UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10‑K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

Commission file number 001‑35478

MILLENNIAL MEDIA, INC.

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐  No ☒

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 check mark 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S‑K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

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

 

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

The aggregate market value of Millennial Media, Inc. voting and non‑voting common equity held by non‑affiliates as of June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) based on the closing sale price of $4.99 as reported on the New York Stock Exchange on that date was $325,749,974.

At March 9, 2015,  139,032,526 shares of Millennial Media, Inc. Common Stock, $.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive proxy statement, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2015 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10‑K.

 

 

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This Annual Report on Form 10-K, or this Annual Report, contains “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve substantial risks and uncertainties. The forward looking statements are contained principally in Part I, Item 1: “Business,” Part I, Item 1A: “Risk Factors,” and Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this Annual Report. In some cases, you can identify forward looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward looking statements. Although we believe that we have a reasonable basis for each forward looking statement contained in this Annual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. All statements other than statements of historical fact could be deemed forward looking, including but not limited to statements about:

You should refer to “Item 1A. Risk Factors” in this Annual Report for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward‑looking statements. As a result of these factors, we cannot assure you that the forward‑looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward‑looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward‑looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward‑looking statements in this Annual Report represent our views as of the date of this Annual Report. Subsequent events and developments may cause our views to change. However, while we may elect to update these forward‑looking statements at some point in the future, we undertake no obligation to publicly update any forward‑looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward‑looking statements as representing our views as of any date subsequent to the date of this Annual Report.

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TABLE OF CONTENTS

 

 

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Conventions Used in this Report

Mobile connected devices—We refer to mobile devices, such as traditional mobile phones, smartphones and tablets, that are able to connect to the internet through a cellular, wireless or other network as mobile connected devices.

Apps—Software applications specifically designed to operate on mobile connected devices are commonly called apps. Mobile connected devices can access information and content either through apps downloaded onto the device or from web‑based mobile sites accessed using a web browser installed on the device. For convenience, unless the context otherwise requires, we refer to these apps and web‑based mobile sites together as apps.

Developers—For convenience, we refer to the developers of apps and the publishers of web‑based mobile sites together as developers.

Unique users—When we discuss the number of unique users our platform reaches, we measure this as the total number of unique users whose devices made ad requests to our platform during the specified period. This represents the number of users to whom we had an opportunity to deliver ads during that period, not the number of users who actually received ads.

Profiles—When we discuss profiles, we are referring to the number of active unique users in our system that are targetable to receive ads as of the specified date.

Audience categories—When we discuss audience categories, we are referring to a grouping of data into a category based on a variety of user attributes, including location, demographics, affluence, intent, gender, and interests.

Cross‑screen users—When we discuss cross‑screen users, we are referring to users who access digital media through both traditional online means, such as on a laptop or PC, as well as on mobile connected devices.

Number of apps and sites—When we discuss the number of apps and sites enabled by developers to receive ads delivered through our platform, we count an app developed for multiple operating systems as multiple apps.

New and existing clients—When we discuss existing clients, we are referring to advertiser clients who had, as of the beginning of the period being discussed, previously advertised on our or Nexage, Inc.’s platform at any time. An existing client would include a new brand or subsidiary of a parent company that had previously advertised with us or Nexage. When we discuss new clients, we are referring to advertiser clients who had, as of the beginning of the period being discussed, not previously advertised on either platform.

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PART I

Item 1.  Business

Overview

We are an independent mobile advertising marketplace delivering products and services to advertisers and developers. We offer advertisers a suite of solutions that allow them to reach and connect with their target audiences across screens—from smartphones, tablets and other mobile devices to PCs—with the scale to make significant impact to their business. We offer developers the ability to maximize their advertising revenue and acquire new users for their apps. Our advertiser and developer solutions support all major mobile operating systems, including Apple® iOS, Android™, Windows Phone and BlackBerry®.  Our proprietary technology and data platform allows advertisers and developers to interact with us in the way that suits them best. For clients who want a higher degree of customer service, we offer our “managed media” services with dedicated account teams. For our clients who want to interact with us on a more automated basis, we offer tools that allow advertisers to buy our ad supply in a programmatic fashion through our ad exchange and developers the opportunity to manage and monetize their ad inventory through our supply side tool.  

The goal of our products and services is to help developers and advertisers remove the complexity from mobile advertising. For developers, we provide tools and services that allow their apps to display video, banner ads, interactive rich media and native ad formats. Through this relationship and access to our platform, developers gain access to advertising campaigns from brand marketers and performance‑based advertisers. In return, developers supply us with space on their apps to deliver ads for our advertiser clients and provide us access to anonymous data associated with their apps and users. We use data to build the sophisticated user profiles and audience groups that, in combination with our real‑time decisioning, optimization and targeting capabilities, enable us to deliver targeted advertising campaigns for our advertiser clients. Advertisers pay us to deliver their campaigns to mobile users, and we pay developers a fee for the use of their ad space. As we deliver more campaigns, we are able to collect additional anonymous data about users, audiences and the effectiveness of particular campaigns, which in turn enhances our targeting capabilities and allows us to deliver better performance for advertisers and better opportunities for developers to increase their revenue streams.

Our robust data management platform, or DMP, allows us to access, analyze and utilize the large volumes of data we possess. This data includes location, social, interest, and contextual data, as well as the insights we derive from measuring campaign effectiveness—providing a unique, multidimensional profile of individual consumers. To date, we have developed more than 700 million active server‑side unique user profiles, over 60 million of which link multiple mobile devices and PCs to a single specific user on an anonymous basis. These user profiles, combined with third party data from our data partners, enable us to deliver more relevant, engaging and effective advertising to our advertising clients. Our data asset also allows us to measure the impact of mobile advertising on consumer engagement, intent and action. We have developed a suite of solutions which measures several different areas of mobile advertising impact. As of December 31, 2014, our platform reached more than 650 million monthly unique users worldwide, including over 175 million monthly unique users in the United States alone. Approximately 60,000 apps and mobile sites are enabled by their developers to receive ads delivered through our platform, and we can deliver ads on over 9,000 different mobile device types and models.  While averaging more than three billion ad requests daily throughout 2014, in the last two months of 2014, our platform typically handled over nine billion ad requests daily, including requests received through our supply side tool, and requests received through third party platforms and processed by our programmatic buying tool.

We were incorporated under the laws of the State of Delaware on May 30, 2006. Our principal executive office is located at 2400 Boston Street, Suite 300, Baltimore, Maryland. Our telephone number is (410) 522‑8705. Our website address is www.millennialmedia.com. Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this Annual Report. We completed our initial public offering in March 2012 and our common stock is listed on the New York Stock Exchange under the symbol “MM”. Unless the context requires otherwise, the words “Millennial Media,” “Company,” “we,” “us,” and “our” refer to Millennial Media, Inc. and its wholly owned subsidiaries.

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On December 4, 2014, we completed our acquisition of Nexage, Inc., or Nexage, a privately held mobile advertising exchange and mobile supply side platform under the terms of an Agreement and Plan of Merger, dated September 23, 2014, as amended and restated on October 31, 2014.  As a result of this acquisition, Nexage is now a wholly owned subsidiary of Millennial Media.

In connection with the acquisition of Nexage, we issued an aggregate of 30,733,436 shares of our common stock to the former securityholders of Nexage and we also issued options to purchase an additional 7,949,236 shares of common stock in exchange for options to purchase shares of Nexage’s common stock.  In the aggregate, the shares issued and shares underlying options represent approximately 26.4% of the total number of shares of our common stock following the closing of the merger, assuming the exercise of all new stock options issued in exchange for the prior Nexage options. Of the total consideration, 4,876,603 of the shares of common stock issued in connection with the acquisition and 1,057,973 of the options exchanged in connection with the acquisition are being held in escrow as partial security for the indemnification obligations of the Nexage securityholders as set forth in the acquisition agreement. We also paid an aggregate of $24.9 million in cash consideration as part of the transaction. All outstanding warrants exercisable for common stock of Nexage were exchanged for a portion of the 30,733,436 shares of our common stock issued at closing. 

The Nexage acquisition expands our existing suite of products and comprehensive mobile advertising technology with an end-to-end mobile ad exchange and supply side platform that enables advertisers and developers to interact directly with each other in a programmatic, or automated, fashion. We expect to transition our existing ad exchange solution to Nexage’s technology and business model in 2015. We believe that the integration of Nexage’s supply side platform with our existing supply side tool will improve the solutions we offer to our developers, in particular by increasing access to and optimization of demand sources.

“Millennial Media,” “Millennial Media Exchange,” “MYDAS,” “S.M.A.R.T.,” “Mobile Mix,” “mmDSP,” “mmStudio,” “mMedia,”  “MM,” “Jumptap,” “Nexage,” and other trademarks or service marks of Millennial Media, Inc. or its subsidiaries appearing in this Annual Report are the property of Millennial Media, Inc. or its subsidiaries. All other trademarks, service marks and trade names appearing in this Annual Report are the property of their respective owners.

Our Strategy

Our objective is to be the strategic independent mobile advertising partner of choice for developers and advertisers by helping them capitalize on the large and growing mobile advertising opportunity. We simplify the technological complexities of mobile advertising to make it accessible to our partners. The following are the key elements of our growth strategy:

Industry Background and Market Opportunity

Consumers now spend more time on mobile devices than on personal computers. This market shift means that advertisers are moving advertising dollars and focus to mobile advertising platforms. We believe mobile advertising is

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now a marketing imperative, and provides significant benefits both to developers and to advertisers. For developers, mobile advertising provides the opportunity to monetize their apps, acquire users and gain insight into their usage. For advertisers, the combination of the personal nature of mobile devices, their enhanced functionality and unique data and measurement capabilities, creates a powerful platform for delivering highly targeted and effective advertising. Mobile advertising provides advertisers and developers with a number of benefits not available in traditional advertising media, such as anytime, anywhere access, personalization, location targeting and relevance, more complete user engagement, enhanced audience targeting and monetization opportunities for developers.

The convergence of several factors is fundamentally changing the way mobile users consume content on their mobile connected devices, creating a significant opportunity for mobile advertising. These factors include:

The Millennial Media Solution

Solutions for Advertisers

We offer advertisers the opportunity to reach and engage with their target audiences across mobile devices and screens. Our significant audience reach, access to a large volume of mobile ad space, sophisticated targeting capabilities and broad array of advertising formats allow us to deliver marketing solutions that can help grow our clients’ business. We

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also enable advertisers to gain insights into the performance of their ad campaigns and to manage their campaigns with a view to maximizing return on their advertising investment. Our solutions are designed to address the needs of large brand advertisers and advertising agencies, as well as performance‑based advertisers. Large brand and performance advertisers typically buy ads on our platform on a full service, or managed, basis, through direct interaction with our sales teams. We also have a smaller tier of clients that prefer to buy ads on our platform through a programmatic, or more automated, approach.

Sophisticated targeting

Our proprietary technology and DMP accesses and analyzes volumes of data about the users on our platform at any point in time. We combine information about a user’s profile and other relevant data in our DMP. Our DMP enables us to offer advertisers the ability to run more targeted and engaging advertising campaigns by incorporating our data, which has been derived from the approximately 60,000 apps and sites enabled to receive ads through our DMP, as well as third-party data or the advertisers’ own customer data.

We have developed more than 700 audience categories to which advertisers can target their ads. Audience categories can be based on a variety of user attributes, including location, demographics, affluence, intent, gender and interests. For example, if a user is browsing the internet and clicks on a news story about a car, that does not necessarily mean the user is interested in purchasing a car. Without additional data points, it is unclear whether the user is interested in purchasing a car or just happened to be interested in the news article. However, if a user has been in a car dealership recently, based on information that can be derived from the location of his or her mobile device, we could place the user into an “in‑market auto” audience category and target car ads to the user. Delivering automotive ads to this user may continue to be very relevant, even after the user has left the car dealership.

Our targeting capabilities also allow us to deliver the type of ad we predict is most likely to engage the user. For example, we may show a video ad for a sports car to a 25‑ to 35‑year‑old affluent male or a rich media ad for a full‑sized SUV or a sedan to a 45‑ to 55‑year‑old father.

We have developed a supplemental approach to data targeting that relies on integrations with several online and offline third party data providers. Our technology addresses the complex problem of merging these providers’ data into the mobile environment.

We also use this third party data to deliver our suite of attribution products. These products use the data derived from the apps and sites on our platform and third party data to show the impact of mobile advertising campaigns, for example, on consumer awareness, product purchase results and in‑store foot traffic. By showing the return on investment of mobile advertising to our large base of advertising clients, we seek to deliver them more consumer insight and thereby increase their confidence in the mobile medium.

We enable advertisers to reach, target and engage audiences directly through our network of approximately 60,000 apps and sites as well as through third party mobile ad exchanges. We also enable third party ad networks, demand side platforms, or DSPs, and advertising agency trading desks to target audiences directly through our ad exchange. We offer managed solutions where we manage algorithmic, real‑time buying on behalf of our clients, as well as direct real‑time bidding.

Cross‑screen capabilities

According to comScore, a market research firm, there are over 100 million cross‑screen users in the United States. We have developed a cross‑screen device map that allows us to associate a single user with his or her multiple online and mobile devices. Using this cross‑screen device map, we offer advertisers the ability both to deliver their message to the same user across screens and then to measure the effectiveness of that message across screens. For example, we are able to deliver an automotive advertisement to the same user on his or her smartphone, tablet and laptop. In addition, we can measure the effectiveness of the mobile advertising even if the user is influenced by an ad on his or her smartphone but interacts with the brand on his or her tablet or laptop, for example by using a website to build a vehicle or schedule an

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appointment at a dealership. Of our more than 700 million unique user profiles, we are currently able to target more than 60 million profiles across mobile connected devices and PCs.

mmDSP

mmDSP is our mobile‑first DSP. Integrated with most major mobile supply side platforms and exchanges, mmDSP is also able to access inventory directly from our developers and through our ad exchange. mmDSP processes billions of ad requests per day and values each ad request in real‑time based on the needs of our advertisers and its understanding of the likely value of the given ad request to those advertisers.

Millennial Media Exchange

Our ad exchange is a transparent marketplace, enabling advertisers to bid on individual ad impressions. Leveraging our sophisticated targeting capabilities and extensive developer relationships, we bring scale and premium quality to mobile real‑time bidding. Extensive device and user data obtained via our SDK ensures advertisers have the data they need to reach their desired target audiences. A wide range of bidding parameters are available in our ad exchange, enabling advertisers to target their campaign by specific criteria, including location, carrier, device ID, user IP address and developer information.

