Rocket Fuel Inc.
Rocket Fuel Inc. (Form: 10-Q, Received: 05/15/2014 06:05:07)





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________

FORM 10-Q
__________________________

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission File Number: 001-36071
__________________________

ROCKET FUEL INC.
(Exact name of registrant as specified in its charter)

Delaware  
(State or other jurisdiction of incorporation or organization)
30-0472319  
(I.R.S. Employer Identification Number)

1900 Seaport Boulevard, Pacific Shores Center, Redwood City, CA 94063
(Address of principal executive offices and Zip Code)
(650) 595-1300
(Registrant's telephone number, including area code)
__________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
  x  (Do not check if a smaller reporting company)
Smaller reporting company
¨

1




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

Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date. On April 30, 2014, 35,142,204 shares of the registrant's common stock, par value $0.001 , were outstanding.

EMERGING GROWTH COMPANY
We are an ‘‘emerging growth company’’ as that term is defined in the Jumpstart Our Business Startups Act of 2012 and, as such, we have elected to comply with certain reduced public company reporting requirements.


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ROCKET FUEL INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TRADEMARKS
 
“Rocket Fuel,” the Rocket Fuel logo, “Advertising that Learns,” and other trademarks or service marks of Rocket Fuel appearing in this Quarterly Report on Form 10-Q are the property of Rocket Fuel Inc. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders and should be treated as such.





3




ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Rocket Fuel Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

 
March 31,
 
December 31,
 
2014
 
2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
218,174

 
$
113,873

Accounts receivable, net
83,293

 
90,502

Deferred tax assets
207

 
207

Prepaid expenses
2,688

 
2,164

Other current assets
6,868

 
3,962

Total current assets
311,230

 
210,708

Property, equipment and software, net
37,283

 
25,794

Restricted cash
2,294

 

Other assets
1,026

 
1,006

Total assets
$
351,833

 
$
237,508

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
34,305

 
$
39,910

Accrued and other current liabilities
24,940

 
21,584

Deferred revenue
878

 
918

    Current portion of capital leases
777

 
203

Current portion of debt
8,493

 
7,243

Total current liabilities
69,393

 
69,858

Long-term debt—Less current portion
18,368

 
19,568

Capital leases—Less current portion
1,568

 
412

Deferred rent—Less current portion
7,445

 
3,909

Deferred tax liabilities
207

 
207

Other liabilities
387

 
387

Total liabilities
97,368

 
94,341

Commitments and contingencies (Note 12)


 


Stockholders’ Equity
 
 
 
Common stock, $0.001 par value— 1,000,000,000 authorized as of March 31, 2014 and December 31, 2013, respectively; 35,108,736 and 32,825,992 issued and outstanding as of March 31, 2014 and December 31, 2013, respectively
35

 
33

Additional paid-in capital
310,113

 
187,624

Accumulated other comprehensive loss
17

 
(15
)
Accumulated deficit
(55,700
)
 
(44,475
)
Total stockholders’ equity
254,465

 
143,167

Total liabilities and stockholders’ equity
$
351,833

 
$
237,508


See Accompanying Notes to Condensed Consolidated Financial Statements.

4



Rocket Fuel Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except loss per share data)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
 
 
 
Revenue
$
74,397

 
$
38,212

Cost of revenue
37,535

 
20,671

Gross profit
36,862

 
17,541

Operating expenses:
 
 
 
Research and development
7,241

 
2,412

Sales and marketing
29,759

 
16,230

General and administrative
10,340

 
5,177

Total operating expenses
47,340

 
23,819

Loss from operations
(10,478
)
 
(6,278
)
Other expense, net:
 
 
 
Interest expense
(414
)
 
(124
)
Other income (expense)—net
(19
)
 
(519
)
Change in fair value of convertible preferred stock warrant liability

 
(1,097
)
Other expense, net
(433
)
 
(1,740
)
Loss before income taxes
(10,911
)
 
(8,018
)
Provision for income taxes
(314
)
 
(54
)
Net loss
$
(11,225
)
 
$
(8,072
)
Basic and diluted net loss per share attributable to common stockholders
$
(0.33
)
 
$
(0.97
)
Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders
34,033

 
8,298


See Accompanying Notes to Condensed Consolidated Financial Statements.


5



Rocket Fuel Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
 
 
 
Net loss
$
(11,225
)
 
$
(8,072
)
Other comprehensive income (loss): (1)
 
 
 
Foreign currency translation adjustments
32

 
(31
)
Comprehensive loss
$
(11,193
)
 
$
(8,103
)

(1) Reclassifications out of Other comprehensive income (loss) into Net loss were not significant.


See Accompanying Notes to Condensed Consolidated Financial Statements.


6



Rocket Fuel Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2014
(In thousands, except share data)
(Unaudited)

 
Common Stock
Additional
Paid-In
Accumulated
Other
Comprehensive
Accumulated
Total
Stockholders’
 
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balance—December 31, 2013    
32,825,992

$
33

$
187,624

$
(15
)
$
(44,475
)
$
143,167

Issuance of common stock upon exercises of employee stock options, net of repurchases
278,744


1,379



1,379

Issuance of common stock upon exercise vesting of restricted stock units
4,000






Issuance of common stock from follow-on offering, net of issuance costs
2,000,000

2

115,435



115,437

Stock-based compensation


5,528



5,528

Foreign currency translation adjustment



32


32

Tax benefit from stock-based award activity


147



147

Net loss




(11,225
)
(11,225
)
Balance—March 31, 2014
35,108,736

$
35

$
310,113

$
17

$
(55,700
)
$
254,465


S ee Accompanying Notes to Condensed Consolidated Financial Statements.


7



Rocket Fuel Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 31,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(11,225
)
 
$
(8,072
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,920

 
1,389

Provision for doubtful accounts
34

 

Stock-based compensation
5,125

 
1,565

Amortization of debt discount
50

 

Excess tax benefit from stock-based activity
(147
)
 

Change in fair value of preferred stock warrant liability

 
1,097

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
7,175

 
(548
)
Prepaid expenses
(523
)
 
(318
)
Other current assets
(2,908
)
 
86

Other assets
(128
)
 
(2
)
Accounts payable
(5,004
)
 
(1,806
)
Accrued and other liabilities
(100
)
 
924

Deferred rent
3,570

 
27

Deferred revenue
(40
)
 
38

Net cash used in operating activities
(1,201
)
 
(5,620
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property, equipment and software
(7,177
)
 
(1,756
)
Capitalized internal-use software development costs
(1,757
)
 
(1,708
)
Restricted cash
(2,281
)
 

Net cash used in investing activities
(11,215
)
 
(3,464
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from the issuance of common stock in follow-on public offering, net of underwriting discounts and commission
116,510

 

Issuance costs related to initial and follow-on public offering
(985
)
 
(170
)
Proceeds from exercise of vested common stock options
1,058

 
18

Proceeds from early exercise of unvested common stock options
2

 
227

Repurchases of common stock options early exercised
(1
)
 

Excess tax benefit from stock-based activity
147

 

Repayment of capital lease obligations
(38
)
 

Proceeds from issuance of long-term debt

 
10,000

Repayment of long-term debt

 
(113
)
Net cash provided by financing activities
116,693

 
9,962

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
24

 
(38
)
CHANGE IN CASH AND CASH EQUIVALENTS
104,301

 
840

CASH AND CASH EQUIVALENTS—Beginning of period
113,873

 
14,896

CASH AND CASH EQUIVALENTS—End of period
$
218,174

 
$
15,736


8



 
Three Months Ended
 
March 31,
 
2014
 
2013
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes
$
200

 
$
90

Cash paid for interest
347

 
80

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment recorded in accounts payable and accruals
$
5,585

 
$
230

Offering costs recorded in accrued liabilities
216

 
393

Property, plant and equipment acquired under capital lease obligations
1,769

 

Vesting of early exercised options
303

 
61

Stock-based compensation capitalized in internal-use software costs
403

 



See Accompanying Notes to Condensed Consolidated Financial Statements.


9



ROCKET FUEL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Rocket Fuel Inc. (the “Company”) was incorporated as a Delaware corporation on March 25, 2008. The Company is a provider of an artificial-intelligence digital advertising solution. The Company is headquartered in Redwood City, California, and has offices in various cities across the United States. The Company established a wholly-owned subsidiary in the United Kingdom in 2011 and in Canada in 2013. The United Kingdom subsidiary has offices throughout Europe and established a wholly-owned subsidiary in Germany in 2013.
In September 2013, the Company completed the initial public offering of its common stock (the “IPO”) whereby 4,000,000 shares of common stock were sold by the Company and 600,000 shares of common stock were sold by selling stockholders. The public offering price of the shares sold in the offering was $29.00 per share. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The total gross proceeds from the offering to the Company were $116.0 million . After deducting underwriters’ discounts and commissions and offering expenses, the aggregate net proceeds received by the Company totaled approximately $103.3 million .
In February 2014, the Company completed an underwritten follow-on public offering (the “Follow-on Offering”) of its common stock in which 2,000,000 shares of common stock were sold by the Company and 3,000,000 shares of common stock were sold by selling stockholders. The public offering price of the shares sold in the offering was $61.00 per share. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The total gross proceeds from the offering to the Company were $122.0 million . After deducting underwriters’ discounts and commissions and offering expenses, the aggregate net proceeds received by the Company totaled approximately $115.4 million .
Basis of Presentation —The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2013 , included in its Annual Report on Form 10-K.
The condensed consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date, but does not include all notes and other disclosures required by GAAP.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2014 or any future period.

Principles of Consolidation —The consolidated financial statements include the Company and its wholly-owned subsidiaries in the United Kingdom and Canada, which are currently engaged in marketing and selling advertising campaigns. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates —The preparation of unaudited condensed consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include, but are not limited to, provisions for doubtful accounts, the amount of software development costs which should be capitalized, future taxable income, the useful lives of long-lived assets and the assumptions used for purposes of determining stock-based compensation. Actual results could differ from those estimates.
Foreign Currency Translation —The Company’s foreign subsidiaries record their assets, liabilities and results of operations in their local currencies, which are their functional currencies. The Company translates its subsidiaries' consolidated financial statements into U.S. dollars each reporting period for purposes of consolidation.
Assets and liabilities of the Company’s foreign subsidiaries are translated at the period-end currency exchange rates, certain equity accounts are translated at historical exchange rates and revenue, expenses, gains and losses are translated at the

10



average currency exchange rates in effect for the period. The effects of these translation adjustments are reported in a separate component of stockholders’ equity titled accumulated other comprehensive income (loss).
Fair Value of Financial Instruments —The Company’s financial instruments consist principally of cash equivalents, accounts receivable, accounts payable, accrued liabilities, capital lease, term debt and revolving credit facilities. The fair value of the Company’s cash equivalents is determined based on quoted prices in active markets for identical assets for its money market funds. The recorded values of the Company’s accounts receivable, accounts payable and accrued liabilities approximate their current fair values due to the relatively short-term nature of these accounts. The Company believes that the fair value of the capital lease, term debt and revolving credit facilities approximates its recorded amount as of March 31, 2014 as the interest rate on the capital lease, term debt and revolving credit facilities is variable and is based on market interest rates after consideration of default and credit risk.
Cash and Cash Equivalents —Cash consists of cash maintained in checking and savings accounts. All highly liquid investments purchased with an original maturity date of 90 days or less at the date of purchase are considered to be cash equivalents. Cash equivalents consist of money market funds.
Restricted Cash —Restricted cash as of March 31, 2014 consists of cash required to be deposited with financial institutions for security deposits for the Company's London, United Kingdom and Paris, France office lease agreements.
Concentration of Credit Risk —Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and accounts receivable. A significant portion of the Company’s cash is held at three major financial institutions, which management assesses to be of high credit quality. The Company has not experienced any losses in such accounts.
The Company mitigates its credit risk with respect to accounts receivable by performing credit evaluations and monitoring agencies' and advertisers' accounts receivable balances. As of March 31, 2014 and December 31, 2013 , no single agency or advertiser accounted for 10% or more of accounts receivable.
During the three months ended March 31, 2014 and 2013 , no single customer represented 10% or more of revenue.
Provision for Doubtful Accounts —The Company records a provision for doubtful accounts based on historical experience and a detailed assessment of the collectability of its accounts receivable. In estimating the allowance for doubtful accounts, management considers, among other factors, the aging of the accounts receivable, historical write-offs and the credit-worthiness of each customer. If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations, the Company’s estimate of the recoverability of the amounts due could be reduced by a material amount.
The following table presents the changes in the allowance for doubtful accounts (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Allowance for doubtful accounts:
 
 
 
Balance, beginning of period
$
1,057

 
$
468

Add: bad debt expense
34

 

Less: write-offs, net of recoveries
(1
)
 

Balance, end of period
$
1,090

 
$
468


Property and Equipment —Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation or amortization, as applicable, are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

