Rocket Fuel Inc.
Rocket Fuel Inc. (Form: 10-Q, Received: 11/06/2015 16:51:34)





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 September 30, 2015
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
  x  
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On October 31, 2015, there were 43,024,143 shares of the registrant's common stock, par value $0.001 , outstanding.


1



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.


2



ROCKET FUEL INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TRADEMARKS
 
“Rocket Fuel,” the Rocket Fuel logo, “Advertising that Learns,” “Marketing 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



PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Rocket Fuel Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

 
September 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
83,083

 
$
107,056

Accounts receivable, net
110,660

 
135,400

Deferred tax assets, net
1,709

 
1,716

Prepaid expenses
3,499

 
3,698

Other current assets
1,689

 
12,531

Total current assets
200,640

 
260,401

Property, equipment and software, net
87,647

 
89,441

Restricted cash
2,235

 
2,915

Intangible assets, net
55,046

 
69,299

Goodwill

 
115,412

Other assets
1,326

 
1,797

Total assets
$
346,894

 
$
539,265

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
61,414

 
$
76,085

Accrued and other current liabilities
32,484

 
33,258

Deferred revenue
1,651

 
593

Current portion of capital leases
7,421

 
5,482

Revolving credit facility, net
39,720

 
39,705

Current portion of term loan, net
6,000

 
6,000

Total current liabilities
148,690

 
161,123

Term loan —Less current portion, net
19,047

 
23,335

Capital leases—Less current portion
11,257

 
12,341

Deferred rent—Less current portion
24,955

 
26,818

Deferred tax liabilities
2,061

 
2,068

Other liabilities
1,171

 
814

Total liabilities
207,181

 
226,499

Commitments and contingencies (Note 10)


 


Stockholders’ Equity:
 
 
 
Common stock, $0.001 par value— 1,000,000,000 authorized as of September 30, 2015 and December 31, 2014; 42,976,684 and 42,002,533 issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
43

 
42

Additional paid-in capital
446,410

 
421,630

Accumulated other comprehensive loss
(88
)
 
(120
)
Accumulated deficit
(306,652
)
 
(108,786
)
Total stockholders’ equity
139,713

 
312,766

Total liabilities and stockholders’ equity
$
346,894

 
$
539,265

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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
111,836

 
$
102,098

 
$
336,235

 
$
269,137

Costs and expenses:
 
 
 
 
 
 
 
Media costs
43,673

 
43,006

 
138,389

 
110,643

Other cost of revenue
20,105

 
11,946

 
59,887

 
28,767

Research and development
11,022

 
11,200

 
34,136

 
26,875

Sales and marketing
41,681

 
40,421

 
126,309

 
103,969

General and administrative
12,328

 
19,320

 
44,663

 
41,795

Impairment of goodwill
117,521

 

 
117,521

 

Restructuring

 

 
6,471

 

Total costs and expenses
246,330

 
125,893

 
527,376

 
312,049

Operating loss
(134,494
)
 
(23,795
)
 
(191,141
)
 
(42,912
)
Interest expense
1,087

 
1,157

 
3,472

 
2,085

Other (income) expense, net
797

 
1,999

 
2,309

 
2,443

Loss before income taxes
(136,378
)
 
(26,951
)
 
(196,922
)
 
(47,440
)
Income tax (benefit) provision
213

 
(4,120
)
 
942

 
(3,625
)
Net loss
$
(136,591
)
 
$
(22,831
)
 
$
(197,864
)
 
$
(43,815
)
Basic and diluted net loss per share attributable to common stockholders
$
(3.19
)
 
$
(0.61
)
 
$
(4.67
)
 
$
(1.23
)
Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders
42,763

 
37,230

 
42,350

 
35,490


See Accompanying Notes to Condensed Consolidated Financial Statements.


5



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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(136,591
)
 
$
(22,831
)
 
$
(197,864
)
 
$
(43,815
)
Other comprehensive income (loss): (1)
 
 
 
 
 
 
 
Foreign currency translation adjustments
25

 
(54
)
 
32

 
(29
)
Comprehensive loss
$
(136,566
)
 
$
(22,885
)
 
$
(197,832
)
 
$
(43,844
)
(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 CASH FLOWS
(In thousands)
(Unaudited)

 
Nine Months Ended
 
September 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(197,864
)
 
$
(43,815
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Impairment of goodwill
117,521

 

Depreciation and amortization
38,078

 
12,525

Impairment of leasehold improvements
2,704

 

Stock-based compensation
20,188

 
17,193

Deferred taxes

 
(3,894
)
Excess tax benefit from stock-based activity

 
(179
)
Other non-cash adjustments, net
1,115

 
422

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
24,133

 
(5,062
)
Prepaid expenses and other assets
9,892

 
(12,398
)
Accounts payable
(13,631
)
 
13,925

Accrued and other liabilities
(1,489
)
 
(1,475
)
Deferred rent
684

 
20,471

Deferred revenue
1,058

 
323

Net cash provided by (used in) operating activities
2,389

 
(1,964
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property, equipment and software
(10,797
)
 
(40,286
)
Business acquisition, net
(367
)
 
(97,444
)
Capitalized internal-use software development costs
(9,207
)
 
(5,459
)
Changes in restricted cash
636

 
(2,203
)
Net cash used in investing activities
(19,735
)
 
(145,392
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from the issuance of common stock, net of issuance costs

 
115,403

Proceeds from employee stock plans, net
3,373

 
6,467

Excess tax benefit from stock-based activity

 
179

Tax withholdings related to net share settlements of restricted stock units
(974
)
 
(241
)
Repayment of capital lease obligations
(4,337
)
 
(559
)
Proceeds from debt facilities, net of debt issuance costs
(242
)
 
35,000

Repayment of debt
(4,500
)
 
(11,133
)
Net cash (used in) provided by financing activities
(6,680
)
 
145,116

 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
53

 
(1
)
CHANGE IN CASH AND CASH EQUIVALENTS
(23,973
)
 
(2,241
)
CASH AND CASH EQUIVALENTS—Beginning of period
107,056

 
113,873

CASH AND CASH EQUIVALENTS—End of period
$
83,083

 
$
111,632


7



 
Nine Months Ended
 
September 30,
 
2015
 
2014
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes, net of refunds
$
834

 
$
195

Cash paid for interest
2,930

 
1,598

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment recorded in accounts payable and accruals
$
1,664

 
$
7,523

Property, plant and equipment acquired under capital lease obligations
5,116

 
7,855

Vesting of early exercised options
133

 
674

Stock-based compensation capitalized in internal-use software costs
2,018

 
1,183

Issuance of common stock in connection with acquisition

 
82,421

See Accompanying Notes to Condensed Consolidated Financial Statements.

8



ROCKET FUEL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 artificial-intelligence digital advertising solutions headquartered in Redwood City.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in Consolidated Financial Statements prepared in accordance with GAAP have been condensed or omitted in accordance with such rules and regulations. The Condensed Consolidated Balance Sheet data as of December 31, 2014 was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of our financial position and our results of operations and cash flows.

These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

The significant accounting policies and recent accounting pronouncements were described in Note 1 to the Consolidated Financial Statements included in the 2014 Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no significant changes in or updates to the accounting policies since December 31, 2014 other than as presented below.

