion orders may be placed, as the customer; and (ii) entities that are part of the same corporate structure are counted as a single customer. We also recognize immaterial amounts of other revenue (i) that are paid by digital media property owners, including platform fees, professional service fees and ad serving fees and (ii) from intermediaries that have relationships with advertising agencies and advertisers. In calculating revenue per direct advertising customer, we exclude this other revenue.

 

 

 

Our revenue tends to fluctuate based on seasonal factors that affect the advertising industry. For example, many advertisers devote the largest portion of their budgets to the fourth quarter of the calendar year, to coincide with increased holiday and year-end purchasing activities. Historically, the fourth quarter of the year reflects the highest advertising activity and the first quarter reflects the lowest level of such activity.

 

			Three Months Ended  September 30,								Change								Nine Months Ended  September 30,								Change
			2014				2013				$				%				2014				2013				$				%
			(dollars in thousands)
Revenue		$	42,993			$	36,157			$	6,836				18.9	%		$	120,671			$	97,089			$	23,582				24.3	%

 

For the three months ended September 30, 2014, revenue increased $6.8 million, or 18.9%, compared to the three months ended September 30, 2013. The increase was primarily due to an increase of $6.7 million in net advertising sales. The increase in net advertising sales was primarily driven by an increase in the number of advertising customers, including those located in international markets we operate in and others we have recently entered. We had 474 advertising customers for the three months ended September 30, 2014, an increase of 41.1%, compared to 336 for the three months ended September 30, 2013. The average revenue per advertising customer for the three months ended September 30, 2014 was $89,000, a decrease of 16.1%, compared to $106,000 for the three months ended September 30, 2013. The decrease in average revenue per advertising customer was primarily the result of the increase in the number of new advertising customers, particularly new international customers, which tend to start out deploying smaller digital video advertising budgets through our solutions. Our top 20 advertising customers for the three months ended September 30, 2014 accounted for $17.0 million, or 39.6%, of our revenue, compared to $17.8 million, or 49.0%, of our revenue for the three months ended September 30, 2013.

 

For the nine months ended September 30, 2014, revenue increased $23.6 million, or 24.3%, compared to the nine months ended September 30, 2013. The increase was primarily due to an increase of $23.3 million in net advertising sales. The increase in net advertising sales was primarily driven by an increase in the number of advertising customers, including those located in international markets we operate in and others we have recently entered. We had 714 advertising customers for the nine months ended September 30, 2014, an increase of 49.1%, compared to 479 for the nine months ended September 30, 2013. The average revenue per advertising customer for the nine months ended September 30, 2014 was $166,000, a decrease of 16.6%, compared to $199,000 for the nine months ended September 30, 2013. The decrease in average revenue per advertising customer was primarily the result of the increase in the number of new advertising customers, particularly new international customers, which tend to start out deploying smaller digital video advertising budgets through our solutions. Additionally, other revenue increased $0.3 million primarily due to an increase in platform licensing revenue. Our top 20 advertising customers for the nine months ended September 30, 2014 accounted for $46.1 million, or 38.2%, of our revenue, compared to $44.7 million, or 46.0%, of our revenue for the nine months ended September 30, 2013.

 

Cost of Revenue and Gross Profit

 

Our cost of revenue primarily consists of amounts incurred with digital media property owners, typically under revenue-sharing arrangements. We refer to these costs as traffic acquisition costs. Generally, we incur traffic acquisition costs in the period the advertising impressions are delivered. In certain circumstances, we incur costs based on minimum guaranteed impressions. Cost of revenue also includes ad delivery costs, such as labor and related costs, depreciation and amortization related to acquired technologies, internally developed software and data center assets, and Internet access costs. These expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized. We expect that cost of revenues, including our traffic acquisition costs, may increase as a percentage of revenue in the near term.

 

			Three Months Ended  September 30,								Change								Nine Months Ended  September 30,								Change
			2014				2013				$				%				2014				2013				$				%
			(dollars in thousands)
Cost of revenue		$	22,674			$	18,968			$	3,706				19.5	%		$	63,535			$	52,179			$	11,356				21.8	%
Percent of revenue			52.7	%			52.5	%											52.7	%			53.7	%
Gross profit		$	20,319			$	17,189			$	3,130				18.2	%		$	57,136			$	44,910			$	12,226				27.2	%
Percent of revenue			47.3	%			47.5	%											47.3	%			46.3	%

  

For the three months ended September 30, 2014, cost of revenue increased $3.7 million, or 19.5%, compared to the three months ended September 30, 2013. The increase was primarily attributable to an increase of $3.2 million in traffic acquisition, third-party service and delivery, and ad delivery costs as a result of the increase in revenue, and a $0.5 million increase in other costs of revenues. For the three months ended September 30, 2014, cost of revenue, as a percentage of revenue, increased 1.2%, to 52.7%, compared to 52.5% for the three months ended September 30, 2013, primarily as a result of the increase in traffic acquisition costs as a percentage of revenue and due to an increase in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of an increase in the number of employees within our cost of revenue function.

 

For the nine months ended September 30, 2014, cost of revenue increased $11.4 million, or 21.8%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to an increase of $10.1 million in traffic acquisition costs, third-party service and delivery, and ad delivery costs as a result of the increase in revenue, and a $1.1 million increase in other costs of revenues. For the nine months ended September 30, 2014, cost of revenue, as a percentage of revenue, decreased 1.0%, to 52.7%, compared to 53.7% for the nine months ended September 30, 2013.

 

 

Sales and Marketing

 

We sell to our customers primarily through our direct sales force personnel who have established relationships with major ad agencies and direct relationships with advertisers. Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel and entertainment expenses, and incentive compensation for our sales and marketing employees. Sales and marketing expenses also include promotional, advertising and public relations costs, as well as depreciation, facilities and other supporting overhead costs. We expect sales and marketing expenses to increase as we hire additional employees to expand our sales force and to support our marketing initiatives, and to decline as a percentage of revenue over time.

 

			Three Months Ended September 30,								Change								Nine Months Ended  September 30,								Change
			2014				2013				$				%				2014				2013				$				%
			(dollars in thousands)
Sales and marketing		$	16,353			$	11,735			$	4,618				39.4	%		$	47,673			$	32,845			$	14,828				45.1	%
Percent of revenue			38.0	%			32.5	%											39.5	%			33.8	%

 

For the three months ended September 30, 2014, sales and marketing expenses increased $4.6 million, or 39.4%, compared to the three months ended September 30, 2013. The increase was primarily attributable to an increase of $3.8 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, primarily as a result of an increase in the number of employees within our sales and marketing organization as we expanded such organization, both domestically and internationally. Additionally, other departmental expenses, including advertising, promotions, tradeshows, sponsorships and consulting services, increased $0.8 million. For the three months ended September 30, 2014, sales and marketing expenses, as a percentage of revenue, increased by 5.5%, to 38.0%, compared to 32.5% for the three months ended September 30, 2013, primarily as a result of the increase in the number of sales and marketing employees.

 

For the nine months ended September 30, 2014, sales and marketing expenses increased $14.8 million, or 45.1%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to an increase of $12.9 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, primarily as a result of an increase in the number of employees within our sales and marketing organization as we expanded such organization, both domestically and internationally. Additionally, other departmental expenses, including advertising, promotions, tradeshows, sponsorships and consulting services, increased $1.9 million. For the nine months ended September 30, 2014, sales and marketing expenses, as a percentage of revenue, increased by 5.7%, to 39.5%, compared to 33.8% for the nine months ended September 30, 2013, primarily as a result of the increase in the number of sales and marketing employees.

 

Research and Development

 

We engage in research and development efforts to create new, and enhance our existing, data-science capabilities and proprietary technologies. Our research and development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product development and information technology personnel. Research and development expenses also include outside services and consulting, depreciation, facilities and other overhead costs. We capitalize a portion of our research and development costs attributable to internally developed software. We expect research and development expenses to increase as we hire additional employees to support our product initiatives, and to decline as a percentage of revenue over time.

 

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
			2014				2013				$				%				2014				2013				$			%
			(dollars in thousands)
Research and development		$	1,582			$	1,165			$	417				35.8	%		$	4,027			$	3,082			$	945				30.7	%
Percent of revenue			3.7	%			3.2	%											3.3	%			3.2	%

 

For the three months ended September 30, 2014, research and development expenses increased $0.4 million, or 35.8%, compared to the three months ended September 30, 2013. The increase was primarily attributable to an increase of $0.4 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of an increase in the number of employees within our research and development organization as we expanded our research and development organization, both domestically and internationally. For the three months ended September 30, 2014, research and development expenses, as a percentage of revenue, increased by 0.5%, to 3.7%, compared to 3.2% for the three months ended September 30, 2013, primarily as a result of the increase in the number of research and development employees.

 

 

For the nine months ended September 30, 2014, research and development expenses increased $0.9 million, or 30.7%, compared to the nine months ended September 30, 2013. The increase was attributable to an increase of $0.5 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of an increase in the number of employees within our research and development organization as we expanded our research and development organization, both domestically and internationally. Additionally, amortization and depreciation expense increased $0.3 million primarily related to purchases of computer equipment and software. For the nine months ended September 30, 2014, research and development expenses, as a percentage of revenue, increased by 0.1%, to 3.3%, compared to 3.2% for the nine months ended September 30, 2013, primarily as a result of the increase in the number of research and development employees.

  

 General and Administrative

 

Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, human resources and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. We expect our general and administrative expenses to increase as we expand our financial, accounting, human resources, information systems and legal personnel and resources to support our public reporting requirements, and to decrease as a percentage of revenue over time.