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Construction in progress primarily includes costs related to the leasehold improvements and also includes network equipment infrastructure to support the Company's data centers around the world. Interest capitalized during the periods presented was not material.
Leasehold improvements are amortized on a straight-line basis over the term of the lease, or the useful life of the assets, whichever is shorter. Depreciation and amortization periods for the Company’s property and equipment are as follows:
Asset Classification
Estimated Useful Life
Computer hardware and purchased software
2–3 years
Capitalized internal-use software costs
2–3 years
Office equipment, furniture and fixtures
5 years
Internal-Use Software Development Costs —The Company incurs costs to develop software for internal use. The Company expenses all costs that relate to the planning and post implementation phases of development as research and development expense. The Company capitalizes costs when preliminary efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and will be used as intended. Costs incurred for enhancements that are expected to result in additional material functionality are capitalized. The Company capitalized $2.1 million and $1.7 million in internal-use software costs during the three months ended March 31, 2014 and 2013 , respectively, which are included in property, equipment and software—net on the condensed consolidated balance sheets.
Amortization commences when the website or software for internal use is ready for its intended use and the amortization period is the estimated useful life of the related asset, which is generally three years. Amortization expense totaled $1.1 million and $0.8 million for the three months ended March 31, 2014 and 2013 , respectively.
Impairment of Long-lived Assets —The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is impaired or the estimated useful life is no longer appropriate. If indicators of impairment exist and the undiscounted projected cash flows associated with an asset are less than the carrying amount of the asset, an impairment loss is recorded to write the asset down to its estimated fair value. Fair value is estimated based on discounted future cash flows. No impairment charges were recorded during the three months ended March 31, 2014 and 2013 .
Revenue Recognition —The Company generates revenue by delivering digital advertisements to Internet users through various channels, including display, mobile, social and video.
The Company recognizes revenue when all four of the following criteria are met:
•    Persuasive evidence of an arrangement exists
•    Delivery has occurred or a service has been provided
•    Customer fees are fixed or determinable
•    Collection is reasonably assured
Revenue arrangements are evidenced by a fully-executed insertion order (“IO”). Generally, IOs state the number and type of advertising impressions (cost-per-thousand) to be delivered, the agreed upon rate for each delivered impression, and a fixed period of time for delivery.
The Company determines collectability by performing ongoing credit evaluations and monitoring its customers’ accounts receivable balances. For new customers and their agents, which may be advertising agencies or other third parties, the Company performs a credit check with an independent credit agency and may check credit references to determine creditworthiness. The Company only recognizes revenue when collection is reasonably assured.
In the normal course of business, the Company frequently contracts with advertising agencies on behalf of their advertiser clients. 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

12



responsible for (i) fulfilling the advertisement delivery, (ii) establishing the selling prices for delivery of the advertisements, (iii) selecting the media to fulfill the insertion order, and (iv) performing all billing and collection activities including retaining credit risk, the Company has concluded that it acts as the principal in the majority of these arrangements and therefore reports revenue earned and costs incurred on a gross basis.
On occasion, the Company has offered customer incentive programs that provide rebates after achieving a specified level of advertising spending. The Company records reductions to revenue for estimated commitments related to these customer incentive programs. For transactions involving incentives, the Company recognizes revenue net of the estimated amount to be paid by rebate, provided that the rebate amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. The Company’s policy requires that, if rebates cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the rebate program lapses.
In addition, the Company has licensed a self-service version of its technology platform to a Japanese advertising agency, for use by the agency's customers.  Under this licensing agreement, the agency is responsible for the media costs. In this type of arrangement, the Company recognizes its licensing fee revenue on a net basis.
Multiple-Element Arrangements —The Company enters into arrangements to sell advertising that includes different media placements or ad services that are delivered at the same time, or within close proximity of one another. Beginning on January 1, 2011, the Company adopted new authoritative guidance on multiple element arrangements, using the prospective method for all arrangements entered into or materially modified from the date of adoption. Under this new guidance, the Company allocates arrangement consideration in multiple-deliverable revenue arrangements at the inception of an arrangement to all deliverables or those packages in which all components of the package are delivered at the same time, 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 determines 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 stand-alone selling prices for these services fall within a reasonably narrow pricing range. The Company has not been able to establish VSOE for any of its advertising offerings.
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 the selling prices of similar competitor services on a stand-alone basis. As a result, the Company has not been able to establish selling price based on TPE.
BESP —When it 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 stand-alone 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, market conditions, competitive landscape and pricing practices. In particular, the Company reviews multiple data points to determine BESP, including price lists used by the Company’s sales team in pricing negotiations, historical average and median pricing achieved in prior contractual customer arrangements and input from the Company’s sales operation department regarding what it believes the deliverables could be sold for on a stand-alone basis. BESP is determined at an advertising unit level that is consistent with the Company’s underlying market strategy and stratified based on specific consideration of channel, geography, industry and size, as deemed necessary.
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 regularly reviews 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 the relative fair value of advertising 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.

13



Cost of Revenue —Cost of revenue consists primarily of media cost for advertising impressions purchased from real-time advertising exchanges and other third parties. Cost of revenue also includes third-party data center costs and the salaries and related costs of the Company’s operations group. This group sets up, initiates and monitors the Company’s advertising campaigns. In addition, depreciation of the data center equipment, rental payments to third-party vendors for data centers and amortization of capitalized internal-use software are included in cost of revenue.
Research and Development —Research and development expenses include costs associated with the maintenance and ongoing development of the Company’s technology, including compensation and employee benefits and allocated costs associated with the Company’s engineering and research and development departments, as well as costs for contracted services and supplies. Allocated costs include charges for facilities, office expenses, telephones, and other miscellaneous expenses. The Company reviews costs incurred in the application development stage and assesses such costs for potential capitalization.
Sales and Marketing —Sales and marketing expenses consist primarily of compensation (including commissions) and employee benefits of sales and marketing personnel and related support teams, allocated costs, certain advertising costs, travel, trade shows and marketing materials. Allocated costs include charges for facilities, office expenses, telephones, and other miscellaneous expenses. The Company incurred advertising costs of $1.2 million and $0.1 million for the three months ended March 31, 2014 and 2013 , respectively.
General and Administrative —General and administrative expenses include facilities costs, executive and administrative compensation and employee benefits, depreciation, professional services fees, insurance costs, bad debt and other allocated costs, such as facility-related expenses, supplies and other fixed costs. Allocated costs include charges for facilities, office expenses, telephones, and other miscellaneous expenses.
Stock-based Compensation —The Company measures compensation expense for all stock-based payment awards, including stock options granted to 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 pricing model. Stock-based compensation is recognized on a straight-line basis over the requisite vesting period, net of estimated forfeitures. The forfeiture rate is based on an analysis of the Company’s actual historical forfeitures.
The Company accounts for stock options issued to non-employees based on the fair value of the awards determined using the Black-Scholes option pricing model. The fair value of stock options granted to non-employees is re-measured as the stock options vest, and the resulting change in fair value, if any, is recognized in the Company’s condensed consolidated statement of operations during the period the related services are rendered, generally between one and four years.
Preferred Stock Warrant Liability —Freestanding warrants related to shares that are redeemable or contingently redeemable were classified as a liability on the Company’s condensed consolidated balance sheet. The fully-vested convertible preferred stock warrants were subject to re-measurement at each balance sheet date, and any change in fair value is recognized as a component of other expense, net. As completion of the Company’s initial public offering constituted a liquidation event, the convertible preferred stock warrants were converted into common stock or warrants to purchase common stock, and the liability was reclassified to additional paid-in capital in the third quarter of 2013.
Income Taxes —The Company accounts for income taxes using an asset and liability approach. 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. Operating loss and tax credit carry-forwards are measured by applying currently enacted tax laws. Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. Due to uncertainty as to the realization of benefits from deferred tax assets, including net operating loss carry-forwards, research and development and other tax credits, the Company has provided a full valuation allowance reserved against such assets as of March 31, 2014 and December 31, 2013 .
The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date, and then, only in an amount more likely than not to be sustained upon review by the tax authorities. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Deferred Offering Costs —Deferred offering costs consisted primarily of direct incremental costs related to the Company’s public offerings of its common stock. Approximately $0.1 million of deferred offering costs were included in other assets on the Company’s condensed consolidated balance sheet as of December 31, 2013 . No deferred offering costs are included as of March 31, 2014. Upon completion of the offerings, these amounts were offset against the proceeds of the offerings.

14



Recently Issued and Adopted Accounting Pronouncements —Under the Jumpstart Our Business Startups Act (the "JOBS Act"), we qualify as an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”
In July 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-11,  Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). The guidance requires an entity to present its unrecognized tax benefits net of its deferred tax assets when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events. Gross presentation of unrecognized tax benefit will still be required in the notes to the financial statements. ASU 2013-11 will apply on a prospective basis to all unrecognized tax benefits that exist at the effective date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on our consolidated financial statements.
NOTE 2.
FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under the guidance for fair value measurement are described below:
Level 1
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Pricing inputs are based upon quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. For securities, the valuations are based on quoted prices of the security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required. As of March 31, 2014 and December 31, 2013, the Company used Level 1 assumptions for its money market funds.
Level 2
Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of March 31, 2014 and December 31, 2013, the Company did not have any Level 2 financial assets or liabilities.
Level 3
Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. As of March 31, 2014 and December 31, 2013, the Company did not have any Level 3 financial assets or liabilities.
The carrying amounts of cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these items. Based on the borrowing rates currently available to the Company for debt with similar terms, the carrying value of the capital lease, term debt and line of credit approximate fair value (using Level 2 inputs).
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013 , by level within the fair value hierarchy. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The Company’s fair value hierarchy for its financial assets and financial liabilities that are carried at fair value are as follows (in thousands):
March 31, 2014
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds (included in cash and cash equivalents)
 
$
127,900

 
$
127,900

 
$

 
$


15




December 31, 2013
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Money market funds (included in cash and cash equivalents)
 
$
2,900

 
$
2,900

 
$

 
$


NOTE 3.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of March 31, 2014 and December 31, 2013 , consisted of the following (in thousands):
 
March 31,
 
December 31,
 
2014
 
2013
Cash and cash equivalents:
 
 
 
Cash
$
90,274

 
$
110,973

Money market funds
127,900

 
2,900

Total cash and cash equivalents
$
218,174

 
$
113,873


NOTE 4.
PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software, net as of March 31, 2014 and December 31, 2013 , consisted of the following (in thousands):
 
March 31,
 
December 31,
 
2014
 
2013
Capitalized internal-use software costs
$
16,190

 
$
14,030

Computer hardware and software
20,607

 
17,077

Furniture and fixtures
4,436

 
1,735

Leasehold improvements
10,460

 
815

Construction in progress

 
3,622

Total
51,693

 
37,279

Accumulated depreciation and amortization
(14,410
)
 
(11,485
)
Total property, equipment and software, net
$
37,283

 
$
25,794

Total depreciation and amortization expense, excluding amortization of internal-use software costs, was $1.8 million and $0.6 million for the three months ended March 31, 2014 and 2013 , respectively. Amortization expense of internal-use software costs was $1.1 million and $0.8 million for the three months ended March 31, 2014 and 2013 , respectively. Refer to Note 6 for details of the Company's capital lease as of March 31, 2014 and December 31, 2013 .

16



NOTE 5.
ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities as of March 31, 2014 and December 31, 2013 , consisted of the following (in thousands):
 
March 31,
 
December 31,
 
2014
 
2013
Payroll and related expenses
$
7,805

 
$
10,722

Accrued vacation
3,188

 
2,220

Professional services
637

 
650

Accrued credit cards
87

 
774

Early exercise of unvested stock options
783

 
1,107

Employee stock purchase plan
2,811

 
1,427

Other accrued expenses
9,629

 
4,684

Total accrued and other current liabilities
$
24,940

 
$
21,584


NOTE 6.
CAPITAL LEASES
Property and equipment at March 31, 2014 and December 31, 2013 included $2.7 million and $0.6 million , respectively, acquired under capital lease agreements of which the majority consists of computer hardware and software. There was $0.1 million and $0 of accumulated depreciation of property and equipment acquired under these capital leases at March 31, 2014 and December 31, 2013 , respectively. The related depreciation is included in depreciation expense.

Approximate remaining future minimum lease payments under these non-cancelable capital leases as of March 31, 2014 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2014 (remaining 9 months)
 
$
658

2015
 
893

2016
 
883

2017
 
96

Thereafter
 

Total minimum lease payments
 
$
2,530

Less: amount representing interest and taxes
 
(185
)
Less: current portion of minimum lease payments
 
(777
)
Capital lease obligations, net of current portion
 
$
1,568



17



NOTE 7.
OTHER INCOME (EXPENSE)—NET
Other income (expense)—net for the three months ended March 31, 2014 and 2013 , consisted of the following (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Gain (loss) on foreign translation
$
(29
)
 
$
(556
)
Other non-operating income (loss), net
10

 
37

Total other income (expense)—net
$
(19
)
 
$
(519
)

NOTE 8.
DEBT
Loan Facility —On December 20, 2013, the Company entered into an Amended and Restated Revolving Credit and Term Loan Agreement (the "Loan Facility") with certain lenders, including Comerica Bank, as administrative agent for the lenders. The Loan Facility provides for an $80.0 million revolving credit facility, with a $5.0 million letter of credit subfacility and a $1.5 million swingline subfacility, and a $20.0 million secured term loan facility. The Loan Facility permits the Company, subject to certain requirements, to request an increase in the maximum revolving commitments under the Loan Facility by up to $25.0 million in additional revolving commitments. Revolving loans may be advanced under the Loan Facility in amounts up to the lesser of the $80.0 million maximum and a borrowing base equal to 85% of the value of eligible accounts receivable. The borrowing base is subject to certain reserves and eligibility criteria. Comerica may also issue letters of credit under the subfacility up to $5.0 million , provided that the aggregate amount of advances outstanding under the revolving facility, the subfacility and the swingline facility do not exceed the lesser of the $80.0 million maximum and the borrowing base amount. If at any time the aggregate amounts outstanding under the revolving facility, the letter of credit subfacility and the swingline facility exceed the lesser of the $80.0 million maximum and the borrowing base then in effect, then the Company must make a prepayment in an amount sufficient to eliminate the excess. Term loans equal to $20.0 million were advanced to the Company under the term loan facility during December 2013. Loan proceeds may be used for general corporate purposes. The Company may prepay revolving loans and term loans under the Loan Facility in whole or in part at any time without premium or penalty, subject to certain conditions.

