Rocket Fuel Inc.
Rocket Fuel Inc. (Form: 10-Q, Received: 08/09/2017 16:44:45)




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, 2017
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)

2000 Seaport Boulevard, Suite 400, 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth 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
¨
 
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
x

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 on common stock as of the latest practicable date. On July 31, 2017 , there were 46,993,632 shares of the registrant's common stock, par value $0.001 , outstanding.

1



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,
 
2017
 
2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
62,356

 
$
84,024

Accounts receivable, net
107,267

 
125,755

Prepaid expenses
2,831

 
2,598

Other current assets
6,046

 
3,049

Total current assets
178,500

 
215,426

Property, equipment and software, net
42,429

 
49,561

Restricted cash
1,784

 
1,749

Intangible assets, net
27,346

 
34,874

Deferred tax assets, net
793

 
574

Other assets
673

 
517

Total assets
$
251,525

 
$
302,701

Liabilities and Stockholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
72,268

 
$
83,001

Accrued and other current liabilities
28,406

 
33,486

Deferred revenue
4,195

 
2,856

Current portion of capital leases
9,256

 
8,325

Current portion of debt
68,998

 
71,190

Total current liabilities
183,123

 
198,858

Capital leases—Less current portion
4,722

 
6,721

Deferred rent—Less current portion
8,840

 
9,121

Other liabilities
1,491

 
850

Total liabilities
198,176

 
215,550

Commitments and contingencies (Note 10)


 


Stockholders’ Equity:
 
 
 
Common stock, $0.001 par value— 1,000,000,000 authorized as of June 30, 2017 and December 31, 2016; 46,972,396 and 46,218,687 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
47

 
46

Additional paid-in capital
479,699

 
473,056

Accumulated other comprehensive loss
(705
)
 
(925
)
Accumulated deficit
(425,692
)
 
(385,026
)
Total stockholders’ equity
53,349

 
87,151

Total liabilities and stockholders’ equity
$
251,525

 
$
302,701

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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
90,747

 
$
116,968

 
$
185,919

 
$
221,713

Costs and expenses:
 
 
 
 
 
 
 
Media costs
48,239

 
50,922

 
95,995

 
93,481

Other cost of revenue
20,053

 
20,397

 
41,558

 
40,482

Research and development
6,863

 
9,438

 
14,133

 
20,077

Sales and marketing
23,212

 
36,190

 
49,110

 
73,030

General and administrative
9,280

 
12,765

 
19,981

 
27,086

Restructuring
986

 
1,766

 
4,754

 
1,567

Total costs and expenses
108,633

 
131,478

 
225,531

 
255,723

Operating loss
(17,886
)
 
(14,510
)
 
(39,612
)
 
(34,010
)
Interest expense
1,231

 
1,032

 
2,368

 
2,269

Other (income) expense, net
(1,136
)
 
866

 
(1,688
)
 
672

Loss before income taxes
(17,981
)
 
(16,408
)
 
(40,292
)
 
(36,951
)
Income tax provision
216

 
285

 
374

 
515

Net loss
$
(18,197
)
 
$
(16,693
)
 
$
(40,666
)
 
$
(37,466
)
Basic and diluted net loss per share attributable to common stockholders
$
(0.39
)
 
$
(0.38
)
 
$
(0.88
)
 
$
(0.85
)
Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders
46,638

 
44,056

 
46,451

 
43,828


See Accompanying Notes to Condensed Consolidated Financial Statements.


5



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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(18,197
)
 
$
(16,693
)
 
$
(40,666
)
 
$
(37,466
)
Other comprehensive income (loss): (1)
 
 
 
 
 
 
 
Foreign currency translation adjustments
141

 
(301
)
 
220

 
(474
)
Comprehensive loss
$
(18,056
)
 
$
(16,994
)
 
$
(40,446
)
 
$
(37,940
)
(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,
 
2017
 
2016
Operating Activities:
 
 
 
Net loss
$
(40,666
)
 
$
(37,466
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
23,384

 
25,145

Impairment of long-lived assets
2,445

 
1,225

Accelerated amortization of leasehold improvements

 
7,059

Stock-based compensation expense
5,436

 
8,892

Deferred taxes
(192
)
 
193

Other non-cash adjustments, net
1,121

 
1,607

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
17,451

 
10,102

Prepaid expenses and other assets
(3,325
)
 
(2,209
)
Accounts payable, accrued and other liabilities
(15,398
)
 
(5,916
)
Deferred rent
(414
)
 
(6,103
)
Deferred revenue
1,339

 
(128
)
Net cash provided by (used in) operating activities
(8,819
)
 
2,401

Investing Activities:
 
 
 
Purchases of property, equipment and software
(1,504
)
 
(3,055
)
Capitalized internal-use software development costs
(4,798
)
 
(5,924
)
Other investing activities
124

 
332

Net cash used in investing activities
(6,178
)
 
(8,647
)
Financing Activities:
 
 
 
Proceeds from employee stock plans, net
904

 
1,080

Tax withholdings related to net share settlements of restricted stock units
(415
)
 
(609
)
Repayment of capital lease obligations
(4,974
)
 
(4,218
)
Proceeds from debt facilities, net of issuance costs
(356
)
 
22,350

Repayment of debt
(2,000
)
 
(24,000
)
Net cash used in financing activities
(6,841
)
 
(5,397
)
 
 
 
 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
170

 
(253
)
Change in Cash and Cash Equivalents
(21,668
)
 
(11,896
)
Cash and Cash Equivalents—Beginning of period
84,024

 
78,560

Cash and Cash Equivalents—End of period
$
62,356

 
$
66,664


7



 
Six Months Ended
June 30,
 
2017
 
2016
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
 
 
 
Cash paid for income taxes, net of refunds
$
1,015

 
$
384

Cash paid for interest
2,161

 
1,937

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property, equipment and software recorded in accounts payable and accruals
$
524

 
$
2,371

Property, equipment and software acquired under capital lease obligations
3,905

 
646

Vesting of early exercised options

 
25

Stock-based compensation capitalized in internal-use software costs
720

 
1,308

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, California.
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, 2016  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 the Company's Annual Report on Form 10-K for the fiscal year ended  December 31, 2016 .

The significant accounting policies and recent accounting pronouncements were described in Note 1 to the Consolidated Financial Statements included in the  2016  Annual Report on Form 10-K for the fiscal year ended  December 31, 2016 . There have been no significant changes in or updates to the accounting policies since  December 31, 2016 .

Going Concern

The Company has incurred losses from operations resulting in an accumulated deficit of $(425.7) million as of June 30, 2017 , with a net loss of $(18.2) million during the three months ended June 30, 2017 . Since inception, the Company's operations and investments have been funded primarily through equity financing, bank loan facilities and capital leases, along with occasional net cash generated from operations. As of June 30, 2017 , the Company had cash and cash equivalents of $62.4 million , of which $3.8 million was held by its foreign subsidiaries, $69.5 million in debt obligations under the Revolving Credit and Term Loan Agreement (the "2016 Loan Facility") which expires on December 31, 2018, and $14.0 million in capital lease obligations.

The Company's ability to continue as a going concern is dependent on the continued availability of external funding sources and its ability to generate sufficient cash from operations. The current primary source of funding is the 2016 Loan Facility, the continued availability which is contingent on compliance with bank-defined EBTIDA targets, minimum cash requirements, and other financial and non-financial covenants. The Company considers the continued availability of the 2016 Loan Facility a critical condition to meeting its payment obligations and enabling it to sustain its business operations. The Company has been required to amend the terms of the loan facility, in particular the bank-defined EBITDA covenant, several times over the past two fiscal years. As discussed further in Note 6, the Company’s results of operations for the 12 months ended June 30, 2017 failed to meet the bank-defined minimum EBITDA for the same period, and accordingly, as described in Note 13, the Company entered into a seventh amendment to its Loan Facility in order to remain in compliance.

In January 2017, the Company announced a plan to improve its operational efficiency, which included the reduction of approximately 11% of its workforce and continued real estate consolidation projects, and these actions were expected to reduce operating expenses by approximately $20 million annually. However, during the first six months of 2017, the Company failed to meet its operating plan targets, particularly for revenue. While the operating plan has variable cost components that could be adjusted if necessary, the unanticipated rate of decline in the media services business has placed further pressure on the Company’s financial condition and liquidity. These events individually and collectively raise substantial doubt about the Company's ability to continue as a going concern.

Further, as noted in Note 13, on July 18, 2017, the Company announced that it had entered into a definitive agreement to be acquired by Sizmek Inc (“Sizmek”). The completion of the acquisition by Sizmek would offer the Company access to funds that would support its operating needs. However, there is uncertainty about the effect that the proposed transaction will have on our relations with employees, partners, and customers, and this transaction could adversely affect our business whether or not it is completed.


9



The acquisition by Sizmek is largely outside of the Company’s control as it is subject to a tender offer which will not be concluded until after the issuance of the accompanying Condensed Consolidated Financial Statements. The Company has therefore concluded that this does not mitigate the substantial doubt raised surrounding the Company’s ability to continue as a going concern.


Recently Issued and Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,  Revenue from Contracts with Customers (Topic 606) . The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , which defers by one year the effective date of ASU 2014-09. The standard becomes effective for the Company beginning January 1, 2018, but allows the Company to adopt the standard one year earlier if it so chooses. In March 2016, the FASB issued ASU No. 2016-08,  Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , which requires an entity to determine whether the nature of its promise is to provide a good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the entity is an agent). In April, 2016, the FASB issued ASU No. 2016-10,  Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which clarifies the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. In May, 2016, the FASB issued ASU No. 2016-12,  Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients , which clarifies guidance in certain narrow areas and adds some practical expedients. The amendments have the same effective date and transition requirements as the new revenue recognition standard. We intend to elect the modified retrospective method in adopting the guidance of ASC 606 starting January 2018. The modified retrospective method requires us to apply the new revenue standard only to the financial statements in the year of adoption and record a cumulative-effect adjustment to the opening balance of retained earnings in the year the new revenue standard is first applied. The opening adjustment to retained earnings will be determined on the basis of the impact of the new revenue standard’s application on contracts that were not completed as of the date of initial application. The Company is currently evaluating the impact of this guidance across our revenue-related activities and are in the processing of determining the impact of the new guidance on our revenue recognition practices, business process and internal controls, and on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which replaces prior lease guidance (Topic 840.) This guidance establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations. The guidance also eliminates today’s real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Entities have the option to use certain practical expedients. Full retrospective application is prohibited. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company expects that upon adoption, ROU assets and lease liabilities will be recognized in the balance sheet in amounts that will be material.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , changing certain aspects of accounting for share-based payments to employees (Topic 718), as well as affecting the accounting classification within the statement of cash flows. The new guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. The new standard allows a policy election to account for forfeitures as they occur and allows an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2016-09 in the first quarter of 2017. No cumulative-effect adjustment was recorded to our accumulated deficit balance as the U.S. deferred tax assets from previously unrecognized excess tax benefits were fully offset by a full valuation allowance; and we did not elect to change our policy of estimating expected forfeitures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , which provides the FASB's guidance on certain cash flow statements items. ASU 2016-15 is effective for fiscal reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted including adoption in an interim period. The adoption of ASU 2016-15 is not expected to have a material impact on our consolidated financial statements and related disclosures.