High level of engagement

We enable advertisers to deliver numerous ad formats:

We believe that these advertising formats, coupled with sophisticated targeting, increase user interaction and engagement with ads, which in turn drives better results for advertisers. Our mmStudio solution enables advertisers and advertising agencies to design rich media and creative ads using a set of templates we have developed. This solution allows the advertiser full control over ad content while ensuring that the ads can be easily integrated and delivered through our platform. We also support the most popular third party rich media creative formats. Our goal is to deliver the most engaging ad possible to a specific user, then to effectively measure the user’s engagement with the ad and, finally, to report the user’s engagement level back to the advertiser.

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Measurement, actionable insights and campaign management

As a result of the amount and nature of the data we collect in our DMP, our reporting to advertisers goes beyond traditional post‑campaign analysis to provide actionable insights for current ad campaigns and future marketing strategies. We offer real‑time reporting and analytics to help advertisers understand why some campaigns perform better than others. We also use our suite of measurement solutions to report back to advertisers on consumer behavior, mobile advertising impact and overall return‑on‑investment.

Solutions for Developers

Developers work with us in order to maximize ad revenues from their apps by receiving dollars associated with ad campaigns from our advertiser clients. We also offer developers solutions that help promote and distribute their apps, including the ability to run ads for their app on their own apps at no cost to them or to reinvest their ad proceeds by advertising their apps elsewhere on our platform. Our solutions provide developers with insights into their user base along with data to help them enhance their apps and their business.

Tools for App Developers

We provide an easy‑to‑use, turn‑key solution for developers. Through our mMedia portal, developers can download and integrate our software development kits, or SDKs, into their apps at no cost to them. The SDK then becomes an integral part of the app. We have created SDKs for each major mobile operating system. Our SDKs allow the app to receive multiple kinds of ads—including video, interactive rich media, banner display and native ad formats—and also allow developers to take advantage of advanced mobile device features, such as gestures, pinch‑zoom, device orientation and movement. Together, these features enable a compelling interactive user experience with ads. We also offer developers ad serving capabilities, mediation tools and access to our ad exchange, which, together, allow developers to allocate ad requests among various advertising campaign sources, including ads the developers sell themselves, ads generated through us directly, and ads from third party demand side platforms, agency trading desks and third party networks. The ability to access ad demand from a variety of sources enables developers to maximize revenue from their ad space. Our SDKs support all major operating systems and thousands of different mobile device models, so developers can be confident that our ads can be delivered to their apps regardless of the operating system or device on which they will be used. Our goal is to have our SDKs integrated into as many apps as possible so that we can deliver ads to these apps and thereby maximize our platform reach and scale. Therefore, we do not charge developers for our SDKs.

Data and Analytics

We offer developers sophisticated reporting and analytics through an integrated dashboard on our mMedia portal, which includes comprehensive ad revenue generation reports for their apps across all major mobile operating systems. These reports help developers gain insight into user interaction and behavior and the performance of their apps. We share this performance data with developers to help them improve their apps and their deployment of our SDKs in order to maximize their ad revenue. In addition, through the more than three billion ad requests that we typically receive each day through our supply side tool (including the Nexage platform), we are able to gain important insights about users that we are able to share with developers on an aggregated basis.

Services

We offer all developers support through our mMedia portal, as well as various webinars, blogs and, in some cases, support from account managers. We then use the insights we gain from our interactions with developers to enhance the tools we provide to our full developer base.

Our Technology-Based Solution

MYDAS, which is how we refer to our comprehensive mobile advertising technology, along with our data assets, is at the core of the solutions and services that we provide to developers and advertisers. Each time an app makes a request to receive an ad, MYDAS performs several tasks automatically and in real‑time, including identifying unique users;

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targeting ads based on user interest, behavior and location; delivering those ads to millions of users through tens of thousands of apps, running on thousands of different device types; ensuring that the ads will work over wireless connections of varying quality and speed; and measuring user engagement and ad performance.

MYDAS combines proprietary technology with our data in order to deliver the right mobile ad to the right person at the right time in the right place. MYDAS, including the Nexage supply side platform, typically receives over three billion ad requests daily in the aggregate. MYDAS typically accomplishes ad delivery in under 50 milliseconds from ad request,  and includes the following sequences:

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MYDAS also includes a suite of enterprise web services that drive our client‑facing tools and interfaces like mMedia and our internal workflow tools and interfaces. Our web services layer enables us to build new offerings and scale our platform for developers and advertisers quickly and cost‑effectively while also enabling us to integrate our solutions with those of third parties.

MYDAS consists primarily of software incorporating our proprietary algorithms, database software and the data that we store. Our software and data are hosted in data centers in the United States. We primarily lease space at data centers on a managed services basis, although we also co‑locate servers and other equipment that we own at the same data centers. In addition, we use third party web services for some of our data and computing needs.

We use techniques that we believe are standard in our industry to protect MYDAS against unauthorized access. These techniques include password‑controlled user access and authentication, secure hosting with firewalls, encryption, load balancers, switches, anti‑virus software and use of physically secure and redundant facilities.

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Our Advertisers and Developers

We have built relationships with developers and advertisers of all sizes. Our developer base includes large mobile web publishers, large app developers and other developers. Our advertiser clients include leading advertising agencies and brands, as well as smaller advertisers and often the developers themselves. Throughout our history, we have worked with many of the top 100 advertisers as ranked by Ad Age, and in 2014, based on the Ad Age rankings for 2013, which is the most recent ranking available, we delivered ads for 95 of the top 100 advertisers. These are typically the largest brand advertisers, and many of them have multiple brands for which they run campaigns throughout the year. We have analyzed the total spending by the top 100 Ad Age advertisers based on the most current rankings for each respective period on our platform from 2010 through 2014. The results of this analysis are summarized in the table below.

Use of our Platform by the Top 100 Ad Age Advertisers

 

 

We have increased the average annual spending from this group of advertisers by more than 234% during the period from 2010 to 2014. We attribute this growth in average spending among these advertisers to our success in capturing advertising campaigns from more brands per advertiser, running more campaigns for each brand per year and supporting larger campaigns from these advertisers. We believe our increased penetration of these 100 advertisers is attributable to increased sales and marketing efforts and our growing reputation for delivering results for large brand advertisers.

Our largest advertiser and developer clients are typically different from period to period. We believe our business is not substantially dependent on any particular client, and no individual advertising client represented more than 10% of our revenue for the year ended December 31, 2014.

Competition

The mobile advertising market is highly competitive. The competitive dynamics of our market are unpredictable because it is in an early stage of development, rapidly evolving, fragmented and subject to potential disruption by new technological innovations. Several competitors provide mobile advertising solutions. Our primary competitors are the large advertising platforms offered by Google and Apple, both of which focus on advertising solutions built for their proprietary mobile operating systems, Android and iOS, respectively. We also compete with in‑house solutions used by companies who choose to coordinate mobile advertising across their own properties, such as Facebook, Twitter, Yahoo!, and Pandora, as well as some smaller point‑solution offerings in the mobile advertising market. Some of these companies, such as Facebook and Twitter, have growing mobile advertising networks that coordinate advertising across third party properties as well.

We believe the principal competitive factors in our industry include the following:

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We believe that we compete favorably with respect to all of these factors and that we are well‑positioned as an independent mobile advertising company that can operate without regard to brand of mobile device or operating system.

Technology and Development

Our technology and development efforts are focused on enhancing the architecture of MYDAS and creating additional functionality for our developer and advertiser customers. We are also continuously working to enhance our database of user profiles, which enables us to help our advertisers reach and engage more precise audiences developed through demographic and behavioral analysis, and then better measure that improved engagement. As part of our cross‑platform SDKs that we provide to developers, we seek to include new capabilities, such as additional analytical tools, notification solutions, payment solutions and mediation tools.

During the years ended December 31, 2014, 2013 and 2012, our technology and development expenses were $29.5 million,  $19.0 million and $13.6 million, respectively.

Intellectual Property

Our ability to protect our intellectual property, including our technology, will be an important factor in the success and continued growth of our business. We protect our intellectual property through trade secrets law, patents, copyrights, trademarks and contracts. Some of our technology relies upon third party licensed intellectual property.

We have 97 issued patents, both in the U.S. and internationally, and have more than 99 pending U.S. and international patent applications as of December 31, 2014. Our U.S.-issued patents extend to various dates between 2025 and 2032.  

We own U.S. trademark registrations for Millennial Media,  Jumptap,  tapMatch,  MYDAS,  Nexage,  Mobile Advertising., Demand More. and Bridging the Mobile Advertising Economy. We also own trademark registrations for Millennial Media in Singapore and Japan and for Jumptap in Australia, Canada, the European Union, Israel, Japan, Malaysia, Mexico, Romania, South Korea, Switzerland, Taiwan, and Turkey, and with the World Intellectual Property Organization. In addition, we own a pending trademark application for Millennial Media in the European Union, as well as pending applications for Jumptap in Brazil, China, Russia, India, Indonesia, Saudi Arabia, and Singapore. We continue to review whether pursuing trademark protection in other countries is appropriate.

In addition to the foregoing, we have established business procedures designed to maintain the confidentiality of our proprietary information, including the use of confidentiality agreements and assignment of inventions agreements with employees, independent contractors, consultants and companies with which we conduct business.

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Government Regulation

We are subject to numerous U.S. and foreign laws and regulations that are applicable to companies engaged in the business of advertising on mobile devices. In addition, many areas of law that apply to our business are still evolving, and could potentially affect our business to the extent they restrict our business practices or impose a greater risk of liability.

Given the nascent stage of mobile advertising, industry practices are rapidly evolving. We participate in the Digital Advertising Alliance and other industry groups that are developing best practices for the mobile advertising industry.

Privacy

Privacy and data protection laws play a significant role in our business. In the United States, at both the state and federal level, there are laws that govern activities such as the collection and use of data by companies like us, and privacy and data protection issues generally have gained wide media and public attention recently. Online advertising activities in the United States have primarily been subject to regulation by the Federal Trade Commission, which has regularly relied upon Section 5 of the Federal Trade Commission Act to enforce against unfair and deceptive trade practices. Section 5 has been the primary regulatory tool used to enforce against alleged violations of online privacy policies, and would apply to privacy practices in the mobile advertising industry. In December 2012, the Federal Trade Commission adopted amendments to rules under the Children’s Online Privacy Protection Act, or COPPA, which went into effect in July 2013. These amendments broadened the potential applicability of COPPA compliance obligations to our activities and those of our clients.

The issue of privacy in the mobile advertising industry is still evolving. Federal legislation and rule‑making has been proposed from time to time that would govern certain advertising practices as they relate to mobile devices, including the use of precise geo‑location data. Although such legislation has not been enacted, it remains a possibility that such federal and state laws may be passed in the future.

There have been numerous civil lawsuits, including class action lawsuits, filed against companies that conduct business in the mobile device industry, including makers of mobile devices, mobile application providers, mobile operating system providers, and mobile third party networks. Plaintiffs in these lawsuits have alleged a range of violations of federal, state and common laws, including computer trespass and violation of privacy laws.

In addition, mobile services are generally not restricted by geographic boundaries, and our services reach mobile devices throughout the world. We currently transact business in Europe and Southeast Asia and, as a result, some of our activities may also be subject to the laws of foreign jurisdictions. In particular, European data protection laws can be more restrictive regarding the collection and use of data than those in U.S. jurisdictions. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.

Advertising

Even though we receive contractual protections from our advertising business partners with respect to their ads, we may nevertheless be subject to regulations concerning the content of ads. Federal and state laws governing intellectual property or other third party rights could apply to the content of ads we place. Laws and regulations regarding unfair and deceptive advertising, sweepstakes, advertising to children, and other consumer protection regulations, may also apply to the ads we place on behalf of clients.

Employees

As of December 31, 2014, we had 636 employees. None of our U.S.‑based employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

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Information about Segment and Geographic Revenue

Information about segment and geographic revenue is set forth in Note 11 to our consolidated financial statements under Item 8 of this Annual Report.

Available Information

Our internet website address is www.millennialmedia.com. In addition to the information about us and our subsidiaries contained in this Annual Report, information about us can be found on our website. Our website and information included in or linked to our website are not part of this Annual Report.

Our annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or the SEC. The public may read and copy the materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1‑800‑SEC‑0330. Additionally the SEC maintains an internet site that contains reports, proxy and information statements and other information. The address of the SEC’s website is www.sec.gov.

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Item 1A.  Risk Factors

Our business is subject to numerous risks. You should carefully consider the following risks and all other information contained in this Annual Report, as well as general economic and business risks, together with any other documents we file with the SEC. If any of the following events actually occur or risks actually materialize, it 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.

Risks Related to Our Acquisition of Nexage

 

The consummation of our acquisition of Nexage could have a negative impact on our business or on our stock price.

 

On December 4, 2014, we completed our acquisition of Nexage, a mobile advertising exchange and mobile supply side platform, in which we acquired all of the outstanding shares of capital stock of Nexage.  We refer to this transaction in these Risk Factors as the “Merger”.  The closing of the Merger could disrupt our and Nexage’s businesses in the following ways, any of which could negatively affect our stock price or could harm our financial condition, results of operations or business prospects:

 

 

 

 

The issuance of our shares in the Merger diluted the voting power and economic interests of our current stockholders.

 

Upon consummation of the Merger, all of Nexage’s capital stock held by accredited investors and all of its warrants issued and outstanding immediately prior to the effective time of the Merger were converted into shares of our common stock and cash. In connection with the Merger, we have issued a total of 30,733,436 shares of our common stock to the former securityholders of Nexage.  We have also issued new options to purchase our common stock in exchange for prior options to purchase common stock of Nexage.  These newly issued options are, in the aggregate, exercisable for 7,949,236 shares of our common stock. The aggregate potential equity consideration of 38,682,672 shares, including the shares issuable upon the exercise of options, represents approximately 26.4% of the total number of shares of Millennial common stock following the closing of the Merger, but assuming the exercise of all new stock options issued in exchange for the prior Nexage options.  Consequently, our stockholders prior to the Merger now own a significantly smaller percentage of the combined company and they should expect to exercise less influence over the management and policies of the combined company following the Merger than they previously exercised over our management and policies.

 

We may be unable to realize the benefits anticipated by the Merger, including estimated cost savings and synergies, or it may take longer than we anticipate for us to achieve those benefits.

 

Our realization of the benefits anticipated as a result of the Merger will depend in part on the integration of Nexage’s business with ours. However, there can be no assurance that we will be able to operate Nexage’s business profitably or integrate it successfully into our operations in a timely fashion, or at all. The size of the combined company’s business is significantly larger than our business was prior to the Merger. Our future success as a combined company depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for our management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. The dedication of management resources to this integration could detract attention from our current

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day-to-day business, and we cannot assure you that there will not be substantial costs associated with the transition process or other negative consequences as a result of these integration efforts. These effects, including, but not limited to, incurring unexpected costs or delays in connection with integration of the two businesses, or the failure of Nexage’s business to perform as expected, could harm our results of operations.

 

The loss of key personnel could hurt our business and our prospects.