Revolving loans bear interest, at our option, at (i) a base rate determined pursuant to the terms of the Loan Facility, plus a spread of 1.75% to 2.50% , or (ii) a LIBOR rate determined pursuant to the terms of the Loan Facility, plus a spread of 2.75% to 3.50% . Term loans bear interest, at our option, at (i) a base rate determined pursuant to the terms of the Loan Facility, plus a spread of 2.75% to 3.50% , or (ii) a LIBOR rate determined pursuant to the terms of the Loan Facility, plus a spread of 3.75% to 4.50% . In each case, the spread is based on the cash reflected on our balance sheet for the preceding fiscal quarter. The base rate is determined by taking the greatest of (i) the prime rate announced by Comerica, (ii) the federal funds rate plus 1.0% and (iii) the daily adjusting LIBOR rate plus 1.0% . Interest is due and payable quarterly in arrears for base rate loans. Interest is due and payable at the end of an interest period (or at each three months interval in the case of loans with interest periods greater than three months ) for LIBOR rate loans. Term loans will be repaid in quarterly principal installments of approximately $1.3 million commencing in January 2015, with any remaining principal, together with all accrued and unpaid interest, due and payable on December 20, 2018. Principal, together with all accrued and unpaid interest, on the revolving loans are due and payable on December 20, 2016.
The Company is required to maintain certain financial covenants under the Loan Facility, including the following:
EBITDA. The Company is required to maintain specified quarterly EBITDA, which is defined for this purpose, with respect to any fiscal period as an amount equal to the sum of (i) consolidated net income (loss) in accordance with GAAP, after eliminating all extraordinary nonrecurring items of income, plus (ii) depreciation and amortization, income tax expense, total interest expense paid or accrued, non-cash stock-based compensation expense, costs and expenses from permitted acquisitions up to certain limits, costs and expenses in connection with the Loan Facility and any other expenses agreed with Comerica and the lenders less (iii) all extraordinary and non-recurring revenues and gains (including income tax benefits).
Liquidity ratio. Under the Loan Facility, the ratio of (i) the sum of all cash on deposit with Comerica and certain other domestic financial institutions and the aggregate amount of all eligible accounts receivable to (ii) all indebtedness owing to the lender of the Loan Facility must be at least 1.10 to 1.00.

18



The terms of the Loan Facility also require the Company to comply with certain non-financial covenants. As of March 31, 2014 , the Company was in compliance with each of the financial and non-financial covenants.
Future Payments
Future principal payments of long-term debt as of March 31, 2014 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2014 (remaining 9 months)
 
$

2015
 
5,000

2016
 
5,000

2017
 
5,000

2018
 
5,000

Total
 
20,000

Less: current portion of long-term debt
 
(1,250
)
Long-term debt, net of current portion
 
$
18,750

As of March 31, 2014 , the $7.4 million balance outstanding under the revolving credit facility had a maturity date of December 20, 2016, and because the Company has the option to draw upon the facility or repay borrowed funds at any time, the balance is shown as a current liability in the accompanying consolidated balance sheet. Additionally, the debt liabilities on the condensed consolidated balance sheet are net of $0.6 million in debt discounts.
NOTE 9.
STOCKHOLDERS’ EQUITY
Follow-on Offering

In February 2014, the Company completed an underwritten follow-on public offering of its common stock in which 2,000,000 shares of common stock were sold by the Company and 3,000,000 shares of common stock were sold by selling stockholders. The public offering price of the shares sold in the offering was $61.00 per share. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The total gross proceeds from the offering to the Company were $122.0 million . After deducting underwriters’ discounts and commissions and offering expenses, the aggregate net proceeds received by the Company totaled approximately $115.4 million .
Reserved Shares of Common Stock —The Company’s shares of capital stock reserved for issuance as of March 31, 2014 were as follows:
 
March 31, 2014
Options outstanding
7,417,535
Restricted stock units outstanding
473,137
Available for future stock option and restricted stock unit grants
5,870,342
Available for future employee stock purchase plan purchases
1,656,319
Total shares reserved
15,417,333
2008 Equity Incentive Plan —The 2008 Equity Incentive Plan (the “2008 Plan”) provides for the grant of incentive stock options and nonqualified stock options. The compensation committee of the Company's board of directors has the authority to approve the employees and non-employees to whom options are granted and determine the terms of each option, including (i) the number of shares of common stock subject to the option; (ii) when the option becomes exercisable; (iii) the option exercise price, which, in the case of incentive stock options, must be at least 100% of the fair market value of the common stock as of the date of grant; and (iv) the duration of the option (which, in the case of incentive stock options, may not exceed 10 years ). Options granted under the 2008 Plan generally vest over four years and expire no later than 10 years from the date of grant. The Company has terminated the 2008 Plan for future use, and no further equity awards are to be granted under the 2008 Plan. All outstanding awards under the 2008 Plan will continue to be governed by their existing terms.

19



Under the terms of the 2008 Plan, certain employees received the right to exercise unvested options. Upon termination of service, an employee’s unvested shares may be repurchased by the Company at the original purchase price. As of March 31, 2014 and December 31, 2013 , 241,574 and 315,579 unvested shares, respectively, were subject to repurchase. During the three months ended March 31, 2014 and year ended December 31, 2013 , the Company repurchased 8,834 and 5,834 shares of unvested stock, respectively.
2013 Equity Incentive Plan —The Company’s board of directors adopted and the Company’s stockholders approved a 2013 Equity Incentive Plan (the “2013 Plan”), which became effective September 18, 2013.  The 2013 Plan permits the grant of incentive stock options, within the meaning of Section 422 of the Code, to the Company’s employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors and consultants and the Company’s parent and subsidiary corporations’ employees and consultants.
 
A total of 5,000,000 shares of common stock were reserved for issuance upon initial adoption of the 2013 Plan.  In addition, the shares to be reserved for issuance under the 2013 Plan will also include shares subject to stock options or similar awards granted under the 2008 Plan that expire or terminate without having been exercised in full and shares issued pursuant to awards granted under the 2008 Plan that are forfeited to or repurchased by the Company (provided that the maximum number of shares that may be added to the 2013 Plan pursuant to this provision is 7,900,000 shares).
 
The number of shares available for issuance under the 2013 Plan also includes an annual increase on the first day of each fiscal year beginning in 2014, equal to the least of (i)  4,000,000 shares; (ii)  5% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year; or (iii) such other amount as the Company’s board of directors may determine. Effective January 1, 2014, 1,641,299 shares were added to the shares reserved for issuance under the 2013 Plan according to the terms described above.
 
The compensation committee of the board of directors has the authority to approve the employees and other service providers to whom equity awards are granted and to determine the terms of each award, subject to the terms of the 2013 Plan.  The compensation committee may determine the number of shares subject to an award, except that awards to non-employee members of the board of directors are determined under the Company's Outside Director Compensation Policy.  Options and stock appreciation rights granted under the 2013 Plan must have a per share exercise price equal to at least 100% of the fair market value of a shares of the Company's common stock as of the date of grant and may not expire later than 10 years from the date of grant.

The following tables summarize option award activity:
 
Number of
Shares
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life
(Years)
 
Aggregate
Intrinsic Value (in thousands)
 
 
 
 
 
 
 
 
Balance at December 31, 2013
7,410,588
 
$
6.97

 
8.5
 
$
404,106

Options granted (weighted average fair value of $56.97 per share)
369,000
 
51.16

 
 
 
 
Options exercised
(287,578)
 
3.69

 
 
 
 
Options forfeited
(74,475)
 
11.82

 
 
 
 
Balance at March 31, 2014
7,417,535
 
$
9.24

 
8.2
 
$
253,267

Options vested and expected to vest—March 31, 2014
6,960,374
 
$
8.82

 
8.2
 
$
240,251

Options vested and exercisable—March 31, 2014
3,100,165
 
$
3.89

 
7.6
 
$
120,875


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. The total intrinsic value of options exercised was approximately $15.3 million and $11.9 million for the three months ended March 31, 2014 and year ended December 31, 2013 , respectively.

20



Employee Stock-based Compensation —The fair value of options on the date of grant is estimated based on the Black-Scholes option-pricing model using the single-option award approach with the weighted-average assumptions set forth below. Expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined based on the simplified method. Due to the lack of historical exercise activity for our company, the simplified method calculates the expected term as the mid-point between the vesting date and the contractual expiration date of the award. Volatility is estimated using comparable public company volatility for similar option terms until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available. The risk-free interest rate is determined using a U.S. Treasury rate for the period that coincides with the expected term.
As the Company has never paid cash dividends, and at present, has no intention to pay cash dividends in the future, expected dividends are zero . Expected forfeitures are based on the Company’s historical experience. The Company uses the straight-line method for expense recognition.
The assumptions used to value stock-based awards granted to employees were as follows:
 
Three Months Ended
 
March 31,
 
December 31,
 
2014
 
2013
 
 
 
 
Expected term (years)
6.3
 
5.3–6.6
Volatility
55.6%
 
53.8%–64.9%
Risk-free interest rate
1.85%
 
1.04%–1.88%
Dividend yield
 

The following table summarizes the allocation of stock-based compensation and restricted stock expense for employees and non-employees in the accompanying consolidated statements of operations (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Cost of revenue
$
252

 
$
27

Research and development
987

 
391

Sales and marketing
2,167

 
512

General and administrative
1,551

 
635

Total *
$
4,957

 
$
1,565


*
The table above includes the impact of the issuance of restricted stock at fair value.
As of March 31, 2014 and December 31, 2013 , unamortized stock-based compensation expense related to unvested common stock options was $32.2 million and $21.7 million , respectively. The weighted-average period over which such stock-based compensation expense will be recognized is approximately 2.6  years.
Options to Non-employees —The Company did not grant any stock options to non-employees for the three months ended March 31, 2014 . The Company granted 5,000 stock options to non-employees for the three months ended March 31, 2013 . The definition of an employee includes a non-employee director of the Company. Stock options granted to non-employees are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. The fair value of options granted to non-employees is expensed when vested.
The Company recorded $0 and $0.1 million of stock-based compensation expense for options issued to non-employees under the 2008 Plan for three months ended March 31, 2014 and 2013 , respectively. Options to non-employees of 3,900 and 8,900 were outstanding as of March 31, 2014 and December 31, 2013 , respectively.

21



Restricted Stock —The Company issued no shares pursuant to restricted stock purchase agreements during the three months ended March 31, 2014 and 2013 , respectively.
Restricted Stock Units (RSUs) — During the three months ended March 31, 2014 , the Company granted 97,585 RSUs, 4,000 shares of common stock were issued upon vesting of RSUs and 2,850 RSUs were canceled. For the three months ended March 31, 2014 , the Company recognized stock-based compensation expense associated with the RSUs of $1.8 million . At March 31, 2014 , unrecognized compensation expense related to the RSUs was $19.1 million . The unrecognized compensation expense will be amortized on a straight-line basis through 2018.
Employee Stock Purchase Plan
 
In August 2013, the Company’s board of directors adopted and the stockholders approved the Company’s 2013 Employee Stock Purchase Plan (the “ESPP”), which became effective upon adoption by the Company’s board of directors. The ESPP allows eligible employees to 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. The offering periods generally start on the first trading day on or after June 1 and December 1 of each year and end on the first trading day on or before November 30 and May 31 approximately six months later. The administrator may, in its discretion, modify the terms of future offering periods. Due to the timing of the IPO, the first offering period started October 1, 2013 and will end on May 31, 2014.  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 trading day of the offering period. As of March 31, 2014 , total compensation costs related to rights to purchase shares of common stock under the ESPP but not yet vested were approximately $1.8 million , which will be recognized over the offering period.

The assumptions used to calculate our stock-based compensation for each stock purchase right granted under the ESPP were as follows:
 
Three Months Ended
 
March 31, 2014
 
 
Expected term (years)
0.67
Volatility
66.2%
Risk-free interest rate
0.07%
Dividend yield


NOTE 10.
NET INCOME (LOSS) PER SHARE
The Company calculates its basic and diluted net income (loss) per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities. Under the two-class method, in periods when the Company has net income, net income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income less current period convertible preferred stock non-cumulative dividends, between common stock and convertible preferred stock. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. The Company’s basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible preferred stock, options to purchase common stock and preferred stock warrants are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive.
Basic loss per share is calculated by dividing net loss by the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of employee stock-based awards and warrants. Because the Company had net losses for the three months ended March 31, 2014 and 2013 , all potential shares of common stock were determined to be anti-dilutive.

22



The following table sets forth the computation of net loss per share of common stock (in thousands, except per share amounts):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Net loss
$
(11,225
)
 
$
(8,072
)
Weighted-average shares used to compute basic and diluted net loss per share
34,033

 
8,298

Basic and diluted net loss per share
$
(0.33
)
 
$
(0.97
)
The following securities were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Convertible preferred stock

 
19,479

Employee stock options
7,418

 
6,904

Shares subject to repurchase
242

 

Restricted stock units (RSUs)
473

 

Employee stock purchase plan
114

 

Convertible preferred stock warrants

 
267

 
8,247

 
26,650


NOTE 11.
INCOME TAXES
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business.  Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are to be reinvested indefinitely.
The Company recorded an income tax provision of $0.3 million and $0.1 million for the three months ended March 31, 2014 and 2013 , respectively, related to foreign income taxes and state minimum taxes. The primary difference between the effective tax rate and the federal statutory tax rate in the United States relates to the valuation allowances on the Company’s net operating losses, foreign tax rate differences, and non-deductible stock-based compensation expense.
 