Concentration of Credit Risk —Financial instruments that 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 four major financial institutions that the Company's management has assessed 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 September 30, 2015 and December 31, 2014, two agency holding companies and no single advertiser accounted for 10% or more of accounts receivable.
With respect to revenue concentration, the Company defines a customer as an advertiser that is a distinct source of revenue and is legally bound to pay for the advertising services that the Company delivers on the advertiser’s behalf. The Company counts 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 the Company. During the three and nine months ended September 30, 2015 and 2014 , no single customer represented 10% or more of revenue.
The Company also monitors the percentage of revenue from advertising agencies, even though advertising agencies that act on behalf of the Company’s advertisers are not considered customers based on the definition above. If all branches and divisions within each global advertising agency were considered to be a single agency for this purpose, two agency holding companies would have been associated with 10% or more of revenue during the three and nine months ended September 30, 2015 and 2014 .
Goodwill —The Company performs an annual impairment test near the end of its fiscal year on December 1 and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. Since the Company operates its business in one reporting unit, the goodwill is tested for impairment at the enterprise level. Due to a stock price decline during the three months ended September 30, 2015, the Company’s market capitalization declined to a value below the net book value of the Company’s equity, triggering the Company to conduct a goodwill impairment test. The outcome of the goodwill impairment test resulted in a non-cash impairment of goodwill of $117.5 million , which was recorded in the Condensed Consolidated Statements of Operations for the period ended September 30, 2015.
Refer to Note 12 for details of the Company's goodwill impairment test.
Fair Value Measurement —The fair value of the money market funds presented as cash equivalents on our Consolidated Balance Sheets were $22.9 million as of September 30, 2015 and December 31, 2015. These are measured as level 1 inputs in the fair value hierarchy.

9



The carrying amounts of our accounts receivable, accounts payable, accrued liabilities, term loan and revolving credit facility approximate their fair value due to their short maturities and, in the case of the term loan and revolving credit facility, their variable, market-based interest rates.
Recently Issued and Adopted Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board ("FASB") issued accounting guidance which simplifies measurement period adjustments in a business combination under ASU 2015-16. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and early adoption is permitted. The Company early adopted the guidance in the three months ended September 30, 2015.
In April 2015, the FASB issued accounting guidance which clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. The guidance is effective for annual periods and interim periods therein beginning after December 15, 2015. The Company utilizes cloud based applications in its administration and sales functions, and is evaluating the impact from the adoption of this guidance on its consolidated financial statements.
In April 2015, the FASB issued accounting guidance which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability under ASU 2015-03. The guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and early adoption is permitted. The Company early adopted the guidance in the three months ended September 30, 2015.

In August 2014, the FASB provided accounting guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures under ASU 2014-15. The amendments are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact of this ASU and expects no material modifications to its financial statements.

In May 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU 2014-09. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB decided to delay the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date January 1, 2017. The deferral results in the new revenue standard being effective January 1, 2018. The Company is currently evaluating the impact of this ASU on its consolidated financial position, results of operations and cash flows.

NOTE 2.
PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software, net as of September 30, 2015 and December 31, 2014 , consisted of the following (in thousands):
 
September 30,
 
December 31,
 
2015
 
2014
Capitalized internal-use software costs
$
34,980

 
$
23,385

Computer hardware and software
54,924

 
46,299

Furniture and fixtures
13,582

 
11,674

Leasehold improvements
39,200

 
36,811

Total
142,686

 
118,169

Accumulated depreciation and amortization
(55,039
)
 
(28,728
)
Total property, equipment and software, net
$
87,647

 
$
89,441

Refer to Note 4 for details of the Company's capital leases as of September 30, 2015 and December 31, 2014 .

10



Total depreciation and amortization expense related to property, equipment and software was $8.3 million and $4.6 million for the three months ended September 30, 2015 and 2014 , respectively, and $23.8 million and $11.4 million for the nine months ended September 30, 2015 and 2014 , respectively.
Amortization expense of internal-use software costs was $2.0 million and $1.4 million for the three months ended September 30, 2015 and 2014 , respectively, and $5.5 million and $3.7 million for the nine months ended September 30, 2015 and 2014 , respectively.
In addition, in the nine months ended September 30, 2015 , the Company recorded an impairment charge of $2.7 million for certain of its leasehold improvements in connection with its restructuring activities. Refer to Note 5 for details of the Company's restructuring plan.

NOTE 3.
BUSINESS COMBINATIONS
On September 5, 2014, the Company acquired X Plus Two Solutions, Inc., a Delaware corporation (“X Plus Two”), which wholly owns X Plus One Solutions, Inc, known in the industry as [x+1] ("[x+1]"). The acquisition of [x+1] significantly expanded the market opportunity and accelerated the Company’s entry into the digital marketing enterprise software-as-a-service ("SaaS") market. At closing, all outstanding shares of [x+1]'s capital stock and stock options were canceled in exchange for an aggregate of $98.0 million in cash and approximately 5.3 million shares of the Company’s common stock. The total purchase consideration is as follows (in thousands):
Purchase consideration:
 
Cash
$
98,045

Fair value of 5,253,084 shares common stock transferred
82,421

Total purchase price
$
180,466

The acquisition of [x+1] was accounted for in accordance with the acquisition method of accounting for business combinations with the Company as the accounting acquirer. The Company expensed the acquisition-related transaction costs in the amount of $4.9 million in general and administrative expenses. The total purchase price as shown in the table above was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of September 5, 2014, as set forth below. The Company finalized its estimates of fair value for certain of the acquired current assets and liabilities resulting in an adjustment of $2.1 million which was recorded during the three months ended September 30, 2015. The total purchase price was allocated as follows (in thousands):
Current assets
$
29,853

Non-current assets
3,999

Current liabilities
(29,354
)
Non-current liabilities
(16,253
)
Net acquired tangible assets
(11,755
)
Identifiable intangible assets
74,700

Goodwill
117,521

Total purchase price
$
180,466

The goodwill was primarily attributable to synergies expected to be generated from combining the Company's and [x+1]’s technology and operations. None of the goodwill recorded as part of the acquisition will be deductible for U.S. federal income tax purposes.

11



The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 are as follows (in thousands):
 
Goodwill
Balance as of December 31, 2013
$

Goodwill acquired
114,871

Goodwill adjustments recorded during the three months ended December 31, 2014 (1)
541

Balance as of December 31, 2014
115,412

Goodwill adjustment recorded during the three months ended September 30, 2015 (1)
2,109

Goodwill impairment recorded during the three months ended September 30, 2015 (1)
(117,521
)
Balance as of September 30, 2015
$


(1) Pursuant to business combinations accounting guidance, goodwill adjustments, for the effect of changes to net assets acquired during the measurement period, may be recorded up to one year from the date of an acquisition. Goodwill adjustments were not significant to our previously reported operating results or financial position.
 
 
 
 
 
As of September 30, 2015
 
Estimated Useful Life (in years)
 
Fair Value
(in thousands)
 
Accumulated Amortization
 
Net Book Value
Developed technology
3-4
 
$
42,100

 
$
(12,396
)
 
$
29,704

Customer relationships
7-8
 
27,700

 
(3,707
)
 
23,993

Trademarks
5
 
2,000

 
(2,000
)
 

Non-compete agreements
2
 
2,900

 
(1,551
)
 
1,349

Total
 
 
$
74,700

 
(19,654
)
 
55,046

Total amortization expense related to intangible assets acquired in the business combination with [x+1] was $5.8 million and $14.3 million for the three and nine months ended September 30, 2015 , respectively. During the three months ended September 30, 2015 , the Company accelerated the amortization of the trademark assets recording $1.6 million in additional amortization expense due to a change of its useful life.

The results of operations of [x+1] have been included in the Company's condensed consolidated statements of operations from the acquisition date. The following unaudited pro forma condensed combined financial information reflects the Company's results of operations for the periods indicated and assumes that the business had been acquired at the beginning of fiscal year 2014. The pro forma results include adjustments for amortization associated with the acquired intangible assets. The pro forma results are presented for informational purposes only and are not necessarily indicative of results that would have occurred had the acquisition taken place at the beginning of the earliest period presented, or of future results (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2014
Pro forma revenue
$
119,298

 
$
329,445

Pro forma revenue less media costs
$
65,614

 
$
182,359

Pro forma net loss
$
(19,779
)
 
$
(54,933
)


12



NOTE 4.
CAPITAL LEASES
Property, equipment and software includes hardware and software related to our data centers, which are acquired under capital lease agreements. The remaining future minimum lease payments under these non-cancelable capital leases as of September 30, 2015 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2015 (remaining 3 months)
 
$
2,115

2016
 
8,236

2017
 
6,550

2018
 
3,169

2019
 
79

Total minimum lease payments
 
$
20,149

Less: amount representing interest and taxes
 
(1,471
)
Less: current portion of minimum lease payments
 
(7,421
)
Capital lease obligations, net of current portion
 
$
11,257


NOTE 5.
RESTRUCTURING COSTS
In April 2015, the Company announced a plan intended to improve its operational efficiency, which included a reduction of its workforce, sublease of certain excess leased office space, among other cost reduction measures. During the three months ended June 30, 2015 , the Company incurred approximately $3.4 million in employee severance costs and $0.3 million in real estate broker costs associated with subleasing of the excess office space. The Company also incurred a $2.7 million non-cash impairment charge for leasehold improvements and certain other assets related to the subleased facility.