10



In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash a consensus of the FASB Emerging Issues Task Force . The standard requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows. The new standard is expected to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01,  Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively and will be effective for the Company beginning January 1, 2018. The Company is currently evaluating the impact of this ASU to its consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ." The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The new standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. the Company is currently evaluating the impact of adopting ASU 2017-09 on our consolidated financial statements and related disclosures.

With the exception of the standards discussed above along with those described in Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 there have been no other recent accounting pronouncements or changes in accounting pronouncements during the  six months ended June 30, 2017 that are of significance or potential significance to the Company.


NOTE 2.
PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software, net as of June 30, 2017 and December 31, 2016 , consisted of the following (in thousands):
 
June 30,
 
December 31,
 
2017
 
2016
Capitalized internal-use software costs
$
57,678

 
$
51,877

Computer hardware and software
65,490

 
60,656

Furniture and fixtures
10,734

 
10,903

Leasehold improvements
16,255

 
16,068

Total
150,157

 
139,504

Accumulated depreciation and amortization
(107,728
)
 
(89,943
)
Total property, equipment and software, net
$
42,429

 
$
49,561

Refer to Note 4 for details of the Company's capital leases.
The Company capitalized internal-use software development costs of $2.9 million and $3.4 million for the three months ended June 30, 2017 and 2016 , respectively, and  $5.8 million  and  $7.0 million  for the  six months ended June 30, 2017 and 2016 , respectively. Amortization expense of internal-use software costs was $3.0 million and $2.7 million for the three months ended June 30, 2017 and 2016 , respectively, and  $6.0 million  and  $5.0 million  for the  six months ended June 30, 2017 and 2016 , respectively.
Total depreciation and amortization expense related to property, equipment and software, exclusive of the amortization of capitalized internal-use software costs, was $4.1 million and $6.0 million for the three months ended June 30, 2017 and 2016 , respectively, and  $9.8 million  and  $11.9 million  for the  six months ended June 30, 2017 and 2016 , respectively.
Additionally, the Company recorded an impairment charge and accelerated amortization of $0.2 million and $4.8 million during the three months ended June 30, 2017 and 2016 , respectively, and $2.4 million and $8.3 million for the six months ended

11



June 30, 2017 and 2016 , respectively for certain of its leasehold improvements in connection with its restructuring activities. Refer to Note 5 for details of the Company's restructuring costs.

NOTE 3.
BUSINESS COMBINATIONS
On September 5, 2014, the Company acquired X Plus Two Solutions, Inc., a Delaware corporation (“X Plus Two”), which wholly owned X Plus One Solutions, Inc. known in the industry as [x+1] ("[x+1]"). Management believed the acquisition of [x+1] would significantly expand the market opportunity and help accelerate the Company’s entry into the digital marketing enterprise software-as-a-service ("SaaS") market. The total purchase consideration was as follows (in thousands):
Purchase consideration:
 
Cash
$
98,045

Fair value of 5.3 million shares common stock transferred
82,421

Total purchase price
$
180,466

The acquisition of [x+1] was accounted for in accordance with the acquisition method of accounting for business combinations with the Company as the accounting acquiror. The Company expensed the acquisition-related transaction costs in the amount of $4.9 million in general and administrative expenses. The total purchase price was allocated as follows (in thousands):
Current assets
$
29,853

Non-current assets
3,999

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

Goodwill
117,521

Total purchase price
$
180,466

Due to a stock price decline during the third quarter of 2015, the Company’s market capitalization declined to a value below the net book value of the Company’s equity, triggering the Company to conduct a goodwill impairment test. The outcome of the goodwill impairment test resulted in a non-cash impairment of goodwill of $ 117.5 million , which was recorded in the third quarter of 2015. Identifiable intangible assets acquired are as follows (in thousands):
 
 
 
 
 
June 30, 2017
 
 
 
December 31, 2016
 
Estimated Useful Life (in years)
 
Gross
 
Accumulated Amortization
 
Net Book Value
 
Gross
 
Accumulated Amortization
 
Net Book Value
Developed technology
3-4
 
$
42,100

 
$
(32,682
)
 
$
9,418

 
$
42,100

 
$
(26,887
)
 
$
15,213

Customer relationships
7-8
 
27,700

 
(9,772
)
 
17,928

 
27,700

 
(8,039
)
 
19,661

Trademarks
5
 
2,000

 
(2,000
)
 

 
2,000

 
(2,000
)
 

Non-compete agreements
2
 
2,900

 
(2,900
)
 

 
2,900

 
(2,900
)
 

Total
 
 
$
74,700

 
(47,354
)
 
27,346

 
$
74,700

 
$
(39,826
)
 
$
34,874

Total amortization expense related to intangible assets acquired was $3.8 million and $4.1 million for the three months ended June 30, 2017 and 2016 , respectively, and  $7.5 million  and  $8.3 million  for the  six months ended June 30, 2017 and 2016 , respectively.

    

12



NOTE 4.
CAPITAL LEASES
Property, equipment and software includes hardware and software related to our data centers, which are typically acquired under capital lease agreements. During the three months ended March 31, 2017, the Company exercised a renewal of one of its capital leases for an additional twelve months, which resulted to an increase in capital lease obligation by  $2.4 million .
The remaining future minimum lease payments under these non-cancelable capital leases as of June 30, 2017 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2017 (remaining 6 months)
 
$
5,500

2018
 
7,098

2019
 
1,900

2020
 
432

Total minimum lease payments
 
$
14,930

Less: amount representing interest and taxes
 
(952
)
Less: current portion of minimum lease payments
 
(9,256
)
Capital lease obligations, net of current portion
 
$
4,722


NOTE 5.
RESTRUCTURING COSTS
The Company recorded net restructuring costs as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Accelerated amortization, impairment and loss on disposal of lease-related assets
$
415

 
$
4,751

 
$
2,680

 
$
8,284

Severance and facility exit costs
202

 
1,211

 
1,705

 
1,613

Release of deferred rent and provision for sublease, net
369

 
(4,196
)
 
369

 
(8,330
)
Total restructuring costs, net
$
986

 
$
1,766

 
$
4,754

 
$
1,567

Office lease related charges, including the release of deferred rent and provision of sublease, relate to the sublease or exit of certain leased spaces in San Francisco, Los Angeles, and Denver for the six months ended June 30, 2017 ; and New York City for the six months ended June 30, 2016 .
The following table summarizes the cash-related restructuring activities for the six months ended June 30, 2017 and fiscal year ended December 31, 2016 included in accrued and other current liabilities on the balance sheets (in thousands):

 
June 30,
 
December 31,
 
2017
 
2016
Severance and facility exit liability - beginning of period
$
1,169

 
$

Expensed
1,705

 
2,846

Billed and/or paid
(2,765
)
 
(1,677
)
Severance and facility exit liability - end of period
$
109

 
$
1,169



13



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"). The 2014 Loan Facility amended and restated the Company's then-existing Amended and Restated Revolving Credit and Term Loan Agreement, dated as of December 20, 2013. Through March 10, 2016, the 2014 Loan Facility provided for an $80.0 million revolving credit facility which matures on December 31, 2017, with a $12.0 million letter of credit subfacility, a $2.5 million swing-line subfacility, and a $30.0 million secured term loan that matures on December 31, 2019. Revolving loans could be advanced under the revolving credit 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.
On March 10, 2016, the Company amended the 2014 Loan Facility and terminated the term loan. The then-remaining balance of the term loan was repaid and refinanced by an additional draw down on the revolving credit facility of $22.5 million . In the amendment, the minimum bank-defined EBITDA covenant and the liquidity ratio covenant were changed. Subsequently, on June 21, 2016, the Company further amended its credit agreement to increase the sublimit of eligible foreign account receivables to $12 million . The credit agreement, as so amended, is referred to in the report as the "2016 Loan Facility". The Company paid customary closing fees in connection with establishing and amending its credit agreement, and pays customary commitment fees and letter of credit fees.
On September 15, 2016, the Company amended the 2016 Loan Facility. This amendment provides for a floor of zero percent ( 0% ) for certain LIBOR definitions and a change in the timing for measuring whether the Company’s aggregated cash on deposit with the lenders and other domestic financial institutions falls below $40.0 million (calculating our balance on the last day of each month rather than on a continuous rolling basis) for purposes of determining whether the Agent has the right to use future cash collections from accounts receivable directly to reduce the outstanding balance of the Company's revolving credit facility. On December 29, 2016, the Company further amended the 2016 Loan Facility to lower the minimum EBITDA financial covenant for the period ending December 31, 2016.

On February 14, 2017, the Company amended the 2016 Loan Facility. This amendment extended the revolving credit maturity date by one year to December 31, 2018, amended the definition of EBITDA to permit the add-back of restructuring charges incurred during the first two quarters of fiscal year 2017, lowered the minimum EBITDA financial covenant, increased the minimum liquidity ratio financial covenant, and decreased the limit for debt under capital leases as well as the amount of permitted capital expenditures per fiscal year.
The Company's EBITDA for 12-month period ended June 30, 2017 failed to meet the minimum EBITDA covenant specified under the amended 2016 Loan Facility, thereby putting the Company into a technical default position as of that date. In July 2017, the Company entered into negotiations with its lenders and on August 9, 2017, the Company further amended the 2016 Loan Facility. The amendment waived the EBITDA default as of June 30, 2017, required a partial paydown of the revolving credit of $20.0 million and reduced the revolving credit line to $53.6 million from $80.0 million (subject to further reduction if the acquisition by Sizmek Inc. announced on July 18, 2017 is terminated or if the Company enters into an alternative acquisition transaction, subject to certain conditions). The amended terms further included a reduction in the minimum bank-defined EBITDA financial covenant as of September 30, 2017 and December 31, 2017, reduction of cash deposit requirements, and made certain other changes to the terms and covenants intended to align with completing the acquisition by Sizmek, or an alternative acquisition transaction. Refer to Item 5 of this Quarterly Report on Form 10-Q for further details.

