YuMe Inc - FORM 10-K - March 10, 2017

Attached files

file	filename
EX-10.17 - EXHIBIT 10.17 - YuMe Inc	ex10-17.htm
EX-32.2 - EXHIBIT 32.2 - YuMe Inc	ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - YuMe Inc	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - YuMe Inc	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - YuMe Inc	ex31-1.htm
EX-23.1 - EXHIBIT 23.1 - YuMe Inc	ex23-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

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

For the annual period ended December 31, 2016

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

Commission File Number: 1-36039

YuMe, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		27-0111478
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1204 Middlefield Road, Redwood City, CA		94063
(Address of Principal Executive Offices)		(Zip Code)

(650) 591-9400

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.001 per share		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the 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 during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☐

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

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, was $69,491,376 based upon the closing price of the Registrant’s common stock reported for such date by the New York Stock Exchange. Shares of common stock held by each executive officer, director, and their affiliated holders have been excluded from that calculation because such persons may be deemed to be affiliates of the Company. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2017, there were 34,038,483 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive proxy statement for its 2017 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, are incorporated by reference in Part III of this Form 10-K.

NOTE REGARDING FORWARD-LOOKNG STATEMENTS

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

This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (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. Forward-looking statements include, for example, statements about:

• Anticipated trends and challenges in our industry, including but not limited to the increasing quantity, variety and fragmentation of digital video content, platforms, distribution channels and technologies;

• The expansion of the digital media advertising market in general and the digital video advertising market in particular;

• Our operating results, including revenue, cost of revenue, expenses and liquidity;

• Our strategy and competition;

• Market trends, including overall opportunities for digital media advertising and shifting advertising budgets;

• The ongoing improvement and refinement of our data-science capabilities;

• Developments in the regulatory framework applicable to our business; and

• Our intellectual property and proprietary technologies.

You should refer to Part I, Item 1A: “Risk Factors” of 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 that we will achieve our objectives and plans in any specified time frame, or at all. We do not undertake any 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 read this Annual Report, and the documents that we reference in this Annual Report and have filed as exhibits to the Annual Report, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

YuMe, Inc.

FORM 10-K

Table of Contents

		Page
PART I

Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	29
Item 3.	Legal Proceedings	29
Item 4.	Mine Safety Disclosures	29


PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	78
Item 9A.	Controls and Procedures	78
Item 9B.	Other Information	79


PART III

Item 10.	Directors, Executive Officers and Corporate Governance	80
Item 11.	Executive Compensation	80
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	80
Item 13.	Certain Relationships and Related Transactions, and Director Independence	80
Item 14.	Principal Accounting Fees and Services	80


PART IV

Item 15.	Exhibits and Financial Statement Schedules	81
Item 16.	Form 10-K Summary	81
	Signatures	82
	Exhibit Index	83

GLOSSARY

To assist you in reading this Annual Report, we have provided definitions of some of the terms and acronyms that we use:

“Ad exchange”—A digital marketplace that enables advertisers and digital media property owners to buy and sell advertising impressions.

“Advertising campaign”—The process by which we deliver a brand advertiser’s digital video advertisements to audiences available through digital media properties and third party ad exchanges in order to fulfill the overall objectives, including the contractual requirements, of the advertising campaign awarded to us by advertising customers.

“Audience Amplifier”—Our machine-learning tool that uses correlative data models to find audiences that YuMe expects to be receptive to specific brand messages based on data collected from the YuMe SDKs, as well as third party data sources.

“Brand advertising”—Advertising that features a particular company, product or service in a manner intended to establish long-term, positive attitudes toward such brand.

“Brand attitudes”—A measure of a person’s positivity or negativity towards a brand.

“Brand awareness”—The extent to which a brand is recognized by potential customers and correctly associated with a particular product.

“Brand favorability”—The number of people who view the brand positively.

“Brand metrics”—Metrics that are specific to an advertising campaign and outline criteria for measuring success of the advertising campaign.

“Brand preference”—A measure of brand loyalty in which a consumer chooses a particular brand in presence of competing brands.

“Brand recall”—A measure of advertising effectiveness in which a sample of respondents who were exposed to an ad and at a later time are asked if they recall the brand that sponsored an ad.

“CPM”—Cost per thousand Impressions, a measure by which advertising campaign placements may be priced for advertisers on a digital media property.

“Direct response advertising”—Advertising that is designed to induce some specific action, such as search engine marketing, click-through banners, newspaper classifieds and coupons.

“Frequency”—A measure of how many times a consumer within a target audience is exposed to a specific advertisement.

“Impression”—The exposure of the ad content on a publisher site.

“Lift”—The percentage improvement in a tested metric.

“Message recall”—A measure of advertising effectiveness in which a sample of respondents who were exposed to an advertising campaign and at a later time are asked if they recall the primary message of an advertising campaign.

“PQI”—YuMe’s Placement Quality Index, our contextual scoring system that assesses the quality of ad placements in order to optimize placements for brand results. PQI algorithms dynamically score advertising inventory based on prior calculations of brand related results and current advertising campaign measures such as video completion rate, player size, player location, content relevancy and advertising campaign objectives.

“Purchase intent”—The likelihood that a person intends to buy a product in a given period of time.

“Reach”—The number of individuals or households that are exposed to an ad in a given period of time.

“Unique viewers”—A measure of the number of individual devices through which a particular piece of video content was viewed online, on mobile, or through other internet-connected device platforms over a period of time, typically one month.

“YuMe SDKs”—YuMe’s Audience Aware Software Development Kit, our proprietary software that digital media property owners embed in websites and applications residing on other devices, along with a related set of implementation tools.

“YFA”—YuMe for Advertisers, our comprehensive demand-side platform (“DSP”) system enabling programmatic procurement of YuMe inventory as well as third party supply-side platform inventory.

PART I

ITEM 1.

BUSINESS

Overview

YuMe is a leading independent provider of multi-screen programmatic video advertising technology, connecting brand advertisers, digital media property owners and consumers of video content across a growing range of internet-connected devices. YuMe offers advertising customers full service marketing solutions by combining programmatic buying tools and data-driven technologies with deep insight into audience behavior. In 2015 we announced the launch of YFA, which is our DSP, to find relevant audiences and deliver targeted advertising. YuMe technologies also provide monetization opportunities for global digital media property owners.

Our digital video advertising solutions are purpose-built for brand advertisers, advertising agencies and digital media property owners. Through a sophisticated platform of proprietary embedded software, data science, machine-learning algorithms, and programmatic tools we deliver video advertising campaigns to relevant, brand-receptive digital audiences. We aggregate these audiences across a wide range of internet-connected devices, which include personal computers, smartphones, tablets, set-top boxes, game consoles and internet-connected TVs, by providing global digital media property owners with proprietary software that monetizes their professionally produced content and applications with our advertising campaigns. Our industry leadership is reflected in our wide audience reach, advanced programmatic capabilities, large customer base and scale in data derived from our large embedded software base.

For our advertising customers, we overcome the complexities of delivering digital video brand advertising campaigns in a highly fragmented environment where audiences use an increasing variety of internet-connected devices to access thousands of online and mobile websites and applications. Our solutions deliver brand-optimized video advertising campaigns seamlessly across internet-connected devices and we deliver those solutions to customers through direct sales and through our programmatic buying platform (both managed and self-service). Our platform optimizes advertising campaign results that are relevant to brand advertisers, such as brand awareness, message recall, brand favorability, and purchase intent. We believe brand advertisers and brand-focused agencies can find particular benefit in our private marketplace programmatic offering through which brand advertisers are able to programmatically manage the audiences and digital media properties where their campaigns will run.

For global digital media property owners that supply advertising inventory, we offer technologies that enable us to make their inventory available to advertising customers and deliver digital video ads to the audiences that are optimized for specific advertising customer needs. In order to categorize these audiences our technology stack gathers first party data through our cross-device SDK and incorporates third party data from partners. We then apply our data science capabilities to aggregate audiences that will be relevant to brand advertisers. In combination, these capabilities allow us to deliver ads to audiences that we expect to be receptive to specific brand messages, which drives better monetization for digital media property owners.

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

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

We generate revenue by delivering digital video ads on internet-connected devices. Our ads run when users choose to view video content on their devices. Advertising campaigns occur when customers submit orders to us directly through our programmatic software or in a managed service and we fulfill those orders by delivering their digital video ads to audiences available through digital media properties and third party ad exchanges, a process that we refer to as an advertising campaign. Advertising customers typically pay us on a CPM basis, of which we generally pay digital media property owners a negotiated percentage. In cases where our programmatic buying platform is used by our advertising customers to source inventory from a third party ad exchange we may collect a transaction fee. Our customers primarily consist of large global brands and their advertising agencies. In 2016, we had 846 customers, including 76 of the top 100 U.S. advertisers as ranked by Advertising Age magazine in 2015 (“the AdAge 100”), such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald’s.

Industry Background

Advertising is generally divided into two broad categories: direct response and branding. Direct response advertising is designed to induce some specific action, while brand advertising is designed to establish long-term, positive consumer attitudes toward a company or its products or services without, necessarily, a specific call to action. While direct response advertisers measure advertising campaign effectiveness against consumer response to an advertisement’s call to action, brand advertisers measure advertising campaign effectiveness against metrics such as reach (how many consumers within the advertiser’s target audience were exposed to the advertisement) and frequency (how many times was the consumer within the target audience exposed to the advertisement). Brand advertisers may conduct post-advertising campaign surveys with their target audience to measure how well an advertising campaign increased brand-relevant metrics, such as brand awareness, message recall, brand favorability and purchase intent.

Currently, direct response advertising campaigns, such as search engine marketing, click-through banners and digital coupons, account for the majority of digital advertising. Historically, brand advertisers have relied on television, print and other traditional media to promote their brands, and we believe that digital advertising remains underpenetrated by brand advertisers relative to traditional media. Increasingly, brand advertisers’ target audiences are spending less time watching traditional TV and more time viewing video entertainment on internet-connected devices.

We believe TV brand advertisers are increasingly following their target audiences onto digital video and allocating more of their budgets to digital video advertising. New solutions such as programmatic platforms, which allow buyers to see and purchase inventory in real-time and sellers to reach multiple buyers, are increasing the reliability and volume of digital brand advertising transactions. Brand advertisers and digital media property owners increasingly use sophisticated data sciences to measure the value of inventory and audiences both in real-time and in private marketplaces. Brand advertisers in particular are drawn to private marketplaces where they can use their own customer collected data and control the inventory providers and the data measurement. As new solutions address the challenges advertisers face with deploying digital video brand advertising campaigns in a fragmented ecosystem, we believe this market is poised to capture increasing amounts of TV advertising spend.

The YuMe Solution

Our solutions are built for brand advertisers, advertising agencies and digital media property owners that produce content and applications. We have built our software stack and data-science capabilities to deliver reliable advertising campaign results for brand advertisers and monetization for digital media property owners. We deliver TV-like video ads when users choose to view video content on their devices, the vast majority of which are prominently displayed before the chosen video content is displayed. We call these ad opportunities, “placements.” We source these placements via direct relationships with digital media property owners and through programmatic ad exchanges where digital media property owners may offer their placement inventory for automated purchasing through programmatic means. We then deliver ads in these placements to audiences across internet-connected devices. With our data-science capabilities, including data collection and sophisticated analytics, our advertiser customers reach large-scale, brand-receptive audiences, and digital media property owners capture brand advertising revenue with their content and applications. In 2015 we announced the launch of our demand-side programmatic platform (YFA) which enables advertiser customers to buy advertising inventory in real-time and in private marketplaces customized for specific advertisers’ needs.

We have developed our solutions on three pillars: embed, learn and deliver. We embed our YuMe SDKs as part of online and mobile websites and applications residing on millions of personal computers, smartphones, tablets, and other devices, yielding valuable data; we learn from that data to build our audience and contextual targeting models; and using our platform we deliver TV-scale campaigns to audiences that we expect to be receptive to specific brand messages.

We believe our software and solutions have advantages that others cannot offer. Our solutions, including YFA, YuMe SDKs, first party data collection and data-science capabilities, monetization opportunities for global digital media property owners and a consultative sales force, combine to make each component more valuable. High PQI ratings enable digital media property owners to attract the best premium brand-advertising to optimize their inventory, maximize CPM and deliver brand value.

Our solutions:

Aggregate large fragmented audiences – Through our embedded YuMe SDKs, we aggregate millions of digital video viewers on more than a thousand digital media properties, across websites and applications residing on a range of devices. The YuMe SDKs, which are customized for individual devices, allow us to deliver relevant and distinct video ad experiences to a range of different devices and audiences, while simultaneously collecting device, content and audience-specific data on the brand performance of those ad placements. The YuMe SDK can be incorporated directly with a digital media property owner, or inserted into ad exchanges using an IAB industry standard VPAID wrapper.

Reach brand-receptive audiences at scale – Our Audience Amplifier method applies machine-learning technology to first party data that we collect from the YuMe SDKs, as well as third party data, in order to identify viewers within our aggregated audience and in public ad exchanges who we expect to be receptive to specific brand messages. We refer to these viewers as brand-receptive audiences. We use characteristics of these audiences to identify additional viewers that may deliver similar or better brand receptivity.

Deliver targeted ads in valuable brand contexts – Our contextual targeting capabilities are designed to ensure that brand advertisements are delivered in the relevant context alongside high-quality content.

Help digital media property owners capture brand dollars – Digital media property owners can use our technologies for creating, managing, monetizing and measuring cross-platform digital video brand advertising inventory. Using our technologies, digital media property owners can monitor how their content is valued, how it performs for brand advertising buyers and how many sales they have generated based on that performance. Digital media property owners can also leverage this information to better monetize their inventory.

Help advertising customers target relevant audiences – Advertising customers can access relevant audiences through YFA, both in real-time bidding and through private marketplaces. YFA provides a programmatic system for generating, targeting, delivering and measuring campaigns across multiple platforms, thousands of digital media properties and multiple third party inventory aggregators called ad exchanges. Private marketplaces give brand advertisers a custom curated programmatic platform to apply specific requirements on inventory buying. This is particularly attractive to brand advertisers who want to closely manage the placement and audiences for their ads.

Measure and optimize advertising campaigns based on brand metrics – Our YuMe SDKs enable us to collect first party advertising campaign data, such as player size and completion rate, and to survey viewers for information about factors such as message recall and brand favorability.

Deliver impactful device-specific ads – Our YuMe SDKs and video ads can be customized for each digital device, so we can utilize specific characteristics of a device to deliver new and impactful video ads.

Augment TV advertising spend – When deployed as part of an integrated digital video and TV campaign, our solutions enable broader reach and better results than TV campaigns alone. In particular, we believe that our Audience Amplifier permits brand advertisers to increase the scale and reach of their digital video advertising campaigns.

The YuMe Platform

The YuMe Platform is the set of products and technologies used to find brand-relevant audiences and deliver impactful video ads. It is comprised of our core technologies as well as our products used by advertisers and by digital media property owners.

YuMe for Advertisers

In June 2015 we announced the launch of YFA which is our demand-side programmatic video buying technology platform providing advertisers with access to multi-screen video audiences at scale with a full suite of unique branding solutions. YFA is a comprehensive demand-side platform that connects brand advertising buyers to relevant digital media property audiences and inventory. YFA delivers an intuitive user interface, multi-screen breadth, brand performance-driving advertising products and integrated third party technologies to support video branding objectives. In addition to buying inventory in real-time, advertising customers using YFA can create private marketplaces to customize the digital media properties and owners relevant for their specific brands.

YFA allows advertising customers to access our programmatic platform and use our sales or managed services team to assist in creating, optimizing and running campaigns. Our YFA programmatic platform can run campaigns across multiple internet-connected devices and through multiple digital media property owners and aggregators. When using YFA, advertising customers can access differentiated audiences from YuMe digital media properties and other audiences through third party supply-side platforms (“SSPs”) and ad exchanges. This gives customers the flexibility to extend their objectives as needed.

YuMe for Publishers

Our technologies provide digital media property owners with scalable, cross-platform monetization opportunities for their advertising inventory. We deliver our technology through a cloud-based hosted platform, ensuring a high level of reliability, scalability and performance, with minimal upfront technology investments by our partners.

Our Core Technologies

YuMe Software Development Kits – The YuMe SDKs consist of software that is embedded by digital media property owners as part of websites and applications residing on a range of different devices, along with a related set of implementation tools. Our YuMe SDKs solve the problem of addressing a fragmented audience because they are customized for each device type based on the specific hardware, software and viewing capabilities of the device. They enable delivery of video ads, customized interactive ads and rich experiences built on video, interactivity and web elements. YuMe SDKs collect relevant data needed to drive our other technologies including our advanced audience targeting and ad placement algorithms.

Key capabilities of our YuMe SDKs include:

•Broad support for multiple devices, as well as related operating systems, video players and plug-ins;

•Support of industry-standard interface definitions such as IAB’s Video Player Ad-servicing Interface Definition and its Mobile Rich Media Ad Interface Definitions;

•Advertising campaign performance surveys;

•Data about viewership, video placement, completion rate, brand safety, such as viewability and traffic quality and other screen-level insights; and

•Delivery of a large selection of video ad units, including customized and interactive advertising units.

The data collected through our YuMe SDKs, including 30 or more variables per ad placement, feed into our PQI and Audience Amplifier technologies to form the core of our data-science capabilities. At the core of our contextual targeting technology is our PQI, an extensible set of scoring and targeting algorithms that use data collected by our YuMe SDKs to optimize all aspects of video advertising and monetization of digital media property owners’ inventory.

YuMe Placement Quality Index (PQI) – YuMe’s PQI is an extensible set of scoring and targeting algorithms that use data collected by our YuMe SDKs to optimize video advertising, targeting and performance across digital media properties. The algorithms continually analyze data from the YuMe SDKs, such as viewership, video completion rate, player size, player location, content relevancy, and advertising campaign objectives. Our PQI is easily extensible to include other measures as we determine their relevancy. First party data collected directly by YuMe, second party data, such as publisher registration data, and third party data, such as anonymized cookie-based data licensed from data providers, can be used together or separately to inform the PQI algorithms. Based on the results of PQI calculations, we deliver the right ad to the right audience at the right time.

A brand advertising campaign may involve millions of ad impressions, formed with pairings of ad requests with brand ad objectives. The flexibility of our PQI algorithm allows us to respond to brand advertising campaign objectives, such as addressing particular devices, websites or applications and targeting particular viewership characteristics. This enables our customers to reach targeted brand-receptive audiences for their advertising campaigns.

As we collect more data, the quality of our PQI analyses improves. The results of our PQI analyses feed our Audience Amplifier tool, helping us improve our audience modeling methodologies and providing us with further audience targeting data, which we in turn use to improve our PQI analyses.

YuMe Audience Amplifier – Audience Amplifier is our data-driven audience measurement, modeling and segmentation engine that delivers relevant addressable audiences at scale. Audience Amplifier is a cross-platform predictive planning tool that finds addressable brand-receptive audiences across a large and highly fragmented ecosystem. While not cookie dependent, Audience Amplifier integrates learning and data from various sources including PQI, our YuMe SDKs, our opt-in audience surveys, and second and third party data to model the large cross-platform brand-receptive audience that meets specific advertiser objectives. Our platform delivers PQI targeted advertising campaigns, measures effectiveness based on data supplied by the YuMe SDKs and feeds that effectiveness data to Audience Amplifier, which in turn optimizes the audience targeting model for those advertising campaigns. Audience Amplifier correlates advertising campaign performance with PQI information to create additional audience models that can be utilized in connection with our direct digital media properties and digital media properties available in ad exchanges. The Audience Amplifier audience segments and models are then used post-advertising campaign to improve YuMe’s overall advertising campaign planning and sales strategy. Advertisers benefit from this feedback loop by getting new audience models and more relevant information on the potential size and quality of audience they can reach, driving increased adoption of our technology.

Our Customers

Our customer base consists primarily of large brand advertisers and the advertising agencies that represent them. In 2016, we had 846 customers, including 76 of the AdAge 100. To reach our advertising customers, we work closely with advertising agencies that build and manage advertiser strategies and tactics.