 

			Three Months Ended September 30,								Change								Nine Months Ended  September 30,								Change
			2014				2013				$				%				2014				2013				$				%
			(dollars in thousands)
General and administrative		$	5,332			$	4,918			$	414				8.4	%		$	15,629			$	13,586			$	2,043				15.0	%
Percent of revenue			12.4	%			13.6	%											13.0	%			14.0	%

 

For the three months ended September 30, 2014, general and administrative expenses increased $0.4 million, or 8.4%, compared to the three months ended September 30, 2013. The increase was primarily attributable to a $0.4 million increase in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of an increase in the number of employees within our general and administrative organization hired to support operating as a public company and to support the growth in our business. For the three months ended September 30, 2014, general and administrative expenses, as a percentage of revenue, decreased by 1.2%, to 12.4%, compared to 13.6% for the three months ended September 30, 2013, primarily as a result of the increase in revenue.

 

For the nine months ended September 30, 2014, general and administrative expenses increased $2.0 million, or 15.0%, compared to the nine months ended September 30, 2013. The increase was primarily attributable to a $2.8 million increase in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of an increase in the number of employees within our general and administrative organization. Additionally, other departmental expenses, including communications and insurance expenses, increased $1.0 million associated with the increase in the number of employees and additional costs associated with operating as a public company. Partially offsetting this increase were decreases of $0.8 million in audit fees and $1.2 million in consulting services primarily related to our initial public offering in August 2013. For the nine months ended September 30, 2014, general and administrative expenses, as a percentage of revenue, decreased by 1.0%, to 13.0%, compared to 14.0% for the nine months ended September 30, 2013, primarily as a result of the increase in revenue.

 

 

Interest and Other Income (Expense), Net

 

Interest and other income (expense), net consists primarily of the interest expense on our capital lease obligations and notes payable, interest income earned on our cash and cash equivalents and marketable securities, foreign exchange gains and losses, and prior to our IPO in August 2013, the revaluation of our outstanding convertible preferred stock warrants.

 

			Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
			2014				2013				$				2014				2013				$
			(in thousands)
Interest income		$	158			$	–			$	158			$	483			$	–			$	483
Interest expense			(2	)			(9	)			7				(8	)			(41	)			33
Accretion and amortization on marketable securities			(124	)			–				(124	)			(382	)			–				(382	)
Transaction gain (loss) on foreign exchange			(379	)			39				(418	)			(635	)			(122	)			(513	)
Change in fair value of warrants liability			–				35				(35	)			–				(126	)			126
Other non-operating income (loss), net			–				–				–				3				(4	)			7
Interest and other income (expense), net		$	(347	)		$	65			$	(412	)		$	(539	)		$	(293	)		$	(246	)

 

Prior to our IPO, the fair value of our preferred stock warrant liability was re-measured at the end of each reporting period and any changes in fair value were recognized in other non-operating income (loss), net. Upon the closing of our IPO in August 2013, the preferred stock warrants were automatically converted into warrants to purchase common stock in accordance with their terms, which resulted in a reclassification of the preferred stock warrant liability to additional paid-in capital. Upon reclassification of the preferred stock warrants, no further changes in fair value will be recognized.

 

For the three months ended September 30, 2014, interest and other expense, net was $0.3 million, compared to interest and other income, net of $0.1 million for the three months ended September 30, 2013. The increase in expense was primarily due to an increase of $0.1 million in amortization and accretion on our investments and an increase of $0.4 million in foreign transaction exchange losses, partially offset by an increase of $0.2 million in interest income on our marketable securities.

 

 For the nine months ended September 30, 2014, interest and other expense, net increased by $0.2 million, compared to the nine months ended September 30, 2013. The increase in expense was primarily due to an increase of $0.4 million in amortization and accretion on our investments and an increase of $0.5 million in foreign transaction exchange losses. Partially offset by an increase of $0.5 million in interest income on our marketable securities and a $0.1 million change in the fair value of our warrants liability.

 

Income Tax (Expense) Benefit

 

Income tax (expense) benefit consists of federal and state income taxes in the U.S. and income taxes in certain foreign jurisdictions, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards.

 

		Three Months Ended September 30,								Change				Nine Months Ended September 30,								Change
		2014				2013				$				2014				2013				$
		(in thousands)
Income tax (expense) benefit		$	267			$	(63	)		$	330			$	75			$	(162	)		$	273

 

For the three and nine months ended September 30, 2014, income tax benefit was primarily related to state taxes. For the three and nine months ended September 30, 2013, income tax expense was primarily related to state taxes and taxes due in foreign jurisdictions.

 

Adjusted EBITDA

 

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude expenses for: interest, income taxes, depreciation and amortization, and stock-based compensation. We believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results in the same manner as management and the board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made. The following is a reconciliation of adjusted EBITDA to net income (loss) for the periods indicated below (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Net loss		$	(3,028	)		$	(627	)		$	(10,657	)		$	(5,058	)
Adjustments:
Interest expense			2				9				8				41
Income tax expense (benefit)			(267	)			63				(75	)			162
Depreciation and amortization expense			1,159				987				3,369				3,037
Stock-based compensation expense			1,685				1,172				4,169				2,508
Total Adjustments			2,579				2,231				7,471				5,748
Adjusted EBITDA		$	(449	)		$	1,604			$	(3,186	)		$	690

 

 

We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by us and the board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

Adjusted EBITDA has limitations as a financial measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•

adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

•

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

•

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

Because of these limitations, adjusted EBITDA should be considered alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity are our cash, cash equivalents, and marketable securities. As of September 30, 2014, we had $62.3 million in cash, cash equivalents, and marketable securities. Cash equivalents and marketable securities are comprised of money market funds, corporate bonds, commercial paper and certificate of deposits. Cash held internationally as of September 30, 2014 totaled $1.6 million and was not material to our liquidity or financial position. As of September 30, 2014, we had capital lease obligations of $0.1 million related to the purchase of property, equipment and software.

 

Since our inception and prior to our IPO, we financed our operations and capital expenditures primarily through private sales of convertible preferred stock. On August 12, 2013, we closed our IPO in which we issued and sold 5,125,000 shares of common stock resulting in net proceeds of approximately $40.0 million, after deducting underwriting discounts and commissions of $3.2 million and offering expenses of $2.9 million. Upon the closing of the IPO, all of our convertible preferred stock outstanding automatically converted into 21,840,537 shares of common stock, based on the shares of convertible preferred stock outstanding as of August 12, 2013. In addition, all outstanding warrants to purchase convertible preferred stock automatically converted into warrants to purchase 53,983 shares of common stock, and the preferred stock warrant liability of $0.4 million as of August 12, 2013 was reclassified to additional paid-in capital.

 

In November 2014, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank. The Loan Agreement is secured by certain assets of the Company and provides for a revolving line of credit of up to a maximum of $25.0 million to be used for general business purposes. Amounts borrowed under the Loan Agreement bear interest at a variable rate, which is tied to the U.S. prime rate. The Loan Agreement contains customary representations and warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, certain merger and acquisition transactions, dispositions and other matters, all subject to certain exceptions. The financial covenant, based on a quarterly financial test, requires the Company not to exceed a maximum leverage ratio. The Company currently has no borrowings outstanding under the Loan Agreement.

 

We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements through at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, requiring us to utilize other available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under Part II, Item 1A: “Risk Factors” in this Quarterly Report on Form 10-Q. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain needed additional funds, we will have to reduce our operating expenses, which would impair our growth prospects and could otherwise negatively impact our business.

 

 

The following table summarizes our cash flows for the periods presented:

 

		Nine Months Ended September 30,
		2014				2013
Condensed Consolidated Statements of Cash Flows Data:		(in thousands)
Net cash used in operating activities		$	(1,052	)		$	(1,920	)
Net cash used in investing activities			(13,096	)			(2,248	)
Net cash provided by financing activities			4,179				39,760

 

Operating Activities

 

Our primary source of cash from operating activities is receipts from the sale of our advertising solutions to our customers. Our primary uses of cash from operating activities are payments to publishers and other vendors for the purchase of digital media inventory and related costs, employee compensation and related expenses, sales and marketing expenses, general operating expenses, and the purchase of property and equipment.

 

We used $(1.1) million of cash for operating activities during the nine months ended September 30, 2014, primarily resulting from our net loss of $10.7 million, adjusted for non-cash charges related to:

 

•

Depreciation and amortization of $3.4 million;

•

Stock-based compensation of $4.2 million;

•

Bad debt expense of $0.4 million; and

•

Deferred income taxes of $(0.2) million.

 

In addition, certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows:

 

•

$10.2 million from a decrease in accounts receivable due to the timing of receipts from advertising customers;

•

$(0.7) million from an increase in prepaid expenses and other current assets primarily due to the timing of payments for rent, insurance and other operating costs;

•

$(7.5) million from a decrease in accounts payable, accrued digital media property owner costs and other accrued liabilities as a result of the growth of our business and the timing of payments to our vendors; and

•

$(0.2) million from a decrease in deferred revenue.

 

We used $(1.9) million of cash for operating activities during the nine months ended September 30, 2013, primarily resulting from our net loss of $5.1 million, adjusted for non-cash charges related to:

 

•

Depreciation and amortization of $3.0 million;

•

Stock-based compensation of $2.5 million;

•

Bad debt expense of $0.3 million; and

•

Deferred income taxes of $(0.1) million.