Valuation allowances are provided when necessary to reduce net deferred tax assets to an amount that is more likely than not to be realized. Due to uncertainty as to the realization of benefits from deferred tax assets, including net operating loss carry-forwards, research and development and other tax credits, the Company has provided a full valuation allowance reserved against such assets as of March 31, 2014 and December 31, 2013 .


NOTE 12.
COMMITMENTS AND CONTINGENCIES
Operating Leases —The Company has operating lease agreements for office space for administration, research and development and sales and marketing activities in the United States that expire at various dates, with the latest expiration date in 2024.
The Company recognizes rent expense on a straight-line basis over the lease term and records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability. Rent expense was $3.2 million and $0.7 million for the three months ended March 31, 2014 and 2013 , respectively.
Approximate remaining future minimum lease payments under these non-cancelable operating leases as of March 31, 2014 were as follows (in thousands):

23



Year ending December 31,
 
Future Payments
2014 (remaining 9 months)
 
$
4,611

2015
 
13,571

2016
 
15,839

2017
 
15,815

2018
 
14,512

Thereafter
 
53,622

 
 
$
117,970

Please refer to Note 6 for details of the Company's capital lease commitments as of March 31, 2014 and December 31, 2013 .
Letters of Credit and Bank Guarantees —As of March 31, 2014 and December 31, 2013 , the Company had irrevocable letters of credit outstanding in the amount of $4.1 million , for the benefit of a landlord related to non-cancelable facilities leases. The letters of credit have various expiration dates, with the latest being June 2025.
As of March 31, 2014 , the Company had $2.3 million in bank guarantees for security deposits for the Company's London, United Kingdom and Paris, France office lease agreements. These amounts are classified as restricted cash on the Company's condensed consolidated balance sheets.
Indemnification Agreements —In the ordinary course of business, the Company enters into agreements providing for indemnification 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. No demands have been made upon the Company to provide indemnification under such agreements, and thus there are no claims that the Company is aware of that could have a material effect on the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss, or condensed consolidated statements of cash flows.
Legal Proceedings —We are not currently a party to any legal proceedings, litigation, or claims that could materially affect our business, results of operations, cash flows, or financial position. We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect our future financial position, results of operations or cash flows.
NOTE 13.
RETIREMENT PLANS
The Company has established a 401(k) plan to provide tax deferred salary deductions for all eligible employees. Participants may make voluntary contributions to the 401(k) plan, limited by certain Internal Revenue Service restrictions. The Company is responsible for the administrative costs of the 401(k) plan. The Company does not match employee contributions.
NOTE 14.
SEGMENTS
The Company considers operating segments to be components of the Company's business for which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The Company has one business activity, and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single operating and reportable segment.

24



The following table summarizes total revenue generated through sales personnel located in the respective locations (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
North America
$
62,647

 
$
32,849

All Other Countries
11,750

 
5,363

Total revenue
$
74,397

 
$
38,212

The following table summarizes total long-lived assets in the respective locations (in thousands):
 
March 31,
 
December 31,
 
2014
 
2013
North America
$
33,637

 
$
23,956

All Other Countries
3,646

 
1,838

Total long-lived assets
$
37,283

 
$
25,794


During the three months ended March 31, 2014 and 2013 , no single customer represented 10% or more of revenue. As of March 31, 2014 and December 31, 2013 , no single agency or advertiser represented 10% or more of accounts receivable.

NOTE 15.
SUBSEQUENT EVENTS
No subsequent events occurred that would require adjustment to the financial statements or disclosures included in the financial statements.

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, (the "Exchange Act"). The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertain expectations of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:
our future financial and operating results;
our ability to maintain an adequate rate of revenue growth;
our capital investment plans and our ability to effectively manage those investments;
our growth strategy;
our future operating expenses, including changes in research and development, sales and marketing and general and administrative expenses;
our ability to timely and effectively adapt our existing technology;
our ability to introduce new offerings that gain market acceptance;
our ability to continue to expand internationally;
our ability to fulfill covenants and obligations under our existing business agreements;

25



our ability to manage our cash to meet our liquidity needs;
the effects of increased competition in our market and our ability to compete effectively;
our plans to use the proceeds from our initial and follow-on public offerings;
future acquisitions of or investments in complementary companies or technologies;
our expectations concerning relationships with third parties; and
the effects of seasonal trends on our results of operations.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in our forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Overview
Rocket Fuel is a technology company that has developed an Artificial Intelligence and Big Data-driven predictive modeling and automated decision-making platform. Our technology is designed to address the needs of markets in which the volume and speed of information render real-time human analysis infeasible. We are focused on the large and growing digital advertising market that faces these challenges.
Our Artificial Intelligence, or AI, system autonomously purchases ad spots, or impressions, one at a time, on advertising exchanges to create portfolios of impressions designed to optimize the goals of our advertisers, such as increased sales, heightened brand awareness and decreased cost per customer acquisition. We believe that our customers value our solution, as our revenue retention rate was 161% and 168% for the twelve months ended March 31, 2014 and December 31, 2013 , respectively. We define our “revenue retention rate” with respect to a given twelve-month period as (i) revenue recognized during such period from customers that contributed to revenue recognized in the prior twelve-month period divided by (ii) total revenue recognized in the prior twelve-month period. For the past twelve trailing months, as of March 31, 2014 , our active customer base included over 80 of the Advertising Age 100 Leading National Advertisers and over 55 of the Fortune 100 companies.  Additionally, we now have 96 customers with more than $1 million in lifetime spend with us, with 49 of these 96 trusting us with over $2 million in lifetime spend.

Our solution is designed to optimize both direct-response campaigns focused on generating specific consumer purchases or responses, generally defined as cost per action goals, as well as brand campaigns geared towards lifting brand metrics, generally defined as cost-per-click and brand survey goals. For the three months ended March 31, 2014 and 2013 , direct response campaigns contributed approximately two-thirds of our revenue, with the remaining one-third of our revenue generated through brand campaigns. We have successfully run advertising campaigns for products and brands ranging from consumer products to luxury automobiles to travel and had served well over 220 billion impressions as of March 31, 2014 . We provide a differentiated solution that is simple, powerful, scalable and extensible across geographies, industry verticals and advertising channels. As of March 31, 2014, our computational infrastructure supported over 34,000 CPU cores in eight data centers and housed 17 petabytes of compressed data.
 

26



We generate revenue by delivering digital advertisements to consumers through our platform across display, mobile, social and video channels. Historically, our revenue has predominantly come from display advertising because display advertising inventory was the first to be made available for programmatic buying through real-time advertising exchanges. The digital advertising industry is rapidly adopting programmatic buying for mobile, social and video advertising, accelerating the amount of digital advertising inventory available through real-time advertising exchanges. We offer a single solution for advertisers across all of these channels to compete for a larger share of advertisers’ budgets. While a majority of our revenue currently comes from display advertising, we are focused on offering advertisers a comprehensive solution that addresses the display, mobile, social and video channels.
 
Our contracts typically have a term of less than one year, and we recognize revenue as we deliver advertising impressions, subject to satisfying all other revenue recognition criteria. Our revenue recognition policies are discussed in more detail under “Note 1—Nature of Business and Summary of Significant Accounting Policies” in the notes to our condensed consolidated financial statements included in Part I, Item 1.
 
We plan to invest for long-term growth. We anticipate that our operating expenses will increase significantly in the foreseeable future as we invest in research and development to enhance our solution, in sales and marketing to acquire new customers and reinforce our relationships with existing customers and in our infrastructure, including our IT, financial and administrative systems and controls. We believe that these investments will contribute to our long-term growth, although they will reduce our profitability in the near term.

Key Metrics
We monitor the key metrics set forth below to help us evaluate growth, establish budgets, measure the effectiveness of our research and development and sales and marketing and other investments, and assess our operational efficiencies. Revenue is discussed under the headings “—Components of Our Results of Operations” and “—Results of Operations.” Revenue less media costs and adjusted EBITDA are discussed under the heading “—Non-GAAP Financial Performance Metrics.” Number of active customers is discussed below (in thousands, except number of active customers):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenue
$
74,397

 
$
38,212

Revenue less media costs (non-GAAP)
44,690

 
21,566

Adjusted EBITDA (non-GAAP)
(3,736
)
 
(4,625
)
Number of active customers
1,251

 
560

Number of Active Customers
We define an active customer as a customer from whom we recognized revenue in the last three months. A customer can be either an advertiser who purchases our solution from us directly or an advertiser who purchases our solution through an advertising agency or other third party. We count all advertisers within a single corporate structure as one customer even in cases where multiple brands, branches or divisions of an organization enter into separate contracts with us. We believe that our ability to increase the number of active customers using our solution is an important indicator of our ability to grow our business, although we expect this number to fluctuate based on the seasonality in our business. For example, the number of active customers, excluding active customers originating through our licensing agreement with a Japanese advertising agency, was flat from December 31, 2013, to March 31, 2014.
Non-GAAP Financial Performance Metrics
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles, or GAAP, we provide investors with the following financial measures that are not prepared in accordance with GAAP.

27



Revenue Less Media Costs
Revenue less media costs is a non-GAAP financial measure defined by us as GAAP revenue less media costs. Media costs consist of costs for advertising impressions we purchase from real-time advertising exchanges or through other third parties. We believe that revenue less media costs is a meaningful measure of operating performance because it is frequently used for internal management purposes, indicates the performance of our solution in balancing the goals of delivering exceptional results to advertisers while meeting our margin objectives and facilitates a more complete period-to-period understanding of factors and trends affecting our underlying revenue performance.
A limitation of revenue less media costs is that it is a measure that we have defined for internal purposes that may be unique to us, and therefore it may not enhance the comparability of our results to other companies in our industry that have similar business arrangements but present the impact of media costs differently. Management compensates for these limitations by also relying on the comparable GAAP financial measures of revenue, cost of revenue and total operating expenses. The following table presents a reconciliation of revenue less media costs to revenue for each of the periods indicated (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenue
$
74,397

 
$
38,212

Less: Media costs
29,707

 
16,646

Revenue less media costs
$
44,690

 
$
21,566


Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure defined by us as net loss before income tax (expense) benefit, interest expense, net, depreciation and amortization (excluding amortization of internal-use software), stock-based compensation expense and change in fair value of convertible preferred stock warrant liability. We have presented adjusted EBITDA in this Quarterly Report on Form 10-Q 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, to develop short and long-term operating plans and to determine bonus payouts. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information in understanding and evaluating our operating results.
Our use of adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are as follows:
although depreciation and amortization of property and equipment (excluding amortization of internal use software) 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: (1) changes in, or cash requirements for, our working capital needs; (2) the potentially dilutive impact of equity-based compensation; or (3) tax payments that may represent a reduction in cash available to us; and
other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, adjusted EBITDA should be considered along with other GAAP-based financial performance measures, including various cash flow metrics, net income or loss, and our other GAAP financial results.

28



The following table presents a reconciliation of adjusted EBITDA to net loss for each of the periods indicated (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Net loss
$
(11,225
)
 
$
(8,072
)
Adjustments:
 
 
 
Interest expense, net
414

 
124

Income tax expense
314

 
54

Depreciation and amortization expense (excluding amortization of internal-use software)
1,804

 
607

Stock-based compensation expense
4,957

 
1,565

Change in fair value of convertible preferred stock warrant liability

 
1,097

Total adjustments
7,489

 
3,447

Adjusted EBITDA
$
(3,736
)
 
$
(4,625
)

Adjusted Net Loss
Adjusted net loss and adjusted diluted net loss per share are non-GAAP financial measures that are useful to us and investors because they present an additional measurement of our financial performance, taking into account depreciation, which we believe is an ongoing cost of doing business, but excluding the impact of certain non-cash expenses (e.g. stock-based compensation). We believe that analysts and investors use adjusted net income and adjusted diluted net income per share as supplemental measures to evaluate the overall operating performance of companies in our industry.
A limitation of adjusted net loss is that it is a measure that may be unique to us and may not enhance the comparability of our results to other companies in the same industry that define adjusted net loss differently. This measure may also exclude expenses that may have a material impact on our reported financial results. Our management compensates for these limitations by also considering the comparable GAAP financial measure of net loss.
The following table presents a reconciliation of adjusted net loss to net loss for each of the periods indicated (in thousands):


Three Months Ended
 
March 31,
 
2014
 
2013
Net loss
$
(11,225
)
 
$
(8,072
)
Adjustments:
 
 
 
Stock-based compensation expense
4,957

 
1,565

Change in fair value of convertible preferred stock warrant liability

 
1,097

Tax impact of the above items

 

Adjusted net loss
$
(6,268
)
 
$
(5,410
)
Adjusted diluted net loss per share
$
(0.18
)
 
$
(0.65
)
Weighted average shares used in computing adjusted diluted net loss per share
34,033

 
8,298


Factors Affecting Our Performance
We believe that the growth of our business and our future success depend on various opportunities, challenges and other factors, including the following:

29



Investment in Growth
We plan to invest for long-term growth. We have invested and will continue to invest in research and development to enhance our solution and create additional offerings, in sales and marketing to acquire new customers and reinforce our relationships with existing customers and in our infrastructure, including our IT, financial and administrative systems and controls, data centers and leasehold improvements. We expect our capital expenditures to increase significantly in 2014 compared to 2013. We are also investing to further automate our business processes with the goal of enhancing our profitability. We believe that these investments will contribute to our long-term growth, although they will reduce our profitability in the near term. We also believe that as our sales team becomes more seasoned, we will experience an increase in sales productivity over the long term.
Technology Enhancements and Customer Satisfaction
 
We will continue to make improvements to our technology platform that may have an impact on both our gross profit margin and our performance against advertiser objectives. While our technology improvements in recent quarters have enabled significant margin improvement, we do not currently expect the margin performance achieved in recent quarters to continue to improve. We expect that our margin may be impacted not only by technology improvements, but also by competitive pressures, our commitment to satisfying advertiser objectives, the impact of seasonality in the advertising business, the supply and demand dynamics of real-time advertising exchange-traded media, and the number and types of campaigns that we run and customers that we serve as we scale our business.

