Rocket Fuel Inc.
Rocket Fuel Inc. (Form: 10-Q, Received: 08/07/2015 18:23:55)





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 June 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 July 31, 2015, there were 42,704,430 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)

 
June 30,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
81,065

 
$
107,056

Accounts receivable, net
119,423

 
135,400

Deferred tax assets, net
1,716

 
1,716

Prepaid expenses
3,167

 
3,698

Other current assets
6,847

 
12,531

Total current assets
212,218

 
260,401

Property, equipment and software, net
86,719

 
89,441

Restricted cash
2,304

 
2,915

Intangible assets, net
60,845

 
69,299

Goodwill
115,412

 
115,412

Other assets
1,620

 
1,797

Total assets
$
479,118

 
$
539,265

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
63,305

 
$
76,085

Accrued and other current liabilities
32,740

 
33,258

Deferred revenue
1,931

 
593

Current portion of capital leases
6,233

 
5,482

Current portion of debt
45,720

 
45,705

Total current liabilities
149,929

 
161,123

Debt—Less current portion
20,477

 
23,335

Capital leases—Less current portion
10,649

 
12,341

Deferred rent—Less current portion
25,498

 
26,818

Deferred tax liabilities
1,949

 
2,068

Other liabilities
1,204

 
814

Total liabilities
209,706

 
226,499

Commitments and contingencies (Note 10)


 


Stockholders’ Equity:
 
 
 
Common stock, $0.001 par value— 1,000,000,000 authorized as of June 30, 2015 and December 31, 2014; 42,662,928 and 42,002,533 issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
43

 
42

Additional paid-in capital
439,542

 
421,630

Accumulated other comprehensive loss
(113
)
 
(120
)
Accumulated deficit
(170,060
)
 
(108,786
)
Total stockholders’ equity
269,412

 
312,766

Total liabilities and stockholders’ equity
$
479,118

 
$
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
120,065

 
$
92,642

 
$
224,399

 
$
167,039

Costs and expenses:
 
 
 
 
 
 
 
Media costs
49,155

 
37,930

 
94,716

 
67,637

Other cost of revenue
19,826

 
8,993

 
39,782

 
16,821

Research and development
11,791

 
8,434

 
23,114

 
15,675

Sales and marketing
41,750

 
33,789

 
84,628

 
63,548

General and administrative
14,761

 
12,135

 
32,335

 
22,475

Restructuring
6,471

 

 
6,471

 

Total costs and expenses
143,754

 
101,281

 
281,046

 
186,156

Operating loss
(23,689
)
 
(8,639
)
 
(56,647
)
 
(19,117
)
Interest expense
1,045

 
514

 
2,385

 
928

Other (income) expense, net
(696
)
 
425

 
1,512

 
444

Loss before income taxes
(24,038
)
 
(9,578
)
 
(60,544
)
 
(20,489
)
Income tax (benefit) provision
372

 
181

 
729

 
496

Net loss
$
(24,410
)
 
$
(9,759
)
 
$
(61,273
)
 
$
(20,985
)
Basic and diluted net loss per share attributable to common stockholders
$
(0.58
)
 
$
(0.28
)
 
$
(1.45
)
 
$
(0.61
)
Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders
42,296

 
35,172

 
42,140

 
34,606


See Accompanying Notes to Condensed Consolidated Financial Statements.


5



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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(24,410
)
 
$
(9,759
)
 
$
(61,273
)
 
$
(20,985
)
Other comprehensive income (loss): (1)
 
 
 
 
 
 
 
Foreign currency translation adjustments
116

 
(7
)
 
7

 
25

Comprehensive loss
$
(24,294
)
 
$
(9,766
)
 
$
(61,266
)
 
$
(20,960
)
(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)

 
Six Months Ended
 
June 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(61,273
)
 
$
(20,985
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
24,023

 
6,940

Impairment of leasehold improvements
2,704

 

Stock-based compensation
13,881

 
11,241

Deferred taxes
(20
)
 
112

Excess tax benefit from stock-based activity

 
(163
)
Other non-cash adjustments, net
1,044

 
69

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Accounts receivable
15,362

 
(3,179
)
Prepaid expenses and other assets
6,318

 
(14,614
)
Accounts payable
(11,538
)
 
(248
)
Accrued and other liabilities
182

 
(1,301
)
Deferred rent
890

 
15,749

Deferred revenue
1,338

 
457

Net cash used in operating activities
(7,089
)
 