 

The success of the Merger will depend, in part, on our ability to retain key employees who are continuing employment with the combined company now that the Merger is completed. If any of these key employees terminate their employment, our sales, marketing or development activities might be negatively impacted and management’s attention might be diverted from successfully integrating Nexage’s operations. In addition, we might not be able to locate suitable replacements on reasonable terms for any such key employees who leave the combined company.

 

Our success will also depend on relationships with third parties and pre-existing customers of both companies, which relationships may be affected by customer preferences or public attitudes about the Merger.

 

Our success following the Merger will be dependent on the ability to maintain and renew relationships with pre-existing customers and other clients of both our company and Nexage and to establish new advertiser and developer relationships. There can be no assurance that the business of the combined company will be able to maintain pre-existing customer contracts and other business relationships, or that we will be able to enter into or maintain new customer contracts and other business relationships on acceptable terms, if at all. Our failure to maintain important customer relationships could harm our reputation, while also negatively impacting our financial condition and results of operations of the combined company.

 

Charges to earnings resulting from the Merger may cause our operating results to suffer.

 

Under accounting principles, we will allocate the total purchase price of the Merger to Nexage’s net tangible assets and intangible assets based on their fair values as of the date of the Merger, and we will record the excess of the purchase price over those fair values as goodwill. Our management’s estimates of fair value will be based upon assumptions that they believe to be reasonable but that are inherently uncertain. The following factors, among others, could result in material charges that would cause our financial results to be negatively impacted:

 

 

 

 

 

Additional costs may include costs of employee redeployment, relocation and retention, including salary increases or bonuses, accelerated amortization of deferred equity compensation and severance payments, reorganization or closure of facilities, taxes and termination of contracts that provide redundant or conflicting services. Some of these costs may have to be accounted for as expenses that would decrease our net income and earnings per share for the periods in which those adjustments are made.

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Risks Related to Our Business and Our Industry

We have incurred significant net losses since inception, and we expect our operating expenses to increase significantly in the foreseeable future. Accordingly, we may never achieve profitability.

We incurred net losses of $149.1 million and $15.1 million for the years ended December 31, 2014 and 2013, respectively, and we had an accumulated deficit of $214.2 million as of December 31, 2014. We do not know when or if we will ever achieve profitability. Although our revenue has increased substantially in recent periods, it is likely that we will not be able to maintain this rate of revenue growth. Historically, our operating expenses have increased in proportion to our revenue. We anticipate that our operating expenses will continue to increase in the foreseeable future to the extent that our revenue grows, and as we increase headcount primarily driven by the Nexage acquisition. Additionally, our acquisition‑related costs may increase if we pursue additional acquisition opportunities. Although we expect to achieve operating efficiencies and greater leverage of resources as we grow, if we are unable to do so, we may be unable to achieve profitability. If we are not able to achieve and maintain profitability, the value of our company and our common stock could decline significantly.

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

The mobile advertising market is highly competitive, with numerous companies providing mobile advertising services. We compete primarily with Google and Apple, both of which are significantly larger than us and have more capital to invest in their mobile advertising businesses, and with social networking companies like Facebook and Twitter, that are expanding their own mobile advertising networks.  We also compete with in-house solutions used by companies, such as Yahoo! and Pandora, that choose to coordinate mobile advertising across their own properties. They, or other companies that offer competing mobile advertising solutions, may establish or strengthen cooperative relationships with their mobile operator partners, brand advertisers, app developers or other parties, thereby limiting our ability to promote our services and generate revenue. Competitors could also seek to gain market share from us by reducing the prices they charge to advertisers or by introducing new technology tools for developers. Moreover, increased competition for mobile advertising space from developers could result in an increase in the portion of advertiser revenue that we must pay to developers to acquire that advertising space.

Our business will suffer to the extent that our developers and advertisers purchase and sell mobile advertising directly from each other or through other companies that are able to become intermediaries between developers and advertisers. For example, we are aware of companies that have substantial existing platforms for developers who had previously not heavily used those platforms for mobile advertising campaigns. These companies could compete with us to the extent they expand into mobile advertising. Other companies, such as large app developers with a substantial mobile advertising business, may decide to directly monetize some or all of their advertising space without utilizing our services. Other companies that offer analytics, mediation, exchange or other third-party services may also become intermediaries between mobile advertisers and developers and thereby compete with us. Any of these developments would make it more difficult for us to sell our services and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share.

The mobile advertising market may deteriorate or develop more slowly than expected, which could harm our business.

Advertising on mobile connected devices is an emerging phenomenon. Advertisers have historically spent a smaller portion of their advertising budgets on mobile media as compared to traditional advertising methods, such as television, newspapers, radio and billboards, or online advertising over the internet, such as placing banner ads on websites. Future demand and market acceptance for mobile advertising is uncertain. Many advertisers still have limited experience with mobile advertising and may continue to devote larger portions of their advertising budgets to more traditional offline or online personal computer-based advertising, instead of shifting additional advertising resources to mobile advertising. In addition, our current and potential advertiser clients may ultimately find mobile advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and services, and they may even reduce their spending on mobile advertising from current levels as a result. If the market for mobile advertising deteriorates, or develops more slowly than we expect, we may not be able to increase our revenue.

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Our business is dependent on the continued growth in usage of smartphones, tablets and other mobile connected devices.

Our business depends on the continued proliferation of mobile connected devices, such as smartphones and tablets, that can connect to the internet over a cellular, wireless or other network, as well as the increased consumption of content through those devices. Consumer usage of these mobile connected devices may be inhibited for a number of reasons, such as:

For any of these reasons, users of mobile connected devices may limit the amount of time they spend on these devices and the number of apps they download on these devices. If user adoption of mobile connected devices and consumer consumption of content on those devices do not continue to grow, our total addressable market size may be significantly limited, which could compromise our ability to increase our revenue and to become profitable.

If mobile connected devices, their operating systems or content distribution channels, including those controlled by our primary competitors, develop in ways that prevent our advertising from being delivered to their users, our ability to grow our business will be impaired.

Our business model depends upon the continued compatibility of our mobile advertising platform with most mobile connected devices, as well as the major operating systems that run on them and the thousands of apps that are downloaded onto them.

 

The design of mobile devices and operating systems is controlled by third parties with whom we do not have any formal relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Network carriers, such as Verizon, AT&T, Sprint or T-Mobile, may also affect the ability to download apps or access specified content on mobile devices.

 

In some cases, the parties that control the development of mobile connected devices and operating systems include companies that we regard as our most significant competitors. For example, Apple controls two of the most popular mobile devices, the iPhone® and the iPad®, as well as the iOS operating system that runs on them. Apple also controls the App Store for downloading apps that run on Apple® mobile devices. Similarly, Google controls the Android™ platform operating system. If our mobile advertising platform were unable to work on these devices or operating systems, either because of technological constraints or because a maker of these devices or developer of these operating systems wished to impair our ability to provide ads on them or our ability to fulfill advertising space from developers whose apps are distributed through their controlled channels, our ability to generate revenue could be significantly harmed.

 

We do not control the mobile networks over which we provide our advertising services.

Our mobile advertising platform is dependent on the reliability of network operators and carriers who maintain sophisticated and complex mobile networks, as well as our ability to deliver ads on those networks at prices that enable us to realize a profit. Mobile networks have been subject to rapid growth and technological change, particularly in recent years. We do not control these networks.

 

Mobile networks could fail for a variety of reasons, including new technology incompatibility, the degradation of network performance under the strain of too many mobile consumers using the network, a general failure from natural

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disaster or a political or regulatory shut-down. Individuals and groups who develop and deploy viruses, worms and other malicious software programs could also attack mobile networks and the devices that run on those networks. Any actual or perceived security threat to mobile devices or any mobile network could lead existing and potential device users to reduce or refrain from mobile usage or reduce or refrain from responding to the services offered by our advertising clients. If the network of a mobile operator should fail for any reason, we would not be able to effectively provide our services to our clients through that mobile network. This in turn could hurt our reputation and cause us to lose significant revenue.

 

Mobile carriers may also increase restrictions on the amounts or types of data that can be transmitted over their networks. We currently generate different amounts of revenue from our advertiser clients based on the kinds of ads we deliver, such as display ads, rich media ads or video ads. In some cases, we are paid by advertisers on a cost-per-thousand, or CPM, basis depending on the number of ads shown. In other cases, we are paid on a cost-per-click, or CPC, or cost-per-action, or CPA, basis depending on the actions taken by the mobile device user. Different types of ads consume differing amounts of bandwidth and network capacity. If a network carrier were to restrict the amounts of data that can be delivered on that carrier’s network, or otherwise control the kinds of content that may be downloaded to a device that operates on the network, it could negatively affect our pricing practices and inhibit our ability to deliver targeted advertising to that carrier’s users, both of which could impair our ability to generate revenue.

Mobile connected device users may choose not to allow advertising on their devices.

The success of our business model depends on our ability to deliver targeted, highly relevant ads to consumers on their mobile connected devices. Targeted advertising is done primarily through analysis of data, much of which is collected on the basis of user‑provided permissions. 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. Users may elect not to allow data sharing for targeted advertising for a number of reasons, such as privacy concerns, or pricing mechanisms that may charge the user based upon the amount or types of data consumed on the device. Users may also elect to opt out of receiving targeted advertising from our platform. In addition, the designers of mobile device operating systems are increasingly promoting features that allow device users to disable some of the functionality, which may impair or disable the delivery of ads on their devices, and device manufacturers may include these features as part of their standard device specifications. Although we are not aware of any such products that are widely used in the market today, as has occurred in the online advertising industry, companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any of these developments were to occur, our ability to deliver effective advertising campaigns on behalf of our advertiser clients would suffer, which could hurt our ability to generate revenue and become profitable.

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

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. As part of the nascent mobile advertising industry, we will encounter risks and difficulties frequently encountered by early‑stage companies in rapidly evolving industries, including the need to:

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

We may not be able to enhance our mobile advertising platform to keep pace with technological and market developments.

The market for mobile advertising services is characterized by rapid technological change, evolving industry standards, new entrants to the market and frequent new service introductions. To keep pace with technological developments, satisfy increasing advertiser and developer requirements, maintain the attractiveness and competitiveness of our mobile advertising solutions and ensure compatibility with evolving industry standards and protocols, we will need to regularly enhance our current services and to develop and introduce new services on a timely basis.

For example, advances in technology that allow developers to generate revenue from their apps without our assistance could harm our relationships with developers and diminish our available advertising space within their apps. Similarly, technological developments that allow third parties to better mediate the delivery of ads between advertisers and developers by introducing an intermediate layer between us and our developers could impair our relationships with those developers. Our inability, for technological, business or other reasons, to enhance, develop, introduce and deliver compelling mobile advertising services in response to changing market conditions and technologies or evolving expectations of advertisers or mobile device users could hurt our ability to grow our business and could result in our mobile advertising platform becoming obsolete.

We depend on developers for mobile advertising space to deliver our advertiser clients’ advertising campaigns, and any decline in advertising supply from these developers could hurt our business.

We depend on developers to provide us with space within their apps, which we refer to as “advertising supply” or “advertising inventory,” on which we deliver ads. The developers that sell their advertising supply to us are not required to provide any minimum amounts of advertising space to us, nor are they contractually bound to provide us with consistent advertising supply. The tools that we provide to developers allow them to make decisions as to how to allocate advertising supply among us and other advertising providers, some of which may be our competitors. A third party acting as a mediator on behalf of developers, or any competing mediation tools embedded within a developer’s apps, could result in pressure on us to increase the prices we pay to developers for that supply or otherwise block our access to developer supply, without which we would be unable to deliver ads on behalf of our advertiser clients.

 

We generate a significant portion of our revenue from the advertising supply provided by a limited number of developers. In most instances, developers can change the amount of supply they make available to us at any time. Developers may also change the price at which they offer supply to us, or they may elect to make advertising space available to our competitors who offer ads to them on more favorable economic terms. In addition, developers may place significant restrictions on our use of their advertising supply. These restrictions may prohibit ads from specific advertisers or specific industries, or they could restrict the use of specified creative content or format. Developers may also use a fee-based or subscription-based business model to generate revenue from their content, in lieu of or to reduce their reliance on ads.

 

If developers decide not to make advertising supply available to us for any of these reasons, decide to increase the price of supply, or place significant restrictions on our use of their advertising space, we may not be able to replace this with supply from other developers that satisfy our requirements in a timely and cost-effective manner. If this happens, our revenue could decline or our cost of acquiring supply could increase.

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Our business depends on our ability to collect and use data to deliver ads, and any limitation on the collection and use of this data could significantly diminish the value of our services and cause us to lose clients and revenue.

When we deliver an ad to a mobile device, we are often able to collect anonymous information about the placement of the ad and the interaction of the mobile device user with the ad, such as whether the user visited a landing page or watched a video. We may also be able to collect information about the user’s mobile location. 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 supply provided to us by developers. For example, we may use the collected information to limit the number of times a specific ad is presented to the same mobile device, to provide an ad to only certain types of mobile devices, or to provide a report to an advertiser client on the number of its ads that were clicked. We also compile the data derived from our platform to publish monthly reports of key mobile industry trends in the form of our S.M.A.R.T. and Mobile Mix reports, which we provide to advertisers and developers to enable them to improve their business decisions about mobile advertising or monetization strategies and to promote their use of our services.

Although the data we collect is not personally identifiable information, our clients might decide not to allow us to collect some or all of this data or might limit our use of this data. For example, app developers may not agree to provide us with the data generated by interactions with the content on their apps, or device users may not consent to having information about their device usage provided to the developer. Any limitation on our ability to collect data about user behavior and interaction with mobile device content could make it more difficult for us to deliver effective mobile advertising programs that meet the demands of our advertiser clients.

Although our contracts with advertisers generally permit us to aggregate data from advertising campaigns, these clients might nonetheless request that we discontinue using data obtained from their campaigns that have already been aggregated with other clients’ campaign data. It would be difficult, if not impossible, to comply with these requests, and responding to these kinds of requests could also 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 of data, could also limit our ability to aggregate and analyze mobile device user data from our clients’ advertising campaigns. If that happens, we may not be able to optimize the placement of advertising for the benefit of our advertiser clients, which could make our services less valuable, and, as a result, we may lose clients and our revenue may decline.

Our business depends in part on our ability to collect and use location‑based information about mobile connected device users.

Our business model depends in part upon our ability to collect data about the location of mobile connected device users when they are interacting with their devices, and then to use that information to provide effective targeted advertising on behalf of our advertising clients. Our ability to either collect or use location‑based data could be restricted by a number of factors, including new laws or regulations, technology or consumer choice. Limitations on our ability to either collect or use location data could impact the effectiveness of our platform and our ability to target ads.