Ability to Increase Penetration in All Channels
Historically, our revenue has predominantly come from display advertising, which has constituted the majority of online advertising. Our future performance is dependent on our continued ability to penetrate and grow our revenue in display, as well as mobile, social and video channels. These latter channels are now growing faster than display. Our technology platform is scalable and extensible across all channels, so technology will not be a barrier to penetration of mobile, social and video channels; however, we may face sales and marketing challenges as we expand into these channels and increase our offerings. We believe that our future success depends in part on the successful introduction of new offerings that expand our capabilities in video, mobile and brand advertising, and our ability to market and cross-sell the full suite of Rocket Fuel offerings to our customers.
Customer Growth and Retention
While we have a significant customer base, we must continue to attract new customers, and gain a larger amount of our current customers’ advertising budgets, to continue our growth. Our number of active customers more than doubled from 560 as of March 31, 2013 to 1,251 as of March 31, 2014 . However, in the three months ended March 31, 2014 , we also experienced a decline in average customer spend compared to the same period in 2013, as well as a decline in spend by some of our larger customers. This contributed to the slowing rate of revenue growth on a percentage basis that we experienced in the first quarter of 2014. We have experienced a slowing rate of revenue growth on a percentage basis since the third quarter of 2013. We expect the slowing rate of revenue growth on a percentage basis to continue in the second quarter of 2014.
We compete for advertising budget with a variety of companies, including companies that offer self-service platforms that allow advertisers to purchase inventory directly from advertising exchanges or other third parties, and to manage and analyze their own and third-party data. In the first quarter of 2014, we experienced a decline in revenue from some customers when they adopted platforms such as these.
Our ability to continue growing revenue will depend in part upon the successful introduction of new offerings for mobile, video and brand advertising campaigns that continue to differentiate us from our competitors, including agency trading desks; our ability to extend our self-service platform offering, which is currently only available to our licensee in Japan; our ability to market and cross-sell our full suite of offerings and increase our larger customers' spend with us; and the rate at which new sales personnel (including those hired in the first quarter of 2014) become productive.
Our revenue retention rate was 161% for the twelve months ended March 31, 2014 , 168% for the twelve months ended December 31, 2013 , and 175% for the twelve months ended December 2012. When customers that use our platform increase their spend in absolute dollars, the year-over-year percentage increases in spend are on average smaller, which affects our revenue retention rate.

30



Growth of the Real-time Advertising Exchange Market and Digital Advertising
Our performance is significantly affected by growth rates in both real-time advertising exchanges and the digital advertising channels that we address. These markets have grown rapidly in the past several years, and any acceleration, or slowing, of this growth would affect our overall performance.
Seasonality
In the advertising industry, companies commonly experience seasonal fluctuations in revenue. For example, many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. Historically, the fourth quarter of the year reflects our highest level of advertising activity, and the first quarter reflects the lowest level of such activity. We expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.
Components of Our Results of Operations
Revenue
We generate revenue by delivering digital advertisements to consumers through the display channel and other channels such as mobile devices and through social and video channels. For the three months ended March 31, 2014 and 2013 , direct-response campaigns, which are focused on generating specific consumer purchases or responses, contributed approximately two-thirds of our revenue, while brand campaigns, which are focused on lifting brand metrics, contributed the remaining one-third of our revenue. We predominantly contract with advertising agencies who purchase our solution on behalf of advertisers. When we contract with an agency, it acts as an agent for a disclosed principal, which is the advertiser. Our contracts usually provide that if the advertiser does not pay the agency, the agency is not liable to us, and we must seek payment solely from the advertiser. Our contracts with advertisers, including advertising agencies representing advertisers, are generally in the form of an insertion order. An insertion order is a contract that outlines the terms and conditions of an advertising campaign and its objectives. Our contracts typically have a term of less than a year, and we recognize revenue as we deliver advertising impressions, subject to satisfying all other revenue recognition criteria. Our revenue recognition policies are discussed in more detail under “—Nature of Business and Summary of Significant Accounting Policies” in the notes to our condensed consolidated financial statements included in Part I, Item 1.
Cost of Revenue
Cost of revenue consists primarily of media costs, and to a lesser extent, personnel costs, depreciation expense, amortization of internal-use software development costs on revenue-producing technologies, third-party inventory validation and data vendor costs, hosting costs and allocated costs. Media costs consist primarily of costs for advertising impressions we purchase from real-time advertising exchanges and other third parties, which are expensed when incurred. We typically pay these advertising exchanges on a per impression basis. Personnel costs include salaries, bonuses, stock-based compensation expense and employee benefit costs. These personnel costs are primarily attributable to individuals maintaining our servers and members of our network operations group, which initiates, sets up and launches advertising campaigns. We capitalize costs associated with software that is developed or obtained for internal-use and amortize these costs in cost of revenue over the internal-use software’s useful life. Third-party inventory validation and data vendor costs consist primarily of costs to augment campaign performance and monitor our brand safety efforts. Cost of revenue also includes third-party data center costs and depreciation of data center equipment. Allocated costs include charges for facilities, office expenses, telephones, and other miscellaneous expenses. We anticipate that our cost of revenue will increase in absolute dollars as our revenue increases.
Operating Expenses
We classify our operating expenses into three categories: research and development, sales and marketing and general and administrative. Our operating expenses consist primarily of personnel costs, and, to a lesser extent, professional fees and allocated costs. Personnel costs for each category of operating expense generally include salaries, bonuses and commissions for sales personnel, stock-based compensation expense and employee benefit costs. Allocated costs include charges for facilities, office expenses, telephones and other miscellaneous expenses.
Research and development. Our research and development expenses consist primarily of personnel costs and professional services associated with the ongoing development and maintenance of our technology. We believe that continued investment in technology is critical to pursuing our strategic objectives, and as a result, we expect research and development expenses to increase in absolute dollars in future periods.

31



Sales and marketing. Our sales and marketing expenses consist primarily of personnel costs (including commissions) and to a lesser extent, allocated costs, professional services, brand marketing, travel, trade shows and marketing materials. Our sales organization focuses on (i) marketing our solution to generate awareness; (ii) increasing the adoption of our solution by existing and new advertisers; and (iii) expanding our international business, primarily by growing our sales team in certain countries in which we currently operate and establishing a presence in additional countries. We expect sales and marketing expenses to increase in absolute dollars in future periods. In particular, we expect to incur additional marketing costs to support the launch of new offerings.
General and administrative. Our general and administrative expenses consist primarily of personnel costs associated with our executive, finance, legal, human resources, compliance and other administrative functions, as well as accounting and legal professional services fees, allocated costs and other corporate expenses. We expect to continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums and compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002. As a result, we expect general and administrative expenses to increase in absolute dollars in future periods.
Other Expense, Net
Interest expense. Interest expense is related to our credit facilities and our previous term debt.
Other income (expense)—net. Other income (expense)—net consists primarily of interest income, gains and losses on the sale and disposal of property, equipment and software, as well as gains and losses on foreign currency translation. We have foreign currency exposure related to our accounts receivable that are denominated in currencies other than the U.S. dollar, principally the British pound sterling and the euro.
Change in fair value of convertible preferred stock warrant liability.   During 2013, 2012 and 2011, we had two outstanding warrants to purchase shares of our capital stock. The convertible preferred stock warrants were subject to re-measurement at each balance sheet date, and any change in fair value was recognized as a component of other expense, net. In connection with the closing of our initial public offering, or IPO, in September 2013, one of the warrants was automatically converted into shares of common stock and the other warrant was converted into a warrant to purchase shares of common stock, which was exercised by the holder following the completion of the IPO. As such, beginning with the fourth quarter of 2013, we are no longer required to remeasure the value of the converted common stock warrant, and therefore, no further charges or credits related to such warrant will be made to other income and expense.
Provision for Income Taxes
Provision for income taxes consists primarily of federal and state income taxes in the United States and income taxes in foreign jurisdictions in which we conduct business. Due to uncertainty as to the realization of benefits from our deferred tax assets, including net operating loss carry-forwards, research and development and other tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance at least in the near term.

32



Results of Operations
The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Consolidated Statements of Operations Data:
 
 
 
Revenue
$
74,397

 
$
38,212

Cost of revenue (1)
37,535

 
20,671

Gross profit
36,862

 
17,541

Operating expenses:
 
 
 
Research and development (1)
7,241

 
2,412

Sales and marketing (1)
29,759

 
16,230

General and administrative (1)
10,340

 
5,177

Total operating expenses
47,340

 
23,819

Loss from operations
(10,478
)
 
(6,278
)
Other expense, net:
 
 
 
Interest expense
(414
)
 
(124
)
Other income (expense)—net
(19
)
 
(519
)
Change in fair value of convertible preferred stock warrant liability

 
(1,097
)
Other expense, net
(433
)
 
(1,740
)
Loss before income taxes
(10,911
)
 
(8,018
)
Provision for income taxes
(314
)
 
(54
)
Net loss
$
(11,225
)
 
$
(8,072
)
Loss per share:
 
 
 
Net loss per share, basic and diluted
$
(0.33
)
 
$
(0.97
)

(1)
Includes stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Cost of revenue
$
252

 
$
27

Research and development
987

 
391

Sales and marketing
2,167

 
512

General and administrative
1,551

 
635

Total *
$
4,957

 
$
1,565


*
The table above includes the impact of the issuance of restricted stock at fair value.

33



 
Three Months Ended
 
March 31,
 
2014
 
2013
Consolidated Statements of Operations Data: *
 
 
 
Revenue
100
 %
 
100
 %
Cost of revenue
50

 
54

Gross profit
50

 
46

Operating expenses:
 
 
 
Research and development
10

 
6

Sales and marketing
40

 
42

General and administrative
14

 
14

Total operating expenses
64

 
62

Loss from operations
(14
)
 
(16
)
Other expense, net:
 
 
 
Interest expense
(1
)
 

Other expense—net

 
(1
)
Change in fair value of convertible preferred stock warrant liability

 
(3
)
Other expense, net
(1
)
 
(5
)
Loss before income taxes
(15
)
 
(21
)
Provision for income taxes

 

Net loss
(15
)%
 
(21
)%

*
Certain figures may not sum due to rounding.
Comparison of the Three Months Ended March 31, 2014 and 2013
Revenue
 
Three Months Ended
 
 
 
March 31,
 
% Change
 
2014
 
2013
 
2014 vs 2013
 
(in thousands, except percentages)
Revenue
$
74,397

 
$
38,212

 
95
%

Revenue increased $36.2 million , or 95% , during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . Revenue from the display channel was $45.4 million , or 61% , of revenue and $33.6 million , or 88% , of revenue for the three months ended March 31, 2014 and 2013 , respectively. Revenue growth was attributable in part to growth in revenue from channels other than display. Revenue from other channels was $29.0 million , or 39% , of revenue and $4.6 million , or 12% , of revenue for the three months ended March 31, 2014 and 2013 , respectively. Revenue from the display channel increased by $11.8 million , or 35% , and revenue from other channels increased by $24.4 million , or 530% , during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . The $24.4 million increase in other channel revenue was primarily from the mobile channel, which was 26% of revenue for the three months ended March 31, 2014 , followed by the social channel and then the video channel.

The increase in revenue was attributable to both increased spending by certain existing customers and an increase in the number of active customers adopting our solution. This increase was partially offset by a decline in revenue from some customers when they adopted third-party self-service platforms. The number of active customers increased from 560 as of March 31, 2013 to 1,251 as of March 31, 2014 . Within the 1,251 active customers, 145 active customers originated through our licensing agreement with a Japanese advertising agency. Growth in our number of active customers was driven primarily by growth in new customers, which generally spend less than customers that have used our solution for longer periods of time. This growth in active customers and new customers also resulted in a 124% increase in the number of campaigns during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . Due to the higher number of campaigns, the volume of impressions delivered increased by 87% during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . The average

34



cost per mille (or cost per thousand impressions), or CPM, increased by 4% , and revenue less media costs as a percentage of revenue increased to 60% from 56% during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . Revenue from outside of North America increased by 119% for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . Revenue from outside of North America, as a percentage of revenue, increased to 16% from 14% during the three months ended March 31, 2014 and 2013 , respectively.
 