Sales and customer support are handled through a number of channels:

•Full-service sales team: Our global sales team creates deep and consultative relationships with our brand and agency customers to facilitate highly iterative advertising campaign planning.

•Ad specialists: We also employ an overlay sales team that has specific and deep knowledge of particular industry and geographic or device verticals. Our full-service sales team often partners with ad specialists or groups of ad specialists to construct complex, multi-platform and multi-objective advertising campaigns. We also operate an international advertising and network operations center 24 hours a day, 365 days a year.

•Product managers: As we innovate, developing increasingly effective and relevant solutions, our product management team often works in conjunction with our customers to identify key requirements and explain in depth the workings of the YuMe Platform technologies.

One customer within the OMG corporate structure accounted for 12% of our total revenue in 2016. No single customer accounted for 10% or more of total revenue in 2015 and 2014.

Our Relationships with Digital Media Property Owners

We have direct relationships with digital media property owners, including owners of websites and developers of smartphone and tablet applications, which display digital videos and manufacturers of internet-connected devices. We also source inventory from ad exchanges where digital media property owners may offer their inventory. These relationships provide us with advertising inventory, which we utilize to deliver our digital video advertising solutions to our advertising customers. We do not believe the success of our business is dependent on our relationship with any single digital media property owner or ad exchange.

In creating direct relationships, we seek to identify owners of digital media properties featuring professionally-produced digital video content and applications that, individually or collectively, have the audience scale, composition and accessibility across internet-connected devices to achieve the brand objectives of our brand advertisers. We review a variety of criteria to determine the quality of the advertising inventory and its appropriateness for brand advertising, including video content, video context, the platforms on which video content can be accessed, the characteristics of the viewing audience, the targeting attributes that can be obtained from the digital media property in real-time and the volume of available video streams and impressions.

We reach these digital media property owners through a variety of methods, including outreach by a dedicated business development team, marketing events at trade shows and conferences where digital media property owners may attend, training and “teach-ins” on YuMe technologies.

When sourcing from ad exchanges we use our data science capabilities to identify digital media properties and inventory that we programmatically calculate will perform well for specific advertisers and campaign objectives.

Competition

We operate in a dynamic and competitive market, influenced by trends in both the overall advertising industry as well as the digital video advertising market. We compete with Facebook, Hulu and Google (YouTube and DoubleClick) as well as many privately-owned ad exchanges, demand-side advertiser platforms, sell-side publisher platforms and ad networks. We also face competition from direct response advertising providers who seek to target brands. Some large advertising agencies, which may represent our current customers, build their own relationships with digital media properties and can directly connect advertisers with digital media properties. Other companies that offer analytics, mediation, ad exchange or other third party solutions are or may become intermediaries between advertisers and digital media properties and thereby compete with us.

We believe the principal competitive factors in our industry include effective audience targeting capabilities, brand-oriented tools and user interface, multi-device advertising campaign delivery capability, platform independence, proven and scalable technologies, audience scale and reach, relationships with leading brand advertisers and their respective agencies and brand awareness and reputation. We believe that we compete favorably with respect to all of these factors and that we are well-positioned as an independent provider of digital video brand advertising solutions.

Research and Development

As of December 31, 2016, we had a total of 144 employees primarily engaged in research and development functions, of which 110 were located in our Chennai and Pune, India offices. We believe that our twelve-year operating history and our ability to attract and retain the large pool of engineering talent available in India help us to scale our business cost-effectively.

Our research and development expense was $11.0 million, $10.9 million and $5.9 million in 2016, 2015 and 2014, respectively.

Intellectual Property

Our ability to protect our intellectual property, including our technologies, is 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. We have established business procedures designed to maintain the confidentiality of our proprietary information such as the use of our license agreements with customers and our use of our confidentiality agreements and intellectual property assignment agreements with our employees, consultants, business partners and advisors where appropriate. Some of our technologies rely upon third party licensed intellectual property.

“YuMe,” the YuMe Y TV logo, “Audience Amplifier,” “Audience-Aware SDK,” “PQI,” “The Science Behind Influence,” “YFA” and our other logos or product names are our registered or common law trademarks in the United States and certain other countries. Other trademarks and trade names referred to in this Annual Report are the property of their respective owners.

Government Regulation

We are subject to many U.S. and foreign laws and regulations that are applicable to companies engaged in the business of providing video advertising on digital media. 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.

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. 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 both the mobile and internet-connected TV advertising industries.

The issue of privacy in the digital media industry is still evolving. Federal legislation and rule-making have been proposed from time to time that would govern certain advertising practices as they relate to digital media, including the use of precise geo-location data. Although such legislation has not been enacted, it remains a possibility that some 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 digital media industry, including makers of devices that display digital media, providers of digital media, operating system providers and 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, digital media solutions are generally not restricted by geographic boundaries, and our solutions reach devices throughout the world. Although we do not use data that identifies specific people by name, and we take steps to avoid collecting such personally identifiable information, the definition of personally identifiable information, personal information or personal data under applicable data protections laws, varies by country and is evolving to capture a wider set of data commonly used for online targeting (in some cases including IP addresses and other online identifiers). Where this is the case, our business may be subject to strict regulations about our use of this data. We currently transact business in Europe, Latin America and Asia and, as a result of these evolving data protection laws, some of our activities may also be subject to the laws of these foreign jurisdictions. In particular, European data protection laws are often 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. Future regulations may affect our ability to collect and use data and could harm our business.

Asset Impairment

For internally developed software, we perform regular recoverability assessments in order to evaluate any impairment indicators or changes to useful lives. During the fourth quarter of 2016, we determined not to allocate any future resources to market, develop and maintain our YFP 5.0 supply-side platform for publishers since it was not generating sufficient revenue to cover its related costs. Our assessment determined YFP 5.0 to be fully impaired and we recorded a one-time non-cash asset impairment charge of $0.9 million related to YFP 5.0 in operating expenses.

Restructuring

On November 8, 2016, our board of directors approved a restructuring plan designed to reduce our operating expenses, realign our cost structure with revenue, better manage our costs and more efficiently manage our business. The restructuring plan was implemented in the fourth quarter of 2016 and completed in the first quarter of 2017. Restructuring expenses totaled $1.6 million and were recorded as restructuring expenses on our consolidated statements of operations in the fourth quarter of 2016. Elements of the restructuring plan included a workforce reduction of approximately 7%, which included employee severance pay and related expenses of $1.2 million, acceleration of our former chief executive officer’s stock-based compensation expense of $0.3 million as a result of his termination without cause and facility exit expenses of $0.1 million. We do not expect to incur any additional expenses under the restructuring plan. As of December 31, 2016, we had $0.8 million of restructuring liabilities included in accrued liabilities on our consolidated balance sheet, which consisted primarily of employee severance pay and related expenses. We expect the restructuring liability to be fully paid in the first quarter of 2017.

Review of Strategic Alternatives

On November 9, 2016, we announced the commencement of a comprehensive review of strategic alternatives and have engaged advisors related to such review. We have not made any determination to enter into any strategic transaction, and there is no assurance that our review of strategic alternatives will result in any transaction being entered into or consummated.

Employees

As of December 31, 2016, we had 505 employees, of whom 81 were primarily engaged in the delivery of advertising campaigns, which we account for as a cost of revenue, 204 were primarily engaged in sales and marketing, 144 were primarily engaged in research and development and 76 were primarily engaged in general and administrative functions. Of these employees, 222 are located in the United States, 228 are located in India and 55 are located in other foreign jurisdictions, primarily Europe. None of our employees are represented by a labor union. Employees in certain European countries are represented by workers’ councils and also have the benefits of collective bargaining arrangements at the national level. We consider our relationship with our employees to be good.

Facilities

Our corporate headquarters is located in Redwood City, California and consists of approximately 20,400 square feet of office space pursuant to lease agreements that expire between October 2019 and October 2021. Our headquarters accommodates our principal sales, marketing, customer support and administrative activities. We occupy office space in Chennai, India consisting of 15,744 square feet under a lease that expires in July 2019. We also occupy office space in Pune, India under a lease that expires in October 2019. Our facilities in India are used primarily for operations support, professional services, customer support, and software development. We also maintain U.S. sales offices in Atlanta, Boston, Chicago, Los Angeles, New York City and international sales offices in London, U.K.; Paris, France; Madrid, Spain; Mexico City, Mexico and Santiago, Chile. We do not own any real property.

We believe that our current facilities are suitable and adequate to meet our current needs and that suitable additional or substitute space will be available as needed in the future to accommodate our operations.

Legal Proceedings

Although we are not currently subject to any material legal proceedings, we may be subject from time to time to various legal proceedings and claims which arise in the ordinary course of our business. The outcome of these and other claims cannot be predicted with certainty; however, we do not believe that the ultimate resolution of these matters will have a material adverse effect on our financial condition, cash flows or results of operations.

Information about Segment and Geographic Revenue

Information about segment and geographic revenue is set forth in Note 14 to our consolidated financial statements under Item 8 of this Annual Report.

Available Information

Our internet website address is www.yume.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 Exchange Act, 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 (“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.

Corporate Information

We were incorporated under the laws of Delaware on December 16, 2004. Our principal executive office is located at 1204 Middlefield Road, Redwood City, CA 94063. Our telephone number is (650) 591-9400. Our website address is www.yume.com. Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this Annual Report.

ITEM 1A. RISK FACTORS

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

Risks Related to Our Business and Our Industry:

Our revenue has declined, we have incurred significant net losses, and we may not be profitable in the future.

We incurred net losses of $7.7 million, $16.7 million and $8.7 million in 2016, 2015 and 2014, respectively. We had an accumulated deficit of $54.9 million as of December 31, 2016. In 2016, 2015 and 2014, we did not generate sufficient revenue to offset operating expenses, which may occur in future periods as well. Our revenue has declined in recent periods as a result of a variety of factors, including intense competition and difficulties extending our geographical reach and our offerings, and we cannot assure you that our revenue will not decline further. You should not consider our historical revenue growth or operating expenses prior to recent periods as indicative of our future performance. If our revenue growth rate continues to decline or our operating expenses exceed expectations, our financial performance will be adversely affected. Further, if our future growth and operating performance fail to meet investor or analyst expectations, it could have a materially negative effect on our stock price.

Our rapidly evolving industry makes it difficult to evaluate our business and prospects and may increase your investment risk.

We commenced operations in 2004 and, as a result, we have only a limited operating history upon which you can evaluate our business and prospects in a rapidly evolving industry. Because the digital video advertising industry is relatively new, we will encounter risks and difficulties frequently encountered by early-stage companies in rapidly evolving industries, including the need to:

•

Maintain our reputation and build trust with advertisers and digital media property owners;

•

Offer competitive pricing to advertisers (including periodic discounting) and digital media properties;

•

Compete with larger, better capitalized competitors in addressing industry trends such as programmatic buying and real-time bidding;

•

Maintain quality and expand quantity of our advertising inventory;

•

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

•

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

•

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

•

Identify, attract, retain and motivate qualified personnel; and

•

Cost-effectively manage our operations, including our international operations.

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

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

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

•

Seasonal patterns in advertising;

•

The addition and loss of new advertisers and digital media properties;

•

Our variable and unpredictable transaction-based sales cycle;

•

Changes in demand for our solutions;

•

Advertising budgets of our advertiser customers;

•

Advertiser cancellation of insertion orders;

•

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

•

Changes in how digital advertising inventory is bought and sold;

•

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

•

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

•

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

•

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

•

Costs necessary to improve and maintain our technologies;

•

Discounts on our products offered to new and existing customers;

•

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

•

Costs related to acquisitions of other businesses.

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

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

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

A substantial portion of our revenue depends on a small number of advertising agency customers representing a limited number of advertisers and a reduction in digital advertising purchased by those customers or advertisers could significantly reduce our revenue.

Brand advertisers represented by a limited number of advertising agencies account for a significant portion of our revenue. Specifically, a single brand advertiser represented by an advertising agency within the OMG corporate structure accounted for approximately 12% of our revenue in the year ended December 31, 2016. A significant reduction in our revenue from digital advertising purchased by these advertising agency customers or by one or more of the brand advertisers that they represent could materially harm our financial condition and results of operations.

Our restructuring and other cost reduction plans may not produce anticipated benefits and may lead to charges that will adversely affect our results of operations.

Commencing in the fourth quarter of 2016, we implemented restructuring and other cost-reduction plans designed to better align our operating expenses with our revenue, better manage our costs, and more efficiently manage our business. Such actions have resulted in disruptions and could continue to result in disruptions to our operations and workforce, and could adversely affect our business. This plan included among other things, a reduction of approximately 7% of our workforce. Actual costs related to such restructuring plans may exceed the amounts that we previously estimated, leading to additional charges as actual costs are incurred. We expect to continue to actively monitor our operating expenses; however, if we do not fully realize the anticipated benefits of any expense reduction initiatives, our business could be adversely affected. We cannot be sure that our efforts to manage expenses and improve our operating leverage will be successful. If our operating expenses are higher than we expect or if we do not maintain adequate control of our costs and expenses, our operating results will suffer.

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

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

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

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

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

In addition, our advertising agency customers may offer components of our solutions, including selling digital video advertising inventory through their own trading desks. As a result, these advertising agencies are, or may become, our competitors. If they further develop their capabilities they may be more likely to offer their own solutions to advertisers, which could compromise our ability to compete effectively and adversely affect our business, financial condition and operating results.

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

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

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

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

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

Digital video advertising is shifting, in part, to programmatic buying, real-time bidding (“RTB”) and header bidding systems. Programmatic buying is the automated purchase of digital advertising inventory through a combination of machine-based transactions, data and algorithms. RTB, a subset of programmatic buying, is the real-time purchase and sale of advertising inventory on an impression-by-impression basis on ad exchanges. Header bidding refers to the process by which digital media property owners offer inventory to multiple ad exchanges or other buyers prior to communicating with the digital media property owner’s ad server. Programmatic buying, RTB and header bidding are emerging and growing trends in the buying and selling of digital advertising inventory. The recognition by advertisers that an increased use of programmatic buying, RTB and header bidding systems may constitute an effective way to achieve their campaign goals and cost savings, and the recognition by digital media property owners that they may achieve greater returns from an increased use of programmatic buying, RTB and header bidding systems is challenging our traditional pricing model. There can be no assurance that such trends, or the acceleration of such trends, will not erode our revenue. In 2014, we introduced Video Reach, our first generation demand-side programmatic buying solution which had limited revenue impact. We have continued to invest resources in expanding our programmatic products. In June 2015 we launched YuMe for Advertisers, or YFA, which is our second generation demand-side programmatic buying solution. We may be unable to successfully sell, integrate or maintain this solution and there can be no assurance that our advertising customers or our network of digital media property owners will embrace or adopt our programmatic solution. The acceleration of these programmatic trends along with the lack of customer adoption of our programmatic solution would cause our revenue to decrease and our business to suffer. In addition, the adoption of header bidding and resulting changes in advertiser and digital media property owner behavior may lead to greater competition for available inventory, rapidly changing pricing dynamics and greater volatility in our operating results.

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

Our business relies on our ability to deliver successful and effective video advertising campaigns. Some of those campaigns may experience fraudulent and other invalid impressions, clicks or conversions that advertisers may perceive as undesirable, such as non-human traffic generated by machines that are designed to simulate human users and artificially inflate user traffic on websites. These activities could overstate the performance of any given video advertising campaign and could harm our reputation. It may be difficult for us to detect fraudulent or malicious activity because we do not own content and rely in part on our digital media properties to control such activity. These risks become more pronounced as the digital video industry shifts to programmatic buying. Industry self-regulatory bodies, the U.S. Federal Trade Commission (the “FTC”) and certain influential members of Congress have increased their scrutiny and awareness of, and have taken recent actions to address, advertising fraud and other malicious activity. While we routinely review the campaign performance on our digital media properties’ inventory, such reviews may not detect or prevent fraudulent or malicious activity. If we fail to detect or prevent fraudulent or other malicious activity, the affected advertisers may experience or perceive a reduced return on their investment and our reputation may be harmed. High levels of fraudulent or malicious activity could lead to dissatisfaction with our solutions, refusals to pay, refund or future credit demands or withdrawal of future business. In addition, advertisers increasingly rely on third party vendors to measure campaigns against audience guarantee, viewability and other requirements and to detect fraud. If we are unable to successfully integrate our technology with such vendors, or our measurement and fraud detection differs from their findings, our customers could lose confidence in our solutions, we may not get paid for certain campaigns and our revenues could decrease. Further, if we are unable to detect fraudulent or other malicious activities and advertisers demand fraud-free inventory, our supply could fall drastically, making it impossible to sustain our current business model. If we fail to detect fraudulent or other malicious activities that impact the performance of our brand advertising campaigns, we could harm our reputation with our advertisers or agencies and our revenue and business would suffer.

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

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

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

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

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

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

Other risks associated with our international operations include:

•

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

•

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

•

Changes or volatility in currency exchange rates, especially the euro and British pound sterling, which are the functional currencies for most of our European operations;

•

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

•

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

•

Economic and political instability and high levels of wage inflation;

•

Potentially adverse tax consequences;

•

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

•

Greater difficulty in enforcing contracts;

•

Heightened risks of unethical, unfair or corrupt business practices, actual or alleged, in certain regions;

•

Weaker intellectual property protection in some countries; and

•

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

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

Risks Relating to the Referendum of the United Kingdom’s Membership of the European Union.

The announcement of the Referendum of the United Kingdom’s (or the U.K.) Membership of the European Union (E.U.) (referred to as Brexit), advising for the exit of the United Kingdom from the European Union, has resulted in significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. As described elsewhere in this report, we translate revenue denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported international revenue is reduced because foreign currencies translate into fewer U.S. dollars. The announcement of Brexit may also create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budget on our products and services.

If the Referendum is passed into law, negotiations would commence to determine the future terms of the U.K.’s relationship with the E.U., including the terms of trade between the U.K. and the E.U. The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and may cause us to lose customers, and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate.

Our dynamic international operations subjects us to new challenges and risks.

Despite our international operations, we have a limited sales operations history as a company outside the United States, and our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the challenges of multiple cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Expanding internationally subjects us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

•

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

•

Challenges inherent to efficiently managing a number of employees over large geographic distances;

•

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

•

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

•

Increased competition from local providers of digital video advertising solutions;

•

Longer sales or collection cycles in some countries;

•

Credit risk and higher levels of payment fraud;

•

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

•

Compliance with foreign data privacy frameworks, such as the EU Data Privacy Directive (and from May 25, 2018, the successor to the Directive, the General Data Protection Regulation);

•

Currency exchange rate fluctuations;

•

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

•

Economic and political instability in some countries;

•

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

•

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

•

Overall higher costs of doing business internationally.

Further expansion or contraction of our international operations may require significant management attention and financial resources and may place burdens on our management, administrative, operational and financial infrastructure. Additionally, in most instances digital media properties can change the terms and supply of ad inventory they make available to us at any time and if digital media properties increase the cost and/or reduce the supply of inventory available to us in international markets, our growth forecasts in these markets may suffer. Further, if our revenue from our international operations, and particularly from our operations in the countries and regions on which we have focused our spending, do not exceed the expense of establishing and maintaining these operations, our business and operating results will suffer. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer.

Our growth forecasts may suffer if we fail to gather sufficient data in a particular international market and effectively coordinate the demand for and supply of advertising inventory.

The performance in a particular geographical market depends on having sufficient advertiser clients and publishers in that market utilizing our solution and our ability to coordinate the demand for and supply of advertising inventory in that market. In most instances digital media properties can change the terms and supply of ad inventory they make available to us at any time and if digital media properties increase the cost and/or reduce the supply of inventory available to us in international markets we may not be coordinated for optimization. As such, as we target new geographic markets, a failure to effectively manage demand for and the supply of advertising inventory could impair our growth forecasts in these markets and could result in lost revenue.

We have experienced foreign currency gains and losses and expect to continue to experience those gains and losses. Fluctuations in currency exchange rates can adversely affect our profitability.