 

In addition, certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows:

 

•

$0.3 million from a decrease in accounts receivable due to the timing of receipts from advertising customers;

•

$(1.3) million from an increase in prepaid expenses and other current assets primarily due to the timing of payments for rent, insurance and other operating costs;

•

$(1.7) million from a decrease in accounts payable, accrued digital media property owner costs and other accrued liabilities as a result of the growth of our business and the timing of payments to our vendors; and

•

$(0.3) million from a decrease in deferred revenue.

 

Investing Activities

 

Prior to 2013, our primary investing activities have consisted of (i) purchases of property and equipment to support the build out of our data centers and software to support website development and operations, and our corporate infrastructure, and (ii) acquisitions. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and website and internal-use software and development. During 2013, we purchased marketable securities using cash proceeds we received from our IPO in August 2013.

 

 

We used $(13.1) million of cash for investing activities during the nine months ended September 30, 2014, primarily as follows:

 

•

$(3.6) million to purchase property, equipment and software;

•

$(1.3) million to develop software for internal use;

•

$(15.4) million to purchase marketable securities; and

•

$7.2 million from the maturities of marketable securities.

 

We used $(2.2) million of cash for investing activities during the nine months ended September 30, 2013, primarily as follows:

 

•

$(0.8) million to purchase property, equipment and software; and

•

$(1.4) million to develop software for internal use.

 

Financing Activities

 

Historically our financing activities have consisted primarily of net proceeds from the issuance of convertible preferred stock, notes payable with a bank and the issuance of common stock related to the exercise of stock options. In our IPO, which closed on August 12, 2013, we issued and sold 5,125,000 shares of common stock at a price of $9.00 per share. Net proceeds were approximately $40.0 million, after deducting underwriting discounts and commissions of $3.2 million and offering expenses of $2.9 million.

 

We generated $4.2 million of cash from financing activities during the nine months ended September 30, 2014. We received $4.5 million of proceeds for the issuance of common stock in association with our employee stock purchase plan and from the exercise of common stock options, partially offset by $(0.3) million used for repayments of capital leases.

 

We generated $39.8 million of cash from financing activities for the nine months ended September 30, 2013. We received $42.9 million of cash proceeds in connection with our IPO and $0.3 million of proceeds from the exercise of common stock options, partially offset by $(2.8) million of payments made for costs related to our IPO and $(0.6) million of repayments of borrowings under notes payable and capital leases.

 

Off Balance Sheet Arrangements

 

We did not have any off balance sheet arrangements for the three and nine months ending September 30, 2014 and 2013, and as of September 30, 2014 and December 31, 2013.

 

Contractual Obligations

 

We lease various office facilities, including our corporate headquarters in Redwood City, California, under operating lease agreements that expire through August 2024. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. Rent expense under operating leases totaled $0.8 million and $1.9 million for the three and nine months ended September 30, 2014, respectively, and totaled $0.5 million and $1.6 million for the three and nine months ended September 30, 2013, respectively.

 

We also have capital lease obligations, and enter into agreements with digital media property owners that require the purchase of a minimum number of impressions on a monthly or quarterly basis. Our capital lease obligations mature at various dates through September 2015, while purchase commitments expire on various dates through December 2014. Periodically, we may significantly increase the amounts of minimum impression purchases which will have the effect of increasing our purchase commitments in certain future periods.

 

Our future minimum payments under these arrangements as of September 30, 2014 are as follows (in thousands):

 

		Payments Due by Period
		Total				Less Than 1 Year				1 – 3 Years				3 – 5 Years				More Than 5 Years
Operating lease obligations		$	8,717			$	2,161			$	3,976			$	924			$	1,656
Capital lease obligations			86				86				—				—				—
Traffic acquisition costs and other purchase commitments			1,610				1,610				—				—				—
Total minimum payments		$	10,413			$	3,857			$	3,976			$	924			$	1,656

 

 

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. The Company has determined its uncertain tax positions as of September 30, 2014 will not result in any additional taxes payable by the Company. As a result, no amounts are shown in the table above relating to the Company’s uncertain tax positions.

 

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have operations in the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate and foreign exchange risks and inflation.

 

Interest Rate Fluctuation Risk

 

Our cash and cash equivalents consist of cash and highly liquid, short-term money market funds. Our marketable securities are classified as available-for-sale and consist of highly liquid corporate bonds, commercial paper and certificates of deposits that comply with our minimum credit rating policy. Short-term marketable securities consist of investments with final maturities of at least three months from the date of purchase that we intend to own for up to 12 months. Long-term marketable securities consist of investments with final maturities of more than 12 months that we intend to own for at least 12 months, but not more than 24 months. By policy, the final maturity for each security within the portfolio shall not exceed 24 months from the date of purchase and the weighted average maturity of the portfolio shall not exceed 12 months at any point in time. Our borrowings under capital lease obligations are generally at fixed interest rates.

 

The primary objective of our investment activities is to preserve principal while maintaining liquidity and maximizing income without significantly increasing risk. Because our cash and cash equivalents have short maturities of less than three months, our cash and cash equivalents fair value is relatively insensitive to interest rate changes.

 

To provide a meaningful assessment of the interest rate risk associated with the our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our portfolio. Based on investment positions as of September 30, 2014, a hypothetical 100 basis point increase in interest rates across all maturities in our portfolio would result in an immaterial incremental decline in the fair market value of our portfolio. Such losses would only be realized if we sold the investments prior to maturity. As such, we do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives. We do not enter into investments for trading or speculative purposes.

 

Foreign Currency Exchange Risk

 

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, principally the British pound sterling, Indian Rupee, Swedish Krona, Mexican Peso and the Euro. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Although we have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains (losses) related to revaluing certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in currencies other than the U.S. dollar, we believe such a change will not have a material impact on our results of operations. In the event our foreign sales and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.

 

Inflation Risk

 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 

 

 

ITEM 4.      CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2014 at the reasonable assurance level.

 

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 Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the most recent fiscal quarter ended September 30, 2014 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls 

 

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 

PART II. OTHER INFORMATION

 

ITEM 1.        LEGAL PROCEEDINGS

 

From time to time the Company may be a party to various litigation matters incidental to the conduct of its business. There is no pending or threatened legal proceeding to which the Company is currently a party that, in management’s opinion, is likely to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

ITEM 1A.      RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Before you make an investment decision regarding our common stock, you should carefully consider the following risks, as well as general economic and business risks, and all of the other information contained in this Quarterly Report on Form 10-Q. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations.

 

Risks Related to Our Business and Our Industry:

 

We have incurred significant net losses, and we may not be profitable in the future.

 

We incurred net losses in the first three quarters of 2014. We incurred a net loss of $11.1 million in 2011. We had net income of $6.3 million and $0.3 million in 2012 and 2013, respectively. We had an accumulated deficit of $32.3 million as of September 30, 2014. In past periods we have not generated sufficient revenue to offset operating expenses, which may occur in future periods as well. Although our revenue has increased in recent periods, it is likely that we will not be able to maintain this rate of revenue growth as a result of a variety of factors, including increased competition and the maturation of our business, and we cannot assure you that our revenue will continue to grow or will not decline. We expect to invest heavily in our operations to support anticipated future growth; as a result, our operating expenses will increase substantially and to be profitable we will need to increase our revenue sufficiently to offset these higher expenses. You should not consider our historical revenue growth or operating expenses as indicative of our future performance. If our revenue growth rate declines or our operating expenses exceed expectations, our financial performance will be adversely affected. Further, if our future growth and operating performance fail to meet investor or analyst expectations, it could have a materially negative effect on our stock price.

 

Our limited operating history makes it difficult to evaluate our business and prospects and may increase your investment risk.

 

We commenced operations in 2004 and, as a result, we have only a limited operating history upon which you can evaluate our business and prospects. Although we have experienced revenue growth in recent periods, it is likely that we will not be able to sustain this growth. Because the digital video advertising industry is relatively new, we will encounter risks and difficulties frequently encountered by early-stage companies in rapidly evolving industries, including the need to:

 

	•	Maintain our reputation and build trust with advertisers and digital media property owners;
	•	Offer competitive pricing to advertisers (including periodic discounting) and digital media properties;

•

Maintain and expand our advertising inventory;

•

Deliver advertising results that are superior to those that advertisers or digital media property owners could achieve through the use of competing providers or technologies;

•

Continue to develop and upgrade the technologies that enable us to provide our solutions;

•

Respond to evolving government regulations relating to the Internet, telecommunications, mobile, privacy, marketing and advertising aspects of our business;

•

Identify, attract, retain and motivate qualified personnel; and

•

Manage expanding operations, including our international expansion.

 

If we do not successfully address these risks, our revenue could decline, our costs could increase, and our ability to pursue our growth strategy and attain profitability could be compromised.

 

 

Our quarterly operating results fluctuate and are difficult to predict, and our results are likely to fluctuate and be unpredictable in the future. As such, our operating results could fall below our expectations or investor expectations.

 

Our operating results are difficult to predict, particularly because we generally do not have long-term arrangements with our customers, and have historically fluctuated. Our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past operating results as an indication of our future performance. Factors that may affect our quarterly operating results include:

 

	•	Seasonal patterns in advertising;
	•	The addition and loss of new advertisers and digital media properties;

•

Our variable and unpredictable transaction-based sales cycle;

•

Changes in demand for our solutions;

•

Advertising budgets of our advertiser customers;

•

Advertiser cancellation of insertion orders;

•

Changes in the amount, price and quality of available advertising inventory from digital media properties;

•

Changes in buying and selling processes related to digital advertising inventory;

•

The timing and amount of sales and marketing expenses incurred to attract new advertisers and digital media properties;

•

Changes in the economic prospects of advertisers or the economy generally, which could alter advertisers' spending priorities, or could increase the time it takes us to close sales with advertisers;

•

Changes in our pricing policies or the pricing policies of our competitors, and changes in the pricing of digital video advertising generally;

•

Changes in governmental regulation of the Internet, wireless networks, mobile platforms, digital video brand or mobile advertising, or the collection, use, processing or disclosure of device or user data;

•

Costs necessary to improve and maintain our technologies;

•

Discounts on our products offered to new and existing customers;

•

Timing differences between our payments to digital media property owners for advertising inventory and our collection of advertising revenue related to that inventory; and

•

Costs related to acquisitions of other businesses.