Cost of Revenue, Gross Profit and Gross Margin
 
Three Months Ended
 
 
 
March 31,
 
% Change
 
2014
 
2013
 
2014 vs 2013
 
(in thousands, except percentages)
Cost of revenue
$
37,535

 
$
20,671

 
82
%
Gross profit
$
36,862

 
$
17,541

 
110
%
Gross margin
50
%
 
46
%
 
 
Headcount (at period end)
58

 
22

 
164
%

Cost of revenue increased by $16.9 million , or 82% , during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . This increase was primarily due to an increase in media costs from $16.6 million to $29.7 million and, to a lesser extent, an increase in personnel costs of $1.4 million , an increase in depreciation and amortization of capitalized internal-use software and other fixed assets of $1.1 million , an increase in data and inventory validation costs of $0.6 million , and an increase in hosting costs of $0.4 million . The $13.1 million increase in media costs was due to our increased sales volume. Media costs represented approximately 40% and 44% of revenue in the three months ended March 31, 2014 and 2013 , respectively. The decrease in media costs as a percentage of revenue was due to improvements in our AI-driven platform, which allowed us to more efficiently deliver our solution. The increase in personnel costs was primarily driven by increased headcount. The increase in data and hosting costs represents increases in costs to support our rapid growth. The amortization of capitalized internal-use software was $1.1 million and $0.8 million for the three months ended March 31, 2014 and 2013 , respectively. Gross profit increased by 110% primarily due to the increase in revenue less media costs from $21.6 million to $44.7 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2014 . This increase was due to technology and scale-driven efficiencies. Gross margin increased from 46% for the three months ended March 31, 2013 to 50% for the three months ended March 31, 2014 . Our gross profit margins are driven by continued advancements in our artificial intelligence and Big Data technologies. The increase was primarily due to decreases in media costs by 4% , partially offset by increases in other fixed costs by less than 1% , in each case as a percentage of revenue for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 .
Research and Development
 
Three Months Ended
 
 
 
March 31,
 
% Change
 
2014
 
2013
 
2014 vs 2013
 
(in thousands, except percentages)
Research and development
$
7,241

 
$
2,412

 
200
%
Percent of revenue
10
%
 
6
%
 
 
Headcount (at period end)
129

 
68

 
90
%

Research and development expense increased by $4.8 million , or 200% , during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . This increase was primarily due to an increase in personnel expense of $3.4 million and, to a lesser extent, to an increase in allocated costs of $0.9 million and an increase in professional services costs of $0.3 million . The increase in personnel expense and allocated costs was primarily due to an increase in headcount, which reflects our continued hiring of engineers to maintain our technologies and support our research and development efforts. Allocated costs include charges for facilities, office expenses, telephones and other miscellaneous expenses.
 

35



We capitalized internal-use software development costs of $2.1 million and $1.7 million for the three months ended March 31, 2014 and 2013 , respectively. The increase was due to additional headcount devoted to internal-use software development.

Sales and Marketing
 
Three Months Ended
 
 
 
March 31,
 
% Change
 
2014
 
2013
 
2014 vs 2013
 
(in thousands, except percentages)
Sales and marketing
$
29,759

 
$
16,230

 
83
%
Percent of revenue
40
%
 
42
%
 
 
Headcount (at period end)
418

 
229

 
83
%

Sales and marketing expense increased by $13.5 million , or 83% , during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . This increase was primarily due to an increase in personnel expense of $9.6 million and, to a lesser extent, an increase in allocated costs of $2.6 million , an increase in travel and related expenses of $0.8 million , and an increase in marketing expenses of $0.7 million . The increase in personnel expense was primarily due to significant expansion of our sales force and, to a lesser extent, to an increase in commission expense related to the increase in revenue. Our sales and marketing headcount increased by 83% and our commission expense increased by 25% during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 , primarily due to our focus on (i) marketing our solution to generate awareness, (ii) increasing the adoption of our solution by existing and new advertisers and (iii) establishing a presence in international markets. Allocated costs include charges for facilities, office expenses, telephones and other miscellaneous expenses.

General and Administrative
 
Three Months Ended
 
 
 
March 31,
 
% Change
 
2014
 
2013
 
2014 vs 2013
 
(in thousands, except percentages)
General and administrative
$
10,340

 
$
5,177

 
100
%
Percent of revenue
14
%
 
14
%
 
 
Headcount (at period end)
105

 
59

 
78
%
    
General and administrative expense increased by $5.2 million , or 100% , during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . This increase was primarily due to an increase in personnel expense of $3.4 million and, to a lesser extent, to an increase in allocated costs of $0.8 million , an increase in professional services of $0.3 million , an increase in other miscellaneous expenses of $0.2 million , and an increase in depreciation expense of $0.1 million . The increase in personnel costs was driven primarily by increased stock-based compensation expense and increased headcount. The increase in third-party professional services was primarily due to increased accounting and legal services necessary to support a public company. We also continued to invest in our infrastructure and in recruiting services to grow our general and administrative headcount. Allocated costs include charges for facilities, office expenses, telephones and other miscellaneous expenses. Other miscellaneous expenses primarily includes local taxes, fees and charitable contributions.

36



Other Expense, Net
 
Three Months Ended
 
 
 
March 31,
 
% Change
 
2014
 
2013
 
2014 vs 2013
 
(in thousands)
Interest expense
$
(414
)
 
$
(124
)
 
234
 %
Gain (loss) on foreign currency translation
(29
)
 
(556
)
 
(95
)%
Other income (expense)—net
10

 
37

 
(73
)%
Change in fair value of convertible preferred stock warrant liability

 
(1,097
)
 
(100
)%
Total other expense, net
$
(433
)
 
$
(1,740
)
 
(75
)%
The decrease in other expense, net, during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily relates to revaluations of convertible preferred stock warrants during 2013 which were converted to equity in September 2013, and, to a lesser extent, to movements within foreign currency translations, partially offset by interest related to our additional borrowings under our revolving credit facility and term debt.
Provision for Income Taxes
Our provision for income taxes of $0.3 million and $0.1 million for the three months ended March 31, 2014 and 2013 , respectively, primarily relates to taxes due in foreign jurisdictions.
Liquidity and Capital Resources
From our incorporation in March 2008 through September 2013, we financed our operations, capital expenditures and working capital needs through private sales of convertible preferred stock, lines of credit and term debt. We received net proceeds of $60.6 million from the issuance of convertible preferred stock between 2008 and 2012. In September 2013, we completed our initial public offering whereby we sold 4,000,000 shares of common stock and certain of our stockholders sold 600,000 shares of common stock. The public offering price of the shares sold in the initial public offering was $29.00 per share. We did not receive any proceeds from the sales of shares by the selling stockholders. The total gross proceeds to us from the initial public offering were $116.0 million . After deducting underwriters’ discounts and commissions, and estimated offering expenses, the aggregate net proceeds we received totaled approximately $103.3 million .
On December 20, 2013, we entered into an Amended and Restated Revolving Credit and Term Loan Agreement, or the Loan Facility, with certain lenders, including Comerica Bank, or Comerica, as administrative agent for the lenders. The Loan Facility amended and restated our then-existing Loan and Security Agreement, dated as of April 7, 2010, or the Existing Loan Facility, by and between us and Comerica.
The Loan Facility provides for an $80.0 million secured accounts receivable formula-based revolving credit facility, with a $5.0 million letter of credit subfacility, a $1.5 million swingline subfacility and a $20.0 million secured term loan facility. The Loan Facility permits us, subject to certain requirements, to request an increase in the maximum revolving commitments under the Loan Facility by up to $25.0 million . We used proceeds of the initial extension of credit under the Loan Facility to refinance $26.9 million of revolving loans and term loans under the Existing Loan Facility.
In February 2014, we completed an underwritten follow-on public offering of our common stock in which 2,000,000 shares of common stock were sold by us and 3,000,000 shares of common stock were sold by selling stockholders. The public offering price of the shares sold in the offering was $61.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. The total gross proceeds from the offering to us were $122.0 million . After deducting underwriters’ discounts and commissions and offering expenses, the aggregate net proceeds we received totaled approximately $115.4 million .
As of March 31, 2014 , we had cash and cash equivalents of $218.2 million and $26.9 million in debt obligations relating to the Existing Loan Facility from Comerica. As of March 31, 2014 , we had the ability to borrow up to an additional $46.9 million under the Existing Loan Facility based on our accounts receivable balance. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments as of March 31, 2014 .

37



We believe that our existing cash and cash equivalents balance, together with the undrawn balance under the Loan Facility, will be sufficient to meet our business requirements for at least the next twelve months. During 2014 we plan to continue to significantly increase our capital expenditures to support our growth, including expenditures on additional hardware, such as data centers and related equipment, and leasehold improvements. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect, particularly if we decide to pursue a material acquisition or other strategic investment. Our future cash requirements and the adequacy of available funds will depend on many factors, including those set forth in the sections of this Quarterly Report on Form 10-Q entitled “Risk Factors.”
If we require additional cash, we may attempt to raise additional capital through private equity, equity-linked or debt financing arrangements. 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 additional funds, we would also take other measures to reduce expenses to offset any shortfall.
Our current debt obligations under the Loan Facility require us to maintain compliance with certain financial covenants, with the most significant covenant being a requirement to maintain a specified minimum quarterly adjusted EBITDA (defined for this purpose as earnings before interest expense, income tax expense, depreciation, amortization and other specified cash and noncash charges). Based on our projections, we believe we will maintain compliance with the debt covenants through 2014. However, if future operating results are less favorable than currently anticipated, we may need to seek waivers or amendments to modify our debt covenants.
There can be no assurances that we will be able to raise additional capital or obtain such waivers or amendments of the Loan Facility on acceptable terms or at all, which would adversely affect our ability to achieve our business objectives. In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business could be adversely affected.
Cash Flows
The following table summarizes our cash flows for the periods presented (in thousands):
 
Three Months Ended
 
March 31,
 
2014
 
2013
Consolidated Statements of Cash Flows Data:
 
 
 
Cash flows used in operating activities
$
(1,201
)
 
$
(5,620
)
Cash flows used in investing activities
(11,215
)
 
(3,464
)
Cash flows provided by financing activities
116,693

 
9,962

Effects of exchange rates on cash
24

 
(38
)
Increase (decrease) in cash and cash equivalents
$
104,301

 
$
840


Operating Activities
Our primary source of cash from operating activities is from collections of receivables for advertising billings. Our primary use of cash in operating activities is for the payment to exchanges for media costs. Cash used in operating activities is primarily influenced by the volume of sales to advertisers and advertising agencies representing advertisers, as well as by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Cash used in operating activities has typically been generated from net losses and further increased by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accrued liabilities, adjusted for non-cash expense items such as depreciation, amortization and stock-based compensation expense.
Our collection cycles can vary from period to period based on common payment practices employed by advertising agencies. Our days sales outstanding were 101 and 113 days as of March 31, 2014 and March 31, 2013 , respectively. Our contracts with advertising exchanges typically are based on the standard payment terms of the advertising exchanges. During the fourth quarter of each year, our working capital needs may increase due to the seasonality of our business. This increase is driven by the fact that

38



we have to make timely payments to publishers and exchanges, but customer payments may be delayed beyond the contractual terms of the customers’ invoices. As a result, the timing of cash receipts and vendor payments can significantly impact our cash provided by (used in) operations for any period presented.
Three months ended March 31, 2014 and 2013. For the three months ended March 31, 2014 , cash used in operating activities was $1.2 million , resulting from a net loss of $11.2 million , offset by non-cash expenses of $8.0 million , which included depreciation, amortization, stock-based compensation expense, excess tax benefit from stock-based activity and the provision for doubtful accounts. These non-cash expenses increased due to capital expenditures and headcount growth, primarily related to continued investment in our business. The remaining cash of $2.0 million was provided by the net change in working capital items, most notably a decrease in accounts payable of $5.0 million , related to the timing of payments, compensation and other general expenses and an increase in prepaid and other assets of $3.6 million due to the timing of payments for software licenses and maintenance, deposits, and other operating costs, and growth of the company. These amounts were partially offset by (i) a decrease in accounts receivable of $7.2 million due to the seasonality of advertising campaigns as well as the timing of payments from customers and agencies and (ii) an increase in deferred rent of $3.6 million . However, our days sales outstanding decreased from 113 to 101 from March 31, 2013 to March 31, 2014 , respectively, due to improved operational processes.
 