We incur foreign currency transaction gains and losses, primarily related to foreign currency exposures that arise from British pound and euro denominated transactions that we expect to cash settle in the near term, which are charged against earnings in the period incurred. We have a program which utilizes foreign currency forward contracts designed to offset the risks associated with certain foreign currency transaction exposures. We may suspend the program from time to time. As a part of this program, we enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in an effort to mitigate the risks and volatility associated with our foreign currency transaction gains or losses. We expect that we will continue to realize gains or losses with respect to our foreign currency exposures, net of gains or losses from our foreign currency forward contracts. For example, we will experience foreign currency gains and losses in certain instances if it is not possible or cost effective to mitigate our foreign currency exposures, if our mitigation efforts are ineffective, or if we suspend our foreign currency forward contract program. Our ultimate realized loss or gain with respect to currency fluctuations will generally depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into foreign currency forward contracts to offset these exposures and other factors. All of these factors could materially impact our results of operations, financial position and cash flows.

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

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

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

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

If the use of “third party cookies” is rejected by internet users, restricted or otherwise subject to unfavorable regulation, our performance could decline and we could lose advertisers and revenue.

Cookies (small text files) are used to gather data to help support our products. These cookies are placed through an internet browser on an internet user’s computer and correspond to certain data sets on our servers. Cookies collect anonymous information, such as when an internet user views an ad, clicks on an ad, or visits one of our advertisers’ websites.

Cookies may easily be deleted or blocked by internet users. All of the most commonly used internet browsers allow internet users to modify their browser settings to prevent first party or third party cookies from being accepted by their browsers. Internet users can also delete cookies and/or download “ad blocking” software that prevents cookies from being stored on a user’s computer. If more internet users adopt these settings or delete their cookies more frequently than they currently do, our business could be harmed. In addition, the Safari browser blocks third party cookies by default, and other browsers may do so in the future. Unless such default settings in browsers are altered by internet users, we will be able to set fewer of our cookies in browsers, which could adversely affect our business. There have also been announcements that prominent advertising platforms plan to replace cookies with alternative web tracking technologies. These alternative mechanisms have not been described in technical detail, and have not been announced with any specific stated time line. It is possible that these companies may rely on proprietary algorithms or statistical methods to track web users without the deployment of cookies, or may utilize log-in credentials entered by users into other web properties owned by these companies, such as their digital email services, to track web usage without deploying third party cookies. Alternatively, such companies may build alternative and potentially proprietary user tracking methods into their widely-used web browsers.

If and to the extent that cookies are blocked and/or replaced by proprietary alternatives, our continued use of cookies may face negative consumer sentiment, reduce our market share, or otherwise place us at a competitive disadvantage. If cookies are replaced, in whole or in part, by proprietary alternatives, we may be obliged to license proprietary tracking mechanisms and data from companies that have developed them, which also compete with us as advertising networks, and we may not be able to obtain such licenses on economically favorable terms. If such proprietary web-tracking standards are owned by companies that compete with us, they may be unwilling to make that technology available to us.

In addition, in the EU, Directive 2002/58/EC (as amended by Directive 2009/136/EC), commonly referred to as the “Cookie Directive,” directs EU member states to ensure that storing or accessing information on an internet user’s device, such as through a cookie, is allowed only if the internet user has given his or her consent. Because we lack a direct relationship with internet users, we rely on our digital media property owners, both practically and contractually, to obtain such consent. Some member states have adopted and implemented, and may continue to adopt and implement, legislation that negatively impacts the use of cookies for digital advertising. Some of these member states also require prior express user consent, as opposed to merely implied consent, to permit the placement and use of cookies. Where member states require prior express consent, our ability to deliver advertisements on certain websites or to certain users may be impaired. Furthermore, there are proposals to replace the current Cookie Directive with a new ePrivacy Regulation, slated to take effect in May 2018. If adopted, the Regulation will standardize the currently disparate cookie consent laws across Europe. However, if adopted in its current draft form, it could create significant challenges for digital advertising models as it introduces enhanced cookie consent and transparency requirements, in particular proposing that browser (and similar internet access software) manufacturers should offer users the ability to accept or refuse cookies upon installation of their software.

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

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

The regulatory framework for privacy issues is evolving worldwide, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the digital advertising industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to collection or use of data to target ads and communication with consumers and the international transfer of data from Europe to the U.S. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. In Europe, in October 2015 the Court of Justice of the European Union invalidated the “US-EU Safe Harbor framework,” which created a safe harbor under the European Data Protection Directive for certain European data transfers to the U.S. We had not self-certified under this regime, and therefore were not directly affected by this decision. In July 2016, the European Commission approved the Privacy Shield, which is a set of principles and related rules that are intended to replace the US-EU Safe harbor framework. The Company is in the process of determining whether to join the Privacy Shield program. Stricter regulation of European data transfers to U.S. in future may impact our ability to serve European customers effectively, or require us to open and operate datacenters in the European Union which would result in a higher cost of doing business in these jurisdictions.

In particular, Europe’s new General Data Protection Regulation (“GDPR”) (which comes into force in May 2018) extends the jurisdictional scope of European data protection law. As a result, we will be subject to the GDPR when we provide our targeting services in Europe. The GDPR imposes stricter data protection requirements that may necessitate changes to our services and business practices. Potential penalties for non-compliance with the GDPR include administrative fines of up to 4% of annual worldwide turnover. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy.

The FTC has also adopted revisions to the Children’s Online Privacy Protection Act (“COPPA”) that expand liability for the collection of information by operators of websites and other electronic solutions that are directed to children. Questions exist as to how regulators and courts may interpret the scope and circumstances for potential liability under COPPA, and the FTC continues to provide guidance and clarification as to its 2013 revisions of COPPA. FTC guidance or enforcement precedent may make it difficult or impractical for us to provide advertising on certain websites, services or applications. In addition, the FTC recently fined an ad network for certain methods of collecting and using data from mobile applications, including certain applications directed at children, and failing to disclose the data collection to mobile application developers in their network.

While we have not collected data that is traditionally considered personal data, such as name, email address, physical address, phone numbers or social security numbers, we typically collect and store IP addresses, geo-location information, and device or other persistent identifiers that are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation. For example, some jurisdictions in the EU regard IP addresses as personal data, and certain regulators, such as the California Attorney General’s Office, have advocated for including IP addresses, GPS-level geolocation data, and unique device identifiers as personal data under California law. Furthermore, when it enters into effect in May 2018, Europe’s GDPR makes clear that online identifiers (such as IP addresses and other device identifiers) will be treated as “personal data” going forward and therefore subject to stricter data protection rules.

Evolving definitions of personal data within the EU, the United States and elsewhere, especially relating to the classification of IP addresses, machine or device identifiers, geo-location data and other such information, may cause us to change our business practices, diminish the quality of our data and the value of our solution, and hamper our ability to expand our offerings into the EU or other jurisdictions outside of the United States. Our failure to comply with evolving interpretations of applicable laws and regulations, or to adequately protect personal data, could result in enforcement action against us or reputational harm, which could have a material adverse impact on our business, financial condition and results of operations.

In addition to compliance with government regulations, we voluntarily participate in trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of internet advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. For instance, new guidelines, codes, or interpretations, by self-regulatory organizations or government agencies, may require additional disclosures, or additional consumer consents, such as “opt-in” permissions to share, link or use data, such as health data from third parties, in certain ways. If we fail to abide by, or are perceived as not operating in accordance with, industry best practices or any industry guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertisers and digital media properties.

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

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

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

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

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

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

•

Inadequate network infrastructure to support advanced features;

•

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

•

Inconsistent quality of cellular or wireless connections;

•

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

•

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

•

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

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

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

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

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

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

•

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

•

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

•

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

•

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

•

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

•

Inability to fulfill audience guarantee or viewability requirements of our advertiser customers;

•

Inability to integrate with third parties that measure our campaigns against audience guarantee or viewability requirements;

•

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

•

Access to quality inventory at sufficient volumes to meet the needs of our advertisers’ campaigns.

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

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

Our financial performance is subject to worldwide economic conditions and their impact on advertising spending by brand advertisers, which may be disproportionately affected by economic downturns. Expenditures by advertisers generally tend to reflect overall economic conditions, and to the extent that worldwide economic conditions materially deteriorate or change, our existing and potential advertisers may reduce current or projected advertising budgets and the use of our advertising solutions. In particular, digital video advertising may be viewed by some of our existing and potential advertisers as a lower priority and could cause advertisers to reduce the amounts they spend on advertising, terminate their use of our digital video advertising solutions or default on their payment obligations to us, which could have a material adverse effect on our business, financial condition and results of operations. For example, concerns over the sovereign debt situation in certain countries in the EU, the impact of Brexit, as well as continued geopolitical turmoil in many parts of the world have, and may continue to, put pressure on global economic conditions, which could lead to reduced spending on advertising.

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

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

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

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

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

Failure to properly manage our future growth could seriously harm our business.

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

•

Implement additional management information systems;

•

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

•

Hire additional personnel;

•

Develop additional levels of management within our company;

•

Locate additional office space;

•

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

•

Manage our expanding international operations.

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

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

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

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

We have experienced and in the future we may periodically experience attrition in key executive management positions. For example, on November 9, 2016, Jayant Kadambi (former President and Chief Executive Officer), James Soss (former Executive Vice President, North American Operations) and Hardeep Bindra (former Executive Vice President, Operations) terminated employment with the Company. The loss of members of our senior management team and other key employees, whether voluntarily or involuntarily, could significantly limit our ability to achieve our strategic objectives. We do not maintain key-person insurance on any of these employees. Our future success also depends on our ability to continue to attract, retain and motivate highly skilled employees, particularly employees with technical skills that enable us to deliver effective advertising solutions and sales and customer support representatives with experience in digital video advertising and strong relationships with brand advertisers, agencies and digital media properties. Competition for these employees in our industry is intense and we have experienced difficulty in recruiting and retaining them. Many of the companies with which we compete for experienced personnel also have greater resources than we have. Competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located, and in Chennai, India, where our engineering and research and development resources are primarily located. As a result, we may be unable to attract or retain these management, technical, sales, marketing and customer support personnel that are critical to our success, resulting in harm to our key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. Additionally, our ability to achieve revenue growth in the future will depend, in part, on our success in recruiting, retaining and training sufficient numbers of sales personnel. These new employees require training in order to achieve full productivity. The timing of these activities may continue to negatively impact sales productivity. Additionally, the loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.

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

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

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

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

•

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

•

Cultural challenges associated with integrating employees;

•

Ineffectiveness or incompatibility of acquired technologies or solutions;

•

Potential loss of key employees;

•

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

•

Diversion of management’s attention from other business concerns;

•

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

•

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

•

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

•

Failure to successfully further develop the acquired technologies in order to achieve appropriate returns on investment; and

•

Increased fixed costs.

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

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

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

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

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

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

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

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

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

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

In the United States, we have 11 patents issued, 12 non-provisional patent applications pending and one provisional patent application pending. We also have 23 foreign patent applications pending. There can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, or that these patents will not be challenged by third parties or found to be invalid or unenforceable. We have eight registered trademarks in the United States, 44 registered trademarks in foreign jurisdictions and are also pursuing the registration of additional trademarks and service marks in the United States and in locations outside the United States. Effective trade secret, copyright, trademark and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming.

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

Our agreements with partners, employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

We rely in part on confidentiality agreements and other restrictions with our customers, partners, employees, consultants and others to protect our proprietary technology and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Despite our efforts to protect our proprietary technology, processes and methods, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. Moreover, policing unauthorized use of our technologies, products and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where applicable laws may be less protective of intellectual property rights than those in the United States, and where enforcement mechanisms for intellectual property rights may be weak. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

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

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

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

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

As a public company we are required to evaluate and determine the effectiveness of our internal control over financial reporting and to provide a management report on our internal control over financial reporting. This requires that we incur substantial internal costs to maintain and expand our accounting and finance functions and that we expend significant management efforts.

We have had significant operations both in the United States and India and more limited operations in Europe and Latin America. Historically, we have had separate systems of internal controls covering our international operations, which may have included control deficiencies. We are in the process of consolidating these systems and remediating any control deficiencies, and we may experience difficulties with the consolidation that could harm our operations and cause our business to suffer. There are inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur due to simple error or mistake. Also, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. Any system of controls is designed in part based on certain assumptions on the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals for the potential future conditions. Over time, controls can become inadequate due to changes in conditions or deterioration in the degree of compliance with policies and procedures.

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

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

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

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

We will remain an emerging growth company until the earliest of: the end of the fiscal year in which the market value of the shares of our common stock held by non-affiliates exceeds $700 million as of June 30, the end of the fiscal year in which we have total annual gross revenue of $1.0 billion, the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period, or December 31, 2018.

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

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

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

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

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

In November 2016, we let our line of credit with Silicon Valley Bank expire, We cannot be certain that additional financing from lenders will be available to us as needed on acceptable terms, or at all.

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

We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal income tax purposes, including any limitations that may be imposed under Section 382 of the Internal Revenue Code as a result of our IPO. At December 31, 2016, we had federal net operating loss carryforwards of $27.2 million, which expire at various dates beginning in 2025. At December 31, 2016 had state and local net operating loss carryforwards of $20.7 million, which begin to expire in 2017. Our gross state net operating loss carryforwards are separate from our federal net operating loss carryforwards and expire over various periods beginning in 2017, based on individual state tax law.

We periodically assess the likelihood that we will be able to recover our net deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a full valuation allowance against our net U.S. deferred tax assets should be applied as of December 31, 2016. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.

Risks Related to Ownership of Our Common Stock:

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

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

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

Our stock price has been and is likely to remain volatile. Since shares of our common stock were sold in our IPO at a price of $9.00 per share, our stock price has ranged from $2.35 to $12.08 through February 28, 2017. The stock market in general and the market for technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:

•

Actual or anticipated variations in quarterly operating results;

•

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

•

Conditions or trends in our industry;

•

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

•

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

•

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

•

Capital commitments;

•

Business disruption and costs related to stockholder activism;

•

Additions or departures of key personnel;

•

Stock repurchase plans; and

•

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

In addition, in the past, stockholders have initiated class action lawsuits against technology companies following periods of volatility in the market prices of these companies’ stock. If litigation is instituted against us, we could incur substantial costs and divert management’s attention and resources. We have failed in the past, and may fail in the future, to meet our publicly announced guidance or other expectations about our business and future operating results. Such past failures have caused, and future failures would likely cause, our stock price to decline.

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

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

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

We had approximately 33.9 million shares of common stock outstanding as of December 31, 2016. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly.

As of December 31, 2016, approximately 10.7 million shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans have been registered under registration statements on Form S-8 and, subject to grants, vesting arrangements and exercise of options and the restrictions of Rule 144 in the case of our affiliates, may become available for sale in the public market.

Additionally, the holders of a certain number of shares of common stock have rights, subject to certain conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register these shares for resale, they could be freely sold in the public market. Further, the stockholders may decide to sell such shares without registration. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

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

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

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

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

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

Our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates, in aggregate, beneficially own approximately 45% of our outstanding common stock. These persons, acting together, are able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.

Actions of activist stockholders against us have been and may continue to be disruptive and costly to us and the possibility that activist stockholders may wage costly future proxy contests or gain additional representation on or control of our board of directors could cause uncertainty about the strategic direction of our business.

Stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or board nominations or otherwise attempt to effect changes, assert influence or acquire some level of control over us. While our board of directors and management team strive to maintain constructive, ongoing communications with all of the Company’s stockholders, including activist stockholders, and welcomes their views and opinions with the goal of enhancing value for all stockholders, including any suggestions they may have for enhancing the depth and breadth of our Board, activist campaigns that contest, or conflict with, our strategic direction or seek changes in the composition of our Board could have an adverse effect on us because:

•

Responding to proxy contests, litigation and other actions by activist stockholders can disrupt our operations, be costly and time-consuming, and divert the attention of our Board and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition;

•

Perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential clients, may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners;

•

These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business; and

•

If individuals are elected to our Board with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders.

We recently announced that we have commenced a comprehensive review of strategic alternatives to enhance stockholder value. There can be no assurance that this review process will result in a transaction, or that if a transaction does occur, that it will successfully enhance stockholder value. In addition, our business could be negatively affected by the announcement that we are exploring strategic alternatives.

On November 9, 2016, we announced that we have commenced a comprehensive review of strategic alternatives and have retained advisors to assist us during that review. There can be no assurance that this review process will result in a transaction, or that if a transaction does occur, that it will successfully enhance stockholder value. In addition, the announcement that we have commenced a review of strategic alternatives may create uncertainty about our prospects as an independent business entity, cause concern to our current or potential customers and partners, and make it more difficult to attract and retain qualified executive and other key personnel. If customers choose to reduce spending with us or do business with our competitors instead of us because of any such issues or perceptions, then our business, operating results and financial condition would be adversely affected. The review process may also be costly, time-consuming, disrupt our operations, divert the attention of management and our employees or result in changes in our management team or our board of directors, all of which could materially and adversely affect our operations and operating results. In addition, our stock price may experience periods of increased volatility as a result of these activities or related rumors and speculation.

Our stock repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.

In February 2016, our board of directors approved a share repurchase program of up to $10.0 million. Through February 28, 2017, we have repurchased $8.1 million of shares of our common stock under such program. The timing and actual number of shares repurchased will depend on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements, an assessment by management and our board of directors of cash availability and other market conditions. The stock repurchase program may be suspended or discontinued at any time without prior notice. Repurchases pursuant to our stock repurchase program could affect the price of our common stock and increase its volatility. The existence of our stock repurchase program could also cause the price of our common stock to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our common stock. Additionally, repurchases under our stock repurchase program will diminish our cash reserves. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased such shares. Any failure to repurchase shares after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our stock price. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.

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

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our principal offices occupy approximately 20,400 square feet of leased office space in Redwood City, California pursuant to lease agreements that expire between October 2019 and October 2021. We also maintain offices in Chennai, India; Pune, India; New York City, New York; Los Angeles, California; Atlanta, Georgia; Boston, Massachusetts; Chicago, Illinois; London, England; Paris, France; Madrid, Spain, Mexico City, Mexico and Santiago, Chile. 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

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

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information for Common Stock

Our common stock has been listed on the New York Stock Exchange since August 7, 2013, under the symbol “YUME.” Prior to our initial public offering there was no public market for our common stock.

The following table sets forth for the indicated periods the high and low sales prices of our common stock as reported on the New York Stock Exchange.

First Quarter

2016

Second Quarter 2016

Third Quarter

2016

Fourth Quarter 2016

High

4.11

3.94

4.24

3.97

Low

2.90

3.48

3.30

3.22

First Quarter

2015

Second Quarter 2015

Third Quarter

2015

Fourth Quarter 2015

High

6.10

5.60

5.46

3.54

Low

4.83

4.31

2.45

2.61

Stock Performance Graph

The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock on August 7, 2013 (the date of our IPO) until December 31, 2016, with the comparative cumulative total return of such amount on (i) the NYSE Composite Index, (ii) the S&P Information Technology Index and (iii) the S&P Internet and Software and Services Index over the same period. We have not paid any cash dividends and, therefore, the cumulative total return calculation for YuMe is based solely upon stock price movement and not upon reinvestment of cash dividends. The graph assumes our closing sales price on August 7, 2013 of $9.00 per share as the initial value of our common stock.

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.

	6/30/2015		9/30/2015		12/31/2015		3/31/2016		6/30/2016		9/30/2016		12/31/2016
YuMe, Inc.	$	60.22	$	28.78	$	39.00		41.56	$	40.89	$	44.11	$	39.78
NYSE Composite		117.78		107.48		111.90		113.39		117.38		120.75		125.26
S&P Information Technology		140.30		135.10		147.49		151.32		147.02		165.93		167.91
S&P Internet Software & Services		134.71		146.49		174.93		177.82		170.41		193.23		183.99

	9/30/2013		12/31/2013		3/31/2014		6/30/2014		9/30/2014		12/31/2014		3/31/2015
YuMe, Inc.	$	117.78	$	82.78	$	81.22	$	65.56	$	55.56	$	56.00	$	57.67
NYSE Composite		100.56		109.29		111.31		116.85		114.55		116.67		118.01
S&P Information Technology		102.34		115.92		118.56		126.28		132.30		139.24		140.04
S&P Internet Software & Services		102.21		123.09		124.17		128.37		136.64		131.22		135.79

	8/07/2013
YuMe, Inc.	$	100.00
NYSE Composite		100.00
S&P Information Technology		100.00
S&P Internet Software & Services		100.00

The table and chart above assume $100.00 was invested in YuMe, Inc. on its IPO date, August 7, 2013, and in the indexes on July 31, 2013 and include the reinvestment of dividends.