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

In the course of providing our services, we collect, use, transmit and store information related to mobile devices and the ads we place, including a device’s geographic location for the purpose of delivering targeted location‑based ads to the device. Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we collect across our mobile advertising platform. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure, or perceived failure, by us to comply with U.S. federal or state laws or international laws, including laws and regulations regulating privacy, data security, or consumer protection, could result in proceedings or actions against us by governmental entities or others. We are aware of several ongoing lawsuits filed against companies in our industry alleging various violations of privacy‑related laws. Any such proceedings against us could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our

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costs of doing business, adversely affect the demand for our services and ultimately result in the imposition of monetary liability or changes to our business practices. We may also be contractually liable to indemnify and hold harmless our clients from the costs or consequences of inadvertent or unauthorized disclosure of data that we store or handle as part of providing our services.

The regulatory framework for privacy issues worldwide is evolving, 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 mobile industry in particular. For example, in January 2013, the State of California released a series of recommendations for privacy best practices for the mobile industry. In January 2014, a California law also became effective amending the required disclosures for online privacy policies. In January 2015, another California law went into effect limiting the types of advertised products that may be served on online properties directed to minors under 18. 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 location‑based advertising services, collection or use of data to target ads, and communication with consumers via mobile devices.

The U.S. government, including the Federal Trade Commission, or FTC, and the Department of Commerce, may take steps that result in greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. In December 2012, the FTC adopted revisions to the Children’s Online Privacy Protection Act, or COPPA, that went into effect on July 1, 2013. COPPA imposes a number of obligations on operators of websites and online services including mobile apps, such as obtaining parental consent, if the operator collects specified information from users and either the site or service is directed to children under 13 years old or the site or service knows that a specific user is a child under 13 years old. The changes broadened the applicability of COPPA, including the types of information that are subject to these regulations, and may apply to information that we or our clients collect through mobile devices or apps that, prior to the adoption of these new regulations, was not subject to COPPA. These revisions impose new compliance burdens on us. In February 2013, the FTC issued a staff report containing recommendations for best practices with respect to consumer privacy for the mobile industry. To the extent that we or our clients choose to adopt these recommendations, or other regulatory or industry requirements become applicable to us, we may have greater compliance burdens.

As we expand our operations globally, compliance with regulations that differ from country to country may also impose substantial burdens on our business. In particular, the European Union has traditionally taken a broader view as to what is considered personal information and has imposed greater obligations under data privacy regulations. In addition, individual EU member countries have had discretion with respect to their interpretation and implementation of the regulations, which has resulted in variation of privacy standards from country to country. In January 2012, the European Commission announced significant proposed reforms to its existing data protection legal framework, including changes in obligations of data controllers and processors, the rights of data subjects and data security, restrictions on profiling, and breach notification requirements. These changes are still going through the EU legislative process, with a view to being adopted at the end of 2015 at the earliest, with a two-year period after adoption before they would go into effect. The EU proposals, if finally adopted, may result in a greater compliance burden if we deliver ads to mobile device users 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 compromise our ability to effectively pursue our growth strategy.

In addition to compliance with government regulations, we voluntarily participate in several trade associations and industry self‑regulatory groups that promulgate best practices or codes of conduct addressing the provision of location‑based services, delivery of promotional content to mobile devices, and tracking of device users or devices for the purpose of delivering targeted advertising. In 2013, the Digital Advertising Alliance, which administers Self-Regulatory Principles to which we adhere, issued guidance on the application of its Self-Regulatory Principles to the mobile environment.  The Digital Advertising Alliance will announce an effective date for this mobile guidance. We could be adversely affected by this mobile guidance or by other 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 are perceived as not operating in accordance with industry best practices or any such guidelines or codes with regard to privacy, we may be the target of investigations or enforcement actions by government regulators or private lawsuits, our reputation may suffer and we could lose relationships with advertiser or developer partners.

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Our business involves the use, transmission and storage of confidential information, and the failure to properly safeguard such information could result in significant reputational harm.

We may at times collect, store and transmit information of, or on behalf of, our clients that may include certain types of confidential information that may be considered personal or sensitive, and that are subject to laws that apply to data breaches. We believe that we take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store, but there is no guarantee that inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts to protect this information, including through a cyber-attack that circumvents existing security measures and compromises the data that we store. If such unauthorized disclosure or access does occur, we may be required to notify persons whose information was disclosed or accessed. Most states have enacted data breach notification laws and, in addition to federal laws that apply to certain types of information, such as financial information, federal legislation has been proposed that would establish broader federal obligations with respect to data breaches. We may also be subject to claims of breach of contract for such unauthorized disclosure or access, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed. The unauthorized disclosure of information, or a cyber-security incident involving data that we store, may result in the termination of one or more of our commercial relationships or a reduction in client confidence and usage of our services. We may also be subject to litigation alleging the improper use, transmission or storage of confidential information, which could damage our reputation among our current and potential clients and cause us to lose business and revenue.

Our quarterly operating results have fluctuated in the past and may do so in the future, which could cause our stock price to decline.

Our operating results have historically fluctuated and our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period‑to‑period comparisons of our operating results as an indication of our future performance. Factors that may affect our quarterly operating results include the following:

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Our operating results may fall below the expectations of market analysts and investors in some future periods. If this happens, even just temporarily, the market price of our common stock may fall.

During 2014, we recognized a significant impairment charge related to our goodwill and intangible assets.  We may be required to recognize additional such charges in the future, which could negatively affect our results or operations and financial condition.

 

Goodwill and intangible asset impairment analysis and measurement is a process that requires significant judgment.  Our stock price and various other factors affect the assessment of the fair value of our underlying business for purposes of performing any goodwill and intangible asset impairment assessment.  For example, our public market capitalization sustained a decline after June 30, 2014 to a value below the net book carrying value of our equity, triggering the need for a goodwill and intangible asset impairment analysis.  As a result of our goodwill and intangible asset impairment analyses, we recorded goodwill and intangible asset impairment charges in the quarter ended September 30, 2014.

 

As of December 31, 2014, we had $172.7 million of remaining goodwill and intangible assets.  This balance was net of the $93.5 million impairment we recorded in the quarter ended September 30, 2014 and included the $81.4 million of additional goodwill and intangible assets in the fourth quarter of 2014 we recorded in connection with our acquisition of Nexage.  If our enterprise value continues to decline below our net asset value or if our financial condition deteriorates, we may recognize further impairment of our goodwill and intangible assets, which would result in charges that could adversely affect our results of operations and financial position.

 

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

Our cash flows from operations could vary from quarter to quarter due to the seasonal nature of our advertisers’ spending. For example, many advertisers devote the largest portion of their budgets to the fourth quarter of the calendar year, to coincide with increased holiday purchasing. To date, these seasonal effects have been masked by our rapid revenue growth. However, if and to the extent that seasonal fluctuations become more pronounced, our operating cash flows could fluctuate materially from period to period as a result.

We report revenue on a gross basis, but Nexage reports revenue on a net basis.

 

Our recognition of revenue is governed by specified criteria that must be met and that determine whether we report revenue on a gross basis, as a principal, or on a net basis, as an agent, depending upon the nature of the sales transaction. We currently recognize revenue on a gross basis, but Nexage recognized revenue on a net basis. We continue to recognize revenue from the portion of our business represented by Nexage through its supply side platform on a net basis. We will continue to evaluate future transactions in which we may engage and/or substantive changes in our business or accounting standards or interpretations as to whether we believe we are acting as the principal or agent in our relationships. This could lead to variations in our revenue and margins that do not necessarily correspond with changes in our underlying activity, may cause comparisons with prior periods to be less meaningful and may make it more difficult for investors to evaluate our performance.

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

Our success requires us to maintain and expand our current advertiser client relationships and to develop new relationships. Our contracts with our advertiser clients generally do not include long‑term obligations requiring them to purchase our services and are cancelable upon short or no notice and without penalty. As a result, we may have limited visibility as to our future advertising revenue streams. We cannot assure you that our advertiser clients will continue to use our services or that we will be able to replace, in a timely or effective manner, departing clients with new clients that

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generate comparable revenue. If a major advertising client representing a significant portion of our business decides to materially reduce its use of our platform or to cease using our platform altogether, it is possible that we would not have a sufficient supply of ads to fill our developers’ advertising supply, in which case our revenue could be significantly reduced. Revenue derived from performance advertisers in particular is subject to fluctuation and competitive pressures. Such advertisers, which seek to drive app downloads, “clicks,” or specific actions by viewers, are less consistent with respect to their spending volume on our platform, and may decide to substantially increase or decrease their use of our platform based on seasonality or popularity of a particular app. Advertisers in general may shift their business to a competitor’s platform because of new or more compelling offerings, strategic relationships, technological developments, pricing and other financial considerations, or a variety of other reasons. 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.

Loss or reduction of business from our large advertiser clients could have a significant impact on our revenues, results of operations and overall financial condition.

From time to time, a limited number of our advertiser clients have accounted for, and may continue to account for, a significant share of our advertising revenue. This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. Our advertiser clients may reduce or terminate their business with us at any time for any reason, including changes in their financial condition or other business circumstances. If a large advertising client representing a substantial portion of our business decided to materially reduce or discontinue its use of our platform, it could cause an immediate and significant decline in our revenue and negatively affect our results of operations and financial condition.

Our customer concentration also increases the concentration of our accounts receivable and our exposure to payment defaults by key customers. We generate significant accounts receivable for the services that we provide to our key advertiser clients, which could expose us to substantial and potentially unrecoverable costs if we do not receive payment from them.

Our sales efforts with both advertisers and developers require significant time and expense.

Attracting new advertisers and developers 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 advertiser clients who do not currently spend on mobile advertising or are unfamiliar with our current services or platform. Furthermore, many of our clients’ purchasing and design decisions typically require input from multiple internal constituencies. As a result, we must identify those involved in the purchasing decision and devote a sufficient amount of time to presenting our services to each of those individuals.

The novelty of our services and our business model often requires us to spend substantial time and effort educating potential advertisers and developers about our offerings, including providing demonstrations and comparisons against other available services. This process can be costly and time‑consuming. If we are not successful in streamlining our sales processes with advertisers and developers, our ability to grow our business may be adversely affected.

If we do not achieve satisfactory results under performance‑based pricing models, we could lose clients and our revenue could decline.

We offer our services to advertisers based on a variety of pricing models, including CPM, CPA and CPC. Under performance‑driven CPA and CPC pricing models, from which we currently derive a significant portion of our revenue, advertisers only pay us if we provide the results they specify. These results‑based pricing models differ from fixed‑rate pricing models, like CPM, under which the fee is based on the number of times the ad is shown, without regard to its effectiveness. As a result, under our contracts with advertisers that provide for us to be paid on a CPC or CPA basis, we must be able to develop effective ad campaigns that result in the desired actions being taken by consumers. If we are not able to perform effectively under these arrangements, or have disagreements with clients over the measurement of deliverables, it could hurt our reputation with advertisers and developers and could cause our revenues to decline.

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If we cannot increase the capacity of our mobile advertising technology platform to meet advertiser or device user demand, our business will be harmed.

We must be able to continue to increase the capacity of our technology platforms in order to support substantial increases in the number of advertisers and device users, to support an increasing variety of advertising formats and to maintain a stable service infrastructure and reliable service delivery for our mobile advertising campaigns. If we are unable to efficiently and effectively increase the scale of our mobile advertising platforms to support and manage a substantial increase in the number of advertisers and mobile device users, while also maintaining a high level of performance, the quality of our services could decline and our reputation and business could be seriously harmed. In addition, if we are not able to support emerging mobile advertising formats or services preferred by advertisers, we may be unable to obtain new advertising clients or may lose existing advertising clients, and in either case our revenue could decline.

If we fail to detect click fraud or other invalid clicks on ads, we could lose the confidence of our advertiser clients, which would cause our business to suffer.

Our business relies on delivering positive results to our advertiser clients. We are exposed to the risk of fraudulent and other invalid clicks or conversions that advertisers may perceive as undesirable. Because of their smaller sizes as compared to personal computers, mobile device usage could result in a higher rate of accidental or otherwise inadvertent clicks by a user. Invalid clicks could also result from click fraud, where a mobile device user intentionally clicks on ads for reasons other than to access the underlying content of the ads, or a computer program that generates automated clicks or views masquerading as clicks or views by a human. If fraudulent or other malicious activity is perpetrated by others, and we are unable to detect and prevent it, the affected advertisers may experience or perceive a reduced return on their investment. High levels of invalid click activity could lead to dissatisfaction with our advertising services, refusals to pay, refund demands or withdrawal of future business. We may also experience negative publicity or allegations relating to invalid traffic within our industry or on our network, which we may not be able to satisfactorily counter. Any of these occurrences could damage our brand and lead to a loss of advertisers and revenue.

System failures could significantly disrupt our operations and cause us to lose advertiser clients or advertising supply.

Our success 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 supply of advertising space. Our revenue depends on the technological ability of our platforms to deliver ads and measure them on a CPM, CPC or CPA basis. Sustained or repeated system failures that interrupt our ability to provide services to clients, including technological failures affecting our ability to deliver ads quickly and accurately and to process mobile device users’ responses to ads, could significantly reduce the attractiveness of our services to advertisers and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, cyber-attacks or other 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 ultimately be successful in preventing system failures. In many cases the delivery of our services may depend on the systems of third-party partners and vendors, such as the data centers where our servers are co-located, and any outages or disruptions in those systems could also have an adverse impact on our business.

Failure to adequately manage our growth may 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 services may suffer, which could negatively affect our reputation and demand for our services. 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. This will require us to, among other things:

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

Our international operations subject us to increased challenges and risks.

We have expanded our international operations over the last several years. However, we have a limited operating 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 particular challenges of supporting a rapidly growing business in an environment of multiple cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. Managing our international operations will require us to invest significant funds and other resources. Operating internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

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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.

Changes in our executive team may not be successful, and our inability to hire or retain other key personnel would also slow our growth.

In 2014, our chief executive officer, our chief financial officer, and our executive vice president of global sales and operations each resigned from their respective positions. Our current chief executive officer, Michael Barrett, was appointed to that position in January 2014, and our current chief financial officer, Andrew Jeanneret, was appointed to that position in August 2014.  Leadership transitions can be inherently difficult to manage and may cause uncertainty or a disruption to our business or may increase the likelihood of turnover in key officers and employees. The uncertainty inherent in our senior management transitions could lead to concerns from current and potential advertisers, developers and other third parties with whom we do business, any of which could hurt our business prospects. In addition, our future success will depend to a significant extent on the continued services of our chief executive officer, chief financial officer and our other executive officers and senior personnel. There can be no assurance that we will be able to retain their services. The loss of the services of one or more of these individuals could adversely affect our business and could divert other senior management time in searching for their replacements.

If we do not attract additional sales and technology talent, we may not be able to sustain our growth or achieve our business objectives.

Our future success 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 mobile advertising solutions and sales, and client support representatives with experience in mobile and other digital advertising and strong relationships with brand advertisers and app developers. Competition for these employees in our industry is intense. As a result, we may be unable to attract or retain these management, technical, sales and client support personnel that are critical to our success, resulting in harm to our key client 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.