Under the 2016 Loan Facility, the lenders have the right to use future cash collections from accounts receivable directly to reduce the outstanding balance of the revolving credit facility if the aggregate cash balances on deposit with the lenders and certain other domestic financial institutions fall below $40.0 million at month-end. This right is referred to as "dominion of funds," or DOF, which is waived for a certain period according to the latest amendment to our 2016 Loan Facility entered into on August 9, 2017 (refer to Note 13 for further details). The Company may repay revolving loans under the 2016 Loan Facility in whole or in part at any time without premium or penalty, subject to certain conditions.
As of June 30, 2017 , the Company had $69.5 million outstanding debt and $4.1 million in letters of credit under the revolving credit facility.
Revolving loans bear interest, at the Company's option, at (i) a base rate determined pursuant to the terms of the 2016 Loan Facility, plus a spread of 1.625% to 2.125% , or (ii) a LIBOR rate determined pursuant to the terms of the 2016 Loan Facility,

14



plus a spread of 2.625% to 3.125% . Term loans bore interest, at the Company's option, at (i) a base rate determined pursuant to the terms of the 2016 Loan Facility, plus a spread of 2.50% to 3.00% , or (ii) a LIBOR rate determined pursuant to the terms of the 2016 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 2016 Loan Facility.
The Company is required to maintain a minimum of $30.0 million of cash on deposit, which have been subsequently reduced following the amendment entered into on August 9, 2017 (refer to Note 13 for further details), with the lenders and comply with certain financial covenants under the 2016 Loan Facility, including the following:
Bank-defined EBITDA. The Company is required to maintain specified bank-defined 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 non-recurring 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 2016 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 2016 Loan Facility, the ratio of (i) the sum of all cash and accounts receivable to (ii) the sum of all accounts payable and all indebtedness owing to the lenders under the 2016 Loan Facility must be at least 1.00 to 1.00.
The terms of the 2016 Loan Facility also require the Company to comply with certain other financial and non-financial covenants. As of June 30, 2017 , the Company was in compliance with all financial and non-financial covenants, except for bank-defined EBITDA. The Company subsequently obtained a waiver as further described in Note 13.
As of June 30, 2017 , the $69.5 million balance outstanding under the 2016 Loan Facility had a maturity date of December 31, 2018, 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. This debt on the condensed consolidated balance sheets is shown net of $0.5 million in unamortized debt issuance costs.

NOTE 7.
STOCKHOLDERS’ EQUITY
Registration Statement
On May 10, 2016, the Company filed a shelf registration statement on Form S-3 with the SEC (the “Registration Statement”). The Registration Statement contains (i) a base prospectus that covers the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $50.0 million of the Company’s common stock, preferred stock, warrants, debt securities, subscription rights and units and (ii) the base prospectus along with an accompanying sales agreement prospectus supplement covering the offering, issuance and sale by the Company of up to a maximum aggregate offering price of $30.0 million of the Company’s common stock that may be issued and sold from time to time under an "at-the-market" offering sales agreement with Cantor Fitzgerald & Co. The up to $30.0 million of common stock that may be issued and sold under the "at-the-market" sales agreement prospectus supplement is included in the $50.0 million of securities that may be offered and sold under the base prospectus. The Registration Statement was declared effective in August 2016.

As of the year ended December 31, 2016 , the Company issued 697,405 shares through an "at-the-market" offering for a total of $1.5 million in proceeds, net of issuance costs which include 3% of sales commission, or approximately $0.1 million , paid to the broker-dealer under this sales agreement. No shares were issued for the six months ended June 30, 2017 .


15



Stock Options and Stock Awards
The following table summarizes information pertaining to our stock-based compensation expense 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,
 
2017
 
2016
Stock options:
 
 
 
Outstanding at the beginning of the period
7,751

 
5,387

Options granted
2,270

 
5,817

Options exercised
(132
)
 
(112
)
Options canceled and forfeited
(1,139
)
 
(3,514
)
Outstanding at the end of the period
8,750

 
7,578

Total intrinsic value of options exercised
$
272

 
$
267

Total unrecognized compensation expense at period-end
$
6,542

 
$
9,958

Weighted-average remaining recognition period at period-end (in years)
2.2

 
2.4

 
 
 
 
Stock awards:
 
 
 
Outstanding at the beginning of the period
1,812

 
3,612

Stock awards granted
563

 
517

Stock awards vested
(273
)
 
(485
)
Stock awards canceled
(356
)
 
(610
)
Outstanding at the end of the period
1,746

 
3,034

Weighted-average grant-date fair value
$
6.37

 
$
9.77

Total unrecognized compensation expense at period-end
$
7,092

 
$
20,133

Weighted-average remaining recognition period at period-end (in years)
1.7

 
2.4


2016 Inducement Equity Incentive Plan
Effective March 4, 2016, the Company's board of directors adopted the 2016 Inducement Equity Incentive Plan (the “2016 Plan”) pursuant to Nasdaq Listing Rule 5635(c)(4) (the "Listing Rule"). The Listing Rule permits a company to adopt a plan without stockholder approval if each grant is made to a new employee of the Company, or an employee returning to the Company after a bona fide period of non-employment, and in each case was offered the grant as a material inducement for the employee to join the Company. The 2016 Plan permits the grant of non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to eligible participants.
A total of 2,200,000 shares of common stock were reserved for issuance upon initial adoption of the 2016 Plan. The 2016 Plan has a term of one year from its effective date. The compensation committee of the board of directors has the authority to approve the employees to whom equity awards are granted and to determine the terms of each award, subject to the terms of the 2016 Plan. The compensation committee may determine the number of shares subject to an award. Options and stock appreciation rights granted under the 2016 Plan must have a per share exercise price equal to at least 100% of the fair market value of a share of the Company's common stock as of the date of grant and may not expire later than 10 years from the date of grant.
As of the six months ended June 30, 2017 , 0.1 million shares and 2.7 million shares have been granted under the 2016 Plan and 2013 Plan, respectively.
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

16



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. 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, 2017 , 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, 2017 were approximately $0.9 million , which will be recognized over the offering period.
Effective January 15, 2016, the compensation committee of the Company's board of directors adopted an amendment and restatement of the ESPP that will apply to offering periods beginning on and after June 1, 2016. Pursuant to the amendment, future offering periods will start on the first trading day on or after June 1 and December 1 of each year and terminate on the first trading day or before the May 31 and November 30 that occurs approximately 24 months later. Each twenty-four month offering period will generally have four purchase periods of approximately six months in length, with the first purchase period of an offering period commencing on the date the offering period commences. At the end of each purchase period, employees are able to purchase shares, subject to any plan limitations, 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 purchase period. Offering periods may overlap. However, if the fair market value of the Company's stock has declined between the first date of an offering period and the end of a purchase period, the offering period will terminate on the purchase date that is at the end of that purchase period immediately after the purchase and participants in that offering period will automatically be re-enrolled in the immediately following 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.
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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Expected term (years)
5.5 - 6.25
 
5.5 - 6.25
 
5.5 - 6.25
 
5.5 - 6.25
Volatility
55.0%
 
55.0%
 
55.0%
 
55%
Risk-free interest rate
1.85% - 2.07%
 
1.29% - 1.55%
 
1.85% - 2.23%
 
1.29% - 1.93%
Dividend yield
 
 
 

17



The assumptions used to calculate our stock-based compensation for each stock purchase right granted under the ESPP were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Expected term (years)
0.5
 
0.5
 
0.5
 
0.5
Volatility
82.0%
 
63.0%
 
66.0% - 82.0%
 
63.0% - 65.0%
Risk-free interest rate
1.07%
 
0.49%
 
0.60% - 1.07%
 
0.42% - 0.49%
Dividend yield
 
 
 
Stock-based Compensation Allocation
The following table summarizes the allocation of stock-based compensation, net of amounts capitalized for internal-use software development, in the accompanying condensed consolidated statements of operations (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Other cost of revenue
$
334

 
$
493

 
$
729

 
$
1,023

Research and development
690

 
981

 
1,232

 
2,346

Sales and marketing
697

 
1,357

 
1,486

 
2,846

General and administrative
867

 
1,251

 
1,989

 
2,677

Total
$
2,588

 
$
4,082

 
$
5,436

 
$
8,892



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, 2017 and 2016 , 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.
The following table sets forth the computation of net loss per share of common stock (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net loss
$
(18,197
)
 
$
(16,693
)
 
$
(40,666
)
 
$
(37,466
)
Weighted-average shares used to compute basic and diluted net loss per share
46,638

 
44,056

 
46,451

 
43,828

Basic and diluted net loss per share
$
(0.39
)
 
$
(0.38
)
 
$
(0.88
)
 
$
(0.85
)
Common stock equivalents excluded from net loss per diluted share because their effect would have been anti-dilutive
10,717

 
10,833

 
10,717

 
10,833



18



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 $0.2 million and $0.3 million for each of the three months ended June 30, 2017 and 2016 , respectively, and $0.4 million and $0.5 million for the six months ended June 30, 2017 and 2016 , respectively, primarily due to foreign and state income taxes.
Due to uncertainty as to the realization of benefits from deferred tax assets, including net operating loss carry-forwards, research and development and other tax credits, the Company has provided valuation allowances against such domestic assets as of  June 30, 2017  and  December 31, 2016 .