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 (the “Securities Act”), or a filing under the Exchange Act.

Dividend Policy

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.

Securities Authorized for Issuance under Equity Compensation Plan

The information concerning our equity compensation plan is incorporated by reference from our Definitive Proxy Statement for the Annual Meeting of Stockholders, which is expected to be filed within 120 days after our fiscal year ended December 31, 2016.

Stockholders

As of February 28, 2017, there were 39 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.

Unregistered Sales of Equity Securities and Use of Proceeds

a) Sale of Unregistered Securities

None.

b) Use of Proceeds from Public Offering of Common Stock

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

c) Issuer Purchases of Equity Securities

On February 18, 2016, we announced a $10 million share repurchase program. The repurchase program has no set expiration date and all purchases are subject to applicable rules and regulations, market conditions and other factors. Purchases under this repurchase program are made in the open market and are intended to comply with Rule 10b-18 under the Exchange Act. The cost of the repurchased shares is funded from available working capital. Such repurchased shares are held in treasury and are presented using the cost method. As of December 31, 2016, we had purchased a total of 1,952,909 shares of our common stock in the open market for $7.1 million (including 27,202 shares repurchased for $0.1 million that had not yet settled as of December 31, 2016) at an average price of $3.64 per share.

For accounting purposes, common stock repurchased under our stock repurchase programs is recorded based upon the purchase date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method. The table below is a summary of stock repurchases for the three months ended December 31, 2016.

Period			Total Number of Shares Purchased		Average Price Paid per Share (1)		Total Number of Shares Purchased as Part of Publically Announced Program		Approximate Dollar Value of Shares that Remain Eligible for Purchase under the Program (in thousands)
									$	5,034
October 1	–	October 31, 2016		161,473	$	3.88		161,473		4,407
November 1	–	November 30, 2016		228,715	$	3.51		228,715		3,605
December 1	–	December 31, 2016 (2)		197,670	$	3.59		197,670		2,895
Total (2)				587,858	$	3.64		587,858	$	2,895

(1)

Average price paid per share includes commission.

	(2)	Includes 27,202 treasury shares purchased in late December 2016 for $98,000 that had not yet settled as of December 31, 2016.
	(3)	We announced our share repurchase program on February 18, 2016. The total amount authorized for repurchases pursuant to the program was $10 million. The program has no set expiration date.


ITEM 6.	SELECTED FINANCIAL DATA

The following selected consolidated financial data is derived from our audited consolidated financial statements. 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 Part II, Item 7: “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.

	Year Ended December 31,
	2016			2015			2014			2013			2012
	(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue	$	160,411		$	173,254		$	177,779		$	151,128		$	116,744
Cost of revenue (1)		80,190			95,028			93,096			80,242			62,985
Gross Profit		80,221			78,226			84,683			70,886			53,759
Operating expenses:
Sales and marketing (1)		51,676			59,912			65,112			47,118			31,385
Research and development (1)		10,968			10,937			5,908			4,499			2,766
General and administrative (1)		22,513			23,584			21,736			17,992			12,466
Asset impairment		922			—			—			—			—
Restructuring		1,577			—			—			—			—
Total operating expenses		87,656			94,433			92,756			69,609			46,617
Income (loss) from operations		(7,435	)		(16,207	)		(8,073	)		1,277			7,142
Interest and other expense, net:
Interest expense		(7	)		(8	)		(8	)		(47	)		(117	)
Other expense, net		(299	)		(230	)		(888	)		(239	)		(147	)
Total interest and other expense, net		(306	)		(238	)		(896	)		(286	)		(264	)
Income (loss) before income taxes		(7,741	)		(16,445	)		(8,969	)		991			6,878
Income tax (expense) benefit		20			(300	)		224			(670	)		(612	)
Net income (loss)	$	(7,721	)	$	(16,745	)	$	(8,745	)	$	321		$	6,266
Net income (loss) attributable to common stockholders	$	(7,721	)	$	(16,745	)	$	(8,745	)	$	321		$	89

Net income (loss) per share attributable to common stockholders:
Basic	$	(0.22	)	$	(0.49	)	$	(0.27	)	$	0.02		$	0.02
Diluted	$	(0.22	)	$	(0.49	)	$	(0.27	)	$	0.02		$	0.02
Weighted-average number of shares used in computing net income (loss) per share attributable to common stockholders:
Basic		34,441			33,829			32,591			15,752			4,716
Diluted		34,441			33,829			32,591			17,250			5,545

Other Financial Data:
Adjusted EBITDA (2)	$	10,880		$	(1,552	)	$	1,433		$	8,975		$	11,820

(1)

Stock-based compensation expense included in the consolidated statements of operations data above is as follows:

	Year Ended December 31,
	2016		2015		2014		2013		2012
	(in thousands)
Cost of revenue	$	178	$	312	$	342	$	185	$	128
Sales and marketing		2,612		3,403		2,776		1,806		1,215
Research and development		1,200		1,111		482		346		184
General and administrative		4,434		4,053		2,174		1,497		515
Total stock-based compensation	$	8,424	$	8,879	$	5,774	$	3,834	$	2,042

(2)

We define adjusted EBITDA as net income (loss) plus income tax (expense) benefit, interest expense, depreciation and amortization, and stock based compensation. Please see “Adjusted EBITDA” below for more information and for the reconciliation of adjusted EBITDA to net income (loss), which is the most directly comparable financial measure calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

	Year Ended December 31,
	2016		2015		2014		2013		2012
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	34,700	$	17,859	$	38,059	$	42,626	$	27,909
Marketable securities (short- and long-term)		30,992		42,324		28,586		21,481		—
Property, equipment and software, net		11,726		12,110		10,407		6,610		5,551
Working capital		75,721		73,644		89,754		79,498		49,400
Total assets		137,379		149,074		155,042		145,387		90,614
Capital lease obligations, long-term		13		—		—		22		380
Convertible preferred stock		—		—		—		—		76,191
Total stockholders’ equity (deficit)		97,243		102,603		107,948		105,965		(15,329	)

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have presented within this Annual Report on Form 10-K adjusted EBITDA, a non-GAAP financial measure. We have provided below a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

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

	Year Ended December 31,
	2016			2015			2014			2013		2012
	(in thousands)
Net income (loss)	$	(7,721	)	$	(16,745	)	$	(8,745	)	$	321	$	6,266
Adjustments:
Interest expense		7			8			8			47		117
Income tax expense (benefit)		(20	)		300			(224	)		670		612
Depreciation and amortization expense		6,876			6,006			4,620			4,103		2,783
Stock-based compensation expense		8,424			8,879			5,774			3,834		2,042
Proxy contest expense		815			—			—			—		—
Asset impairment		922			—			—			—		—
Restructuring		1,577			—			—			—		—
Total adjustments		18,601			15,193			10,178			8,654		5,554
Adjusted EBITDA	$	10,880		$	(1,552	)	$	1,433		$	8,975	$	11,820

We have presented adjusted EBITDA in this Annual Report on Form 10-K because it 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 considered by the compensation committee of our board of directors in connection with the determination of 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.

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

•

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

•

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

•

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

•

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

•

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

Because of these and other limitations, you should consider adjusted EBITDA along with other GAAP-based financial performance measures, including various cash flow metrics, net income or loss, and our other GAAP financial results.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements included later in this Form 10-K. 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 Form 10-K, particularly in Part I, Item 1A: “Risk Factors.”

Overview

For our advertising customers, we overcome the complexities of delivering digital video brand advertising campaigns in a highly fragmented environment where audiences use an increasing variety of internet-connected devices to access thousands of online and mobile websites and applications. Our solutions deliver brand-optimized video advertising campaigns seamlessly across internet-connected devices, and we deliver those solutions to customers through direct sales and through our programmatic buying platform (both managed and self-service). Our platform optimizes advertising campaign results that are relevant to brand advertisers, such as brand awareness, message recall, brand favorability, and purchase intent. We believe brand advertisers and brand-focused agencies can find particular benefit in our private marketplace programmatic offering through which brand advertisers are able to programmatically manage the audiences and digital media properties where their campaigns will run.

We generate revenue by delivering digital video ads on internet-connected devices. Our ads run when users choose to view video content on their devices. Advertising campaigns occur when customers submit orders to us directly through our programmatic software or in a managed service and we fulfill those orders by delivering their digital video ads to audiences available through digital media properties and third party ad exchanges, a process that we refer to as an advertising campaign. Advertising customers typically pay us on a CPM basis, of which we generally pay digital media property owners a negotiated percentage. In cases where our programmatic buying platform is used by our advertising customers to source inventory from a third party ad exchange, we may collect a transaction fee known as our “take rate.” Our customers primarily consist of large global brands and their advertising agencies. In 2016, we had 846 customers, including 76 of the top 100 U.S. advertisers as ranked by Advertising Age magazine in 2015 (“the AdAge 100”), such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald’s.

YFA allows advertising customers to access our programmatic platform and use our sales or managed services team to assist in creating, optimizing and running campaigns. Our YFA programmatic platform can run campaigns across multiple internet-connected devices and through multiple digital media property owners and aggregators. When using YFA, advertising customers can access differentiated audiences from YuMe digital media properties and other audiences through third party supply-side platforms, or SSPs, and ad exchanges. This gives customers the flexibility to extend their objectives as needed.

Results of Operations

The following tables set forth our results of operations for the years ended December 31, 2016, 2015 and 2014. The period-to-period comparison of financial results is not necessarily indicative of future results.

	Year Ended December 31,
	2016					2015					2014
	(dollars in thousands)
Consolidated Statements of Operations Data:
Revenue	$	160,411		100.0	%	$	173,254		100.0	%	$	177,779		100.0	%
Cost of revenue (1)(3)		80,190		50.0			95,028		54.8			93,096		52.4
Gross profit		80,221		50.0			78,226		45.2			84,683		47.6
Operating expenses:
Sales and marketing (1)(4)		51,676		32.2			59,912		34.6			65,112		36.6
Research and development (1)		10,968		6.8			10,937		6.3			5,908		3.3
General and administrative (1)(5)		22,513		14.0			23,584		13.6			21,736		12.2
Asset impairment		922		0.6			—		—			—		—
Restructuring		1,577		1.0			—		—			—		—
Total operating expenses		87,656		54.6			94,433		54.5			92,756		52.2
Loss from operations		(7,435	)	(4.6	)		(16,207	)	(9.4	)		(8,073	)	(4.5	)
Interest and other expense, net:
Interest expense		(7	)	(0.0	)		(8	)	(0.0	)		(8	)	(0.0	)
Other expense, net		(299	)	(0.2	)		(230	)	(0.1	)		(888	)	(0.5	)
Total interest and other expense, net		(306	)	(0.2	)		(238	)	(0.1	)		(896	)	(0.5	)
Loss before income taxes		(7,741	)	(4.8	)		(16,445	)	(9.5	)		(8,969	)	(5.0	)
Income tax (expense) benefit		20		(0.0	)		(300	)	(0.2	)		224		0.1
Net loss	$	(7,721	)	(4.8	)%	$	(16,745	)	(9.7	)%	$	(8,745	)	(4.9	)%

	Year Ended December 31,
	2016		2015		2014
	(in thousands)
Cost of revenue (3)	$	178	$	312	$	342
Sales and marketing (4)		2,612		3,403		2,776
Research and development (2)		1,200		1,111		482
General and administrative (5)		4,434		4,053		2,174
Total stock-based compensation expense	$	8,424	$	8,879	$	5,774


	(1)	Stock-based compensation expense included in the consolidated statements of operations data above is as follows:

(2)

Excludes $537,000, $544,000 and $360,000 of stock-based compensation expense that was capitalized as part of internal-use software development costs for the years ended December 31, 2016, 2015 and 2014, respectively.

(3)

Cost of revenue excludes restructuring expenses totaling $86,000 in 2016.

(4)

Sale and Marketing excludes restructuring expenses totaling $642,000 in 2016.

(5)

General and administrative excludes restructuring expenses totaling $849,000 in 2016.

Revenue

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

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

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

	Year Ended December 31,		Change						Year Ended December 31,		Change						Year Ended December 31,
	2016			$		%			2015			$		%			2014
						(dollars in thousands)
Revenue	$	160,411	$	(12,843	)		(7.4	)%	$	173,254	$	(4,525	)		(2.5	)	$	177,779

For 2016, revenue decreased $12.8 million, or 7.4%, compared to 2015. The decrease in revenue was driven by a $13.1 million decrease in international revenue, partially offset by a $0.3 million increase in domestic revenue. The decrease in international revenue was primarily driven by a decline in sales through some of our European offices, which was associated largely with personnel turnover. Average revenue per advertising customer for 2016 was $186,100, an increase of 9.1%, compared to $171,000 for 2015. The increase was primarily the result of an increase in the spending of our top 20 advertising customers, which accounted for $69.3 million, or 43.2%, of our 2016 revenue, compared to $65.2 million, or 37.7%, of our 2015 revenue. We had 846 advertising customers in 2016, a decrease of 15.5%, compared to 1,001 customers in 2015. The decrease primarily reflects a decrease in international advertising customers.

For 2015, revenue decreased $4.5 million, or 2.5%, compared to 2014. The decrease in revenue was primarily driven by certain brand advertisers spending less on our platform due to the effects of prior operational issues and our currently immaterial participation in the programmatic channel. Additionally, the strengthening of the U.S. dollar during 2015 compared to the British pound and euro contributed to the decrease in revenue. The average revenue per advertising customer for 2015 was $171,000, a decrease of 13.6%, compared to $198,000 for 2014. The decrease in average revenue per advertising customer was primarily the result of the increase in the number of new advertising customers, particularly new customers, which tend to start out deploying smaller digital video advertising budgets through our solutions. We had 1,001 advertising customers in 2015, an increase of 13.8%, compared to 880 in 2014. Our top 20 advertising customers for 2015 accounted for $65.2 million, or 37.7%, of our revenue, compared to $63.3 million, or 35.6%, of our revenue for 2014.

Cost of Revenue and Gross Profit

Our cost of revenue primarily consists of costs incurred with digital media property owners, typically under revenue-sharing arrangements. We refer to these costs as traffic acquisition costs. Generally, we incur traffic acquisition costs in the period the advertising impressions are delivered. In limited circumstances, we incur costs based on minimum guaranteed impressions. Cost of revenue also includes ad delivery costs such as labor and related costs, depreciation and amortization of acquired technologies, internally developed software and data center assets, and Internet access costs. These expenses are classified as cost of revenue for the period in which the revenue is recognized. As a percentage of revenue, we expect cost of revenues, including our traffic acquisition costs, to be in the 46% to 48% range in 2017.

	Year Ended December 31,			Change						Year Ended December 31,			Change						Year Ended December 31,
	2016				$		%			2015				$		%			2014
							(dollars in thousands)
Cost of revenue	$	80,190		$	(14,838	)		(15.6	)%	$	95,028		$	1,932			2.1	%	$	93,096
Gross profit amount	$	80,221		$	1,995			2.6	%	$	78,226		$	(6,457	)		(7.6	)%	$	84,683
Gross profit percentage		50.0	%								45.2	%								47.6	%

For 2016, cost of revenue decreased $14.8 million, or 15.6%, compared to 2015. The decrease was primarily attributable to a $14.6 million decrease in traffic acquisition costs, third party services and ad delivery costs. Additionally, other costs of revenues, including labor costs, decreased $0.2 million. Traffic acquisition costs decreased due to the decline in revenue, improvements in operational efficiency and better targeting of suitable digital media inventory. For 2016, gross profit, as a percentage of revenue, increased to 50.0% from 45.2% for 2015, primarily as a result of an increase in the number of ads run on SDK-enabled inventory resulting in lower traffic acquisition costs.

For 2015, cost of revenue increased $1.9 million, or 2.1%, compared to 2014. The increase was primarily attributable to an increase of $6.1 million in traffic acquisition costs, third party service and ad delivery costs, which was partially offset by a $4.2 million decrease in other costs of revenues. For 2015, gross profit, as a percentage of revenue, decreased to 45.2% from 47.6% for 2014, primarily as a result of product mix resulting in higher traffic acquisition costs.

Sales and Marketing

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

	Year Ended December 31,			Change						Year Ended December 31,			Change						Year Ended December 31,
	2016				$		%			2015				$		%			2014
							(dollars in thousands)
Sales and marketing	$	51,676		$	(8,236	)		(13.7	)%	$	59,912		$	(5,200	)		(8.0	)%	$	65,112
Percentage of revenue		32.2	%								34.6	%								36.6	%

For 2016, sales and marketing expenses decreased $8.2 million, or 13.7%, compared to 2015. The decrease was primarily attributable to a decrease of $7.8 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, reflecting fewer employees in our sales and marketing organization. Additionally, other sales and marketing expenses including advertising, promotions, tradeshows, sponsorships, recruiting and temporary services, decreased $0.4 million primarily as a result of a decrease in discretionary advertising spending. For 2016, sales and marketing expenses, as a percentage of revenue, decreased to 32.2% from 34.6% for 2015.

For 2015, sales and marketing expenses decreased $5.2 million, or 8.0%, compared to 2014. The decrease was primarily attributable to a decrease of $4.8 million in employee compensation, benefits and other employee-related expenses, primarily as a result of a decrease in the number of employees within our sales and marketing organization. Additionally, other sales and marketing expenses including advertising, promotions, tradeshows, sponsorships and consulting services, decreased $0.4 million primarily as a result of a decrease in discretionary advertising spending. For 2015, sales and marketing expenses, as a percentage of revenue, decreased to 34.6% from 36.6% for 2014, primarily as a result of the decrease in the number of sales and marketing employees.

Research and Development

We engage in research and development efforts to create and enhance our existing, data-science capabilities and proprietary technologies. Our research and development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product development and information technology personnel. Research and development expenses also include outside services and consulting, depreciation, facilities and other overhead costs. We capitalize a portion of our research and development costs attributable to internally developed software.

As of December 31, 2016, 2015 and 2014, we had 144, 148 and 91 research and development employees, respectively. As of December 31, 2016, 110 research and development employees were located in our Chennai and Pune, India offices. We expect our research and development expenses to increase as we continue to invest in the research and development of our products, and to increase as a percentage of revenue in the short term. We believe that our twelve-year operating history and our ability to attract and retain the large pool of engineering talent available in India will help us expand our engineering resources and capabilities cost-effectively.

	Year Ended December 31,			Change					Year Ended December 31,			Change					Year Ended December 31,
	2016				$	%			2015				$	%			2014
						(dollars in thousands)
Research and development	$	10,968		$	31		0.3	%	$	10,937		$	5,029		85.1	%	$	5,908
Percentage of revenue		6.8	%							6.3	%							3.3	%

For 2016, research and development expenses increased by $31,000, or 0.3%, compared to 2015. The increase was attributable to an increase of $0.3 million other departmental expenses, including equipment and software support and maintenance. Partially offsetting this increase was a decrease of $0.2 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, primarily as a result of a decrease in the number of employees in our research and development organization. For 2016, research and development expenses, as a percentage of revenue, increased to 6.8% from 6.3% for 2015, primarily as a result of an increase in other departmental expenses, including equipment and software support and maintenance.

For 2015, research and development expenses increased $5.0 million, or 85.1%, compared to 2014. The increase was attributable to an increase of $3.6 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of an increase in the number of employees within our research and development organization as it expanded both domestically and internationally. Additionally, other departmental expenses, including equipment support and maintenance and depreciation, including depreciation expense related to capitalized internally developed software, increased $1.4 million. For 2015, research and development expenses, as a percentage of revenue, increased to 6.3% from 3.3% for 2014, primarily as a result of the increase in research and development employee compensation, benefits and other employee-related expenses, including stock-based compensation.