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

A key part of our growth strategy is to pursue additional acquisitions or investments in other businesses or individual technologies. For example, we acquired Metaresolver, Inc., a mobile media buying and targeting platform, in April 2013, and we acquired Jumptap Inc., a competing mobile advertising company, in November 2013. Also, in December 2014, we completed our acquisition of Nexage, an advertising exchange and mobile supply side platform company. For more information about Nexage, see “—Risks Related to Our Acquisition of Nexage.” These and future acquisitions or investments may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions involve numerous risks, any of which could disrupt or harm our business, including:

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The benefits of these and future acquisitions or investments may take considerable time to develop, and we cannot be certain that any particular acquisition or investment will produce its intended benefits, which could harm our business and operating results.  Acquisitions may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt, and may result in liabilities or expenses related to intangible assets or write-offs of goodwill or intangible assets.

 

Activities of our advertiser clients could damage our reputation or give rise to legal claims against us.

Our advertiser clients’ promotion of their products and services may not comply with federal, state and local laws, including, but not limited to, laws and regulations relating to mobile communications. Failure of our clients to comply with federal, state or local 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 artwork, text or other 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. Although we generally receive assurance from our advertisers that their ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in an ad, and although we are normally indemnified by the advertisers, a third party or regulatory authority may still file a claim against us. Any such claims could be costly and time‑consuming to defend and could also hurt our reputation. Further, if we are exposed to legal liability as a result of the activities of our advertiser clients, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our services or otherwise expend significant resources.

Our business depends on our ability to maintain the quality of our advertiser and developer content.

We must be able to ensure that our clients’ ads are not placed in developer content that is unlawful, harmful or inappropriate. Likewise, our developers rely upon us not to place ads in their apps that are unlawful, harmful or inappropriate. If we are unable to ensure that the quality of our advertiser and developer content does not decline as the number of advertisers and developers we work with continues to grow, then our reputation and business may suffer.

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Our growth depends, in part, on the success of our strategic relationships with third parties.

 

We anticipate that we will continue to depend on various third-party relationships in order to provide our services, such as relationships with technology providers, advertising exchanges, market research companies, and other strategic partners. These third parties may not perform as expected under our agreements with them, and we may have disagreements or disputes with such third parties, which could negatively affect our business and reputation. As we seek additional relationships with third parties, the products and services they offer may not be available to us on reasonable or acceptable terms, or at all, or our competitors may be successful in negotiating exclusive or preferential arrangements with third parties that adversely affect the terms available to us, and our growth may suffer as a result.

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 technology platform incorporates 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 such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our platform to our clients. In the future, we could be required to seek licenses from third parties in order to continue offering our platform, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re‑engineer our platform or discontinue use of portions of the functionality provided by our platform. In addition, the terms of open source software licenses may require us to provide software that we develop using such software to others on unfavorable license terms. Our inability to use third party 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 mobile advertising platform 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 mobile advertising platform. Although we test software before incorporating it into our platform, we cannot guarantee that all of the third party technology that we incorporate will not contain errors, bugs or other defects. We continue to launch enhancements to our mobile advertising platform, and we cannot guarantee any such enhancements will be free from these kinds of defects. If errors or other defects occur in technology that we utilize in our mobile advertising platform, it could result in damage to our reputation and losses in revenue, and we could be required to spend significant amounts of additional resources to fix any problems.

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

We regard the protection of our intellectual property, which includes trade secrets, patents, copyrights, trademarks, domain names and patent applications, 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 third parties with whom we conduct business in order to limit access to, and disclosure and use of, our intellectual property and 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.

We seek patent protection for certain of our technologies, but with respect to pending international and domestic patent applications, there can be no assurance that patents will ultimately issue. We are also pursuing the registration of our domain names, trademarks and service marks in the United States and in certain locations outside the United States. Effective trade secret, copyright, trademark, domain name 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

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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.

We have licensed in the past, and expect to license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation.

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. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. 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 services that incorporate our most technologically advanced features, which could seriously reduce demand for our mobile advertising services. 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 such 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 upon our intellectual property rights.

We operate in an industry with extensive intellectual property litigation. Claims of infringement against us may hurt our business.

Our success depends, in part, upon non‑infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures or adverse consequences. The mobile telecommunications industry generally is characterized by extensive intellectual property litigation. Although our technology is relatively new and our industry is rapidly evolving, many participants that own, or claim to own, intellectual property historically have aggressively asserted their rights. From time to time, we may be subject to legal proceedings and claims relating to the intellectual property rights of others, including currently pending proceedings related to alleged patent infringement, as described in Part I, Item 3. Legal Proceedings, below, and we expect that third parties will continue to assert intellectual property claims against us, particularly as we expand the complexity and scope of our business.

Future litigation may be necessary to defend ourselves or our clients by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time‑consuming and costly to evaluate and defend and could:

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In addition to liability for monetary damages against us, which may be tripled and may include attorneys’ fees, or, in some circumstances, damages against our clients, we may be prohibited from developing, commercializing or continuing to provide some or all of our mobile advertising solutions unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all.

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

We are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes‑Oxley Act of 2002, the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the New York Stock Exchange. The Sarbanes‑Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting and perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting. This requires that we incur substantial professional fees and internal costs related to our accounting and finance functions and that our management expend significant efforts.

We may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting will not prevent or detect all error and 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 in the future, we may not be able to produce timely and accurate financial statements, and we may conclude that our internal controls over financial reporting are 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 New York Stock Exchange, the SEC or other regulatory authorities.

We are an “emerging growth company,” and if we decide to comply only with reduced disclosure requirements applicable to emerging growth companies, our common stock could be less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startup Act, or JOBS Act, enacted in 2012, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We complied with these reduced disclosure requirements in our proxy statement for the 2014 annual meeting of our stockholders and expect to do so for our 2015 proxy statement. We could be an “emerging growth company” through the year ending December 31, 2017, although a variety of circumstances could cause us to lose that status earlier. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies that become public can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

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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.

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 future technologies and services, increasing working capital, acquiring businesses and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. In addition, pursuant to the terms of our credit facility, we may be restricted from using the net proceeds of financing transactions for our operating objectives. 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 development of new technologies.

Our credit facility subjects us to operating restrictions and financial covenants that impose risk of default and may restrict our business and financing activities.

 

On November 21, 2014, we entered into an amended and restated loan and security agreement with Silicon Valley Bank that provides a senior secured asset-based credit facility with up to $40 million available on a revolving basis until November 2018. At December 31, 2014, we had no amounts outstanding under this loan and security agreement. Borrowings under this agreement are secured by substantially all of our tangible and intangible assets. This credit facility is subject to certain financial covenants, as well as restrictions that limit, among other things, changes in control, indebtedness, investments, distributions on capital stock, mergers and acquisitions, payments of indebtedness, liens, transactions with affiliates, and dispositions of assets. These covenants may restrict our ability to finance our operations and to pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control. If a default were to occur and not be waived, such default could cause, among other remedies, all of the outstanding indebtedness under our loan and security agreement to become immediately due and payable, which could materially adversely affect our liquidity and ability to conduct our business.

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. At December 31, 2014, we had federal net operating loss carryforwards of $225.0 million, which expire at various dates through 2034. Our gross state net operating loss carryforwards are equal to or less than the federal net operating loss carryforwards and expire over various periods 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 valuation allowance against our net deferred tax assets should be applied as of December 31, 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 such 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 continue to develop or be sustained.

Prior to our initial public offering in March 2012, there was no public market for our common stock, and we cannot assure you that an active trading market for our shares will continue to develop or be sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult for investors in our common stock to sell shares without depressing the market price for the shares or to sell such shares at all.

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The trading price of the shares of our common stock has been and is likely to continue to be volatile.

Since our initial public offering in March 2012, our stock price has exhibited significant volatility, ranging from a high of $27.90 per share to a low of $1.28 per share. 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:

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. Such litigation could cause us to incur substantial costs and divert management’s attention and resources. In September and October 2014, two purported class action complaints were filed alleging violations of the federal securities laws against a group of defendants, including us and certain of our current and former executive officers and directors, among others, as described in Part I, Item 3. Legal Proceedings, below. 

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 will rely in part on the research and reports that equity research analysts publish about us and our business. We have only limited research coverage by equity research analysts. Equity research analysts may elect not to initiate or to continue to provide research coverage of our common stock, and such lack of research coverage may adversely affect the market price of our common stock. Even if we do have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included in their reports. 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.

We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which would cause our stock price to decline.

 

We have provided and may continue to provide guidance about our business and future operating results. In developing this guidance, our management must make certain assumptions and judgments about our future performance. Our industry is rapidly changing, and as we make acquisitions or adopt new business models to address customer requirements, our historical methods of forecasting may prove inadequate. Our business results may vary significantly

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from our guidance due to a number of factors, many of which could adversely affect our operations and operating results. If our publicly announced guidance of future operating results fails to meet expectations of securities analysts, investors or other interested parties, the price of our common stock would likely decline, as it has in the past.

The issuance of additional stock in connection with financings, acquisitions, investments, our stock incentive plans or otherwise will dilute all other stockholders.

Our certificate of incorporation authorizes us to issue up to 250,000,000 shares of common stock and up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined by our board of directors. Subject to compliance with applicable rules and regulations, we may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a  financing, acquisition, investment, our stock incentive plans or otherwise. For example, in connection with our acquisition of Nexage in December 2014, we issued a total of 30,733,436 shares of our common stock to the former securityholders of Nexage, and we also issued new options to purchase our common stock in exchange for options to purchase common stock of Nexage.  These newly issued options are, in the aggregate, exercisable for an additional 7,949,236 shares of our common stock. The aggregate potential equity consideration of 38,682,672 shares, including shares issuable upon the exercise of options, represents approximately 26.4% of the total number of shares of our common stock following the closing of the Merger, but assuming the exercise of all new stock options issued in exchange for the prior Nexage options.  Any similar issuances of our equity securities in the future could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to 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 amended and restated certificate of incorporation and amended and restated 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 up to 5,000,000 shares of preferred stock. The board of directors can 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:

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.

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Our amended and restated certificate of incorporation also provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future and our stock may not appreciate in value.

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. There is no guarantee that shares of our common stock will appreciate in value or that the price at which our stockholders have purchased their shares will be able to be maintained.

We will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies in the United States.

As a public company listed in the United States, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and stock exchanges, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue‑generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

Item 1B.  Unresolved Staff Comments

 

None.

 

Item 2.  Properties

Our principal offices occupy approximately 96,000 square feet of leased office space in Baltimore, Maryland pursuant to a lease agreement that expires in September 2024. We also maintain offices in New York, New York; Boston, Massachusetts; Chicago, Illinois; Los Angeles, California; Detroit, Michigan; London, England; San Francisco, California; Atlanta, Georgia; Paris, France; Hamburg, Germany; Singapore and Tokyo, Japan. We believe that our current facilities are suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

Item 3.  Legal Proceedings

Streetspace, Inc. v. Google, Inc. et al.  On August 23, 2010, plaintiff Streetspace, Inc. filed a complaint in the U.S. District Court for the Southern District of California, alleging patent infringement against a group of defendants including us. The plaintiff alleged that each of the defendants has infringed, and continues to infringe, plaintiff’s patent. On September 12, 2011, the court granted the defendants’ motion to transfer the case to the U.S. District Court for the Northern District of California. On September 15, 2011, the defendants jointly filed a request to reexamine plaintiff’s claimed patent with the U.S. Patent and Trademark Office (the “PTO”). On November 18, 2011, the PTO granted the request, ordered a reexamination of the plaintiff’s patent, and rejected all of the plaintiff’s patent’s claims. The PTO entered an Action Closing Prosecution on June 4, 2012 rejecting all of the plaintiff’s patent’s claims of the patent‑in‑suit. The PTO

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entered its final rejection of all claims, also known as Right of Appeal Notice, on May 10, 2013. The plaintiff filed its Notice of Appeal on June 10, 2013 and the defendants filed their Notice of Cross Appeal on June 24, 2013. The plaintiff filed its appeal brief and a petition requesting continued reexamination to enter a concurrently filed amendment on August 12, 2013. The defendants filed their response to the plaintiff’s appeal brief on September 12, 2013. The Patent Office dismissed the plaintiff’s Petition for Continued Reexamination on November 20, 2013. On January 29, 2014, the PTO rejected the plaintiff’s appeal brief as defective, and the plaintiff filed a corrected brief on February 28, 2014. In the cross-appeal, the defendants filed their cross-appeal brief on August 26, 2013, and plaintiff filed its response on September 26, 2013. The parties are awaiting the examiner’s Answer to the appeal briefing. The defendants also filed a motion to stay the case in the Northern District of California, pending the reexamination. The court granted the motion to stay in February 2012 and there has been no discovery in the litigation. The court has issued periodic orders continuing the stay of litigation pending re-examination, including the most recent order on January 28, 2015.

Evolutionary Intelligence, LLC. v. Millennial Media, Inc.  On October 17, 2012, Evolutionary Intelligence, LLC filed a complaint against us in the U.S. District Court for the Eastern District of Texas. The plaintiff alleges that we are infringing U.S. Patent No. 7,010,536, entitled “System and Method for Creating and Manipulating Containers with Dynamic Registers” and U.S. Patent No. 7,702,682, entitled “System and Method for Creating and Manipulating Containers with Dynamic Registers.” The complaint seeks declaratory judgment, unspecified damages and injunctive relief. We answered the complaint on December 17, 2012. Among other things, we asserted defenses based non‑infringement and invalidity of the patents in question. We filed a motion to transfer venue to the Northern District of California on December 21, 2012 and the Eastern District of Texas granted the transfer motion on August 27, 2013. The case was opened in the Northern District of California on September 17, 2013. On January 31, 2014, we filed a motion to stay the proceedings, based on several requests for inter partes review (“IPR”) of the patents-in-suit pending before the PTO. On April 25 and 28, 2014, the PTO denied all but one of the IPR requests, and instituted one IPR for one of the patents-in-suit. We were not a party to the IPR requests and are not a party to the pending IPR. On June 11, 2014, the court conditionally granted our motion to stay, contingent on our agreement to be bound by the same estoppel that limits IPR petitioners as set forth in 35 U.S.C. § 315(e). On June 20, 2014, we requested leave of court to seek reconsideration of the court’s order as to the scope of the proposed estoppel. Plaintiff filed an opposition to our request on June 30, 2014, and our request is pending. On July 11, 2014, after briefing and a hearing, the court related the nine co-pending Evolutionary Intelligence cases and assigned them to the same judge. After further briefing on whether the stays should be lifted in light of the denial of all but one of the IPR requests, the court held a hearing on September 19, 2014, and stayed the cases pending the final decision on the IPR. Along with other non-petitioning defendants, we agreed to be bound by a limited estoppel in return for the stay.