NOTE 6.
DEBT
Loan Facility —On December 31, 2014, the Company entered into a Second Amended and Restated Revolving Credit and Term Loan Agreement with certain lenders, the ("2014 Loan Facility"), which was last amended on March 13, 2015. The 2014 Loan Facility amended and restated the Company's then-existing Loan and Security Agreement, dated as of April 7, 2010, (as amended, the "2010 Loan Facility"). The 2014 Loan Facility provides for an $80.0 million revolving credit facility that matures on December 31, 2017, with a $12.0 million letter of credit subfacility and a $2.5 million swingline subfacility, and a $30.0 million secured term loan that matures on December 31, 2019. Revolving loans may be advanced under the 2014 Loan Facility in amounts up to the lesser of (i) 85% of eligible accounts receivable and (ii) $80.0 million , less the then outstanding principal amount of the term loan. If at any time the aggregate amounts outstanding exceed the allowable maximum advance, then the Company must make a repayment in an amount sufficient to eliminate the excess.
If the aggregated cash balances on deposit with the lenders and certain other domestic financial institutions fall below $40.0 million , the lenders have the right to use future cash collections from accounts receivable directly to reduce the outstanding balance of the revolving credit facility. The Company is also obligated to prepay the term loan with proceeds from the occurrence of certain events. The Company may repay revolving loans and term loans under the 2014 Loan Facility in whole or in part at any time without premium or penalty, subject to certain conditions.
As of September 30, 2015 , $25.5 million in term loans, $40.0 million under the revolving credit facility and letters of credit in the amount of $7.2 million were outstanding. The term loan is being repaid in quarterly principal installments of $1.5 million . The Company paid customary closing fees and pays customary commitment fees and letter of credit fees.
Revolving loans bear interest, at the Company's option, at (i) a base rate determined pursuant to the terms of the 2014 Loan Facility, plus a spread of 1.625% to 2.125% , or (ii) a LIBOR rate determined pursuant to the terms of the Loan Facility, plus a spread of 2.625% to 3.125% . Term loans bear interest, at the Company's option, at (i) a base rate determined pursuant to the

13



terms of the 2014 Loan Facility, plus a spread of 2.50% to 3.00% , or (ii) a LIBOR rate determined pursuant to the terms of the 2014 Loan Facility, plus a spread of 3.50% to 4.00% . In each case, the spread is based on the cash reflected on the Company’s balance sheet for the preceding fiscal quarter, plus an amount equal to the average unused portion of the revolving credit commitments during such fiscal quarter. The base rate is determined as the highest of (i) the prime rate announced by Comerica Bank, (ii) the federal funds rate plus a margin equal to 1.00% and (iii) the daily adjusted LIBOR rate plus a margin equal to 1.00% . Under certain circumstances, a default interest rate of  2.00%  above the applicable interest rate will apply on all obligations during the existence of an event of default under the 2014 Loan Facility.
The Company is required to maintain a minimum of $30.0 million of cash on deposit with the lenders and comply with certain financial covenants under the 2014 Loan Facility, including the following:
EBITDA. The Company is required to maintain specified EBITDA, which is defined for this purpose, with respect to any trailing twelve month 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; non-cash expenses or losses; stock-based compensation expense; costs and expenses from permitted acquisitions up to certain limits; costs and expenses in connection with the 2014 Loan Facility up to certain limits; certain legal fees up to certain limits incurred through December 2015; integration costs related to the [x+1] acquisition up to certain limits incurred through December 31, 2014 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 2014 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 owed to the lenders under the 2014 Loan Facility must be at least 1.10 to 1.00 .
The terms of the 2014 Loan Facility also require the Company to comply with certain other financial and non-financial covenants. As of September 30, 2015 , the Company was in compliance with all covenants.
Future Payments
Future principal payments of term loan as of September 30, 2015 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2015 (remaining 3 months)
 
$
1,500

2016
 
6,000

2017
 
6,000

2018
 
6,000

2019
 
6,000

Total
 
25,500

Less: current portion of term loan
 
(6,000
)
Term loan, net of current portion
 
$
19,500

As of September 30, 2015 , the $40.0 million balance outstanding under the revolving credit facility had a maturity date of December 31, 2017, 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 condensed consolidated balance sheets. The debt on the condensed consolidated balance sheets is shown net of $0.7 million in debt issuance costs.
    

14



NOTE 7.
STOCKHOLDERS’ EQUITY
The following table summarizes information pertaining to our stock-based compensation from stock options and stock awards, which are comprised of restricted stock awards and restricted stock units (in thousands, except grant-date fair value and recognition period):
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
Stock options:
 
 
 
Outstanding at the beginning of the period
6,291

 
7,411

Options granted
396

 
538

Options exercised
(423
)
 
(960
)
Options forfeited
(628
)
 
(273
)
Outstanding at the end of the period
5,636

 
6,716

Total intrinsic value of options exercised
$
2,619

 
$
29,726

Total unrecognized compensation expense at period-end
$
14,997

 
$
27,239

Weighted-average remaining recognition period at period-end (in years)
1.9

 
2.2

 
 
 
 
Stock awards:
 
 
 
Outstanding at the beginning of the period
2,515

 
382

Stock awards granted
2,767

 
718

Stock awards vested
(357
)
 
(54
)
Stock awards canceled
(1,032
)
 
(69
)
Outstanding at the end of the period
3,893

 
977

Weighted-average grant-date fair value
$
13.28

 
$
38.35

Total unrecognized compensation expense at period-end
$
36,013

 
$
26,755

Weighted-average remaining recognition period at period-end (in years)
2.8

 
3.3

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 Company's initial public offering, the first offering period started on October 1, 2013 and ended 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 September 30, 2015 , total compensation costs related to outstanding rights to purchase shares of common stock under the ESPP offering period ending on the first trading day on or before November 30, 2015, were approximately $0.9 million , which will be recognized over the offering period.
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 the 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 the Company's 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 fair value of restricted stock unit awards is the grant date closing price of the Company's common stock.

15



The Company uses the straight-line method for expense recognition over the vesting period of the award or option.
The assumptions used to value options granted to employees were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Expected term (years)
6.3
 
6.3
 
6.3
 
5.5–6.3
Volatility
50.7%–58.0%
 
56.7%–57.6%
 
50.7%–58.0%
 
55.6%–58.0%
Risk-free interest rate
1.57%–1.85%
 
1.84%
 
1.57%–1.85%
 
1.84%–1.97%
Dividend yield
 
 
 
The assumptions used to calculate our stock-based compensation for each stock purchase right granted under the ESPP were as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Expected term (years)
0.5
 
0.5
 
0.5
 
0.5-0.7
Volatility
73.3%
 
77.4%
 
73.3%
 
66.2%-77.4%
Risk-free interest rate
0.07%
 
0.06%
 
0.07%
 
0.06%-0.07%
Dividend yield
 
 
 
Stock-based compensation allocation
The following table summarizes the allocation of stock-based compensation in the accompanying condensed consolidated statements of operations (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Other cost of revenue
$
465

 
$
282

 
$
1,567

 
$
810

Research and development
1,688

 
1,279

 
5,769

 
3,577

Sales and marketing
2,478

 
2,683

 
7,634

 
7,598

General and administrative
1,676

 
1,685

 
5,218

 
4,900

Total
$
6,307

 
$
5,929

 
$
20,188

 
$
16,885


NOTE 8.
NET LOSS PER SHARE
Basic net 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. Because the Company had net losses for the three and nine months ended September 30, 2015 and 2014 , all these potentially dilutive shares of common stock were determined to be anti-dilutive and accordingly were not included in the calculation of diluted net loss per share.