General and Administrative

Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, human resources and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. We expect general and administrative expenses to remain at current levels in the near term.

	Year Ended December 31,			Change						Year Ended December 31,			Change					Year Ended December 31,
	2016				$		%			2015				$	%			2014
							(dollars in thousands)
General and administrative	$	22,513		$	(1,071	)		(4.5	)%	$	23,584		$	1,848		8.5	%	$	21,736
Percentage of revenue		14.0	%								13.6	%							12.2	%

For 2016, general and administrative expenses decreased $1.1 million, or 4.5%, compared 2015. The decrease was primarily attributable to a $1.2 million decrease in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of a decrease in the number of employees within our general and administrative organization. Partially offsetting this decrease was an increase of $0.1 million in other general and administrative expenses, including rent and outside legal and consulting fees related to our proxy contest. For 2016, general and administrative expenses, as a percentage of revenue, increased to 14.0% from 13.6% for 2015, primarily as a result of the decrease in revenue in 2016.

For 2015, general and administrative expenses increased $1.8 million, or 8.5%, compared to 2014. The increase was primarily attributable to a $2.4 million increase in employee compensation, benefits and other employee-related expenses, including stock-based compensation, as a result of an increase in the number of employees within our general and administrative organization. Partially offsetting this increase was a decrease of $0.5 million in professional service fees and consulting services as we placed greater reliance on internal employee labor rather than external consultants. For 2015, general and administrative expenses, as a percentage of revenue, increased by 1.4% to 13.6% from 12.2% for 2014, primarily as a result of the increase in general and administrative employees and the associated increase in employee compensation, benefits and other employee-related expenses, including stock-based compensation.

Asset Impairment

Restructuring

On November 8, 2016, our board of directors approved a restructuring plan designed to reduce our operating expenses, realign our cost structure with revenue, better manage our costs and more efficiently manage our business. The restructuring plan was implemented in the fourth quarter of 2016 and completed in the first quarter of 2017. Restructuring expenses totaled $1.6 million and were recorded as restructuring expenses on our consolidated statements of operations in the fourth quarter of 2016. Elements of the restructuring plan included a workforce reduction of approximately 7%, which included employee severance pay and related expenses, acceleration of our former chief executive officer’s stock-based compensation expense as a result of his termination without cause and facility exit expenses. We do not expect to incur any additional expenses under the restructuring plan. As of December 31, 2016, we had $0.8 million of restructuring liabilities included in accrued liabilities on our consolidated balance sheet, which consisted primarily of employee severance pay and related expenses. We expect the restructuring liability to be fully paid in the first quarter of 2017.

Restructuring expenses incurred in 2016 were as follows (in thousands):

		Workforce Reduction Expenses (1)				Stock-Based Compensation Expense Acceleration (2)				Facility Exit Expenses (3)				Total
Restructuring		$	1,172			$	288			$	117			$	1,577

(1)

Workforce reduction expenses include employee severance and temporary health insurance costs under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).

(2)

In accordance with the 2015 Executive Severance Plan, 25% of the chief executive officer’s unvested equity holdings immediately accelerate to become vested if the chief executive officer is terminated for any reason other than cause. Stock-based compensation expense is a non-cash expense.

(3)

We exited a facility located in Redwood City, California on November 11, 2016. Facility exit expenses include rental payments we are required to make on the vacant office space and broker fees we will pay to find a new tenant to sublease the vacated office space.

Interest and Other Expense, Net

Interest and other expense, net consists primarily of interest income earned on our cash equivalents and marketable securities, interest expense on our capital lease obligations, accretion and amortization on marketable securities, gains and losses on our derivative instruments and foreign exchange gains and losses.

	Year Ended December 31,						Year Ended December 31,						Year Ended December 31,
	2016			Change			2015			Change			2014
							(in thousands)
Interest income	$	628		$	(53	)	$	681		$	42		$	639
Interest expense		(7	)		1			(8	)		—			(8	)
Transaction loss on foreign exchange		(1,319	)		(775	)		(544	)		483			(1,027	)
Gain on derivative instruments		683			626			57			57			—
Amortization and accretion of marketable securities		(289	)		131			(420	)		83			(503	)
Other non-operating income (loss), net		(2	)		2			(4	)		(7	)		3
Interest and other expense, net	$	(306	)	$	(68	)	$	(238	)	$	658		$	(896	)

For 2016, interest and other expense, net was $(0.3) million compared to $(0.2) million for 2015. The change was primarily due to $(1.3) million in foreign transaction exchange losses in 2016 compared to a $(0.5) million loss 2015 as a result of fluctuations in the U.S. dollar against the British pound sterling and euro. In addition, we realized a $0.7 million gain on our derivative instruments in 2016 compared to a $57,000 gain in 2015.

For 2015, interest and other expense, net decreased by $0.7 million, compared to 2014. The decrease was primarily due to a decrease of $0.5 million in foreign transaction exchange losses as a result of fluctuations in the U.S. dollar against the British pound sterling and euro. In addition, we realized a $0.1 million gain on our derivative instruments in 2015. Our investments in derivative instruments are intended to mitigate a portion of our foreign transaction exchange gains and losses reported as income or expense on our statements of operations. Additionally, amortization and accretion expense on our marketable securities increased $0.1 million.

Provision for Income Taxes

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

	Year Ended December 31,				Year Ended December 31,						Year Ended December 31,
	2016		Change		2015			Change			2014
					(in thousands)
Income tax (expense) benefit	$	20	$	320	$	(300	)	$	(524	)	$	224

For 2016, income tax benefit was priamrily related to the full year net loss before income taxes of $7.7 million. Partially offsetting the federal and state tax benefit were taxes due in foreign jurisdictions. For 2015, income tax (expense) benefit was primarily related to state taxes and taxes due in foreign jurisdictions. For 2014, income tax benefit was primarily related to the full-year net loss before income taxes of $9.0 million. Partially offsetting the federal and state tax benefit were taxes due in foreign jurisdictions.

Adjusted EBITDA

	Years Ended December 31,
	2016			2015			2014
				(in thousands)
Net loss	$	(7,721	)	$	(16,745	)	$	(8,745	)
Adjustments:
Interest expense		7			8			8
Income tax expense (benefit)		(20	)		300			(224	)
Depreciation and amortization expense		6,876			6,006			4,620
Stock-based compensation expense		8,424			8,879			5,774
Proxy contest expense		815			—			—
Asset impairment		922			—			—
Restructuring		1,577			—			—
Total Adjustments		18,601			15,193			10,178
Adjusted EBITDA	$	10,880		$	(1,552	)	$	1,433

•

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

•

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

•

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

•

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

Quarterly Results of Operations

The following tables presenting our unaudited quarterly results of operations should be read in conjunction with the consolidated financial statements and notes included in Item 8 of this Annual Report on Form 10-K. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

The following tables present unaudited quarterly results for 2016 and 2015. These tables include all adjustments, consisting only of normal recurring adjustments, that we consider for the fair statement of our consolidated financial position and operating results for the quarters presented. Seasonality has caused, and is likely to continue to cause fluctuations in our quarterly results.

Selected summarized quarterly financial information for 2016 and 2015 is as follows (in thousands, except per share amounts):

	Fourth Quarter		Third Quarter			Second Quarter			First Quarter
2016
Revenue	$	45,550	$	34,953		$	40,675		$	39,233
Gross profit	$	24,002	$	16,903		$	20,564		$	18,752
Net income (loss)	$	2,827	$	(4,464	)	$	(2,486	)	$	(3,598	)
Net income (loss) per share (a):
Basic	$	0.08	$	(0.13	)	$	(0.07	)	$	(0.10	)
Diluted	$	0.08	$	(0.13	)	$	(0.07	)	$	(0.10	)

	Fourth Quarter		Third Quarter			Second Quarter			First Quarter
2015
Revenue	$	53,836	$	38,870		$	40,403		$	40,145
Gross profit	$	24,980	$	17,400		$	16,987		$	18,859
Net income (loss)	$	1,620	$	(6,534	)	$	(5,835	)	$	(5,996	)
Net income (loss) per share (a):
Basic	$	0.05	$	(0.19	)	$	(0.17	)	$	(0.18	)
Diluted	$	0.05	$	(0.19	)	$	(0.17	)	$	(0.18	)

(a)

Basic and diluted net income (loss) per share are computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash, cash equivalents, and marketable securities. As of December 31, 2016, we had $65.7 million in cash, cash equivalents, and marketable securities. Cash equivalents and marketable securities as of December 31, 2016 are comprised of money market funds, corporate bonds, U.S. government and agency bonds and commercial paper. Cash held internationally as of December 31, 2016 totaled $4.2 million.

On February 18, 2016, we announced a $10 million share repurchase program. The repurchase program has no set expiration date and all purchases are subject to applicable rules and regulations, market conditions and other factors. Purchases under this repurchase program are made in the open market and are intended to comply with Rule 10b-18 under the Exchange Act. The cost of the repurchased shares is funded from available working capital. Such repurchased shares are held in treasury and are presented using the cost method. As of December 31, 2016, we had purchased 1,952,909 shares of our common stock for $7.1 million (including 27,202 shares repurchased for $0.1 million that had not yet settled as of December 31, 2016) at an average price of $3.64 per share.

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

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

	Year Ended December 31,
	2016			2015			2014
	(in thousands)
Consolidated Statements of Cash Flows Data:
Net cash provided by (used in) operating activities	$	18,662		$	(1,130	)	$	6,766
Net cash provided by (used in) investing activities	$	4,799		$	(21,108	)	$	(15,509	)
Net cash provided by (used in) financing activities	$	(6,708	)	$	2,086		$	4,234

Operating Activities

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

We generated $18.7 million of cash from operating activities during 2016, primarily resulting from a net loss of $7.7 million, as adjusted for non-cash charges related to:

•

Depreciation and amortization of $6.9 million;

•

Stock-based compensation of $8.7 million;

•

Bad debt expense of $0.8 million;

•

Amortization of premiums on marketable securities of $0.3 million;

•

Non-cash asset impairment charge of $0.9 million; and

•

Deferred income taxes of $(0.2) million.

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

•

$15.0 million from a decrease in accounts receivable due to the timing of payments received from advertising customers;

•

$(6.4) million from a decrease in accounts payable, accrued digital media property owner costs and other accrued liabilities as a result of the timing of payments to our vendors;

•

$0.6 million from an increase in other liabilities due to an increase in deferred rent;

•

$0.2 million from a decrease in prepaid expenses and other current assets primarily due to the timing of payments for rent, insurance and other operating costs; and

•

$(0.3) million from an increase in deposits and other assets.

We used $1.1 million of cash in operating activities during 2015, primarily resulting from a net loss of $16.7 million, as adjusted for non-cash charges related to:

•

Depreciation and amortization of $6.0 million;

•

Stock-based compensation of $8.9 million;

•

Bad debt expense of $1.0 million;

•

Amortization of premiums on marketable securities of $0.4 million; and

•

Deferred income taxes of $(0.3) million.

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

•

$(0.4) million from a net decrease in accounts payable, accrued digital media property owner costs and other accrued liabilities as a result of the timing of payments to our vendors;

•

$0.3 million from a decrease in accounts receivable due to a decrease in billings for advertising campaigns as well as timing of payments from these advertising customers; and

•

$(0.3) million from an increase in prepaid expenses and other current assets primarily due to the timing of payments for rent, insurance and other operating costs.

We generated $6.8 million of cash from operating activities during 2014, primarily resulting from a net loss of $8.7 million, as adjusted for non-cash charges related to:

•

Depreciation and amortization of $4.6 million;

•

Stock-based compensation of $5.8 million;

•

Bad debt expense of $1.2 million;

•

Amortization of premiums on marketable securities of $0.5 million; and

•

Deferred income taxes of $(0.3) million.

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

•

$9.1 million from an increase in accounts payable, accrued digital media property owner costs and other accrued liabilities as a result of the timing of payments to our vendors;

•

$(4.1) million from an increase in accounts receivable due to an increase in billings for advertising campaigns, especially during the fourth quarter ended December 31, 2014, as well as timing of payments from these advertising customers; and

•

$(1.1) million from an increase in prepaid expenses and other current assets primarily due to the timing of payments for rent, insurance and other operating costs.

Investing Activities

Our primary investing activities consist of (i) purchases of property and equipment to support the build out of our data centers and software to support website development and operations, and our corporate infrastructure, (ii) expenditures to develop internal-use software, and (iii) purchases of marketable securities of sales and maturities. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and website and internal-use software and development.

We generated $4.8 million of cash from investing activities during 2016, primarily as follows:

•

$11.1 million from maturities of short- and long-term marketable securities, net of purchases;

•

$2.1 million used to purchase property, equipment and software; and

•

$4.2 million used to develop software for internal use.

We used $21.1 million of cash for investing activities during 2015, primarily as follows:

•

$14.2 million used to purchase short- and long-term marketable securities, net of maturities;

•

$2.8 million used to purchase property, equipment and software;

•

$3.7 million used to develop software for internal use; and

•

$0.4 million increase in restricted cash associated with a new building lease in New York City.

We used $15.5 million of cash for investing activities during 2014, primarily as follows:

•

$7.6 million used to purchase short- and long-term marketable securities of maturities and sales;

•

$5.9 million used to purchase property, equipment and software; and

•

$2.0 million used to develop software for internal use.

Financing Activities

Our financing activities consist primarily of the issuance of common stock upon the exercise of stock options pursuant to our employee stock purchase plan, and, beginning in the three months ended March 31, 2016, tax payments related to net share settlement of equity awards and repurchases of our common stock.

We used $6.7 million of cash for financing activities during 2016, primarily as follows:

•

$7.0 million used for repurchases our common stock on the open market;

•

$1.1 million of proceeds from the exercise of common stock options; and

•

$0.8 million used for net share settlements of vesting restricted stock units.

We generated $2.1 million of cash from financing activities during 2015 primarily from the exercise of common stock options.

We generated $4.2 million of cash from financing activities during 2014. We received $4.6 million of proceeds from the exercise of common stock options, partially offset by $0.3 million of repayments of borrowings under notes payable and capital leases.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of December 31, 2016 and 2015.

Indemnification Agreements

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

Contractual Obligations

We lease various office facilities, including our corporate headquarters in Redwood City, California, under non-cancellable operating lease agreements that expire through September 2027. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. Rent expense under operating leases totaled $3.5 million, $3.0 million and $2.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.

We also have capital lease obligations and enter into agreements with digital media property owners that require the purchase of a minimum number of impressions on a monthly or quarterly basis. Our capital lease obligations mature in July 2019 and our purchase commitments expire on various dates through December 2017.

Our future minimum payments under these arrangements as of December 31, 2016 are as follows (in thousands):

	Payments Due by Period
	Total		Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years
Operating lease obligations	$	17,282	$	3,327	$	6,864	$	3,230	$	3,861
Capital lease obligations		21		8		13		—		—
Traffic acquisition costs and other purchase commitments		509		509		—		—		—
Total minimum payments	$	17,812	$	3,844	$	6,877	$	3,230	$	3,861

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above. We have determined our uncertain tax positions as of December 31, 2016 will not result in any additional taxes payable by us. As a result, no amounts are shown in the table above relating to uncertain tax positions.

Critical Accounting Policies and Estimates

We prepared our consolidated financial statements 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, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, internal-use software development costs, business combinations, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see Note 2 of the notes to our consolidated financial statements.

Revenue Recognition

Our revenue is principally derived from advertising services measured by the number of advertising impressions displayed on digital media properties owned and controlled by third party digital media property owners and priced on a CPM basis. We recognize revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. For all revenue transactions, we consider a signed agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement. Our arrangements generally do not include a provision for cancellation, termination, or refunds that would significantly impact revenue recognition. Arrangements for these services generally have a term of up to three months and in some cases the term may be up to one year.

In the normal course of business, we act as a facilitator in executing transactions with third parties. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether we are acting as the principal or an agent in the transaction. In determining whether we act as the principal or an agent, we follow the accounting guidance for principal-agent considerations. While none of the factors identified in this guidance is individually considered presumptive or determinative, because we are the primary obligor and are responsible for (i) identifying and contracting with third party advertisers, (ii) establishing the selling prices of the advertisements sold, (iii) performing all billing and collection activities including retaining credit risk and (iv) bearing sole responsibility for fulfillment of the advertising, we act as the principal in these arrangements and therefore reports revenue earned and costs incurred on a gross basis.

We generally recognize revenue based on delivery information from a combination of third party reporting and our proprietary campaign tracking systems. Revenue is attributed to the U.S. and individual foreign countries based on the domicile of the salesperson that facilitated the revenue generating transaction.

Multiple-element Arrangements

We enter into arrangements with customers to sell advertising packages that include different media placements or ad services that are delivered at the same time, or within close proximity of one another.

At the inception of an arrangement, we allocate arrangement consideration in multiple-deliverable revenue arrangements to all deliverables, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific objective evidence (“VSOE”), if available; (2) third party evidence (“TPE”), if VSOE is not available; and (3) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.

VSOE—We evaluate VSOE based on our historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the standalone selling prices for these services fall within a reasonably narrow pricing range. We historically have not entered into a large volume of single element arrangements, so we have not been able to establish VSOE for any of our advertising products.

TPE—When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of services cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services’ selling prices are on a standalone basis. As a result, we have not been able to establish selling price based on TPE.

BESP—When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a standalone basis. BESP is generally used to allocate the selling price to deliverables in our multiple element arrangements. We determine BESP for deliverables by considering multiple factors including, but not limited to, prices we charge for similar offerings, class of advertiser, size of transaction, seasonality, observed pricing trends, available online inventory, industry pricing strategies, market conditions and competitive landscape. We limit the amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not contingent on future performance or future deliverables. We will regularly review BESP. Changes in assumptions or judgments or changes to the elements in the arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

We recognize revenue for media placements and ad services as they are delivered assuming all other revenue recognition criteria are met. Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition

Internal-Use Software Development Costs

We capitalize certain costs related to software developed for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Such costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in product development expenses on our consolidated statements of operations. Costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over the estimated useful life of the enhancements, generally three years.

Goodwill

Goodwill is not amortized, but is tested for impairment at least annually or as circumstances indicate the value may no longer be recoverable. We evaluate goodwill for impairment annually in the fourth quarter of our fiscal year as of December 31, or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a decrease in market capitalization, increasing cost structure, a significant adverse change in customer demand or business climate that could affect the value of goodwill, a significant decrease in expected cash flows, restructuring activities undertaken to reduce increasing future operating expenses, the loss of key personnel, whether voluntarily or involuntarily, and/or a decline revenue forecasts. If we determine any of these qualitative triggering events exist, or that in aggregate they might indicate a goodwill impairment exists, we would then proceed to performing the two-step goodwill impairment test as needed to determine if an impairment exists. As of December 31, 2016, we performed the first step of the goodwill impairment test and determined that the fair value of our goodwill is greater than its carrying value and no impairment of goodwill exists.

Business Combinations

When we acquire a business, 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, we evaluate whether the awards are contingent 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. The carrying value of acquired working capital is generally assumed to be equal to its fair value, given the short-term nature of these assets and liabilities.

Income Taxes

We account for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. We maintain a full valuation allowance to offset domestic net deferred tax assets due to the uncertainty of realizing future tax benefits from our net operating loss carry forwards and other deferred tax assets. Our valuation allowance as of December 31, 2016 was attributable to the uncertainty of realizing future tax benefits from U.S. net operating losses, foreign timing differences and other deferred tax assets.

As of December 31, 2016, we had U.S. federal net operating loss carry forwards of approximately $27.2 million, expiring beginning in 2025. As of December 31, 2016, we had U.S. state net operating loss carry forwards of approximately $20.7 million, which will begin to expire in 2017. As of December 31, 2016 we had federal research and development tax credits of approximately $1.0 million, expiring beginning in 2025. As of December 31, 2016, we had state research and development tax credits of approximately $1.1 million, and other tax credits of $0.3 million, both of which carry forward indefinitely.

We operate in various tax jurisdictions and we are subject to audit by various tax authorities. We provide for tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, relative tax law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

We record uncertain tax positions in accordance with accounting standards on the basis of a two-step process whereby (1) a determination is made as to whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority.

Stock-based Compensation

We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option valuation model to determine the fair value of stock options. The determination of the grant date fair value of options using an option valuation model is affected by our common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends.

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including identifying performance obligations. The new standard, as amended, is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. We do not plan to early adopt, and thus the new standard will become effective for us on January 1, 2018. As part of this plan, we are currently assessing the impact of the new guidance on our results of operations. However, further analysis is required and we will continue to evaluate this assessment in 2017. We currently expect to apply the modified retrospective method of adoption; however, we have not yet finalized our transition method, but expects to do so in 2017 upon completion of further analysis.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions and events that raise substantial doubt about our ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about our ability to continue as a going concern. ASU 2014-15 becomes effective for annual periods ending after December 15, 2016 and for interim reporting periods thereafter. We adopted this standard for our fiscal year ended December 31, 2016.

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies when fees paid in a cloud computing arrangement pertain to the acquisition of a software license, services, or both. ASU 2015-05 provides criteria for customers in a cloud computing arrangement to use to determine whether the arrangement includes a license of software. The criteria are based on existing guidance for cloud service providers. However, the ASU does not change the accounting for cloud service providers. ASU 2015-05 is effective for annual and interim periods in fiscal years beginning after December 15, 2015. We adopted this standard prospectively as of January 1, 2016 and the impact to our consolidated financial statements was not material.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We are currently evaluating the impact of adopting this standard.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). This ASU requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We are currently evaluating the impact of adopting this standard.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). This ASU was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This standard covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows and will be effective as of January 1, 2017, with early adoption permitted. We adopted the standard on January 1, 2017 and we are currently evaluating the impact of adopting this standard.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU is an update to the standard on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Upon adoption, entities will be required to apply the update prospectively. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Fluctuation Risk

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

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

To provide a meaningful assessment of the interest rate risk within our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our portfolio. Based on investment positions as of December 31, 2016 a hypothetical 100 basis point increase in interest rates across all maturities in our portfolio would result in an immaterial incremental decline in the fair market value of our portfolio. Such losses would only be realized if we sold the investments prior to maturity. As such, we do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives. We do not enter into investments for trading or speculative purposes.

Foreign Currency Exchange Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, principally the British pound sterling and Euro. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and we expect we will continue to experience fluctuations in our net income (loss) as a result of transaction gains (losses) related to revaluing certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in currencies other than the U.S. dollar. In 2016, 2015 and 2014, foreign exchange transaction losses recorded to our condensed consolidated statements of operations, net of foreign exchange gains on our British pound and euro forward contracts, were $0.6 million, $0.5 million and $1.0 million, respectively.

In the second quarter of 2015 we established a program that utilizes foreign currency forward contracts to offset the risks associated with changes in the exchange rates of the currencies in which we do business, including the British pound sterling and the euro. Under this program, we enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Our foreign currency forward contracts are short-term in duration. To the degree that our foreign revenues and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business.

Inflation Risk

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

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents

		Page

Report of Independent Registered Public Accounting Firm		54
Consolidated Balance Sheets		55
Consolidated Statements of Operations		56
Consolidated Statements of Comprehensive Income (Loss)		57
Consolidated Statements of Stockholders’ Equity (Deficit)		58
Consolidated Statements of Cash Flows		59
Notes to Consolidated Financial Statements		60

The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of Operations.”

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

YuMe, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows present fairly, in all material respects, the financial position of YuMe, Inc. and its subsidiaries as of December 31, 2016 and December 31,2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 10, 2017

YuMe, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	As of December 31, 2016			As of December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	34,700		$	17,859
Marketable securities		25,751			30,600
Restricted cash		—			292
Accounts receivable, net		51,171			67,131
Prepaid expenses and other current assets		3,591			3,978
Total current assets		115,213			119,860
Marketable securities, long-term		5,241			11,724
Property, equipment and software, net		11,726			12,110
Goodwill		3,902			3,902
Intangible assets, net		—			659
Restricted cash, non-current		710			403
Deposits and other assets		587			416
Total assets	$	137,379		$	149,074

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	10,775		$	12,080
Accrued digital media property owner costs		16,385			17,155
Accrued liabilities		12,192			16,767
Deferred revenue		132			214
Capital leases, current		8			—
Total current liabilities		39,492			46,216
Capital leases, non-current		13			—
Other long-term liabilities		631			77
Deferred tax liability		—			178
Total liabilities		40,136			46,471

Commitments and contingencies (Note 9)

Stockholders’ equity:
Preferred stock: $0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding as of December 31, 2016 and December 31, 2015		—			—
Common stock: $0.001 par value; 200,000,000 shares authorized as of December 31, 2016 and 2015; 33,946,820 and 34,455,220 shares issued and outstanding as of December 31, 2016 and 2015, respectively		36			34
Additional paid-in-capital		159,550			150,001
Treasury stock: 2,019,575 shares and 66,666 shares as of December 31, 2016 and 2015, respectively		(7,105	)		—
Accumulated deficit		(54,888	)		(47,167	)
Accumulated other comprehensive loss		(350	)		(265	)
Total stockholders’ equity		97,243			102,603
Total liabilities and stockholders’ equity	$	137,379		$	149,074

See accompanying notes to consolidated financial statements.

YuMe, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Years Ended December 31,
	2016			2015			2014
Revenue	$	160,411		$	173,254		$	177,779
Cost of revenue		80,190			95,028			93,096
Gross profit		80,221			78,226			84,683
Operating expenses:
Sales and marketing		51,676			59,912			65,112
Research and development		10,968			10,937			5,908
General and administrative		22,513			23,584			21,736
Asset impairment		922			—			—
Restructuring		1,577			—			—
Total operating expenses		87,656			94,433			92,756
Loss from operations		(7,435	)		(16,207	)		(8,073	)
Interest and other expense, net
Interest expense		(7	)		(8	)		(8	)
Other expense, net		(299	)		(230	)		(888	)
Total interest and other expense, net		(306	)		(238	)		(896	)
Loss before income taxes		(7,741	)		(16,445	)		(8,969	)
Income tax (expense) benefit		20			(300	)		224
Net loss	$	(7,721	)	$	(16,745	)	$	(8,745	)

Net loss per share:
Basic	$	(0.22	)	$	(0.49	)	$	(0.27	)
Diluted	$	(0.22	)	$	(0.49	)	$	(0.27	)
Weighted-average shares used to compute net loss per share:
Basic		34,441			33,829			32,591
Diluted		34,441			33,829			32,591

See accompanying notes to consolidated financial statements.

YuMe, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Years Ended December 31,
	2016			2015			2014
Net loss	$	(7,721	)	$	(16,745	)	$	(8,745	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(147	)		(48	)		(58	)
Unrealized gain (loss) on marketable securities, net of tax		62			(57	)		(22	)
Other comprehensive loss		(85	)		(105	)		(80	)
Comprehensive loss	$	(7,806	)	$	(16,850	)	$	(8,825	)

See accompanying notes to consolidated financial statements.

YuMe, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

	Common Stock					Treasury Stock
	Shares			Amount		Shares		Amount			Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity (Deficit)
Balances at December 31, 2013		31,933,862		$	32		66,666	$	-		$	127,690		$	(21,677	)	$	(80	)	$	105,965
Issuance of common stock upon exercise of stock options and warrants		801,691			1		–		–			3,143			–			–			3,144
Issuance of common stock upon the vesting of restricted stock units		15,450			–		–		–			–			–			–			–
Issuance of common stock in connection with employee stock purchase plan		315,324			–		–		–			1,530			–			–			1,530
Stock-based compensation		–			–		–		–			6,134			–			–			6,134
Foreign currency translation adjustment		–			–		–		–			–			–			(58	)		(58	)
Net unrealized losses on marketable securities		–			–		–		–			–			–			(22	)		(22	)
Net loss		–			–		–		–			–			(8,745	)		–			(8,745	)
Balances at December 31, 2014		33,066,327		$	33		66,666	$	–		$	138,497		$	(30,422	)	$	(160	)	$	107,948
Issuance of common stock upon exercise of stock options and warrants		268,172			–		–		–			803			–			–			803
Issuance of common stock upon the vesting of restricted stock units cash used to net settle equity awards		723,978			1		–		–			(44	)		–			–			(43	)
Issuance of common stock in connection with employee stock purchase plan		396,743			–		–		–			1,322			–			–			1,322
Stock-based compensation		–			–		–		–			9,423			–			–			9,423
Foreign currency translation adjustment		–			–		–		–			–			–			(48	)		(48	)
Net unrealized losses on marketable securities		–			–		–		–			–			–			(57	)		(57	)
Net loss		–			–		–		–			–			(16,745	)		–			(16,745	)
Balances at December 31, 2015		34,455,220		$	34		66,666	$	–		$	150,001		$	(47,167	)	$	(265	)	$	102,603
Issuance of common stock upon exercise of stock options		12,434			–		–		–			21			–			–			21
Issuance of common stock upon the vesting of restricted stock units cash used to net settle equity awards		985,573			1		–		–			(797	)		–			–			(796	)
Issuance of common stock in connection with employee stock purchase plan		446,502			1		–		–			1,076			–			–			1,077
Repurchased shares pursuant with the stock repurchase plan		(1,952,909	)		–		1,952,909		(7,105	)		–			–			–			7,105
Stock-based compensation		–			–		–		–			9,249			–			–			9,249
Foreign currency translation adjustment		–			–		–		–			–			–			(147	)		(147	)
Net unrealized gains on marketable securities		–			–		–		–			–			–			62			62
Net loss		–			–		–		–			–			(7,721	)		–			(7,721	)
Balances at December 31, 2016		33,946,820		$	36		2,019,575	$	(7,105	)	$	159,550		$	(54,888	)	$	(350	)	$	97,243

See accompanying notes to consolidated financial statements.

YuMe, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended December 31,
	2016			2015			2014
Operating activities:
Net income (loss)	$	(7,721	)	$	(16,745	)	$	(8,745	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		6,876			6,006			4,620
Stock-based compensation		8,712			8,879			5,774
Allowances for doubtful accounts receivable		777			963			1,154
Deferred income taxes		(178	)		(253	)		(340	)
Amortization of premiums on marketable securities		294			422			498
Asset impairment		922			—			—
Changes in operating assets and liabilities:
Accounts receivable		14,992			347			(4,102	)
Prepaid expenses and other current assets		222			(336	)		(1,070	)
Deposits and other assets		(286	)		(32	)		(22	)
Accounts payable		(1,262	)		381			4,515
Accrued digital media property owner costs		(770	)		(1,122	)		918
Accrued liabilities		(4,388	)		384			3,704
Deferred revenue		(82	)		16			(116	)
Other liabilities		554			(40	)		(22	)
Net cash provided by (used in) operating activities		18,662			(1,130	)		6,766
Investing activities:
Purchases of property and equipment		(2,055	)		(2,824	)		(5,888	)
Capitalized software development costs		(4,215	)		(3,666	)		(1,996	)
Purchases of marketable securities		(22,904	)		(43,845	)		(18,231	)
Maturities of marketable securities		34,006			29,630			9,400
Sales of marketable securities		—			—			1,206
Change in restricted cash		(33	)		(403	)		—
Net cash provided by (used in) investing activities		4,799			(21,108	)		(15,509	)
Financing activities:
Repayments of borrowings under capital leases		(2	)		(41	)		(340	)
Proceeds from exercise of common stock options and employee stock purchase plan		1,082			2,127			4,574
Repurchases of common stock		(7,007	)		—			—
Cash used to net-share settle equity awards		(781	)		—			—
Net cash provided by (used in) financing activities		(6,708	)		2,086			4,234
Effect of exchange rate changes on cash and cash equivalents		88			(48	)		(58	)
Change in cash and cash equivalents		16,841			(20,200	)		(4,567	)
Cash and cash equivalents—Beginning of period		17,859			38,059			42,626
Cash and cash equivalents—End of period	$	34,700		$	17,859		$	38,059
Supplemental disclosures of cash flow information:
Cash paid for interest	$	—		$	—		$	9
Cash paid for income taxes	$	588		$	426		$	930
Stock-based compensation capitalized for internal-use software	$	537		$	544		$	360
Non-cash investing and financing activities:
Purchases of property and equipment recorded in accounts payable	$	—		$	44		$	37
Purchases of property and equipment under capital lease obligations	$	24		$	—		$	—
Vesting of early exercised stock options	$	—		$	—		$	100

See accompanying notes to consolidated financial statements.

1.	Organization and Description of Business

Organization and Nature of Operations

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

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

Basis of Presentation

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”).

Basis of Consolidation

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

Certain Significant Risks and Uncertainties

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

2.	Summary of Significant Accounting Policies

Use of Estimates

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

Foreign Currency Translation and Transactions

The consolidated financial statements of the Company’s foreign subsidiaries are measured using the local currency as the functional currency, except for India and France, which have U.S. dollar and British pound sterling functional currencies, respectively. Assets and liabilities of foreign subsidiaries are translated at exchange rates in effect as of the balance sheet date. Revenues and expenses are translated at average exchange rates in effect during the period. Translation adjustments are recorded within accumulated other comprehensive loss, a separate component of stockholders’ equity, on the consolidated balance sheets. Foreign exchange transaction losses totaled $0.6 million, $0.5 million and $1.0 million for 2016, 2015 and 2014, respectively.

Cash and Cash Equivalents

The Company invests a portion of its excess cash in money market funds. The Company considers all highly liquid financial instruments purchased with original maturities of three months or less to be cash equivalents.

Marketable Securities

Marketable securities are classified as available-for-sale and have consisted of highly liquid corporate bonds, commercial paper and certificates of deposits that comply with the Company’s minimum credit rating policy. Short-term marketable securities must have a credit rating of A-1/P-1 or better by Standard and Poor’s and Moody’s Investor Service at the time they are purchased and long-term marketable securities must have a credit rating of A or better by Standard and Poor’s and A2 or better by Moody’s Investor Service at the time they are purchased. Asset backed marketable securities must have a credit rating of AAA at the time they are purchased. Short-term marketable securities consist of investments with final maturities of at least three months from the date of purchase that the Company intends to own for up to 12 months. Long-term marketable securities consist of investments with final maturities of more than 12 months from the date of purchase that the Company intends to own for more than 12 months, but not more than 24 months. By policy, the final maturity for each security within the portfolio shall not exceed 24 months from the date of purchase and the weighted average maturity of the portfolio shall not exceed 12 months at any point in time. Marketable securities are carried at fair value with unrealized gains and losses, net of taxes, reported as a component of stockholders’ equity on the consolidated balance sheets. See Note 3 for additional information regarding the Company’s marketable securities.

Restricted Cash

The Company’s lease agreement for its New York City office requires a security deposit in the amount of $0.4 million to be maintained in the form of an unconditional, irrevocable letter of credit issued to the benefit of the landlord. The letter of credit is subject to renewal annually until the lease expires in September 2027. On July 1, 2020, the required security deposit will decrease to $0.3 million.

The lease agreement for the Company’s previous New York City office required a security deposit in the amount of $0.3 million to be maintained in the form of an unconditional, irrevocable letter of credit issued to the benefit of the landlord. The letter of credit expired in the second quarter of 2016.

In the three months ended September 30, 2016, the Company entered in to a $0.3 million deed as security against overdrafts on a bank account to be used for processing payroll in the United Kingdom. The term of the deed is continuous until it is released by the bank. The amount of the deed is recorded as restricted cash, non-current in the condensed consolidated balance sheets.

Foreign Currency Transaction Risk—Foreign Currency Forward Contracts

The Company transacts business in various foreign currencies and in the second quarter of 2015 established a program that utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, to the Company enters into foreign currency forward contracts so that increases or decreases in foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with the Company’s foreign currency transactions. The Company may suspend this program from time to time. Foreign currency exposures typically arise from British pound and euro denominated transactions that the Company expects to cash settle in the near term, which are charged against earnings in the period incurred. The Company’s foreign currency forward contracts are short-term in duration.

The Company does not use foreign currency forward contracts for trading purposes nor does it designate forward contracts as hedging instruments pursuant to ASC 815. Accordingly, the Company records the fair values of these contracts as of the end of its reporting period to its condensed consolidated balance sheets with changes in fair values recorded to its condensed consolidated statement of operations. Given the short duration of the forward contracts, the amount recorded is not significant. The balance sheet classification for the fair values of these forward contracts is prepaid expenses and other current assets for a net unrealized gain position, and accrued liabilities for a net unrealized loss position. The statement of operations classification for changes in fair value of these forward contracts is other expense, net for both realized and unrealized gains and losses.

The Company expects to continue to realize gains or losses with respect to its foreign currency exposures, net of gains or losses from its foreign currency forward contracts. The Company’s ultimate realized gain or loss with respect to foreign currency exposures will generally depend on the size and type of cross-currency transactions that it enters into, the currency exchange rates associated with these exposures and changes in those rates, the net realized gain or loss on its foreign currency forward contracts and other factors. As of December 31, 2016, the notional amount and the aggregate fair value of the forward contracts the Company held to purchase U.S. dollars in exchange for British pounds and euros was $3.6 million. Net foreign exchange transaction gains/(losses) relating to the Company’s British pound sterling and euro forward contracts are included in other income (expense), net in the Company’s consolidated statements of operations. Net foreign exchange transaction gains/(losses) included in other expense, net in the Company’s consolidated statements of operations was immaterial for 2015 and was $0.7 million for 2016 relating to the Company’s British pound sterling and euro forward contracts.

Concentrations and Other Risks

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

Credit risk with respect to accounts receivable is dispersed due to the large number of advertising customers. Collateral is not required for accounts receivable. The Company performs ongoing credit evaluations of customers’ financial condition and periodically evaluates its outstanding accounts receivable and establishes an allowance for doubtful accounts receivable based on the Company’s historical experience, the current aging and circumstances of accounts receivable and general industry and economic conditions. Accounts receivable are written off by the Company when it has been determined that all available collection avenues have been exhausted. In 2016, 2015 and 2014, bad debt write-offs totaled $0.4 million, $0.5 million and $0.7 million, respectively. If circumstances change, higher than expected bad debts may result in future write-offs that are greater than the Company’s estimates.

No customers accounted for 10% or more of the Company’s accounts receivable as of December 31, 2016 or 2015. One customer accounted for 12% of the Company’s revenue in 2016. No single customer accounted for 10% or more of the Company’s revenue in 2015 and 2014.

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

	Years Ended December 31,
	2016			2015			2014
Allowance for doubtful accounts receivable:
Balance – beginning of period	$	1,961		$	1,471		$	1,056
Allowance for doubtful accounts receivable		777			963			1,154
Doubtful accounts receivable write-offs		(393	)		(473	)		(739	)
Balance – end of period	$	2,345		$	1,961		$	1,471

Property, Equipment and Software

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are generally three to five years. Leasehold improvements are amortized over the shorter of the asset life or remaining lease term.

Internal-Use Software Development Costs

The Company capitalizes the costs to develop internal-use software when preliminary development efforts are successfully completed, it has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Such costs are amortized on a straight-line basis over the estimated useful life of the software, which approximates three years. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred. Costs incurred for upgrades and enhancements that are expected to result in additional material functionality are capitalized and amortized over the respective estimated useful life.

The Company capitalized $4.8 million, $4.2 million and $2.4 million of internal-use software costs during the years ended December 31, 2016, 2015 and 2014, respectively, which are included in property, equipment and software on the consolidated balance sheets. Amortization expense associated with capitalized internal-use software totaled approximately $2.7 million, $1.6 million and $1.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Impairment of Long-lived Assets

The Company evaluates its long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported as a separate caption at the lower of the carrying amount or fair value less costs to sell. There were no changes in estimated useful lives during years ended December 31, 2016, 2015 and 2014.