Public Employees’ Retirement System of Mississippi v. Millennial Media, Inc. et al. and Travis Ostroviak v. Millennial Media, Inc., et al.   On September 30, 2014, plaintiff Public Employees’ Retirement System of Mississippi filed a purported class action complaint in the U.S. District Court for the Southern District of New York, alleging violations of the federal securities laws against a group of defendants including us, certain of our current and former executive officers, directors, and large shareholders, and the underwriters associated with our initial public offering and secondary offering. Plaintiff alleges, among other things, that certain defendants engaged in a fraudulent scheme to artificially inflate the price of our common stock by making false and misleading statements to investors. On October 17, 2014, plaintiff Travis Ostroviak also filed a purported class action complaint in the U.S. District Court for the Southern District of New York, in which Plaintiff makes certain of the same allegations made in the action brought by Public Employees’ Retirement System of Mississippi. The complaint names us and certain of our current and former executive officers and directors as defendants. On February 10, 2015, the Court consolidated these two purported class actions. On February 17, 2015, the Court ordered that a consolidated amended complaint be filed in the actions by March 20, 2015, and that Defendants file any motion to dismiss the complaint by April 17, 2015. We are currently evaluating the claims asserted in these two matters.

Stephen Posko v. Palmieri et al.   On January 16, 2015, plaintiff Stephen Posko filed a shareholder derivative complaint in the U.S. District Court for the Southern District of New York. The complaint purports to assert claims derivatively on our behalf against certain of our current and former officers and executives for breach of fiduciary duty, waste, unjust enrichment, and violations of the federal securities laws. The allegations and claims set forth in the complaint are related to the allegations and claims in Public Employees’ Retirement System of Mississippi v. Millennial Media, Inc. et al. and Travis Ostroviak v. Millennial Media, Inc., et al. (the “Securities Class Actions”). The parties in the shareholder

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derivative action have agreed to seek a stay of the action pending the Court’s ruling on any motion to dismiss filed by Defendants in the Securities Class Actions. We are currently evaluating the claims asserted in this matter.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has been listed on the New York Stock Exchange, or the NYSE, since March 29, 2012, under the symbol “MM”. Prior to our initial public offering, or IPO, there was no public market for our common stock.

The following tables set forth for the indicated periods the high and low sales prices of our common stock as reported on the NYSE.

 

 

 

 

As of February 20, 2015, there were 130 registered stockholders of record for our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.

We have never declared or paid any dividends on our common stock. We anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of the agreements governing our credit facility.

Stock Performance Graph

The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock between March 29, 2012 (the date of our IPO) and December 31, 2014, with the comparative cumulative total return of such amount on (i) the NYSE Composite Index, (ii) Global X Social Media Index ETF, and (iii) SPDR Morgan Stanley Technology Fund ETF over the same period. We have not paid any cash dividends and, therefore, the cumulative total return calculation for us is based solely upon stock price appreciation (depreciation) and not upon reinvestment of cash dividends. The graph assumes our closing sales price on March 29, 2012 of $25.00 per share as the initial value of our common stock.

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The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.

 

The information presented above in the stock performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, except to the extent that we subsequently specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act of 1933, as amended, or a filing under the Securities Exchange Act of 1934, as amended.

Item 6.  Selected Consolidated Financial Data

The following selected consolidated financial data as of and for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 is derived from our audited consolidated financial statements, which have been audited by Ernst & Young LLP, independent registered public accounting firm. Our historical results are not necessarily indicative of the results to be expected in the future. The selected consolidated financial data should be read together with “Item 7.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this Annual Report.

 

 

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Adjusted EBITDA

The following table presents a reconciliation of adjusted EBITDA to net loss,  the most directly comparable financial measure calculated and presented in accordance with United States generally accepted accounting principles, or GAAP, for each of the periods indicated.  Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Performance Metrics” for more information regarding our use of adjusted EBITDA.

 

 

 

 

 

 

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to those statements included later in this Annual Report. In addition to historical financial information, the following discussion contains forward‑looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in “Item 1A. Risk Factors” and “Special Note Regarding Forward‑Looking Statements.”

Overview

We are an independent mobile advertising company delivering products and services to advertisers and developers. Our technology, tools and services help developers maximize their advertising revenue, acquire users for their apps and gain insight about their users. To advertisers, we offer the ability to reach more than 650 million monthly unique users, including over 175 million monthly unique users in the United States alone. We also offer advertisers sophisticated targeting capabilities and the opportunity to deliver interactive and engaging ad experiences to consumers on their smartphones, tablets, other mobile connected devices and PCs. Approximately 60,000 apps are enabled to receive ads through our platform, and we can deliver ads on over 9,000 different mobile device types and models. We have developed more than 700 million proprietary, anonymous user profiles that we can use to more accurately and efficiently target ads. Our platform is compatible with all major mobile operating systems, including Apple® iOS, Android™, Windows Phone and BlackBerry®.

We help developers and advertisers remove complexity from mobile advertising. By working with us, developers gain access to our tools and services that allow their apps to display video ads, banner ads, interactive rich media ads and native ad formats from our platform. In return, developers supply us with space on their apps to deliver ads for our advertiser clients and also provide us with access to anonymous data associated with their apps and users. We analyze this data to build sophisticated user profiles and audience groups that, in combination with the real‑time decisioning, optimization and targeting capabilities of our technology platform, enable us to deliver highly targeted advertising campaigns for our advertiser clients. Advertisers pay us to deliver ad campaigns to mobile connected device users, and we pay developers a fee for the use of their ad space. As we deliver more ad campaigns, we are able to collect additional anonymous data about users, audiences and the effectiveness of particular ad campaigns, which in turn enhances our targeting capabilities and allows us to deliver better performance for advertisers and better opportunities for developers to increase their revenue streams.

We have built relationships with advertisers and developers of all sizes. Our advertiser clients include leading advertising agencies and brands, including 95 of Ad Age’s top 100 national advertisers, as well as smaller advertisers and often the developers themselves. Our developer base includes large mobile web publishers, large app developers and other developers. Advertisers and developers are able to access our platform through our full‑service offering and through self‑service interfaces. We offer programmatic buying capabilities to advertisers through our ad exchange and through our demand side platform, mmDSP.

We operate in one segment, mobile advertising services. We have increased our revenue from $47.8 million for the year ended December 31, 2010 to $296.2 million for the year ended December 31, 2014. During the year ended December 31, 2014, 16.2% of our revenue was derived from outside of the United States. We have international operations in Europe and Asia. We offer the same services internationally as we do in the United States, and we intend to continue to pursue a strategy of expanding our international operations.

On December 4, 2014, we acquired Nexage, Inc., an advertising exchange and mobile supply side platform and provider of real-time-bidding technology that helps to automate the buying and selling of mobile advertising. While Nexage’s results were not material to our operations in 2014, we believe that Nexage's business is complementary to our existing suite of mobile advertising services and products, and that the combination of our two companies will allow us to offer our customers a “full-stack” mobile-advertising solution and an independent mobile programmatic marketplace with improved buy and sell-side capabilities. In addition to providing managed services for agencies and marketers, we believe

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the combined company will be able to offer a more complete set of automated mobile programmatic solutions to advertisers and developers, and will be able to more effectively compete in our fast-paced, consolidating industry. We believe the addition of Nexage’s capabilities provides us with a unique opportunity to achieve one of our key strategic objectives to be a market leader in mobile advertising solutions.

 

The acquisition of Nexage contributed $1.4 million to revenue and $2.1 million to operating expenses in the fourth quarter of 2014.

 

Key Operating and Financial Performance Metrics

We monitor the key operating and financial performance metrics set forth in the table below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies.

 

 

 

Gross margin is our gross profit, or revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be primarily affected by our pricing terms with new and existing developers, as well as the mix of offerings used by our clients. Some of our offerings, such as our ad exchange, typically generate lower gross margins for us than other portions of our business, such as our network business.

Adjusted EBITDA represents our earnings/(losses) before interest, income taxes, depreciation and amortization, adjusted to eliminate goodwill and intangible asset impairment charges, non‑cash stock‑based compensation expense and expenses related to acquisitions, such as costs for services of lawyers, investment bankers, accountants, and other third parties and acquisition related severance costs, bonuses, retention bonuses and accrual of retention payments that represent contingent compensation to be recognized as expense over a requisite service period. We do not consider the inclusion of these costs to be indicative of our core operating performance. Adjusted EBITDA is a key measure used by our management and 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, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period‑to‑period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the development of incentive‑based compensation for our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Diluted non‑GAAP net income per share is calculated as adjusted EBITDA divided by the diluted weighted average number of shares outstanding during the period.

Adjusted EBITDA and diluted non‑GAAP net income per share are not measures calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, these non‑GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do.

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These non‑GAAP measures have limitations as an analytical tool, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are:

Because of these and other limitations, you should consider adjusted EBITDA and diluted non‑GAAP net income (loss) per share alongside other GAAP‑based financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP financial results. The following tables present reconciliations of net loss to adjusted EBITDA for each of the periods indicated:

 

 

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The following tables present reconciliations of GAAP net loss per share to diluted non‑GAAP net income (loss) per share for each of the periods indicated:

 

 

Components of Operating Results

Revenue

We generate revenue by charging advertisers to deliver campaigns to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Our fees from advertisers are commonly based on the number of ads delivered, views, clicks or actions by users on mobile advertisements we deliver, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell campaigns on several bases: cost per thousand impressions, or CPM, on which we charge advertisers for each ad delivered to a consumer; cost per click, or CPC, on which we charge advertisers for each ad clicked on by a user; and cost per action, or CPA, on which we charge advertisers each time a consumer takes a specified action, such as downloading an app. Our revenue recognition policies are discussed in more detail in the section below entitled “—Critical Accounting Policies and Significant Judgments and Estimates.”

We classify our advertiser clients as “brand” advertisers or “performance” advertisers, depending on the intent of the advertiser. We believe this classification is typical in the advertising and media industries. The goal of a brand advertiser, such as a large automobile manufacturer, is primarily to promote recognition and awareness of its brand among potential consumers and to induce those consumers to purchase a product or service over time. On the other hand, a performance advertiser, such as a social gaming company, typically seeks to cause a specific action by the viewer of the ad, such as clicking on the ad to be taken to a mobile website, downloading an app on the viewer’s mobile device or registering the viewer’s email address in order to receive further communications from the provider of a product or service.

Most of our brand advertiser clients, whether based in the United States or internationally, pay us on a CPM basis, as their primary goal is to maximize the number of ad impressions being viewed, although some brand advertisers may use CPC pricing terms from time to time. On the other hand, U.S. and international performance advertisers generally pay us on a CPC or CPA basis, in which case we are only paid when a viewer takes the specified action, such as clicking on the ad or downloading an app.

Historically, brand advertisers have typically represented about 60% of our annual revenues, with performance advertisers generating the remainder. However, the composition of revenue from brand and performance advertisers on our platform often changes throughout the year. For example, we typically see a larger proportion of our revenue derived from brand advertisers in the second and fourth quarters, reflecting what we believe to be traditional seasonality in the advertising industry due to increased consumer spending going into the summer and winter holiday seasons. We tend to see the lowest percentage of brand advertising and the highest percentage of performance advertising in the first quarter of the year. Following these seasonal trends, brand advertising typically represents between one‑half and two‑thirds of our

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revenue in any particular quarter. In addition, based on our historical experience, a higher percentage of our international revenue is derived from performance advertisers than is the percentage for domestic revenues, although there is a wide variation from country to country, even within a global region, of the mix between performance and brand advertising in any particular quarter.

Following our acquisition of Jumptap Inc. in November 2013, our split between brand and performance revenue was closer to equal. During the year ended December 31, 2014, we experienced a decline in our U.S. performance advertising business and a corresponding increase in the percentage of our business derived from brand advertisers. This decline was the result of some performance advertisers reducing their overall spending, or looking to drive downloads of their applications by moving their business to competitive platforms, particularly those that enabled them to buy across multiple mobile exchanges.

Cost of revenue

Cost of revenue consists primarily of the payments we make to developers for their advertising space on which we deliver mobile ads. These payments are typically determined in advance as either a percentage of the advertising revenue we earn from mobile ads placed on the developer’s app or as a fixed fee for the ad space or fees paid to win bids for advertising inventory purchased from auction‑based marketplace exchanges. We recognize cost of revenue on a developer‑by‑developer basis at the same time as we recognize the associated revenue. Costs owed to developers but not yet paid are recorded on our consolidated balance sheets as accrued cost of revenue. The use of CPM, CPC, or CPA pricing, whether by U.S. or international advertisers, does not directly affect the gross margin percentage we earn because we pay the same percentage or fixed fee to a developer regardless of what pricing model generated the revenue for us. The cost of revenue for ads delivered through auction‑based exchanges can vary depending on our ability to purchase inventory at competitive rates to win the auction bid. In addition, the geographic location of our developers is not a factor in determining the percentage or fixed fee we pay for ad space. We expect that our exchange business may generate a lower gross margin for us than our network business, as is typical in the industry.

Operating expenses

Operating expenses consist of sales and marketing, technology and development and general and administrative expenses. Salaries and personnel costs are the most significant component of each of these expense categories. We expect to continue to hire new employees in order to support our anticipated revenue growth. We include stock‑based compensation expense in connection with the grant of any equity instrument in the applicable operating expense category based on the respective equity award recipient’s function. With the closing of our acquisition of Nexage in December 2014, operating expenses increased by $2.1 million in the fourth quarter of 2014. Additionally, with the closing of the acquisition of Jumptap and our assumption of the Jumptap sales and marketing, technology and development and general and administrative functions, we saw an immediate increase in our operating expenses beginning in the fourth quarter of 2013.

Sales and marketing expense.  Sales and marketing expense consists primarily of salaries and personnel costs for our advertiser‑focused sales and marketing employees, including stock‑based compensation, commissions and bonuses. Historically, salaries and personnel costs have been approximately 70% of total sales and marketing expenses. Additional expenses include marketing programs, consulting, amortization of customer relationship intangible assets, travel and other related overhead. We expect our sales and marketing expense to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities.

Technology and development expense.  Technology and development expense primarily consists of salaries and personnel costs for development employees, including stock‑based compensation and bonuses. Historically, salaries and personnel costs have been 80% to 90% of total technology and development expenses. Technology and development employees are focused on new product and technology development. Additional expenses include costs related to the development, quality assurance and testing of new technology and enhancement of existing technology, amortization of technology intangible assets and internally developed software related to our technology infrastructure, consulting, travel and other related overhead. Other general IT costs are included in general and administrative expenses. We engage third party consulting firms for various technology and development efforts, such as documentation, quality assurance and

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support. We intend to continue to invest in our technology and development efforts by hiring additional development personnel and by using outside consulting firms for various technology and development efforts. We believe continuing to invest in technology and development efforts is essential to maintaining our competitive position.