For the three months ended March 31, 2013 , cash used in operating activities was $5.6 million , resulting from a net loss of $8.1 million , offset by non-cash expenses of $4.1 million , which included depreciation, amortization, stock-based compensation expense and the change in fair value of preferred stock warrant liability. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of $1.6 million was from the net change in working capital items, most notably a decrease in accounts payable of $1.8 million related to the timing of payments partially offset by increase in accrued liabilities of $0.9 million, related to the timing of compensation and other general expenses. There was an increase in accounts receivable of $0.6 million due to an increase in billings for advertising campaigns as well as timing of payments from domestic and international customers and agencies and an increase in prepaid expenses and other current assets of $0.2 million primarily due to the timing of payments for rent, insurance and other operating costs.
Investing Activities
During the three months ended March 31, 2014 and 2013 , investing activities consisted of purchases of property and equipment, including hardware and software to support our growth as well as capitalized internal-use software development costs. During the three months ended March 31, 2014 , such activities also consisted of $2.3 million in restricted cash required to be deposited with financial institutions for security deposits for our London, United Kingdom and Paris, France office lease agreements. Purchases of property and equipment may vary from period-to-period due to the timing of the expansion of our operations, the addition of headcount and the development cycles of our internal-use hosted software platform. We expect to continue to invest in property and equipment and in the further development and enhancement of our software platform for the foreseeable future.
Financing Activities
Three months ended March 31, 2014 and 2013. During the three months ended March 31, 2014 , cash provided by financing activities was $116.7 million , consisting primarily of $116.5 million in proceeds from our follow-on public offering completed on February 5, 2014, partially offset by $1.0 million in cash used to pay costs related to our follow-on public offering. Cash was also provided by $1.1 million in proceeds from the exercise of stock options.
During the three months ended March 31, 2013 , cash provided by financing activities amounted to $10.0 million , consisting of $10.0 million in borrowings under our Comerica line of credit.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of March 31, 2014 or December 31, 2013 other than the operating leases and indemnification agreements described below.
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify 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 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. No demands have been made upon us to provide indemnification under such agreements,

39



and there are no claims that we are aware of that could have a material effect on our condensed consolidated balance sheet, condensed consolidated statements of operations, condensed consolidated statements of comprehensive loss or condensed consolidated statements of cash flows.
Operating Leases
We lease various office facilities, including our corporate headquarters in Redwood City, California and various sales offices, under operating lease agreements that expire through March 2025. Included within these operating lease agreements is our new headquarters facility, which expires in December 2019 and a new sales office in New York, NY, which expires in March 2025.
Contractual Obligations and Known Future Cash Requirements
There have been no material changes in our commitments under contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Commitments
As of March 31, 2014 , our principal commitments consisted of obligations under the Loan Facility that were scheduled to mature at various dates through December 2018 and operating leases for our offices, as well as capital lease agreements on computer hardware and software.
The following table summarizes our future minimum payments under these arrangements as of March 31, 2014 (in thousands):
 
Payments Due by Period
 
Total
 
Less Than
1 Year
 
1–3 Years
 
3–5 Years
 
More Than
5 Years
Operating lease obligations
$
117,970

 
$
7,038

 
$
31,099

 
$
30,415

 
$
49,418

Capital lease obligations
2,530

 
881

 
1,649

 

 

Term debt (1)    
20,000

 
1,250

 
10,000

 
8,750

 

Revolving credit facility (2)
7,444

 

 
7,444

 

 

Total minimum payments
$
147,944

 
$
9,169

 
$
50,192

 
$
39,165

 
$
49,418


(1)
Accrues interest, at our option, at (i) a base rate determined in accordance with the Loan Facility, plus a spread of 2.75% to 3.50%, or (ii) a LIBOR rate determined in accordance with the credit agreement, plus a spread of 3.75% to 4.50%, which was equal to 3.90% , as of March 31, 2014 , and is scheduled to mature in December 2018.

(2)
Accrues interest, at our option, at (i) a base rate determined in accordance with the Loan Facility, plus a spread of 1.75% to 2.50%, or (ii) a LIBOR rate determined in accordance with the credit agreement, plus a spread of 2.75% to 3.50%, which was equal to 2.90% , as of March 31, 2014 , and has a final maturity date in December 2016.
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.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions and estimates associated with revenue recognition, internal-use software development costs, income taxes and stock-based compensation expense 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 the notes to our consolidated financial statements.

40



There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within 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, foreign exchange and inflation risks.
Interest Rate Fluctuation Risk
Our cash and cash equivalents consist of cash and money market funds. Our borrowings under our credit facility are at variable interest rates, and our long-term credit facility exposes us to interest rate fluctuations over the next four years. If our variable interest rates materially increase during that time, our results of operations could be adversely affected. Our borrowings under capital lease obligations are at fixed interest rates, and therefore do not expose us to additional interest rate fluctuation risk.
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash and cash equivalents have a relatively short maturity, our portfolio’s fair value is relatively insensitive to interest rate changes. We do not believe that an increase or decrease in interest rates of 100 basis points would have a material effect on our financial condition or results of operations. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.
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 British pounds sterling and the euro. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Although we have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains (losses) related to translating certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in currencies other than the U.S. dollar, we believe such fluctuations will not have a material impact on our results of operations. As our foreign sales and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.


41



ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
The phrase "disclosure controls and procedures" refers to controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, or SEC. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer, or CEO, and chief financial officer, or CFO, as appropriate to allow timely decision regarding required disclosure.
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act), as of March 31, 2014 , the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2014 , our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the first quarter of 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.



42



PART II

ITEM 1. LEGAL PROCEEDINGS

We are not currently a party to any legal proceedings, litigation, or claims that could materially affect our business, results of operations, cash flows, or financial position. We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect our future financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 25 of this Quarterly Report on Form 10-Q for a discussion of the forward-looking statements that are qualified by these risk factors. If any of the events or circumstances described in the following risk factors actually occurs, our business, operating results and financial condition could be materially adversely affected.

Risks Related to Our Business and Our Industry
Our limited operating history makes it difficult to evaluate our business and prospects.
We were incorporated in 2008 and, as a result, have only a limited operating history upon which our business and future prospects may be evaluated. Although we have experienced substantial revenue growth in our limited history, the rate of growth has declined in recent quarters. We may not be able to slow or reverse this decline in the revenue growth rate and we may not be able to maintain our current revenue levels. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries, including challenges related to recruiting, integrating and retaining qualified employees; making effective use of our limited resources; achieving market acceptance of our existing and future offerings; competing against companies with greater financial and technical resources; acquiring and retaining customers and maintaining relationships with advertising agencies; and developing new offerings.
Our current operational infrastructure may require changes for us to scale our business efficiently and effectively to keep pace with demand for our solution, and achieve long-term profitability. If we fail to implement these changes on a timely basis, or if we are unable to implement them effectively or at all due to factors beyond our control or other reasons, our business may suffer. We cannot provide assurance that we will be successful in addressing these and other challenges we may face in the future. As a growing company in a rapidly evolving industry, our business prospects depend in large part on our ability to:
develop and offer a competitive technology platform and offerings that meet our advertising customers’ needs as they change;
build a reputation for a superior solution and create trust and long-term relationships with advertisers and advertising agencies;
distinguish ourselves from competitors in our industry;
maintain and expand our relationships with the sources of quality inventory through which we execute our customers’ advertising campaigns;
respond to evolving industry standards and government regulations that impact our business, particularly in the areas of data collection and consumer privacy;
prevent or otherwise mitigate failures or breaches of security or privacy;
expand our business internationally; and
attract, hire, integrate and retain qualified and motivated employees.

43



If we are unable to meet one or more of these objectives or otherwise adequately address the risks and difficulties that we face, our business may suffer, our revenue may decline and we may not be able to achieve further growth or long-term profitability.
If we do not manage our growth effectively, the quality of our solution or our relationships with our customers may suffer, and our operating results may be negatively affected.
Our business has grown rapidly. We rely heavily on information technology, or IT, systems to manage critical functions such as advertising campaign management and operations, data storage and retrieval, revenue recognition, budgeting, forecasting, financial reporting and other administrative functions. To manage our growth effectively, we must continue to improve and expand our infrastructure, including our IT, financial and administrative systems and controls, data centers and leasehold improvements. We must also continue to manage our employees, operations, finances, research and development and capital investments efficiently. Our productivity and the quality of our solution may be adversely affected if we do not integrate and train our new employees, particularly our sales and account management personnel, quickly and effectively and if we fail to appropriately coordinate across our executive, engineering, finance, human resources, legal, marketing, sales, operations and customer support teams. If we continue our rapid growth, we will incur additional expenses, and our growth may continue to place a strain on our resources, infrastructure and ability to maintain the quality of our solution. If we do not adapt to meet these evolving growth challenges, and if the current and future members of our management team do not effectively scale with our growth, the quality of our solution may suffer and our corporate culture may be harmed. Failure to manage our future growth effectively could cause our business to suffer, which, in turn, could have an adverse impact on our financial condition and results of operations.
If we fail to make the right investment decisions in our offerings and technology platform, we may not attract and retain advertisers and advertising agencies and our revenue and results of operations may decline.
We compete for advertisers, which are often represented by advertising agencies, who want to purchase digital media for advertising campaigns. Our industry is subject to rapid changes in standards, technologies, products and service offerings, as well as in advertiser demands and expectations. We continuously need to make decisions regarding which offerings and technology to invest in to meet advertiser demand and evolving industry standards and regulatory requirements. We may make wrong decisions regarding these investments. For example, we expect advertisers to award us credit, or attribution, for impressions that generate specific consumer purchases or responses using certain criteria such as last ad clicked or viewed. Our technology considers these attribution models and if new attribution models are introduced by advertisers, we may need to make changes in our technology. If new or existing competitors offer more attractive offerings, we may lose advertisers or advertisers may decrease their spending on our solution. New advertiser demands, superior competitive offerings or new industry standards could render our existing solution unattractive, unmarketable or obsolete and require us to make substantial unanticipated changes to our technology platform or business model. Our failure to adapt to a rapidly changing market or to anticipate advertiser demand could harm our business and our financial performance.
We have a history of losses and may not achieve or sustain profitability in the future.
We incurred net losses of $11.2 million and $8.1 million , for three months ended March 31, 2014 and 2013 , respectively. As of March 31, 2014 , we had an accumulated deficit of $55.7 million . We may not achieve profitability in the foreseeable future, if at all. Although our revenue has increased significantly in recent periods, we may not be able to sustain this revenue growth. In addition, our operating expenses have increased with our revenue growth, primarily due to substantial investments in our business and increasing our headcount by approximately 87% from March 31, 2013 to March 31, 2014 . We expect our cost of revenue and operating expenses to continue to increase substantially in the foreseeable future as we continue to expand our business, including by adding sales, marketing and related support employees in existing and new territories, adding engineering employees to support continued investments in our technology platform and offerings, and adding general and administrative employees to support our growth and expansion.
We may experience fluctuations in our operating results, which make our future results difficult to predict and could cause our operating results to fall below our expectations or those of investors or analysts.
Our quarterly and annual operating results have fluctuated in the past. Similarly, we expect our future operating results to fluctuate for the foreseeable future due to a variety of factors, many of which are beyond our control. Our fluctuating results could cause our performance to fall below the expectations of investors and securities analysts, and adversely affect the price of our common stock. Because our business is changing and evolving rapidly, our historical operating results may not be useful in predicting our future operating results. Factors that may increase the volatility of our operating results include the following:
the addition or loss of new advertisers and advertising agencies;

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changes in demand and pricing for our solution;
the seasonal nature of our customers’ spending on digital advertising campaigns;
changes in our pricing policies or the pricing policies of our competitors;
the pricing of advertising inventory or of other third-party services;
the introduction of new technologies, product or service offerings by our competitors;
changes in our customers’ advertising budget allocations, agency affiliations, or marketing strategies;
changes and uncertainty in the regulatory environment for us or our advertisers;
changes in the economic prospects of our advertisers or the economy generally, which could alter current or prospective advertisers’ spending priorities, or could increase the time or costs required to complete sales with advertisers;
changes in the availability of advertising inventory through real-time advertising exchanges, or in the cost to reach end consumers through digital advertising;
changes in our capital expenditures as we acquire the hardware, equipment and other assets required to support our business; and
costs related to acquisitions of people, businesses or technologies.
Based upon all of the factors described above and others that we may not anticipate, including those beyond our control, we have a limited ability to forecast our future revenue, costs and expenses. As a result, our operating results may from time to time fall below our estimates or the expectations of investors and analysts.
If we are unable to attract new advertising customers and sell additional and new offerings to our existing customers, our revenue growth will be adversely affected.
To sustain or increase our revenue, we must add new advertisers and encourage existing advertisers (both of which are often represented by advertising agencies) to purchase additional offerings from us. As the digital advertising industry matures and as competitors introduce lower cost or differentiated products or services that compete with or are perceived to compete with ours, our ability to sell our solution to new and existing advertisers based on our offerings, pricing, technology platform and functionality could be impaired. Some advertisers that are repeat users of our solution tend to increase their spend over time. Conversely, some advertisers that are newer to our solution tend to spend less than, and may not return as frequently as, advertisers who have used our solution for longer periods of time. With long-time advertisers, we may reach a point of saturation at which it is challenging to continue to grow our revenue from those advertisers because of their unfamiliarity with the breadth of our product suite, as well as factors beyond our control such as internal limits that advertisers or their agencies may place on the allocation of their advertising budgets to digital media, to particular campaigns, to a particular provider, or for other reasons not known to us. In the three months ended March 31, 2014, we experienced a decline in average customer spend compared to the same period in 2013, as well as a decline in spend by some of our larger customers. If we are unable to continue to attract new advertisers or obtain new business from existing advertisers, our revenue growth and our business may be adversely affected. We have experienced a slowing rate of revenue growth since the third quarter of 2013, which we expect will continue in the second quarter of 2014. Our ability to slow or reverse this declining rate of growth will depend in part upon the successful introduction of new offerings and our ability to cross-sell our full suite of offerings. We operate in a highly competitive market and there can be no assurance that these new offerings will gain significant levels of market acceptance.
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.
We use “cookies” (small text files) to gather important data to help deliver our solution. These cookies are placed through an Internet browser on an Internet user’s computer and correspond to a data set that we keep on our servers. Our cookies are known as "third party" cookies because we do not have a direct relationship with the Internet user. Our cookies collect anonymous information, such as when an Internet user views an ad, clicks on an ad, or visits one of our advertisers’ websites. On mobile devices, we may also obtain location based information about the user’s device. We use these cookies to help us achieve our