16



The following table sets forth the computation of net loss per share of common stock (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(136,591
)
 
$
(22,831
)
 
$
(197,864
)
 
$
(43,815
)
Weighted-average shares used to compute basic and diluted net loss per share
42,763

 
37,230

 
42,350

 
35,490

Basic and diluted net loss per share
$
(3.19
)
 
$
(0.61
)
 
$
(4.67
)
 
$
(1.23
)
Common stock equivalents excluded from net loss per diluted share because their effect would have been anti-dilutive
9,754

 
7,937

 
9,754

 
7,937


NOTE 9.
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 intended to be reinvested indefinitely.

The Company recorded income tax provision of $0.2 million and an income tax benefit of $4.1 million for the three months ended September 30, 2015 and 2014 , respectively. The Company recorded income tax provision of $0.9 million and an income tax benefit of $3.6 million for the nine months ended September 30, 2015 and 2014 , respectively. The tax provision for the three and nine months ended September 30, 2015 is primarily due to foreign and state income tax expense. The tax benefit for the  three and nine months ended September 30, 2014  is primarily due to a partial release of valuation allowance against the Company’s deferred tax assets limited to the amount of the net deferred tax liabilities generated from intangibles acquired from the [x+1] acquisition, partially offset by provisions for foreign and state income taxes. 
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 certain valuation allowance against such assets as of  September 30, 2015  and December 31, 2014.

NOTE 10.
COMMITMENTS AND CONTINGENCIES
Operating Leases —The Company has operating lease agreements for office space for administrative, research and development and sales and marketing activities in the United States that expire at various dates through 2025.
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 $3.9 million for both the three months ended September 30, 2015 and 2014 , and $11.9 million and $10.8 million for the nine months ended September 30, 2015 and 2014 , respectively.

17



The approximate remaining future minimum cash lease payments under these non-cancelable operating leases as of September 30, 2015 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2015 (remaining 3 months)
 
$
5,203

2016
 
20,833

2017
 
19,788

2018
 
18,648

2019
 
21,147

Thereafter
 
43,657

 
 
$
129,276

Please refer to Note 4 for details of the Company's capital lease commitments as of September 30, 2015 .
Letters of Credit Bank Guarantees and Restricted Cash —As of September 30, 2015 and December 31, 2014 , the Company had irrevocable letters of credit for facilities leases of $7.2 million and $6.8 million , respectively. The letters of credit have various expiration dates, with the latest being December 2023.
As of September 30, 2015 , the Company had $2.2 million in cash reserved to support bank guarantees for certain 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 —The Company is involved from time to time in claims, proceedings, and litigation, including the following:
On September 3, 2014 and September 10, 2014, respectively, two purported class actions were filed in the Northern District of California against the Company and certain of its officers and directors. The actions are Shah v. Rocket Fuel Inc., et al. , Case No. 4:14-cv-03998, and Mehrotra v. Rocket Fuel Inc., et al. , Case No. 4:14-cv-04114. The underwriters in the Company's initial public offering on September 19, 2013 (the “IPO”) and its secondary offering on February 5, 2013 (the “Secondary Offering”) are also named as defendants. These actions were consolidated and a consolidated complaint, In re Rocket Fuel Securities Litigation , was filed on February 27, 2015. The consolidated complaint alleges that the defendants made false and misleading statements about the ability of the Company's technology to detect and eliminate fraudulent web traffic, and about Rocket Fuel’s future prospects. The consolidated complaint also alleges that the Company's registration statements and prospectuses for the IPO and the Secondary Offering contained false and misleading statements on these topics. The consolidated complaint purports to assert claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5, and for violations of Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”), on behalf of those who purchased the Company's common stock between September 20, 2013 and August 5, 2014, inclusive, as well as those who purchased stock in its initial public offering on September 19, 2013, and a claim for violation of Section 12(a)(2) of the Securities Act in connection with the Secondary Offering. The consolidated complaint seeks monetary damages in an unspecified amount. All defendants moved to dismiss the consolidated complaint on April 13, 2015. No decision had been made yet on that motion.
On March 23, 2015, a purported shareholder derivative complaint for breach of fiduciary duty, waste of corporate assets, and unjust enrichment was filed in San Mateo, California Superior Court against certain of the Company's current and former officers and its board of directors at that time. The action is Davydov v. George H. John , et.al, Case No. CIV 53304. This state court action has been stayed pending the outcome of the defendants’ motions to dismiss in In re Rocket Fuel Securities Litigation .

18



On October 6, 2015, a purported verified shareholder derivative complaint was filed in the Northern District of California. The action is Victor Veloso v. George H. John et al. , Case No. 4:15-cv-04625-PJH. The complaint, which is based on substantially the same facts as the In re Rocket Fuel Securities Litigation, names its board of directors at that time and certain current and former executives as defendants and has been related to the In re Rocket Fuel Securities Litigation .
We intend to vigorously defend ourselves against these actions.
The outcomes of the Company's legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to its consolidated financial position, results of operations or cash flows by an unfavorable resolution of these actions. At present, we are unable to reasonably estimate a possible range of loss for these actions.
Legal fees are expensed in the period in which they are incurred.

NOTE 11.
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.
The following table summarizes total revenue generated through sales personnel located in the respective locations (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
North America
$
93,415

 
$
85,948

 
$
283,330

 
$
226,519

All Other Countries
18,421

 
16,150

 
52,905

 
42,618

Total revenue
$
111,836

 
$
102,098

 
$
336,235

 
$
269,137

The following table summarizes total long-lived assets in the respective locations (in thousands):
 
September 30,
 
December 31,
 
2015
 
2014
North America
$
82,134

 
$
85,355

All Other Countries
5,513

 
4,086

Total long-lived assets
$
87,647

 
$
89,441


NOTE 12.
GOODWILL
Due to a stock price decline during the three months ended September 30, 2015, the Company’s market capitalization declined to a value below the net book value of the Company’s equity, triggering the Company to test its goodwill for impairment.

The Company first tested its intangible assets (other than goodwill) as of September 30, 2015 and determined that these assets were not impaired.


19



Goodwill is tested for impairment in a two-step process. The first step is to determine if there is an indication of impairment by comparing the estimated fair value of the reporting unit to its carrying value including goodwill. Goodwill is considered impaired if the reporting unit’s carrying value exceeds its estimated fair value. Upon indication of impairment, a second step is performed to determine the amount of the impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying value of the goodwill. Since the Company operates its business in one reporting unit, goodwill is tested for impairment at the enterprise level.

In the first step of the goodwill impairment test, the Company estimated the fair value of its reporting unit using the market approach. Under the market approach, the Company utilized the market capitalization of its publicly-traded shares and comparable company information to determine revenue multiples which were used to determine the fair value of the reporting unit. Based on this approach, the Company determined that there is an indication of impairment as the carrying value including goodwill exceeded the estimated fair value of the reporting unit.

In the second step of the goodwill impairment test the Company estimated the fair value of its assets and liabilities to determine the implied fair value of goodwill, and then compared the implied fair value of the goodwill to its carrying value. The outcome of this second step resulted in a non-cash impairment of goodwill of $117.5 million , which was recorded in the Condensed Consolidated Statements of Operations for the period ended September 30, 2015.

The inputs used to measure the estimated fair value of goodwill are classified as a Level 3 fair value measurement due to the significance of unobservable inputs based on company specific information.
    