For internally developed software, the Company performs regular recoverability assessments in order to evaluate any impairment indicators or changes to useful lives. During the fourth quarter of 2016, the Company determined not to allocate any future resources to market, develop and maintain its YFP 5.0 supply-side platform for publishers since it was not generating sufficient revenue to cover its related costs. The Company’s assessment determined YFP 5.0 to be fully impaired and the Company recorded a one-time non-cash asset impairment charge of $0.9 million related to YFP 5.0 in operating expenses.

Deferred Rent

The Company leases facilities worldwide under non-cancelable operating leases that expire through August 2024. These leases contain various renewal options. The Company recognizes rent holidays and escalating rent provisions on a straight-line basis over the term of the lease. The Company’s deferred rent liability related to these facilities was approximately $0.9 and $0.4 million at December 31, 2016 and 2015, respectively, which are included in “Accrued liabilities” and “Other long-term liabilities” on the consolidated balance sheets.

Revenue Recognition

The Company’s revenue is principally derived from advertising services measured by the number of advertising impressions displayed on digital media properties owned and controlled by third party digital media property owners and primarily priced on a cost per thousand impressions (“CPM”) basis. The Company recognizes revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. For all revenue transactions, the Company considers a signed agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement. Arrangements for these services generally have a term of up to three months. In some cases the term may be up to one year or more.

In the normal course of business, the Company acts as a facilitator in executing transactions with third parties. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in the transaction. In determining whether the Company acts as the principal or an agent, the Company follows the accounting guidance for principal-agent considerations. While none of the factors identified in this guidance is individually considered presumptive or determinative, because the Company is the primary obligor and is responsible for (i) identifying and contracting with third party advertisers, (ii) establishing the selling prices of the advertisements sold, (iii) performing all billing and collection activities including retaining credit risk and (iv) bearing sole responsibility for fulfillment of the advertising, which may also include committing to buy advertising inventory in advance, the Company acts as the principal in these arrangements and therefore reports revenue earned and costs incurred on a gross basis.

The Company recognizes revenue based on delivery information from a combination of third party reporting and the Company’s proprietary campaign tracking systems.

Multiple-element Arrangements

The Company enters into arrangements with customers to sell advertising packages that include different media placements or ad services that are delivered at the same time, or within close proximity of one another.

At the inception of an arrangement, the Company allocates arrangement consideration in multiple-deliverable revenue arrangements to all deliverables, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific objective evidence (“VSOE”) if available; (2) third party evidence (“TPE”) if VSOE is not available; and (3) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.

VSOE—The Company evaluates VSOE based on its historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, the Company requires that a substantial majority of the standalone selling prices for these services fall within a reasonably narrow pricing range. The Company historically has not entered into a large volume of single-element arrangements, so it has not been able to establish VSOE for any of its advertising products.

TPE—When VSOE cannot be established for deliverables in multiple element arrangements, the Company applies judgment with respect to whether it can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a significant level of differentiation such that the comparable pricing of services cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor services’ selling prices are on a standalone basis. As a result, the Company has not been able to establish selling price based on TPE.

BESP—When the Company is unable to establish selling price using VSOE or TPE, the Company uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the service were sold on a standalone basis. BESP is generally used to allocate the selling price to deliverables in the Company’s multiple-element arrangements. The Company determines BESP for deliverables by considering multiple factors including, but not limited to, prices it charges for similar offerings, class of advertiser, size of transaction, seasonality, observed pricing trends, available online inventory, industry pricing strategies, market conditions and competitive landscape. The Company limits the amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not contingent on future performance or future deliverables. The Company periodically reviews its BESP. Changes in assumptions or judgments or changes to the elements in the arrangement could cause a material increase or decrease in the amount of revenue that the Company reports in a particular period.

The Company recognizes revenue for media placements and ad services as they are delivered assuming all other revenue recognition criteria are met. Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition.

Cost of revenue

Cost of revenue consists of amounts incurred with digital media property owners that are directly related to a revenue-generating event, direct labor costs, amortization of revenue-producing acquired technologies, Internet access costs and depreciation expense. The Company incurs costs with digital media property owners in the period the advertising impressions are delivered or in limited circumstances, based on minimum guaranteed number of impressions. Such amounts incurred are classified as cost of revenue in the corresponding period in which the revenue is recognized in the consolidated statements of operations.

Advertising expense

The Company’s advertising costs are expensed as incurred. The Company incurred approximately $0.5 million, $0.6 million and $1.7 million in advertising expenses for the years ended December 31, 2016, 2015 and 2014, respectively.

Stock-based Compensation

The Company measures compensation expense for all stock-based payment awards, including stock options granted to employees, directors and non-employees based on the estimated fair values on the date of the grant. The fair value of each stock option granted is estimated using the Black-Scholes option valuation model. Stock-based compensation expense related to restricted stock units (“RSUs”) is based on the grant date fair value of the RSUs. Stock-based compensation is recognized on a straight-line basis over the requisite service period.

Stock-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of income and as such is recorded for only those share-based awards that we expect to vest. The Company estimates the forfeiture rate based on historical forfeitures of equity awards and adjusts the rate to reflect changes in facts and circumstances, if any. The Company will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and changes in accumulated other comprehensive income (loss), which are primarily the result of foreign currency translation adjustments and unrealized gains or losses on marketable securities, net of tax.

Goodwill

Goodwill is not amortized, but is tested for impairment at least annually or as circumstances indicate the value may no longer be recoverable. The Company evaluates goodwill for impairment annually in the fourth quarter of its fiscal year as of December 31, or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a decrease in market capitalization, increasing cost structure, a significant adverse change in customer demand or business climate that could affect the value of goodwill, a significant decrease in expected cash flows, restructuring activities undertaken to reduce increasing future operating expenses, the loss of key personnel, whether voluntarily or involuntarily, and/or a decline revenue forecasts. If management determines any of these qualitative triggering events exist, or that in aggregate they might indicate a goodwill impairment exists, management would then proceed to performing the two-step goodwill impairment test as needed to determine if an impairment exists. As of December 31, 2016, management performed the first step of the goodwill impairment test and determined that the fair value of its goodwill is greater than its carrying value and no impairment of goodwill exists.

Intangible Assets

Acquired intangible assets consist of acquired customer relationships and developed technology. Acquired intangible assets are recorded at fair value, net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset over its fair value.

Restructuring

On November 8, 2016, the Company’s board of directors approved a restructuring plan designed to reduce its operating expenses, realign its cost structure with revenue, better manage its costs and more efficiently manage the business. The restructuring plan was implemented in the fourth quarter of 2016 and completed in the first quarter of 2017. Restructuring expenses totaled $1.6 million and were recorded as restructuring expenses on our consolidated statements of operations in the fourth quarter of 2016. Elements of the restructuring plan included a workforce reduction of approximately 7%, which included employee severance pay and related expenses, acceleration of the Company’s former chief executive officer’s stock-based compensation expense as a result of his termination without cause and facility exit expenses. The Company does not expect to incur any additional expenses under the restructuring plan. The Company accounts for its employee termination and facility consolidation restructuring activities under ASC 420, Exit or Disposal Cost Obligations, which addresses when to recognize a liability for involuntary employee termination benefits pursuant to a one-time benefit arrangement and costs to consolidate facilities. See Note 11 Restructuring for additional information regarding the Company’s restructuring activities.

Income Taxes

The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or income tax returns. In estimating future tax consequences, expected future events other than enactments or changes in the tax law or rates are considered. Deferred tax valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

The following table sets forth our deferred tax valuation allowance for the years ended December 31, 2016, 2015 and 2014.

	Balance at Beginning of Year		Charged to Other Accounts		Balance End of Year
	(in thousands)
2014	$	7,524	$	1,633	$	9,157
2015	$	9,157	$	2,605	$	11,762
2016	$	11,762	$	3,212	$	14,974

The Company operates in various tax jurisdictions and is subject to audit by various tax authorities. The Company provides for tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, relative tax law, and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

The Company records uncertain tax positions in accordance with accounting standards on the basis of a two-step process whereby (1) a determination is made as to whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority.

Recently Issued and Adopted Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including identifying performance obligations. The new standard, as amended, is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company does not plan to early adopt, and thus the new standard will become effective for the Company on January 1, 2018. As part of this plan, the Company is currently assessing the impact of the new guidance on its results of operations. However, further analysis is required and the Company will continue to evaluate this assessment in 2017. The Company currently expects to apply the modified retrospective method of adoption; however, it has not yet finalized its transition method, but expects to do so in 2017 upon completion of further analysis.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU 2014-15 becomes effective for annual periods ending after December 15, 2016 and for interim reporting periods thereafter. The Company adopted this standard for its fiscal year ended December 31, 2016.

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies when fees paid in a cloud computing arrangement pertain to the acquisition of a software license, services, or both. ASU 2015-05 provides criteria for customers in a cloud computing arrangement to use to determine whether the arrangement includes a license of software. The criteria are based on existing guidance for cloud service providers. However, the ASU does not change the accounting for cloud service providers. ASU 2015-05 is effective for annual and interim periods in fiscal years beginning after December 15, 2015. The Company adopted this standard prospectively as of January 1, 2016 and the impact to its consolidated financial statements was not material.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). This ASU requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). This ASU was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This standard covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows and will be effective as of January 1, 2017, with early adoption permitted. The Company adopted the standard January 1, 2017 and is currently evaluating the impact of adopting this standard.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU is an update to the standard on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Upon adoption, entities will be required to apply the update prospectively. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial statements.

3.	Cash, Cash Equivalents, Marketable Securities and Derivative Instruments

The Company’s cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase. Short- and long-term marketable securities are comprised of highly liquid available-for-sale financial instruments (primarily corporate bonds, commercial paper and certificates of deposit) with final maturities of at least three months but no more than 24 months from the date of purchase. None of the Company’s marketable securities were in a continuous loss position for over twelve months as of December 31, 2016.

Beginning in the second quarter of 2015, the Company entered into non-designated derivative instruments, specifically foreign currency forward contracts, to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies. The Company’s foreign currency forward contracts have terms of no more than 12 months, are classified as Level 2 and are valued using alternative pricing sources, such as spot currency rates, that are observable for the entire term of the asset or liability. These derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in other income (expense), net in the consolidated statement of operations.

The cost, gross unrealized gains and losses and fair value of the Company’s marketable securities and foreign currency forward contracts consisted of the following as of December 31, 2016 and 2015 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016:
Cash	$	22,750	$	—	$	—		$	22,750
Cash equivalents:
Money market funds		10,653		—		—			10,653
Commercial paper		1,297		—		—			1,297
Total cash and cash equivalents		34,700		—		—			34,700
Marketable securities:
Corporate bonds		16,780		—		(17	)		16,763
Government and agency bonds		9,050		1		(8	)		9,043
Commercial paper		5,186		—		—			5,186
Total marketable securities		31,016		1		(25	)		30,992
Total cash, cash equivalents and marketable securities	$	65,716	$	1	$	(25	)	$	65,692

Foreign currency forward contracts, net (1)	$	—	$	11	$	(16	)	$	(5	)

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2015:
Cash	$	7,638	$	—	$	—		$	7,638
Cash equivalents:
Money market funds		10,221		—		—			10,221
Total cash and cash equivalents		17,859		—		—			17,859
Marketable securities:
Corporate bonds		31,372		—		(78	)		31,294
Government and agency bonds		6,544		—		(8	)		6,536
Commercial paper		4,494		—		—			4,494
Total marketable securities		42,410		—		(86	)		42,324
Total cash, cash equivalents and marketable securities	$	60,269	$	—	$	(86	)	$	60,183

Foreign currency forward contracts, net (1)	$	—	$	19	$	(29	)	$	(10	)

(1)

Included in “Accrued liabilities” in the accompanying consolidated balance sheet as of December 31.

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

4.	Fair Value of Financial Instruments

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

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

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

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

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

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

The following tables present information about the Company’s money market funds, marketable securities and foreign currency forward contracts measured at fair value on a recurring basis as of December 31, 2016 and 2015 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

	Fair Value Measurements at December 31, 2016
	Level 1		Level 2			Level 3		Total
Cash equivalents:
Money market funds	$	10,653	$	—		$	—	$	10,653
Commercial paper		—		1,297			—		1,297
Total cash equivalents	$	10,653	$	1,297		$	—	$	11,950

Marketable securities:
Corporate bonds	$	—	$	16,763		$	—	$	16,763
Government and agency bonds		—		9,043			—		9,043
Commercial paper		—		5,186			—		5,186
Total marketable securities	$	—	$	30,992		$	—	$	30,992

Foreign currency forward contracts, net	$	—	$	(5	)	$	—	$	(5	)

	Fair Value Measurements at December 31, 2015
	Level 1		Level 2			Level 3		Total
Money market funds	$	10,221	$	—		$	—	$	10,221
Marketable securities:
Corporate bonds	$	—	$	31,294		$	—	$	31,294
Government and agency bonds		—		6,536			—		6,536
Commercial paper		—		4,494			—		4,494
Total marketable securities	$	—	$	42,324		$	—	$	42,324

Foreign currency forward contracts, net	$	—	$	(10	)	$	—	$	(10	)

5.	Property, Equipment and Software

Property, equipment and software consisted of the following (in thousands):

	December 31,
	2016			2015
Office furniture and fixtures	$	750		$	793
Equipment and computers		14,042			12,597
Leasehold improvements		2,074			1,965
Software		2,167			2,011
Internally developed software costs (1)		15,937			12,110
Total property, equipment and software		34,970			29,476
Less: accumulated depreciation and amortization		(23,244	)		(17,366	)
Property, equipment and software, net	$	11,726		$	12,110

(1)

Internally developed software costs exclude $0.9 million of asset impairment charges as of December 31, 2016 related to the impairment of YFP 5.0, the Company’s supply-side platform for publishers.

Depreciation and amortization expense, including amortization of internal use software costs, was approximately $6.9 million, $6.0 million and $4.6 million, for the years ended December 31, 2016, 2015 and 2014, respectively.

Assets recorded under capital leases consist primarily of data center equipment and were as follows (in thousands):

	December 31,
	2016			2015
Gross assets under capital leases	$	657		$	633
Less: accumulated depreciation		(636	)		(633	)
Net assets under capital leases	$	21		$	—

6.	Goodwill and Intangible Assets

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

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted-Average Remaining Life (years)
December 31, 2016:
Developed technology	$	2,950	$	(2,950	)	$	—		—
Customer relationships		104		(104	)		—		—
	$	3,054	$	(3,054	)	$	—

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted-Average Remaining Life (years)
December 31, 2015:
Developed technology	$	2,950	$	(2,300	)	$	650		1.0
Customer relationships		104		(95	)		9		0.4
	$	3,054	$	(2,395	)	$	659

Amortization expense for each of the years ended December 31, 2016, 2015 and 2014 was $0.7 million. Amortization expense related to developed technology is included as a component of “Cost of revenue” in the consolidated statements of operations.

7.	Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	December 31,
	2016		2015
Accrued compensation	$	4,871	$	5,210
Accrued vacation and other employee benefits		1,392		3,849
Accrued customer incentives		3,425		4,945
Accrued taxes		—		458
Other accrued expenses		2,504		2,305
Total accrued liabilities	$	12,192	$	16,767

8.	Borrowings

In November 2014, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) to borrow up to a maximum of $25.0 million collateralized by the Company’s cash deposits, accounts receivable and equipment, as well as certain other assets. The Loan and Security Agreement requires the Company to comply with certain financial and reporting covenants, including maintaining an adjusted quick ratio of at least 1.6 to 1.0. Annual fees under the agreement total one quarter of 1.0% of the average unused balance of the credit line per annum. The Company’s Loan and Security Agreement with SVB expired in early November 2016. The Company has decided not to renew this Loan and Security Agreement. The Company never borrowed under the credit line and maintained compliance with all financial and reporting covenants.

9.	Commitments and Contingencies

Leases

The Company leases office facilities under various non-cancellable operating leases that expire through September 2027. Rent expense under operating leases totaled $3.5 million, $3.0 million and $2.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Company also has capital lease obligations that mature in July 2019.

Purchase Commitments

During the normal course of business, to secure adequate ad inventory and impressions for its sales arrangements, the Company enters into agreements with digital media property owners that require purchase of a minimum number of impressions on a monthly or quarterly basis. Purchase commitments as of December 31, 2016 expire on various dates through December 2017.

Future Payments

Future minimum payments under these arrangements as of December 31, 2016 are as follows (in thousands):

	Payments Due by Period
	Total		Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years
Operating lease obligations	$	17,282	$	3,327	$	6,864	$	3,230	$	3,861
Capital lease obligations		21		8		13		—		—
Traffic acquisition costs and other purchase commitments		509		509		—		—		—
Total minimum payments	$	17,812	$	3,844	$	6,877	$	3,230	$	3,861

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that the Company can cancel without a significant penalty are not included in the table above. The Company has determined its uncertain tax positions as of December 31, 2016 will not result in any additional taxes payable by the Company. As a result, no amounts are shown in the table above relating to the Company’s uncertain tax positions.

Legal Proceedings

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

Indemnification Agreements

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

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

10.

Stockholders’ Equity

Preferred Stock

In association with the IPO, the board of directors authorized the Company to issue up to 20,000,000 shares of preferred stock, par value $0.001 per share. As of December 31, 2016 and 2015, no shares of preferred stock were outstanding.

Common Stock

At December 31, 2016 and 2015 there were 33,946,820 and 34,455,220 shares of common stock issued and outstanding, respectively. The following table summarizes common stock activity during the year ended December 31, 2016:

	Number of Shares
Outstanding at December 31, 2015		34,455,220
Option exercises		12,434
RSUs released, net of shares withheld for taxes		985,573
Common stock issued in connection with employee stock purchase plan		446,502
Repurchases of common stock		(1,952,909	)
Outstanding at December 31, 2016		33,946,820

Stock Repurchase Program

On February 18, 2016, the Company announced its board of directors authorized a $10 million share repurchase program. The repurchase program has no set expiration date and all purchases are subject to applicable rules and regulations, market conditions and other factors. Purchases under this repurchase program are made in the open market and complied with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The cost of the repurchased shares is funded from available working capital. For accounting purposes, common stock repurchased under the Company’s stock repurchase program is recorded based upon the repurchase date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method.

Stock repurchase activity under the Company’s stock repurchase program during 2016 is summarized as follows (in thousands, except share and per share amounts):

	Total Number of Shares Repurchased		Average Price Paid per Share (1)		Amount of Repurchase
Cumulative balance at December 31, 2015		—	$	—	$	—
Repurchases of common stock (2)		1,952,909	$	3.64		7,105
Cumulative balance at December 31, 2016		1,952,909	$	3.64	$	7,105

(1)

Average price paid per share includes commission.

(2)

Includes 27,202 treasury shares purchased in late December 2016 for $98,000 that had not yet settled as of December 31, 2016.

Treasury Stock

In addition to the 1,952,909 shares repurchased in 2016, the Company has 66,666 shares of treasury stock related to the acquisition of Crowd Science, for a total of 2,019,575 shares of treasury stock. Treasury stock is carried at cost and could be re-issued if the Company determined to do so.

Equity Incentive Plans

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

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

The following table summarizes option activity:

	Number of Shares (in thousands)			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (1) (in thousands)
Balance at December 31, 2015		4,360		$	5.04		6.30	$	1,480
Granted (2)		305		$	3.61
Exercised		(12	)	$	1.66
Canceled and forfeited (3)		(899	)	$	4.47
Balance at December 31, 2016		3,754		$	5.08		4.96	$	1,671
Vested as of December 31, 2016 and expected to vest thereafter (4)		3,720		$	5.07		4.94	$	1,669
Vested and exercisable as of December 31, 2016		3,339		$	4.90		4.69	$	1,654

(1)

The aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock and the exercise price of outstanding in-the-money options as of those dates.

(2)

Options granted include 0.7 million re-issued options in connection with a modification. See “Modification of Employee Stock Options” below for more information.

(3)

Options cancelled and forfeited include 0.7 million options that were cancelled in connection with a modification. See “Modification of Employee Stock Options” below for more information.