 

As a result of these and other factors, our operating results may fall below the expectations of market analysts and investors in some future periods. If this happens, even temporarily, the market price of our common stock may fall.

 

Seasonal fluctuations in digital video advertising activity could adversely affect our cash flows.

 

Our cash flows from operations vary from quarter to quarter due to the seasonal nature of advertiser spending. For example, many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. In addition, we acquire advertising inventory on a guaranteed basis, or at a fixed price, in order to meet the anticipated increased demand in the fourth quarter. These seasonal effects have been partially masked by our revenue growth and other factors, such as episodic political campaign advertising spending. However, if and to the extent that seasonal fluctuations become more pronounced, or are not offset by other factors, our operating cash flows could fluctuate materially from period to period as a result.

 

We depend on a single advertising agency customer and a single advertiser for a substantial portion of our revenue, and a reduction in digital advertising purchased by that customer or advertiser could significantly reduce our revenue.

 

Brand advertisers represented by an advertising agency within the OMG corporate structure, accounted for approximately 7% of our revenue in the nine months ended September 30, 2014 and accounted for more than 16% of our revenue in the nine months ended September 30, 2013. A significant reduction for any reason in our revenue from digital advertising purchased by OMG or one or more brand advertisers that it represents would materially harm our financial condition and results of operations.

 

 

We generally do not have long-term agreements with our customers, and we may be unable to retain key customers, attract new customers, or replace departing customers with customers that can provide comparable revenue to us.

 

Our success requires us to maintain and expand our current customer relationships and to develop new relationships. Our contracts and relationships with advertising agencies on behalf of advertisers generally do not include long-term obligations requiring them to purchase our solutions and are cancelable upon short or no notice and without penalty. As a result, we may have limited visibility into our future advertising revenue streams. We cannot assure you that our customers will continue to use our solutions, or that we will be able to replace, in a timely or effective manner, departing customers with new customers that generate comparable revenue. If a major customer representing a significant portion of our business decides to materially reduce its use of our solutions or to cease using our solutions altogether, our revenue could be significantly reduced. Any non-renewal, renegotiation, cancellation or deferral of large advertising contracts, or a number of contracts that in the aggregate account for a significant amount of revenue, could cause an immediate and significant decline in our revenue and harm our business.

 

We are highly dependent on advertising agencies as intermediaries, and this may adversely affect our ability to attract and retain business.

 

Nearly all of our revenue comes from executing brand advertising campaigns for advertising agencies that purchase our solutions on behalf of their advertiser clients. Advertising agencies are instrumental in assisting brand owners to plan and purchase advertising, and each advertising agency will allocate advertising spend from brands across numerous channels. We do not have exclusive relationships with advertising agencies and we depend on agencies to work with us as they embark on marketing campaigns for brands. While in some cases we are invited by advertising agencies to present directly to their advertiser clients or otherwise have developed a relationship directly with an advertiser, we nevertheless depend on advertising agencies to present to their advertiser clients the merits of our digital video advertising solutions. Inaccurate descriptions of our digital video advertising solutions by advertising agencies, over which we have no control, negative recommendations to use our service offerings or failure to mention our solutions at all could hurt our business. In addition, if an advertising agency is disappointed with our solutions on a particular marketing campaign or generally, we risk losing the business of the advertiser for whom the campaign was run and of other advertisers represented by that agency. With advertising agencies acting as intermediaries for multiple brands, our customer base is more concentrated than might be reflected by the number of brand advertisers for which we conduct marketing campaigns. Since many advertising agencies are affiliated with other agencies in a larger corporate structure, if we fail to maintain good relations with one agency in such an organization, we may lose business from the affiliated agencies as well.

 

Our sales could be adversely impacted by industry changes relating to the use of advertising agencies. For example, if advertisers seek to bring their marketing campaigns in-house rather than using an advertising agency, we would need to develop direct relationships with the advertisers, which we might not be able to do and which could increase our sales and marketing expense. Moreover, as a result of dealing primarily with advertising agencies, we have a less direct relationship with advertisers than would be the case if advertisers dealt with us directly. This may drive advertisers to attribute the value we provide to the advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with advertisers. Advertisers may move from one advertising agency to another, and, accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying business when an advertiser switches to a new agency. The presence of advertising agencies as intermediaries between us and the advertisers thus creates a challenge to building our own brand awareness and affinity with the advertisers that are the ultimate source of our revenue.

 

In addition, advertising agencies that are our customers also offer or may offer some of the components of our solutions, including selling digital video advertising inventory through their own trading desks. As such, these advertising agencies are, or may become, our competitors. If they further develop their capabilities they may be more likely to offer their own solutions to advertisers and our ability to compete effectively could be significantly compromised and our business, financial condition and operating results could be adversely affected.

 

We operate in a highly competitive industry, and we may not be able to compete successfully.

  

The digital video advertising market is highly competitive, with many companies providing competing solutions. We also face competition from direct response advertisers who also seek to target brands. We compete with Hulu and Google (YouTube and DoubleClick) as well as many ad exchanges, demand side advertiser platforms and ad networks. Many of our competitors are significantly larger than we are and have more capital to invest in their businesses. They, or other companies that offer competing digital video brand advertising solutions, may establish or strengthen cooperative relationships with their digital media property partners and brand advertisers or other parties, thereby limiting our ability to promote our solutions and generate revenue. For example, the adoption by our brand advertiser customers of demand side advertiser platforms may disrupt the direct client relationship with such customers. Competitors could also seek to gain market share from us by reducing the prices they charge to advertisers, introducing products and solutions that are the same or similar to ours, or introducing new technology tools for advertisers and digital media properties. Moreover, increased competition for video advertising inventory from digital media properties could result in an increase in the portion of advertiser revenue that we must pay to digital media property owners to acquire that advertising inventory.

   

 

Some large advertising agencies that represent our current advertising customers have their own relationships with digital media properties and can directly connect advertisers with digital media properties. Our business will suffer to the extent that our advertisers and digital media properties purchase and sell advertising inventory directly from one another or through other companies that act as intermediaries between advertisers and digital media properties. Other companies that offer analytics, mediation, exchange or other third party solutions have or may become intermediaries between advertisers and digital media properties and thereby compete with us. Any of these developments would make it more difficult for us to sell our solutions and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share.

 

If we fail to detect advertising fraud or other actions that impact our advertising campaign performance, we could harm our reputation with advertisers or agencies, which would cause our revenue and business to suffer.

 

Our business relies on our ability to deliver successful and effective video advertising campaigns. Some of those campaigns may experience fraudulent and other invalid impressions, clicks or conversions that advertisers may perceive as undesirable, such as non-human traffic delivered by machines that are designed to simulate human users and artificially inflate user traffic on websites. These activities could overstate the performance of any given video advertising campaign and could harm our reputation. It may be difficult for us to detect fraudulent or malicious activity because we do not own content and rely in part on our digital media properties to control such activity. While we routinely review the campaign performance on our digital media properties’ websites, such reviews may not detect or prevent fraudulent or malicious activity. If we fail to detect or prevent fraudulent or other malicious activity, the affected advertisers may experience or perceive a reduced return on their investment and our reputation may be harmed. High levels of fraudulent or malicious activity could lead to dissatisfaction with our solutions, refusals to pay, refund or future credit demands or withdrawal of future business. If we fail to detect fraud or other activities that impact the performance of our brand advertising campaigns, we could harm our reputation with our advertisers or agencies and our revenue and business would suffer.

 

The digital video market may deteriorate or develop more slowly than we expect, which could harm our business.

 

Digital video advertising is an emerging market. Advertisers have historically spent a smaller portion of their advertising budgets on digital advertising than on traditional advertising methods, such as television, newspapers, radio and billboards, and spending on digital advertising has historically been primarily for direct response advertising, or relatively simple display advertising such as banner ads on websites. Advertiser spending in the emerging digital video advertising market is uncertain. Many advertisers still have limited experience with digital video advertising and may continue to devote larger portions of their limited advertising budgets to more traditional offline or online performance-based advertising, instead of shifting resources to digital video advertising. In addition, our current and potential future customers may ultimately find digital video advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and solutions, and they may reduce their spending on digital video advertising as a result. If the market for digital video advertising deteriorates, or develops more slowly than we expect, or brand advertisers prefer traditional TV advertising over our solutions, we may not be able to increase our revenue and our business would suffer.

 

We may not be able to integrate, maintain and enhance our advertising solutions to keep pace with technological and market developments.