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 and outside of the United States that expire at various dates through 2027.
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 $2.0 million and $4.3 million for the three months ended June 30, 2017 and 2016 , respectively, and  $4.2 million  and  $8.6 million  for the  six months ended June 30, 2017 and 2016 , respectively.
The approximate remaining future minimum cash lease payments under these non-cancelable operating leases as of June 30, 2017 were as follows (in thousands):
Year ending December 31,
 
Future Payments
2017 (remaining 6 months)
 
$
6,526

2018
 
11,645

2019
 
9,622

2020
 
7,661

2021
 
5,997

Thereafter
 
17,144

 
 
$
58,595

Total minimum rentals to be received in the future under non-cancelable subleases as of June 30, 2017 was $13.3 million .
Please refer to Note 4 for details of the Company's capital lease commitments as of June 30, 2017 .
Letters of Credit, Bank Guarantees and Restricted Cash —As of June 30, 2017 and December 31, 2016 , the Company had irrevocable letters of credit for facilities leases of $4.1 million and $6.7 million , respectively. The letters of credit have various expiration dates, with the latest being March 2023.
As of June 30, 2017 and December 31, 2016 , the Company had $2.0 million and $1.7 million , respectively, in cash reserved to support bank guarantees for certain office lease agreements. These amounts are classified as restricted cash and other assets 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,

19



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 us and certain of our officers and directors at the time. 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 initial public offering on September 19, 2013, or the "IPO," and the secondary offering on February 5, 2014, or the "Secondary Offering," were 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 alleged that the defendants made false and misleading statements about the ability of our technology to detect and eliminate fraudulent web traffic, and about our future prospects. The consolidated complaint also alleged that our registration statements and prospectuses for the IPO and the Secondary Offering contained false and misleading statements on these topics. The consolidated complaint purported to assert claims for violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 (the "Exchange Act claims"), and for violations of Sections 11 and 15 of the Securities Act (the "Securities Act claims"), on behalf of those who purchased the our common stock between September 20, 2013 and August 5, 2014, inclusive, as well as those who purchased common stock in the IPO, and a claim for violation of Section 12(a)(2) of the Securities Act in connection with the Secondary Offering. The consolidated complaint sought monetary damages in an unspecified amount. All defendants moved to dismiss the consolidated complaint and on December 23, 2015, the court granted in part and denied in part the defendants’ motions to dismiss. The court dismissed the Securities Act claims and all but one of the statements on which the Exchange Act claims were based. The court also dismissed all claims against the outside directors and the underwriters of the public offerings. On February 24, 2017, the parties advised the court that they had reached an agreement in principle to settle the case in its entirety. The agreement in principle to settle the lawsuit is subject to several conditions, including final approval from the court, among other things. If the settlement is finalized and approved by the court, the settlement amount will be funded by the Company’s insurance carrier. On April 25, 2017, the parties executed a stipulation of settlement. On May 31, 2017, the court granted a motion for preliminary approval of the settlement and directed the preparation of notice to the propose class members. The potential settlement has been accrued as of June 30, 2017 with a corresponding receivable from the insurance carrier.
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 our then-current and former officers and our board of directors at that time. The action was Davydov v. George H. John , et.al, Case No. CIV 53304. The complaint sought monetary damages in an unspecified amount, restitution, and reform of internal controls. On March 29, 2016, a purported shareholder derivative complaint for breach of fiduciary duty and violation of California corporations code section 25402 was filed in San Francisco, California Superior Court against certain of the Company's current and former officers and certain of the Company's current and former directors. The action was Lunam v. William Ericson, et. al., Case No. CGC-16-551209. The complaint sought monetary damages in an unspecified amount and reform of internal controls. Both of these state court actions were stayed pending the resolution of the In re Rocket Fuel, Inc. Derivative Litigation action described below. Following the dismissal with prejudice of the In re Rocket Fuel, Inc. Derivative Litigation action as described below, the parties in both the Lunam and Davydov actions reached agreements to voluntarily dismiss the actions without compensation. On February 6, 2017, the Lunam action was dismissed without prejudice, and on February 8, 2017, the Davydov action was dismissed without prejudice.
On October 6, 2015, a purported verified shareholder derivative complaint was filed in the Northern District of California. The action is Victor Veloso v. George H. John et al. , Case No. 4:15-cv-04625-PJH. Beginning in January 2016, three substantially similar related cases, Gervat v. Wootton et al. , 4:16-cv-00332-PJH, Pack v. John et al. , 4:16-cv-00608-EDL, and McCawley v. Wootton et al ., Case No. 4:16-cv-00812, also were filed in the Northern District of California on January 21, 2016, February 4, 2016 and February 18, 2016, respectively. The complaints in these related actions were based on substantially the same facts as the In re Rocket Fuel Securities Litigation, and named as defendants the Company’s board of directors at the time of filing and certain then-current and former executives. The four purported verified shareholder derivative complaints were consolidated by the Court in March 2016, and a complaint in the consolidated action, titled In re Rocket Fuel, Inc. Derivative Litigation , Case No. 4:15-cv-4625-PJH, was filed on April 14, 2016. All defendants moved to dismiss the consolidated complaint on May 19, 2016 and on October 6, 2016 In re Rocket Fuel Inc. Derivative Litigation was dismissed with prejudice. Following the dismissal with prejudice, former plaintiffs in In re Rocket Fuel Inc. Derivative Litigation sent us a letter dated October 12, 2016 (the “Shareholder Demand”) demanding that the Board of Directors take action to remedy purported breaches of fiduciary duties allegedly related to the claims asserted in In re Rocket Fuel, Inc. Derivative Litigation which were substantially the same as the asserted claims in

20



In re Rocket Fuel Securities Litigation . The Company acknowledged the Shareholder Demand on October 19, 2016. Similar letters were sent by the plaintiffs in the Lunam derivative action discussed above and the plaintiff in the Davydov action discussed above, on November 14, 2016 and February 26, 2017, respectively, also demanding that the Board of Directors take action to remedy the same purported breaches of fiduciary duties alleged in the Shareholder Demand. Our Board of Directors has formed a committee (the “Demand Committee”) to evaluate the demand letters and investigate the claims associated therewith. On July 18, 2017, the Demand Committee, on behalf of the Board of Directors, sent a letter in response to each Shareholder Demand explaining that the Demand Committee’s investigation found no evidence that would support any potential claim relating to the matters raised in the Shareholder Demand, and therefore, the Board of Directors voted to reject the Shareholder Demand and declined to pursue litigation against any of the individuals relating to the claims associated therewith.
The outcomes of the legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular period. Unless otherwise specifically disclosed in this note, no provision for loss nor disclosure is required related to these actions because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claims; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
United States
$
68,603

 
$
89,973

 
$
142,210

 
$
171,370

All Other Countries (1)
22,144

 
26,995

 
43,709

 
50,343

Total revenue
$
90,747

 
$
116,968

 
$
185,919

 
$
221,713

(1) No individual country, other than the United States exceeded 10% of our total revenue for any period presented.

The following table summarizes total carrying values of long-lived assets, in the respective locations (in thousands):
 
June 30,
 
December 31,
 
2017
 
2016
United States
$
38,512

 
$
44,871

All Other Countries (1)
3,917

 
4,690

Total long-lived assets
$
42,429

 
$
49,561

(1) No individual country, other than the United States exceeded 10% of our total assets for any period presented.


21



NOTE 12. RELATED PARTY TRANSACTIONS
John J. Lewis joined Nielsen Holding Plc ("Nielsen") in 2006, most recently serving as Global President responsible for running the Nielsen Buy business and overseeing all global regions before leaving Nielsen in June 2016. Mr. Lewis joined our board of directors on January 19, 2016. Mr. Lewis was also appointed to the Audit Committee of the Company's board of directors.

Nielsen is one of the Company's data vendors. Total expense recognized for services delivered by Nielsen and its affiliates during the six months ended June 30, 2017 and 2016 was $1.2 million and $0.5 million , respectively. Total accounts payable as of June 30, 2017 and December 31, 2016 were both $0.7 million .

Clark Kokich has served on the board of directors of Acxiom Corporation ("Acxiom") since 2009 and currently chairs its Technology and Innovation Committee. Mr. Kokich has served as a member of our board of directors since April 2011. Mr. Kokich is also a member of the Audit Committee and the Nominating and Governance Committee of the Company's board of directors.

Acxiom and LiveRamp, Inc., a subsidiary of Acxiom ("LiveRamp"), are both data vendors to the Company. Total expense recognized for services delivered by Acxiom and LiveRamp during the six months ended June 30, 2017 and 2016 was $0.6 million and $0.2 million , respectively. Total accounts payable as of June 30, 2017 and December 31, 2016 were $0.3 million and $0.2 million , respectively.


NOTE 13. SUBSEQUENT EVENTS
Merger Agreement

On July 17, 2017, the Company into an Agreement and Plan of Merger (the “Merger Agreement”) with Sizmek Inc. (“Parent”) and Fuel Acquisition Co., a wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger Agreement and upon the terms and subject to the conditions thereof, Merger Sub will commence a tender offer (the "Tender Offer") to purchase any and all of the outstanding shares of the Company’s common stock at a price of $2.60 per share, payable net to the sellers thereof in cash, without interest, in accordance with the terms of the Merger Agreement, subject to any deduction or withholding of taxes required by applicable laws. Following the consummation of the Tender Offer, and subject to the conditions set forth in the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”). In connection with the Merger, the separate existence of Merger Sub will cease, and the Company will be the surviving corporation and a wholly owned subsidiary of Parent. The Merger will be governed by and effected under Section 251(h) of the Delaware General Corporation Law (the “DGCL”), without a vote of the stockholders of the Company. The Company’s Board of Directors (the “Board”) unanimously (1) determined that the Merger Agreement and the transactions contemplated thereby, including the Tender Offer and the Merger, are fair to, and in the best interests of, the Company and its stockholders; and (2) recommended that stockholders of the Company accept the Tender Offer and tender their shares of Company Common Stock to Merger Sub pursuant to the Tender Offer.

Completion of the Merger is subject to customary closing conditions, including a majority of the outstanding shares of the Company Common Stock having been tendered in the Tender Offer and clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The parties expect the transaction to be completed in third quarter of 2017.

As of and for the three months ended June 30, 2017, the Company has incurred $1.0 million in related legal and other professional costs.

Stockholder Litigation

On August 2, 2017, the Company filed a Schedule 14D-9 Solicitation/Recommendation Statement with the Securities and Exchange Commission in connection with the Tender Offer (the “Schedule 14D-9”). That same day, the Company received a demand letter from a purported stockholder of the Company, alleging that the Schedule 14D-9 omitted material information necessary for the Company’s stockholders to make an informed decision regarding the Tender Offer. The letter demands that the Company and its Board of Directors provide immediate corrective disclosures in an amended Schedule 14D-9.

On August 4, 2017 two purported stockholders of the Company filed an action in the United States District Court for the Northern District of California on behalf of a putative class of the Company’s stockholders against the Company and its Board of Directors, alleging violations of federal securities laws. The case is captioned Bushansky et al. v. Rocket Fuel Inc. et al. (Case 3:17-cv-04454). The complainants allege, among other things, that the Schedule 14D-9 omits material information necessary for the Company’s stockholders to make an informed decision regarding the Tender Offer. The complainants seek, among other things,

22



either to enjoin the Tender Offer or, should it be consummated, to rescind it or award rescissory damages, as well as an award of the plaintiffs’ attorneys’ fees and costs in the actions.

On August 7, 2017, two additional actions alleging violations of federal securities laws were filed by purported stockholders of the Company in the United States District Court for the Northern District of California. In the first, captioned Haines v. Rocket Fuel et al. (Case 5:17-cv-04473), an alleged stockholder of the Company filed an action on behalf of a putative class of the Company’s stockholders against the Company and its Board of Directors. In the second, captioned Scarantino v. Rocket Fuel Inc. et al. (Case 3:17-cv-04489), an alleged stockholder of the Company filed an action on behalf of a putative class of the Company’s stockholders against the Company, its Board of Directors, Sizmek Inc., Fuel Acquisition Co., and Vector Capital. The complainants in both the Haines and Scarantino actions allege claims similar to those in the Bushansky action, and seek similar relief.