General and administrative expense.  General and administrative expense primarily consists of salaries and personnel costs for product, operations, developer support, business development, administration, finance and accounting, legal, information systems and human resources employees, including stock‑based compensation and bonuses. Historically, salaries and personnel costs have been approximately 50% to 60% of total general and administrative expenses. Additional expenses include consulting and professional fees, travel, bad debt expense, insurance and other corporate expenses. We expect our general and administrative expenses to increase in the foreseeable future to support our continued growth.

Goodwill and intangible asset impairment charges. 

We review our long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. During the year ended December 31, 2014, we determined that our technology and customer relationship assets were not fully recoverable due to lower projected revenue levels from associated products and customers. As a result, we recorded a goodwill impairment charge of $57.1 million and an intangible asset impairment charge of $36.4 million during the year ended December 31, 2014 based on the impairment analysis performed.  

Interest and other income (expense)

Interest expense, net consists primarily of interest expense, offset by interest income. Interest expense consists primarily of interest from capital leases, amortization of deferred financing costs and commitment fees on loans. We have not borrowed under our existing credit facility to date.

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Results of Operations

The following table sets forth our consolidated statement of operations data, both in dollars and as a percentage of revenue, for each of the periods indicated.

 

Comparison of Years Ended December 31, 2014 and 2013

 

 

 

Revenue.  Revenue was $296.2 million for the year ended December 31, 2014 compared to $259.2 million for the year ended December 31, 2013, an increase of $37.0 million, or 14.3%. Revenue for 2014 includes revenue from Nexage of $1.4 million for the period from December 5, 2014 to December 31, 2014. The remaining growth was primarily attributable to a full year of Jumptap revenue and the related increase in spending from our existing advertiser clients, as well as an increase in the number of advertiser clients using our platform.  The Jumptap acquisition was completed on November 6, 2013. Revenue from our existing advertiser clients increased by 16.6% during the year ended December 31, 2014 as compared to the year ended December 31, 2013 and represented 89.3% of our total revenue for the year ended December 31, 2014. The increase in revenue from existing clients was driven both by our acquisitions and by additional campaigns from brand and performance advertisers that had previously advertised with us, larger campaign sizes and campaigns for new brands owned by existing clients. Revenue from new advertiser clients decreased by 3.1% during the year ended December 31, 2014 as compared to the year ended December 31, 2013 and represented 10.7% of our total revenue for the year ended December 31, 2014.

Our revenue from international operations was $48.1 million, or 16.2% of total revenue, for the year ended December 31, 2014 compared to $62.1 million, or 24.0% of total revenue, for the year ended December 31, 2013. The decrease in revenue in our international operations was primarily driven by certain large, international performance clients, who spent significantly less with us in 2014 versus 2013.

We classify revenue based on the geographic location where the advertising was sold. Performance advertising often is displayed globally. Therefore, we may sell a campaign to a large performance advertiser in one location, such as Europe, and principally deliver ads for that campaign to consumers located in the United States.

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Cost of revenue.  Cost of revenue was $179.8 million, or 60.7% of revenue, for the year ended December 31, 2014, an increase of $25.0 million, or 16.1%, from $154.8 million, or 59.7% of revenue, for the year ended December 31, 2013. The increase in cost of revenue in absolute dollars was the direct result of the increase in revenue, as we pay a percentage of that revenue to developers for use of their ad space in delivering mobile ads for our advertising clients.

Sales and marketing.  Sales and marketing expense was $53.6 million, or 18.1% of revenue, for the year ended December 31, 2014, an increase of $14.9 million, or 38.6%, from $38.7 million, or 14.9% of revenue, for the year ended December 31, 2013. The increase in sales and marketing expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $7.9 million increase in salaries and personnel‑related costs associated with an increase in headcount, as we increased the number of sales and marketing personnel to support and expand our client base.  We also experienced higher commission costs associated with higher revenue. The number of full‑time sales and marketing employees was 224 at December 31, 2014, which is an increase from 187 at December 31, 2013. As a result of the Nexage acquisition we added 17 sales and marketing employees. These employees and corresponding expenses only affected the period from December 5, 2014 to December 31, 2014. As a result of the Jumptap acquisition we added 40 sales and marketing employees in November 2013. These employees and corresponding expenses only affected the period from November 6, 2013 to December 31, 2013 for 2013. 2014 includes the full year impact of these Jumptap employees. In addition, we experienced an additional $4.1 million in depreciation and amortization, $1.6 million in travel and travel related expenses and an $812,000 increase in our marketing programs and travel expenses.

Technology and development.  Technology and development expense was $29.5 million, or 9.9% of revenue, for the year ended December 31, 2014, an increase of $10.5 million, or 55.4%, from $19.0 million, or 7.3% of revenue, for the year ended December 31, 2013. The increase in technology and development expense, in absolute dollars and as a percentage of revenue, was primarily attributable to a $5.6 million increase in salaries and personnel‑related costs associated with an increase in the full year headcount, partially offset by a decrease in stock compensation expense of $958,000 primarily associated with a one‑time cost recorded in the prior year related to the departure of certain employees in the technology and development functions and acceleration of unvested stock awards. The number of full‑time technology and development employees was 154 at December 31, 2014, which is an increase from 143 at December 31, 2013. As a result of the Nexage acquisition we added 22 technology and development employees in December 2014. These employees and corresponding expenses only affected the period from December 5, 2014 to December 31, 2014. As a result of the Jumptap acquisition we added 51 technology and development employees in November 2013. These employees and corresponding expenses only affected the period from November 6, 2013 to December 31, 2013 for 2013. 2014 includes the full year impact of these Jumptap employees. In addition, for the year ended December 31, 2014, we incurred $5.0 million in increased depreciation and amortization expense related to our property, equipment, internally developed software and acquired intangible assets and an additional $828,000 in rent expense.

General and administrative.  General and administrative expense was $88.6 million, or 29.9% of revenue, for the year ended December 31, 2014, an increase of $26.7 million, or 43.1%, from $61.9 million, or 23.9% of revenue, for the year ended December 31, 2013. The increase in general and administrative expense was primarily attributable to a  $11.0 million increase in salaries and personnel‑related costs associated with an increase in headcount and $5.4 million increase in stock compensation expense as a result of the full year impact of the employees related to the Jumptap acquisition and the partial year impact of employees related to the Nexage acquisition. As a result of the Nexage acquisition we added 34 general and administrative employees. These employees and corresponding expenses only affected the period from December 5, 2014 to December 31, 2014. As a result of the Jumptap acquisition we added 64 general and administrative employees in November 2013. These employees and corresponding expenses only affected the period from November 6, 2013 to December 31, 2013 for 2013. 2014 includes the full year impact of these Jumptap employees. The number of full‑time general and administrative employees was 258 at December 31, 2014, a decrease from 270 at December 31, 2013. In addition, for the year ended December 31, 2014, we incurred an additional $6.5 million in IT expenses, $1.9 million in other operating expenses, $1.8 million in depreciation and amortization and $1.5 million in travel and travel related expenses. These increases were offset by lower acquisition related costs of $2.6 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013.

Goodwill and intangible asset impairment.  We recorded a goodwill impairment charge of $57.1 million and an intangible asset impairment charge of $36.4 million for the year ended December 31, 2014. No goodwill or intangible asset impairments were recorded for the year ended December 31, 2013.

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Income tax (expense)/benefit.  For the year ended December 31, 2014, we recognized an income tax expense of $192,000 primarily due to foreign tax liabilities as well as minimum state tax liabilities.

Comparison of Years Ended December 31, 2013 and 2012

 

 

Revenue.    Revenue was $259.2 million for the year ended December 31, 2013 compared to $177.7 million for the year ended December 31, 2012, an increase of $81.5 million, or 45.9%. 2013 revenue includes revenue from Jumptap of $25.6 million for the period from November 6, 2013 to December 31, 2013. This growth was primarily attributable to an increase in spending from our existing advertiser clients as well as an increase in the number of advertiser clients using our platform. Revenue from our existing advertiser clients increased by 52.8% during the year ended December 31, 2013 as compared to the year ended December 31, 2012 and represented 87.3% of our total revenue for the year ended December 31, 2013. The increase in revenue from existing clients was driven by additional campaigns from brand and performance advertisers that had previously advertised with us, larger campaign sizes and campaigns for new brands owned by existing clients. Revenue from new advertiser clients increased by 8.9% during the year ended December 31, 2013 as compared to the year ended December 31, 2012 and represented 12.7% of our total revenue for the year ended December 31, 2013.

Our revenue from international operations was $62.1 million, or 24.0% of total revenue, for the year ended December 31, 2013 compared to $26.2 million, or 14.8% of total revenue, for the year ended December 31, 2012. This revenue growth in our international operations was primarily driven by certain large, international performance clients, though revenue increased across a number of clients globally in 2013.

We classify revenue based on the geographic location where the advertising was sold. Performance advertising often is displayed globally. Therefore, we may sell a campaign to a large performance advertiser in one location, such as Europe, and principally deliver ads for that campaign to consumers located in the United States. As a result, our revenue from advertising delivered to U.S. consumers was higher than the revenue derived from advertising sold in the United States in 2013.

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We also substantially increased our overall sales force during the year ended December 31, 2013 compared to the prior year, allowing us to increase our number of advertising client relationships and the number of developer applications enabled to receive ads delivered through our platform.

Cost of revenue.    Cost of revenue was $154.8 million, or 59.7% of revenue, for the year ended December 31, 2013, an increase of $49.1 million, or 46.4%, from $105.7 million, or 59.5% of revenue, for the year ended December 31, 2012. The increase in cost of revenue in absolute dollars was the direct result of the increase in revenue, as we pay a percentage of that revenue to developers for use of their ad space in delivering mobile ads for our advertising clients.

 

Sales and marketing.    Sales and marketing expense was $38.7 million, or 14.9% of revenue, for the year ended December 31, 2013, an increase of $14.9 million, or 62.4%, from $23.8 million, or 13.4% of revenue, for the year ended December 31, 2012. The increase in sales and marketing expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $9.8 million increase in salaries and personnel-related costs associated with an increase in headcount and stock-based compensation expense, as we increased the number of sales and marketing personnel to support our expanding client base and experienced higher commission costs associated with higher revenue. The number of full-time sales and marketing employees was 187 at December 31, 2013, which is an increase from 113 at December 31, 2012. As a result of the Jumptap acquisition we added 40 sales and marketing employees. These employees and corresponding expenses only affected the period from November 6, 2013 to December 31, 2013. In addition, we experienced a $2.5 million increase in our marketing programs and travel expenses, an additional $509,000 in depreciation expense related to our property and equipment, an additional $531,000 in amortization expense for acquired intangible assets, an additional $723,000 in rent expense, $801,000 in severance payments which resulted from the acquisition of Jumptap, and an additional $100,000 in other general sales and marketing costs to support our growing sales force.

Technology and development.    Technology and development expense was $19.0 million, or 7.3% of revenue, for the year ended December 31, 2013, an increase of $5.4 million, or 39.3%, from $13.6 million, or 7.7% of revenue, for the year ended December 31, 2012. The increase in technology and development expense, in absolute dollars, was primarily attributable to a $5.2 million increase in salaries and personnel-related costs associated with an increase in headcount, partially offset by a decrease in stock compensation expense of $2.1 million primarily associated with a one-time cost recorded in the prior year related to the departure of certain employees in the technology and development functions and acceleration of unvested stock awards. The number of full-time technology and development employees was 143 at December 31, 2013, which is an increase from 79 at December 31, 2012. As a result of the Jumptap acquisition we added 51 technology and development employees. These employees and corresponding expenses only affected the period from November 6, 2013 to December 31, 2013. In addition, for the year ended December 31, 2013, we incurred $780,000 in increased depreciation expense related to our property, equipment, and internally developed software, an additional $765,000 in amortization expense for acquired intangible assets, an additional $107,000 in rent expense, an additional $162,000 in travel related activities, an additional $334,000 in production server hosting expenses, and $95,000 in severance payments as a result of the acquisition of Jumptap. The decrease in technology and development expenses as a percentage of revenue for the year ended December 31, 2013 was primarily attributable to our revenue growing faster than our expenses during 2013, but was also affected by the $2.1 million of higher stock-based compensation expense for our technology and development employees in the prior year.

General and administrative.    General and administrative expense was $61.9 million, or 23.9% of revenue, for the year ended December 31, 2013, an increase of $22.9 million, or 58.9%, from $39.0 million, or 21.9% of revenue, for the year ended December 31, 2012. The increase in general and administrative expense was primarily attributable to a $9.4 million increase in salaries and personnel-related costs associated with an increase in headcount and stock compensation expense. In addition, for the year ended December 31, 2013, we incurred $7.6 million of acquisition-related costs and severance related to the Jumptap and Metaresolver acquisitions, increased professional service fees of $1.3 million, $1.0 million in increased depreciation and amortization expense related to our property, equipment, and internally developed software, $750,000 of deferred compensation expense related to our acquisition of Metaresolver, increased rent expense of $475,000, increased information system costs of $272,000, and an increase of $2.1 million in other general corporate costs necessary to support the overall growth in our business. The number of full-time general and administrative employees was 270 at December 31, 2013, an increase from 156 at December 31, 2012. As a result of the Jumptap acquisition we added 64 general and administrative employees. These employees and corresponding expenses only affected the period from November 6, 2013 to December 31, 2013.

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Income tax benefit.    For the year ended December 31, 2013, we recognized an income tax benefit of $47,000 primarily due to investment tax credits in Singapore, partially offset by minimal state and foreign tax liabilities.

Seasonality

Our revenue tends to be seasonal in nature, with the fourth quarter of each calendar year historically representing the largest percentage of our total revenue for the year, and the first quarter representing our smallest percentage of total revenue for the year. Many brand advertisers spend the largest portion of their advertising budgets during the fourth quarter, in preparation for the holiday season.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. 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.

Liquidity and Capital Resources

Sources of Liquidity

As of December 31, 2014, we had cash and cash equivalents totaling $49.5 million. In August 2011, we entered into a line of credit with Silicon Valley Bank, or SVB, which allowed for borrowings up to $15.0 million. Amounts borrowed under the line of credit are secured by all of our assets. The loan agreement was amended in October 2013 to extend the maturity date to May 9, 2014, to revise the interest rate payable under the agreement and to make other changes. The loan agreement was amended again in May 2014 increasing allowed borrowings under the agreement to $20.0 million. The loan agreement was amended and restated in November 2014, increasing allowed borrowings to $40.0 million and making other changes. Advances under the line of credit bear interest at a floating rate equal to, at our option, either the prime rate published in the Wall Street Journal plus a margin of 1.6% or the ICE Benchmark Administration LIBOR rate plus a margin of 2.6%, in either case with interest payable monthly. The line of credit agreement requires that we maintain a ratio of cash, cash equivalents and billed accounts receivable to current liabilities less the current portion of deferred revenue of at least 1.25 to 1.00. There are also EBITDA minimum requirements under the credit agreement. Additionally, the line of credit agreement contains an unused line fee of 0.2% per year, calculated based on the average unused portion of the loan, payable monthly.

