10-Q 1 a12-20133_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2012

 

OR

 

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

 

Commission File Number: 001-35478

 

MILLENNIAL MEDIA, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-5087192

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

2400 Boston Street, Suite 201, Baltimore, Maryland

 

21224

(Address of principal executive offices)

 

(Zip Code)

 

(410) 522-8705

(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 o

 

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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of the close of business on October 31, 2012 was 78,337,477.

 

 

 



Table of Contents

 

Millennial Media, Inc.

 

FORM 10-Q Quarterly Report

 

Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

Consolidated Balance Sheets as of December 31, 2011 and September 30, 2012 (unaudited)

2

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2012

3

Unaudited Consolidated Statements of Comprehensive Loss for the three and nine months ended September  30, 2011 and 2012

4

Unaudited Consolidated Statement of Changes in Stockholders’ (Deficit) Equity for the nine months ended September 30, 2012

5

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2012

6

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

 

PART II. OTHER INFORMATION

29

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

Item 6.

Exhibits

51

 

 

 

 

Signatures

53

 

1



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

Millennial Media, Inc.

 

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

December 31,

 

September 30,

 

 

 

2011

 

2012

 

 

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

16,707

 

$

122,404

 

Accounts receivable, net of allowances of $1,216 and $2,217 as of December 31, 2011 and September 30, 2012, respectively

 

34,986

 

51,176

 

Prepaid expenses and other current assets

 

1,417

 

2,119

 

Total current assets

 

53,110

 

175,699

 

 

 

 

 

 

 

Property and equipment, net

 

3,688

 

5,777

 

Goodwill

 

1,348

 

1,348

 

Intangible assets, net

 

1,179

 

980

 

Deferred offering costs

 

1,985

 

 

Other assets

 

575

 

634

 

Total assets

 

$

61,885

 

$

184,438

 

 

 

 

 

 

 

Liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,883

 

$

3,176

 

Accrued cost of revenue

 

20,963

 

28,227

 

Accrued payroll and payroll related expenses

 

5,153

 

6,431

 

Deferred revenue

 

157

 

219

 

Total current liabilities

 

29,156

 

38,053

 

 

 

 

 

 

 

Series B warrant outstanding

 

183

 

 

Other long-term liabilities

 

299

 

267

 

Total liabilities

 

29,638

 

38,320

 

 

 

 

 

 

 

Redeemable convertible preferred stock:

 

 

 

 

 

Series A-1 preferred stock, $0.001 par value, 6,341,465 and 0 shares authorized, issued and outstanding as of December 31, 2011 and September 30, 2012, respectively

 

1,880

 

 

Series A-2 preferred stock, $0.001 par value, 9,448,220 and 0 shares authorized, issued and outstanding as of December 31, 2011 and September 30, 2012, respectively

 

7,033

 

 

Series B preferred stock, $0.001 par value, 12,737,605 and 0 shares authorized, 12,686,855 and 0 issued and outstanding as of December 31, 2011 and September 30, 2012, respectively

 

19,882

 

 

Series C preferred stock, $0.001 par value, 10,759,630 and 0 shares authorized, issued and outstanding as of December 31, 2011 and September 30, 2012, respectively

 

18,441

 

 

Series D preferred stock, $0.001 par value, 8,442,833 and 0 shares authorized, issued and outstanding as of December 31, 2011 and September 30, 2012, respectively

 

29,432

 

 

Total redeemable convertible preferred stock

 

76,668

 

 

 

 

 

 

 

 

Stockholders’ (deficit) equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding as of December 31, 2011 and September 30, 2012

 

 

 

Common stock, $0.001 par value, 250,000,000 shares authorized, 18,011,035 and 76,757,515 shares issued and outstanding as of December 31, 2011 and September 30, 2012, respectively

 

17

 

75

 

Additional paid-in capital

 

 

198,687

 

Accumulated other comprehensive loss

 

(25

)

(52

)

Accumulated deficit

 

(44,413

)

(52,592

)

Total stockholders’ (deficit) equity

 

(44,421

)

146,118

 

Total liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity

 

$

61,885

 

$

184,438

 

 

See accompanying notes.

 

2



Table of Contents

 

Millennial Media, Inc.

 

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

25,189

 

$

47,366

 

$

69,129

 

$

119,707

 

Cost of revenue

 

15,293

 

28,005

 

42,536

 

71,683

 

Gross profit

 

9,896

 

19,361

 

26,593

 

48,024

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

3,203

 

5,922

 

10,179

 

16,561

 

Technology and development

 

1,518

 

4,667

 

3,316

 

10,084

 

General and administrative

 

5,382

 

10,491

 

13,946

 

28,428

 

Total operating expenses

 

10,103

 

21,080

 

27,441

 

55,073

 

Loss from operations

 

(207

)

(1,719

)

(848

)

(7,049

)

Interest and other expense

 

 

 

 

 

 

 

 

 

Interest expense

 

(1

)

(14

)

(2

)

(52

)

Other expense

 

(36

)

 

(62

)

(834

)

Total interest and other expense

 

(37

)

(14

)

(64

)

(886

)

Loss before income taxes

 

(244

)

(1,733

)

(912

)

(7,935

)

Income tax benefit (expense)

 

2

 

(36

)

495

 

(46

)

Net loss

 

(242

)

(1,769

)

(417

)

(7,981

)

Accretion of dividends on redeemable convertible preferred stock

 

(1,259

)

 

(3,728

)

(1,328

)

Net loss attributable to common stockholders

 

$

(1,501

)

$

(1,769

)

$

(4,145

)

$

(9,309

)

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.09

)

$

(0.02

)

$

(0.25

)

$

(0.17

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

16,400,211

 

75,498,564

 

16,336,295

 

55,146,195

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense included above:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

49

 

$

286

 

$

112

 

$

410

 

Technology and development

 

385

 

2,037

 

621

 

2,889

 

General and administrative

 

170

 

903

 

371

 

1,974

 

 

See accompanying notes.

 

3



Table of Contents

 

Millennial Media, Inc.

 

Unaudited Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(242

)

$

(1,769

)

$

(417

)

$

(7,981

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(5

)

(3

)

(2

)

(27

)

Total comprehensive loss

 

$

(247

)

$

(1,772

)

$

(419

)

$

(8,008

)

 

See accompanying notes.

 

4



Table of Contents

 

Millennial Media, Inc.

 

Unaudited Consolidated Statement of Changes in Stockholders’ (Deficit) Equity

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Loss

 

Deficit

 

(Deficit) Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

18,011,035

 

$

17

 

$

 

$

(25

)

$

(44,413

)

$

(44,421

)

Exercise of a warrant to purchase common stock

 

46,760

 

 

 

 

 

 

Exercise of stock options

 

1,147,447

 

 

499

 

 

 

499

 

Stock-based compensation expense

 

 

 

5,273

 

 

 

5,273

 

Accretion of dividends on redeemable convertible preferred stock

 

 

 

(1,136

)

 

(192

)

(1,328

)

Accretion of issuance costs on redeemable convertible preferred stock

 

 

 

 

 

(6

)

(6

)

Conversion of redeemable convertible preferred stock to common stock

 

47,679,003

 

48

 

77,955

 

 

 

78,003

 

Conversion of Series B warrant to common stock warrant

 

 

 

1,017

 

 

 

1,017

 

Issuance of common stock in initial public offering, net of issuance costs

 

9,873,270

 

10

 

115,079

 

 

 

115,089

 

Net loss

 

 

 

 

 

(7,981

)

(7,981

)

Foreign currency translation adjustments

 

 

 

 

(27

)

 

(27

)

Balance, September 30, 2012

 

76,757,515

 

$

75

 

$

198,687

 

$

(52

)

$

(52,592

)

$

146,118

 

 

See accompanying notes.

 

5



Table of Contents

 

Millennial Media, Inc.

 

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2011

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(417

)

$

(7,981

)

Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:

 

 

 

 

 

Stock-based compensation expense

 

1,104

 

5,273

 

Non-cash change in fair value of Series B warrant prior to conversion

 

62

 

834

 

Bad debt expense

 

101

 

1,123

 

Deferred income taxes

 

(483

)

 

Depreciation and amortization

 

456

 

1,593

 

Amortization of deferred financing fees

 

6

 

21

 

Changes in assets and liabilities, net of acquired balances:

 

 

 

 

 

Accounts receivable

 

(5,784

)

(17,312

)

Prepaid expenses and other current assets

 

(672

)

(695

)

Other assets

 

(175

)

(150

)

Accounts payable and accrued expenses

 

503

 

2,274

 

Accrued cost of revenue

 

2,754

 

7,264

 

Accrued payroll and payroll related expenses

 

537

 

1,263

 

Other long-term liabilities

 

211

 

62

 

Deferred revenue

 

(287

)

(34

)

Net cash and cash equivalents used in operating activities

 

(2,084

)

(6,465

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Payments for acquisitions, net of cash acquired

 

(2,060

)

 

Purchases of property and equipment

 

(2,262

)

(3,480

)

Net cash and cash equivalents used in investing activities

 

(4,322

)

(3,480

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

 

115,089

 

Payment of deferred offering costs

 

(614

)

 

Payment of deferred financing fees

 

(52

)

 

Proceeds from exercises of stock options

 

122

 

499

 

Repurchase and retirement of common shares

 

(827

)

 

Net cash and cash equivalents (used in) provided by financing activities

 

(1,371

)

115,588

 

Effect of exchange rates on cash and cash equivalents

 

(11

)

54

 

Net (decrease) increase in cash and cash equivalents

 

(7,788

)

105,697

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of the period

 

27,803

 

16,707

 

Cash and cash equivalents, end of the period

 

$

20,015

 

$

122,404

 

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

Issuance of common stock in connection with the Condaptive acquisition

 

$

75

 

$

 

Accretion of dividends on redeemable convertible preferred stock

 

$

3,728

 

$

1,328

 

Accretion of issuance costs on redeemable convertible preferred stock

 

$

25

 

$

6

 

 

See accompanying notes.

 

6



Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

1.               Description of Business

 

Millennial Media, Inc. (the ‘‘Company’’) was incorporated in the state of Delaware in May 2006. The Company is engaged in the business of providing mobile advertising solutions to advertisers and developers. Its technology, tools and services help developers to maximize their advertising revenue, acquire users and gain insight about their users. The Company offers advertisers significant audience reach, sophisticated targeting capabilities and the ability to deliver rich and engaging ad experiences to consumers on their mobile connected devices.

 

On April 3, 2012, the Company closed its initial public offering (“IPO”) of common stock in which the Company sold and issued 9,873,270 shares of common stock. Upon closing of the IPO, all of the redeemable convertible preferred stock outstanding automatically converted into 47,679,003 shares of common stock, based on the shares of redeemable convertible preferred stock outstanding as of April 3, 2012. In addition, the outstanding Series B warrant automatically converted into a warrant to purchase common stock, and the preferred stock warrant liability of $1.0 million as of April 3, 2012 was reclassified to additional paid-in capital.

 

2.               Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Interim Consolidated Financial Information

 

The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s financial position, results of operations, changes in stockholders’ (deficit) equity and cash flows. The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related footnotes presented in the Company’s prospectus filed with the Securities and Exchange Commission (“SEC”) on October 24, 2012.

 

Recently Adopted Accounting Pronouncements

 

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, ‘‘Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.’’ The ASU is the result of joint efforts by the FASB and the International Accounting Standards Board (‘‘IASB’’) to develop a single, converged fair value framework. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments. Key additional disclosures include quantitative disclosures about unobservable inputs in Level 3 measures, qualitative information about the sensitivity of Level 3 measures and valuation process, and classification within the fair value hierarchy for instruments where fair value is only disclosed in the footnotes but the carrying amount is on some other basis. The Company adopted ASU 2011-04 effective

 

7



Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

January 1, 2012. This adoption did not have an impact on the Company’s financial position, results of operations or cash flows.

 

In September 2011, the FASB issued ASU No. 2011-08, ‘‘Testing for Goodwill Impairment.’’ The objective of ASU 2011-08 is to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a ‘‘qualitative’’ assessment to determine whether further impairment testing is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The Company adopted ASU 2011-08 effective January 1, 2012. This adoption did not have an impact on the Company’s financial position, results of operations or cash flows.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Revenue Recognition and Deferred Revenue

 

The Company recognizes revenue based on the activity of mobile users viewing advertisements through developer applications and mobile websites. Revenues are recognized when the related advertising services are delivered based on the specific terms of the advertising contract, and are commonly based on the number of ads delivered, or views, clicks or actions by users on mobile advertisements. The Company recognizes revenue based on these terms because the services have been provided, the fees the Company charges are fixed or determinable, persuasive evidence of an arrangement exists, and collectability is reasonably assured.

 

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

 

Deferred revenue arises as a result of differences between the timing of revenue recognition and receipt of cash from the Company’s customers. As of December 31, 2011 and September 30, 2012 there was $157,000 and $219,000, respectively, of services for which cash payments were received in advance of the Company’s performance of the service under the arrangement and recorded as deferred revenue in the accompanying unaudited consolidated balance sheets.

 

Cost of Revenue

 

Cost of revenue consists primarily of amounts due to developers for the advertising utilized in running mobile advertisements.  These amounts are typically either a percentage of the advertising revenue earned by the Company

 

8



Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

based on mobile advertisements that are run on each developer’s application or mobile website or a fixed fee for the ad space.  The Company recognizes the cost of revenue as the associated revenue is recognized, on a developer by developer basis during the period the advertisements run on the developer’s advertising application or mobile website.  Costs owed to developers but not yet paid are recorded as accrued cost of revenue.

 

Concentration of Credit Risk

 

Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalent accounts may exceed federally insured limits at times. The Company has not experienced any losses on cash and cash equivalents to date. To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for doubtful accounts.

 

During the three months ended September 30, 2011, one customer accounted for greater than 10% of revenue. During the three months ended September 30, 2012, no customer accounted for greater than 10% of revenue.

 

During the nine months ended September 30, 2011 and 2012, no customer accounted for greater than 10% of revenue.

 

As of December 31, 2011 and September 30, 2012, no customer accounted for greater than 10% of accounts receivable.

 

Accounts Receivable and Allowance for Doubtful Accounts and Sales Credits

 

The Company extends credit to customers without requiring collateral. Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts. The Company utilizes the allowance method to provide for doubtful accounts based on management’s evaluation of the collectability of amounts due. The Company’s estimate is based on historical collection experience and a review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly differed from the Company’s estimates. However, higher than expected bad debts may result in future write-offs that are greater than the Company’s estimates.

 

The Company also estimates an allowance for sales credits based on the Company’s historical sales credits experience. Historically, actual sales credits have not significantly differed from the Company’s estimates. However, higher than expected sales credits may result in future write-offs that are greater than the Company’s estimates. The allowances for doubtful accounts and sales credits are included in accounts receivable, net in the accompanying consolidated balance sheets.

 

Stock-Based Compensation

 

The Company accounts for share-based payment awards by measuring employee services received in exchange for all equity awards granted based on the fair value of the award as of the grant date.  The Company recognizes stock-based compensation expense on a straight-line basis over the awards’ vesting period, adjusted for estimated forfeitures.

 

The Company values stock options using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions.  The use of the option valuation model requires the input of assumptions, including the fair value of the Company’s common

 

9



Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

stock, the expected life, and the expected stock price volatility based on peer companies.  Stock options are granted with exercise prices not less than the fair market value of the Company’s common stock at the date of grant.  Additionally, the recognition of expense requires the estimation of the number of options that will ultimately vest and the number of options that will ultimately be forfeited. Options generally vest ratably over a four-year period, except those options granted to non-employees, portions of which may vest immediately or ratably over two years. Options expire ten years from the date of grant.

 

3.               Fair Value Measurements

 

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their respective fair values due to their short-term nature. Prior to its conversion to a common stock warrant on April 3, 2012, the Company’s preferred stock warrant was recorded at fair value.

 

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value.  The three tiers are defined as follows:

 

·                  Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities;

 

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

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments. The following table summarizes the conclusions reached as of December 31, 2011 and September 30, 2012 (in thousands):

 

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Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Balance at
December 31,
2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

10,909

 

$

10,909

 

$

 

$

 

 

 

$

10,909

 

$

10,909

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Series B warrant (2)

 

$

183

 

$

 

$

 

$

183

 

 

 

$

183

 

$

 

$

 

$

183

 

 

 

 

Balance at
September 30,
2012

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Money market funds (1)

 

$

108,414

 

$

108,414

 

$

 

$

 

 

 

$

108,414

 

$

108,414

 

$

 

$

 

 


(1)          Money market funds are classified as cash equivalents in the Company’s consolidated balance sheets. As short-term, highly liquid investments readily convertible to known amounts of cash, with remaining maturities of three months or less at the time of purchase, the Company’s cash equivalent money market funds have carrying values that approximate fair value. Amounts do not include $5.8 million and $14.0 million of operating cash balances as of December 31, 2011 and September 30, 2012, respectively.

 

(2)          The Company used an option pricing model to determine the fair value of the Series B preferred stock warrant. Significant inputs included an estimate of the fair value of the Company’s stock, the remaining contractual life of the warrant, a risk-free rate of interest, and an estimate of the Company’s stock volatility using the volatilities of guideline peer companies.

 

4.               Series B Warrant

 

The Company was a party to a derivative financial instrument in which it issued a Series B warrant allowing the holder to purchase 50,750 shares of Series B preferred stock. The warrant was issued in conjunction with a long-term debt borrowing in 2008. The warrant had a term of 10 years and a stated exercise price of $1.18 per share and could be exercised in whole or in part at any time. The warrant included a cashless exercise option which allowed the holder to receive fewer shares of Series B preferred stock in exchange for the warrant rather than paying cash to exercise. As of December 31, 2011, the warrant was classified as a liability in the accompanying consolidated balance sheet and adjusted to fair value due to the fact that it was exercisable into a redeemable security.

 

The fair value of the warrant was estimated to be $183,000 at December 31, 2011. On April 3, 2012, upon closing of the Company’s IPO, the warrant converted from a warrant to purchase Series B preferred stock to a warrant to purchase common stock and the liability at its then fair value of $1.0 million was reclassified to additional paid-in capital. Prior to this date, all changes in the fair value of the warrant were recorded in other income (expense) in the accompanying unaudited consolidated statements of operations. The Company recorded other expense of $36,000 and $62,000 for the three and nine months ended September 30, 2011, respectively, related

 

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Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

to the fair value adjustment of the warrant. The Company recorded other expense of $0 and $834,000 for the three and nine months ended September 30, 2012, respectively, related to the fair value adjustment of the warrant.

 

On September 24, 2012, the warrant to purchase common stock was exercised on a cashless basis, resulting in the issuance of 46,760 shares of the Company’s common stock.

 

5.               Redeemable Convertible Preferred Stock (“preferred stock”)

 

The following table summarizes the Company’s issuances of preferred stock:

 

Issue Date

 

Name

 

Price per
Share

 

Number of Shares

 

Conversion
Price per
Share

 

July 2006

 

Series A-1

 

$

0.21

 

6,341,465

 

$

0.21

 

December 2006

 

Series A-2

 

$

0.53

 

9,448,220

 

$

0.53

 

November 2007

 

Series B

 

$

1.18

 

12,686,855

 

$

1.18

 

November 2009

 

Series C

 

$

1.49

 

10,759,630

 

$

1.49

 

December 2010

 

Series D

 

$

3.26

 

8,442,833

 

$

3.26

 

 

Series A-1, Series A-2, Series B, Series C, and Series D are collectively referred to as the Series Preferred. Price per share above for each series of preferred stock excludes the cost of issuance.

 

Summary of Activity

 

The following table presents a summary of activity for the Series Preferred issued and outstanding for the nine months ended September 30, 2012 (in thousands):

 

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Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Redeemable Convertible Preferred Stock

 

 

 

Series A-1

 

Series A-2

 

Series B

 

Series C

 

Series D

 

Total Amount

 

Balance, December 31, 2011

 

$

1,880

 

$

7,033

 

$

19,882

 

$

18,441

 

$

29,432

 

$

76,668

 

Preferred stock dividends accreted for Series A-1 preferred stock

 

32

 

 

 

 

 

32

 

Preferred stock dividends accreted for Series A-2 preferred stock

 

 

120

 

 

 

 

120

 

Preferred stock dividends accreted for Series B preferred stock

 

 

 

343

 

 

 

343

 

Preferred stock dividends accreted for Series C preferred stock

 

 

 

 

320

 

 

320

 

Preferred stock dividends accreted for Series D preferred stock

 

 

 

 

 

514

 

514

 

Accretion of issuance costs

 

 

 

1

 

3

 

2

 

6

 

Conversion of preferred stock to common stock

 

(1,912

)

(7,153

)

(20,226

)

(18,764

)

(29,948

)

(78,003

)

Balance, September 30, 2012

 

$

 

$

 

$

 

$

 

$

 

$

 

 

Upon closing of the Company’s IPO, all outstanding shares of convertible preferred stock converted into an aggregate of 47,679,003 shares of common stock. In addition, immediately following the closing of the IPO, the Company’s certificate of incorporation was amended to authorize 5,000,000 shares of undesignated preferred stock and 250,000,000 shares of common stock.

 

6.              Stock-Based Compensation

 

There were options outstanding to purchase an aggregate of 6,537,943 shares of common stock as of September 30, 2012 under the Company’s 2006 Equity Incentive Plan, as amended. In March 2012, the Company established the 2012 Equity Incentive Plan (the “2012 Plan”) pursuant to which the Company has reserved an additional 3,250,000 shares of its common stock for issuance to its employees, directors, and non-employee third parties. As of September 30, 2012, options to purchase 456,750 shares of common stock and 420,107 restricted stock units (“RSUs”) were outstanding under the 2012 Plan. Each RSU represents the contingent right to receive one share of common stock. Upon adoption of the 2012 Plan, no additional awards under the 2006 Equity Incentive Plan are available to be issued. As of September 30, 2012, 2,373,143 shares are available for future grant under the 2012 Plan.

 

Stock Option Awards

 

For the three-month periods ended September 30, 2011 and 2012, the Company recognized total stock-based compensation expense associated with stock option awards of $231,000 and $734,000, respectively. For the nine-month periods ended September 30, 2011 and 2012, the Company recognized total stock-based compensation expense associated with stock option awards of $506,000 and $1.9 million, respectively.

 

The following summarizes the assumptions used for estimating the fair value of stock options granted to employees:

 

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Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.2% - 1.9%

 

0.8% - 0.9%

 

1.2% — 2.4%

 

0.8% — 1.3%

 

Expected life

 

5.9 — 6.1 years

 

6.0 years

 

5.7 — 6.1 years

 

5.7 — 6.1 years

 

Expected volatility

 

44% - 45%

 

55%

 

44% — 47%

 

53% — 55%

 

Dividend yield

 

0%

 

0%

 

0%

 

0%

 

Weighted-average grant date fair value

 

$1.36

 

$6.40

 

$1.35

 

$5.82

 

 

The following table summarizes by grant date the stock options granted from January 1, 2012 through September 30, 2012, as well as the associated per share exercise price, which was equal to the estimated fair value of the Company’s common stock at the grant date.

 

Grant Date

 

Number of
Shares
Underlying
Options Granted

 

Exercise Price
per Share

 

 

 

 

 

 

 

January 24, 2012

 

106,250

 

6.00

 

March 28, 2012

 

142,250

 

13.00

 

July 9, 2012

 

109,600

 

12.85

 

September 11, 2012

 

214,400

 

12.24

 

 

Prior to the IPO, the Company determined for financial reporting purposes the estimated per share fair value of its common stock at various dates using contemporaneous valuations performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” also known as the Practice Aid. In conducting the contemporaneous valuations, the Company considered all objective and subjective factors that it believed to be relevant for each valuation conducted, including management’s best estimate of the Company’s business condition, prospects and operating performance at each valuation date.

 

The following is a summary of option activity for the nine months ended September 30, 2012:

 

 

 

Number

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term
(in years)

 

Aggregate
Intrinsic
Value

(in thousands)

 

Options outstanding at January 1, 2012

 

7,650,498

 

$

1.11

 

 

 

 

 

Granted

 

572,500

 

11.39

 

 

 

 

 

Exercised

 

(1,147,447

)

0.44

 

 

 

 

 

Forfeited

 

(66,390

)

4.65

 

 

 

 

 

Expired

 

(14,468

)

0.24

 

 

 

 

 

Options outstanding at September 30, 2012

 

6,994,693

 

$

2.03

 

6.96

 

$

86,171

 

 

 

 

 

 

 

 

 

 

 

Options vested and exercisable at September 30, 2012

 

4,699,100

 

$

0.78

 

6.16

 

63,782

 

Options vested and expected to vest at September 30, 2012

 

6,948,963

 

$

2.00

 

6.95

 

85,843

 

 

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Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

The total compensation cost related to unvested awards not yet recognized as of September 30, 2012 totaled $4.7 million and will be recognized over a weighted-average period of approximately 3.1 years.

 

The aggregate intrinsic value of all options exercised during the nine-month periods ended September 30, 2011 and 2012 was $1.1 million and $17.1 million, respectively.

 

Restricted Common Stock

 

In connection with the acquisition of Condaptive on May 6, 2011, the Company issued 1,448,080 shares of restricted common stock to the employee shareholders of Condaptive. Under the terms of the stock restriction agreements, a portion of the shares of common stock issued was released from restriction on May 6, 2012, the first anniversary of the issuance. Thereafter, shares of common stock will be released from restriction on a monthly basis over a period that expires between May 2013 and December 2014, depending on the individual award, so long as the shareholder remains an employee of the Company as of the date of each such release, until all of the common stock is released from restriction. If the shareholder’s employment terminates prior to the release of all shares from restriction, the shares not yet vested are subject to repurchase by the Company at the lower of $0.001 or the share’s then fair market value. As of September 30, 2012, a total of 964,495 shares had been released from restriction.

 

Stock-based compensation expense related to the restricted common stock is being recognized ratably over the restriction period based on the fair value of the individual awards. For the three and nine months ended September 30, 2012, the Company recognized stock-based compensation expense associated with restricted common stock of $2.0 million and $2.8 million, respectively. At September 30, 2012, unrecognized compensation expense relating to the restricted stock awards was $2.4 million and the aggregate intrinsic value of the unvested restricted stock was $6.9 million. The unrecognized compensation expense will be amortized on a straight line basis for the remaining 2.4 years.

 

Restricted Stock Units (RSUs)

 

In connection with the Company’s IPO, the Company granted 17,307 RSUs under the 2012 Plan all of which vested in October 2012. In September 2012, the Company granted an additional 402,800 RSUs under the 2012 Plan, which RSUs are scheduled to vest in quarterly installments over a four-year period ending in August 2016. For the three and nine months ended September 30, 2012, the Company recognized stock-based compensation expense associated with the RSUs of $501,000 and $612,000, respectively. At September 30, 2012, unrecognized compensation expense related to the RSUs was $4.5 million. The unrecognized compensation expense will be amortized on a straight-line basis through August 2016.

 

7.              Net Loss Per Common Share

 

The Company uses the two-class method to compute net loss per share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Each

 

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Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

series of the Company’s redeemable convertible preferred stock on an as-if-converted basis (prior to their conversion to common shares) as well as the restricted common stock issued in the Condaptive acquisition are entitled to participate in distributions, when and if declared by the board of directors, that are made to common stockholders and as a result are considered participating securities.

 

Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed under the two-class method by using the weighted-average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrant. In addition, the Company analyzes the potential dilutive effect of the outstanding participating securities under the “if-converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches (two class or “if-converted”) as its diluted net income per share during the period. Due to net losses for the three- and nine-month periods ended September 30, 2011 and 2012, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.

 

The following securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive:

 

 

 

Three and Nine Months Ended
September 30,

 

 

 

2011

 

2012

 

Redeemable convertible preferred stock:

 

 

 

 

 

Series A-1

 

6,341,465

 

 

Series A-2

 

9,448,220

 

 

Series B

 

12,686,855

 

 

Series C

 

10,759,630

 

 

Series D

 

8,442,833

 

 

Unvested restricted common stock

 

1,448,080

 

483,585

 

Warrant to purchase Series B preferred stock/common stock

 

50,750

 

 

Stock options

 

7,488,450

 

6,994,693

 

RSUs

 

 

420,107

 

 

8.              Income Taxes

 

The benefit for income taxes for the three and nine months ended September 30, 2011 includes $0 and $495,000, respectively, of discrete tax benefits.  The Company recorded a discrete tax benefit in the second quarter of 2011 due to a change in judgment about the realizability of the Company’s deferred tax assets as the result of a future taxable temporary difference established in connection with the acquisition of Condaptive, Inc.

 

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Table of Contents

 

Millennial Media, Inc.

 

Notes to Unaudited Consolidated Financial Statements

 

9.              Geographic Information

 

Substantially all assets were held in the United States at December 31, 2011 and September 30, 2012.  The following table summarizes revenues derived from the sales activity of U.S. and non-U.S. subsidiaries (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2011

 

2012

 

2011

 

2012

 

Revenue:

 

 

 

 

 

 

 

 

 

Domestic

 

$

21,495

 

$

41,119

 

$

62,363

 

$

104,856

 

International

 

3,694

 

6,247

 

6,766

 

14,851

 

Total

 

$

25,189

 

$

47,366

 

$

69,129

 

$

119,707

 

 

10.       Subsequent Event

 

On October 29, 2012, the Company closed a registered public offering of its common stock in which the Company issued and sold, and certain selling stockholders sold, a total of 11,500,000 shares of common stock (including the full exercise of the underwriters’ option to purchase additional shares) at a public offering price of $14.15 per share. The Company received net proceeds from this offering of approximately $11.7 million (after deducting underwriting discounts and estimated offering expenses), from the issuance and sale of 921,952 shares of common stock in the offering. The selling stockholders sold the remainder of the shares sold in the offering, and the Company did not receive any proceeds from the sale of such shares.

 

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Table of Contents

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors,” and our other filings with the Securities and Exchange Commission, or “SEC”. Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the fiscal year ended December 31, 2011 appearing in our prospectus filed with the SEC on October 24, 2012.

 

Overview

 

We are the leading independent mobile advertising platform company and the second largest mobile display advertising platform overall in the United States. Our technology, tools and services help developers maximize their advertising revenue, acquire users for their apps and gain insight about their users. To advertisers, we offer significant audience reach, sophisticated targeting capabilities and the opportunity to deliver interactive and engaging ad experiences to consumers on their mobile connected devices. More than 38,000 apps are enabled to receive ads through our platform, and we can deliver ads on over 7,000 different mobile device types and models. Our platform is compatible with all major mobile operating systems, including Apple iOS, Android, Windows Phone, Blackberry and Symbian.

 

We help developers and advertisers remove complexity from mobile advertising. By working with us, developers gain access to our tools and services that allow their apps to display banner ads, interactive rich media ads and video ads from our platform. In return, developers supply us with space on their apps to deliver ads for our advertiser clients and also provide us with access to anonymous data associated with their apps and users. We analyze this data to build sophisticated user profiles and audience groups that, in combination with the real-time decisioning, optimization and targeting capabilities of our technology platform, enable us to deliver highly targeted advertising campaigns for our advertiser clients. Advertisers pay us to deliver their ads to mobile connected device users, and we pay developers a fee for the use of their ad space. As we deliver more ads, we are able to collect additional anonymous data about users, audiences and the effectiveness of particular ad campaigns, which in turn enhances our targeting capabilities and allows us to deliver better performance for advertisers and better opportunities for developers to increase their revenue streams.

 

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Table of Contents

 

Key Operating and Financial Performance Metrics

 

We monitor the key operating and financial performance metrics set forth in the table below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies.

 

 

 

Three Months Ended September 30,

 

 

 

2011

 

2012

 

 

 

(in thousands, except percentages)

 

Revenue

 

$

25,189

 

$

47,366

 

Gross margin

 

39.3

%

40.9

%

Net loss

 

$

(242

)

$

(1,769

)

Adjusted EBITDA

 

$

582

 

$

2,138

 

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2012

 

 

 

(in thousands, except percentages)

 

Revenue

 

$

69,129

 

$

119,707

 

Gross margin

 

38.5

%

40.1

%

Net loss

 

$

(417

)

$

(7,981

)

Adjusted EBITDA

 

$

650

 

$

(1,017

)

 

Gross margin is our gross profit, or revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be primarily affected by our pricing terms with new and existing developers.

 

Adjusted EBITDA represents our earnings before net interest (income) expense, income taxes, depreciation and amortization, adjusted to eliminate stock-based compensation expense, which is a non-cash item. Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the development of incentive-based compensation for our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

Adjusted EBITDA is not a measure calculated in accordance with GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted EBITDA in the same manner that we do. Adjusted EBITDA eliminates the

 

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Table of Contents

 

impact of stock-based compensation expense as we do not consider the inclusion of stock-based compensation expense to be indicative of our core operating performance.

 

Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:

 

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

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

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

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

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

 

Because of these and other limitations, you should consider adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results. The following table presents a reconciliation of adjusted EBITDA to net loss for each of the periods indicated:

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2011

 

2012

 

 

 

(in thousands)

 

Net loss

 

$

(242

)

$

(1,769

)

Adjustments:

 

 

 

 

 

Interest expense, net

 

1

 

14

 

Income tax (benefit) expense

 

(2

)

36

 

Depreciation and amortization expense

 

220

 

631

 

Stock-based compensation expense

 

605

 

3,226

 

Total net adjustments

 

824

 

3,907

 

Adjusted EBITDA

 

$

582

 

$

2,138

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2011

 

2012

 

 

 

(in thousands)

 

Net loss

 

$

(417

)

$

(7,981

)

Adjustments:

 

 

 

 

 

Interest expense, net

 

2

 

52

 

Income tax (benefit) expense

 

(495

)

46

 

Depreciation and amortization expense

 

456

 

1,593

 

Stock-based compensation expense

 

1,104

 

5,273

 

Total net adjustments

 

1,067

 

6,964

 

Adjusted EBITDA

 

$

650

 

$

(1,017

)

 

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Components of Operating Results

 

Revenue

 

We generate revenue by charging advertisers to deliver ads to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Our fees from advertisers are commonly based on the number of ads delivered, views, clicks or actions by users on mobile advertisements we deliver, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell ads on several bases: cost per thousand, or CPM, on which we charge advertisers for each ad delivered to a consumer; cost per click, or CPC, on which we charge advertisers for each ad clicked on by a user; and cost per action, or CPA, on which we charge advertisers each time a consumer takes a specified action, such as downloading an app.

 

Our brand advertiser clients, which currently comprise a majority of our revenue, generally use CPM pricing, although some brand advertisers use CPC pricing terms with us from time to time. On the other hand, our performance advertiser clients typically use CPC pricing, but sometimes use CPA pricing. The mix of revenue generated from brand advertisers and performance advertisers on our platform changes throughout the year. For example, we typically see a higher percentage of our revenue from brand advertisers in the second and fourth quarters of the year than we do during the first and third quarters. The overall mix of advertisers using CPM, CPC and CPA pricing models changes throughout the year, and we are not aware of any meaningful trends in our revenue resulting from each of these three categories at this time.

 

When we discuss new advertising clients for any period, we are referring to clients who first advertised on our platform after the end of the prior-year comparative period.  When we discuss existing advertising clients for any period, we are referring to all other clients, specifically those who had advertised on our platform at any time before the end of the prior-year comparative period.  If an existing client advertises a new brand on our platform, or a subsidiary of an existing client begins advertising on our platform, we also categorize those as existing clients.

 

Our revenue tends to be seasonal in nature, with the fourth quarter of each calendar year historically representing the largest percentage of our total revenue for the year. Many brand advertisers spend the largest portion of their advertising budgets during the fourth quarter, in preparation for the holiday season.

 

Cost of Revenue

 

Cost of revenue consists primarily of payments we make to developers for their advertising space on which we deliver mobile ads. These payments are typically either a percentage of the advertising revenue we earn from mobile ads placed on the developer’s app or a fixed fee for the ad space. We recognize cost of revenue on a developer-by-developer basis at the same time as we recognize the associated revenue. Costs owed to developers but not yet paid are recorded on our consolidated balance sheets as accrued cost of revenue.

 

Operating Expenses

 

Operating expenses consist of sales and marketing, technology and development and general and administrative expenses. Salaries and personnel costs are the most significant component of each of these expense categories. We grew from 119 employees at December 31, 2010 to 323 employees at September 30, 2012, and we expect to continue to hire new employees in order to support our anticipated revenue growth. We include stock-based

 

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compensation expense in connection with the grant of stock options in the applicable operating expense category based on the respective equity award recipient’s function.

 

Sales and marketing expense. Sales and marketing expense consists primarily of salaries and personnel costs for our advertiser-focused sales and marketing employees, including stock-based compensation, commissions and bonuses. Developer support salaries and personnel costs are included in general and administrative expenses. Additional expenses include marketing programs, consulting, travel and other related overhead. The number of employees in sales and marketing functions grew from 44 at December 31, 2010 to 107 at September 30, 2012, and we expect our sales and marketing expense to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities.

 

Technology and development expense. Technology and development expense primarily consists of salaries and personnel costs for development employees, including stock-based compensation and bonuses. Technology and development employees are focused on new product and technology development. Additional expenses include costs related to the development, quality assurance and testing of new technology and enhancement of existing technology, amortization of internally developed software related to our technology infrastructure, consulting, travel and other related overhead. Other general IT costs are included in general and administrative expenses. We engage third-party consulting firms for various technology and development efforts, such as documentation, quality assurance and support. The number of employees in technology and development functions grew from 19 at December 31, 2010 to 73 at September 30, 2012. We intend to continue to invest in our technology and development efforts, by hiring additional development personnel and by using outside consulting firms for various technology and development efforts. We believe continuing to invest in technology and development efforts is essential to maintaining our competitive position.

 

General and administrative expense. General and administrative expense primarily consists of salaries and personnel costs for product, operations, developer support, business development, administration, finance and accounting, legal, information systems and human resources employees, including stock-based compensation and bonuses. Additional expenses include consulting and professional fees, travel, bad debt expense, insurance and other corporate expenses. The number of employees in general and administrative functions grew from 56 at December 31, 2010 to 143 at September 30, 2012, and we expect our general and administrative expenses to increase in the foreseeable future as we further increase the number of general and administrative personnel and expand our organization as a public registrant.

 

Other Expense

 

Other expense consists primarily of interest income, interest expense and changes in the fair value of our preferred stock warrant liability prior to its conversion to a common stock warrant on April 3, 2012. Interest income is derived from interest received on our cash and cash equivalents. Interest expense consists primarily of the fees incurred on the unused portion of our credit facilities.

 

Prior to our IPO in April 2012, the fair value of our preferred stock warrant liability was re-measured at the end of each reporting period and any changes in fair value were recognized in other income or expense. Upon the closing of our IPO in April 2012, the preferred stock warrant was automatically converted into a warrant to purchase common stock, which resulted in a reclassification of the preferred stock warrant liability to additional paid-in capital. Upon reclassification of the preferred stock warrant, no further changes in fair value will be recognized in other income or expense.

 

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Income Tax (Expense) Benefit

 

Income tax expense consists of U.S. federal, state and foreign income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. We incurred minimal state and foreign income tax liabilities for the three and nine month periods ended September 30, 2011 and 2012.

 

Income tax benefit consists of changes in judgment about the realizability of our deferred tax assets.

 

Critical Accounting Policies and Estimates

 

We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected. During the nine months ended September 30, 2012, there were no material changes to our critical accounting policies and use of estimates, which are disclosed in our audited consolidated financial statements for the year ended December 31, 2011 included in our prospectus filed with the SEC on October 24, 2012.

 

Results of Operations

 

The following table sets forth selected consolidated statement of operations data for each of the periods indicated.

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

2011

 

2012

 

 

 

 

 

 

 

(in thousands)

 

Period-to-Period Change

 

 

 

 

 

Percentage of

 

 

 

Percentage of

 

 

 

Consolidated Statement of Operations Data:

 

Amount

 

Revenue

 

Amount

 

Revenue

 

Amount

 

Percentage

 

Revenue

 

$

25,189

 

100.0

%

$

47,366

 

100.0

%

$

22,177

 

88.0

%

Cost of revenue

 

15,293

 

60.7

 

28,005

 

59.1

 

12,712

 

83.1

 

Gross profit

 

9,896

 

39.3

 

19,361

 

40.9

 

9,465

 

95.6

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

3,203

 

12.7

 

5,922

 

12.5

 

2,719

 

84.9

 

Technology and development

 

1,518

 

6.0

 

4,667

 

9.9

 

3,149

 

207.4

 

General and administrative

 

5,382

 

21.4

 

10,491

 

22.1

 

5,109

 

94.9

 

Total operating expenses

 

10,103

 

40.1

 

21,080

 

44.5

 

10,977

 

108.7

 

Loss from operations

 

(207

)

(0.8

)

(1,719

)

(3.6

)

(1,512

)

730.4

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(1

)

0.0

 

(14

)

0.0

 

(13

)

1,300.0

 

Other income (expense)

 

(36

)

(0.1

)

 

0.0

 

36

 

(100.0

)

Total other income (expense)

 

(37

)

(0.1

)

(14

)

0.0

 

23

 

(62.2

)

Loss before income taxes

 

(244

)

(1.0

)

(1,733

)

(3.7

)

(1,489

)

610.2

 

Income tax benefit (expense)

 

2

 

0.0

 

(36

)

(0.1

)

(38

)

(1,900.0

)

Net loss

 

$

(242

)

(1.0

)%

$

(1,769

)

(3.7

)%

$

(1,527

)

631.0

 

 

Revenue. Revenue increased by $22.2 million, or 88.0%, from $25.2 million for the quarter ended September 30, 2011 to $47.4 million for the quarter ended September 30, 2012. This growth was primarily attributable to an increase in the number of advertiser clients using our platform as well as an increase in spending from our existing advertiser clients. Revenue from our existing advertiser clients increased by 141.6% during the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011 and represented 75.6% of

 

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our total revenue for the quarter ended September 30, 2012. The increase in revenue from existing clients was driven by additional campaigns from brands that had previously advertised with us, larger campaign sizes and new brands owned by existing clients that began advertising with us during the quarter. Revenue from new advertiser clients increased by 13.5% during the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011 and represented 24.4% of our total revenue for the quarter ended September 30, 2012.

 

Our revenue from international operations increased from $3.7 million, or 14.7% of total revenue, for the quarter ended September 30, 2011, to $6.2 million, or 13.2% of total revenue, for the quarter ended September 30, 2012. The revenue growth in our international operations during the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011 was primarily attributable to an increase in the size of our international sales force focused on generating revenue, principally in Europe.

 

We also increased the size of our overall sales force during the quarter ended September 30, 2012 compared to the same period in the prior year, allowing us to increase our number of advertising client relationships and the number of developer applications enabled to receive ads delivered through our platform.

 

Cost of revenue. Cost of revenue increased by $12.7 million, or 83.1%, from $15.3 million, or 60.7% of revenue, for the quarter ended September 30, 2011, to $28.0 million, or 59.1% of revenue, for the quarter ended September 30, 2012. The increase in cost of revenue was driven primarily by the need to purchase greater quantities of advertising inventory for use in delivering mobile ads. The decrease in cost of revenue as a percentage of revenue and corresponding increase in gross margin for the quarter ended September 30, 2012 was primarily the result of more favorable pricing terms with developers and improved optimization of our ad delivery process. In addition, we experienced increased usage of our self-service portal for developers, which is the primary interface for our developers that do not require a full-service solution. Fees paid to developers for ads placed through this portal are generally lower, especially for developers who do not qualify for volume-based discounts, resulting in higher gross margin from these ads.

 

Sales and marketing. Sales and marketing expense increased by $2.7 million, or 84.9%, from $3.2 million, or 12.7% of revenue, for the quarter ended September 30, 2011, to $5.9 million, or 12.5% of revenue, for the quarter ended September 30, 2012. The increase in sales and marketing expense was primarily attributable to a $2.0 million increase in salaries and personnel-related costs associated with an increase in headcount and stock-based compensation expense, as we increased the number of sales and marketing personnel to support our expanding client base and experienced higher commission costs associated with higher revenue. For the three months ended September 30, 2011 and 2012, the number of full-time sales and marketing employees increased from 61 to 107. The decrease in sales and marketing expense as a percentage of revenue for the quarter ended September 30, 2012 was primarily the result of our growth in revenue and improved efficiencies in our sales organization.

 

Technology and development. Technology and development expense increased by $3.1 million, or 207.4%, from $1.5 million, or 6.0% of revenue, for the quarter ended September 30, 2011, to $4.7 million, or 9.9% of revenue, for the quarter ended September 30, 2012. The increase in technology and development expense was primarily attributable to a $1.3 million increase in salaries and personnel-related costs associated with an increase in headcount, as well as an increase of $618,000 in stock-based compensation expense resulting from the Condaptive acquisition and an additional $1.0 million in one-time stock-based compensation expense related to the departure of certain employees in technology and development functions. The number of full-time technology and development employees increased from 34 at September 30, 2011 to 73 at September 30, 2012. Additionally, for the three months ended September 30, 2012, we incurred an additional $212,000 in amortization expense primarily related to our internally developed software. The increase in technology and development expense as a percentage of revenue for the quarter ended September 30, 2012 was primarily attributable to our increase in headcount and the one-time stock-based compensation expense described above.

 

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General and administrative. General and administrative expense increased by $5.1 million, or 94.9%, from $5.4 million, or 21.4% of revenue, for the quarter ended September 30, 2011, to $10.5 million, or 22.1% of revenue, for the quarter ended September 30, 2012. The increase in general and administrative expense was primarily attributable to a $2.3 million increase in salaries and personnel-related costs associated with an increase in headcount, along with the associated stock-based compensation expense for equity grants to new employees, as well as approximately $1.0 million in one-time expense related to the departure of certain employees in general and administrative functions. Additionally, we experienced an additional $532,000 in bad debt expense, an additional $176,000 in increased business insurance expense as a result of becoming a public company, and an additional $1.1 million in overhead costs to support our growing employee base. The number of full-time general and administrative employees increased from 95 at September 30, 2011 to 143 at September 30, 2012. Additionally, over that same comparative period, we experienced higher overhead costs as a result of recently becoming a public company. The increase in general and administrative expense as a percentage of revenue for the quarter ended September 30, 2012 was also primarily attributable to our increase in headcount.

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2011

 

2012

 

 

 

 

 

 

 

(in thousands)

 

Period-to-Period Change

 

 

 

 

 

Percentage of

 

 

 

Percentage of

 

 

 

Consolidated Statement of Operations Data:

 

Amount

 

Revenue

 

Amount

 

Revenue

 

Amount

 

Percentage

 

Revenue

 

$

69,129

 

100.0

%

$

119,707

 

100.0

%

$

50,578

 

73.2

%

Cost of revenue

 

42,536

 

61.5

 

71,683

 

59.9

 

29,147

 

68.5

 

Gross profit

 

26,593

 

38.5

 

48,024

 

40.1

 

21,431

 

80.6

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

10,179

 

14.7

 

16,561

 

13.8

 

6,382

 

62.7

 

Technology and development

 

3,316

 

4.8

 

10,084

 

8.4

 

6,768

 

204.1

 

General and administrative

 

13,946

 

20.2

 

28,428

 

23.7

 

14,482

 

103.8

 

Total operating expenses

 

27,441

 

39.7

 

55,073

 

46.0

 

27,632

 

100.7

 

Loss from operations

 

(848

)

(1.2

)

(7,049

)

(5.9

)

(6,201

)

731.3

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense)

 

(2

)

0.0

 

(52

)

0.0

 

(50

)

2,500.0

 

Other income (expense)

 

(62

)

(0.1

)

(834

)

(0.7

)

(772

)

1,245.2

 

Total other income (expense)

 

(64

)

(0.1

)

(886

)

(0.7

)

(822

)

1284.4

 

Loss before income taxes

 

(912

)

(1.3

)

(7,935

)

(6.6

)

(7,023

)

770.1

 

Income tax benefit (expense)

 

495

 

0.7

 

(46

)

 

(541

)

(109.3

)

Net loss

 

$

(417

)

(0.6

)%

$

(7,981

)

(6.7

)%

$

(7,564

)

1,813.9

 

 

Revenue. Revenue increased by $50.6 million, or 73.2%, from $69.1 million for the nine months ended September 30, 2011 to $119.7 million for the nine months ended September 30, 2012. This growth was primarily attributable to an increase in the number of advertiser clients using our platform as well as an increase in spending from our existing advertiser clients. Revenue from our existing advertiser clients increased by 100.2% during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 and represented 82.2% of our total revenue for the nine months ended September 30, 2012. The increase in revenue from existing clients was driven by additional campaigns from brands that had previously advertised with us, larger campaign sizes and new brands owned by existing clients that began advertising with us during the period. Revenue from new advertiser clients increased by 10.4% during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 and represented 17.8% of our total revenue for the nine months ended September 30, 2012.

 

Our revenue from international operations increased from $6.8 million, or 9.8% of total revenue, for the nine months ended September 30, 2011, to $14.9 million, or 12.4% of total revenue, for the nine months ended September 30, 2012. The revenue growth in our international operations during the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 was primarily attributable to an increase in the size of our international sales force focused on generating revenue principally in Europe.

 

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Table of Contents

 

We also increased the size of our overall sales force during the nine months ended September 30, 2012 compared to the same period in the prior year, allowing us to increase our number of advertising client relationships  and the number of developer applications enabled to receive ads delivered through our platform.

 

Cost of revenue. Cost of revenue increased by $29.1 million, or 68.5%, from $42.5 million, or 61.5% of revenue, for the nine months ended September 30, 2011, to $71.7 million, or 59.9% of revenue, for the nine months ended September 30, 2012. The increase in cost of revenue was driven primarily by the need to purchase greater quantities of advertising inventory for use in delivering mobile ads. The decrease in cost of revenue as a percentage of revenue and corresponding increase in gross margin for the nine months ended September 30, 2012 was primarily the result of more favorable pricing terms with developers, improved optimization of our ad delivery process, and increased usage of our self-service portal for developers.

 

Sales and marketing. Sales and marketing expense increased by $6.4 million, or 62.7%, from $10.2 million, or 14.7% of revenue, for the nine months ended September 30, 2011, to $16.6 million, or 13.8% of revenue, for the nine months ended September 30, 2012. The increase in sales and marketing expense was primarily attributable to a $4.3 million increase in salaries and personnel-related costs associated with an increase in headcount and stock-based compensation expense, as we increased the number of sales and marketing personnel to support our expanding client base and experienced higher commission costs associated with higher revenue. The number of full-time sales and marketing employees increased from 61 at September 30, 2011 to 107 at September 30, 2012. In addition, we experienced an approximately $600,000 increase in our marketing programs and consulting expense. The decrease in sales and marketing expense as a percentage of revenue for the nine months ended September 30, 2012 was primarily the result of our growth in revenue and improved efficiencies in our sales organization.

 

Technology and development. Technology and development expense increased by $6.8 million, or 204.1%, from $3.3 million, or 4.8% of revenue, for the nine months ended September 30, 2011, to $10.1 million, or 8.4% of revenue, for the nine months ended September 30, 2012. The increase in technology and development expense was primarily attributable to a $5.6 million increase in salaries and personnel-related costs associated with an increase in headcount and stock-based compensation expense related to the Condaptive acquisition. The number of full-time technology and development employees increased from 34 at September 30, 2011 to 73 at September 30, 2012. Additionally, for the nine months ended September 30, 2012, we incurred an additional $600,000 in amortization expense primarily related to our internally developed software. The increase in technology and development expense as a percentage of revenue for the nine months ended September 30, 2012 was primarily attributable to our increase in headcount.

 

General and administrative. General and administrative expense increased by $14.5 million, or 103.8%, from $13.9 million, or 20.2% of revenue, for the nine months ended September 30, 2011, to $28.4 million, or 23.7% of revenue, for the nine months ended September 30, 2012. The increase in general and administrative expense was primarily attributable to a $7.6 million increase in salaries and personnel-related costs associated with an increase in headcount and stock-based compensation expense. Additionally, we experienced $1.3 million in higher external consulting fees, a $1.5 million increase in IT costs to support our growing business, an additional $1.0 million in bad debt expense, an additional $0.5 million in increased business insurance expense as a result of becoming a public company, and an additional $2.6 million in overhead costs to support our growing employee base. The number of full-time general and administrative employees increased from 95 at September 30, 2011 to 143 at September 30, 2012. The increase in general and administrative expense as a percentage of revenue for the nine months ended September 30, 2012 was also primarily attributable to our increase in headcount.

 

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Table of Contents

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Prior to our IPO, we funded our operations principally through private placements of our capital stock and bank borrowings. From 2006 through 2010, we raised an aggregate of $64.8 million from the sale of redeemable convertible preferred stock to third parties.

 

In August 2011, we entered into a line of credit with Silicon Valley Bank, or SVB, which allows for borrowings up to $15.0 million. Amounts borrowed under the line of credit are secured by all of our assets. Advances under the line of credit bear interest at a floating rate equal to SVB’s prime rate, with interest payable monthly. The line of credit agreement requires that we maintain a ratio of cash, cash equivalents and billed accounts receivable to current liabilities of at least 1.25 to 1.00. Additionally, the line of credit agreement contains an unused line fee of 0.25% per year, calculated on the average unused portion of the loan, payable monthly. The line of credit is scheduled to mature on August 11, 2013, at which time all outstanding borrowings would be due and payable. As part of the line of credit, we have a maximum of $2.0 million in available but unused letters of credit. As of September 30, 2012, we had not yet drawn on this line of credit.

 

Public Offerings

 

On April 3, 2012, we closed our IPO in which we sold and issued 9,873,270 shares of common stock resulting in net proceeds of $115.5 million. Upon closing of the IPO, all of the redeemable convertible preferred stock outstanding automatically converted into 47,679,003 shares of common stock, based on the shares of redeemable convertible preferred stock outstanding as of April 3, 2012. In addition, the outstanding Series B warrant automatically converted into a warrant to purchase common stock, and the preferred stock warrant liability of $1.0 million as of April 3, 2012 was reclassified to additional paid-in capital.

 

On October 29, 2012, we closed an offering of our common stock in which we sold and issued 921,952 shares of common stock resulting in net proceeds of approximately $11.7 million to us, after deducting underwriting discounts and estimated offering expenses.

 

Cash Flows

 

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

 

 

 

 

Nine Months Ended September 30,

 

 

 

2011

 

2012

 

 

 

(in thousands)

 

Cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

(2,084

)

$

(6,465

)

Investing activities

 

(4,322

)

(3,480

)

Financing activities

 

(1,371

)

115,588

 

 

Operating Activities

 

For the nine months ended September 30, 2012, our net cash used in operating activities of $6.5 million consisted of a net loss of $8.0 million and $7.3 million of cash used to fund changes in working capital, which was primarily driven both by the domestic and international expansion of our operations and by our investment in technology and development and personnel to facilitate our growth,

 

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Table of Contents

 

offset by $8.8 million in adjustments for non-cash items. Adjustments for non-cash items primarily consisted of stock compensation expense of $5.3 million, non-cash change in the fair value of our Series B preferred stock warrant of $834,000 which was reclassified to additional paid-in capital on April 3, 2012 upon the closing of our IPO, depreciation and amortization expense of $1.6 million and bad debt expense of $1.1 million. The increased depreciation and amortization expense primarily related to increased capital expenditure requirements and our intangible assets resulting from the acquisition of a business. The decrease in cash resulting from changes in working capital primarily consisted of an increase in accounts receivable of $17.3 million, primarily driven by increased revenue during the period as we continue to expand our operations both domestically and internationally. These decreases in working capital were partially offset by increases in operating cash flow due to a $7.3 million increase in accrued cost of revenue, driven primarily by an increase in developer-related charges.

 

For the nine months ended September 30, 2011, our net cash used in operating activities of $2.1 million consisted of a net loss of $417,000 and $2.9 million of cash used to fund changes in working capital, which was primarily driven both by the domestic and international expansion of our operations and by our investment in technology and development and personnel to facilitate our growth. The decrease in cash resulting from changes in working capital primarily consisted of an increase in accounts receivable of $5.8 million, primarily driven by increased revenue during the period as we continue to expand our operations both domestically and internationally. These decreases in working capital were partially offset by increases in operating cash flow due to a $2.8 million increase in accrued cost of revenue, driven primarily by an increase in developer-related charges.

 

Investing Activities

 

Our investing activities have consisted primarily of purchases of property and equipment.

 

For the nine month periods ended September 30, 2011 and 2012, net cash used in investing activities was $2.3 million and $3.5 million, respectively, for purchases of property and equipment. Additionally, net cash used in investing activities for the nine-month period ended September 30, 2011 included $2.1 million paid for the acquisition of Condaptive, Inc., net of cash acquired.

 

Financing Activities

 

For the nine months ended September 30, 2012, net cash provided by financing activities was $115.6 million, consisting primarily of $115.1 million in net proceeds from our IPO. In addition, we received net cash of $500,000 upon the exercise of stock options.

 

For the nine months ended September 30, 2011, net cash used in financing activities was $1.4 million, consisting primarily of $827,000 in cash used to repurchase common stock from one of our executive officers and $614,000 in cash used to pay deferred offering costs.

 

Recent Accounting Pronouncements

 

See Note 2 of the unaudited consolidated financial statements included in this report for a discussion of FASB’s recent accounting pronouncements and their effect on us.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

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Table of Contents

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

 

No material changes in our market risk occurred from December 31, 2011 through September 30, 2012. Information regarding our market risk at December 31, 2011 is contained in Management’s Discussion and Analysis, “Quantitative and Qualitative Disclosures About Market Risk,” in our prospectus filed with the SEC on October 24, 2012.

 

Item 4.   Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is  recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.   Legal Proceedings

 

Augme Technologies, Inc. v. Millennial Media, Inc.  On April 5, 2012, Augme Technologies, Inc. filed a complaint in the U.S. District Court for the District of Delaware, alleging patent infringement against us.  Plaintiff alleges that we are infringing U.S. Patent No. 7,783,721 entitled “Method and Code Module For Adding Function To A Web Page,” U.S. Patent No. 7,269,636 entitled “Method and Code Module For Adding Function To A Web Page,” and U.S. Patent No. 6,594,691 entitled “Method and System For Adding Function To A Web Page.”  We answered the complaint on July 5, 2012.  Among other things, we filed counterclaims asking for a declaratory judgment of non-infringement and invalidity of the patents in question.  The case is in the early stages of discovery.

 

Streetspace, Inc. v. Google, Inc. et al.  On August 23, 2010, plaintiff Streetspace, Inc. filed a complaint in the U.S. District Court for the Southern District of California, alleging patent infringement against a group of defendants including us. The plaintiff alleged that each of the defendants has infringed, and continues to infringe,

 

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plaintiff’s patent On September 12, 2011, the court granted the defendants’ motion to transfer the case to the U.S. District Court for the Northern District of California. On September 15, 2011, the defendants jointly filed a request to reexamine plaintiff’s claimed patent with the U.S. Patent and Trademark Office. On November 18, 2011, the Patent and Trademark Office granted the defendants’ request, ordered a reexamination of the plaintiff’s patent, and rejected all of the plaintiff’s patent claims in the first office action. The defendants also filed a motion to stay the case in the Northern District of California, pending the reexamination.  The court granted the motion to stay in February 2012.  On June 4, 2012, the Patent and Trademark Office entered an Action Closing Prosecution rejecting all claims.  Plaintiff filed its amended response in the patent reexamination on September 25, 2012. The case is currently stayed.

 

Evolutionary Intelligence, LLC. v. Millennial Media, Inc. On October 17, 2012, Evolutionary Intelligence, LLC filed a complaint in the U.S. District Court for the Eastern District of Texas, Tyler Division, alleging patent infringement against us. The plaintiff alleges that we are infringing U.S. Patent No. 7,010,536, entitled ‘‘System and Method for Creating and Manipulating Containers with Dynamic Registers’’ and U.S. Patent No. 7,702,682, entitled ‘‘System and Method for Creating and Manipulating Containers with Dynamic Registers.’’ The complaint seeks declaratory judgment, unspecified damages and injunctive relief. We have not yet answered the complaint.

 

Item 1A. Risk Factors

 

Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the following risks, as well as general economic and business risks, and all of the other information contained in this report. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline.

 

Risks Related to Our Business and Our Industry

 

We have incurred significant net losses since inception, and we expect our operating expenses to increase significantly in the foreseeable future. Accordingly, we may never achieve profitability.

 

We incurred net losses of $8.0 million in the first nine months of 2012, and we had an accumulated deficit of $52.6 million as of September 30, 2012. We do not know when or if we will ever achieve profitability. Although our revenue has increased substantially in recent periods, it is likely that we will not be able to maintain this rate of revenue growth. Historically, our operating expenses have increased in proportion to our revenue. We anticipate that our operating expenses will continue to increase in the foreseeable future to the extent that our revenue grows and as we increase headcount, particularly our sales and technology-related headcount, incur general and administrative expenses associated with being a public company and expand our facilities. Although we expect to achieve operating efficiencies and greater leverage of resources as we grow, if we are unable to do so, we may be unable to achieve profitability. If we are not able to achieve and maintain profitability, the value of our company and our common stock could decline significantly.

 

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

 

The mobile advertising market is highly competitive, with numerous companies providing mobile advertising services. We compete primarily with Google Inc. and Apple Inc., both of which are significantly larger than us and have more capital to invest in their mobile advertising businesses. They, or other companies that offer competing mobile advertising solutions, may establish or strengthen cooperative relationships with their mobile operator partners, brand advertisers, app developers or other parties, thereby limiting our ability to promote our services and generate revenue. Competitors could also seek to gain market share from us by reducing the prices they charge to advertisers or by introducing new technology

 

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tools for developers. Moreover, increased competition for mobile advertising space from developers could result in an increase in the portion of advertiser revenue that we must pay to developers to acquire that advertising space.

 

Our business will suffer to the extent that our developer clients and advertiser clients purchase and sell mobile advertising directly from each other or through other companies that are able to become intermediaries between developers and advertisers. For example, we are aware of companies that have substantial existing platforms for developers who had previously not heavily used those platforms for mobile advertising campaigns. These companies could compete with us to the extent they expand into mobile advertising. Other companies, such as large app developers with a substantial mobile advertising business, may decide to directly monetize some or all of their advertising space without utilizing our services. Other companies that offer analytics, mediation, exchange or other third-party services may also become intermediaries between mobile advertisers and developers and thereby compete with us. Any of these developments would make it more difficult for us to sell our services and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share.

 

The mobile advertising market may deteriorate or develop more slowly than expected, which could harm our business.

 

Advertising on mobile connected devices is an emerging phenomenon. Advertisers have historically spent a smaller portion of their advertising budgets on mobile media as compared to traditional advertising methods, such as television, newspapers, radio and billboards, or online advertising over the internet, such as placing banner ads on websites. Future demand and market acceptance for mobile advertising is uncertain. Many advertisers still have limited experience with mobile advertising and may continue to devote larger portions of their advertising budgets to more traditional offline or online personal computer-based advertising, instead of shifting additional advertising resources to mobile advertising. In addition, our current and potential advertiser clients may ultimately find mobile advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and services, and they may even reduce their spending on mobile advertising from current levels as a result. If the market for mobile advertising deteriorates, or develops more slowly than we expect, we may not be able to increase our revenue.

 

Our business is dependent on the continued growth in usage of smartphones, tablets and other mobile connected devices.

 

Our business depends on the continued proliferation of mobile connected devices, such as smartphones and tablets, that can connect to the internet over a cellular, wireless or other network, as well as the increased consumption of content through those devices. Consumer usage of these mobile connected devices may be inhibited for a number of reasons, such as:

 

·                  inadequate network infrastructure to support advanced features beyond just mobile web access;

 

·                  users’ concerns about the security of these devices;

 

·                  inconsistent quality of cellular or wireless connection;

 

·                  unavailability of cost-effective, high-speed internet service; and

 

·                  changes in network carrier pricing plans that charge device users based on the amount of data consumed.

 

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For any of these reasons, users of mobile connected devices may limit the amount of time they spend on these devices and the number of apps they download on these devices. If user adoption of mobile connected devices and consumer consumption of content on those devices do not continue to