The defendants deny any wrongdoing in connection with the Merger and plan to defend vigorously against the claims set forth in these actions.

Amendment of 2016 Loan Facility

On August 9, 2017, the Company entered into the Seventh Amendment (the “Seventh Amendment”) to its Second Amended and Restated Revolving Credit and Term Loan Agreement with certain lenders party thereto and Comerica Bank, as administrative agent. The Seventh Amendment provided for, among other things, (i) waiving of bank-defined EBITDA default as of June 30, 2017, (ii) paydown of the revolving credit of $20.0 million and reduction of the revolving credit line to $53.6 million from $80.0 million (subject to further reductions if the acquisition by Sizmek is terminated or if the Company enters into an alternative acquisition transaction, subject to certain conditions), (iii) reduction of the minimum bank-defined EBITDA financial covenant as of September 30, 2017 and December 31, 2017, (iv) reduction of cash deposit requirements from $30.0 million to $18.0 million through August 22, 2017 and $22.5 million thereafter, and, (v) certain other changes to the terms and covenants intended to align with completing the acquisition by Sizmek or an alternative acquisition transaction.

Refer to section Item 5. "Other Information" of this Quarterly Report on Form 10-Q.

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," "predict," "intend," "could," "should," "would," "project," "plan," "expect," "seek," "foresee," "forecast," or the negative of these words, 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 future financial performance, including revenue, media costs, other costs of revenue, and the levels of operating expenses in the areas of research and development, sales and marketing, general and administrative, and restructuring;

expectations regarding our valuation allowance against our deferred tax assets;

expectations related to the our pending acquisition by Sizmek Inc.;

expectations related to financing;
expectations related to our ability to continue as a going concern;

our expectations surrounding cash and cash equivalents, financing availability from the 2016 Loan Facility, and our liquidity and ability to sustain business continuity;
our expectations related to our 2016 Loan Facility;
expected restructuring costs in 2017;
the anticipated impact of the growth rates in the real-time advertising exchange market and digital advertising on our future performance;

23



our belief that our programmatic marketing platform can enhance digital media buying across any programmatic inventory;
our goal of gaining a larger share of current customers' budgets and attracting new high-value customers;
the expected impact on our growth and profitability of focusing on our top 50 and top 250 customers;
the expected increase in demand for programmatic brand advertising;
the expected impact of adjusted pricing on our media margins;
our plans to reduce capital expenditures for property and equipment in 2017 compared to 2016, including our intention to finance data center hardware through capital leasing facilities;
the impact that our sales strategies and our product mix between our Media Services and Platform Solutions will have on margins, media costs and other costs of revenue;
the impact of working capital requirements on our goal of growing our business;
the expected impact of seasonality on our operating results;
our expectation that, if our foreign revenues and expenses increase, our operating results may be more affected by fluctuations in the exchange rates of the currencies in which we do business; and
our intention to vigorously defend against pending securities lawsuits.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in our forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results and circumstances described in the forward-looking statements will be achieved or will occur. Moreover, we assume no responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason, 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, 2016, and (iii) the understanding that our actual results and circumstances may be materially different from our forward-looking statements and/or expectations.
Overview
Rocket Fuel brings the power of machine learning to the world of digital marketing, offering technology and services
designed to help advertising agencies and their clients connect with consumers through digital media at moments when that connection is most likely to be influential and most likely to achieve the advertiser’s objectives. Our platform autonomously purchases ad spots, or impressions, one at a time, on real-time advertising exchanges to create portfolios of impressions designed to optimize the goals of our advertisers, such as increased sales, heightened brand awareness and decreased cost per customer acquisition.

Our core service offerings are organized around two solutions - a Demand Side Platform (DSP) and a Data Management Platform (DMP) - which can be used independently or together, and can be integrated with a customer’s other customer relationship management or marketing platforms. We refer to our DSP alone or our DSP plus DMP solutions as our Predictive Marketing Platform. That integrated platform is designed to deliver and optimize media spend to engage, upsell, and retarget consumers across addressable channels-including display, mobile, video, social, and television, and across addressable devices, including tablets, personal computers, set top boxes, television, and mobile phones. We offer our Predictive Marketing Platform as a managed service,

24



which we operate on behalf of our customers (our "Media Services"), and as a technology solution our customers acquire by way of a subscription service and operate themselves, or acquire by way of subscription service and obtain other supporting services from us (our "Platform Solutions").

Core to our ability to connect advertisers and consumers is our artificial intelligence (AI) engine, which consists of big data-driven predictive modeling and automated decision-making components. Our programmatic marketing platform uses a technology enabled by our AI that we call Moment Scoring™, which is designed to consider in a fraction of a second whether a particular advertising opportunity, or impression, is the right time to influence a consumer, based on our platform’s real-time scoring - positive or negative - of the likelihood of consumer engagement with the advertising based on relevant attributes.

Our programmatic marketing platform is designed to learn from each advertising message it delivers and apply that learning to future decisions as the advertising campaign is being delivered - a feature we call Marketing that Learns™.

In September 2014, we acquired X Plus Two Solutions, Inc., the parent company of X Plus One Solutions, Inc. ("[x+1]"), a privately held programmatic marketing technology company. Our acquisition of [x+1] allowed us to add important assets to our technology solutions, including our DMP.

Factors Affecting Our Performance
We believe the growth and any future profitability of our business and our future success depend on various opportunities, challenges and other factors, including the following:
Working Capital
In all of our Media Services business and substantially all of our Platform Solutions business, we make media purchases to run our customers' advertising campaigns. In our industry, agencies and advertisers typically pay their media services suppliers more slowly than the corresponding payment terms demanded by our media providers, resulting in payment terms that are approximately one-half of collection times. Our goal is to grow our business, but to do so will require either that we better align our collection and payment terms, obtain additional credit or obtain additional capital to support this working capital requirement, or develop alternatives to enable our customers to purchase media directly.

Growth and Availability of the Real-time Advertising Exchange Market and Digital Advertising
Our performance is affected by growth rates in both real-time advertising exchanges and the digital advertising channels we address. These markets have grown rapidly in the past several years but are highly dynamic; any acceleration, or slowing, of this growth would affect our overall performance.
The availability of inventory on real-time advertising exchanges and our ability to access this inventory, and our access to premium inventory available directly from publishers via private market places ("PMP"), could also impact our performance as we must optimize our solutions across the display (fundamentally desktop and laptop), mobile, social and video channels. For example, at the beginning of 2015, Facebook eliminated access to the Facebook exchange platform, or "FBX," for some of their partners including us, requiring us to adapt our offering in order to continue to access some of the advertising inventory from Facebook. We adapted our technology offerings to address this change, but our sales efforts were impacted and our Facebook campaigns declined as we shifted to buying Facebook inventory through their APIs. Facebook continued to allow some other companies in our industry to purchase inventory through the FBX platform, which was available through November 1, 2016, and which likely put us at a competitive disadvantage. Another potential emerging trend that could impact our future performance is our ability to access inventory, particularly premium inventory through real-time bidding, or "RTB", or through relationships directly with publishers. We face different competitive landscapes in mobile, social and video channels. Our DSP offering primarily relies on having access to RTB exchanges; however, some publishers have begun to remove their advertising inventory from RTB exchanges. For example, beginning in 2016, Google announced it would no longer make any YouTube video advertising inventory available to any third parties, opting instead to utilize all such inventory for its own account.
Another potential emerging trend that could impact our future performance is our ability to access inventory, particularly premium inventory through programmatic buying directly with publishers or through RTB exchanges especially through header bidding. Our DSP offering primarily relies on having access to RTB exchanges where publishers make their advertising inventory available; however, some publishers have begun to remove their advertising inventory from RTB exchanges, notably the FBX restrictions and changes to Google’s YouTube video inventory availability noted above. Publishers are also reducing and consolidating the amount of RTB Exchanges where they make their inventory available as a result of the impact of header bidding.

25




Ability to Compete Effectively to Sell our Media Services and Platform Solutions
We are focused on developing direct response and brand advertising solutions for agencies, advertisers and publishers, available through our Media Services and our Platform Solutions. We believe we can offer our Predictive Marketing Platform that combines the functionality of our DSP with features of our DMP to enhance digital media buys across any programmatic inventory.

Our Predictive Marketing Platform competes for digital advertising budgets with a variety of companies, including other companies with DSP offerings, agency trading desks, publishers that sell their inventory directly to agencies and advertisers, and companies that offer self-service platforms, which allow advertisers to purchase inventory directly from advertising exchanges or other third parties and to manage and analyze their own data and third-party data. 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.
In July 2014, we announced our Platform Solutions in the United States and Europe, which allow us to compete more directly with companies that offer self-service platform solutions to agencies (as their trading desk solution) and to advertisers. To succeed, we must attract customers to our Predictive Marketing Platform, and establish relationships with systems integrators and other partners to integrate our functionality into their customers' marketing technology platforms. We must also compete with offerings that are often priced at a substantially lower percentage of media spend than our platform pricing. As we offer Platform Solutions to more customers across the globe, our costs of compliance with policies set by real time advertising exchanges for the use of their exchanges increases as these customers use our Predictive Marketing Platform to purchase inventory. We also take on risk that customers on our platform violate these policies through the distribution of malware or other policy violations, and those policy violations jeopardize our access to real time advertising exchanges on behalf of our Media Services customers and other Platform Solutions customers. We have terminated relationships with customers whose policy violations have jeopardized our access to real time advertising exchanges.
In addition to challenges created by the emergence of agency trading desks and competing self-service platforms, our insertion order, or "IO,"-based Media Services business has faced increased challenges within some of the major agency holding companies. These challenges include overcoming questions and objections regarding our pricing and related media margins, impression placements and the transparency of our results, and how our technology achieved them. We are focused on addressing these concerns with the major agency holding companies, their agencies and trading desks, and in some cases adjusted our pricing in order to better compete which has reduced and will continue to reduce our media margin in at least the near term.
To expand our reach with advertisers we have a number of sales representatives dedicated to Platform Solutions sales. We are also developing partnerships with marketing software companies, system integrators and agency partners to enhance our ability to gain access to senior level marketing decision makers.
Our customers have many DSP and DMP solutions and technology partners to choose from. In order to increase the adoption of our Predictive Marketing Platform, we are enhancing its ease of use and working on proving the value of our solutions to agency holding companies, their affiliated operating agencies and advertisers.
Mix of Media Services versus Platform Solutions and Impact on Margins
Our strategy to offer our Predictive Marketing Platform as a Platform Solution has had, and we expect will continue to have, an impact on our revenue mix and profitability, and we expect our media margins to decline. Platform Solutions represented 38%  and  18%  of revenue for the  three months ended June 30, 2017 and 2016 , respectively.
Media Services agreements, in the form of insertion orders, typically have a term of a few weeks to months, and are most often priced on a cost-per-thousand impressions basis with the media spend optimized by our technology. Platform Solutions agreements, on the other hand, may have longer terms to use the technology at a predetermined percentage of media spend, which may vary based on volume. The media margin in Platform Solutions is typically materially lower than for Media Services. Our strategy to focus on a smaller number of high value customers is also impacting our Media Service and Platform Solutions margins, primarily due to lower fixed rates provided to clients with larger media spend.
In Platform Solutions, our operating costs are higher up front as we train and assist our customers adopting our platform and as they increase the number of campaigns run on it, but we expect such costs to decline over time as our customers learn to use the platform or agree to pay us additional services fees for assistance we provide on a longer term basis. Our success in our Platform