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advertisers’ campaign goals, to help us ensure that the same Internet user does not unintentionally see the same advertisement too frequently, to report aggregate information to our advertisers regarding the performance of their advertising campaigns and to detect and prevent fraudulent activity throughout our network of inventory. We also use data from cookies to help us decide whether to bid on, and how much to bid on, an opportunity to place an advertisement in a certain location, at a given time, in front of a particular Internet user. A lack of data associated with cookies may detract from our ability to make decisions about which inventory to purchase for an advertiser’s campaign, and undermine the effectiveness of our solution.
Cookies may easily be deleted or blocked by Internet users. All of the most commonly used Internet browsers (including Chrome, Firefox, Internet Explorer, and Safari) allow Internet users to prevent cookies from being accepted by their browsers. Internet users can also delete cookies from their computers at any time. Some Internet users also 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 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. In addition, companies such as Google have publicly disclosed their intention to move away from cookies to another form of persistent unique identifier, or ID, to indicate Internet users in the bidding process on advertising exchanges. If companies do not use shared IDs across the entire ecosystem, this could have a negative impact on our ability to find the same anonymous user across different web properties, and reduce the effectiveness of our solution.
In addition, in the European Union, or EU, Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” directs EU member states to ensure that accessing information on an Internet user’s computer, such as through a cookie, is allowed only if the Internet user has given his or her consent. We may not be able to develop or implement additional tools that compensate for the lack of data associated with cookies. Moreover, even if we are able to do so, such additional tools may be subject to further regulation, time consuming to develop or costly to obtain, and less effective than our current use of cookies.
Potential “Do Not Track” standards or government regulation could negatively impact our business by limiting our access to the anonymous user data that informs the advertising campaigns we run, and as a result could degrade our performance for our customers.
As the use of cookies has received ongoing media attention over the past three years, some government regulators and privacy advocates have suggested creating a “Do Not Track” standard that would allow Internet users to express a preference, independent of cookie settings in their web browser, not to have their website browsing recorded. All the major Internet browsers have implemented some version of a “Do Not Track” setting. Microsoft’s Internet Explorer 10 includes a “Do Not Track” setting that is selected “on” by default. However, there is no definition of “tracking,” no consensus regarding what message is conveyed by a “Do Not Track” setting and no industry standards regarding how to respond to a “Do Not Track” preference. It is possible that we could face competing policy standards, or standards that put our business model at a competitive disadvantage to other companies that collect data from Internet users, standards that reduce the effectiveness of our solution, or standards that require us to make costly changes to our solution. The Federal Trade Commission, or FTC, has stated that it will pursue a legislative solution if the industry cannot agree upon a standard. The “Do-Not-Track Online Act of 2013” was introduced in the United States Senate in February 2013. If a “Do Not Track” web browser setting is adopted by many Internet users, and the standard either imposed by state or federal legislation, or agreed upon by standard setting groups, requires us to recognize a “Do Not Track” signal and prohibits us from using non-personal data as we currently do, then that could hinder growth of advertising and content production on the web generally, and limit the quality and amount of data we are able to store and use, which would cause us to change our business practices and adversely affect our business.
Our international expansion subjects us to additional costs and risks and may not yield returns, including anticipated revenue growth, in the foreseeable future, and our continued expansion internationally may not be successful.
Our significant investment in international expansion subjects us to many challenges associated with supporting a rapidly growing business across a multitude of cultures, customs, monetary, legal and regulatory systems and commercial infrastructures. We have a limited operating history outside of the United States, and our ability to manage our business and conduct our operations internationally requires considerable attention and resources. We began operations in the United Kingdom in 2011. Our UK subsidiary has employees in the United Kingdom, the Netherlands, France, Italy, Spain and Sweden. We established subsidiaries in Germany and Canada in 2013. In addition, in 2012, we made arrangements with a software platform licensee to make our solution available in Japan. We expect to significantly expand our international operations in the future.
Our international expansion and the integration of international operations present challenges and risks to our business and require significant attention from our management, finance, analytics, operations, sales and engineering teams to support advertising campaigns abroad. For example, as a direct result of our relationship with our Japan licensee, we have undertaken

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engineering and other work to support campaigns for Japanese advertisers and localize our technology platform for language, currency and time zone, and have made substantial investments to train our Japan licensee’s sales team to sell our solution in Japan. Moreover, our Japan licensee is a wholly-owned subsidiary of a large advertising agency holding company, which has other subsidiaries that may offer services that compete with us. As a result, there is a risk that conflicts of interest may arise that could reduce our ability to gain market share in the Japanese market. Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business abroad, could interfere with our ability to offer our solution competitively to advertisers and advertising agencies in one or more countries and expose us or our employees to fines and penalties. In some cases, our advertisers might impose additional requirements on our business in efforts to comply with their interpretation of their own or our legal obligations. These requirements might differ significantly from the requirements applicable to our business in the United States and could require engineering and other costly resources to accommodate. Laws and regulations that could impact us include but are not limited to tax laws, employment laws, data privacy regulations, U.S. laws such as the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments to governmental officials and private entities, such as the U.K. Bribery Act. Violations of these laws and regulations could result in monetary damages, criminal sanctions against us, our officers, or our employees, and prohibitions on the conduct of our business. We will likely incur significant operating expenses as a result of our international expansion, and it may not be successful. Our international business also subjects us to the impact of global and regional recessions and economic and political instability, differing regulatory requirements, costs and difficulties in managing a distributed workforce, potentially adverse tax consequences in the United States and abroad, fluctuations in foreign currency exchange rates and restrictions on the repatriation of funds to the United States. Our failure to manage these risks and challenges successfully could materially and adversely affect our business, financial condition and results of operations.
We may not be able to compete successfully against current and future competitors because competition in our industry is intense, and our competitors may offer solutions that are perceived by our customers to be more attractive than ours, or that may operate to limit our access to advertisers' budgets even if our solution is more effective. These factors could result in declining revenue, or inability to grow our business.
Competition for our advertisers’ advertising budgets is intense. We also expect competition to increase as the barriers to enter our market are low. Increased competition may force us to charge less for our solution, or offer pricing models that are less attractive to us and decrease our margins. Our principal competitors include traditional advertising networks; advertising agencies themselves, and companies that offer demand side and data management platforms that allow advertisers to purchase inventory directly from advertising exchanges or other third parties and manage and analyze their own consumer data. In the first quarter of 2014, we experienced a decline in revenue from some customers that adopted demand side and data management platforms such as these.
We rely predominately on advertising agencies to purchase our solution on behalf of advertisers, and certain of those agencies or agency holding companies are creating competitive solutions, referred to as agency trading desks. If these agency trading desks are successful in leveraging their relationships with the advertisers we may be unable to compete for advertisers' budgets even if our solution is more effective. Many agencies that we work with are also owned by large agency holding companies. For various reasons related to the agencies’ own priorities or those of their holding companies, they may not recommend our solution, even though it may be more effective, and we may not have the opportunity to demonstrate our value to advertisers.
We also compete with services offered through large online portals that have significant brand recognition, such as Yahoo!, Google, AOL and MSN. These large portals have substantial proprietary digital advertising inventory that may provide them with competitive advantages, including far greater access to Internet user data, and the ability to significantly influence pricing for digital advertising inventory. We also compete for a share of advertisers’ total advertising budgets with online search advertising, for which we do not offer a solution, and with traditional advertising media, such as direct mail, television, radio, cable and print. Some of our competitors have also established reputations for specific services, such as retargeting with dynamic creative, for which we do not have an established market presence. Many current and potential competitors have competitive advantages relative to us, such as longer operating histories, greater name recognition, larger client bases, greater access to advertising inventory on premium websites and significantly greater financial, technical, sales and marketing resources. Increased competition may result in reduced pricing for our solution, longer sales cycles or a decrease of our market share, any of which could negatively affect our revenue and future operating results and our ability to grow our business.
Our ability to continue growing revenue will depend in part upon the successful introduction of new offerings for mobile, video and brand advertising campaigns that continue to differentiate us from our competitors, including agency trading desks; and our ability to extend our self-service platform offering, which is currently only available to our licensee in Japan.

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We have been dependent on display advertising. A decrease in the use of display advertising, or our inability to further penetrate display, mobile, social and video advertising channels would harm our business, growth prospects, operating results and financial condition.
Historically, our customers have predominantly used our solution for display advertising, and the substantial majority of our revenue is derived from advertisers, typically through their agencies, that use our solution for display advertising. We expect that display advertising will continue to be a significant channel used by our customers. Recently, the market for display advertising, excluding mobile, social and video, has been declining as overall display advertising growth has been driven by mobile, social and video advertising. Should our customers lose confidence in the value or effectiveness of display advertising, the demand for our display solution could decline. In addition, many of our customers may think of us as only providing display advertising solutions, and we must develop marketing strategies that help our sales representatives cross-sell non-display products to our existing customer base. Our failure to achieve market acceptance of our solution for mobile, social and video advertising would harm our growth prospects, financial condition and results of operations.
We have historically relied, and expect to continue to rely, on a small number of customers for a significant portion of our revenue. The loss of any of these customers could significantly harm our business, financial condition and results of operations.
A relatively small number of customers have historically accounted for a majority of our revenue. For the three months ended March 31, 2014 and March 31, 2013, our top 20 customers accounted for 26% and 35% of our revenue, respectively. However, no customer accounted for 10% or more of our revenue during the respective period. While we expect this reliance to decrease over time, we expect that we will continue to depend upon a relatively small number of customers for a significant portion of our revenue for the foreseeable future. As a result, if we fail to successfully attract or retain new or existing customers or if existing customers run fewer advertising campaigns with us, defer or cancel their insertion orders, or terminate their relationship with us altogether, whether through the actions of their agency representatives or otherwise, our business, financial condition and results of operations would be harmed.

We do not have long-term commitments from our advertisers, and we may not be able to retain advertisers or attract new advertisers that provide us with revenue that is comparable to the revenue generated by any advertisers we may lose.
Most of our advertisers do business with us by placing insertion orders for particular advertising campaigns. If we perform well on a particular campaign, then the advertiser, or most often, the advertising agency representing the advertiser, may place new insertion orders with us for additional advertising campaigns. We rarely have any commitment from an advertiser beyond the campaign governed by a particular insertion order. We use the Interactive Advertising Bureau, or IAB, standard terms and conditions, pursuant to which our insertion orders may also be canceled by advertisers or their advertising agencies prior to the completion of the campaign without penalty. As a result, our success is dependent upon our ability to outperform our competitors and win repeat business from existing advertisers, while continually expanding the number of advertisers for whom we provide services. In addition, it is relatively easy for advertisers and the advertising agencies that represent them to seek an alternative provider for their advertising campaigns because there are no significant switching costs. Agencies, with whom we do the majority of our business, often have relationships with many different providers, each of whom may be running portions of the same advertising campaign. Because we generally do not have long-term contracts, it may be difficult for us to accurately predict future revenue streams. We cannot provide assurance that our current advertisers will continue to use our solution, or that we will be able to replace departing advertisers with new advertisers that provide us with comparable revenue.
If we fail to detect fraud or serve our advertisers’ advertisements on undesirable websites, our reputation will suffer, which would harm our brand and reputation and negatively impact our business, financial condition and results of operations.
Our business depends in part on providing our advertisers with a service that they trust, and we have contractual commitments to take reasonable measures to prevent advertisers’ advertisements from appearing on undesirable websites or on certain websites that they identify. We use proprietary technology to detect click fraud and block inventory that we know or suspect to be fraudulent, including “tool bar” inventory, which is inventory that appears within an application, often called a “tool bar,” and that overlays a website and displaces any advertising that would otherwise be displayed on such website. We also use third-party services in an effort to prevent our advertisers’ advertisements from appearing on undesirable websites. Preventing and combating fraud requires constant vigilance, and we may not always be successful in our efforts to do so. We may serve advertising on inventory that is objectionable to our advertisers, and we may lose the trust of our advertisers, which would harm our brand and reputation and negatively impact our business, financial condition and results of operations. We may also purchase inventory inadvertently that proves to be unacceptable for advertising campaigns, in which case we are responsible for the cost and cannot bill that cost to any campaign. If we buy substantial volumes of unusable inventory, this could negatively impact our results of operations.

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If our access to quality advertising inventory is diminished or if we fail to acquire new advertising inventory, our revenue could decline and our growth could be impeded.
We must maintain a consistent supply of attractive advertising inventory, meaning the digital space on which we place advertising impressions, including websites, proprietary social networks, such as Facebook, and mobile applications. Our success depends on our ability to secure quality inventory on reasonable terms across a broad range of advertising networks and exchanges, including real time advertising exchanges, such as Google’s DoubleClick Ad Exchange or AppNexus; suppliers of video and mobile inventory; and social media platforms, such as the Facebook Exchange, known as FBX.
The amount, quality and cost of inventory available to us can change at any time. Our suppliers are generally not bound by long-term contracts. As a result, we cannot provide any assurance that we will have access to a consistent supply of quality inventory. Moreover, the number of competing intermediaries that purchase advertising inventory from real-time advertising exchanges continues to increase, which could put upward pressure on inventory costs. If we are unable to compete favorably for advertising inventory available on real-time advertising exchanges, or if real-time advertising exchanges decide not to make their advertising inventory available to us, we may not be able to place advertisements at competitive rates or find alternative sources of inventory with comparable traffic patterns and consumer demographics in a timely manner. Furthermore, the inventory that we access through real-time advertising exchanges may be of low quality or misrepresented to us, despite attempts by us and our suppliers to prevent fraud and conduct quality assurance checks.
Suppliers control the bidding process for the inventory they supply, and their processes may not always work in our favor. For example, suppliers may place restrictions on our use of their inventory, including restrictions that prohibit the placement of advertisements on behalf of certain advertisers. Through the bidding process, we may not win the right to deliver advertising to the inventory that we select and may not be able to replace inventory that is no longer made available to us.
If we are unable to maintain a consistent supply of quality inventory for any reason, our business, advertiser retention and loyalty, financial condition and results of operations would be harmed.