 

The market for digital video advertising solutions is characterized by rapid technological change, evolving industry standards and frequent new product and service introductions. To keep pace with technological developments, satisfy increasing advertiser and digital media property requirements, maintain the attractiveness and competitiveness of our advertising solutions and ensure compatibility with evolving industry standards and protocols, we will need to anticipate and respond to varying product lifecycles, regularly enhance our current advertising solutions and develop and introduce new solutions and functionality on a timely basis. This requires significant expenditures of financial and other resources. For example, we are required to invest significant resources into integrating our solutions with multiple forms of Internet-connected devices in order to maintain a comprehensive advertising platform. We have periodically experienced difficulty integrating with some digital media properties. We may continue to experience similar difficulties and these difficulties will consume financial, engineering and managerial resources and we may not have the financial resources to make investments across all new forms of Internet-connected devices in the future. Additionally, Internet-connected TV is a relatively new market opportunity, from which we have realized only limited revenue, that requires us to apply financial, development, engineering and managerial resources to ensure that our advertising solutions remain compatible with the technological and market developments. Similarly, advertising exchanges and other technological developments may displace us or introduce an additional intermediate layer between us and our advertising customers and digital media properties that could impair our relationships with those customers. Our inability, for technological, business or other reasons, to enhance, develop, introduce and deliver compelling advertising solutions in response to changing market conditions and technologies or evolving expectations of advertisers, digital media properties or consumers of digital video advertising could hurt our ability to grow our business and could result in our advertising solutions becoming obsolete.

 

Digital advertising is shifting, in part, to programmatic buying and real-time bidding (“RTB”) systems. Programmatic buying is the automated purchase of digital advertising inventory through a combination of machine-based transactions, data and algorithms. RTB, a subset of programmatic buying, is the real-time purchase and sale of advertising inventory on an impression-by-impression basis on advertising exchanges. Programmatic buying and RTB are emerging and growing trends in the buying and selling of digital advertising inventory. The recognition by advertisers that an increased use of programmatic buying and RTB systems may constitute an effective way to achieve their campaign goals and cost savings, and the recognition by digital media property owners that they may achieve greater returns from an increased use of programmatic buying and RTB systems is challenging to our traditional pricing model. There can be no assurance that such trends, or the acceleration of such trends, will not erode our revenue. We recently introduced Video Reach, our programmatic video brand advertising solution. We may be unable to successfully sell, integrate or maintain this solution and there can be no assurance that our advertising customers or our network of digital media property owners will embrace Video Reach as a programmatic solution. 

  

Due to our significant level of international operations, including our development and ad operations work conducted in Chennai, India, we are subject to international operational, financial, legal and political risks that could harm our operating results.

 

Most of our research and development and ad operations work is conducted in Chennai, India, where we have a significant presence. In addition, we have operations in Europe, Latin America and China, and may continue to expand our international operations into other countries. We expect to continue to rely on significant cost savings obtained by concentrating our research and development and ad operations work in Chennai, India, rather than in the San Francisco Bay Area. However, the rate of wage inflation has historically been higher in India than in the United States, and we may not be able to maintain these cost savings in the future. If the cost of development and engineering work in Chennai, India were to significantly increase or the labor environment in Chennai, India were to change unfavorably, we would no longer be able to rely on these cost savings or may need to move our development, engineering and ad operations work elsewhere. Accordingly, if we are unable to rely on these significant cost savings, we would lose a competitive advantage, we may not be able to sustain our growth and our profits may decline.

  

Other risks associated with our international operations include:

 

•

The difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations, particularly labor, environmental, data privacy and other laws and regulations that govern our operations in those countries;

•

The challenge of managing a development team in geographically disparate locations;

 

 

 

•

Potential customer perceptions about receiving ad operations support services from Chennai, India, where our ad operations team is based;

•

Legal uncertainties regarding foreign taxes, tariffs, quotas, export controls, export licenses, import controls and other trade barriers;

•

Economic and political instability and high levels of wage inflation;

•

Changes or volatility in currency exchange rates;

•

Potentially adverse tax consequences;

•

Legal requirements for transfer, processing and use of data generated through our operations in foreign countries;

•

Weaker intellectual property protection in some countries; and

•

Difficulties and costs in recruiting and retaining talented and capable individuals in foreign countries.

 

Any of these factors could harm our international operations and businesses and impair our ability to continue expanding into international markets.

 

Expanding our international operations subjects us to new challenges and risks.

 

We expect to expand our international operations by opening offices in new countries and regions. For example, we expanded into the United Kingdom with the acquisition of Appealing Media in the second half of 2011, launched operations in Canada, France and Spain in 2012, the Nordic region and Germany in 2013, and Latin America and China in 2014. However, we have a limited sales operations history as a company outside the United States, and our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the challenges of supporting a rapidly growing business in an environment of multiple cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Expanding internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

 

•

Establishing and maintaining effective controls at foreign locations and the associated increased costs;

•

Providing digital video advertising solutions among different cultures, including potentially modifying our solutions and features to ensure that we deliver ads that are culturally relevant in different countries;

•

Variations in traffic access costs and margins, region by region;

•

Increased competition from local providers of digital video advertising solutions;

•

Longer sales or collection cycles in some countries;

•

Credit risk and higher levels of payment fraud;

•

Compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act;

•

Compliance with foreign data privacy frameworks, such as the EU Data Privacy Directive;

•

Currency exchange rate fluctuations;

•

Foreign exchange controls that might prevent us from repatriating cash earned outside the United States;

•

Economic instability in some countries, particularly those in Europe where we have recently expanded;

•

Political instability;

•

Compliance with the laws of numerous taxing jurisdictions where we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws;

•

The complexity and potential adverse consequences of U.S. tax laws as they relate to our international operations; and

•

Overall higher costs of doing business internationally.

 

Further expansion of our international operations may require significant management attention and financial resources and may place burdens on our management, administrative, operational and financial infrastructure. Additionally, in most instances digital media properties can change the terms and supply of ad inventory they make available to us at any time and if digital media properties increase the cost and/or reduce the supply of inventory available to us in international markets, our growth forecasts in these markets may suffer. Further, if our revenue from our international operations, and particularly from our operations in the countries and regions on which we have focused our spending, do not exceed the expense of establishing and maintaining these operations, our business and operating results will suffer.

 

 

We depend on the proliferation of digital video advertisements and anything that prevents this proliferation, including the possibility to opt out of services and functionality, will negatively impact our business model.

 

The success of our business model depends on our ability to deliver digital video advertisements to consumers on a wide variety of Internet-connected devices. We believe that digital video advertising is most successful when targeted primarily through analysis of data. This data might include a device's location or data collected when device users view an ad or video or when they click on or otherwise engage with an ad, or it could include demographic or other data about users' interests or activities that is licensed in or acquired from third parties. Users may elect not to allow data sharing for targeted advertising for many reasons, such as privacy concerns, or to avoid usage charges based on the amount or type of data consumed on the device. Users may opt out of interest-based advertising by YuMe through the opt-out feature on YuMe's website or the Network Advertising Initiative's consumer choices website. In addition, Internet-connected devices and operating systems controlled by third parties increasingly contain features that allow device users to disable functionality that allows for the delivery of ads on their devices. Device and browser manufacturers may include or expand these features as part of their standard device specifications. For example, when Apple announced that UDID, a standard device identifier used in some applications, was being superseded and would no longer be supported, application developers were required to update their apps to utilize alternative device identifiers such as universally unique identifier, or, more recently, identifier-for-Advertising, which simplify the process for Apple users to opt out of behavioral targeting. In addition, many advertising companies may participate in self-regulatory programs, such as the Network Advertising Initiative, through which they agree to offer users the ability to opt out of behavioral advertising. If users elect to utilize the opt-out mechanisms in greater numbers, our ability to deliver effective advertising campaigns on behalf of our advertisers would suffer, which could hurt our ability to generate revenue and become profitable.

 

Our business depends on our ability to collect and use data to deliver ads, and to disclose data relating to the performance of our ads, and any limitation on these practices could significantly diminish the value of our solutions and cause us to lose customers and revenue.

 

When we deliver an ad to an Internet-connected device, we are able to collect information about the placement of the ad and the interaction of the device user with the ad, such as whether the user visited a landing page or watched a video. We are also able to collect information about the user's IP address, device, mobile location and some demographic characteristics. We may also contract with one or more third parties to obtain additional anonymous information about the device user who is viewing a particular ad, including information about the user's interests. As we collect and aggregate this data provided by billions of ad impressions, we analyze it in order to optimize the placement and scheduling of ads across the advertising inventory provided to us by digital media properties.

 

Although the data we collect does not enable us to determine the actual identity of any individual, our customers or end users might decide not to allow us to collect some or all of the data or might limit our use of it. For example, a digital media property might not agree to provide us with data generated by interactions with the content on its apps, or device users might not consent to share their information about device usage. Additionally, we collect substantially more data from digital media properties using our YuMe SDKs instead of industry standard technologies such as IAB's Video Ad Serving Template (“VAST”). If more digital media property owners choose to continue to use VAST or other industry standard technologies rather than our proprietary YuMe SDKs, our ability to collect valuable data may be impaired, negatively affecting our business and revenue. Any limitation on our ability to collect data about user behavior and interaction with content could make it more difficult for us to deliver effective digital video advertising programs that meet the demands of our customers. This in turn could harm our revenue and impair our business.

 

Although our contracts with advertisers generally permit us to aggregate data from advertising campaigns, sometimes an advertiser declines to permit the use of this data, which limits the usefulness of the data that we collect. Furthermore, advertisers may request that we discontinue using data obtained from their campaigns that have already been aggregated with other advertisers' campaign data. It would be difficult, if not impossible, to comply with these requests, and complying with these kinds of requests could cause us to spend significant amounts of resources. Interruptions, failures or defects in our data collection, mining, analysis and storage systems, as well as privacy concerns and regulatory restrictions regarding the collection, use and processing of data, could also limit our ability to aggregate and analyze the data from our customers' advertising campaigns. If that happens, we may not be able to optimize the placement of advertising for the benefit of our advertising customers, which could make our solutions less valuable, and, as a result, we may lose customers and our revenue may decline.