26



Solutions strategy depends upon our ability to train our platform customers quickly and efficiently, to charge for services required over time, and to increase the number of high volume digital media placements these customers run through our platform.
Expanding our Business with Higher Value Customers
In order to achieve sustainable revenue growth, we must retain spend with existing high value customers, gain a larger share of our current customers’ advertising budgets, and attract new, high-value customers. Our strategy is to focus on expanding our business with a smaller set of larger, higher value customers rather than expanding our customer count. Accordingly, a key measure for us is revenue from our top 50 and 250 customers. During the three months ended June 30, 2017 , revenue from our top 50 customers was 66% of total revenue, compared to 53% in the second quarter of fiscal year 2016 . During the three months ended June 30, 2017 , revenue from our top 250 customers was 92% of total revenue, compared to 82% in the second quarter of fiscal year 2016 .
We believe that expanding our business with higher value customers is an important indicator of our ability to grow our business and achieve profitability through scale. Our goal is to increase our revenue period-over-period, and to increase the percentage of that revenue represented by these two customer sets.
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 and infrastructure to address the needs of our target markets, including offering our Predictive Marketing Platform as Media Services and Platform Solutions. Looking ahead, we will focus on achieving revenue growth by focusing our sales efforts on fewer, higher value customers, and by increasing the adoption of our Platform Solutions by agencies and direct customers.
Employee attrition and the resulting influx of new leaders and other employees in 2016 and 2015 have impacted our efficiency across the company as we expend the time and resources necessary to recruit and retain our talent, restructure our organizations, and train new employees.
Our capital expenditures for property, equipment and software were $5.4 million during fiscal year 2016 to purchase property, equipment and software, that we did not finance through capital leases, and for fiscal year 2017 we expect these expenditures to remain at comparable levels or lower. In the first six months of fiscal year 2017 , we invested $ 1.5 million into property, equipment and software. To minimize the upfront cash investment required to scale our data centers, we utilize capital leasing facilities, as available, to finance our data center hardware and software needs. We will need to invest in our computational infrastructure and equipment to continue to maintain and scale our business.
Ability to Grow Programmatic Advertising for Video Brand Campaigns
Our DSP solutions are designed to optimize campaigns for direct response and brand advertisers by generating specific consumer responses, and to drive brand awareness.
The digital advertising industry is rapidly adopting programmatic buying for video advertising and programmatic TV, or "pTV," which is dominated by brand campaigns. To measure our success in brand, we categorize and report video and pTV campaigns as brand, and report all non-video or non-pTV campaigns as direct-response. In the second quarter of fiscal year 2017 , the revenue split between direct-response and brand was approximately 88% to 12% , compared to 93% to 7% in the second quarter of fiscal year 2016 . We expect the demand for programmatic brand advertising to expand in the future, and thus we will continue our strategic focus on this opportunity. Our success in our brand strategy will depend in part upon our ability to further develop models to validate our video campaigns' performance to our customers.
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 be influenced by 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.

27



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 video and social 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 DMP and DSP offerings and related professional services, which are generally recognized over the term of the performance period.
Costs and Expenses
We classify our expenses into these categories: media costs, other cost of revenue, research and development, sales and marketing, general and administrative, and restructuring expense. Personnel costs for each category of expense other than media costs generally include salaries, bonuses and sales commissions (for sales and marketing only), stock-based compensation expense and employee benefit costs. Allocated costs include charges for facilities, office expenses, utilities, telephones and other miscellaneous expenses.
Media costs. These costs consist primarily of costs for advertising impressions we purchase from advertising exchanges, publishers and other third parties, which are expensed when incurred. We typically pay for these media costs on a per impression basis. We anticipate that our media costs will continue to vary with the related seasonal changes in revenue and overall growth in revenue. Starting in the fourth quarter of fiscal year 2016, we reported a sequential increase in media costs as a percentage of revenue. This is primarily due to the increasing percentage of our revenue that is generated by Platform Solutions offerings, which have substantially lower media margins (revenue minus media costs), and with our focus on doing business through holding companies and with larger customers, that typically have lower media margins. Over the longer term, if we are successful with our efforts to increase the Platform Solutions business as part of our revenue mix, and/or are successful in structuring large agency trading desk deals, we expect the resulting changes in revenue mix to continue to increase our media costs as a percentage of total revenue in fiscal 2017.
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 our platform 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 remain relatively consistent in fiscal 2017 compared to fiscal 2016.
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 we will prioritize resources on the most critical projects. Consistent with GAAP, we capitalize a portion of our software development costs, and amortize such costs to Other Costs of Revenue over the useful periods of the projects' lives. In fiscal 2017, we expect research and development expenses (net of amounts capitalized in software development costs) to decrease from fiscal year 2016 levels.
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 marketing our solutions to generate awareness, as well as increasing the adoption of our solutions by existing and new advertisers and agencies. In fiscal year 2017, we expect overall sales and marketing expenses to decrease from fiscal year 2016 levels.

28



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 and fees. In fiscal year 2017, we expect general and administrative expenses to decrease from fiscal year 2016 levels.
Restructuring expense. Restructuring expense is related to severance payments to employees, exit costs for excess facilities, depreciation or impairments of lease-related assets and the release of deferred rent liabilities related to terminated leases. We expect to incur additional restructuring related expenses (net of gains) as we continue to restructure our facilities in fiscal year 2017. Refer to Note 5 to our Condensed Consolidated Financial Statements in in this Quarterly Report on Form 10-Q for details of our restructuring expenses.
Other Expense, Net
Interest expense. Interest expense is primarily related to our credit facility 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 Provision (Benefit)
Income tax provision (benefit) consists primarily of income taxes in foreign jurisdictions in which we conduct business. Due to uncertainty as to the realization of benefits from our deferred tax assets, including net operating loss carry-forwards, research and development and other tax credits, we maintain a full valuation allowance against most of our deferred tax assets. We expect to maintain this valuation allowance at least in the near term.

29



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 (unaudited, in thousands, except loss per share):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenue
$
90,747

 
$
116,968

 
$
185,919

 
$
221,713

Costs and expenses:
 
 
 
 
 
 
 
Media cost
48,239

 
50,922

 
95,995

 
93,481

Other cost of revenue (1)
20,053

 
20,397

 
41,558

 
40,482

Research and development (1)
6,863

 
9,438

 
14,133

 
20,077

Sales and marketing (1)
23,212

 
36,190

 
49,110

 
73,030

General and administrative (1)
9,280

 
12,765

 
19,981

 
27,086

Restructuring
986

 
1,766

 
4,754

 
1,567

Total costs and expenses
108,633

 
131,478

 
225,531

 
255,723

Operating loss
(17,886
)
 
(14,510
)
 
(39,612
)
 
(34,010
)
Interest expense
1,231

 
1,032

 
2,368

 
2,269

Other (income) expense, net
(1,136
)
 
866

 
(1,688
)
 
672

Loss before income taxes
(17,981
)
 
(16,408
)
 
(40,292
)
 
(36,951
)
Income tax (benefit) provision
216

 
285

 
374

 
515

Net loss
$
(18,197
)
 
$
(16,693
)
 
$
(40,666
)
 
$
(37,466
)
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.39
)
 
$
(0.38
)
 
$
(0.88
)
 
$
(0.85
)
(1)
Includes stock-based compensation expense as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Other cost of revenue
$
334

 
$
493

 
$
729

 
$
1,023

Research and development
690

 
981

 
1,232

 
2,346

Sales and marketing
697

 
1,357

 
1,486

 
2,846

General and administrative
867

 
1,251

 
1,989

 
2,677

Total
$
2,588

 
$
4,082

 
$
5,436

 
$
8,892


30



 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Consolidated Statements of Operations Data Percentage of Revenue: *
 
 
 
 
 
 
 
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Costs and expenses:
 
 
 
 
 
 
 
Media cost
53

 
44

 
52

 
42

Other cost of revenue
22

 
17

 
22

 
18

Research and development
8

 
8

 
8

 
9

Sales and marketing
26

 
31

 
26

 
33

General and administrative
10

 
11

 
11

 
12

Restructuring
1

 
2

 
3

 
1

Total costs and expenses
120

 
112

 
121

 
115

Operating loss
(20
)
 
(12
)
 
(21
)
 
(15
)
Interest expense
1

 
1

 
1

 
1

Other (income) expense, net
(1
)
 
1

 
(1
)
 

Loss before income taxes
(20
)
 
(14
)
 
(22
)
 
(17
)
Income tax (benefit) provision

 

 

 

Net loss
(20
)%
 
(14
)%
 
(22
)%
 
(17
)%
*
Certain figures may not sum due to rounding.
Comparison of the Three and Six Months Ended June 30, 2017 and 2016
Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
(in thousands, except percentages)
Revenue
$
90,747

 
$
116,968

 
(22
%)
 
$
185,919

 
$
221,713

 
(16
%)
Revenue decreased $26.2 million or 22% , during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 , due primarily to lower North American agency business and lower revenue from International (outside of North America) operations, partially offset by higher revenue from our Platform Solutions offerings. Media Services is losing customers faster than it is gaining new customers or growing existing customers, due to the industry-wide shift of customers to self-service platforms. Media Services represented 62% and 82% of revenue and Platform Solutions was 38% and 18% of revenue for the three months ended June 30, 2017 and 2016 , respectively. Revenue from International operations, as a percentage of revenue, increased for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 , from 21% to 23% of revenue.
Revenue decreased $35.8 million or 16% , during the  six months ended June 30, 2017  compared to the  six months ended June 30, 2016 , due primarily to lower North American agency business and lower revenue from International operations, partially offset by higher revenue from our Platform Solutions offerings. Media Services represented  67%  and  83%  of revenue and Platform Solutions was  33%  and  17%  of revenue for the  six months ended June 30, 2017 and 2016 , respectively. International revenue, as a percentage of revenue, increased by  2%  for the  six months ended June 30, 2017  compared to the  six months ended June 30, 2016 , from  20%  to  22%  of revenue.