(4)

Options expected to vest reflect an estimated forfeiture rate.

The weighted average grant date fair value of options granted was $1.93, $2.78 and $3.76 in 2016, 2015 and 2014, respectively. The total intrinsic value of options exercised was not material for 2016 was approximately $0.5 million and $2.0 million for 2015 and 2014, respectively.

The following table summarizes restricted stock unit activity:

	Number of Shares (in thousands)			Weighted Average Fair Value at Grant		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (1) (in thousands)
Balance at December 31, 2015		1,619		$	5.39		0.99	$	5,681
Granted		1,914		$	3.84
Released		(1,218	)	$	5.19
Canceled and forfeited		(636	)	$	4.26
Balance at December 31, 2016		1,678		$	4.19		1.05	$	6,663

(1)

The intrinsic value of RSUs is based on the Company’s closing stock price as reported by the New York Stock Exchange on that date.

The total grant date fair value of restricted stock units vested during the years ended December 31, 2016, 2015 and 2014 was $6.3 million, $4.3 million and $0.1 million, respectively. All of our RSUs that were released during the years ended December 31, 2016, 2015 and 2014 were net share settled. As such, upon each release date, RSUs were withheld to cover the required withholding tax, which is based on the value of the RSU on the release date as determined by the closing price of our common stock on the trading day of the settlement date. The remaining amounts are delivered to the recipient as shares of our common stock.

Modification of Employee Stock Options

On January 2, 2015, the Company modified options to purchase 0.7 million shares of common stock previously granted to non-executive employees with exercise prices over $7.00 per share. The exercise price of the modified options was reduced to $5.14 per share, the closing price of the Company’s common stock on the New York Stock Exchange on January 2, 2015. No other terms of these options were modified. The Company expects to recognize an additional $0.4 million of stock-based compensation expense over the remaining vesting terms of the options as a result of the modification. As of December 31, 2016, an immaterial amount of additional stock-based compensation expense related to the modification remains to be expensed.

Employee Stock Purchase Plan

In July 2013, the Company adopted a 2013 Employee Stock Purchase Plan (the “2013 Purchase Plan”) that became effective on August 6, 2013. The 2013 Purchase Plan is designed to enable eligible employees to periodically purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period. Purchases are accomplished through participation in discrete offering periods. The 2013 Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. The Company initially reserved 500,000 shares of its common stock for issuance under the 2013 Purchase Plan and shares reserved for issuance increase January 1 of each year by the lesser of (i) a number of shares equal to 1% of the total number of outstanding shares of common stock on December 31 immediately prior to the date of increase or (ii) such number of shares as may be determined by the board of directors.

The fair value of stock purchased through the 2013 Purchase Plan is estimated on the first trading day of the offering period using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the volatility of the Company’s common stock, a risk-free interest rate, expected dividends, and estimated forfeitures. To the extent actual results differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. Volatility is based on an average of the historical volatilities of the common stock of a group of entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for six-month treasury notes corresponding with the length of the offering period. Expected forfeitures are based on the Company’s historical experience. The Company currently has no history or expectation of paying cash dividends on common stock.

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

	Year Ended December 31, 2016			Year Ended December 31, 2015			Year Ended December 31, 2014
Expected term (years)		0.50			0.50			0.50
Volatility		56%			56%			80%
Risk-free interest rate	0.21%	-	0.45%	0.07%	-	0.36%	0.05%	-	0.08%
Dividend yield		—			—			—

Shares Reserved for Future Issuance

At December 31, 2016 and 2015, the Company has reserved the following shares of common stock for future issuance:

	December 31,
	2016		2015
Common stock reserved:
Common stock options		3,754,122		4,360,015
Restricted stock units		1,678,448		1,618,543
Shares available for future issuance under the 2013 Plan		4,952,254		3,680,862
Employee stock purchase plan		335,984		437,934
		10,720,808		10,097,354

Stock-Based Compensation

The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), volatility of the Company’s common stock, a risk-free interest rate, expected dividends, and the estimated forfeitures of unvested stock options. To the extent actual results differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. The Company uses the simplified calculation of expected life, and volatility is based on an average of the historical volatilities of the common stock of a group of entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Expected forfeitures are based on the Company’s historical experience. The Company currently has no history or expectation of paying cash dividends on common stock.

The fair value of options granted to employees is determined using the Black-Scholes option valuation model with the following assumptions:

	Years Ended December 31,
	2016		2015			2014
Expected term (years)		6.00		6.00			6.00
Volatility		56%	56%	-	80%		80%
Risk-free interest rate		1.90%	1.54%	-	1.79%	1.74%	-	2.02%
Dividend yield		—		—			—
Weighted-average fair value		$1.93		$2.78			$3.76

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

	Years Ended December 31,
	2016		2015		2014
Cost of revenue	$	178	$	312	$	342
Sales and marketing		2,612		3,403		2,776
Research and development (1)		1,200		1,111		482
General and administrative (2)		4,434		4,053		2,174
Total stock-based compensation (2)	$	8,424	$	8,879	$	5,774

(1)

(2)

Excludes $288,000 of stock-based compensation expense for the year ended December 31, 2016 related to the partial acceleration of the Company’s former chief executive officer’s unvested equity awards in association with his severance agreement. The $288,000 is included in restructuring on the Company’s consolidated statements of operations. See Note 11 below.

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options during the years ended December 31, 2016, 2015 and 2014. As of December 31, 2016, there was $6.8 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 1.72 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

11.

Restructuring

On November 8, 2016, the Company’s board of directors approved a restructuring plan designed to reduce its operating expenses, realign its cost structure with revenue, better manage its costs and more efficiently manage the business. The restructuring plan was implemented in the fourth quarter of 2016 and completed in the first quarter of 2017. Restructuring expenses totaled $1.6 million and were recorded as restructuring expenses on our consolidated statements of operations in the fourth quarter of 2016. Elements of the restructuring plan included a workforce reduction of approximately 7%, which included employee severance pay and related expenses, acceleration of the Company’s former chief executive officer’s stock-based compensation expense as a result of his termination without cause and facility exit expenses. The Company does not expect to incur any additional expenses under the restructuring plan. As of December 31, 2016, the Company had $0.8 million of restructuring liabilities included in accrued liabilities on its consolidated balance sheet, which consisted primarily of employee severance pay and related expenses. The Company expects its restructuring liability to be fully paid in the first quarter of 2017.

Restructuring expenses incurred in 2016 were as follows:

		Workforce Reduction Expenses (1)				Stock-Based Compensation Expense Acceleration (2)				Facility Exit Expenses (3)				Total
Restructuring		$	1,172			$	288			$	117			$	1,577

(1)

Workforce reduction expenses include employee severance and temporary health insurance costs under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”).

(2)

(3)

The Company exited a facility located in Redwood City, California on November 11, 2016. Facility exit expenses include rental payments the Company is required to make on the vacant office space and broker fees the Company will pay to find a new tenant to sublease the vacated office space.

12.

Net Loss per Share

Basic and diluted net loss per common share is presented in conformity with the treasury stock method. Basic net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding, including potential dilutive common shares assuming the dilutive effect of outstanding stock options.

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

	Years Ended December 31,
	2016			2015			2014
Numerator:
Net loss	$	(7,721	)	$	(16,745	)	$	(8,745	)

Denominator:
Weighted-average shares used in computing net loss per share:
Basic		34,441			33,829			32,591
Weighted-average effect of potentially dilutive shares:
Employee stock options and restricted stock units		—			—			—
Common stock warrants and employee stock purchase plan		—			—			—
Diluted		34,441			33,829			32,591
Net loss per share:
Basic	$	(0.22	)	$	(0.49	)	$	(0.27	)
Diluted	$	(0.22	)	$	(0.49	)	$	(0.27	)

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

	As of December 31,
	2016		2015		2014
Stock options		4,133		4,723		5,263
Restricted stock units		552		499		657
Common stock warrants		—		6		25
Employee stock purchase plan		48		110		24

13.

Income Taxes

The Company accounts for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

The following table presents domestic and foreign components of loss before income taxes for the periods presented (in thousands):

	Years Ended December 31,
	2016			2015			2014
Domestic	$	(8,507	)	$	(17,604	)	$	(9,899	)
Foreign		766			1,159			930
Total	$	(7,741	)	$	(16,445	)	$	(8,969	)

The components of income tax (expense) benefit are as follows (in thousands):

	Years Ended December 31,
	2016			2015			2014
Current:
Federal	$	—		$	—		$	21
State		42			(29	)		270
Foreign		(253	)		(524	)		(403	)
Total		(211	)		(553	)		(112	)
Deferred:
Federal		221			221			221
State		11			12			105
Foreign		(1	)		20			10
Total		231			253			336
Total income tax (expense) benefit	$	20		$	(300	)	$	224

The primary differences between the effective tax rates and the federal statutory tax rate relates to the valuation allowances on the Company’s net operating losses, state income taxes, foreign tax rate differences and non-deductible stock-based compensation expense. The following table presents a reconciliation of the statutory federal rate and the Company’s effective tax rate for the periods presented:

	Years Ended December 31,
	2016			2015			2014
Tax at federal statutory rate		34.0	%		34.0	%		34.0	%
State, net of federal effect		0.5			(0.1	)		4.2
Foreign taxes		(4.2	)		(2.8	)		(4.4	)
Foreign rate differential		3.4			2.4			3.5
Stock-based compensation		(3.8	)		(4.6	)		(9.7	)
Change in valuation allowance		(31.9	)		(31.7	)		(28.8	)
Other non-deductible expenses		(0.3	)		(0.2	)		(0.6	)
Other		2.6			1.2			4.3
Effective tax rate		0.3	%		(1.8	)%		2.5	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented (in thousands):

	December 31,
	2016			2015
Deferred tax assets:
Accruals and reserves	$	1,714		$	1,955
Net operating loss carryforwards		10,396			8,547
Tax credit carryforwards		1,521			1,697
Stock-based compensation		3,324			1,969
Foreign taxes		53			54
Total deferred tax assets		17,008			14,222

Fixed assets		(1,988	)		(1,799	)
State taxes		7			(607	)
Purchased intangible assets		—			(232	)
Total deferred tax liabilities		(1,981	)		(2,638	)

Valuation allowance		(14,974	)		(11,762	)
Total net deferred tax liabilities	$	53		$	(178	)

A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. As of December 31, 2016 and 2015, a full valuation allowance on domestic deferred tax assets was placed due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. The Company’s valuation allowance as of December 31, 2016 and 2015 was attributable to the uncertainty of realizing future tax benefits from U.S. net operating losses, foreign timing differences and other deferred tax assets. The Company’s valuation allowance increased $3.2 million, $2.6 million and $1.6 million in the years ended December 31, 2016, 2015 and 2014, respectively.

As of December 31, 2016, the Company has U.S. federal net operating loss carryforwards of approximately $27.2 million, expiring beginning in 2025. As of December 31, 2016, the Company has U.S. state and local net operating loss carryforwards of approximately $20.7 million, expiring beginning in 2017.

As of December 31, 2016, the Company has federal research and development tax credits of approximately $1.0 million, which expire beginning in 2025. As of December 31, 2016, the Company has state research and development tax credits of approximately $1.1 million, and other tax credits of approximately $0.3 million, both of which carry forward indefinitely.

Internal Revenue Code section 382 places a limitation (the “Section 382 Limitation”) on the amount of taxable income that can be offset by net operating carryforwards after a change in control of a loss corporation. Generally, after a change in control, a loss corporation cannot deduct operating loss carryovers in excess of the Section 382 Limitation. Management has determined that any limitation imposed by Section 382 will not have significant impact on the utilization of its net operating loss and credit carryforwards against taxable income in future periods.

U.S. income and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on undistributed earnings of foreign subsidiaries. The Company intends to reinvest theses earnings indefinitely outside the United States. If these earnings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant subsidiaries were sold or otherwise transferred, the Company may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes; however, the determination of such amount is not practicable. As of December 31, 2016, the cumulative amount of earnings upon which U.S. income taxes have not been provided for is approximately $2.3 million.

Uncertain Tax Positions

A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended December 31, 2016, 2015 and 2014 consist of the following (in thousands):

	Years Ended December 31,
	2016			2015		2014
Unrecognized benefit – beginning of period	$	580		$	459	$	358
Gross increases – current year tax positions		130			121		101
Gross decreases – prior year tax positions		(76	)		—		—
Unrecognized benefit – end of period	$	634		$	580	$	459

The entire amount of any unrecognized tax benefits would impact the Company’s effective tax rate if recognized.

Accrued interest and penalties related to unrecognized tax benefits are classified as income tax expense and were immaterial. The Company files income tax returns in the United States, various states and certain foreign jurisdictions. The tax periods 2012 through 2015 remain open in most jurisdictions. In addition, any tax losses and research and development credit carryforwards that were generated in prior years and carried forward may also be subject to examination by respective taxing authorities. The Company is not currently under examination by income tax authorities in federal, state or other foreign jurisdictions.

14.

Segments and Geographical Information

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

	Years Ended December 31,
	2016		2015		2014
Domestic	$	147,907	$	147,601	$	149,617
International		12,504		25,653		28,162
Total revenue	$	160,411	$	173,254	$	177,779

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


ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.


ITEM 9A.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016 at the reasonable assurance level.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on the assessment, management has concluded that its internal control over financial reporting was effective as of December 31, 2016 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the most recent fiscal quarter ended December 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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


ITEM 9B.	OTHER INFORMATION

None.

PART III


ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information concerning our directors, executive officers, compliance with Section 16(a) of the Exchange Act, as amended, and corporate governance required by this Item 10 of Form 10-K is incorporated by reference from the information contained in the Definitive Proxy Statement for the Annual Meeting of Stockholders, which is expected to be filed within 120 days after the Company’s fiscal year ended December 31, 2016.

We have adopted a Code of Conduct for Directors that applies to all directors and a Code of Conduct for Employees that applies to all employees, including our principal executive officer, Paul Porrini, principal financial officer, Tony Carvalho, and all other executive officers. These Codes of Conduct are available on the ABOUT US/Investor Relations/Corporate Governance page of our website at www.yume.com. A copy may also be obtained without charge by contacting investor relations, attention Director of Investor Relations, 1204 Middlefield Road, Redwood City, CA 94063 or by calling (650) 503-7875.

We plan to post on our website at the address described above any future amendments or waivers of our Codes of Conduct.


ITEM 11.	EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated herein by reference from the information contained in the Definitive Proxy Statement for the Annual Meeting of Stockholders, which is expected to be filed within 120 days after the Company’s fiscal year ended December 31, 2016.


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 of Form 10-K is incorporated herein by reference from the information contained in the Definitive Proxy Statement for the Annual Meeting of Stockholders, which is expected to be filed within 120 days after the Company’s fiscal year ended December 31, 2016.


ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 of Form 10-K is incorporated herein by reference from the information contained in the Definitive Proxy Statement for the Annual Meeting of Stockholders, which is expected to be filed within 120 days after the Company’s fiscal year ended December 31, 2016.


ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated herein by reference from the information contained in the Definitive Proxy Statement for the Annual Meeting of Stockholders, which is expected to be filed within 120 days after the Company’s fiscal year ended December 31, 2016.

PART IV


ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) We have filed the following documents as part of this Annual Report on Form 10-K:

1. Consolidated Financial Statements

Information in response to this Item is included in Part II, Item 8 of this Annual Report on Form 10-K.

2. Financial Statement Schedules

None.

3. Exhibits

See Item 15(b) below.

(b) Exhibits—We have filed, or incorporated into this Annual Report on Form 10-K by reference, the exhibits listed on the accompanying Index to Exhibits of this Annual Report on Form 10-K.

(c) Financial Statement Schedules—See Item 15(a) above.


ITEM 16.	FORM 10-K SUMMARY

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

March 10, 2017

YuMe, Inc.

/ s / PAUL PORRINI		/ s / TONY CARVALHO
Paul Porrini		Tony Carvalho
Chief Executive Officer		Chief Financial Officer
(Principal Executive Officer)		(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 10th day of March, 2017.

Signature		Title

/ s / PAUL PORRINI		Chief Executive Officer
Paul Porrini

/ s / AYYAPPAN SANKARAN		Director
Ayyappan Sankaran

/ s / MITCHELL HABIB		Director
Mitchell Habib

/ s / JAYANT KADAMBI		Director
Jayant Kadambi

/ s / ADRIEL LARES		Director
Adriel Lares

/ s / ELIAS NADER		Director
Elias Nader

/ s / CHRISTOPHER PAISLEY		Director
Christopher Paisley

/ s / ERIC SINGER		Director
Eric Singer

/ s / DANIEL SPRINGER		Director
Daniel Springer

EXHIBIT INDEX

Exhibit

Incorporated by Reference

Filed

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

3.1

Restated Certificate of Incorporation of the Registrant

10-Q

001-36039

3.1

August 30, 2013

3.2

Amended and Restated Bylaws of the Registrant

10-Q

001-36039

3.2

August 30, 2013

4.1

Form of Registrant’s common stock certificate

S-1

333-189772

4.1

July 25, 2013

4.2

Amended and Restated Investors’ Rights Agreement, dated October 28, 2011, by and among Registrant and certain stockholders of Registrant, as amended

S-1

333-189772

4.2

July 25, 2013

10.1

Form of Indemnity Agreement.

S-1

333-189772

10.1

July 2, 2013

10.2*

2004 Stock Plan, as amended, and forms of stock option, stock option exercise agreement and restricted stock purchase agreement.

S-1

333-189772

10.2

July 2, 2013

10.3*

2013 Equity Incentive Plan and forms of stock option award agreement, stock option exercise agreement and restricted stock unit award agreement.

S-1

333-189772

10.3

July 25, 2013

10.4*

2013 Employee Stock Purchase Plan and form of subscription agreement.

S-1

333-189772

10.4

July 25, 2013

10.5*

Offer letter between Jayant Kadambi and Registrant, dated December 17, 2004.

S-1

333-189772

10.5

July 2, 2013

10.6*

Offer letter between Scot McLernon and Registrant, dated December 30, 2009.

S-1

333-189772

10.6

July 2, 2013

10.7*

Offer letter between Hardeep Bindra and Registrant, dated November 3, 2014.

8-K

001-36039

10.1

November 6, 2014

10.8*

2016 Cash Incentive Plan.

8-K

001-36039

99.2

February 18, 2016

10.9*

Description of Director Compensation.

S-1

333-189772

10.10

July 25, 2013

10.10*

Executive Severance Plan.

8-K

001-36039

99.2

February 17, 2015

10.11*

Offer letter between James Soss and Registrant, dated March 16, 2016.

8-K

001-36039

99.1

March 17, 2016

10.12*

Promotion memorandum between Michael Hudes and Registrant, dated November 9, 2016.

8-K

001-36039

99.4

November 9, 2016

10.13*

Promotion memorandum between Paul Porrini and Registrant, dated November 18, 2016.

8-K

001-36039

99.1

November 18, 2016

10.14*

Separtaion Agreement between Jayant Kadambi and Registrant, dated November 9, 2016.

8-K

001-36039

99.1

November 9, 2016

10.15*

Separation Agreement between James Soss and Registrant, dated November 9, 2016.

8-K

001-36039

99.2

November 9, 2016

10.16*

Separation Agreement between Hardeep Bindra and Registrant, dated November 9, 2016.

8-K

001-36039

99.3

November 9, 2016

10.17*

Compensation memorandum between Scot McLernon and Registrant, dated July 1, 2016.

23.1

Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 INS**

XBRL Instance Document.

101 SCH**

XBRL Taxonomy Extension Schema Document.

101 CAL**

XBRL Taxonomy Extension Calculation Linkbase Document.

101 DEF**

XBRL Taxonomy Extension Definition Linkbase Document.

101 LAB**

XBRL Taxonomy Extension Labels Linkbase Document.

101 PRE**

XBRL Taxonomy Extension Presentation Linkbase Document.

Compensatory plan or arrangement.

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

YuMe Inc - FORM 10-K - March 10, 2017

Attached files

YuMe Inc Reports