(5,922
)
INVESTING ACTIVITIES:
 
 
 
Purchases of property, equipment and software
(10,085
)
 
(19,141
)
Capitalized internal-use software development costs
(6,048
)
 
(3,555
)
Changes in restricted cash
636

 
(2,203
)
Net cash used in investing activities
(15,497
)
 
(24,899
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from the issuance of common stock, net of issuance costs

 
115,130

Proceeds from employee stock plans, net
3,139

 
5,671

Excess tax benefit from stock-based activity

 
163

Tax withholdings related to net share settlements of restricted stock units
(533
)
 
(53
)
Repayment of capital lease obligations
(2,755
)
 
(430
)
Proceeds from debt facilities, net of debt issuance costs
(242
)
 

Repayment of debt
(3,000
)
 

Net cash (used in) provided by financing activities
(3,391
)
 
120,481

 
 
 
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(14
)
 
7

CHANGE IN CASH AND CASH EQUIVALENTS
(25,991
)
 
89,667

CASH AND CASH EQUIVALENTS—Beginning of period
107,056

 
113,873

CASH AND CASH EQUIVALENTS—End of period
$
81,065

 
$
203,540


7



 
Six Months Ended
 
June 30,
 
2015
 
2014
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes, net of refunds
$
454

 
$
205

Cash paid for interest
1,921

 
791

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property and equipment recorded in accounts payable and accruals
$
428

 
$
9,079

Offering costs recorded in accrued liabilities

 
32

Property, plant and equipment acquired under capital lease obligations
1,786

 
7,350

Vesting of early exercised options
97

 
576

Stock-based compensation capitalized in internal-use software costs
1,286

 
762

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 June 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 six months ended June 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 six months ended June 30, 2015 and 2014 .
Goodwill —The Company performs an annual impairment test towards 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. During the quarter ended June 30, 2015, the market capitalization of its publicly traded common stock sustained a decline. The Company determined the decline to be a change in circumstances triggering the necessity to test its goodwill for impairment. Since the Company operates its business in one reporting unit, the goodwill is tested for impairment at the enterprise level. Since the reporting unit's fair value based on quoted market prices of the Company's common stock was in excess of its carrying value, it concluded that there has been no impairment of goodwill during the quarter ended June 30, 2015 . If facts, circumstances or assumptions change in the future, the Company may be required to record impairment charges to reduce the carrying value of its goodwill.
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 June 30, 2015 and December 31, 2015. These are measured as level 1 inputs in the fair value hierarchy.

9



The fair values of our other financial instruments, not carried at fair value on the Consolidated Balance Sheets, including accounts receivable, accounts payable, accrued liabilities, term loan and revolving credit facility do not materially differ from their carrying amounts 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
On April 15, 2015, the Financial Accounting Standards Board ("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 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. Earlier adoption is permitted for financial statements that have not been previously issued. The Company does not expect this guidance to affect our balance sheets as we currently present debt issuance costs as offsets to the related debt.

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. On July 9, 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 June 30, 2015 and December 31, 2014 , consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2015
 
2014
Capitalized internal-use software costs
$
30,955

 
$
23,385

Computer hardware and software
49,906

 
46,299

Furniture and fixtures
13,531

 
11,674

Leasehold improvements
39,147

 
36,811

Total
133,539

 
118,169

Accumulated depreciation and amortization
(46,820
)
 
(28,728
)
Total property, equipment and software, net
$
86,719

 
$
89,441

Total depreciation and amortization expense, excluding amortization of internal-use software costs, was $6.1 million and $2.7 million for the three months ended June 30, 2015 and 2014 , respectively, and $12.1 million and $4.5 million for the six months ended June 30, 2015 and 2014 , respectively. Amortization expense of internal-use software costs was $1.8 million and $1.2 million for the three months ended June 30, 2015 and 2014 , respectively, and $3.4 million and $2.3 million for the six months ended June 30, 2015 and 2014 , respectively. Refer to Note 4 for details of the Company's capital leases as of June 30, 2015 and December 31, 2014 .

10



In the three months ended June 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.
Total amortization expense related to intangible assets acquired in the business combination with [x+1] was $4.2 million and $8.5 million for the three and six months ended June 30, 2015 , respectively.