31



Media Costs and Other Cost of Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
(in thousands, except headcount and percentages)
Media costs
$
48,239

 
$
50,922

 
(5
)%
 
$
95,995

 
$
93,481

 
3
%
Other cost of revenue
$
20,053

 
$
20,397

 
(2
)%
 
$
41,558

 
$
40,482

 
3
%
Headcount (at period end)
155

 
163

 
(5
)%
 
 
 
 
 
 
Media costs decreased by $2.7 million , or 5% , during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 to approximately 53% as a percentage of revenue from 44% of revenue for the three months ended June 30, 2017 and 2016 , respectively, partially due to the broader adoption of fixed-margin agreements as opposed to CPM-based pricing and the mix shift from Media Services to Platform Solutions which has substantially lower media margins (revenue minus media costs).
Other cost of revenue decreased slightly by $0.3 million , or 2% , during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 . This decrease was primarily due to a net decrease of $0.8 million in personnel and data and inventory charges, offset by a slight increase in depreciation and amortization of  $0.5 million , which includes capitalized internal-use software, acquired technology intangible assets and other fixed assets. Amortization of capitalized internal-use software was $3.0 million and $2.7 million for the three months ended June 30, 2017 and 2016 , respectively.
Media costs increased by  $2.5 million , or  3% , during the  six months ended June 30, 2017  compared to the  six months ended June 30, 2016  to approximately 52% as a percentage of revenue from  42%  of revenue for the  six months ended June 30, 2017 and 2016 , respectively, partially due to the broader adoption of fixed-margin agreements as opposed to CPM-based pricing and the mix shift from Media Services to Platform Solutions which has substantially lower media margins (revenue minus media costs).

Other cost of revenue increased slightly by  $1.1 million , or  3% , during the  six months ended June 30, 2017  compared to the  six months ended June 30, 2016 , primarily due to an increase in depreciation and amortization of  $2.3 million , which includes capitalized internal-use software, acquired technology intangible assets, and other fixed assets, offset by a net decrease of $1.2 million in personnel and data and inventory charges. Amortization of capitalized internal-use software was  $6.0 million  and  $5.0 million  for the  six months ended June 30, 2017 and 2016 , respectively.

Research and Development
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
(in thousands, except headcount and percentages)
Research and development
$
6,863

 
$
9,438

 
(27
)%
 
$
14,133

 
$
20,077

 
(30
)%
Percent of revenue
8
%
 
8
%
 
 
 
8
%
 
9
%
 
 
Headcount (at period end)
137

 
138

 
(1
)%
 
 
 
 
 
 
Research and development expense decreased by $2.6 million , or 27% , during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 . This decrease was due to a decrease in personnel expense, net of capitalized costs, of $1.3 million , a decrease in allocated expense of $0.5 million and a decrease in depreciation and amortization of $0.5 million from a reduction in average headcount as we continue to optimize our cost structure to support our business and provide operating leverage.
Research and development expense decreased by  $5.9 million , or  30% , during the  six months ended June 30, 2017  compared to the  six months ended June 30, 2016 . This change was due to a decrease in personnel expense from a reduction in average headcount as described above.


32



We capitalized internal-use software development costs of $2.9 million and $3.4 million for the three months ended June 30, 2017 and 2016 , respectively, and  $5.8 million  and  $7.0 million  for the  six months ended June 30, 2017 and 2016 , respectively. The change was due to decreased headcount devoted to internal-use software development.
Sales and Marketing
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
(in thousands, except headcount and percentages)
Sales and marketing
$
23,212

 
$
36,190

 
(36
)%
 
$
49,110

 
$
73,030

 
(33
)%
Percent of revenue
26
%
 
31
%
 
 
 
26
%
 
33
%
 
 
Headcount (at period end)
346

 
449

 
(23
)%
 
 
 
 
 
 
Sales and marketing expense decreased by $13.0 million , or 36% , during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 . This decrease was primarily due to a decrease in personnel expense of $8.1 million , a decrease in allocated expenses of $2.0 million , a decrease in depreciation and amortization expense of $1.5 million , and a decrease in travel and marketing related expenses of $ 1.1 million . The decrease in personnel expense was primarily due to a decrease in average headcount and the decrease in travel, marketing and allocated costs was due to cost cutting measures implemented during the three months ended June 30, 2017 . The decrease in depreciation and amortization expense is related to the impairments of our leasehold improvement assets in certain offices and other reorganization in connection with our restructuring activities during the end of 2016 and the first quarter of 2017.
Sales and marketing expense decreased by  $23.9 million or  33% , during the  six months ended June 30, 2017  compared to the  six months ended June 30, 2016 . This decrease was primarily due to a decline in average headcount, which decreased personnel expense by  $14.1 million , a decrease in allocated expenses of $4.1 million , a decrease in depreciation and amortization expense of $2.9 million , and a decrease in travel and marketing related expense of  $2.8 million .

General and Administrative
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
(in thousands, except headcount and percentages)
General and administrative
$
9,280

 
$
12,765

 
(27
)%
 
$
19,981

 
$
27,086

 
(26
)%
Percent of revenue
10
%
 
11
%
 
 
 
11
%
 
12
%
 
 
Headcount (at period end)
88

 
149

 
(41
)%
 
 
 
 
 
 
General and administrative expense decreased by $3.5 million , or 27% , during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 . This decrease was primarily due to the decline in average headcount, which decreased personnel expenses, and facility related allocated expenses by  $3.4 million .
General and administrative expense decreased by  $7.1 million , or  26% , during the six months ended June 30, 2017  compared to the  six months ended June 30, 2016 . This decrease was primarily due to decreased personnel expenses and facility related allocated expenses by  $6.6 million  and professional services, net of acquisition costs by  $0.5 million .


33



Restructuring
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
(in thousands, except percentages)
Restructuring charges
$
986

 
$
1,766

 
(44
%)
 
$
4,754

 
$
1,567

 
203
%
Percent of revenue
1
%
 
2
%
 
 
 
3
%
 
1
%
 
 
During the three months ended June 30, 2017 , we recorded $1.0 million of restructuring expenses, net of credits, consisting of accelerated amortization, impairment charges and losses on disposal of lease-related assets of $0.4 million , release of deferred rent of $0.4 million , and facility exit and severance costs of $0.2 million .
During the  six months ended June 30, 2017 , we recorded $4.8 million of restructuring expenses, net of credits, consisting of accelerated amortization, impairment charges and losses on disposal of lease-related assets of $2.7 million , facility exit and severance costs of $1.7 million , and release of deferred rent of $0.4 million .

    Total workforce declined from 899 at June 30, 2016 to 726 at June 30, 2017 , as we continue to manage our workforce with a goal of improving our operating efficiency.
Interest and Other Expense
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
(in thousands, except percentages)
Interest expense
$
1,231

 
$
1,032

 
19
 %
 
$
2,368

 
$
2,269

 
4
 %
Other (income) expense, net
(1,136
)
 
866

 
(231
)%
 
(1,688
)
 
672

 
(351
)%
Total
$
95

 
$
1,898

 
(95
)%
 
$
680

 
$
2,941

 
(77
)%
The decrease in interest and other expense during the three months ended June 30, 2017 compared to the three months ended June 30, 2016 , was primarily due to net gains in foreign currency exchange rate fluctuations.
Interest and other expense decreased during the  six months ended June 30, 2017  compared to the  six months ended June 30, 2016 , primarily due to lower foreign currency losses from exchange rate fluctuations.

Income Tax (Benefit) Provision
We recorded an income tax expense of $0.2 million and $0.3 million for each of the three months ended June 30, 2017 and 2016 , respectively, and $0.4 million and $0.5 million for the six months ended June 30, 2017 and 2016 , respectively, primarily due to foreign income taxes.
Liquidity and Capital Resources
As of June 30, 2017 , we had cash and cash equivalents of $62.4 million (of which $3.8 million was held by our foreign subsidiaries), $69.0 million in debt obligations, net of $0.5 million in unamortized debt issuance costs, under the amended and restated Revolving Credit and Term Loan Agreement (the "2016 Loan Facility") and $14.0 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, 2017 .
On December 31, 2014, we entered into the Second Amended and Restated Revolving Credit and Term Loan Agreement with certain lenders, including Comerica Bank, or "Comerica," as administrative agent for the lenders (the "2014 Loan Facility"). The 2014 Loan Facility amended and restated our then-existing Amended and Restated Revolving Credit and Term Loan Agreement, dated December 20, 2013, between us, certain lenders, and Comerica as administrative agent for the lenders. The 2014 Loan Facility provided for a secured $80.0 million three year revolving credit facility, 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)

34



$80.0 million . If the borrowing base falls below our outstanding balance under the revolving credit facility, we may not have access to additional borrowing capacity and may have to repay some of the outstanding balance.
In March 2016, we amended the 2014 Loan Facility (the "2016 Loan Facility") and terminated the term loan. On March 11, 2016, the then remaining balance of the term loan was repaid and refinanced by an additional draw down on the revolving credit facility.
In September 2016, we amended the 2016 Loan Facility. This amendment provides for a floor of zero percent (0%) for certain LIBOR definitions and a change in the timing for measuring whether the Company’s aggregated cash on deposit with the lenders and other domestic financial institutions falls below $40 million (calculating our balance on the last day of each month rather than on a continuous rolling basis) for purposes of determining whether the Agent has the right to use future cash collections from accounts receivable directly to reduce the outstanding balance of the Company's revolving credit facility. In December 2016, we amended the 2016 Loan Facility to lower the minimum EBITDA financial covenant for the period ending December 31, 2016.

In February 2017, we amended the 2016 Loan Facility. This amendment extended the revolving credit maturity date by one year to December 31, 2018, amended the definition of EBITDA to permit the add-back of restructuring charges incurred during the first two quarters of fiscal year 2017, lowered the minimum EBITDA financial covenant, increased the minimum liquidity ratio financial covenant, and decreased the limit for debt under capital leases as well as the amount of permitted capital expenditures per fiscal year.
On August 9, 2017, we further amended the 2016 Loan Facility. This amendment waived the EBITDA default as of June 30, 2017, required a partial paydown of the revolving credit of $20.0 million and reduced the revolving credit line to $53.6 million from $80.0 million (subject to further reduction if the acquisition by Sizmek is terminated or if we enter into an alternative acquisition transaction, subject to certain conditions). The amended terms also included a reduction in the minimum bank-defined EBITDA financial covenant as of September 30, 2017 and December 31, 2017, a reduction of cash deposit requirements, and made certain other changes to the terms and covenants that are intended to align with completing the acquisition by Sizmek or an alternative acquisition transaction.

The 2016 Loan Facility contains customary affirmative and negative covenants, that limit our ability to, among other things, incur additional debt, make acquisitions, make certain restricted payments, make investments or make capital expenditures. If the aggregated cash balances on deposit with the lenders and certain other domestic financial institutions fall below a certain threshold at month-end, the lenders have the right to use future cash collections from accounts receivable directly to reduce the outstanding balance of the revolving credit facility. We must comply with a minimum bank-defined EBITDA covenant, maintain certain level of cash on deposit with the lenders and maintain a minimum liquidity ratio (Refer to Item 5 of this Quarterly Report on Form 10-Q for details of the latest amended terms). As of June 30, 2017 , we were in compliance with all covenants under the 2016 Loan Facility, except for the bank-defined EBITDA covenant (refer to Note 6 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details). We subsequently entered into an amendment to the 2016 Loan Facility and received a waiver (Refer to Note 13 to our Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for details) to cure the default.
As of June 30, 2017 , we had $69.5 million of outstanding revolving loans and letters of credit had been issued amounting to $4.1 million under the 2016 Loan Facility. As of June 30, 2017 , we have an available borrowing capacity of approximately $0.7 million . Our intra-quarter cash flows are highly cyclical, and therefore, our intra-quarter cash balances fluctuate and can present significant cash management challenges for us, and could potentially trigger our lenders’ rights to use future cash collections from accounts receivable directly to reduce our outstanding balance under the revolving credit facility.
In May 2016, we filed a registration statement on Form S-3 covering up to $50.0 million of our common stock and other types of securities. The Registration Statement was declared effective by the SEC in August 2016. We concurrently entered into a sales agreement for "at-the-market" offerings under which we may offer and sell shares of common stock into the market over time. This sales agreement gives us the flexibility to issue shares in the amount of up to $30.0 million. In fiscal year 2016, we sold 0.7 million shares of common stock for $1.5 million in proceeds, net of issuance costs which include a sales commissions of 3% , or approximately $0.1 million , paid to the broker-dealer under this sales agreement.    
Refer to Note 1 under “Going Concern” section to our Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on form 10-Q where we have concluded that there is substantial doubt as to our ability to continue as a going concern. There can be no assurances that we will be able to raise additional capital through sales of equity, or through debt financing arrangements, or obtain any desired waivers or amendments of the 2016 Loan Facility on acceptable terms or at all, and the failure to do so would adversely affect our ability to achieve our business objectives. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence

35



of indebtedness, we will be subject to increased debt service obligations and could also be subject to more restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. In addition, if our future operating performance is below our expectations, our liquidity and ability to operate our business could be adversely affected. See "Risk Factors - Our credit agreement contains operating and financial covenants that restrict our business and financing activities and, in some cases, could result in an immediate requirement to repay our outstanding loans " and “ There is substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain further financing.
Cash Flows
The following table summarizes our cash flows for the periods presented (unaudited, in thousands):
 
Six Months Ended
June 30,
 
2017
 
2016
Consolidated Statements of Cash Flows Data:
 
 
 
Cash flows provided by (used in) operating activities
$
(8,819
)
 
$
2,401

Cash flows used in investing activities
(6,178
)
 
(8,647
)
Cash flows used in financing activities
(6,841
)
 
(5,397
)
Effects of exchange rate changes on cash and cash equivalents
170

 
(253
)
Decrease in cash and cash equivalents
$
(21,668
)
 
$
(11,896
)
Operating Activities
Our primary source of cash from operating activities is from the collection of receivables from customer billings. Our primary use of cash in operating activities is for media costs. Cash from operating activities is primarily influenced by the volume of sales to advertising agencies representing advertisers and directly to advertisers, as well as by the amount of cash we invest in personnel and infrastructure. Cash used in or derived from operating activities has typically been due to net losses, adjusted for non-cash expense items such as depreciation, amortization and stock-based compensation expense, and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable.
Our collection cycles can vary from period to period based on common payment practices employed by advertising agencies. Our contracts with advertising inventory suppliers and exchanges typically are based on industry standard payment terms which are typically shorter than our corresponding payment terms with customers. Typically, we expect that during the second and the fourth quarter of each year, our working capital needs may increase due to the seasonality of our business. This increase is driven by the fact that we have to make timely payments to publishers and exchanges, while our customer payments may be delayed beyond the contractual terms of the customers’ invoices. As a result, the timing of cash receipts and vendor payments can significantly impact our cash used in operations for any period presented.
For the six months ended June 30, 2017 , cash used in operating activities was $8.8 million , resulting from a net loss of $40.7 million , offset by non-cash expenses of $32.2 million , which mainly included depreciation, amortization, impairment of long-lived assets, and stock-based compensation expense. Cash used in operating activities was further affected by the $0.3 million increase in net working capital items, most notably an increase in accounts receivable of $17.5 million due to the seasonality of advertising campaigns as well as timing of payments from customers and agencies which was offset by an increase in accounts payable and other liabilities of $15.4 million , due to the seasonality of advertising campaigns as well as the timing of our payments to our vendors and an increase of $3.3 million prepaid expenses and other assets, net of an increase in deferred revenue and rent of $0.9 million .
For the six months ended June 30, 2016 , cash provided by operating activities was $2.4 million , resulting from a net loss of $37.5 million , offset by non-cash expenses of $44.1 million , which mainly included depreciation, amortization and stock-based compensation expense and accelerated amortization charges related to our terminated office lease in New York. Cash provided by operating activities was further affected by the $4.3 million  increase in net working capital items, most notably a decrease in accounts receivable of $10.1 million  due to the seasonality of advertising campaigns as well as timing of payments from customers and agencies which was more than offset by a decrease in accounts payable and other liabilities of $5.9 million , due to the seasonality of advertising campaigns as well as the timing of our payments to our vendors and the decrease in deferred rent of $6.1 million as well as other items.

36



Investing Activities
During the six months ended June 30, 2017 , investing activities primarily consisted of $1.5 million of capital expenditures for facilities, equipment and software and $4.8 million of capitalized internal-use software.
During the six months ended June 30, 2016 , investing activities primarily consisted of $3.1 million of capital expenditures for facilities, equipment and software and $5.9 million of capitalized internal-use software.
Financing Activities
During the six months ended June 30, 2017 , cash used in financing activities was $6.8 million , consisting primarily of $5.0 million payments towards our capital lease obligations as well as $2.0 million in repayments of debt.
During the six months ended June 30, 2016 , cash used in financing activities was $5.4 million , consisting primarily of $ 4.2 million  in payments, inclusive of debt issuance costs, towards our capital lease obligations as well as the net payments towards the term loan under our Loan Facility of $1.7 million.

Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements as of June 30, 2017 or December 31, 2016 as defined in Item 303(a)(4) of Regulation S-K.
Contractual Obligations and Known Future Cash Requirements
Commitments
As of June 30, 2017 , our principal commitments consisted of obligations under the 2016 Loan Facility, our operating leases for our offices, and capital lease agreements for computer hardware and software.
The following table summarizes our future minimum payments under these arrangements as of June 30, 2017 (audited, in thousands):
 
Payments Due by Period
 
Total
 
Less Than
1 Year
 
1–3 Years
 
3–5 Years
 
More Than
5 Years
Operating lease obligations
$
58,595

 
$
12,383

 
$
19,613

 
$
12,116

 
$
14,483

Capital lease obligations
13,978

 
9,256

 
4,622

 
100

 

Revolving credit facility (1)
69,500

 
69,500

 

 

 

Total minimum payments
$
142,073

 
$
91,139

 
$
24,235

 
$
12,216

 
$
14,483

(1)
Accrues interest, at our option, at (i) a base rate determined in accordance with the 2016 Loan Facility, plus a spread of 2.000% to 2.500%, or (ii) a LIBOR rate determined in accordance with the credit agreement, plus a spread of 3.000% to 3.500%, which was equal to 4.48% , as of June 30, 2017 . Refer to Item 5 of this Quarterly Report on Form 10-Q for additional details on the amendment to the 2016 Loan Facility entered into on August 9, 2017.
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Critical Accounting Policies, Estimates and Judgments
Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or "GAAP." The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

37



We believe that the assumptions, estimates and judgments associated with revenue recognition, allowances for doubtful accounts and returns, internal-use software development costs, income taxes, stock-based compensation expense and impairment of intangible and other assets have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our condensed consolidated financial statements. The critical accounting policies, estimates and judgments are described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2016 Annual Report on Form 10-K for the fiscal year ended December 31, 2016 . There have been no changes or updates to our critical accounting policies since the end of fiscal year 2016 .

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, primarily interest rate and foreign currency exchange risks.
Interest Rate Fluctuation Risk
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Our cash and cash equivalents consist of cash, deposits and money market funds which, due to their relatively short maturity, are relatively insensitive to interest rate changes.
Our borrowings under our credit facility are subject to variable interest rates and thus expose us to interest rate fluctuations depending on the extent to which we utilize the credit facility. If market interest rates materially increase, our results of operations could be adversely affected. A hypothetical increase in market interest rates of 100 basis points would result in an increase in our interest expense of $0.1 million per year for every $10.0 million of outstanding debt under the credit facility.
Our borrowings under capital lease obligations are at fixed interest rates, and therefore do not expose us to additional interest rate fluctuation risk.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Canadian dollar, the British Pound and the Euro. While a portion of our sales are denominated in these foreign currencies and then translated into the U.S. dollar, the vast majority of our media costs are billed in the U.S. dollar, causing both our revenue and, disproportionately, our operating loss and net loss to be impacted by fluctuations in the exchange rates.
In addition, gains or losses from the translation of certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in these currencies impact our net income (loss). A hypothetical decrease in all foreign currencies against the US dollar of 10 percent, would result in a foreign currency loss of approximately $3.0 million on foreign-denominated balances, excluding our intercompany loans with our subsidiaries, at  June 30, 2017 . As our foreign operations expand, our results may be more impacted by fluctuations in the exchange rates of the currencies in which we do business.
At this time we do not, but we may in the future, enter into financial instruments to hedge our foreign currency exchange risk.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Pro