 

 

Our business practices with respect to data could give rise to liabilities, restrictions on our business or reputational harm as a result of evolving governmental regulation, legal requirements or industry standards relating to consumer privacy and data protection.

 

In the course of providing our solutions, we transmit and store information related to Internet-connected devices, user activity and the ads we place. Federal, state and international laws and regulations govern the collection, use, processing, retention, sharing and security of data that we collect across our advertising solutions. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data collection, processing use and disclosure. However, the applicability of specific laws may be unclear in some cases and domestic and foreign government regulation and enforcement of data practices and data tracking technologies is expansive, not clearly defined and rapidly evolving. In addition, it is possible that these requirements may be interpreted and applied in a manner that is new or inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any actual or perceived failure by us to comply with U.S. federal, state or international laws, including laws and regulations regulating privacy, data, security or consumer protection, or disclosure or unauthorized access by third parties to this information, could result in proceedings or actions against us by governmental entities, private parties or others. Any proceedings or actions against us alleging violations of consumer protection laws or asserting privacy-related theories could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our solutions and ultimately result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of litigation resulting from using our solutions or from the disclosure of confidential information, which could damage our reputation among our current and potential customers, require significant expenditures of capital and other resources and cause us to lose business and revenue.

 

The regulatory framework for privacy issues is evolving worldwide, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the digital advertising industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to collection or use of data to target ads and communication with consumers. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. The Federal Trade Commission has also adopted revisions to the Children's Online Privacy Protection Act that expand liability for the collection of information by operators of websites and other electronic solutions that are directed to children. In addition, the European Union has adopted the Data Protection Directive and the Privacy and Electronics Communications Directive and the member states are in the process of considering reforms to its existing data protection legal framework, which may result in a greater compliance burden for us in the course of delivering ads in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy.

 

In addition to compliance with government regulations, we voluntarily participate in trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of Internet advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. If we fail to abide by or are perceived as not operating in accordance with industry best practices or any industry guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertisers and digital media properties.

 

We depend on digital media properties for advertising inventory to deliver our advertising customers' advertising campaigns, and any decline in the supply of advertising inventory from these digital media properties could hurt our business.

 

We depend on digital media properties to provide us with inventory within their sites and apps on which we deliver ads. The digital media property owners that supply their advertising inventory to us are not required to provide any minimum amounts of advertising inventory to us, nor are they contractually bound to provide us with a consistent supply of advertising inventory. The tools that we provide to digital media properties allow them to make decisions as to how to allocate advertising inventory among us and other advertising technology providers, some of which may be our competitors. An ad exchange, or other third party acting as an intermediary on behalf of digital media properties, could pressure us to increase the prices we pay to digital media property owners for that inventory, which may reduce our operating margins, or otherwise block our access to that inventory, without which we would be unable to deliver ads on behalf of our advertising customers.

 

In most instances, digital media properties can change the amount of inventory they make available to us at any time. Digital media properties may seek to change the terms at which they offer inventory to us, or they may elect to make advertising inventory available to our competitors who offer ads to them on more favorable economic terms. Supply of advertising inventory is also limited for some digital media properties, such as special sites or new technologies, and these digital media properties may request higher prices, fixed price arrangements or guarantees. In addition, digital media properties sometimes place significant restrictions on our use of their advertising inventory. These restrictions may prohibit ads from specific advertisers or specific industries, or they could restrict the use of specified creative content or format.

 

If digital media properties decide not to make advertising inventory available to us for any of these reasons, or decide to increase the price of inventory, or place significant restrictions on our use of their advertising inventory, we may not be able to replace this with inventory from other digital media properties that satisfy our requirements in a timely and cost-effective manner. If we enter into fixed price arrangements or guarantees to secure inventory or significantly increase the amounts of such arrangements or guarantees, we may be unable to sell some or all of such inventory profitably or at all. In addition, significant digital media properties in the industry may enter into exclusivity arrangements with our competitors, which could limit our access to a meaningful supply of advertising inventory. If any of this happens, our revenue could decline, our liquidity could be negatively impacted and our cost of acquiring inventory could increase, lowering our operating margins.

 

 

Our business model is dependent on the continued growth in usage of the Internet, computers, smartphones, tablets, Internet-connected TVs and other devices, as well as continued audience fragmentation as a result of this continued growth.

 

Our business model depends on the continued proliferation of the Internet, computers and Internet-connected devices, such as smartphones, tablets and Internet-connected TVs, as well as the increased consumption of digital media content on the Internet through those devices resulting in increased audience fragmentation. However, consumer usage of these Internet-connected devices and resulting audience fragmentation may be inhibited for a number of reasons, such as:

 

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Inadequate network infrastructure to support advanced features;

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Users' concerns about the security of these devices and the privacy of their information;

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Inconsistent quality of cellular or wireless connections;

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Unavailability of cost-effective, high-speed Internet service;

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Changes in network carrier pricing plans that charge device users based on the amount of data consumed; and

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Government regulation of the Internet, telecommunications industry, mobile platforms and related infrastructure.

 

For any of these reasons, users of the Internet and Internet-connected devices may limit the amount of time they spend and the type of activities they conduct on these devices. In addition, technological advances may standardize or homogenize the way users access digital video content, making brand-receptive audiences easier for advertisers to reach without use of our solutions. Our total addressable market size may be significantly limited if user adoption of the Internet and Internet-connected devices and consumer consumption of content on those devices and resulting audience fragmentation do not continue to grow. These conditions could compromise our ability to increase our revenue and to become profitable.

 

 

We may be unable to deliver advertising in a context that is appropriate for digital advertising campaigns, which could harm our reputation and cause our business to suffer.

 

It is very important to advertisers that their brand advertisements not be placed in or near content that is unlawful or would be deemed offensive or inappropriate by their customers. Unlike advertising on television, where the context in which an advertiser's ad will appear is highly predictable and controlled, digital media content is more unpredictable, and we cannot guarantee that digital video advertisements will appear in a context that is appropriate for the brand. If we are not successful in delivering context appropriate digital video advertising campaigns for advertisers, our reputation will suffer and our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our customers may seek to avoid payment or demand future credits for inappropriately placed advertisements, any of which could harm our business, financial condition and operating results.

 

Any inability to deliver successful digital video advertising campaigns due to technological challenges or an inability to persuasively demonstrate success will prevent us from growing or retaining our current advertiser base.

 

It is critical that we deliver successful digital video advertising campaigns on behalf of our advertisers. Factors that may adversely affect our ability to deliver successful digital video advertising campaigns include:

 

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Inability to accurately process data and extract meaningful insights and trends, such as the failure of our Audience Amplifier to accurately process data to place ads effectively at digital media properties;

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Faulty or out-of-date algorithms that fail to properly process data or result in inability to capture brand-receptive audiences at scale;

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Technical or infrastructure problems causing digital video not to function, display properly or be placed next to inappropriate context;

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Inability to control video completion rates, maintain user attention or prevent end users from skipping advertisements;

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Inability to detect and prevent advertising fraud and other malicious activity; and

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Unavailability of standard digital video audience ratings and brand receptivity measurements for brand advertisers to effectively measure the success of their campaigns.

 

Our ability to deliver successful advertising campaigns also depends on the continuing and uninterrupted performance of our own internal systems, which we utilize to place ads, monitor the performance of advertising campaigns and manage our advertising inventory. Our revenue depends on the technological ability of our solutions to deliver ads and measure them. Sustained or repeated system failures that interrupt our ability to provide solutions to customers, including security breaches and other technological failures affecting our ability to deliver ads quickly and accurately and to collect and process data in connection with these ads, could significantly reduce the attractiveness of our solutions to advertisers, negatively impact operations and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures. Also, advertisers may perceive any technical disruption or failure in ad performance on digital media properties' platforms to be attributable to us, and our reputation could similarly suffer, or advertisers may seek to avoid payment or demand future credits for disruptions or failures, any of which could harm our business and results of operations. If we are unable to deliver successful advertising campaigns, our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed and our business, financial condition and operating results could be adversely affected.

 

The impact of worldwide economic conditions, including effects on advertising spending by brand advertisers, may adversely affect our business, operating results and financial condition.

 

Our financial performance is subject to worldwide economic conditions and their impact on advertising spending by brand advertisers, which may be disproportionately affected by economic downturns. Expenditures by advertisers generally tend to reflect overall economic conditions, and to the extent that the current economic slowdown continues, or worldwide economic conditions materially deteriorate or change, our existing and potential advertisers may reduce current or projected advertising budgets and the use of our advertising solutions. In particular, digital video advertising may be viewed by some of our existing and potential advertisers as a lower priority and could cause advertisers to reduce the amounts they spend on advertising, terminate their use of our digital video advertising solutions or default on their payment obligations to us, which could have a material adverse effect on our business, financial condition and results of operations.

 

 

Our sales efforts with advertisers and digital media properties require significant time and expense.

 

Attracting new advertisers and digital media properties requires substantial time and expense, and we may not be successful in establishing new relationships or in maintaining or advancing our current relationships. For example, it may be difficult to identify, engage and market to potential advertisers who do not currently spend on digital video advertising or are unfamiliar with our current solutions. Furthermore, many of our customers' purchasing and design decisions typically require input from multiple internal constituencies, including those units historically responsible for a larger TV brand campaign. As a result, we must identify those persons involved in the purchasing decision and devote a sufficient amount of time to presenting our solutions to each of those persons.

 

The novelty of our solutions and our business model often requires us to spend substantial time and effort educating potential advertisers, advertising agencies and digital media properties about our offerings, including providing demonstrations and comparisons against other available solutions. This process can be costly and time-consuming. If we are not successful in targeting, supporting and streamlining our sales processes, our ability to grow our business may be adversely affected.

 

If our pricing model is not accepted by our advertisers, we could lose customers and our revenue could decline.

 

We offer our solutions to advertisers based principally on a fixed-rate pricing model under which the fee is based on the number of times the ad is shown, known as an impression, without regard to immediate performance. Alternative pricing models, such as cost-per-click, cost-per-action and cost-per-engagement, have proliferated in the marketplace and may make it more difficult for us to convince advertisers that our pricing model is superior. We do not employ pricing models under which advertisers pay only if some specific viewer action is taken, for instance, clicking through to a website or installing a mobile application. Our ability to generate significant revenue from advertisers will depend, in part, on the advertisers' belief in the brand uplift and recall value proposition of digital video advertising compared to either traditional TV advertising or performance-based advertising and pricing models. In addition, it is possible that new pricing models that are not compatible with our business model may be developed and gain widespread acceptance. If advertisers do not understand or accept the benefits of our pricing model, then the market for our solutions may decline or develop more slowly than we expect, limiting our ability to grow our revenue and profits.

 

Failure to manage growth properly could seriously harm our business.

 

We have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of our solutions may suffer, which could negatively affect our reputation and demand for our solutions. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. Among other things, this will require us to:

 

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Implement additional management information systems;

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Further develop our operating, administrative, legal, financial and accounting systems and controls;

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Hire additional personnel;

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Develop additional levels of management within our company;

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Locate additional office space;

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Maintain and improve coordination among our engineering, product, operations, legal, finance, sales, marketing and customer service and support organizations; and

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Manage our expanding international operations.

 

Moreover, as our sales increase, we may be required to concurrently deploy our advertising technologies infrastructure at multiple additional locations and/or provide increased levels of customization. As a result, we may lack the resources to deploy our advertising solutions on a timely and cost-effective basis. Failure to accomplish any of these requirements could impair our ability to deliver our advertising solutions in a timely fashion, fulfill existing customer commitments or attract and retain new customers.

 

Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.

 

Our systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. For example, a significant natural disaster, such as a tornado, earthquake, fire or flood, could have a material adverse effect on our business, results of operations and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices and one of our data centers are located in California, a region known for earthquakes and one of our data centers is located in New Jersey, a region susceptible to hurricane activity. Our development and ad operations work is located in Chennai, India, a region susceptible to tsunamis and typhoons. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our advertisers' businesses or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins, denial-of-service attacks and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California, New Jersey or Chennai, India. As we rely heavily on our data centers, computer and communications systems and the Internet to conduct our business and provide high-quality customer service, such disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt our advertisers' businesses, which could have a material adverse effect on our business, results of operations and financial condition.

 

 

If we do not retain our senior management team and key employees, or attract additional sales and technology talent, we may not be able to sustain our growth or achieve our business objectives.

 

We have experienced recent attrition in certain key management positions. Our future success is substantially dependent on the continued service of our senior management team. We do not maintain key-person insurance on any of these employees. Our future success also depends on our ability to continue to attract, retain and motivate highly skilled employees, particularly employees with technical skills that enable us to deliver effective advertising solutions and sales and customer support representatives with experience in digital video advertising and strong relationships with brand advertisers, agencies and digital media properties. Competition for these employees, and for sales personnel, in our industry is intense. Many of the companies with which we compete for experienced personnel also have greater resources than we have. Competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located, and in Chennai, India, where our engineering and research and development resources are primarily located. As a result, we may be unable to attract or retain these management, technical, sales, marketing and customer support personnel that are critical to our success, resulting in harm to our key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.

 

If we cannot foster or maintain an effective corporate culture as we grow and evolve, our future success could be negatively impacted.

 

We believe that fostering and maintaining an effective corporate culture that promotes innovation, creativity and teamwork has been and will be in the future a critical contributor to our success. Fostering and maintaining an effective corporate culture will become increasingly difficult as we grow and implement the more complex organizational management structures necessary to support our growth and to comply with the requirements imposed on public companies. Failure to foster, maintain and further develop our culture could negatively impact our future success.

 

Acquisitions or investments may be unsuccessful and may divert our management's attention and consume significant resources.

 

A part of our growth strategy is to pursue additional acquisitions or investments in other businesses or individual technologies where the acquisition fits within our strategic goals and we could complete it at an attractive valuation. Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions involve many risks, any of which could harm our business, including:

 

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Difficulties in integrating the operations, technologies, solutions and personnel of acquired businesses, especially if those businesses operate outside of our core competency of delivering digital video advertising;

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Cultural challenges associated with integrating employees from the acquired company into our organization;

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Ineffectiveness or incompatibility of acquired technologies or solutions;

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Potential loss of key employees of acquired businesses;

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Inability to maintain the key business relationships and the reputations of acquired businesses;

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Diversion of management's attention from other business concerns;

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Litigation for activities of the acquired company, including claims from terminated employees, customers, former stockholders or other third parties;

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In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

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Costs necessary to establish and maintain effective internal controls for acquired businesses;

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Failure to successfully further develop the acquired technologies in order to recoup our investment; and

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Increased fixed costs.

 

 

Activities of our advertising customers and digital media properties with which we do business could damage our reputation or give rise to legal claims against us.

 

We do not monitor or have the ability to control whether our advertising customers' advertising of their products and solutions complies with federal, state, local and foreign laws. Failure of our advertising customers to comply with federal, state, local or foreign laws or our policies could damage our reputation and expose us to liability under these laws. We may also be liable to third parties for content in the ads we deliver if the content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. A third party or regulatory authority may file a claim against us even if our advertising customer has represented that its ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in an ad. Any of these claims could be costly and time-consuming to defend and could also hurt our reputation within the advertising industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our solutions or otherwise expend significant resources. Similarly, we do not monitor or have the ability to control whether digital media property owners with which we do business are in compliance with applicable laws and regulations, or intellectual property rights of others, and their failure to do so could expose us to legal liability.

 

Our software could be susceptible to errors, defects, or unintended performance problems that could result in loss of reputation, lost inventory or liability.

 

We develop and offer complex software that is embedded by digital media properties in devices, video technologies, software and operating systems. Complex software often contains defects, particularly when first introduced or when new versions are released. Determining whether our software has defects may occur after versions are released into the market and distributed to digital media properties. Defects, errors or unintended performance problems with our software could unintentionally jeopardize the performance of digital media properties' products. This could result in injury to our reputation, loss of revenue, diversion of development and technical resources, increased insurance costs and increased warranty costs. If our software contains any undetected defects, errors or unintended performance problems, digital media properties may refuse to embed our software into their products and we may be unable to collect data or acquire advertising inventory from digital media properties. These defects, errors and unintended performance problems could also result in product liability or warranty claims. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and limitation of liability clauses in our agreements, these contractual provisions may not be enforceable in every instance. Furthermore, although we maintain errors and omissions insurance, this insurance may not adequately cover these claims. If a court refused to enforce the liability-limiting provisions of our contracts for any reason, or if liabilities arose that were not contractually limited or adequately covered by insurance, our business could be materially harmed.

 

Our inability to use software licensed from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt our business.

 

Our technologies incorporate software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that these licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our solutions to our customers. In the future, we could be required to seek licenses from third parties in order to continue offering our solutions, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our solutions or discontinue use of portions of the functionality provided by our solutions. In addition, the terms of open source software licenses may require us to provide software that we develop using this software to others on unfavorable license terms. Further, if a digital media property owner who embeds our software in their devices, video technologies, software and operating systems incorporates open source software into its software and our software is integrated with such open source software in the final product, we could, under some circumstances, be required to disclose the source code to our software. While we carefully monitor the use of all open source software and try to ensure that no open source software is used in such a way as to require us to disclose the source code to our software, such use could inadvertently occur. Our inability to use third-party software or the requirement to disclose the source code to our software could result in disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could impair our business.

 

Software and components that we incorporate into our advertising solutions may contain errors or defects, which could harm our reputation and hurt our business.

 

We use a combination of custom and third party software, including open source software, in building our advertising solutions. Although we test software before incorporating it into our solutions, we cannot guarantee that all of the third party technologies that we incorporate will not contain errors, bugs or other defects. We continue to launch enhancements to our advertising solutions, and we cannot guarantee any of these enhancements will be free from these kinds of defects. If errors or other defects occur in technologies that we utilize in our advertising solutions, it could result in damage to our reputation and losses in revenue, and we could be required to spend significant amounts of additional research and development resources to fix any problems.

 

 

Our failure to protect our intellectual property rights could diminish the value of our solutions, weaken our competitive position and reduce our revenue.

 

We regard the protection of our intellectual property, which includes patents and patent applications, trade secrets, copyrights, trademarks and domain names, as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.

 

In the United States, we have seven patents issued, 18 non-provisional patent applications pending and five provisional patent applications pending. We also have 34 foreign patent applications pending. There can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, or that these patents will not be challenged by third parties or found to be invalid or unenforceable. We have eight registered trademarks in the United States, 21 registered trademarks in foreign jurisdictions and are also pursuing the registration of additional trademarks and service marks in the United States and in locations outside the United States. Effective trade secret, copyright, trademark and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming.

 

Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Further, our competitors may independently develop technologies that are similar to ours but which avoids the scope of our intellectual property rights. In addition, the laws of many countries, such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property could result in competitors offering solutions that incorporate our most technologically advanced features, which could seriously reduce demand for our advertising solutions. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not the litigation results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be able to stop our competitors from infringing our intellectual property rights.

 

We could incur substantial costs and disruption to our business as a result of any claim of infringement of another party's intellectual property rights, which could harm our business and operating results.

 

In recent years, there has been significant litigation in the United States over patents and other intellectual property rights. From time to time, we face allegations that we or customers who use our products have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including allegations made by our competitors or by non-practicing entities. We cannot predict whether assertions of third party intellectual property rights or claims arising from these assertions will substantially harm our business and operating results. If we are forced to defend any infringement claims, whether they are with or without merit or are ultimately determined in our favor, we may face costly litigation and diversion of technical and management personnel. Some of our competitors have substantially greater resources than we do and are able to sustain the cost of complex intellectual property litigation to a greater extent and for longer periods of time than we could. Furthermore, an adverse outcome of a dispute may require us: to pay damages, potentially including treble damages and attorneys' fees, if we are found to have willfully infringed a party's patent or other intellectual property rights; to cease making, licensing or using products that are alleged to incorporate or make use of the intellectual property of others; to expend additional development resources to redesign our products; and to enter into potentially unfavorable royalty or license agreements in order to obtain the rights to use necessary technologies. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all. In any event, we may need to license intellectual property which would require us to pay royalties or make one-time payments. Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could harm our business, operating results, financial condition and reputation.

 

In addition, if our advertising customers do not own the copyright for advertising content included in their advertisements or if digital media property owners do not own the copyright for content to the digital media next to which the advertisements appear, advertisers and digital media properties could receive complaints from copyright owners, which could harm our reputation and our business.

 

 

If we fail to establish and maintain effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

 

Prior to our IPO, we were a private company and were not required to test our internal controls on a systematic basis. In addition, we had limited accounting personnel and other resources with which to address our internal controls. As a public company we are required to evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our Annual Report for the fiscal year ending December 31, 2014, to provide a management report on our internal control over financial reporting. This will require that we incur substantial additional internal costs to expand our accounting and finance functions; including costs associated with hiring additional accounting and administrative staff, and that we expend significant management efforts.

 

A material weakness in our internal control over financial reporting existed as of December 31, 2012. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected and corrected on a timely basis. This material weakness arose primarily due to a lack of technical accounting skills and a lack of adequate review processes and controls within our accounting and finance organization. As a result, there were a number of post-close and audit-related adjustments that were material to the financial statements, including adjustments to publisher costs, commissions and goodwill.

 

We have successfully completed the implementation of the remediation plan, including building a more experienced accounting and finance organization, and designing and implementing improved processes and controls. Accordingly, as of December 31, 2013, the previously disclosed material weakness had been remediated. However, the remediation of this material weakness may not prevent future material weaknesses in our internal control over financial reporting.

 

We have had significant operations both in the United States and India and we have recently expanded in Europe, Latin America and China. Historically, we have had separate systems of internal controls covering our international operations, which may have included control deficiencies. We are in the process of consolidating these systems and remediating any control deficiencies, and we may experience difficulties with the consolidation that could harm our operations and cause our business to suffer.

 

We may in the future discover areas of our internal controls that need improvement. Our internal control over financial reporting will not prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

 

If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements, and we or our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As an emerging growth company we are not required to obtain auditor attestation of our reporting on internal control over financial reporting, we have reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are not required to hold nonbinding advisory votes on executive compensation. We cannot predict whether investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We will remain an emerging growth company until the earliest of: the end of the fiscal year in which the market value of the shares of our common stock held by non-affiliates exceeds $700 million as of June 30, the end of the fiscal year in which we have total annual gross revenue of $1.0 billion, the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period, or August 2018.

 

 

We have incurred and will continue to incur significantly increased costs and devote substantial management time as a result of operating as a public company.

 

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we are and will continue to be subject to the reporting requirements of the Exchange Act and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the New York Stock Exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Compliance with these requirements has increased our legal and financial compliance costs and has made some activities more time consuming and costly, while also diverting management attention. In particular, we expect to continue to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company as defined by the JOBS Act.

 

Operating as a public company has made it more expensive for us to obtain director and officer liability insurance. As a public company, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

 

We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available on favorable terms, or at all, which could compromise our ability to meet our financial obligations and grow our business.

 

While we anticipate that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing existing or future technologies and solutions, increasing working capital, acquiring businesses, expanding geographically and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or the continued development of new or existing technologies or solutions and geographic expansion.

 

Our net operating loss carryforwards may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.

 

We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal income tax purposes, including any limitations that may be imposed under Section 382 of the Internal Revenue Code as a result of our IPO. At December 31, 2013, we had federal net operating loss carryforwards of $8.3 million, which expire at various dates beginning in 2025. At December 31, 2013, we had state and local net operating loss carryforwards of $14.8 million, which expire beginning in 2015. Our gross state net operating loss carryforwards are separate from our federal net operating loss carryforwards and expire over various periods beginning in 2015, based on individual state tax law.

 

We periodically assess the likelihood that we will be able to recover our net deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a full valuation allowance against our net U.S. deferred tax assets should be applied as of September 30, 2014. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.

 

Risks Related to Ownership of Our Common Stock:

 

An active trading market for our common stock may not be sustained and investors may not be able to resell their shares at or above the price at which they purchased them.

 

We have a limited history as a public company. An active trading market for our shares may not be sustained. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the price they paid or at the time that they would like to sell. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could harm our business.

 

 

The trading price of the shares of our common stock is likely to remain volatile, and purchasers of our common stock could incur substantial losses.

 

Our stock price has been and is likely to remain volatile. Since shares of our common stock were sold in our initial public offering in August 2013 at a price of $9.00 per share, our stock price has ranged from $4.54 to $12.08 through October 31, 2014. The stock market in general and the market for technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:

 

•

Actual or anticipated variations in quarterly operating results;

•

Changes in financial estimates by us or by any securities analysts who might cover our stock;

•

Conditions or trends in our industry;

•

Stock market price and volume fluctuations of other publicly traded companies and, in particular, those that operate in the advertising, Internet or media industries;

•

Announcements by us or our competitors of new product or service offerings, significant acquisitions, strategic partnerships or divestitures;

•

Announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

•

Capital commitments;

•

Additions or departures of key personnel; and

•

Sales of our common stock, including sales by our directors and officers or specific stockholders.

 

In addition, in the past, stockholders have initiated class action lawsuits against technology companies following periods of volatility in the market prices of these companies' stock. If litigation is instituted against us, we could incur substantial costs and divert management's attention and resources.

 

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock is likely to respond to the presence or absence of equity research published about us and our business, and to the content of any such research. If no or few equity research analysts elect to provide research coverage of our common stock, the lack of research coverage may adversely affect the market price of our common stock. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

 

A sale a substantial number of shares of our commons stock in the public market could occur at any time. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

We had approximately 33.0 million shares of common stock outstanding as of September 30, 2014. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly.

 

Approximately 8.5 million shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans have been registered under registration statements on Form S-8 and, subject to grants, vesting arrangements and exercise of options and the restrictions of Rule 144 in the case of our affiliates, may become available for sale in the public market.

 

Additionally, the holders of an aggregate of approximately 10.0 million shares of common stock and 24,838 shares of common stock issuable upon the exercise of outstanding warrants, or their transferees, have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register these shares for resale, they could be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

 

Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.

 

There are provisions in our certificate of incorporation and bylaws that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors has the authority to issue shares of preferred stock, and to fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.

 

 

Our charter documents also contain other provisions that could have an anti-takeover effect, including that our board of directors is divided into three classes with staggered three-year terms and stockholders are not be able to remove directors other than for cause, take actions by written consent or call a special meeting of stockholders. In addition, stockholders are required to give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.

 

In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions by prohibiting Delaware corporations from engaging in specified business combinations with particular stockholders of those companies. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are willing to pay for our stock.

 

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

 

Our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates, in aggregate, beneficially own approximately 41% of our outstanding common stock. These persons, acting together, are able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.

 

Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains.

 

We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

 

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

 

a)

Sale of Unregistered Securities

 

None.

 

b)

Use of Proceeds from Public Offering of Common Stock

 

There have been no material changes in our use of the proceeds from our initial public offering in August 2013.

 

c)

Issuer Purchases of Equity Securities

 

None.

 

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4.      MINE SAFETY DISCLOSURES

 

Not applicable.

  

 

ITEM 5.      OTHER INFORMATION

 

None.

 

 

ITEM 6.

EXHIBITS

 

Exhibit		Description of Exhibit
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 INS**		XBRL Instance Document
101 SCH**		XBRL Taxonomy Extension Schema
101 CAL**		XBRL Taxonomy Extension Calculation
101 DEF**		XBRL Taxonomy Extension Definition
101 LAB**		XBRL Taxonomy Extension Labels
101 PRE**		XBRL Taxonomy Extension Presentation

 

*

Filed herewith.

 

**

As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of YuMe, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filings.

 

 

SIGNATURE

 

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.

 

 

YuMe, Inc.

/s/ Tony Carvalho

Tony Carvalho Chief Financial Officer (Principal Financial Officer and Duly Authorized Signatory)

Date: November 10, 2014

                                       

 

 

INDEX TO EXHIBITS

 

Exhibit		Description of Exhibit
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 INS**		XBRL Instance Document
101 SCH**		XBRL Taxonomy Extension Schema
101 CAL**		XBRL Taxonomy Extension Calculation
101 DEF**		XBRL Taxonomy Extension Definition
101 LAB**		XBRL Taxonomy Extension Labels
101 PRE**		XBRL Taxonomy Extension Presentation

 

*

Filed herewith.

 

**

As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of YuMe, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filings.

  

47