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, or the Exchange Act. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty 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:
expectations for financial performance in the future, including revenue, media costs, other costs or revenue, margins, levels of operating expenses in the areas of research and development, sales and marketing and general and administrative, and our goal of achieving positive non-GAAP adjusted EBITDA for the full year, cash flows form operations and free cash flows;
the expected impact of our operational efficiency initiatives announced in April 2015;
the expected impact of seasonality on our operating results;
our expectations regarding our headcount levels in 2015 and beyond;
our ability to improve the productivity and efficiency of our resources and infrastructure;
our ability to improve sales productivity;
our ability to reduce certain operating expenses as a percentage of revenue;
our expectation that capital expenditures will decline in 2015 and in the immediate future from 2014 levels;
the usefulness of non-GAAP financial measures for understanding and evaluating our operating results;
our plans to finance data center hardware requirements through capital leasing facilities;
the adequacy of our office facilities to meet or exceed our needs for the immediate future and our ability to sublease unused facilities;
our expectation that existing cash and cash equivalents will be sufficient to meet our business requirements for at least the next 12 months;

20



anticipated growth of the digital advertising market;
the ability of our solutions to deliver intended results to customers;
the impact of our September 2014 acquisition of [x+1] on our financial condition and results of operations, including but not limited to the impact of assumptions underlying the accounting treatment of the transaction;
our ability to effectively integrate the operations of [x+1] and realize anticipated synergies and new market opportunities from this combination;
our ability to fully integrate our DSP platform with our DMP platform to create a self-service platform and experience that is both engaging and effective for the advertiser;
our ability to adapt our relationships with agencies and agency holding companies in light of the evolving competitive environment;
our expectations regarding the number of sales representatives focused on direct advertisers;
our expectations regarding an increase in the number of active customers;
our ability to avoid serving ads on unsafe or inappropriate websites or to non-human targets;
our ability to continue to expand internationally; and
our intention to vigorously defend against pending securities lawsuits.
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, we assume no responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update 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 (i) our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, (ii) the audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and (iii) the understanding that our actual results and circumstances may be materially different from our forward looking statements and/or expectations.
Overview
We are a technology company that has developed an Artificial Intelligence, or AI, and Big Data-driven predictive modeling and automated decision-making platform. We are focused on maintaining and expanding our AI platform and our R&D team is currently developing a next-generation AI system. 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. Specifically, we have developed a media buying technology platform that uses AI to solve marketing’s age-old challenge: how to deliver better return-on-investment, or "ROI," on marketing initiatives by providing the right message to the right person at the right time, on addressable devices across the globe. Our media-buying platform, which we refer to as our Demand-Side Platform, or “DSP”, is available to advertising agencies and advertisers as a managed service offering, whereby Rocket Fuel manages certain elements of advertising campaigns on behalf of an advertiser, and through a self-service offering, whereby an agency or advertiser licenses our technology to manage its own advertising campaigns.

21



Our DSP solutions are 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. During the year ended December 31, 2014 , direct response campaigns contributed approximately two-thirds of our revenue, with the remaining one-third of our revenue generated through brand campaigns. Historically, our digital ads were delivered primarily through a computer display medium. More recently, the digital advertising industry is rapidly adopting programmatic buying for mobile, social and video advertising. Our technology works for advertisers across all of these channels, allowing us to compete for a larger share of advertisers’ digital advertising budgets.
In September 2014, we acquired X Plus Two Solutions, Inc., the parent company of [x+1], a privately held programmatic marketing technology company. Our acquisition of [x+1] added important assets to our offerings, principally a data management platform, or “DMP," and site optimization technology, which are software-as-a-service, or "SaaS" solutions that enable customers to use their own customer relationship data, or "first party data," and third party data to deliver timely and relevant advertising messages across paid, earned, and owned media channels, including an advertiser's own website.
The addition of these offerings gives us the opportunity to offer solutions to help marketers optimize the complete consumer journey, and to extend our core AI technology beyond paid advertising to more broadly address the advertisers' marketing challenges across a brand’s paid, earned and owned media.
Non-GAAP Measures     
To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles applicable in the United States, or GAAP, we also monitor the non-GAAP metrics set forth below to help us evaluate growth and profitability, establish budgets, and assess our operational efficiencies (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Non-GAAP net revenue
$
68,163

 
$
59,092

 
$
197,846

 
$
158,494

Non-GAAP adjusted EBITDA
$
3,422

 
$
(2,954
)
 
$
(8,810
)
 
$
(3,810
)
Non-GAAP adjusted net income (loss)
$
(6,957
)
 
$
(6,591
)
 
$
(39,233
)
 
$
(16,519
)
Non-GAAP adjusted net income (loss) per share
$
(0.16
)
 
$
(0.18
)
 
$
(0.93
)
 
$
(0.47
)
Non-GAAP net revenue
Non-GAAP net revenue 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 and other third parties. We believe that non-GAAP net revenue is a meaningful measure of operating performance because it is frequently used for internal management purposes, indicates the performance of our solutions 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 non-GAAP net revenue 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 considering the comparable GAAP financial measures of revenue, media costs and other cost of revenue. The following table presents a reconciliation of GAAP revenue to non-GAAP net revenue for each of the periods indicated (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
111,836

 
$
102,098

 
$
336,235

 
$
269,137

   Less: Media costs
43,673

 
43,006

 
138,389

 
110,643

Non-GAAP net revenue
$
68,163

 
$
59,092

 
$
197,846

 
$
158,494


22



Non-GAAP Adjusted EBITDA
Non-GAAP adjusted EBITDA is a non-GAAP financial measure defined by us for the periods presented as GAAP net loss before interest expense, other income (expense), net, income tax provision (benefit), depreciation and amortization expense, stock-based compensation expense and related payroll taxes and, acquisition or restructuring related expense and impairment charges.
We have presented non-GAAP adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop operating plans. In particular, we believe that the exclusion of the expenses eliminated in calculating non-GAAP adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that non-GAAP adjusted EBITDA provides useful information to understand and evaluate our operating results.
However, our use of non-GAAP adjusted EBITDA has limitations and should not be considered in isolation or as a substitute to our financial results as reported under GAAP. Some of these limitations are as follows: although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and non-GAAP adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; non-GAAP adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; non-GAAP adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation; non-GAAP adjusted EBITDA does not reflect acquisition and restructuring related expenses, tax and interest expenses that may represent payments reducing the cash available to us; and other companies, including those in our industry, may calculate non-GAAP adjusted EBITDA differently, which reduces its usefulness as a comparative measure. Because of these limitations, our management considers non-GAAP adjusted EBITDA alongside other financial performance measures, including cash flow metrics, GAAP net income (loss) and our other GAAP results.
The following table presents a reconciliation of GAAP net loss to non-GAAP adjusted EBITDA for each of the periods indicated (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(136,591
)
 
$
(22,831
)
 
$
(197,864
)
 
$
(43,815
)
Adjustments:
 
 
 
 
 
 
 
Interest expense
1,087

 
1,157

 
3,472

 
2,085

Income tax (benefit) provision
213

 
(4,120
)
 
942

 
(3,625
)
Depreciation and amortization expense
14,055

 
5,749

 
38,078

 
12,525

Stock-based compensation
6,307

 
5,929

 
20,188

 
16,885

Other (income) expense, net
797

 
1,999

 
2,309

 
2,443

Acquisition expense

 
9,136

 

 
9,236

Restructuring expense

 

 
6,471

 

Payroll tax expense related to stock based compensation
33

 
27

 
73

 
456

Impairment of goodwill
117,521

 

 
117,521

 

Total adjustments
140,013

 
19,877

 
189,054

 
40,005

Non-GAAP adjusted EBITDA
$
3,422

 
$
(2,954
)
 
$
(8,810
)
 
$
(3,810
)


23



Non-GAAP Adjusted Net Income (Loss)
Non-GAAP adjusted net income (loss) and non-GAAP adjusted net income (loss) per diluted 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 such as amortization of intangible assets and stock-based compensation, and expenses such as acquisition and restructuring related expenses and impairment charges. We believe that analysts and investors use non-GAAP adjusted net income and non-GAAP adjusted net income (loss) per diluted share as supplemental measures to evaluate the overall operating performance of companies in our industry.
A limitation of non-GAAP adjusted net income (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 income (loss).
The following table presents a reconciliation of GAAP net loss to non-GAAP adjusted net income (loss) for each of the periods indicated (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(136,591
)
 
$
(22,831
)
 
$
(197,864
)
 
$
(43,815
)
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
6,307

 
5,929

 
20,188

 
16,885

Amortization of intangible assets
5,799

 
1,175

 
14,253

 
1,175

Acquisition expense

 
9,136

 

 
9,236

Restructuring expense

 

 
6,471

 

Tax impact of the above items
7

 

 
198

 

Impairment of goodwill
117,521

 

 
117,521

 

Non-GAAP adjusted net income (loss)
$
(6,957
)
 
$
(6,591
)
 
$
(39,233
)
 
$
(16,519
)
 
 
 
 
 
 
 
 
Basic and diluted net loss per share attributable to common stockholders
$
(3.19
)
 
$
(0.61
)
 
$
(4.67
)
 
$
(1.23
)
 
 
 
 
 
 
 
 
Non-GAAP adjusted net income (loss) per diluted share
$
(0.16
)
 
$
(0.18
)
 
$
(0.93
)
 
$
(0.47
)
Weighted average shares used in computing non-GAAP adjusted net income (loss) per diluted share
42,763

 
37,230

 
42,350

 
35,490

Factors Affecting Our Performance
We believe that the growth and any future profitability of our business and our future success depend on various opportunities, challenges and other factors, including the following:
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. In 2014 we noted an expanding trend of customer concerns about inventory quality on real-time advertising exchanges that impacts the entire industry. In addition, a significant shift in the channel mix of digital advertising could also impact our performance as we must optimize our solutions for, and face a different competitive landscape in, the mobile, social and video channels. For example, at the beginning of 2015 Facebook eliminated our access to the Facebook exchange platform, or FBX, requiring us to adapt our offering in order to continue to access advertising inventory from Facebook and expand into mobile advertising with Facebook. We adapted our technology and offerings to address this change, but our sales

24



efforts were impacted and we noticed a decline in our Facebook campaigns from the second quarter to the third quarter of 2015. Facebook also allows some other companies in our industry to purchase inventory through the FBX platform. This could put us at a competitive disadvantage. Another potential emerging trend that could impact our future performance is our ability to access inventory through real-time bidding (RTB). Our offering primarily relies on having access to RTB exchanges, however some publishers have begun to remove their advertising inventory from RTB exchanges, notably the Facebook FBX restrictions noted above and the proposed changes to Google’s Youtube video inventory availability beginning in 2016.
Ability to Market and Sell our Solutions to Advertisers and their Agencies and Agency Holding Companies
Our DSP offering competes for digital advertising budgets with a variety of companies, including other companies with DSP offerings, publishers that sell their inventory directly to agencies and advertisers, agency trading desks and 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 our experience, it is our larger and longer tenured customers who are more likely to reduce spend with us in favor of self-service platforms, agency trading desks, or other media strategies. Beginning in 2014, we have experienced a decline in revenue from some customers when they utilized agency trading desks to a greater extent or adopted third party self-serve platforms. Furthermore, agencies have been effective at promoting the use of agency trading desks and are increasingly involved in helping to select self-service platform providers for the advertisers they represent. This trend has impacted, and may continue to impact, our ability to grow and/or retain revenue. In July 2014, we announced an expansion of our self-service platform to the United States and Europe, which allows us to compete more directly with companies that offer self-service platform solutions to agencies (as their trading desk solution) and to advertisers. In addition to challenges created by the emergence of agency trading desks and competing self-service platforms, our insertion order, or "IO", business has faced increased challenges within some of the major agency holding companies. These challenges include overcoming questions and objections regarding our pricing and related media cost margins and transparency of results and impression placements. In order to directly address these concerns, we established a strategic agency selling team to market our services to the major agency holding companies and their agencies and trading desks. Agency holding companies have many DSP and technology partners and we need to prove the value and quality of our solutions to agency holding companies and their affiliated operating agencies to provide advertising services to their customers.
Ability to Market and Sell Our Solutions and SaaS Technology Platform to Direct Advertisers
In September 2014, we acquired X Plus Two Solutions, Inc., the parent company of [x+1], a privately held programmatic marketing technology company. Our acquisition of [x+1] added important assets to our technology solutions, principally a Data Management Platform, or “DMP,” and Site Optimization technology, which are enterprise solutions that enable customers to use their own customer relationship data and third party data to deliver timely and relevant advertising messages across paid, earned, and owned media channels, including an advertiser's own website. These additions have enabled us to broaden our solutions to help marketers optimize the consumer journey, and to extend our core AI technology beyond paid advertising to more broadly address advertisers' marketing challenges across paid, earned and owned media. As part of this strategy, we have increased, and expect to continue to increase, the number of sales representatives we have calling on direct advertisers. We have also announced a channel strategy of partnering with marketing software companies, system integrators and direct response agency partners to enhance our ability to gain access to senior level marketing decision makers.
These SaaS and self-service offerings have different margins and operating costs than our DSP offerings. Our strategy to sell to direct advertisers and to offer DMP as well as DSP platforms had, and will continue to have, an impact on our revenue mix and non-GAAP net revenue margins.
Customer Growth and Retention
In order to continue our growth, we must improve our retention of customers, attract new customers, retain spend and gain a larger amount of our current customers’ advertising budgets. Over the long term, we aim to improve each of these dimensions, but the relative focus on onboarding new customers or developing existing customers will vary over time with our product offerings, sales and service capabilities, and efficiencies.
Our number of active customers increased to 1,541 as of September 30, 2015 from 1,446 as of September 30, 2014 .We define an active customer as a customer from whom we recognized revenue in the last three months. Thus, active customers in a given quarter includes both new customers and longer-term customers returning to spend with us again. 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

25



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.
Our revenue retention rate was 115% for the twelve months ended September 30, 2015 and 121%, 128%, 130%, and 135% for each of the twelve months ended June 30, 2015 , March 31, 2015 , December 31, 2014 , and September 30, 2014 , respectively. We define our revenue retention rate with respect to a given twelve-month period as (i) the 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.
New customers generally spend less than customers that have used our solution for longer periods of time. We also experienced decreased spending in recent periods by some of our larger customers, as measured by the amount of spend, when compared to the same period in prior fiscal years. Adding new customers that tend to spend less and declining spend from larger and longer tenured customers has contributed to the slowing rate of year-over-year revenue growth on a percentage basis since the third quarter of 2013 and in the third quarter of 2015 we experienced a sequential decline of revenue compared to the second quarter of 2015.
Ability to Market and Sell Multiple Digital Advertising Products via Multiple Advertising Channels

Our DSP solutions are 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. In fiscal year 2014, direct response campaigns contributed approximately two-thirds of our revenue, while the remaining one-third was generated through brand campaigns. However, in the nine months ended September 30, 2015, our direct response campaigns represented approximately 77% of our business and the balance was brand related. Since brand advertising is growing faster than direct response, and is projected to be a larger potential market than direct response advertising, our future performance is dependent in part on our ability to grow share in the brand advertising market.
The digital advertising industry is rapidly adopting programmatic buying for additional “channels” such as mobile, social and video advertising. Historically, our revenue has predominantly come from display advertising, while revenue from delivery to other channels, which include mobile, video and social channels, has grown to represent approximately 39% of our revenue for the nine months ended September 30, 2015. As display advertising is growing more slowly than these other channels, our future performance is dependent in part on our ability to grow our share of these other channels.
Ability to Improve the Productivity and Efficiency of our Resources and Infrastructure
We have invested for long-term growth through the expansion of our offerings to address additional needs of marketers, including offering our DMP and DSP as self-service SaaS solutions in addition to our managed service offerings. As part of this growth strategy, we added sales, marketing, operations and customer support personnel. Our growth strategy also includes continuing to invest in research and development to enhance our solutions, integrate our technology platforms and create additional offerings. As a result of these investments in resources and growth, w e saw operating expenses increase significantly in absolute dollars and increase as a percent of revenue during 2014. In 2015, w e are focusing on automating and streamlining our customer service, operations, account management, IT, financial and administrative systems and controls with a goal of reducing the cost of those functions as a percentage of revenue in future periods. As part of our operational efficiency plan, on April 22, 2015 we announced a reduction in our workforce of approximately 11% and other cost reduction measures and recorded $6.5 million in restructuring charges in the second quarter of 2015.
We have experienced a continuing decline in sales productivity in North America since the second quarter of 2014. In the short term, we expect sales productivity to continue to be impacted as certain sales personnel transition from supporting our traditional business to supporting our enterprise solutions and as we continue to hire new sales personnel, including senior sales leaders, who require time to become productive. Looking ahead, we will focus on achieving improved sales productivity by better tailoring our sales model to differing sizes of customers and prospects, and by improving the focus of our sales representatives on our core offerings. Employee attrition, and the resulting influx of new leaders and other employees in 2015, also impacts our productivity and efficiency across the company as we expend the time and resources necessary to recruit and retain our talent, restructure our organizations, and train new employees.
Our capital expenditures for property and equipment were approximately $48 million in 2014, a significant increase over 2013 as we opened and expanded many of our office facilities. However, during the nine months ended September 30, 2015, these capital expenditures declined to approximately $11 million as we have completed the majority of our facility expansion. In order to minimize the upfront cash investment required to scale our data centers, we attempt to utilize capital leasing facilities, if available, to finance our data center hardware needs and plan to continue this practice throughout 2015.

26



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. Despite the seasonal nature of our revenue, many of our costs, such as headcount related expenses, depreciation and amortization, and facilities costs, are relatively fixed in the short term and do not follow these same seasonal trends.
Components of Our Results of Operations
Revenue
We generate revenue primarily by delivering digital advertisements to consumers through the display channel and other channels such as mobile devices and through social and video channels. 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 typically 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 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. To a lesser extent we generate revenue from license fees to access our SaaS DMP and DSP offerings and related professional services, which are generally recognized over the term of the performance period. Our revenue recognition policies are discussed in more detail in Note 1 to the Consolidated Financial Statements included in the 2014 Annual Report on Form 10-K for the fiscal year ended December 31, 2014 .
Costs and Expenses
We classify our expenses into these categories: media costs, other cost of revenue, research and development, sales and marketing, and general and administrative. Personnel costs for each category of expense generally include salaries, bonuses and sales commissions, stock-based compensation expense and employee benefit costs. Allocated costs include charges for facilities, office expenses, utilities, telephones and other miscellaneous expenses.
Media costs. These costs consist primarily of costs for advertising impressions we purchase from advertising exchanges, publishers and other third parties, which are expensed when incurred. We typically pay for these media costs on a per impression basis. We anticipate that our media costs will continue to vary with the related seasonal changes in revenue and overall growth in revenue. In the first, second and third quarters of fiscal year 2015, we reported a sequential decline in media costs as a percentage of revenue as we continued to see the benefits of improvements in our AI-based targeting overall and migrated some former [x+1] DSP customers to the Rocket Fuel DSP with its higher performance targeting. Over the longer term, if we are successful with our efforts to sell self-service offerings, including our SaaS-based DMP and DSP, and also large agency trading desk deals, we expect the resulting changes in revenue mix to impact our media costs as a percentage of total revenue.  
Other cost of revenue. These costs include personnel costs, depreciation and amortization expense, amortization of internal-use software development costs, third-party inventory validation and data vendor costs, data center hosting costs and allocated costs. The personnel costs are primarily attributable to individuals maintaining our servers and members of our operations and analytics groups, which initiates, sets up, launches and monitors our advertising campaigns or implements and supports our platform. We capitalize costs associated with software that is developed or obtained for internal-use and amortize these costs in other 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. Other cost of revenue also includes third-party data center costs and depreciation of data center equipment. We anticipate that our other cost of revenue will increase in absolute dollars in future periods as we scale the capabilities of our operations to meet the demands of higher volumes.
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 remain approximately at the third quarter spending levels.

27



Sales and marketing. Our sales and marketing expenses consist primarily of personnel costs (including sales commissions) and allocated costs, professional services, brand marketing, travel, trade shows and marketing materials. Our sales and marketing organization focuses on (i) marketing our solution to generate awareness; (ii) increasing the adoption of our solution by existing and new advertisers and agencies; and (iii) expanding our business geographically, primarily by growing our sales team in certain countries in which we currently operate and, to a limited extent, establishing a presence in additional countries. We expect such costs to increase as we invest in selling efforts to enterprise businesses and other strategic initiatives.
General and administrative. Our general and administrative expenses consist primarily of personnel costs associated with our executive, IT, finance, legal, human resources, compliance and other administrative functions, as well as accounting, audit and legal professional services fees, allocated costs and other corporate expenses. Other miscellaneous expenses primarily include local taxes, fees and charitable contributions. We expect to continue to invest in corporate infrastructure, such as automation projects, and incur additional expenses associated with legal and accounting costs and compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002.
Other Expense, Net
Interest expense. Interest expense is primarily related to our credit facility, term debt and capital leases.
Other (income) expense—net. Other (income) expense—net consists primarily of gains and losses on foreign currency transactions. We have foreign currency exposure related to our cash and accounts receivable that are denominated in currencies other than the U.S. dollar, primarily the Canadian dollar, British pound and the Euro. As our foreign sales and expenses increase, our operating results may be more affected by fluctuations in the exchange rates of the currencies in which we do business.
Income Tax (Benefit) Provision
Income tax (benefit) provision consists primarily of income taxes in foreign jurisdictions in which we conduct business and, to a lesser extent, of federal and state income taxes in the United States. 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 maintain a valuation allowance against most of our deferred tax assets. We expect to maintain this valuation allowance at least in the near term.

28



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, except loss per share data):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue
$
111,836

 
$
102,098

 
$
336,235

 
$
269,137

Costs and expenses:
 
 
 
 
 
 
 
Media cost
43,673

 
43,006

 
138,389

 
110,643

Other cost of revenue (1)
20,105

 
11,946

 
59,887

 
28,767

Research and development (1)
11,022

 
11,200

 
34,136

 
26,875

Sales and marketing (1)
41,681

 
40,421

 
126,309

 
103,969

General and administrative (1)
12,328

 
19,320

 
44,663

 
41,795

Impairment of goodwill
117,521

 

 
117,521

 

Restructuring

 

 
6,471

 

Total costs and expenses
246,330

 
125,893

 
527,376

 
312,049

Operating loss
(134,494
)
 
(23,795
)
 
(191,141
)
 
(42,912
)
Interest expense
1,087

 
1,157

 
3,472

 
2,085

Other (income) expense, net
797

 
1,999

 
2,309

 
2,443

Loss before income taxes
(136,378
)
 
(26,951
)
 
(196,922
)
 
(47,440
)
Income tax (benefit) provision
213

 
(4,120
)
 
942

 
(3,625
)
Net loss
$
(136,591
)
 
$
(22,831
)
 
$
(197,864
)
 
$
(43,815
)
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(3.19
)
 
$
(0.61
)
 
$
(4.67
)
 
$
(1.23
)
(1)
Includes stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Other cost of revenue
$
465

 
$
282

 
$
1,567

 
$
810

Research and development
1,688

 
1,279

 
5,769

 
3,577

Sales and marketing
2,478

 
2,683

 
7,634

 
7,598

General and administrative
1,676

 
1,685

 
5,218

 
4,900

Total
$
6,307

 
$
5,929

 
$
20,188

 
$
16,885


29



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Consolidated Statements of Operations Data: *
 
 
 
 
 
 
 
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Costs and expenses:
 
 
 
 
 
 
 
Media cost
39

 
42

 
41

 
41

Other cost of revenue
18

 
12

 
18

 
11

Research and development
10

 
11

 
10

 
10

Sales and marketing
37

 
40

 
38

 
39

General and administrative
11

 
19

 
13

 
16

Impairment of goodwill
105

 

 
35

 

Restructuring

 

 
2

 

Total costs and expenses
220

 
124

 
157

 
117

Operating loss
(120
)
 
(23
)
 
(57
)
 
(16
)
Interest expense
1

 
1

 
1

 
1

Other (income) expense, net
1

 
2

 
1

 
1

Loss before income taxes
(122
)
 
(26
)
 
(59
)
 
(18
)
Income tax (benefit) provision

 
(4
)
 

 
(1
)
Net loss
(122
)%
 
(22
)%
 
(59
)%
 
(16
)%
*
Certain figures may not sum due to rounding.
Comparison of the Three and Nine Months Ended September 30, 2015 and 2014
Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Revenue
$
111,836

 
$
102,098

 
10
%
 
$
336,235

 
$
269,137

 
25
%
Revenue increased $9.7 million , or 10% , during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 , driven in part by revenue from the acquired [x+1] business. Revenue from advertising delivered through the display channel was 61% and 56% of revenue and revenue from advertising delivered through other channels was 39% and 44% of revenue for the three months ended September 30, 2015 and 2014 , respectively. This is due in part to the Company’s transition from the Facebook exchange (FBX) to Facebook’s API for the purchase of Facebook inventory in the first half of 2015. The mobile channel was 28% of revenue for the three months ended September 30, 2015 , followed by the social channel and then the video channel.
The increase in revenue was attributable to the revenue from the former [x+1] customers following the acquisition in September 2014 and an increase in the number of active customers. This increase was partially offset by, among other factors, a decline in revenue from customers migrating their business to competitors or adopting third-party self-service platforms. The number of campaigns that ran across our platforms decreased by 4% during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 . The volume of impressions delivered increased by 19% during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 . The average cost per mille (or cost per thousand impressions) or "CPM", decreased by 11% . Revenue from outside of North America increased by 14% for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 . Revenue from outside of North America, as a percentage of revenue, was 16% for both the three months ended September 30, 2015 and 2014 , respectively.
Revenue increased $67.1 million , or 25% , during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 , driven in part by revenue from the acquired [x+1] business. Revenue from the display channel was 61% and 57% of revenue and revenue from other channels was 39% and 43% of revenue for the nine months ended September 30, 2015

30



and 2014 , respectively. The mobile channel was 26% of revenue for the nine months ended September 30, 2015 , followed by the social channel and then the video channel.
The increase in revenue was attributable to increased spending by certain existing customers and an increase in the number of active customers adopting our solution. This increase was partially offset by, among other factors, decline in revenue from customers migrating their business to competitors or adopting third-party self-service platforms. The number of campaigns that ran across our platforms increased by 2% during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 . The volume of impressions delivered increased by 25% during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 . The average cost per mille (or cost per thousand impressions) or "CPM" decreased by 3% . Revenue from outside of North America increased by 24% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 . Revenue from outside of North America, as a percentage of revenue, was 16% for both the nine months ended September 30, 2015 and 2014 .
Media Cost and Other Cost of Revenue
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Media Cost
$
43,673

 
$
43,006

 
2
%
 
$
138,389

 
$
110,643

 
25
%
Other cost of revenue
$
20,105

 
$
11,946

 
68
%
 
$
59,887

 
$
28,767

 
108
%
Headcount (at period end)
141

 
85

 
66
%
 
 
 
 
 
 
Media costs increased by $0.7 million , or 2% , during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to increased sales volume. Media costs decreased to approximately 39% of revenue from 42% of revenue for the three months ended September 30, 2015 and 2014 , respectively, due to improvements in our IA-based DSP platform.
Other cost of revenue increased by $8.2 million or 68% , during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 . This increase was primarily due to an increase in depreciation and amortization of $3.9 million , which includes capitalized internal-use software, other fixed assets and acquired technology intangible assets, an increase in personnel costs of $3.3 million . Amortization of acquired technology intangible assets was $2.9 million and $0.4 million for the three months ended September 30, 2015 and 2014 , respectively. Amortization of capitalized internal-use software was $2.0 million and $1.4 million for the three months ended September 30, 2015 and 2014 , respectively. The increase in personnel costs was primarily due to the addition of [x+1] personnel plus other hiring.
Media costs increased by $27.7 million , or 25% , during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to increased sales volume. Media costs were approximately 41% of revenue for both the nine months ended September 30, 2015 and 2014 .
Other cost of revenue increased by $31.1 million or 108% , during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 . This increase was primarily due to an increase in depreciation and amortization of $12.9 million , which includes capitalized internal-use software, other fixed assets and acquired technology intangible assets, an increase in personnel costs of $11.7 million , an increase in data and inventory validation costs of $3.0 million and an increase in hosting costs of $2.6 million . Amortization of acquired technology intangible assets was $8.7 million and $0.4 million for the nine months ended September 30, 2015 and 2014 . Amortization of capitalized internal-use software was $5.5 million and $3.7 million for the nine months ended September 30, 2015 and 2014 , respectively. The increase in personnel costs was primarily due to the addition of [x+1] personnel plus other hiring. The increase in data, inventory validation and hosting costs reflected the growth in revenue and expansion of our data centers.

31



Research and Development
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Research and development
$
11,022

 
$
11,200

 
(2
)%
 
$
34,136

 
$
26,875

 
27
%
Percent of revenue
10
%
 
11
%
 
 
 
10
%
 
10
%
 
 
Headcount (at period end)
167

 
182

 
(8
)%
 
 
 
 
 
 
Research and development expense decreased by $0.2 million , or 2% , during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 .
Research and development expense increased by $7.3 million , or 27% , during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 . This increase was primarily due to an increase in personnel expense of $5.8 million and, to a lesser extent, to an increase in depreciation and amortization expense of $2.0 million . The increase in personnel expense was primarily due the addition of [x+1] personnel plus other hiring.
We capitalized internal-use software development costs of $4.0 million and $2.3 million for the three months ended September 30, 2015 and 2014 , respectively, and $11.6 million and $6.6 million for the nine months ended September 30, 2015 and 2014 , respectively. The increase was due to additional headcount devoted to internal-use software development.
Sales and Marketing
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Sales and marketing
$
41,681

 
$
40,421

 
3
%
 
$
126,309

 
$
103,969

 
21
%
Percent of revenue
37
%
 
40
%
 
 
 
38
%
 
39
%
 
 
Headcount (at period end)
513

 
613

 
(16
)%
 
 
 
 
 
 
Sales and marketing expense increased by $1.3 million , or 3% , during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 . This increase was primarily due to an increase in amortization expense of $1.6 million related to the accelerated amortization of the trademarks intangible asset. Refer to Note 3 for details of the Company's intangible assets.
Sales and marketing expense increased by $22.3 million , or 21% , during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 . This increase was primarily due to an increase in personnel expense of $11.8 million and, to a lesser extent, an increase in depreciation and amortization expense of $10.0 million , primarily for the acquisition of intangible assets of [x+1]. The increase in personnel expense was primarily due to the expansion of our sales force through hiring and the addition of [x+1] personnel.
General and Administrative
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
General and administrative
$
12,328

 
$
19,320

 
(36
)%
 
$
44,663

 
$
41,795

 
7
%
Percent of revenue
11
%
 
19
%
 
 
 
13
%
 
16
%
 
 
Headcount (at period end)
141

 
148

 
(5
)%
 
 
 
 
 
 

32



General and administrative expense decreased by $7.0 million , or 36% , during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 . This decrease was primarily due to a decrease in acquisition costs of $5.9 million related to the acquisition of [x+1] in September 2014.
General and administrative expense increased by $2.9 million , or 7% , during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 . This increase was primarily due to an increase in personnel expense of $5.0 million and, to a lesser extent, to an increase in professional services of $1.2 million , an increase in allocated costs, mostly facility costs, of $1.8 million , offset by a decrease in acquisition costs of $5.9 million . The increase in personnel costs was driven by hiring and the addition of [x+1] personnel. The increase in professional services was primarily due to legal fees.
Restructuring
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Restructuring charges
$

 
$

 
n/a
 
$
6,471

 
$