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 preliminary 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 preliminary 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. The total purchase price was allocated using the information currently available for asset acquired and liabilities assumed and may be revised when these estimates change (in thousands):
Current assets
$
32,005

Non-current assets
3,999

Current liabilities
(28,893
)
Non-current liabilities
(16,216
)
Net acquired tangible assets
(9,105
)
Identifiable intangible assets
74,700

Goodwill
114,871

Total preliminary 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.
The changes in the carrying amount of goodwill for the year ended December 31, 2014 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 and June 30, 2015
$
115,412



11



(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.
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2014
Pro forma revenue
$
114,753

 
$
210,147

Pro forma revenue less media costs
$
63,531

 
$
116,745

Pro forma net loss
$
(17,319
)
 
$
(35,154
)

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 June 30, 2015 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2015 (remaining 6 months)
 
$
3,514

2016
 
7,028

2017
 
5,342

2018
 
2,329

2019
 
79

Thereafter
 

Total minimum lease payments
 
$
18,292

Less: amount representing interest and taxes
 
(1,410
)
Less: current portion of minimum lease payments
 
(6,233
)
Capital lease obligations, net of current portion
 
$
10,649


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, subletting of certain excess leased office space, and 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 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. The Company expects to complete any remaining cash obligations associated with these restructuring activities in the third quarter of 2015.


12



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 June 30, 2015 , $27.0 million in term loans, $40.0 million under the revolving credit facility and letters of credit in the amount of $7.0 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 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 June 30, 2015 , the Company was in compliance with all covenants.

13



Future Payments
Future principal payments of term loan as of June 30, 2015 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2015 (remaining 6 months)
 
$
3,000

2016
 
6,000

2017
 
6,000

2018
 
6,000

2019
 
6,000

Total
 
27,000

Less: current portion of term loan
 
(6,000
)
Term loan, net of current portion
 
$
21,000

As of June 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 $0.8 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):
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
Stock options:
 
 
 
Outstanding at the beginning of the period
6,291

 
7,411

Options granted
375

 
487

Options exercised
(217
)
 
(818
)
Options forfeited
(364
)
 
(154
)
Outstanding at the end of the period
6,085

 
6,926

Total intrinsic value of options exercised
$
1,426

 
$
12,717

Total unrecognized compensation expense at period-end
$
18,569

 
$
30,405

Weighted-average remaining recognition period at period-end (in years)
2.0

 
2.4

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

 
382

Stock awards granted
1,628

 
520

Stock awards vested
(172
)
 
(27
)
Stock awards canceled
(561
)
 
(31
)
Outstanding at the end of the period
3,410

 
845

Weighted-average grant-date fair value
$
12.76

 
$
44.15

Total unrecognized compensation expense at period-end
$
39,102

 
$
27,238

Weighted-average remaining recognition period at period-end (in years)
3.2

 
3.5

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 June 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 $1.1 million , which will be recognized over the remaining 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Expected term (years)
6.3
 
5.5–6.3
 
6.3
 
5.5–6.3
Volatility
50.7%–58.0%
 
57.8%–58.0%
 
50.7%–58.0%
 
55.6%–58.0%
Risk-free interest rate
1.57%–1.85%
 
1.96%–1.97%
 
1.57%–1.85%
 
1.85%–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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Expected term (years)
0.5
 
0.5-0.7
 
0.5
 
0.5-0.7
Volatility
73.3%-77.2%
 
66.2%-77.4%
 
73.3%-77.2%
 
66.2%-77.4%
Risk-free interest rate
0.07%-0.08%
 
0.06%-0.07%
 
0.07%-0.08%
 
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Other cost of revenue
$
477

 
$
276

 
$
1,102

 
$
528

Research and development
1,834

 
1,311

 
4,081

 
2,298

Sales and marketing
2,325

 
2,748

 
5,156

 
4,915

General and administrative
1,798

 
1,664

 
3,542

 
3,215

Total
$
6,434

 
$
5,999

 
$
13,881

 
$
10,956


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 six months ended June 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(24,410
)
 
$
(9,759
)
 
$
(61,273
)
 
$
(20,985
)
Weighted-average shares used to compute basic and diluted net loss per share
42,296

 
35,172

 
42,140

 
34,606

Basic and diluted net loss per share
$
(0.58
)
 
$
(0.28
)
 
$
(1.45
)
 
$
(0.61
)
Common stock equivalents excluded from net loss per diluted share because their effect would have been anti-dilutive
9,606

 
7,993

 
9,606

 
7,993


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 provisions of $0.4 million and $0.2 million for the three months ended June 30, 2015 and 2014 , respectively and $0.7 million and $0.5 million for the six months ended June 30, 2015 and 2014 , respectively, primarily due to foreign and state income tax expense. The primary difference between the effective tax rate and the federal statutory tax rate in the United States relates to the valuation allowances on the Company’s net operating losses, state and foreign tax rate differences, and research and development credits. 
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  June 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 $4.0 million and $3.6 million for the three months ended June 30, 2015 and 2014 , respectively, and $8.0 million and $6.8 million for the six months ended June 30, 2015 and 2014 , respectively.

17



The approximate remaining future minimum cash lease payments under these non-cancelable operating leases as of June 30, 2015 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2015 (remaining 6 months)
 
$
10,020

2016
 
20,701

2017
 
19,826

2018
 
18,686

2019
 
21,185

Thereafter
 
43,810

 
 
$
134,228

Please refer to Note 4 for details of the Company's capital lease commitments as of June 30, 2015 .
Letters of Credit Bank Guarantees and Restricted Cash —As of June 30, 2015 and December 31, 2014 , the Company had irrevocable letters of credit for facilities leases, with all financial institutions, in the amounts 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 June 30, 2015 , the Company had $2.3 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. The Company intends to vigorously defend itself against this purported class action.
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 officers and its board

18



of directors. 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 .
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. We cannot currently estimate a reasonably 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
North America
$
101,666

 
$
77,924

 
$
189,915

 
$
140,571

All Other Countries
18,399

 
14,718

 
34,484

 
26,468

Total revenue
$
120,065

 
$
92,642

 
$
224,399

 
$
167,039

The following table summarizes total long-lived assets in the respective locations (in thousands):
 
June 30,
 
December 31,
 
2015
 
2014
North America
$
82,568

 
$
85,355

All Other Countries
4,151

 
4,086

Total long-lived assets
$
86,719

 
$
89,441


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 2015, 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;

19



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;
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 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;
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 a pending securities class action lawsuit.
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.

20



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.
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.
During 2014, we served advertising impressions for 93 of the Advertising Age 100 Leading National Advertisers and 62 of the Fortune 100 companies. Additionally, in 2014, we had 143 customers with more than $1 million in lifetime spend with us, including 74 with over $2 million in lifetime spend and 22 with over $5 million in lifetime spend.

21



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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Non-GAAP net revenue
$
70,910

 
$
54,712

 
$
129,683

 
$
99,402

Non-GAAP adjusted EBITDA
$
1,394

 
$
1,535

 
$
(12,232
)
 
$
(856
)
Non-GAAP adjusted net income (loss)
$
(7,177
)
 
$
(3,660
)
 
$
(32,276
)
 
$
(9,929
)
Non-GAAP adjusted net income (loss) per share
$
(0.17
)
 
$
(0.10
)
 
$
(0.77
)
 
$
(0.29
)
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
120,065

 
$
92,642

 
$
224,399

 
$
167,039

   Less: Media costs
49,155

 
37,930

 
94,716

 
67,637

Non-GAAP net revenue
$
70,910

 
$
54,712

 
$
129,683

 
$
99,402

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.
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

22



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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(24,410
)
 
$
(9,759
)
 
$
(61,273
)
 
$
(20,985
)
Adjustments:
 
 
 
 
 
 
 
Interest expense, net
1,045

 
514

 
2,385

 
928

Income tax (benefit) provision
372

 
181

 
729

 
496

Depreciation and amortization expense
12,158

 
3,890

 
24,024

 
6,810

Stock-based compensation
6,434

 
5,999

 
13,881

 
10,956

Other (income) expense, net
(696
)
 
425

 
1,512

 
444

Acquisition expense

 
100

 

 
100

Restructuring expense
6,471

 

 
6,471

 

Payroll tax expense related to stock based compensation
20

 
185

 
39

 
395

Total adjustments
25,804

 
11,294

 
49,041

 
20,129

Non-GAAP adjusted EBITDA
$
1,394

 
$
1,535

 
$
(12,232
)
 
$
(856
)
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. 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 loss.

23



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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(24,410
)
 
$
(9,759
)
 
$
(61,273
)
 
$
(20,985
)
Adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
6,434

 
5,999

 
13,881

 
10,956

Amortization of intangible assets
4,227

 

 
8,454

 

Acquisition expense

 
100

 

 
100

Restructuring expense
6,471

 

 
6,471

 

Tax impact of the above items
101

 

 
191

 

Non-GAAP adjusted net income (loss)
$
(7,177
)
 
$
(3,660
)
 
$
(32,276
)
 
$
(9,929
)
 
 
 
 
 
 
 
 
Basic and diluted net loss per share attributable to common stockholders
$
(0.58
)
 
$
(0.28
)
 
$
(1.45
)
 
$
(0.61
)
 
 
 
 
 
 
 
 
Non-GAAP adjusted net income (loss) per diluted share
$
(0.17
)
 
$
(0.10
)
 
$
(0.77
)
 
$
(0.29
)
Weighted average shares used in computing non-GAAP adjusted net income (loss) per diluted share
42,296

 
35,172

 
42,140

 
34,606

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, Facebook recently announced restrictions on 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 are adapting our technology and offerings to address this challenge. Facebook allows some other companies in our industry to purchase inventory through the FBX platform. This could put us at a competitive disadvantage.
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, 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 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 we believe will allow us to compete more directly with companies that offer self-service platform solutions to agencies (as their trading desk solution) and to advertisers. We established a strategic agency selling team and have been entering into contracts in which agency holding companies

24



utilize our technology for or with their trading desk solutions.  Agency holding companies have many technology partners and we need to prove the value of our solutions.
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.
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. To illustrate, during the second quarter of 2015, non-GAAP net revenue from direct advertisers increased to $15.4 million, or 22% of non-GAAP net revenue, compared to $4.9 million, or 9% of non-GAAP net revenue, for the second quarter of 2014. Our total non-GAAP net revenue, as a percentage of GAAP revenue, was 59% in the second quarter of 2015, the same percentage as in the second quarter of 2014.
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 1,592 as of June 30, 2015 from 1,444 as of June 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 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 121% for the twelve months ended June 30, 2015 and 128%, 130%, 135%, and 149% for each of the twelve months ended March 31, 2015 , December 31, 2014 , September 30, 2014 and June 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, which we expect may continue.
Ability to Market and Sell to Multiple Digital Advertising Products via Multiple 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, with the remaining one-third generated through brand campaigns. The digital advertising industry is rapidly adopting programmatic buying for mobile, social and video advertising. Historically, our revenue has predominantly come from managed service display advertising, and we grew revenue from delivery to other channels, which include mobile, video and social channels, to 44% of our revenue in fiscal year 2014. As display advertising is now growing more slowly than other channels, our future performance is dependent in part on our ability to grow our share of these other channels.

25



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. As part of this plan, we incurred $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 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.
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. For 2015, we expect these capital expenditures to decline significantly from 2014 levels as we have completed the majority of our facility expansion. In addition, 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 in 2015.
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

26



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 and second 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 second quarter spending levels for the remainder of fiscal year 2015.
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 sales and marketing expenses to remain approximately at the second quarter spending levels for the remainder of fiscal year 2015, increasing modestly with any revenue increases due to higher sales commissions associated with such revenue increases. However, over the longer term, we expect such costs to increase as we invest in selling efforts to enterprise businesses and expand to additional international markets.
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. As a result, we expect general and administrative expenses to remain approximately at the second quarter spending levels for the remainder of fiscal year 2015.
Other Expense, Net
Interest expense. Interest expense is primarily related to our credit facilities, 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

27



a valuation allowance against most of our deferred tax assets. We expect to maintain this valuation allowance at least in the near term.
Results of Operations
The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue
$
120,065

 
$
92,642

 
$
224,399

 
$
167,039

Costs and expenses:
 
 
 
 
 
 
 
Media cost
49,155

 
37,930

 
94,716

 
67,637

Other cost of revenue (1)
19,826

 
8,993

 
39,782

 
16,821

Research and development (1)
11,791

 
8,434

 
23,114

 
15,675

Sales and marketing (1)
41,750

 
33,789

 
84,628

 
63,548

General and administrative (1)
14,761

 
12,135

 
32,335

 
22,475

Restructuring
6,471

 

 
6,471

 

Total costs and expenses
143,754

 
101,281

 
281,046

 
186,156

Operating loss
(23,689
)
 
(8,639
)
 
(56,647
)
 
(19,117
)
Interest expense
1,045

 
514

 
2,385

 
928

Other (income) expense, net
(696
)
 
425

 
1,512

 
444

Loss before income taxes
(24,038
)
 
(9,578
)
 
(60,544
)
 
(20,489
)
Income tax (benefit) provision
372

 
181

 
729

 
496

Net loss
$
(24,410
)
 
$
(9,759
)
 
$
(61,273
)
 
$
(20,985
)
Loss per share:
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.58
)
 
$
(0.28
)
 
$
(1.45
)
 
$
(0.61
)
(1)
Includes stock-based compensation expense as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Other cost of revenue
$
477

 
$
276

 
$
1,102

 
$
528

Research and development
1,834

 
1,311

 
4,081

 
2,298

Sales and marketing
2,325

 
2,748

 
5,156

 
4,915

General and administrative
1,798

 
1,664

 
3,542

 
3,215

Total
$
6,434

 
$
5,999

 
$
13,881

 
$
10,956


28



 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Consolidated Statements of Operations Data: *
 
 
 
 
 
 
 
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Costs and expenses:
 
 
 
 
 
 
 
Media cost
41

 
41

 
42

 
40

Other cost of revenue
17

 
10

 
18

 
10

Research and development
10

 
9

 
10

 
9

Sales and marketing
35

 
36

 
38

 
38

General and administrative
12

 
13

 
14

 
13

Restructuring
5

 

 
3

 

Total costs and expenses
120

 
109

 
125

 
110

Operating loss
(20
)
 
(9
)
 
(25
)
 
(11
)
Interest expense
1

 
1

 
1

 
1

Other (income) expense, net
(1
)
 

 
1

 

Loss before income taxes
(20
)
 
(10
)
 
(27
)
 
(12
)
Income tax (benefit) provision

 

 

 

Net loss
(20
)%
 
(11
)%
 
(27
)%
 
(13
)%
*
Certain figures may not sum due to rounding.
Comparison of the Three and Six Months Ended June 30, 2015 and 2014
Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Revenue
$
120,065

 
$
92,642

 
30
%
 
$
224,399

 
$
167,039

 
34
%
Revenue increased $27.4 million , or 30% , during the three months ended June 30, 2015 compared to the three months ended June 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 for the three months ended June 30, 2015 and 2014 , respectively. Revenue from advertising delivered through other channels was 39% and 44% of revenue for the three months ended June 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 during the three months ended June 30, 2015 . The mobile channel was 26% of revenue for the three months ended June 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, 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. Growth in our number of active customers was driven primarily by growth in new customers, which generally spend less than customers that have used our solution for longer periods of time. This growth in active customers and new customers also resulted in a 5% increase in the number of campaigns that ran across our platforms during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 . Due to the higher number of campaigns, the volume of impressions delivered increased by 27% during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 . The average cost per mille (or cost per thousand impressions) or "CPM", decreased by 1% . Revenue from outside of North America increased by 25% for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 . Revenue from outside of North America, as a percentage of revenue, decreased to 15% from 16% between the three months ended June 30, 2015 and 2014 , respectively.

29



Revenue increased $57.4 million , or 34% , during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 , driven in part by revenue from the acquired [x+1] business. Revenue from the display channel was 60% and 58% of revenue for the six months ended June 30, 2015 and 2014 , respectively. Revenue from other channels was 40% and 42% of revenue for the six months ended June 30, 2015 and 2014 , respectively. The mobile channel was 25% of revenue for the six months ended June 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. Growth in our number of active customers was driven primarily by growth in new customers, which generally spend less than customers that have used our solution for longer periods of time. This growth in active customers and new customers also resulted in a 6% increase in the number of campaigns that ran across our platforms during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 . Due to the higher number of campaigns, the volume of impressions delivered increased by 29% during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 . The average cost per mille (or cost per thousand impressions) or "CPM" remained flat. Revenue from outside of North America increased by 30% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 . Revenue from outside of North America, as a percentage of revenue, decreased to 15% from 16% between the six months ended June 30, 2015 and 2014 , respectively.
Media Cost and Other Cost of Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Media Cost
$
49,155

 
$
37,930

 
30
%
 
$
94,716

 
$
67,637

 
40
%
Other cost of revenue
$
19,826

 
$
8,993

 
120
%
 
$
39,782

 
$
16,821

 
137
%
Headcount (at period end)
143

 
58

 
147
%
 
 
 
 
 
 
Media costs increased by $11.2 million , or 30% , during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 due to increased sales volume. Media costs were approximately 41% of revenue for both the three months ended June 30, 2015 and 2014 , respectively.
Other cost of revenue increased by $10.8 million or 120% , during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 . This increase was primarily due to an increase in depreciation and amortization of $4.6 million , which includes capitalized internal-use software, other fixed assets and acquired technology intangible assets, an increase in personnel costs of $3.7 million , an increase in data and inventory validation costs of $1.2 million and an increase in hosting costs of $1.0 million . Amortization of acquired technology intangible assets was $2.9 million for the three months ended June 30, 2015 . Amortization of capitalized internal-use software was $1.8 million and $1.2 million for the three months ended June 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.
Media costs increased by $27.1 million , or 40% , during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 due to increased sales volume. Media costs increased to approximately 42% of revenue from 40% of revenue for the six months ended June 30, 2015 and 2014 , respectively. This increase was due to the mix of business and our acquisition of [x+1].
Other cost of revenue increased by $23.0 million or 137% , during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 . This increase was primarily due to an increase in depreciation and amortization of $9.0 million , which includes capitalized internal-use software, other fixed assets and acquired technology intangible assets, an increase in personnel costs of $8.5 million , an increase in data and inventory validation costs of $3.0 million and an increase in hosting costs of $1.9 million . Amortization of acquired technology intangible assets was $5.8 million for the six months ended June 30, 2015 . Amortization of capitalized internal-use software was $3.4 million and $2.3 million for the six months ended June 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.

30



Research and Development
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Research and development
$
11,791

 
$
8,434

 
40
%
 
$
23,114

 
$
15,675

 
47
%
Percent of revenue
10
%
 
9
%
 
 
 
10
%
 
9
%
 
 
Headcount (at period end)
189

 
154

 
23
%
 
 
 
 
 
 
Research and development expense increased by $3.4 million , or 40% , during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 . This increase was primarily due to an increase in personnel expense of $2.5 million and, to a lesser extent, to an increase in depreciation and amortization expense of $0.7 million . The increase in personnel expense was primarily due the addition of [x+1] personnel plus other hiring.
Research and development expense increased by $7.4 million , or 47% , during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 . This increase was primarily due to an increase in personnel expense of $5.1 million and, to a lesser extent, to an increase in depreciation and amortization expense of $1.9 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 $3.9 million and $2.2 million for the three months ended June 30, 2015 and 2014 , respectively, and $7.2 million and $4.3 million for the six months ended June 30, 2015 and 2014 , respectively. The increase was due to additional headcount devoted to internal-use software development.
Sales and Marketing
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Sales and marketing
$
41,750

 
$
33,789

 
24
%
 
$
84,628

 
$
63,548

 
33
%
Percent of revenue
35
%
 
36
%
 
 
 
38
%
 
38
%
 
 
Headcount (at period end)
531

 
491

 
8
%
 
 
 
 
 
 
Sales and marketing expense increased by $8.0 million , or 24% , during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 . This increase was primarily due to an increase in personnel expense of $4.3 million and, to a lesser extent, an increase in depreciation and amortization expense of $2.9 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.
Sales and marketing expense increased by $21.1 million , or 33% , during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 . This increase was primarily due to an increase in personnel expense of $11.9 million and, to a lesser extent, an increase in depreciation and amortization expense of $5.9 million , primarily for the acquisition of intangible assets of [x+1], and an increase in allocated costs, mostly facility costs, of $1.8 million . The increase in personnel expense was primarily due to the expansion of our sales force through hiring and the addition of [x+1] personnel.


31



General and Administrative
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
General and administrative
$
14,761

 
$
12,135

 
22
%
 
$
32,335

 
$
22,475

 
44
%
Percent of revenue
12
%
 
13
%
 
 
 
14
%
 
13
%
 
 
Headcount (at period end)
145

 
123

 
18
%
 
 
 
 
 
 
General and administrative expense increased by $2.6 million , or 22% , during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 . This increase was primarily due to an increase in personnel expense of $1.6 million . The increase in personnel costs was driven by hiring and the addition of [x+1] personnel.
General and administrative expense increased by $9.9 million , or 44% , during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 . This increase was primarily due to an increase in personnel expense of $5.4 million and, to a lesser extent, to an increase in professional services of $1.8 million and an increase in allocated costs, mostly facility costs, of $1.7 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 and consulting fees.
Restructuring
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Restructuring charges
$
6,471

 
$

 
n/a
 
$
6,471

 
$

 
n/a
Percent of revenue
5
%
 
%
 
 
 
3
%
 
%
 
 
Restructuring expense for the restructuring plan announced in April 2015 was $6.5 million , during the three and six months ended June 30, 2015 . The Company incurred expenses for employee severance costs of $3.5 million, $0.3 million in broker costs and $2.7 million in asset impairment charges related to subletting of certain excess leased office space. Our total workforce declined from 1,183 at March 31, 2015 to 1,008 at June 30, 2015 , due to the reduction in force and attrition.
Interest and Other Expense
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
 
(in thousands, except percentages)
Interest expense
$
1,045

 
$
514

 
103
 %
 
$
2,385

 
$
928

 
157
 %
(Gain) loss on foreign currency transactions
(701
)
 
432

 
(262
)%
 
1,495

 
461

 
224
 %
Other (income) expense, net
5

 
(7
)
 
(171
)%
 
17

 
(17
)
 
(200
)%
Total
$
349

 
$
939

 
(63
)%
 
$
3,897

 
$
1,372

 
184
 %
The decrease in interest and other expense during the three months ended June 30, 2015 compared to the three months ended June 30, 2014 , was primarily due to foreign currency gains following the increases in the Canadian dollar, British pound and the Euro against the U.S. dollar during the three months ended June 30, 2015 . Interest and other expense increased during the six months ended June 30, 2015 compared to the six months ended June 30, 2014 primarily due to higher foreign currency transaction losses following the declines in the Canadian dollar, British pound and the Euro against the U.S. dollar during the six months ended June 30, 2015 , as well as higher interest expense related to additional borrowings under our revolving credit facility, term debt, and higher capital leases.

32



Income Tax (Benefit) Provision
We recorded an income tax expense of $0.4 million and $0.2 million for the three months ended June 30, 2015 and 2014 , respectively, and $0.7 million and $0.5 million for the six months ended June 30, 2015 and 2014 , respectively, primarily due to foreign and state income tax expense.
Liquidity and Capital Resources
As of June 30, 2015 , we had cash and cash equivalents of $81.1 million , of which $1.0 million was held by our foreign subsidiaries, $67.0 million in debt obligations, net of $0.8 million in debt issuance costs, under the amended and restated Revolving Credit and Term Loan Agreement (the "2014 Loan Facility") and $16.9 million in capital lease obligations. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments as of June 30, 2015 .
From our incorporation in March 2008 through September 2013, we financed our operations, capital expenditures and working capital needs through private sales of convertible preferred stock, lines of credit and term debt. We received net proceeds of $60.6 million from the issuance of convertible preferred stock between 2008 and 2012. In September 2013, we completed our initial public offering whereby we sold 4,000,000 shares of common stock and certain of our stockholders sold 600,000 shares of common stock. The public offering price of the shares sold in the initial public offering was $29.00 per share. We did not receive any proceeds from the sales of shares by the selling stockholders. The total gross proceeds to us from the initial public offering were $116.0 million . After deducting underwriters’ discounts and commissions, and offering expenses, the aggregate net proceeds we received totaled approximately $103.3 million .
In February 2014, we completed an underwritten follow-on public offering of our common stock in which 2,000,000 shares of common stock were sold by us and 3,000,000 shares of common stock were sold by selling stockholders. The public offering price of the shares sold in the offering was $61.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. The total gross proceeds from the offering to us were $122.0 million . After deducting underwriters’ discounts and commissions and offering expenses, the aggregate net proceeds we received totaled approximately $115.4 million .
On September 5, 2014, we acquired [x+1] for an aggregate purchase price of $98.0 million in cash and approximately 5.3 million shares of our common stock.
On December 31, 2014, we entered into the 2014 Loan Facility, with certain lenders, including Comerica Bank, or Comerica, as administrative agent for the lenders, which was last amended on March 13, 2015. The 2014 Loan Facility amended and restated our then-existing Loan and Security Agreement, dated as of April 7, 2010, (as amended, the "2010 Loan Facility"), between us and Comerica. The 2014 Loan Facility provides for a secured $80.0 million three year revolving credit facility, secured by accounts receivable, and a secured $30.0 million five-year term loan. 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.
The 2014 Loan Facil