As of December 31, 2014, we had not yet drawn on this line of credit. As of December 31, 2014, we were in compliance with all covenants under the loan agreement.

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Working Capital

The following table summarizes our cash and cash equivalents, accounts receivable, working capital and cash flows for the periods indicated:

 

 

 

 

Our cash and cash equivalents at December 31, 2014 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts, certificates of deposit and money market funds that are currently providing only a minimal return.

Of our total cash and cash equivalents, less than 3% was held outside of the United States at December 31, 2014 and 2013. Our international operations consist of selling and marketing functions supported by our U.S. operations, and we are dependent on our U.S. operations for our international working capital needs. If our cash and cash equivalents held outside of the United States were ever needed for our operations inside the United States, we would be required to accrue and pay U.S. taxes to repatriate these funds. We currently intend to permanently reinvest these foreign amounts outside the United States, and our current plans do not demonstrate a need to repatriate the foreign amounts to fund our U.S. operations.

Cash Flows

Operating Activities

For the year ended December 31, 2014, our net cash used in operating activities of $10.2 million consisted of a net loss of $149.1 million offset by $125.6 million in adjustments for non‑cash items and by $13.3 million of cash provided by changes in working capital. Adjustments for non‑cash items primarily consisted of the goodwill and intangible asset impairment of $93.5 million, non‑cash stock compensation expense of $13.6 million, depreciation and amortization expense of $16.8 million and bad debt expense of $1.3 million. The increased depreciation and amortization expense primarily related to increased capital expenditure requirements and our intangible assets resulting from the Metaresolver and Jumptap acquisitions that closed in 2013. The increase in cash resulting from changes in working capital primarily consisted of a decrease in accounts receivable of $18.3 million, offset by an increase in other assets of $1.9 million and a $5.4 million decrease in accrued cost of revenue, driven primarily by an increase in developer‑related payments associated with the increase in revenue.

For the year ended December 31, 2013, our net cash used in operating activities of $21.4 million consisted of a net loss of $15.1 million and $23.0 million of cash used to fund changes in working capital, which was primarily driven by the acquisition of Jumptap, domestic and international expansion of our operations, and by our investment in technology and development and personnel to facilitate our growth, offset by $16.7 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of non-cash stock compensation expense of $9.0 million, depreciation and amortization expense of $5.9 million, and bad debt expense of $1.8 million. The increased depreciation and amortization expense primarily related to increased capital expenditure requirements and our intangible assets resulting from the Metaresolver and Jumptap acquisitions that closed in 2013. The decrease in cash resulting from changes in

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working capital primarily consisted of an increase in accounts receivable of $28.1 million, which was primarily driven by increased revenue during the year as we continued to expand our operations both domestically and internationally, an increase in prepaid expenses and other current assets of $1.3 million, which was primarily the result of additional deposit requirements for new office space and future marketing events and memberships, an increase in accounts payable and accrued expenses of $4.7 million, which was primarily the result of our Jumptap acquisition, and increases in accrued payroll and payroll related expenses of $1.1 million, which was primarily the result of increases in headcount to support our growing business. These decreases were partially offset by increases in operating cash flow due to an $11.5 million increase in accrued cost of revenue, driven primarily by an increase in developer-related charges.

 

For the year ended December 31, 2012, our net cash used in operating activities of $2.5 million consisted of a net loss of $5.4 million and $9.3 million of cash used to fund changes in working capital, which was primarily driven both by the domestic and international expansion of our operations and by our investment in technology and development and personnel to facilitate our growth, offset by $12.3 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of non-cash stock compensation expense of $7.5 million, depreciation and amortization expense of $2.4 million and non-cash changes in the fair value of a preferred stock warrant liability of $834,000 from January 1, 2012 until its reclassification to additional paid-in capital on April 3, 2012. The increased depreciation and amortization expense primarily related to increased capital expenditure requirements and our intangible assets resulting from the Condaptive acquisition that closed in 2011. The decrease in cash resulting from changes in working capital primarily consisted of an increase in accounts receivable of $25.7 million, which was primarily driven by increased revenue during the year as we continued to expand our operations both domestically and internationally, and an increase in prepaid expenses and other assets of $542,000, which was primarily the result of additional deposit requirements for new office space and future marketing events and memberships. These decreases were partially offset by increases in operating cash flow due to a $16.4 million increase in accounts payable and accrued expenses and accrued cost of revenue, driven primarily by an increase in developer-related charges, and an $869,000 increase in accrued payroll and payroll-related expenses resulting from an increase in the number of employees.

 

Investing Activities

For the year ended December 31, 2014, net cash used in investing activities was $40.5 million. This amount consisted of $22.4 million of cash consideration paid, net of cash received, as part of the Nexage acquisition and $18.1 million for the purchase of property and equipment.

For the year ended December 31, 2013, net cash used in investing activities was $3.1 million, consisting of a cash inflow of $2.0 million of cash acquired, net of cash consideration paid, as part of the Metaresolver and Jumptap acquisitions, offset by a cash outflow of $5.1 million for purchases of property and equipment.

 

For the year ended December 31, 2012, net cash used in investing activities was $5.3 million, consisting of purchases of property and equipment.

Financing Activities

For the year ended December 31, 2014, net cash provided by financing activities was $1.2 million, consisting primarily of $2.1 million of cash received upon the exercise of stock options, offset by cash used for payment of employee withholding taxes related to restricted stock unit vesting of $941,000.

For the year ended December 31, 2013, net cash used in financing activities was $13.5 million, consisting primarily of $14.4 million in cash used to repay a line of credit and long-term debt acquired in the Jumptap acquisition and cash used for payment of employee withholding taxes related to restricted stock unit vesting of $518,000. The cash used in financing activities was partially offset by $1.5 million in cash received upon the exercise of stock options.

 

For the year ended December 31, 2012, net cash provided by financing activities was $128.5 million, consisting of $127.0 million in proceeds from the issuance of common stock in two offerings, net of offering costs and $1.5 million in cash received upon the exercise of stock options.

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Operating and Capital Expenditure Requirements

We believe that our existing cash balances and unused capacity under our line of credit will be sufficient to meet our anticipated cash requirements through at least the next 12 months. During this period, we expect our capital expenditure requirements to be approximately $4.0 million to $5.0 million, primarily for computer and network equipment and leasehold improvements for some of our office locations.

Contractual Obligations

We have non‑cancelable contractual obligations for office space and capital leases. The following table discloses aggregate information about material contractual obligations and periods in which payments were due as of December 31, 2014. Future events could cause actual payments to differ from these estimates. We also have a line of credit with SVB, as described above, although we have not borrowed under this facility.

 

 

We have sublease agreements for office space that will offset the operating lease obligations set forth in the table above by $290,000, $324,000 and $49,000 in 2015, 2016 and 2017, respectively.

 

Off‑Balance Sheet Arrangements

As of December 31, 2014, we did not have any off‑balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S‑K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates.

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in Item 8 of this Annual Report, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue based on the activity of mobile users viewing ads through developer applications and mobile websites. Our revenue is recognized when our advertising services are delivered based on the specific terms of the advertising contract, which are commonly based on the number of ads delivered, or views, clicks or actions by users on mobile advertisements. At the time that our services have been provided, the fees charged are fixed or determinable, persuasive evidence of an arrangement exists, and collectability is reasonably assured.

We evaluate whether it is appropriate to recognize revenue based on the gross amount billed to the customers or the net amount earned as revenue share. Generally, when we are primarily obligated in a transaction, have latitude in

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establishing prices, are responsible for fulfillment of the transaction, have credit risk, or have several but not all of these indicators, we recognize revenue on a gross basis. While none of the factors individually are considered presumptive or determinative, in reaching our conclusions on gross versus net revenue recognition, we place the most weight on the analysis of whether or not we are the primary obligor in the arrangement. We generally record the net amounts as revenue earned if we are not primarily obligated or do not have latitude in establishing prices or credit risk.

We record deferred revenue when we receive cash payments from our advertiser clients in advance of when we perform the services under our arrangements with them.

Accounts Receivable and Allowances for Doubtful Accounts and Sales Credits

Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts that we maintain for estimated losses expected to result from the inability of some clients to make payments as they become due. Our estimated allowance is based on our analysis of past due amounts and ongoing credit evaluations. Historically, our actual collection experience has not varied significantly from our estimates, due primarily to our credit and collection policies and the financial strength of many of our clients.

We also estimate an allowance for sales credits based on our historical experience of sales credits as a percentage of revenue. Historically, actual sales credits have not significantly differed from our estimates. However, if our revenue and client base continues to grow, higher than expected sales credits may result in future write‑offs that are greater than our estimates.

Business Combinations

In business combinations, we determine the acquisition purchase price as the sum of the consideration we provide. When we issue stock‑based awards to an acquired company’s selling stockholders or employees, we evaluate whether the awards are purchase consideration or compensation for post‑business combination services. Our evaluation includes, among other things, whether the vesting of the stock‑based awards is contingent on the continued employment of the selling stockholder beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post‑acquisition services and recognized as future compensation expense over the required service period.

We allocate the purchase price in a business combination to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.

To date, the assets acquired and liabilities assumed in our business combinations have primarily consisted of acquired working capital and definite‑lived intangible assets. Working capital is recorded at its fair value. We estimate the fair value of definite‑lived intangible assets acquired using a discounted cash flow approach, which includes an analysis of the future cash flows expected to be generated by the asset and the risk associated with achieving these cash flows. The key assumptions used in the discounted cash flow model include the discount rate that is applied to the forecasted future cash flows to calculate the present value of those cash flows and the estimate of future cash flows attributable to the acquired intangible asset, which include revenue, operating expenses and taxes.

Stock‑Based Compensation

We include stock‑based compensation as part of operating expenses in connection with the grant or modification of stock options and other equity awards to our directors, employees and non‑employees. We apply the fair value method in accordance with authoritative guidance for determining the cost of stock‑based compensation. The total cost of the grant is measured based on the estimated fair value of the award at the date of grant. Modifications are measured based on the fair value at the date of modification. The fair value is then recognized as stock‑based compensation expense over the requisite service period, which is the vesting period, of the award. Information about the assumptions used in the calculation of stock‑based compensation expense is set forth in the Stock‑Based Compensation footnote to our consolidated financial statements included under Item 8 of this Annual Report.

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Intangible Asset Impairment

We review long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets are not recoverable, the impairment to be recognized, if any, is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets or asset group.  As we operate as one business unit and our long-lived assets do not have identifiable cash flows that are independent of the other assets and liabilities of this business unit, the intangible asset test is performed at the entity level.

During the year ended December 31, 2014, we determined that our technology and customer relationship assets were not fully recoverable due to lower projected revenue levels from associated products and customers.  As a result, we recognized an impairment charge of $36.4 million to reduce the carrying values of these intangible assets to their estimated fair values.  Fair value was estimated using the income approach based on management’s forecast of future cash flows to be derived from the asset’s use. We continue to evaluate the fair value of our intangible assets based on the results of our operations. Depending on our operations, we may in the future be required to record additional impairment charges.

Goodwill Impairment

Goodwill is tested annually for impairment on October 1 of each year or more frequently if impairment indicators arise.  Goodwill is tested for impairment at the reporting unit level using a two‑step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two is performed to measure the amount of the impairment, if any.

During the year ended December 31, 2014, we determined sufficient indication existed to require performance of an interim goodwill impairment analysis as of September 30, 2014 for our reporting unit.  This indicator was a decrease in our market capitalization below the carrying value of our net assets.  In this interim goodwill impairment test, the reporting unit failed step one.

The combination of the lower reporting unit fair value calculated in step one and the identification of unrecognized fair value changes to the carrying values of other assets and liabilities in the second step of the interim goodwill impairment test, resulted in an implied fair value of goodwill below the carrying value of goodwill.  As a result, we recorded a goodwill impairment loss of $57.1 million. We continue to evaluate the fair value of our goodwill based on the results of our operations. Depending on our operations, we may in the future be required to record additional impairment charges.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”.  ASU No. 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification, or ASC, Topic 605, Revenue Recognition. The adoption of ASU No. 2014-09 is required for public entities for fiscal years beginning after December 15, 2016.  The Company is evaluating what the effects, if any, of the adoption of ASU No. 2014-09 will have on its consolidated financial statements.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We are exposed to market risk related to changes in foreign currency exchange rates. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into exchange rate hedging arrangements to manage the risks described below.

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Interest Rate Sensitivity

We maintain a short‑term investment portfolio consisting mainly of highly liquid short‑term money market funds, which we consider to be cash equivalents. These investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. Any borrowings under our line of credit with SVB are at a variable rate and, as a result, increases in market interest rates would generally result in increased interest expense on our outstanding borrowings. During 2014, we did not have any borrowings outstanding under the line of credit.

Foreign Currency Exchange Risk

With international operations, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and if our exposure increases, adverse movement in foreign currency exchange rates would have a material adverse impact on our financial results. Historically, our primary exposures have been related to non‑U.S. dollar denominated operating expenses in the United Kingdom, other countries in Europe, and Singapore. As a result, our results of operations would generally be adversely affected by a decline in the value of the U.S. dollar relative to these foreign currencies. However, based on the size of our international operations and the amount of our expenses denominated in foreign currencies, we would not expect a 10% decline in the value of the U.S. dollar from rates on December 31, 2014 to have a material effect on our financial position or results of operations. Substantially all of our sales contracts are currently denominated in U.S. dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue.

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Item 8.  Financial Statements and Supplementary Data

Millennial Media, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Internal Control Over Financial Reporting

The Board of Directors and Stockholders of Millennial Media, Inc.:

We have audited Millennial Media, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Millennial Media, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Report on Internal Control Over Financial Reporting appearing in Item 9A. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in Management’s Report on Internal Control Over Financial Reporting appearing in Item 9A, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Nexage, Inc., which is included in the 2014 consolidated financial statements of Millennial Media, Inc. and constituted $20.8 million and $1.5 million of total and net assets, respectively, as of December 31, 2014 and $1.4 million and $703,000 of revenues and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of Millennial Media, Inc. also did not include an evaluation of the internal control over financial reporting of Nexage, Inc.

In our opinion, Millennial Media, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Millennial Media, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014 of Millennial Media, Inc., and our report dated March 11, 2015 expressed an unqualified opinion thereon.

 

 

Baltimore, Maryland

March 11, 2015  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Consolidated Financial Statements

The Board of Directors and Stockholders of Millennial Media, Inc.

We have audited the accompanying consolidated balance sheets of Millennial Media, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(b). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Millennial Media, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Millennial Media, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control‑Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 11, 2015 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Baltimore, Maryland

March 11, 2015

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Millennial Media, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

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Millennial Media, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

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Millennial Media, Inc.

Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

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Millennial Media, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(in thousands, except share and per share data)

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

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Millennial Media, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements