S-1 1 d450382ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on February 13, 2013

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

MARIN SOFTWARE INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   7372   20-4647180

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

123 Mission Street, 25th Floor

San Francisco, California 94105

(415) 399-2580

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Christopher A. Lien

Founder, Chief Executive Officer and Director

Marin Software Incorporated

123 Mission Street, 25th Floor

San Francisco, California 94105

(415) 399-2580

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Gordon K. Davidson, Esq.

Jeffrey R. Vetter, Esq.

Michael A. Brown, Esq.

Fenwick & West LLP

801 California Street

Mountain View, CA 94041

(650) 988-8500

 

Rashmi Garde, Esq.

General Counsel

Marin Software Incorporated

123 Mission Street, 25th Floor

San Francisco, California 94105

(415) 399-2580

 

Douglas D. Smith, Esq.

Stewart L. McDowell, Esq.

Gibson Dunn & Crutcher LLP

555 Mission Street

San Francisco, CA 94105

(415) 393-8200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.    ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.    ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨   Accelerated filer   ¨    Non-accelerated filer   x   Smaller reporting company  ¨
  (Do not check if a smaller reporting company)

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities

to be registered

 

Proposed maximum
aggregate offering

price(1)(2)

 

Amount of

registration fee

Common Stock, $0.001 par value per share

  $75,000,000   $10,230

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
(2) Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated February 13, 2013.

             Shares

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of Marin Software Incorporated.

Marin Software is offering                  of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional                  shares. Marin Software will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . Marin Software intends to list the common stock on the New York Stock Exchange under the symbol “MRIN.”

 

 

We are an “emerging growth company” as defined under federal securities laws. See “Risk Factors” on page 11 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                    

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to Marin Software

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

To the extent that the underwriters sell more than                  shares of common stock, the underwriters have the option to purchase up to an additional                  shares from Marin Software and the selling stockholders at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2013.

 

Goldman, Sachs & Co.   Deutsche Bank Securities
    UBS Investment Bank   Stifel    
Wells Fargo Securities

 

 

Prospectus dated                     , 2013


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     34   

Industry and Market Data

     35   

Use of Proceeds

     36   

Dividend Policy

     36   

Capitalization

     37   

Dilution

     39   

Selected Consolidated Financial Data

     41   

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

     43   

Business

     72   

Management

     93   

Executive Compensation

     101   

Certain Relationships and Related Party Transactions

     110   

Principal and Selling Stockholders

     114   

Description of Capital Stock

     117   

Shares Eligible for Future Sale

     122   

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock

     124   

Underwriting

     129   

Legal Matters

     133   

Experts

     133   

Where You Can Find Additional Information

     133   

Index to Consolidated Financial Statements

     F-1   

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. Before deciding to invest in shares of our common stock, you should read this summary together with the more detailed information, including our consolidated financial statements and the related notes, provided elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors,” our consolidated financial statements and the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus.

Marin Software Incorporated

Our Business

We provide a leading cloud-based digital advertising management platform that enables advertisers and agencies to improve financial performance, realize efficiencies and time savings, and make better business decisions. Our Revenue Acquisition Management platform is an analytics, workflow, and optimization solution for marketing professionals, enabling them to effectively manage their digital advertising spend across search, display, social and mobile advertising channels. Our solution is designed to help our customers:

 

  Ÿ  

measure the effectiveness of their advertising campaigns through our proprietary reporting and analytics capabilities;

 

  Ÿ  

manage and execute campaigns through our intuitive user interface and underlying technology that streamlines and automates key functions, such as ad creation and bidding, across multiple publishers and channels; and

 

  Ÿ  

optimize campaigns across multiple publishers and channels in real time based on market and business data to achieve desired revenue outcomes using our predictive bid management technology.

Advertisers are increasingly focused on performance-based marketing and are seeking ways to gather, analyze and leverage data about the effectiveness of digital advertising to run more impactful and targeted campaigns. Our robust and flexible platform integrates with leading publishers, such as Baidu, Bing, Facebook, Google, Yahoo! and Yahoo! Japan, as well as leading web analytics and ad-serving solutions, and key enterprise applications to enable marketers to measure the return on investment of their marketing programs.

Our platform serves as a system-of-record for advertising performance, revenue and conversion data and allows advertisers to correlate advertising spend to subsequent revenue outcomes or business events. Through a single, intuitive interface, designed to meet the daily workflow requirements of online marketers, we enable our customers to simultaneously run large-scale digital advertising campaigns across multiple publishers and channels, making it easy for marketers to create, publish, modify and optimize campaigns in real time. Our predictive bid management and optimization technology also allows advertisers to forecast outcomes and optimize campaigns across multiple publishers and channels to achieve their business goals. Our optimization technology enables advertisers to easily and rapidly increase spend on those campaigns, publishers and channels that are performing while reducing investment in those that are not.

In December 2012, our customers collectively managed $                   in annualized advertising spend on our platform and we had                    active advertisers using our solution globally across a wide

 

 

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range of industries. We define an active advertiser as an advertiser from whom we recognized revenues in excess of $2,000 in the last month of a quarter. We market and sell our solutions to advertisers directly and through leading advertising agencies. We generate revenues from subscription contracts under which we charge fees generally based upon the amount of advertising spend that our customers manage through our platform. We have achieved 14 consecutive quarters of revenue growth. For 2009, 2010 and 2011, and for the nine months ended September 30, 2012, our revenues were $7.5 million, $19.0 million, $36.1 million and $42.5 million, representing period-over-period growth of 186%, 152%, 90% and 72%, respectively. We had net losses of $9.7 million in 2009, $10.9 million in 2010, $17.4 million in 2011 and $19.2 million for the nine months ended September 30, 2012.

Industry Overview

As audiences have increased their time spent online, the ability to acquire revenue through digital channels has emerged as a strategic priority for marketers. A growing number of consumers and businesses worldwide are relying on the Internet, social media and mobile devices to research products and services and make purchases. These trends are causing an ongoing shift in advertising budgets to digital channels as enterprises increasingly compete to acquire customers and revenues online. This competition for revenue acquisition is driving a need for a new category of enterprise software to help advertisers effectively measure, manage and optimize their digital advertising spend.

Global spend on advertising is expected to grow from $480 billion in 2012 to $619 billion in 2017, according to Magna Global. Rapid growth in online activity and engagement is resulting in a significant and ongoing shift in advertising spend to digital channels with global spend on digital advertising expected to grow from $98 billion in 2012 to $174 billion in 2017, according to Magna Global.

The evolution of a multi-channel and multi-device digital advertising ecosystem creates opportunities for advertisers to more effectively target and reach specific audiences to optimize revenue acquisition and other desired business results. However, as digital advertising becomes increasingly competitive and complex, digital advertisers are faced with several key challenges, such as the need to quickly and efficiently respond to changing market conditions and consistently deliver desired business results across multiple channels, publishers and devices. Existing approaches to digital advertising management are limited in scope and effectiveness. These approaches include: publisher tools, which only manage workflow on a particular publisher platform; spreadsheets, which are not scalable; proprietary internal systems, which are increasingly complex and expensive to build and maintain; and bid management tools, which lack end-to-end workflow and analytics capabilities.

The inadequacy of these existing approaches, coupled with a growing shift in budgets to digital advertising and demand for performance-based marketing, has created the need for a new category of enterprise-class digital advertising management solutions. This category of solutions, which we refer to as Revenue Acquisition Management, enables businesses to intelligently and efficiently measure, manage, and optimize their digital advertising spend to achieve desired business results. We believe there is significant demand for Revenue Acquisition Management solutions among advertisers worldwide.

Our Solution

We believe our Revenue Acquisition Management platform enables advertisers to significantly improve their ability to acquire revenue through digital advertising campaigns.

 

 

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Business Benefits

Financial lift.    As a result of optimization of advertising spend, efficiencies in workflow and better decision making, our customers are able to create and execute successful campaigns that lead to increased revenue and other desired business outcomes. Based on our internal customer surveys, we believe that our customers typically realize financial lift from using our platform through a variety of means such as increased volumes of revenues or leads, higher profits, improved advertising return on investment, and lower costs of customer acquisition.

Efficiencies and time savings.    Utilizing our solution, customers are able to automate manual and time-intensive tasks such as reporting, analysis, campaign creation and bidding, allowing advertisers to focus on campaign strategy, expansion and optimization. In June 2012, we conducted an internal survey of employees of our customers that had used our platform at least four times in the last 365 days. Of the 250 responses, representing 149 unique customers, half of the respondents reported time savings of 25% or greater from using our solution.

Better business decision making.    Our Revenue Acquisition Management platform enables advertisers to manage campaigns to their business objectives by identifying campaign elements for segmentation and analysis in order to easily categorize, filter and compare data sets that are important to their business. In addition, through our proprietary recommendation engine, we are able to proactively suggest modifications to optimize marketing campaigns.

Key Strengths

Robust and flexible integration.    Our platform is architected to enable our customers to aggregate and analyze key data from their digital advertising campaigns and business information systems, creating a system-of-record that marketers can use to attribute revenue to specific marketing spend, gain visibility into the path to purchase, and assess customer lifetime value.

Big data analytics.    Our platform provides sophisticated analytics functionality that can parse through massive and growing data sets to enable advertisers to understand their return on advertising investment, easily identify outliers and trends, and take appropriate action.

Real-time, cross-publisher campaign management.    Our solution enables customers to simultaneously run large-scale digital advertising campaigns across multiple publishers and channels, making it easy for marketers to create, publish, modify and optimize campaigns in real time using a single interface.

Predictive bid management and optimization.    Our bid management technology allows marketers to optimize campaigns across multiple publishers and channels to achieve their business goals, such as increasing revenues or decreasing the cost per lead or cost per customer acquired. Advertisers can also forecast and adjust outcomes using our predictive bidding technology.

Intuitive interface offering visibility and control.    Our intuitive interface is designed to simplify the daily workflow requirements of online marketers, including managing multiple campaigns, performing real-time analytics and collaborating with multi-user teams.

Experienced team committed to customer success.    We have a global team experienced in the areas of digital advertising and enterprise software, which enables us to provide effective onboarding, best-practice advice and reliable and responsive technology support to our customers.

 

 

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Highly-scalable and extensible cloud-based architecture.    We deliver our cloud-based platform using a purpose-built technology foundation designed to support enterprise-scale data sets and transaction volumes. Our technology allows customers to aggregate, store and process large amounts of data while maintaining high application availability and responsiveness.

Our Growth Strategy

Our goal is to extend our lead in and grow the Revenue Acquisition Management category. Key elements of our growth strategy include:

Enhancing our leadership position by innovating and expanding our platform.    We intend to continue to enhance the value of our platform by developing new functionality, optimizing our feature set and platform capabilities, and expanding support for additional publishers and data sources.

Acquiring new advertisers.    We intend to continue to make investments to acquire new advertisers. We intend to expand our sales organization by adding sales executives globally and plan to continue to market our platform to new advertisers and agencies.

Expanding within our existing advertiser base.    We believe that we can capture additional advertising spend on our platform from our existing advertiser base by expanding our current capabilities as well as offering new features and functionality, providing best practices support and demonstrating our ability to help our advertisers obtain financial lift, time savings and better business results.

Further penetrating display, social and mobile opportunities.    We believe that we can increase advertising spend on our platform as mobile, social and display channels grow in scale and complexity. We intend to continue to optimize our solution to handle unique complexities associated with display, social and mobile advertising channels.

Continuing to expand internationally.    We plan to continue to grow our international business by supporting additional regional publishers, expanding our global sales team and working with leading agencies and advertisers worldwide.

Growing our partner ecosystem and selectively pursuing acquisitions.    We intend to further develop our partner ecosystem with leading publishers, technology partners, advertising agencies, and other sales channel partners. In addition, we intend to selectively pursue acquisitions of complementary businesses and technologies.

Selected Risks Associated with Our Business

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. Some of these risks include:

 

  Ÿ  

We have a history of losses and we may not achieve or sustain profitability in the future.

 

  Ÿ  

Our limited operating history makes it difficult to evaluate our current business and future prospects.

 

  Ÿ  

Our usage-based pricing model makes it difficult to accurately forecast revenues.

 

  Ÿ  

The market for digital advertising management solutions is relatively new and dependent on growth in digital advertising channels. If this market develops more slowly or differently than we expect, our business, growth prospects and financial condition would be adversely affected.

 

  Ÿ  

If we are unable to maintain our relationships with, and access to, publishers, our business will suffer.

 

 

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  Ÿ  

Our growth depends in part on the success of our relationships with advertising agencies.

 

  Ÿ  

We may not be able to compete successfully against current and future competitors.

 

  Ÿ  

Our business depends on our customers’ continued willingness to manage advertising spend on our platform.

 

  Ÿ  

We incur upfront costs associated with onboarding advertisers to our platform and may not recoup our investment if we do not maintain the advertiser relationship over time.

 

  Ÿ  

Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control. After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate,    % of our outstanding common stock.

Corporate Information

We were incorporated in the State of Delaware in March 2006. Our principal executive offices are located at 123 Mission Street, 25th Floor, San Francisco, California 94105, and our telephone number is (415) 399-2580. Our website address is www.marinsoftware.com. The information contained on, or that can be accessed through, our website is not a part of this prospectus. Investors should not rely on any such information in deciding whether to purchase our common stock.

Unless the context indicates otherwise, as used in this prospectus, the terms “Company,” “Marin Software,” “we,” “us” and “our” refer to Marin Software Incorporated, a Delaware corporation, and its subsidiaries taken as a whole, unless otherwise noted.

We have registered the trademark “Marin” in the European Union and have a pending trademark application for the trademark “Marin” pending with the United States Patent and Trademark Office. The Marin Software logo and all product names are our common law trademarks. All other service marks, trademarks and tradenames appearing in this prospectus are the property of their respective owners.

 

 

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THE OFFERING

 

Shares of common stock offered by us

  

                 shares

Shares of common stock offered by the selling stockholders

  

                 shares

        Total shares of common stock offered

  

                 shares

Over-allotment option to be offered by us

  

                 shares

Over-allotment option to be offered by the selling stockholders

  

                 shares

Shares of common stock to be outstanding immediately after this offering

  

                 shares (                 shares if the over-allotment option is exercised in full)

Use of proceeds

   We intend to use the net proceeds to us for working capital and other general corporate purposes. We may use a portion of the proceeds to acquire complementary businesses or technologies. We will not receive any of the proceeds from the shares of common stock to be sold by the selling stockholders. See “Use of Proceeds.”

Risk factors

   You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed New York Stock Exchange symbol

  

“MRIN”

The number of shares of our common stock to be outstanding following this offering is based on 23,266,995 shares of our common stock outstanding as of September 30, 2012 and excludes:

 

  Ÿ  

4,273,447 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2012, with a weighted average exercise price of $3.72 per share;

 

  Ÿ  

211,000 shares of common stock issuable upon the exercise of options granted between October 1, 2012 and December 10, 2012, with an exercise price of $12.15 per share;

 

  Ÿ  

87,692 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2012, with a weighted average exercise price of $2.73 per share;

 

  Ÿ  

309,447 shares of our common stock that are issued but were subject to a right of repurchase by us as of September 30, 2012 and therefore are not included in stockholders’ (deficit) equity; and

 

  Ÿ  

                 shares of our common stock reserved for future issuance under our equity compensation plans, consisting of (a) 3,263 shares of our common stock reserved for issuance under our 2006 Equity Incentive Plan as of September 30, 2012, (b)                  shares of our common stock that will be reserved for issuance under our 2013 Equity Incentive Plan, and (c)                  shares of our common stock reserved for issuance under our 2013 Employee Stock Purchase Plan. On the date of this prospectus, any remaining shares available for issuance under our 2006 Equity Incentive Plan will be added to the shares reserved under our 2013 Equity Incentive Plan and we will cease granting awards under the 2006 Equity Incentive Plan.

 

 

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Our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation—Employee Benefit Plans.”

Unless otherwise noted, the information in this prospectus reflects and assumes the following:

 

  Ÿ  

the automatic conversion of all outstanding shares of our convertible preferred stock, including shares of our Series F-1 convertible preferred stock issued in November 2012, into an aggregate of 18,752,943 shares of our common stock effective immediately prior to the completion of this offering;

 

  Ÿ  

the filing of our restated certificate of incorporation and the effectiveness of our restated bylaws, which will occur upon the completion of this offering;

 

  Ÿ  

no exercise of outstanding options or warrants; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase up to an additional                  shares of our common stock from us in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables present our summary historical financial data. You should read this information in conjunction with “Selected Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

We derived the summary consolidated statements of operations data for 2009, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the unaudited consolidated statements of operations data for the nine months ended September 30, 2011 and 2012, and the unaudited consolidated balance sheet data as of September 30, 2012 from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of the results to be expected in the future, and the results for the nine months ended September 30, 2012 are not necessarily indicative of operating results to be expected for the full year ending December 31, 2012 or any other period.

 

    Years Ended December 31,     Nine Months
Ended
September 30,
 
        2009             2010             2011         2011     2012  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

         

Revenues

  $ 7,527      $ 19,005      $ 36,121      $ 24,711      $ 42,507   

Cost of revenues(1)

    5,101        11,040        18,691        13,523        17,728   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    2,426        7,965        17,430        11,188        24,779   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Sales and marketing(1)

    6,146        8,884        20,357        14,474        23,615   

Research and development(1)

    3,410        4,568        7,071        5,027        9,651   

General and administrative(1)

    2,171        5,195        6,679        4,132        10,001   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    11,727        18,647        34,107        23,633        43,267   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (9,301     (10,682     (16,677     (12,445     (18,488

Interest expense, net

    (212     (230     (378     (276     (349

Other income (expenses), net

    (92     78        (229     (143     (222
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (9,605     (10,834     (17,284     (12,864     (19,059

Provision for income taxes

    (103     (23     (139     (96     (167
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (9,708   $ (10,857   $ (17,423   $ (12,960   $ (19,226

Redemption of preferred stock in connection with the Series D financing and deemed dividend

    —          (1,033     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

  $ (9,708   $ (11,890   $ (17,423   $ (12,960   $ (19,226
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share available to common stockholders (basic and diluted)(2)

  $ (2.74   $ (3.27   $ (4.29   $ (3.26   $ (4.46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

    3,540        3,639        4,058        3,978        4,312   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share available to common stockholders, basic and diluted(2)

      $ (0.96     $ (0.84
     

 

 

     

 

 

 

Weighted average pro forma shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted(2)

        18,108          22,809   
     

 

 

     

 

 

 

Other Financial Data:

         

Adjusted EBITDA(3)

  $ (9,100   $ (8,715   $ (15,208   $ (11,408   $ (13,367

(footnotes on next page)

 

 

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(1) Stock-based compensation included in the consolidated statements of operations data above was allocated as follows:

 

     Years Ended December 31,      Nine Months Ended
September 30,
 
         2009              2010              2011              2011              2012      
     (in thousands)  

Cost of revenues

   $ 66       $ 90       $ 165       $ 119       $ 292   

Sales and marketing

     81         66         226         162         817   

Research and development

     26         58         163         120         648   

General and administrative

     19         1,172         143         82         2,490   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 192       $ 1,386       $ 697       $ 483       $ 4,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 12 of consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of basic and diluted net loss per share available to common stockholders and pro forma net loss per share available to common stockholders.
(3) We define Adjusted EBITDA as net loss, adjusted for stock-based compensation expense, depreciation and amortization, capitalized internal-use software development costs, interest expense, net, provision for income taxes and other income (expenses), net. Adjusted EBITDA is a financial measure that is not calculated in accordance with U.S. generally accepted accounting principles (GAAP).

 

     As of September 30, 2012  
     Actual     Pro
Forma(1)
     Pro Forma
As
Adjusted(2)
 
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 16,990      $ 36,890       $                

Property and equipment, net

     8,479        8,479      

Total assets

     40,300        60,200      

Debt, current and long-term

     10,185        10,185      

Convertible preferred stock, net of issuance costs

     85,808        —        

Total stockholders’ (deficit) equity

     (66,760     39,272      

 

(1) The pro forma consolidated balance sheet data as of September 30, 2012 reflects (i) the issuance of 1,478,064 shares of Series F-1 preferred stock and receipt of the related net proceeds of $19.9 million, (ii) the automatic conversion of all our outstanding convertible preferred stock into common stock upon the completion of this offering and (iii) the conversion of all outstanding convertible preferred stock warrants into common stock warrants.
(2) The pro forma as adjusted column in the summary consolidated balance sheet data above reflects the effect of our sale of shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

Adjusted EBITDA

Adjusted EBITDA should not be considered as an alternative to net loss, operating loss or any other measure of financial performance calculated and presented in accordance with GAAP. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. You are encouraged to evaluate these adjustments and the reason we consider them appropriate.

We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons:

 

  Ÿ  

Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items, such as stock-based compensation expense,

 

 

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depreciation and amortization, capitalized internal-use software development costs, interest expense, net, provision for income taxes and other income or expense, net, that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

 

  Ÿ  

Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance; and

 

  Ÿ  

Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

We understand that, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:

 

  Ÿ  

Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

  Ÿ  

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs or contractual commitments;

 

  Ÿ  

Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense; and

 

  Ÿ  

Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated:

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
     (in thousands)  

Net loss

   $ (9,708   $ (10,857   $ (17,423   $ (12,960   $ (19,226

Depreciation and amortization

     382        1,016        1,800        1,268        2,148   

Interest expense, net

     212        230        378        276        349   

Provision for income taxes

     103        23        139        96        167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     (9,011     (9,588     (15,106     (11,320     (16,562

Other (income) expenses, net

     92        (78     229        143        222   

Capitalized internal-use software development costs

     (373     (435     (1,028     (714     (1,274

Stock-based compensation

     192        1,386        697        483        4,247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (9,100   $ (8,715   $ (15,208   $ (11,408   $ (13,367
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of may also become important factors that adversely affect our business. If any of the following risks actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In that event, the market price of our stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business

We have a history of losses and we may not achieve or sustain profitability in the future.

We have incurred significant losses in each fiscal year since our incorporation in 2006. We experienced net losses of $17.4 million during 2011 and $19.2 million during the nine months ended September 30, 2012. As of September 30, 2012, we had an accumulated deficit of $70.1 million. The losses and accumulated deficit were due to the substantial investments we made to grow our business and acquire customers. We anticipate that our cost of revenues and operating expenses will increase substantially in the foreseeable future as we continue to invest to grow our business and acquire customers and develop our platform and new functionality. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these higher expenses. Many of our efforts to generate revenues from our business are new and unproven, and any failure to increase our revenues or generate revenues from new solutions could prevent us from attaining or increasing profitability. Furthermore, to the extent we are successful in increasing our customer base, we could also incur increased losses because costs associated with entering into customer contracts are generally incurred up front, while customers are billed over the term of the contract generally through our usage-based pricing model. We do not expect to be profitable in the foreseeable future and we cannot be certain that we will be able to attain profitability on a quarterly or annual basis, or if we do, that we will sustain profitability.

Our limited operating history makes it difficult to evaluate our current business and future prospects.

Although we began our operations in March 2006, we did not begin generating substantial revenues until 2009. Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries, including challenges in forecasting accuracy, determining appropriate investments of our limited resources, market acceptance of our existing and future solutions, competition from established companies with greater financial and technical resources, acquiring and retaining customers, managing customer deployments and developing new solutions. Our current operations infrastructure may require changes in order for us to achieve profitability and scale our operations efficiently. For example, we may need to automate portions of our solution to decrease our costs, ensure our marketing infrastructure is designed to drive highly qualified leads cost effectively and implement changes in our sales model to improve the predictability of our sales and reduce our sales cycle. If we fail to implement these changes on a timely basis or are unable to implement them due to factors beyond our control, our business may suffer. We cannot assure you that we will be successful in addressing these and other challenges we may face in the future.

 

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Our usage-based pricing model makes it difficult to evaluate our current business and future prospects.

We have a usage-based pricing model where most of our fees are calculated as a percentage of customers’ advertising spend managed on our platform. This pricing model makes it difficult to accurately forecast revenues because our customers’ advertising spend managed by our platform may vary from month to month based on the variety of industries in which our advertisers operate, the seasonality of those industries and fluctuations in our customers’ advertising budgets or other factors. Our contracts with our direct advertiser customers generally contain a minimum monthly fee, which is generally one-half of our estimated monthly revenues from the customer at the time the contract is signed, and, as a result, the monthly minimum may not be a good indicator of our revenues from that customer. In addition, advertisers that use our platform through our agency customers typically do not have a minimum monthly spend amount or a minimum term during which they must use our platform and, as a result, the ability to forecast revenues from these advertisers is difficult. Additionally, if we overestimate usage, we may incur additional expenses in adding infrastructure, without a commensurate increase in revenues, which would harm our gross margins and other operating results.

The market for digital advertising management solutions is relatively new and dependent on growth in various digital advertising channels. If this market develops more slowly or differently than we expect, our business, growth prospects and financial condition would be adversely affected.

The market for digital advertising management solutions such as ours is relatively new and these solutions may not achieve or sustain high levels of demand and market acceptance. While search and display advertising has been used successfully for several years, marketing via new digital advertising channels such as mobile and social media is not as well established. The future growth of our business could be constrained by both the level of acceptance and expansion of emerging digital advertising channels, as well as the continued use and growth of existing channels, such as search and display advertising. Even if these channels become widely adopted, advertisers and agencies may not make significant investments in solutions such as ours that help them manage their digital advertising spend across publisher platforms and advertising channels. It is difficult to predict customer adoption rates, customer demand for our platform, the future growth rate and size of the digital advertising management solutions market or the entry of competitive solutions. Any expansion of the market for digital advertising management solutions depends on a number of factors, including the growth of the digital advertising market, the growth of social and mobile as advertising channels and the cost, performance and perceived value associated with digital advertising management solutions. If digital advertising management solutions do not achieve widespread adoption, or there is a reduction in demand for digital advertising caused by weakening economic conditions, decreases in corporate spending or otherwise, it could result in reduced usage, which could decrease revenues or otherwise adversely affect our business.

If we are unable to maintain our relationships with, and access to, publishers, our business will suffer.

We currently depend on relationships with various publishers, including Baidu, Bing, Facebook, Google, Yahoo! and Yahoo! Japan. Our subscription services interface with these publishers’ platforms through application programming interfaces (API), such as the Google AdWords API. We are subject to the publishers’ standard API terms and conditions, which govern the use and distribution of data from these publishers’ platforms. Our business significantly depends on having access to these APIs, particularly the Google AdWords API, which the substantial majority of our customers use, on commercially reasonable terms and our business would be harmed if any of these publishers discontinue or limit access to their platforms, modify their terms of use or other policies or place additional restrictions on us as API users, or charge API license fees for API access. Moreover, some

 

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of these publishers, such as Google, market competitive solutions for their platforms. Because the publishers control their APIs, they may develop competitive offerings that are not subject to the limits imposed on us through the API terms and conditions. Currently, restrictions in these API agreements limit our ability to implement certain functionality, require us to implement functionality in a particular manner or require us to implement certain required minimum functionality, causing us to devote development resources to implement certain functionality that we would not otherwise include in our subscription services and to incur costs for personnel to provide services to implement functionality that we are prohibited from automating. Publishers update their API terms of use from time to time and new versions of these terms could impose additional restrictions on us. In addition, publishers continually update their APIs, which requires us to modify our software to accommodate these changes. Any of these outcomes could cause demand for our products to decrease, our research and development costs to increase, and our results of operations and financial condition to be harmed.

Our growth depends in part on the success of our relationships with advertising agencies.

Our future growth will depend, in part, on our ability to enter into successful relationships with advertising agencies. Identifying agencies and negotiating and documenting relationships with them requires significant time and resources. These relationships may not result in additional customers or enable us to generate significant revenues. Our contracts for these relationships are typically non-exclusive and do not prohibit the agency from working with our competitors or from offering competing services. We generally bill agencies for their customers’ use of our platform, but the agency’s customer has no direct contractual commitment to make payment to us. Furthermore, some of these agency contracts include provisions whereby the agency is not liable for making payment to us for our subscription services if the agency does not receive a corresponding payment from its client on whose behalf the subscription services were rendered. These provisions may result in longer collections periods or our inability to collect payment for some of our subscription services. If we are unsuccessful in establishing or maintaining our relationships with these agencies on commercially reasonable terms, or if these relationships are not profitable for us, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results would suffer.

We may not be able to compete successfully against current and future competitors.

The overall market for digital advertising management solutions is rapidly evolving, highly competitive, complex, fragmented, and subject to changing technology and shifting customer needs. We face significant competition in this market and we expect competition to intensify in the future. We currently compete with large, well-established companies, such as Adobe Systems Incorporated and Google Inc. (through its wholly-owned subsidiary DoubleClick), and privately-held companies, such as Acquisio Inc., which focuses solely on agencies, and Kenshoo Ltd. We also compete with in-house proprietary tools and custom solutions, including spreadsheets. Increased competition may result in reduced pricing for our solutions, longer sales cycles or a decrease of our market share, any of which could negatively affect our revenues and future operating results and our ability to grow our business.

A number of competitive factors could cause us to lose potential sales or to sell our solutions at lower prices or at reduced margins, including, among others:

 

  Ÿ  

potential customers may choose to develop or continue to use internal solutions rather than paying for our solutions;

 

  Ÿ  

companies may enter our market by expanding their platforms or acquiring a competitor;

 

  Ÿ  

some of our competitors, such as Adobe and Google, have greater financial, marketing and technical resources than we do, allowing them to leverage a larger installed customer base,

 

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adopt more aggressive pricing policies, and devote greater resources to the development, promotion and sale of their products and services than we can; and

 

  Ÿ  

companies marketing search, social, display, mobile or web analytics services could bundle digital advertising management solutions or offer such products at a lower price as part of a larger product sale.

We cannot assure you that we will be able to compete successfully against current and future competitors. If we cannot compete successfully, our business, results of operations and financial condition could be negatively impacted.

Our business depends on our customers’ continued willingness to manage advertising spend on our platform.

In order for us to improve our operating results, it is important that our customers continue to manage their advertising spend on our platform, increase their usage and also purchase additional solutions from us. In the case of our direct advertiser customers, we offer our solutions primarily through subscription contracts and generally bill customers over the related subscription period, which is typically in the range of six months to one year. During the term of their contracts, our direct advertiser customers generally have no obligation to maintain or increase their advertising spend on our platform beyond a specified minimum monthly fee, which is typically set at the time the contract is signed and is half of the monthly amount we anticipate the customer will spend. Our direct advertiser customers have no renewal obligation after the initial or then-current renewal subscription period expires, and even if customers renew contracts, they may decrease the level of their digital advertising spend managed through our platform, resulting in lower revenues from that customer. Advertisers that we serve through our arrangements with our advertising agencies generally do not have any contractual commitment to use our platform. Our customers’ usage may decline or fluctuate as a result of a number of factors, including, but not limited to, their satisfaction with our platform and our customer support, the frequency and severity of outages, the pricing of our, or competing, solutions, the effects of global economic conditions, and reductions in spending levels or changes in our customers’ strategies regarding digital advertising. Due to our limited historical experience, we may not be able to accurately predict future usage trends. If our customers renew on less favorable terms or reduce their advertising spend on our platform, our revenues may grow more slowly than expected or decline.

We incur upfront costs associated with onboarding advertisers to our platform and may not recoup our investment if we do not maintain the advertiser relationship over time.

Our operating results may be negatively affected if we are unable to recoup our upfront costs for onboarding new advertisers to our platform. Upfront costs when adding new advertisers generally include sales commissions for our sales force, expenses associated with entering customer data into our platform and other implementation-related costs. Because our customers, including direct advertisers and agencies, are billed over the term of the contract, if new customers sign contracts with short initial subscription periods and do not renew their subscriptions, or otherwise do not continue to use our platform to a level that generates revenues in excess of our upfront expenses, our operating results could be negatively impacted. In cases in which the implementation process is particularly complex, the revenues resulting from the customer under our typical six-month or one-year contract may not cover the upfront investment, so if a significant number of these customers do not renew their contracts, it could negatively affect our operating results.

 

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Because we generally bill our customers over the term of the contract, near term decline in new or renewed subscriptions may not be reflected immediately in our operating results.

Most of our revenues in each quarter are derived from contracts entered into with our customers during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be fully reflected in our revenues for that quarter. Such declines, however, would negatively affect our revenues in future periods and the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. In addition, we may be unable to adjust our cost structure rapidly, or at all, to take account of reduced revenues. Our subscription model also makes it difficult for us to rapidly increase our total revenues through additional sales in any period, as revenues from new customers must be earned over the applicable subscription term based on the value of their monthly advertising spend.

We have been dependent on our customers’ use of search advertising. Any decrease in the use of search advertising or our inability to further penetrate mobile, social and display advertising channels would harm our business, growth prospects, operating results and financial condition.

Historically, our customers have primarily used our solutions for managing their search advertising, including mobile search advertising, and the substantial majority of our revenues are derived from advertisers that use our platform to manage their search advertising. We expect that search advertising will continue to be the primary channel used by our customers for the foreseeable future. Should our customers lose confidence in the value or effectiveness of search advertising, the demand for our solutions may decline. In addition, our failure to achieve market acceptance of our solution for the management of mobile, social and display advertising spend would harm our growth prospects, operating results and financial condition.

Our sales cycle can be long and unpredictable and require considerable time and expense, which may cause our operating results to fluctuate.

The sales cycle for our solutions, from initial contact with a potential lead to contract execution and implementation, varies widely by customer, but is typically one to nine months. Some of our customers undertake a significant evaluation process that frequently involves not only our solutions but also those of our competitors, which has in the past resulted in extended sales cycles. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our platform. In addition, we offer an initial term, typically of a few months in duration, to new customers who may terminate their subscription at any time during this initial period before the fixed term contract commences. We have no assurance that the substantial time and money spent on our sales efforts will produce any sales. If our sales efforts result in a new customer subscription, the customer may terminate its subscription during the initial period, after we have incurred the expenses associated with entering the customer’s data in our platform and related training and support. If sales expected from a customer are not realized in the time period expected or not realized at all, or if a customer terminates during the initial period, our business, operating results and financial condition could be adversely affected.

Material defects or errors in our software platform could harm our reputation, result in significant costs to us and impair our ability to sell our subscription services.

Our customers collectively managed $             in annualized advertising spend on our platform in December 2012. The software applications underlying our subscription services are inherently complex and may contain material defects or errors, which may cause disruptions in availability, misallocation of advertising spend or other performance problems. Any such errors, defects, disruptions in service or other performance problems with our software platform could negatively impact our customers’ businesses or the success of their advertising campaigns and cause harm to our reputation. If we have

 

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any errors, defects, disruptions in service or other performance problems with our software platform, customers could elect not to renew or reduce their usage or delay or withhold payment to us, which could result in an increase in our provision for doubtful accounts or an increase in the length of collection cycles for accounts receivable. Errors, defects, disruptions in service or other performance problems could also result in customers making warranty or other claims against us, our giving credits to our customers toward future advertising spend or costly litigation. As a result, material defects or errors in our platform could have a material adverse impact on our business and financial performance.

The costs incurred in correcting any material defects or errors in our software platform may be substantial and could adversely affect our operating results. After the release of new versions of our software, defects or errors may be identified from time to time by our internal team and by our customers. We implement bug fixes and upgrades as part of our regularly scheduled system maintenance. If we do not complete this maintenance according to schedule or if customers are otherwise dissatisfied with the frequency and/or duration of our maintenance services, customers could elect not to renew, or delay or withhold payment to us, or cause us to issue credits, make refunds or pay penalties.

We derive our revenues from a single software platform and any factor adversely affecting subscriptions to our platform could harm our business and operating results.

We derive our revenues from sales of a single software platform. As such, any factor adversely affecting subscriptions to our platform, including product release cycles, market acceptance, product competition, performance and reliability, reputation, price competition, and economic and market conditions, could harm our business and operating results.

We use a single third-party data center to deliver our services. Any disruption of service at this facility could harm our business.

We manage our services and serve substantially all of our customers from a single third-party data center facility. While we control the actual computer, network and storage systems upon which our platform runs, and deploy them to the data center facility, we do not control the operation of the facility. The owner of the facility has no obligation to renew the agreement with us on commercially reasonable terms, or at all. If we are unable to renew the agreement on commercially reasonable terms, we may be required to transfer to a new facility or facilities, and we may incur significant costs and possible service interruption in connection with doing so.

The facility is vulnerable to damage or service interruption resulting from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. Moreover, we have not implemented a disaster recovery capability whereby we maintain a back-up copy of our software platform permitting us to immediately switch over to the back-up software platform in the event of damage or service interruption at our data center. The occurrence of a natural disaster or an act of terrorism, any outages or vandalism or other misconduct, or a decision to close the facility without adequate notice or other unanticipated problems could result in lengthy interruptions in our services.

Any changes in service levels at the facility or any errors, defects, disruptions or other performance problems at or related to the facility that affect our services could harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenues, subject us to potential liability, or result in reduced usage of our platform. In addition, some of our customer contracts require us to issue credits for downtime in excess of certain levels and in some instances give our customers the ability to terminate their subscriptions.

 

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We also depend on third-party Internet-hosting providers and continuous and uninterrupted access to the Internet through third-party bandwidth providers to operate our business. If we lose the services of one or more of our Internet-hosting or bandwidth providers for any reason or if their services are disrupted, for example due to viruses or “denial-of-service” or other attacks on their systems, or due to human error, intentional bad acts, power loss, hardware failures, telecommunications failures, fires, wars, terrorist attacks, floods, earthquakes, hurricanes, tornadoes or similar events, we could experience disruption in our ability to offer our solutions or we could be required to retain the services of replacement providers, which could increase our operating costs and harm our business and reputation.

If we cannot efficiently implement our solutions for customers, we may lose customers.

Our customers have a variety of different data formats, enterprise applications and infrastructure and our platform must support our customers’ data formats and integrate with complex enterprise applications and infrastructures. If our platform does not currently support a customer’s required data format or appropriately integrate with a customer’s applications and infrastructure, then we must configure our platform to do so, which increases our expenses. Additionally, we do not control our customers’ implementation schedules. As a result, as we have experienced in the past, if our customers do not allocate internal resources necessary to meet their implementation responsibilities or if we face unanticipated implementation difficulties, the implementation may be delayed. Further, in the past, our implementation capacity has at times constrained our ability to successfully implement our solutions for our customers in a timely manner, particularly during periods of high demand. If the customer implementation process is not executed successfully or if execution is delayed, we could incur significant costs, customers could become dissatisfied and decide not to increase usage of our platform, not to use our platform beyond an initial period prior to their term commitment or, in some cases, revenue recognition could be delayed. In addition, competitors with more efficient operating models with lower implementation costs could penetrate our customer relationships.

Additionally, large customers may request or require specific features or functions unique to their particular business processes, which increase our upfront investment in sales and deployment efforts and the revenues resulting from the customers under our typical contract length may not cover the upfront investments. If prospective large customers require specific features or functions that we do not offer, then the market for our solution will be more limited and our business could suffer. In addition, supporting large customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. If we are unable to address the needs of these customers in a timely fashion or further develop and enhance our solution, these customers may not renew their subscriptions, seek to terminate their relationship with us, renew on less favorable terms, or reduce their advertising spend on our platform. If any of these were to occur, our revenues may decline and our operating results could be adversely affected.

If we are unable to maintain or expand our sales and marketing capabilities, we may not be able to generate anticipated revenues.

Increasing our customer base and achieving broader market acceptance of our software platform will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We expect to be substantially dependent on our sales force to obtain new customers. We currently plan to expand our sales team in order to increase revenues from new and existing customers and to further penetrate our existing markets and expand into new markets. Our solutions require a sophisticated sales force with specific sales skills and technical knowledge. Competition for qualified sales personnel is intense, and we may not be able to retain our existing sales personnel or attract, integrate or retain sufficient highly qualified sales personnel.

 

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Our ability to achieve revenue growth in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel. These new employees require significant training and experience before they achieve full productivity. For internal planning purposes, we assume that it will take approximately three months before a newly hired sales representative is fully trained and productive in selling our solutions. This amount of time may be longer for sales personnel focused on new geographies or specific market segments. As a result, the cost of hiring and carrying new representatives cannot be offset by the revenues they produce for a significant period of time. Our recent hires and planned hires may not become productive as quickly as we would like, and we may not be able to hire or retain sufficient numbers of qualified individuals in the markets where we do business. Our business will be seriously harmed if these expansion efforts do not work as planned or generate a corresponding significant increase in revenues.

Any failure to offer high-quality technical support services may adversely affect our relationships with our customers and harm our financial results.

Our customers depend on our support organization to resolve any technical issues relating to our solutions. In addition, our sales process is highly dependent on the quality of our solutions, our business reputation and on strong recommendations from our existing customers. Any failure to maintain high-quality technical support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our ability to sell our solutions to existing and prospective customers, and harm our business, operating results and financial condition.

We offer technical support services with our solutions and may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. It is difficult to predict customer demand for technical support services and if customer demand increases significantly, we may be unable to provide satisfactory support services to our customers. Additionally, increased customer demand for these services, without corresponding revenues, could increase costs and adversely affect our operating results.

If our security measures are breached or unauthorized access to customer data or our data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce the use of or stop using our solutions and we may incur significant liabilities.

Security breaches could result in the loss of information, litigation, indemnity obligations and other liability. While we have security measures in place, our systems and networks are subject to ongoing threats and therefore these security measures may be breached as a result of third-party action, including cyber-attacks or other intentional misconduct by computer hackers, employee error, malfeasance or otherwise. This could result in one or more third parties obtaining unauthorized access to our customers’ data or our data, including intellectual property and other confidential business information. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Third parties may also attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers’ data or our data, including intellectual property and other confidential business information. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed, we could lose potential sales and existing customers or we could incur other liability.

 

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We must develop and introduce enhancements and new features that achieve market acceptance or that keep pace with technological developments to remain competitive in our evolving industry.

We operate in a dynamic market characterized by rapidly changing technologies and industry and legal standards. The introduction of new Revenue Acquisition Management solutions by our competitors, the market acceptance of solutions based on new or alternative technologies, or the emergence of new industry standards could render our platform obsolete. Our ability to compete successfully, attract new customers and increase revenues from existing customers depends in large part on our ability to enhance and improve our existing Revenue Acquisition Management platform and to continually introduce or acquire new features that are in demand by the market we serve. We also must update our software to reflect changes in publishers’ APIs and terms of use. The success of any enhancement or new solution depends on several factors, including timely completion, adequate quality testing, appropriate introduction and market acceptance. Any new platform or feature that we develop or acquire may not be introduced in a timely or cost-effective manner, may contain defects or may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to anticipate or timely and successfully develop or acquire new offerings or features or enhance our existing platform to meet customer requirements, our business and operating results will be adversely affected.

Our growth depends in part on the success of our strategic relationships with third parties.

Our future growth will depend on our ability to enter into successful strategic relationships with third parties. For example, we are seeking to establish relationships with third parties to develop integrations with complementary technology and content. These relationships may not result in additional customers or enable us to generate significant revenues. Identifying partners and negotiating and documenting relationships with them require significant time and resources. Our contracts for these relationships are typically non-exclusive and do not prohibit the other party from working with our competitors or from offering competing services. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenues could be impaired and our operating results would suffer.

As a result of our customers’ increased usage of our software platform, we will need to continually improve our hosting infrastructure to avoid service interruptions or slower system performance.

We have experienced significant growth in the number of advertisers, transactions and data that our hosting infrastructure supports. We seek to maintain sufficient excess capacity in our infrastructure to meet the needs of all of our customers. We also seek to maintain excess capacity to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments. For example, if we secure a large customer or a group of customers which require significant amounts of bandwidth or storage, we may need to increase bandwidth, storage, power or other elements of our application architecture and our infrastructure, and our existing systems may not be able to scale in a manner satisfactory to our existing or prospective customers.

The amount of infrastructure needed to support our customers is based on our estimates of anticipated usage. If we were to experience unforeseen increases in usage, we could be required to increase our infrastructure investments resulting in increased costs or reduced gross margins, and if we do not accurately predict our infrastructure capacity requirements, our customers could experience service outages that may subject us to financial penalties and liabilities and result in customer losses. If our hosting infrastructure capacity fails to keep pace with increased sales, customers may experience service interruptions or slower system performance as we seek to obtain additional capacity, which could harm our reputation and adversely affect our revenue growth. As use of our software platform grows and as customers use it for more complicated tasks, we will need to devote additional resources

 

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to improving our application architecture and our infrastructure in order to maintain the performance of our software platform. We may need to incur additional costs to upgrade or expand our computer systems and architecture in order to accommodate increased demand if our systems cannot handle current or higher volumes of usage. In addition, increasing our systems and infrastructure in advance of new customers would cause us to have increased cost of revenues, which can adversely affect our gross margins until we increase revenues that are spread over the increased costs.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our intellectual property. We primarily rely on a combination of copyright, trade secret and trademark laws, as well as confidentiality procedures and contractual restrictions with our employees, customers, partners and others to establish and protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate or we may be unable to secure intellectual property protection for all of our solutions. In particular, we have one issued U.S. patent and have only recently begun to implement a strategy to expand patent protection for our technology.

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market products and services similar to ours and our ability to compete effectively would be impaired. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property rights depends on our legal actions against these infringers being successful, but we cannot be sure these actions will be successful, even when our rights have been infringed. In addition, defending our intellectual property rights might entail significant expense and diversion of management resources. Any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. Any patents issued in the future may not provide us with competitive advantages or may be successfully challenged by third parties.

Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Effective protection of our intellectual property may not be available to us in every country in which our solutions are available. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.

We might be required to spend significant resources to monitor and protect our intellectual property rights, and our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management, whether or not it is resolved in our favor, and could ultimately result in the impairment or loss of portions of our intellectual property.

We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Companies in the Internet and technology industries are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights, and our competitors may hold patents or have pending patent applications, which could be related to our business. These risks have been amplified by the increase in third parties, which we refer to as non-practicing entities, whose sole primary business is to assert such claims. We have

 

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received in the past, and expect to receive in the future, notices that claim we or our customers using our solutions have misappropriated or misused other parties’ intellectual property rights. If we are sued by a third party that claims that our technology infringes its rights, the litigation could be expensive and could divert our management resources. We do not currently have an extensive patent portfolio of our own, which may limit the defenses available to us in any such litigation.

In addition, in most instances, we have agreed to indemnify our customers against certain claims that our subscription services infringe the intellectual property rights of third parties. Our business could be adversely affected by any significant disputes between us and our customers as to the applicability or scope of our indemnification obligations to them. The results of any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may require us to do one or more of the following:

 

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cease offering or using technologies that incorporate the challenged intellectual property;

 

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make substantial payments for legal fees, settlement payments or other costs or damages;

 

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obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or

 

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redesign technology to avoid infringement.

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or costs could have a material adverse effect upon our business and financial results.

Our use of open source technology could impose limitations on our ability to commercialize our software platform.

We use open source software in our platform. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. The terms of various open source licenses have not been interpreted by the U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our software platform. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our applications, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could cause us to breach customer contracts, harm our reputation, result in customer losses or claims, increase our costs or otherwise adversely affect our business and operating results.

If the market for cloud-based software develops more slowly than we expect or declines, our business could be harmed.

The cloud computing market is not as mature as the market for on-premise software, and it is uncertain whether cloud computing will achieve and sustain high levels of customer demand and market acceptance. If other cloud computing providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud computing as a whole, including our solution, may be negatively affected. If cloud computing does not achieve widespread adoption, or there is a reduction in demand for cloud computing caused by a lack of customer acceptance,

 

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technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise, it could result in decreased revenues or increased expenses from development of alternative on-premise solutions and our business could be adversely affected.

Because our long-term success depends, in part, on our ability to expand our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.

We currently maintain offices and/or have sales personnel in Australia, England, France, Germany, Japan and Singapore, as well as the United States. As we continue to expand our customer base outside the United States, our business will be increasingly susceptible to risks associated with international operations. However, we have a limited operating history outside the United States, and our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to particular challenges of supporting a rapidly growing business in an environment of diverse cultures, languages, customs, tax laws, legal systems, alternate dispute systems and regulatory systems. The risks and challenges associated with international expansion include:

 

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the need to support and integrate with local publishers and partners;

 

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continued localization of our platform, including translation into foreign languages and associated expenses;

 

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competition with companies that have greater experience in the local markets than we do or who have pre-existing relationships with potential customers in those markets;

 

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compliance with multiple, potentially conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

 

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compliance with anti-bribery laws, including compliance with the Foreign Corrupt Practices Act;

 

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difficulties in invoicing and collecting in foreign currencies and associated foreign currency exposure;

 

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difficulties in staffing and managing foreign operations and the increased travel, infrastructure and legal compliance costs associated with international operations;

 

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different or lesser protection of our intellectual property rights;

 

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difficulties in enforcing contracts and collecting accounts receivable, longer payment cycles and other collection difficulties;

 

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restrictions on repatriation of earnings; and

 

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regional economic and political conditions.

We have limited experience marketing, selling and supporting our subscription services internationally, which increases the risk that any potential future expansion efforts that we may undertake will not be successful.

Fluctuations in the exchange rate of foreign currencies could result in currency transactions losses.

We currently have foreign sales denominated in Australian Dollars, British Pound Sterling, Chinese Yuan, Euros, Japanese Yen and Singapore Dollars. In addition, we incur a portion of our operating expenses in the currencies of the countries where we have offices. We face exposure to

 

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adverse movements in currency exchange rates, which may cause our revenues and operating results to differ materially from expectations. A decline in the U.S. dollar relative to foreign currencies would increase our non-U.S. revenues when translated into U.S. dollars. Conversely, if the U.S. dollar strengthens relative to foreign currencies, our revenues would be adversely affected. Our operating results could be negatively impacted depending on the amount of expense denominated in foreign currencies. As exchange rates vary, revenues, cost of revenues, operating expenses and other operating results, when translated, may differ materially from expectations. In addition, our revenues and operating results are subject to fluctuation if our mix of U.S. and foreign currency denominated transactions or expenses changes in the future because we do not currently hedge our foreign currency exposure. Even if we were to implement hedging strategies to mitigate foreign currency risk, these strategies might not eliminate our exposure to foreign exchange rate fluctuations and would involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategies and potential accounting implications.

If we fail to develop widespread brand awareness cost-effectively, our business may suffer.

We believe that developing and maintaining widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our solution and attracting new customers. We expect sales and marketing expenses to increase as a result of our marketing and brand promotion activities. We may not generate customer awareness or increase revenues enough to offset the increased expenses we incur in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial marketing and sales expenses, which are not offset by increased revenues, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our solution.

Unfavorable conditions in the market for digital advertising or the global economy or reductions in digital advertising spend could limit our ability to grow our business and negatively affect our operating results.

Revenue growth and potential profitability of our business depends on digital advertising spend by advertisers in the markets we serve. Our operating results may vary based on changes in the market for digital advertising or the global economy. To the extent that weak economic conditions cause our customers and potential customers to freeze or reduce their advertising budgets, particularly digital advertising, demand for our solution may be negatively affected.

Historically, economic downturns have resulted in overall reductions in advertising spend. If economic conditions deteriorate or do not materially improve, our customers and potential customers may elect to decrease their advertising budgets or defer or reconsider software and service purchases, which would limit our ability to grow our business and negatively affect our operating results.

Our business and operations have experienced rapid growth in recent periods, which has placed, and may continue to place, significant demands on our management and infrastructure. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

We increased our number of full-time employees from 285 as of December 31, 2011 to 386 as of September 30, 2012. Our growth has placed, and may continue to place, a significant strain on our managerial, administrative, operational, financial and other resources. We intend to further expand our overall headcount and operations both domestically and internationally, with no assurance that our business or revenues will continue to grow. Creating a global organization and managing a geographically dispersed workforce will require substantial management effort, the allocation of

 

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valuable management resources and significant additional investment in our infrastructure. We will be required to continue to improve our operational, financial and management controls and our reporting procedures and we may not be able to do so effectively. Further, to accommodate our expected growth we must continually improve and maintain our technology, systems and network infrastructure. As such, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross margins or operating expenses in any particular quarter. If we fail to manage our anticipated growth and change in a manner that does not preserve the key aspects of our corporate culture, the quality of our solutions may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers.

Our business depends on retaining and attracting qualified management and technical personnel.

Our success depends upon the continued service of our founders and senior management team and key technical employees, as well as our ability to continue to attract and retain additional highly qualified management and operating personnel. We do not maintain key person life insurance policies on any of our employees. Each of our founders, executive officers, key technical personnel and other employees could terminate his or her relationship with us at any time. Our business also requires skilled technical and sales personnel, who are in high demand and are often subject to competing offers. As we expand into additional geographic markets, we will require personnel with expertise in these new areas. Competition for qualified employees is intense in our industry and particularly in San Francisco, California, where most of our technical employees are based. The loss of our founders or any other member of our senior management team or, even a few qualified employees, or an inability to retain, attract, relocate and motivate additional highly skilled employees required for the planned expansion of our business, could delay or prevent the achievement of our business objectives and could materially harm our business and our customer relationships.

Domestic and foreign government regulation and enforcement of data practices and data tracking technologies is expansive, not clearly defined and rapidly evolving. Such regulation could directly restrict portions of our business or indirectly affect our business by constraining our customers’ use of our platform or limiting the growth of our markets.

Federal, state, municipal and/or foreign governments and agencies have adopted and could in the future adopt, modify, apply or enforce laws, policies, and regulations covering user privacy, data security, technologies such as cookies that are used to collect, store and/or process data, the taxation of products and services, unfair and deceptive practices, and/or the collection, use, processing, transfer, storage and/or disclosure of data associated with a unique individual. The categories of data regulated under these laws vary widely and are often ill-defined and subject to new applications or interpretation by regulators. Our subscription services enable our customers to collect, manage and store data regarding the measurement and valuation of their digital advertising and marketing campaigns, which may include data that is directly or indirectly obtained or derived through the activities of end users online and/or on mobile devices. The uncertainty and inconsistency among these laws, coupled with a lack of guidance as to how these laws will be applied to current and emerging Internet and mobile analytics technologies, creates a risk that regulators, lawmakers or other third parties, such as potential plaintiffs, may assert claims, pursue investigations or audits, or engage in civil or criminal enforcement. These actions could limit the market for our subscription services or impose burdensome requirements on our services and/or customers’ use of our services, thereby rendering our business unprofitable.

Some features of our subscription services use cookies, which trigger the data protection requirements of certain foreign jurisdictions, such as the EU Cookie Directive. In addition, although our subscription services do not involve the collection or use of personally identifiable information from end users, our services collect anonymous data about end users’ interactions with our advertiser clients

 

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that may be subject to regulation under current or future laws or regulations. If our privacy or data security measures fail to comply with these current or future laws and regulations in any of the jurisdictions in which we collect information, we may be subject to litigation, regulatory investigations, civil or criminal enforcement, audits or other liabilities in such jurisdictions, or our advertisers may terminate their relationships with us.

This area of the law is currently under intense government scrutiny and many governments, including the U.S. government, are considering a variety of proposed regulations that would restrict or impact the conditions under which data obtained from or through the activities of end users could be collected, processed or stored. In addition, regulators such as the Federal Trade Commission and the California Attorney General are continually proposing new regulations and interpreting and applying existing regulations in new ways. Changes to existing laws or new laws regulating the solicitation, collection or processing of personal and consumer information, truth-in-advertising and consumer protection could affect our customers’ utilization of digital advertising and marketing, potentially reducing demand for our subscription services, or impose restrictions that make it more difficult or expensive for us to provide our services.

If legislation dampens the growth in web and mobile usage or access to the Internet, our results of operations could be harmed.

Legislation enacted in the future could dampen the growth in web and mobile usage and decrease its acceptance as a medium of communications and commerce or result in increased adoption of new modes of communication and commerce that may not be serviced by our products. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet, which could result in slower growth or a decrease in ecommerce, use of social media and/or use of mobile devices. Any of these outcomes could cause demand for our platform to decrease, our costs to increase, and our results of operations and financial condition to be harmed.

If our customers fail to abide by applicable privacy laws or to provide adequate notice and/or obtain consent from end users, we could be subject to litigation or enforcement action or reduced demand for our services. Industry self-regulatory standards may be implemented in the future that could affect demand for our platform and our ability to access data we use to provide our platform.

Our customers utilize our services to support and measure their direct interactions with end users and we must rely on our customers to implement and administer any notice or choice mechanisms required under applicable laws. If customers fail to abide by these laws, it could result in litigation or regulatory or enforcement action against our customers or against us directly.

In addition, self-regulatory organizations (such as the Network Advertising Initiative) to which our customers may belong may impose opt-in or opt-out requirements on our customers, which may in the future require our customers to provide various mechanisms for users to opt-in or opt-out of the collection of any data, including anonymous data, with respect to such users’ web or mobile activities. In addition, the online and/or mobile industries may adopt technical or industry standards, such as the proposed Do Not Track header, that allow users to opt-in or opt-out of data that is necessary to our business. If any of these events were to occur in the future, it could have a material effect on our ability to provide services and for our customers to collect the data that is necessary to use our services.

Our revenues may be adversely affected if we are required to charge sales taxes in additional jurisdictions or other taxes for our solutions.

We collect or have imposed upon us sales or other taxes related to the solutions we sell in certain states and other jurisdictions. Additional states, countries or other jurisdictions may seek to impose

 

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sales or other tax collection obligations on us in the future, or states or jurisdictions in which we already pay tax may increase the amount of taxes we are required to pay. A successful assertion by any state, country or other jurisdiction in which we do business that we should be collecting sales or other taxes on the sale of our products and services could, among other things, create significant administrative burdens for us, result in substantial tax liabilities for past sales, discourage clients from purchasing solutions from us or otherwise substantially harm our business and results of operations.

The forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, we cannot assure you our business will grow at similar rates, if at all.

Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates, which may not prove to be accurate. Forecasts relating to the expected growth in digital advertising and other markets, including the forecasts or projections referenced in this prospectus, may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.

We may experience quarterly fluctuations in our operating results due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as indicative of our future performance. If our revenues or operating results fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of our common stock could decline substantially.

In addition to other risk factors listed in this section, factors that may affect our quarterly operating results include the following:

 

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the level of advertising spend managed through our platform for a particular quarter;

 

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customer renewal rates, and the pricing and usage of our platform in any renewal term;

 

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demand for our platform and the size and timing of our sales;

 

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customers delaying purchasing decisions in anticipation of new releases by us or of new products by our competitors;

 

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network outages or security breaches and any associated expenses;

 

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changes in the competitive dynamics of our industry, including consolidation among competitors or customers;

 

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market acceptance of our current and future solutions;

 

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changes in spending on digital advertising or information technology and software by our current and/or prospective customers;

 

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budgeting cycles of our customers;

 

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our potentially lengthy sales cycle;

 

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our ability to control costs, including our operating expenses;

 

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  Ÿ  

the amount and timing of infrastructure costs and operating expenses related to the maintenance and expansion of our business, operations and infrastructure;

 

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foreign currency exchange rate fluctuations; and

 

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general economic and political conditions in our domestic and international markets.

Based upon all of the factors described above, we have a limited ability to forecast our future revenues, costs and expenses, and as a result, our operating results may from time to time fall below our estimates or the expectations of public market analysts and investors.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our existing platform, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

We will selectively pursue acquisitions of complementary businesses and technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and adversely affect our operating results.

We will selectively pursue acquisitions of complementary businesses and technologies that we believe could complement or expand our applications, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

In addition, we have never acquired another business. If we acquire businesses or technologies, we may not be able to integrate the acquired personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

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inability to integrate or benefit from acquired technologies or services in a profitable manner;

 

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unanticipated costs or liabilities associated with the acquisition;

 

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incurrence of acquisition-related costs;

 

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difficulty integrating the accounting systems, operations and personnel of the acquired business;

 

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difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;

 

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difficulty converting the customers of the acquired business onto our applications and contract terms, including disparities in the revenues, licensing, support or professional services model of the acquired company;

 

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  Ÿ  

diversion of management’s attention from other business concerns;

 

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adverse effects to our existing business relationships with business partners and customers as a result of the acquisition;

 

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the potential loss of key employees;

 

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use of resources that are needed in other parts of our business; and

 

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use of substantial portions of our available cash to consummate the acquisition.

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition, if an acquired business fails to meet our expectations, our operating results, business and financial position may suffer.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our annual report for the fiscal year ending December 31, 2014, provide a management report on the internal control over financial reporting, which must be attested to by our independent registered public accounting firm to the extent we decide not to avail ourself of the exemption provided to an emerging growth company, as defined by The Jumpstart Our Businesses Act of 2012 (the JOBS Act). If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We are in the process of designing and implementing the internal control over financial reporting required to comply with this obligation, which process will be time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), and will be required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the New York Stock Exchange, including the establishment and maintenance of effective disclosure

 

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and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

We also expect that operating as a public company will make it more expensive for us to obtain director and officer liability insurance on the terms that we would like. As a public company, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenues of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) five years from the date of this prospectus.

We may not be able to utilize a significant portion of our net operating loss or research tax credit carryforwards, which could adversely affect our profitability.

As of December 31, 2011, we had federal and state net operating loss carryforwards due to prior period losses, which if not utilized will begin to expire in 2026 and 2016 for federal and state purposes, respectively. We also have federal research tax credit carryforwards, which if not utilized will begin to expire in 2026. These net operating loss and research tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax

 

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credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. This offering or future issuances of our stock could cause an “ownership change.” It is possible that any future ownership change could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (FASB), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

Risks Related to Our Initial Public Offering

and Ownership of Our Common Stock

There has been no prior public market for our common stock, the stock price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to our initial public offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following our initial public offering. If you purchase shares of our common stock in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon closing of our initial public offering or, if it does develop, it may not be sustainable. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  Ÿ  

overall performance of the equity markets;

 

  Ÿ  

our operating performance and the performance of other similar companies;

 

  Ÿ  

changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;

 

  Ÿ  

announcements of technological innovations, new applications or enhancements to services, acquisitions, strategic alliances or significant agreements by us or by our competitors;

 

  Ÿ  

disruptions in our services due to computer hardware, software or network problems;

 

  Ÿ  

announcements of customer additions and customer cancellations or delays in customer purchases;

 

  Ÿ  

recruitment or departure of key personnel;

 

  Ÿ  

the economy as a whole, market conditions in our industry, and the industries of our customers;

 

  Ÿ  

the expiration of market standoff or contractual lock-up agreements;

 

  Ÿ  

the size of our market float; and

 

  Ÿ  

any other factors discussed in this prospectus.

 

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In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

Substantial blocks of our total outstanding shares may be sold into the market when “lock-up” or “market standoff” periods end. If there are substantial sales of shares of our common stock, the price of our common stock could decline.

The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers, and significant stockholders, or if there is a large number of shares of our common stock available for sale. All of the shares of common stock sold in this offering will be available for sale in the public market. Substantially all of our outstanding shares of common stock are currently restricted from resale as a result of market standoff and “lock-up” agreements, as more fully described in “Shares Eligible for Future Sale.” These shares will become available to be sold 181 days after the date of this prospectus. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended (Securities Act) and various vesting agreements.

After our initial public offering, certain of our stockholders will have rights, subject to some conditions, to require us to file registration statements covering their shares to include their shares in registration statements that we may file for ourselves or our stockholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale until 181 days after the date of this prospectus. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market standoff or lock-up agreements.

Goldman, Sachs & Co. and Deutsche Bank Securities Inc. may, at their discretion, permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in those lock-up agreements.

The market price of the shares of our common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore if you purchase shares of our common stock in this offering, based on the midpoint of the price range set forth on the cover of this prospectus, you will experience immediate dilution of $         per share, the difference between the price per share you pay for our common stock and its pro forma net tangible book value per share as of December 31, 2012, after giving effect to the issuance of                 shares of our common stock in this offering.

 

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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our common stock would be negatively affected. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from our initial public offering. We will have broad discretion in the application of the net proceeds, including working capital, possible acquisitions, and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our business and financial condition. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.

After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate,     % of our outstanding common stock, based on the midpoint of the price range set forth on the cover of this prospectus. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

 

  Ÿ  

delaying, deferring or preventing a change in control of us;

 

  Ÿ  

impeding a merger, consolidation, takeover or other business combination involving us; or

 

  Ÿ  

discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.

See “Principal and Selling Stockholders” below for more information regarding the ownership of our outstanding stock by our executive officers and directors, together with their affiliates.

We do not intend to pay dividends for the foreseeable future.

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

 

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Delaware law and provisions in our restated certificate of incorporation and restated bylaws that will be in effect at the closing of our initial public offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.

Following the closing of our initial public offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws that will be in effect at the closing of our initial public offering will contain provisions that may make the acquisition of our company more difficult, including the following:

 

  Ÿ  

our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;

 

  Ÿ  

only our board of directors will have the right to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

  Ÿ  

only our chairman of the board, our chief executive officer, our president, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

  Ÿ  

certain litigation against us can only be brought in Delaware;

 

  Ÿ  

our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without the approval of the holders of common stock; and

 

  Ÿ  

advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

For information regarding these and other provisions, see “Description of Capital Stock.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the “Risk Factors” section. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including independent industry publications by Forrester Research, Inc. (Forrester), Gartner, Inc. (Gartner), International Data Corporation (IDC) and Magna Global USA, Inc. (Magna Global). In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and in our experience to date in, the markets for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although neither we nor the underwriters have independently verified the accuracy or completeness of any third-party information, we believe the information from these industry publications that is included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The Gartner report described below, (the “Gartner Report”) represents data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice.

Certain information in the text of the prospectus is contained in independent industry publications. This information is identified with a superscript number. The source of, and selected additional information contained in, these independent industry publications are provided below:

 

  (1) Forrester, US Cross-Channel Retail Forecast, 2011 To 2016, June 12, 2012, as updated July 23, 2012.

 

  (2) Gartner, Webinar: By 2017 the CMO Will Spend More on IT Than the CIO, Laura McLellan, January 3, 2012.

 

  (3) IDC, Worldwide New Media Market Model IH-2012: Worldwide and U.S. Data, September 2012.

 

  (4) Magna Global, Digital Media Forecasts, December 2012. The digital advertising channels cited by Magna Global include search, display, social and mobile. Revenues from these four digital advertising channels, as reported by Magna Global, are mutually exclusive.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $         million, based on an assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that we will receive additional net proceeds of $         million. A $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds that we receive from this offering by approximately $         million, assuming the number of shares offered by us remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders, including any shares of common stock sold by the selling stockholders in connection with the underwriters’ exercise of their option to purchase additional shares of common stock, although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares.

The principal purposes of this offering are to create a public market for our common stock, obtain additional capital, facilitate our future access to the public equity markets, increase awareness of our company among advertisers and improve our competitive position. Our management will have broad discretion in the application of the net proceeds to us from this offering, and investors will be relying on the judgment of our management regarding the application of the proceeds. Pending their use, we plan to invest our net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

As of the date of this prospectus, except as described above, we cannot specify with certainty all of the other particular uses for the net proceeds from this offering. We expect to use the remaining net proceeds from this offering for working capital and other general corporate purposes. Additionally, we may choose to expand our current business through acquisitions of, or investments in, complementary businesses or technologies, using cash or shares of our common stock. However, we have no commitments with respect to any such acquisitions or investments at this time.

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock. We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings will be used for the operation and growth of our business. Any future determination to declare cash dividends would be subject to the discretion of our board of directors and would depend upon various factors, including our results of operations, financial condition and liquidity requirements, restrictions that may be imposed by applicable law and our contracts and other factors deemed relevant by our board of directors. In addition, the terms of our credit facility currently restrict our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of September 30, 2012 on:

 

  Ÿ  

an actual basis;

 

  Ÿ  

a pro forma basis to give effect to the issuance of 1,478,064 shares of Series F-1 preferred stock and receipt of the related net proceeds of $19.9 million, the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 18,752,943 shares of our common stock immediately upon the completion of this offering, including the shares of our Series F-1 preferred stock issued in November 2012, and the conversion of outstanding warrants to purchase 50,792 of our Series B preferred stock into warrants to purchase 50,792 shares of common stock; and

 

  Ÿ  

a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments described above, (ii) the sale by us of                 shares of our common stock in this offering, at our initial public offering price of $         per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and (iii) the filing of our restated certificate of incorporation upon the completion of this offering.

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Actual     Pro Forma     Pro Forma
As
Adjusted(1)
 
     (in thousands, except shares)  

Cash and cash equivalents

   $ 16,990      $ 36,890      $                
  

 

 

   

 

 

   

 

 

 

Total debt, current and long-term

     10,185        10,185     
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, net of issuance costs $0.001 par value: 17,456,943 shares authorized, 17,274,879 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma or pro forma as adjusted

     85,808        —       
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity

      

Preferred stock, $0.001 par value: no shares authorized, issued and outstanding, actual and pro forma;                 shares authorized and no shares issued or outstanding, pro forma as adjusted

     —          —       

Common stock, $0.001 par value: 34,000,000 shares authorized, 4,823,499 shares issued and 4,514,052 outstanding, actual;                 authorized, 23,266,995 shares issued and outstanding, pro forma;                 shares authorized and                 shares issued and outstanding, pro forma as adjusted

     5        24     

Additional paid-in capital

     3,328        109,341     

Accumulated deficit

     (70,093     (70,093  
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity

     (66,760     39,272     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 46,223      $ 86,347      $     
  

 

 

   

 

 

   

 

 

 

 

(1) A $1.00 increase or decrease in the assumed initial public offering price of $         per share of our common stock, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

 

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The number of shares of our common stock to be outstanding following this offering is based on 23,266,995 shares of our common stock outstanding as of September 30, 2012 and excludes:

 

  Ÿ  

4,273,447 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2012, with a weighted average exercise price of $3.72 per share;

 

  Ÿ  

211,000 shares of common stock issuable upon the exercise of options granted between October 1, 2012 and December 10, 2012, with an exercise price of $12.15 per share;

 

  Ÿ  

87,692 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2012, with a weighted average exercise price of $2.73 per share;

 

  Ÿ  

309,447 shares of our common stock that are issued but were subject to a right of repurchase by us as of September 30, 2012 and therefore are not included in stockholders’ (deficit) equity; and

 

  Ÿ  

                shares of our common stock reserved and available for future issuance under our equity compensation plans, consisting of (a) 3,263 shares of our common stock reserved for issuance under our 2006 Equity Incentive Plan as of September 30, 2012, (b)                 shares of our common stock that will be reserved for issuance under our 2013 Equity Incentive Plan, and (c)                 shares of our common stock reserved for issuance under our 2013 Employee Stock Purchase Plan. On the date of this prospectus, any remaining shares available for issuance under our 2006 Equity Incentive Plan will be added to the shares reserved under our 2013 Equity Incentive Plan and we will cease granting awards under the 2006 Equity Incentive Plan. Our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation—Employee Benefit Plans.”

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after our initial public offering.

As of September 30, 2012, our pro forma net tangible book value was $39.3 million, or $1.70 per share of common stock. Pro forma net tangible book value per share represents the amount of our tangible assets less our liabilities divided by the total number of shares of our common stock outstanding, after giving effect to the conversion of our convertible preferred stock, including the shares of our Series F-1 convertible preferred stock issued in November 2012, into an aggregate of 18,752,943 shares of our common stock upon the closing of this offering.

Our pro forma as adjusted net tangible book value as of September 30, 2012 was $         million, or $         per share of common stock. Pro forma as adjusted net tangible book value per share reflects the pro forma adjustments described above and further reflects the sale of                 shares of common stock by us in this offering at the initial public offering price of $         per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to existing stockholders and immediate dilution of $         per share to new investors purchasing shares in the offering.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $            

Pro forma net tangible book value per share as of September 30, 2012

   $ 1.70      

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to investors in this offering

      $     
     

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share of our common stock, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value per share after this offering by $        , assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after this offering would be $         per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $         per share of common stock.

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2012, the differences between the number of shares of common stock purchased from us, the total cash consideration and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering, at the initial public offering price of $         per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

   23,266,995      $ 109,007,013         $ 4.69   

New public investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100   $           100  
  

 

  

 

 

   

 

 

    

 

 

   

 

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A $1.00 increase or decrease in the assumed initial public offering price of $         per share of our common stock, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the total consideration paid by new investors by $         million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after before deducting estimated underwriting discounts and commissions.

If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to     % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to                     , or    % of the total number of shares of common stock to be outstanding after this offering.

Sales of shares of common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to                     , or approximately     % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to                     , or approximately     % of the total shares of common stock outstanding after this offering.

The table and discussion above are based on 23,266,995 shares of our common stock outstanding as of September 30, 2012 and exclude:

 

  Ÿ  

4,273,447 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2012, with a weighted average exercise price of $3.72 per share;

 

  Ÿ  

211,000 shares of common stock issuable upon the exercise of options granted between October 1, 2012 and December 10, 2012, with an exercise price of $12.15 per share;

 

  Ÿ  

87,692 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2012, with a weighted average exercise price of $2.73 per share;

 

  Ÿ  

309,447 shares of our common stock that are issued but were subject to a right of repurchase by us as of September 30, 2012 and therefore are not included in stockholders’ (deficit) equity; and

 

  Ÿ  

            shares of our common stock reserved and available for future issuance under our equity compensation plans, consisting of (a) 3,263 shares of our common stock reserved for issuance under our 2006 Equity Incentive Plan as of September 30, 2012, (b)                 shares of our common stock that will be reserved for issuance under our 2013 Equity Incentive Plan, and (c)             shares of our common stock reserved for issuance under our 2013 Employee Stock Purchase Plan. On the date of this prospectus, any remaining shares available for issuance under our 2006 Equity Incentive Plan will be added to the shares reserved under our 2013 Equity Incentive Plan and we will cease granting awards under the 2006 Equity Incentive Plan. Our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved thereunder, as more fully described in “Executive Compensation—Employee Benefit Plans.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present our selected historical consolidated financial data. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

We derived the consolidated statements of operations data for 2009, 2010 and 2011, and the consolidated balance sheet data as of December 31, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statements of operations data for 2008 and the consolidated balance sheet data as of December 31, 2008 and 2009 from our audited financial statements not included in this prospectus. The unaudited consolidated statements of operations data for the nine months ended September 30, 2011 and 2012, and the unaudited consolidated balance sheet data as of September 30, 2012, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited consolidated financial statements. Our historical results are not necessarily indicative of the results to be expected in the future, and the results for the nine months ended September 30, 2012 are not necessarily indicative of operating results to be expected for the full year ending December 31, 2012 or any other period.

 

    Years Ended December 31,     Nine Months
Ended
September 30,
 
    2008     2009     2010     2011     2011     2012  
    (in thousands, except per share data)  

Consolidated Statements of Operations Data:

           

Revenues

  $ 2,629      $ 7,527      $ 19,005      $ 36,121      $ 24,711      $ 42,507   

Cost of revenues(1)

    2,416        5,101        11,040        18,691        13,523        17,728   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    213        2,426        7,965        17,430        11,188        24,779   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

           

Sales and marketing(1)

    4,299        6,146        8,884        20,357        14,474        23,615   

Research and development(1)

    2,263        3,410        4,568        7,071        5,027        9,651   

General and administrative(1)

    1,060        2,171        5,195        6,679        4,132        10,001   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,622        11,727        18,647        34,107        23,633        43,267   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,409     (9,301     (10,682     (16,677     (12,445     (18,488

Interest income (expense), net

    45        (212     (230     (378     (276     (349

Other income (expenses), net

    6        (92     78        (229     (143     (222
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (7,358     (9,605     (10,834     (17,284     (12,864     (19,059

Provision for income taxes

    (1     (103     (23     (139     (96     (167
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (7,359   $ (9,708   $ (10,857   $ (17,423   $ (12,960   $ (19,226

Redemption of preferred stock in connection with the Series D financing and deemed dividend

    —          —          (1,033     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

  $ (7,359   $ (9,708   $ (11,890   $ (17,423   $ (12,960     (19,226
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share available to common stockholders (basic and diluted)(2)

  $ (2.13   $ (2.74   $ (3.27   $ (4.29   $ (3.26   $ (4.46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net loss per share attributable to common stockholders, basic and diluted(2)

    3,459        3,540        3,639        4,058        3,978        4,312   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share available to common stockholders, basic and diluted(2)

        $ (0.96     $ (0.84
       

 

 

     

 

 

 

Weighted average pro forma shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted(2)

          18,108          22,809   
       

 

 

     

 

 

 

Other financial data

           

Adjusted EBITDA(3)

  $ (7,364   $ (9,100   $ (8,715   $ (15,208   $ (11,408   $ (13,367

(footnotes on next page)

 

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(1) Stock-based compensation included in the consolidated statements of operations data above was allocated as follows:

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
        2008             2009             2010             2011             2011             2012      
    (in thousands)  

Cost of revenues

  $ 15      $ 66      $ 90      $ 165      $ 119      $ 292   

Sales and marketing

    33        81        66        226        162        817   

Research and development

    11        26        58        163        120        648   

General and administrative

    26        19        1,172        143        82        2,490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 85      $ 192      $ 1,386      $ 697      $ 483      $ 4,247   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) See Note 12 of the consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of basic and diluted net loss per share available to common stockholders and pro forma net loss per share available to common stockholders.
(3) We define Adjusted EBITDA as net loss, adjusted for stock-based compensation expense, depreciation and amortization, capitalized internal-use software development costs, interest expense, net, provision for income taxes and other income (expenses), net. Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. See “Summary Consolidated Financial Data—Adjusted EBITDA” for more information regarding Adjusted EBITDA, including its limitations as an analytical tool. The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated:

 

     Years Ended December 31,      Nine Months Ended
September 30,
 
     2008      2009      2010      2011      2011      2012  
     (in thousands)  

Net loss

   $ (7,359    $ (9,708    $ (10,857    $ (17,423    $ (12,960    $ (19,226

Depreciation and amortization

     126         382         1,016         1,800         1,268         2,148   

Interest (income) expense, net

     (45      212         230         378         276         349   

Provision for income taxes

     1         103         23         139         96         167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     (7,277      (9,011      (9,588      (15,106      (11,320      (16,562

Other (income) expenses, net

     (6      92         (78      229         143         222   

Capitalization of internally developed software

     (166      (373      (435      (1,028      (714      (1,274

Stock-based compensation

     85         192         1,386         697         483         4,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (7,364    $ (9,100    $ (8,715    $ (15,208    $ (11,408    $ (13,367
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth our consolidated balance sheet data as of the dates presented:

 

     As of December 31,     As of
September 30,
 
     2008     2009     2010     2011     2012  
     (in thousands)        

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

   $ 3,584      $ 5,132      $ 1,172      $ 1,719      $ 16,990   

Property and equipment, net

     516        1,271        3,113        4,909        8,479   

Total assets

     5,376        9,144        10,653        18,297        40,300   

Debt, current and long-term

     3,409        2,805        3,195        6,629        10,185   

Convertible preferred stock, net of issuance costs

     12,059        24,974        35,580        51,514        85,808   

Total stockholders’ deficit

     (11,131     (20,605     (32,578     (48,408     (66,760

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements below. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We provide a leading cloud-based digital advertising management platform that enables advertisers and agencies to improve financial performance, realize efficiencies and time savings, and make better business decisions. Our Revenue Acquisition Management platform is an analytics, workflow, and optimization solution for marketing professionals, enabling them to effectively manage their digital advertising spend across search, display, social and mobile advertising channels. Our solution is designed to help our customers:

 

  Ÿ  

measure the effectiveness of their advertising campaigns through our proprietary reporting and analytics capabilities;

 

  Ÿ  

manage and execute campaigns through our intuitive user interface and underlying technology that streamlines and automates key functions, such as ad creation and bidding, across multiple publishers and channels; and

 

  Ÿ  

optimize campaigns across multiple publishers and channels in real time based on market and business data to achieve desired revenue outcomes using our predictive bid management technology.

In December 2012, our customers collectively managed $             in annualized advertising spend on our platform and we had              active advertisers using our solution globally across a wide range of industries. We market and sell our solutions to advertisers directly and through leading advertising agencies. We generate revenues from subscription contracts under which we charge fees generally based upon the amount of advertising spend that our customers manage through our platform. We have achieved 14 consecutive quarters of revenue growth. For 2009, 2010 and 2011, and for the nine months ended September 30, 2012, our revenues were $7.5 million, $19.0 million, $36.1 million and $42.5 million, representing period-over-period growth of 186%, 152%, 90% and 72%, respectively. We had net losses of $9.7 million in 2009, $10.9 million in 2010, $17.4 million in 2011 and $19.2 million for the nine months ended September 30, 2012. In order for us to begin to generate net income, we will need to grow revenues at a rate faster than our cost of revenues and operating expenses. For example, in 2010, 2011 and 2012, we had revenues of $19.0 million, $36.1 million and $        million, respectively, but had total cost of revenues of $11.1 million, $18.7 million and $        million, respectively, and operating expenses of $18.6 million, $34.1 million and $        million, respectively. We must continue to increase revenues at a higher rate than our cost of revenues and operating expenses increase, or we will need to make additional efforts to decrease cost of revenues and operating expenses as a percentage of revenues in order to begin to generate net income.

We generate revenues principally from subscription contracts under which we provide advertisers with access to our platform, either directly or through the advertiser’s relationship with an agency that has a contract with us. Our contracts are generally six months to one year in length for our direct advertisers and up to two years in length for our advertising agencies. Under our subscription contracts with most of our direct advertisers and some of our agency customers, customers are contractually committed to a monthly minimum fee, which is payable on a monthly basis over the duration of the contract and is generally one-half of our estimated monthly revenues from these customers, at the time

 

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the contract is signed. However, most of our subscription contracts with our advertising agency customers do not include a committed monthly minimum fee. Our contractual arrangement is with the advertising agency and the advertiser is not a party to the terms of the contract. Accordingly, most advertisers through our agency customers do not have a commitment to use our services and the advertisers may be added or removed from our platform at the discretion of the respective agency. We invoice the advertising agency the amounts due under the contract. Historically, approximately half of our revenues have been generated from advertising agency customers. Our subscription fee under most contracts is variable based upon the value of advertising spend that our customers manage through our platform. Our deferred revenues consist of the unearned portion of billed subscription fees. As we invoice our customers on a monthly basis in arrears, we currently have limited deferred revenue and, as a result, our deferred revenue balance is not an indicator of our future subscription revenues.

Our subscription contracts indicate the date at which we begin invoicing our customers, which is generally the first day of the month following the execution of the contract. We generally invoice the greater of the minimum fee or the percentage of advertising spend on our platform. The implementation process for new advertisers is typically four to six weeks; however, we do not charge a separate implementation fee under our subscription contracts.

Our implementation and customer support personnel, as well as costs associated with our cloud infrastructure, are included in our cost of revenues. Our cost of revenues and operating expenses have increased in absolute dollars over the past four years due to our need to increase our headcount to grow our business and to increase data center capacity to support customer revenue growth on our platform. We expect that our cost of revenues and operating expenses will continue to increase in absolute dollars as we continue to invest in our growth and incur additional costs as a public company.

In order to grow revenues, we will invest in sales and marketing activities by adding sales executives globally to target new advertisers and agencies. We will also invest in research and development to further expand our platform and support for additional publishers. All of these activities will require us to make investments, particularly in research and development and sales and marketing, and if these investments do not generate additional customers or additional advertising spend managed by our platform, our future operating results could be harmed.

The majority of our revenues are derived from our advertisers in the United States. We believe the markets outside of the United States offer an opportunity for growth and we intend to make additional investments in sales and marketing to expand in these markets. Advertisers from outside of the United States represented 26% of total revenues for the nine months ended September 30, 2012 and, 7%, 20% and 26% for 2009, 2010 and 2011, respectively.

We were incorporated in 2006 and initially focused on building the core elements of our cloud-based platform, which we currently use to service our customers. In September 2007, we launched Marin Enterprise, which targets large advertisers and agencies. We released Marin Professional Edition in March 2011, which targets mid-market advertisers and agencies. We have an iterative release cycle and we typically release new features every one to two months. Additionally, we have continued to expand internationally, opening our London office in 2009, our offices in Paris, Hamburg, Singapore and Sydney in 2011 and our Tokyo office in 2012.

Key Metrics

We regularly review a number of metrics to evaluate growth trends, measure our performance, establish budgets and make strategic decisions. Our selected key metrics include revenue, gross margin, operating expenses, active advertisers, annualized advertising spend on our platform and revenue retention rate. We discuss revenue, gross margin and operating expenses below under “—Components of Our Results of Operations.” We monitor our key metrics to measure our success. Our revenues are generally based on the amount of advertising spend our customers manage on our platform in a period.

 

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As a result, revenues are an important metric to understanding the overall health of our business, and we use revenue trends to formulate financial projections and make strategic business decisions.

Number of Active Advertisers

We define an active advertiser as an advertiser from whom we recognized revenues in excess of $2,000 in at least one month in a period. We believe the $2,000 threshold best identifies advertisers who are actively using our platform. We focus on revenue in at least one month in a period to account for seasonality in advertising spend by our customers, some of whom may not run digital advertising campaigns in every month of a year but still represent an active advertiser on our platform. We count organizations within the same corporate structure as one advertiser, even if they have signed separate contracts with us for different brands or divisions, whether they are a direct advertiser or an advertiser through an agency. When our subscription contract is with an advertising agency, we include each advertiser whose advertising spend is managed by the agency through our platform as a different advertiser. Advertisers who have advertising spend managed by multiple agencies on our platform are counted as one advertiser. We believe that our ability to increase the number of active advertisers using our platform is a leading indicator of our ability to grow revenues. While our active advertiser count has increased over time, this metric can fluctuate from quarter to quarter given the seasonal trends in advertising spend of our customers. We had 223, 390 and              active advertisers in the quarters ending December 31, 2010, 2011 and 2012, respectively, and 436, 487 and 502 active advertisers in the quarters ending March 31, 2012, June 30, 2012 and September 30, 2012, respectively.

Annualized Advertising Spend on our Platform

We calculate annualized advertising spend as advertising spend in the last month of a period multiplied by 12. We believe that increases in annualized advertising spend on our platform have a strong correlation to our ability to increase revenues. Our customers collectively managed $1.7 billion, $3.2 billion and $         billion, in annualized advertising spend on our platform in December 2010, 2011 and 2012, respectively. Additionally, annualized advertising spend managed on our platform increased sequentially for the three months ended March 31, 2012, June 30, 2012 and September 30, 2012.

Revenue Retention Rate

We believe our ability to retain and grow revenues from our existing advertisers is an indicator of the stability of our revenue base and the long-term value of our advertiser relationships. We assess our ability to retain and grow subscription revenues using a metric we refer to as revenue retention rate. We calculate our revenue retention rate metric by dividing retained revenues by retention base revenues. We define retention base revenues as revenues from all advertisers in the corresponding prior period, and we define retained revenues as revenues from all advertisers from the prior period that remain advertisers in the current period. This metric is calculated on a quarterly basis, and for annual periods, we use an average of the quarterly metrics. Although we have lost individual advertisers over time, advertisers who have remained on our platform have generally, in the aggregate, increased their advertising spend on our platform. At the same time, advertising spend on our platform may vary quarter to quarter, and as a result, quarterly revenue retention rates may fluctuate quarter to quarter. Our annual revenue retention rates were 123%, 109% and     % in 2010, 2011 and 2012, respectively.

Components of Our Results of Operations

Revenues

We generate revenues principally from subscription contracts under which we provide advertisers with access to our platform, either directly or through the advertiser’s relationship with an agency with whom we have a contract. Under our subscription contracts with most direct advertisers and some of

 

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our agency customers, customers contractually commit to a monthly minimum fee, which is generally one-half of our estimated monthly revenues from these customers, at the time the contract is signed. However, most of our subscription contracts with our advertising agency customers do not include a committed monthly minimum fee. Additionally, advertisers we serve through our arrangements with our advertising agencies generally do not have a minimum commitment to continue using our services. Our subscription fee under most contracts is variable based upon the value of advertising spend that our customers manage through our platform, although some customers pay a flat monthly rate over the term of their subscription contract. We invoice our customers for the fees that we have earned based upon their monthly usage of our platform and, as a result, we currently have limited deferred revenue. Our deferred revenues consist of the unearned portion of billed subscription fees.

Cost of Revenues

Cost of revenues primarily includes personnel costs, consisting of salaries, benefits, bonuses and stock-based compensation, for employees associated with our cloud infrastructure and global services for implementation and ongoing customer service organizations. Other costs of revenues include fees paid to contractors who supplement our support and data center personnel, expenses related to the use of a third-party data center, depreciation of data center equipment, amortization of capitalized research and development costs and allocated overhead.

We intend to continue to invest additional resources in our global services teams and in the capacity of our hosting service infrastructure. As we continue to invest in technology innovation through our research and development organization, we expect to have increased amortization of capitalized research and development costs. We expect that this investment in technology should not only expand the breadth and depth of our Revenue Acquisition Management platform but also increase the efficiency of how we deliver these solutions, enabling us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of revenues in the future.

Sales and Marketing Expenses

Sales and marketing expenses include personnel costs, sales commissions and other costs including travel and entertainment, marketing and promotional events, public relations, marketing activities, professional fees and allocated overhead. All of these costs are expensed as incurred, including sales commissions. Our commission plans provide that payment of commissions to our sales representatives are paid based on the actual amounts we invoice customers over a period that is generally between five to seven months following the execution of the applicable customer contract, contingent on their continued employment with us.

We plan to continue investing in sales and marketing by increasing the number of sales and account management employees, expanding our domestic and international sales and marketing activities, building brand awareness and sponsoring additional marketing events, which we believe will enable us to add new customers and increase penetration within our existing customer base. We expect that, in the future, sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense category.

Research and Development Expenses

Research and development expenses consist primarily of personnel costs for our product development and engineering employees and executives, including salaries, benefits, stock-based compensation expense and bonuses. Also included are non-personnel costs such as professional fees payable to third-party development resources and allocated overhead.

 

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Our research and development efforts are focused on enhancing our software architecture, adding new features and functionality to our platform and improving the efficiency with which we deliver these services to our customers. We expect that, in the future, research and development expenses will increase in absolute dollars, partially offset by the amount of capitalized internal-use software development costs. We believe that these investments are necessary to maintain and improve our competitive position.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs, including salaries, benefits, stock-based compensation expense and bonuses, for our administrative, legal, human resources, finance and accounting employees and executives. Also included are non-personnel costs, such as travel-related expenses, audit fees, tax services and legal fees, as well as professional fees, insurance and other corporate expenses, along with allocated overhead.

We expect to incur incremental costs associated with supporting the growth of our business, both in terms of size and geographic expansion, and to meet the increased compliance requirements associated with our transition to and operation as a public company. Such costs include increases in our accounting and legal personnel, additional consulting, legal and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act. As a result, we expect our general and administrative expenses to increase in absolute dollars in future periods but to decrease as a percentage of revenues over time.

Results of Operations

The following table is a summary of our consolidated statements of operations. The period-to-period comparisons of results are not necessarily indicative of results for future periods.

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
     (in thousands)  

Consolidated Statement of Operations Data:

          

Revenues

   $ 7,527      $ 19,005      $ 36,121      $ 24,711      $ 42,507   

Cost of revenues(1)

     5,101        11,040        18,691        13,523        17,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,426        7,965        17,430        11,188        24,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Sales and marketing(1)

     6,146        8,884        20,357        14,474        23,615   

Research and development(1)

     3,410        4,568        7,071        5,027        9,651   

General and administrative(1)

     2,171        5,195        6,679        4,132        10,001   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     11,727        18,647        34,107        23,633        43,267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (9,301     (10,682     (16,677     (12,445     (18,488

Interest expense, net

     (212     (230     (378     (276     (349

Other income (expenses), net

     (92     78        (229     (143     (222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (9,605     (10,834     (17,284     (12,864     (19,059

Provision for income taxes

     (103     (23     (139     (96     (167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (9,708   $ (10,857   $ (17,423   $ (12,960   $ (19,226
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other financial data:

          

Adjusted EBITDA(2)

   $ (9,100   $ (8,715   $ (15,208   $ (11,408   $ (13,367

(footnotes on next page)

 

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(1) Stock-based compensation included in the consolidated statements of operations data above was as follows:

 

     Years Ended December 31,      Nine Months Ended
September 30,
 
         2009              2010              2011              2011              2012      
     (in thousands)  

Cost of revenues

   $ 66       $ 90       $ 165       $ 119       $ 292   

Sales and marketing

     81         66         226         162         817   

Research and development

     26         58         163         120         648   

General and administrative

     19         1,172         143         82         2,490   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 192       $ 1,386       $ 697       $ 483       $ 4,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) We define Adjusted EBITDA as net loss, adjusted for stock-based compensation expense, interest expense, depreciation and amortization, capitalized internal-use software development costs, income expense, net, provision for income taxes and other income (expenses), net. See footnote 3 on page 41 to the table in the section of this prospectus titled “Selected Consolidated Financial Data” for a reconciliation of Adjusted EBITDA to net loss.

The following table sets forth our consolidated results of operations for the specified periods as a percentage of our revenues for those periods.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
      2009         2010         2011       2011     2012  

Revenues

    100     100     100     100     100

Cost of revenues

    68        58        52        55        42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    32        42        48        45        58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Sales and marketing

    82        47        56        59        56   

Research and development

    45        24        20        20        23   

General and administrative

    29        27        18        17        24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    156        98        94        96        102   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (124     (56     (46     (50     (43

Interest expense, net

    (3     (1     (1     (1     (1

Other income (expenses), net

    (1     —          (1     (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (128     (57     (48     (52     (45

Provision for income taxes

    (1     —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (129 )%      (57 )%      (48 )%      (52 )%      (45 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth our consolidated revenues by geographic area:

 

     Years Ended December 31,      Nine Months Ended
September 30,
 
     2009      2010      2011      2011      2012  
     (in thousands)  

United States

   $ 6,966       $ 15,246       $ 26,673       $ 18,573       $ 31,360   

International

     561         3,759         9,448         6,138         11,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,527       $ 19,005       $ 36,121       $ 24,711       $ 42,507   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Comparison of the Nine Months Ended September 30, 2011 and 2012

Revenues

 

     Nine Months Ended
September 30,
     Change  
     2011      2012      $      %  
     (dollars in thousands)  

Revenues

   $ 24,711       $ 42,507       $ 17,796         72

Revenues increased $17.8 million, or 72%, for the nine months ended September 30, 2012 as compared to the same period in 2011. This increase was driven by growth in revenues from both new and existing advertisers in all geographies as our ongoing investment in sales and marketing resources resulted in increased demand for our platform worldwide. During the nine months ended September 30, 2012, we generated $6.3 million of revenue from new advertisers and $11.5 million of additional revenue from our existing advertisers. There were no customers that accounted for greater than 10% of our revenues for the nine months ended September 30, 2011 or 2012.

Revenues for the nine months ended September 30, 2012 from the United States and international locations represented 74% and 26%, respectively, of revenues, and for the nine months ended September 30, 2011, revenues from the United States and international locations represented 75% and 25%, respectively, of revenues.

Cost of Revenues and Gross Margin

 

     Nine Months Ended
September 30,
    Change  
     2011     2012     $      %  
     (dollars in thousands)  

Cost of revenues

   $ 13,523      $ 17,728      $ 4,205         31

Gross profit

     11,188        24,779        13,591         121   

Gross margin

     45     58     

Cost of revenues increased $4.2 million, or 31%, for the nine months ended September 30, 2012 as compared to the same period in 2011. This reflected an increase in the number of global services personnel from 107 employees as of September 30, 2011 to 124 employees as of September 30, 2012, resulting in a $2.2 million increase in compensation expenses and a $1.2 million increase in allocated overhead due to opening of new offices in Europe and Asia. We also experienced increases of $0.7 million in hosting costs and $0.6 million of depreciation and amortization expense, partially offset by a $0.2 million decrease in professional fees.

Our gross margin increased to 58% for the nine months ended September 30, 2012 from 45% for the same period in 2011. This increase was due to the achievement of greater operational efficiency from personnel dedicated to our cloud infrastructure and global services precipitated by upgraded functionality and capabilities delivered by our engineering team. Compensation for these personnel was 26% of revenues during the nine months ended September 30, 2012, as compared to 35% during the same period in 2011. Additional costs related to recruiting, travel and equipment expenses represented 2% of our revenues during the nine months ended September 30, 2012, as compared to 5% during the same period in 2011.

 

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Sales and Marketing

 

     Nine Months Ended
September 30,
    Change  
     2011     2012     $      %  
     (dollars in thousands)  

Sales and marketing

   $ 14,474      $ 23,615      $ 9,141         63

Percent of revenues

     59     56     

Sales and marketing expenses increased $9.1 million, or 63%, for the nine months ended September 30, 2012 as compared to the same period in 2011. The increase was primarily due to an increase in global sales and marketing headcount from 84 employees as of September 30, 2011 to 127 employees as of September 30, 2012, contributing to a $7.3 million increase in personnel-related costs, consisting primarily of increased employee compensation, benefits and travel costs associated with our sales force and including $0.4 million in stock-based compensation directly attributable to the redemption of common shares from an employee for an amount above the fair value at the time of the redemption. Allocated overhead increased $1.4 million due to opening of new offices in Europe and Asia. Marketing and event costs increased $0.3 million due to our continued efforts to generate sales leads and build brand awareness.

Research and Development

 

     Nine Months Ended
September 30,
    Change  
         2011             2012       $      %  
     (dollars in thousands)  

Research and development

   $ 5,027      $ 9,651      $ 4,624         92

Percent of revenues

     20     23     

Research and development expenses increased $4.6 million, or 92%, for the nine months ended September 30, 2012 as compared to the same period in 2011. This reflected an increase in the number of research and development personnel from 49 employees as of September 30, 2011 to 95 employees as of September 30, 2012, resulting in a $3.9 million increase in compensation expense. Included in this amount was $0.3 million in stock-based compensation directly attributable to the redemption of common shares from two employees for an amount above the fair value at the time of the redemption. Allocated overhead increased $0.8 million due to the increase in headcount. These increases were partially offset by a $0.2 million decrease in outside consulting services.

General and Administrative

 

     Nine Months Ended
September 30,
    Change  
     2011     2012     $      %  
     (dollars in thousands)  

General and administrative

   $ 4,132      $ 10,001      $ 5,869         142

Percent of revenues

     17     24     

General and administrative expenses increased $5.9 million, or 142%, for the nine months ended September 30, 2012, as compared to the same period in 2011. Our general and administrative headcount increased from 22 employees as of September 30, 2011 to 40 employees as of September 30, 2012. As a result, compensation expenses increased by $4.2 million as we added employees to support the growth of our business and as we prepared to become a public company. Included in this amount is $1.9 million in stock-based compensation directly attributable to the

 

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redemption of common shares from two employees for an amount above the fair value at the time of the redemption. Professional fees increased $1.4 million to support our global expansion and as we took certain steps to prepare ourselves to be a public company. Allocated overhead increased by $0.4 million due to the increase in headcount.

Other Expenses, Net

 

     Nine Months Ended
September 30,
    Change  
       2011         2012       $     %  
     (dollars in thousands)  

Other expenses, net

   $ (419   $ (571   $ (152     36

Other expenses, net primarily consists of foreign currency transaction gains and losses and interest expense. There were no significant changes in these expenses during the periods presented.

Provision for Income Taxes

 

     Nine Months Ended                
     September 30,      Change  
         2011              2012        $      %  
     (dollars in thousands)  

Provision for income taxes

   $ 96       $ 167       $ 71         74

Provision for income taxes increased by approximately $0.1 million for the nine months ended September 30, 2012 as compared to the same period in 2011 as a result of increased profits generated in foreign jurisdictions by our wholly-owned subsidiaries.

Comparison of Years Ended December 31, 2010 and 2011

Revenues

 

     Years Ended
December 31,
     Change  
     2010      2011      $      %  
     (dollars in thousands)  

Revenues

   $ 19,005       $ 36,121       $ 17,116         90

Revenues increased $17.1 million, or 90%, for 2011 as compared to 2010. During 2011, revenues increased due to new customers in all geographies and increased usage of our platform by existing customers. During 2011, we generated $8.1 million of revenue from new advertisers and $9.0 million of additional revenue from our existing advertisers. There were no customers that accounted for greater than 10% of our revenues in 2010 or 2011.

Revenues in 2011 from the United States and international locations represented 74% and 26%, respectively, of revenues, and in 2010, revenues from the United States and international locations represented 80% and 20%, respectively, of revenues.

 

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Cost of Revenues

 

     Years Ended
December 31,
    Change  
     2010     2011     $      %  
     (dollars in thousands)  

Cost of revenues

   $ 11,040      $ 18,691      $ 7,651         69

Gross profit

     7,965        17,430        9,465         119   

Gross margin

     42     48     

Cost of revenues increased $7.7 million, or 69%, for 2011 as compared to 2010. This reflected an increase in the number of customer service personnel from 67 employees as of December 31, 2010 to 112 employees as of December 31, 2011, resulting in a $5.0 million increase in compensation expense, a $1.0 million increase in allocated overhead and a $0.2 million increase in travel costs. We also experienced increases of $0.7 million of depreciation and amortization expense, $0.3 million in hosting costs and $0.2 million in professional fees, primarily as a result of the overall increase in the size of the support operations.

Our gross margin increased to 48% during 2011 from 42% during 2010. This increase was primarily due to greater operational efficiency from personnel dedicated to our cloud infrastructure and global services. Compensation for these personnel was 33% of revenues during 2011, as compared to 37% during 2010. We also realized greater efficiency from our hosting costs and related equipment, the associated costs of which were 8% of revenues during 2011 as compared to 10% during 2010.

Sales and Marketing

 

     Years Ended
December 31,
    Change  
     2010     2011     $      %  
     (dollars in thousands)  

Sales and marketing

   $ 8,884      $ 20,357      $ 11,473         129

Percent of revenues

     47     56     

Sales and marketing expenses increased $11.5 million, or 129%, for 2011 as compared to 2010. This reflected the expansion of our sales force and increases in marketing programs to address additional opportunities in new and existing markets. The increase was primarily due to an increase in headcount from 47 employees as of December 31, 2010 to 93 employees as of December 31, 2011, contributing to an $8.7 million increase in personnel-related costs, consisting primarily of increased employee compensation, benefits and travel costs associated with our sales force. Marketing and event costs increased $1.5 million due to our continued efforts to generate sales leads and build brand awareness. Allocated overhead costs increased $0.9 million and recruiting costs increased $0.5 million as a result of increased headcount.

Research and Development

 

     Years Ended
December 31,
    Change  
     2010     2011     $      %  
     (dollars in thousands)  

Research and development

   $ 4,568      $ 7,071      $ 2,503         55

Percent of revenues

     24     20     

 

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Research and development expenses increased $2.5 million, or 55%, for 2011 as compared to 2010. This reflected an increase in the number of research and development personnel from 38 employees as of December 31, 2010 to 52 employees as of December 31, 2011, resulting in a $1.2 million increase in compensation, a $0.5 million increase in outside consulting services related to contract research and development services and a $0.1 million increase in recruiting fees. Allocated overhead costs increased $0.5 million as a result of our increased headcount. The increase was a result of our continued investment in expanding and enhancing our platform.

General and Administrative

 

     Years Ended
December 31,
    Change  
     2010     2011     $      %  
     (dollars in thousands)  

General and administrative

   $ 5,195      $ 6,679      $ 1,484         29

Percent of revenues

     27     18     

General and administrative expenses increased $1.5 million, or 29%, for 2011 as compared to 2010. General and administrative headcount increased from 14 employees as of December 31, 2010 to 28 employees as of December 31, 2011. As a result, compensation expenses increased by $0.6 million. Additionally, professional fees increased $1.1 million due to the establishment of several international wholly-owned subsidiaries.

Other Expenses, Net

 

     Years Ended
December 31,
    Change  
     2010     2011     $     %  
     (in thousands)  

Other expenses, net

   $ (152   $ (607   $ (455     *   

 

* Percentage is not meaningful.

Other expenses, net primarily consisted of adjustments to the fair value of preferred stock warrants, foreign currency transaction gains and losses and interest expense. The increase of $0.5 million was primarily due to a $0.2 million increase in the loss from the adjustment of the fair value of an outstanding preferred stock warrant and a $0.2 million increase in interest expense as a result of additional borrowings under our credit facility.

Provision for Income Taxes

 

     Years Ended
December 31,
     Change  
     2010      2011      $      %  
     (in thousands)  

Provision for income taxes

   $ 23       $ 139       $ 116             

 

* Percentage is not meaningful.

Provision for income taxes increased by $0.1 million for 2011 as compared to 2010 as a result of increased profits generated in foreign jurisdictions by our wholly-owned subsidiaries.

 

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Comparison of Years Ended December 31, 2010 and 2009

Revenues

 

     Years Ended
December 31,
     Change  
     2009      2010      $      %  
     (dollars in thousands)  

Revenues

   $ 7,527       $ 19,005       $ 11,478         152

Revenues increased $11.5 million, or 152%, for 2010 as compared to 2009. During 2010, revenues increased due an increase in revenues from new and existing advertisers, resulting from their increase in advertising spend managed through the platform. During 2010, we generated $5.7 million of revenue from new advertisers and $5.8 million of additional revenue from our existing advertisers.

Revenues in 2010 from the United States and international locations represented 80% and 20%, respectively, of revenues, and in 2009, revenues from the United States and international locations represented 93% and 7%, respectively, of revenues.

Cost of Revenues

 

     Years Ended
December 31,
    Change  
     2009     2010     $      %  
     (dollars in thousands)  

Cost of revenues

   $ 5,101      $ 11,040      $ 5,939         116

Gross profit

     2,426        7,965        5,539         228   

Gross margin

     32     42     

Cost of revenues increased $5.9 million, or 116%, for 2010 as compared to 2009. This reflected an increase in the number of customer service personnel from 25 employees as of December 31, 2009 to 67 employees as of December 31, 2010, resulting in a $4.0 million increase in compensation and travel expenses. We also experienced increases of $0.7 million of depreciation and amortization expense, $0.4 million in allocated overhead, primarily as a result of the overall increase in the size of the support operations, and $0.2 million in hosting costs.

Our gross margin increased to 42% during 2010 from 32% during 2009. This increase was primarily due to the achievement of greater operational efficiency from personnel dedicated to our cloud infrastructure and global services. Compensation for these personnel was 37% of revenues during 2010, as compared to 43% during 2009. We also realized greater efficiency from our hosting costs and related equipment, the associated costs of which were 10% of revenues during 2010 as compared to 12% during 2009. Additionally, professional fees incurred to support our infrastructure were 2% of revenue during 2010 as compared to 3% during 2009.

Sales and Marketing

 

     Years Ended
December 31,
    Change  
     2009     2010     $      %  
     (dollars in thousands)  

Sales and marketing

   $ 6,146      $ 8,884      $ 2,738         45

Percent of revenues

     82     47     

 

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Sales and marketing expenses increased $2.7 million, or 45%, for 2010 as compared to 2009. This reflected the expansion of our sales force and increases in marketing programs to address additional opportunities in new and existing markets. The increase was primarily due to an increase in headcount from 19 employees as of December 31, 2009 to 47 employees as of December 31, 2010, contributing to a $2.1 million increase in personnel-related costs, consisting primarily of increased employee compensation and travel costs associated with our sales force. Marketing and event costs increased $0.3 million due to our continued efforts to generate sales leads and build brand awareness. Allocated overhead increased $0.1 million due to our increase in headcount.

Research and Development

 

     Years Ended
December 31,
    Change  
     2009     2010     $      %  
     (dollars in thousands)  

Research and development

   $ 3,410      $ 4,568      $ 1,158         34

Percent of revenues

     45     24     

Research and development expenses increased $1.2 million, or 34%, for 2010 as compared to 2009. This reflected an increase in the number of research and development personnel from 26 employees as of December 31, 2009 to 38 employees as of December 31, 2010, resulting in a $1.5 million increase in compensation expenses. This increase was partially offset by a $0.1 million decrease in outside consulting services related to contract research and development services and in recruiting fees.

General and Administrative

 

     Years Ended
December 31,
    Change  
     2009     2010     $      %  
     (dollars in thousands)  

General and administrative

   $ 2,171      $ 5,195      $ 3,024         139

Percent of revenues

     29     27     

General and administrative expenses increased $3.0 million, or 139%, for 2010 as compared to 2009. Our general and administrative headcount increased from six employees as of December 31, 2009 to 14 employees as of December 31, 2010. As a result, personnel-related expenses increased by $1.9 million, consisting of increased employee compensation and travel costs, as we added employees to support the growth of our business. The 2010 amount includes $0.8 in stock-based compensation resulting from the repurchase of shares of common stock from one executive for an amount above the fair value at the time of the repurchase. Allocated overhead expenses increased $0.4 million and professional fees increased $0.1 million due to the establishment of the wholly-owned subsidiary in the United Kingdom. Additionally, a provision of $0.4 million was recorded in 2010 for unremitted and uncollected sales taxes from several U.S. state taxing authorities.

Other Expenses, Net

 

     Years Ended
December 31,
    Change  
     2009     2010     $      %  
     (dollars in thousands)  

Other expenses, net

   $ (304   $ (152   $ 152         (50 )% 

 

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Other expenses, net primarily consisted of adjustments to the fair value of preferred stock warrants, foreign currency transaction gains and losses and interest expense. The decrease of $0.2 million was primarily due to the adjustment of the fair value of an outstanding preferred stock warrant.

Provision for Income Taxes

 

     Years Ended
December 31,
     Change  
     2009      2010      $     %  
     (dollars in thousands)  

Provision for income taxes

   $ 103       $ 23       $ (80     (78 )% 

Provision for income taxes decreased by $0.1 million for 2010 as compared to 2009 as a result of decreased profits generated by our wholly-owned subsidiary in the United Kingdom.

Liquidity and Capital Resources

Since our incorporation in March 2006, we have relied primarily on sales of our preferred stock to fund our operating activities. To date, we have raised $105.7 million, net of related issuance costs, in funding through private placements of our preferred stock and $2.8 million in proceeds from the exercise of options to purchase common stock. As of September 30, 2012, our principal sources of liquidity were our cash of $17.0 million and $1.2 million available under our revolving credit facility. In November 2012, we raised $19.9 million in proceeds, net of related issuance costs, from the sale of our Series F-1 preferred stock. Our primary operating cash requirements include the payment of compensation and related costs, as well as costs for our facilities and information technology infrastructure.

In January 2010, we entered into a loan and security agreement, which provided for a revolving line of credit and other term loans (the “Revolving Credit Facility”). In January 2011, we amended our Revolving Credit Facility to include an equipment advance facility of $2.0 million. In December 2011, we further amended our Revolving Credit Facility, which increased the revolving line of credit to the lesser of $10.0 million or 80% of our eligible accounts receivable and to provide us with an additional equipment advance facility of $2.0 million. With respect to the revolving line of credit, the expiration date was extended to July 10, 2013 and the annual interest rate was amended to 0.75% over the prime rate payable on a monthly basis. The equipment advance facilities may only be used to finance the purchase of eligible equipment. The equipment advance facilities accrue interest at a fixed per annum rate of 5.5% and are repayable in 36 consecutive monthly installments of principal and interest, with final payments due at various dates between December 2014 and August 2015.

The Revolving Credit Facility is collateralized with all of our assets, excluding shares of controlled foreign subsidiaries, patents and copyrights. The Revolving Credit Facility also contains various covenants, including covenants related to the delivery of financial and other information, the maintenance of monthly financial covenants, as well as limitations on dispositions, change in business or management, mergers or consolidations, dividends and other corporate activities. As of September 30, 2012, we were in compliance with all loan covenants.

As of September 30, 2012, we had $3.0 million and $7.2 million outstanding under our equipment advance facilities and revolving line of credit, respectively, and had $0 available for withdrawal under the equipment advance facilities. Additionally, as of September 30, 2012 we had a $0.5 million letter of credit outstanding relating to our office lease in New York.

In December 2012, we entered into another amendment to the Revolving Credit Facility pursuant to which amounts available for borrowing under the revolving line of credit increased to the lesser of

 

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$15.0 million or 80% of our eligible accounts receivable and to extend the expiration date to July 31, 2014. We also entered into an additional equipment advance facility of $3.0 million (the “Supplemental Equipment Advance”). The Supplemental Equipment Advance accrues interest at a fixed per annum rate of 3.0% and will be repayable in 33 consecutive monthly installments of principal and interest. The Supplemental Equipment Advance expires March 1, 2016. In connection with this amendment, we issued a warrant to purchase 26,513 shares of common stock at $12.15 per share to the lender. This warrant expires in November 2022.

To the extent existing cash and cash from operations are not sufficient to fund our future activities, we may need to raise additional funds. Although we are not currently a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, services or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity financing or use our cash resources. We have no present understandings, commitments or agreements to enter into any such acquisitions.

Based on our current level of operations and anticipated growth, we believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, and the timing and extent of spending to support product development efforts and expansion into new territories, and the timing of introductions of new features and enhancements to our platform. To the extent that existing cash and cash equivalents and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing.

Summary Cash Flows

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2009     2010     2011     2011     2012  
     (in thousands)  

Net cash used in operating activities

   $ (9,622   $ (9,775   $ (16,490   $ (13,328   $ (13,778

Net cash used in investing activities

     (1,150     (2,882     (3,360     (2,020     (5,971

Net cash provided by financing activities

     12,320        8,697        20,397        19,053        35,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

   $ 1,548      $ (3,960   $ 547      $ 3,705      $ 15,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Activities

Cash used in operating activities is primarily influenced by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business and the increase in the number of advertisers using our platform. Cash used in operating activities has typically been generated from net losses and further increased by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accrued liabilities, adjusted for non-cash expense items such as depreciation, amortization and stock-based compensation.

Cash used in operating activities for the nine months ended September 30, 2012 of $13.8 million was the result of a net loss of $19.2 million, offset by non-cash expenses of $7.3 million, which included depreciation, amortization and stock-based compensation expense. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of $1.9 million was from the net change in working capital items, most notably an increase in accounts receivable of $2.9 million resulting from

 

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our revenue growth and an increase in prepaid expenses and other current assets of $0.8 million primarily related to the timing of payments for insurance premiums and software subscriptions. These were partially offset by an increase in accounts payable and accrued liabilities of $1.5 million and $0.4 million, respectively, related to the growth of our operations and timing of compensation and other general expenses.

Cash used in operating activities for the nine months ended September 30, 2011 of $13.3 million was the result of a net loss of $13.0 million, offset by non-cash expenses of $2.0 million, which included depreciation, amortization and stock-based compensation expense. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of $2.3 million was from the net change in working capital items, most notably an increase in accounts receivable of $3.7 million resulting from our revenue growth, partially offset by an increase in accrued liabilities of $1.8 million related to the growth of our operations and timing of compensation and other general expenses.

Cash used in operating activities in 2011 of $16.5 million was the result of a net loss of $17.4 million, offset by non-cash expenses of $3.2 million, which included depreciation, amortization and stock-based compensation expense. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of $2.3 million was from the net change in working capital items, most notably an increase in accounts receivable of $5.5 million resulting from our revenue growth, partially offset by an increase in accrued liabilities of $3.5 million related to the growth of our operations and the timing of compensation and other general expenses.

Cash used in operating activities in 2010 of $9.8 million was the result of a net loss of $10.9 million, offset by non-cash expenses of $2.7 million which included depreciation, amortization and stock-based compensation expense. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of $1.6 million was from the net change in working capital items, most notably an increase in accounts receivable of $3.3 million resulting from our revenue growth and an increase in prepaid expenses and other current assets of $0.5 million primarily related to software subscription purchases. These items were partially offset by an increase in accrued liabilities and accounts payable of $1.5 million and $0.6 million, respectively, related to the growth of our operations and the timing of compensation and other general expenses.

Cash used in operating activities in 2009 of $9.6 million was the result of a net loss of $9.7 million, offset by non-cash expenses of $0.8 million which included depreciation, amortization and stock-based compensation expense. These non-cash expenses increased due to capital expenses and headcount growth, primarily related to continued investment in our business. The remaining use of funds of $0.7 million was from the net change in working capital items, most notably an increase in accounts receivable of $1.2 million resulting from our revenue growth, partially offset by an increase in accrued liabilities of $0.7 million related to the growth of our operations and timing of compensation and other general expenses.

Investing Activities

During 2009, 2010 and 2011 and the nine months ended September 30, 2011 and 2012, investing activities consisted of purchases of property and equipment, including technology hardware and software to support our growth as well as capitalized internal-use software development costs. Purchases of property and equipment may vary from period-to-period due to the timing of the expansion of our operations and the development cycles of our internal-use hosted software platform. We expect to continue to invest in property and equipment and developing our software platform for the foreseeable future.

 

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Financing Activities

Our financing activities have consisted primarily of the issuance of preferred stock purchases of common stock, and borrowings and repayments under our credit facility.

Cash provided by financing activities for the nine months ended September 30, 2012 was $35.0 million. This consisted of $34.3 million of net proceeds from the issuance of our Series F preferred stock, $1.9 million of proceeds from the exercise of stock options and issuance of common stock, and net borrowings under our credit facility of $3.3 million during this period. These inflows were partially offset by $4.5 million paid to redeem common stock during the period.

Cash provided by financing activities for the nine months ended September 30, 2011 was $19.1 million. This consisted of $15.9 million of net proceeds from the issuance of our Series E preferred stock, $0.5 million of proceeds from the exercise of stock options and net borrowings under our credit facility of $2.6 million during this period.

Cash provided by financing activities in 2011 was $20.4 million. This consisted of $15.9 million of net proceeds from the issuance of our Series E preferred stock, $3.5 of net proceeds from activity under our credit facility and $0.9 million from the exercise of employee stock options and common stock warrants.

Cash provided by financing activities in 2010 was $8.7 million. This consisted of $7.8 million of net proceeds from the issuance of our Series D preferred stock, $0.4 of net proceeds from activity under our credit facility and $0.5 million from the exercise of employee stock options.

Cash provided by financing activities in 2009 was $12.3 million. This consisted of proceeds from the sales of our Series C preferred stock of $12.9 million, partially offset by repayment of credit facility borrowings of $0.6 million.

In November 2012, we issued 1,478,064 shares of Series F-1 preferred stock at a price of $13.5312 per share for net proceeds of approximately $19.9 million through a private placement with existing stockholders.

Contractual Obligations and Commitments

Our principal commitments consist of obligations under operating leases for office space and our data center. As of December 31, 2011, the future minimum payments under these commitments, as well as obligations under our credit facility, were as follows:

 

     Payments Due By Period  
     Total      Less
Than
1 Year
     1 - 3
Years
     3 - 5
Years
     More
Than
5 Years
 
                   (in thousands)         

Debt obligations

   $ 6,882       $ 1,447       $ 5,331       $ 104       $ —     

Interest expense payments

     241         138         102         1         —     

Operating leases

     3,524         1,645         1,879         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,647       $ 3,230       $ 7,312       $ 105       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amounts in the table above are associated with agreements that are enforceable and legally binding, which specify significant terms including payment terms, related services and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table.

 

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In 2012, we entered into new office leases in Portland, San Francisco, Chicago and New York. The lease arrangements are noncancelable and expire in December 2014, March 2015, October 2015, and July 2017, respectively.

During the ordinary course of business, we include indemnification provisions within certain of our contracts. Pursuant to these arrangements, we may be obligated to indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally parties with which we have commercial relations, in connection with certain intellectual property infringement claims by any third party with respect to our software. To date, there have not been any costs incurred in connection with such indemnification arrangements and therefore, there is no accrual for such amounts as of December 31, 2011 and September 30, 2012.

Off-Balance Sheet Arrangements

During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See “Risk Factors” for certain matters that may affect these estimates or our future financial condition or results of operations. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if the changes in estimate that are reasonably likely to occur could materially impact the financial statements.

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in this prospectus, and we believe that the accounting policies discussed below involve the greatest degree of complexity and exercise of judgment by our management. The methods, estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations and, accordingly, we believe the policies described below are the most critical for understanding and evaluating our financial condition and results of operations.

 

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Revenue Recognition

We generate revenues principally from subscriptions to our platform pursuant to our contracts that are generally six months to one year in length. Our subscription fee under most contracts is variable based on the value of the advertising spend that our advertisers manage through the platform. Some of our contracts also include a minimum monthly fee that is payable over the duration of the contract. Our customer does not have the right to take possession of the software supporting the application service at any time, nor do the arrangements contain general rights of return. We commence revenue recognition when all of the following conditions are met:

 

  Ÿ  

persuasive evidence of an arrangement exists;

 

  Ÿ  

our platform is made available to the customer;

 

  Ÿ  

the fee is fixed or determinable, and;

 

  Ÿ  

collection is reasonably assured.

We account for these arrangements by recognizing the total monthly minimum fee, where applicable, over the duration of the contract, commencing on the date that our service is made available to the customer, provided revenues recognized do not exceed amounts that are invoiced and due. The variable fee, which is based on a percentage of the value of the advertising spend managed through our platform, is recognized once the amount is fixed or determinable, which is generally on a monthly basis concurrent with the issuance of the customer invoice. Signed contracts are used as evidence of an arrangement. We assess collectability based on a number of factors such as past collection history with the customer and creditworthiness of the customer. If we determine collectability is not reasonably assured, we defer the revenue recognition until collectability becomes reasonably assured.

In October 2009, the Financial Accounting Standards Board, or FASB, ratified authoritative accounting guidance regarding revenue recognition for arrangements with multiple deliverables effective for fiscal periods beginning on or after June 15, 2010. We adopted the new guidance on a prospective basis for fiscal 2011. Professional services and training, when sold with our platform subscription services, are accounted for separately when those services have standalone value. In determining whether professional services and training services can be accounted for separately from subscription services, we consider the following factors: availability of the services from other vendors, the nature of the services; the dependence of the subscription services on the customer’s decision to buy the professional services; and whether we sell our subscription services without professional services. If the deliverables have stand-alone value, we account for each deliverable separately and revenues are recognized for the respective deliverables as they are delivered. If one or more of the deliverables do not have stand-alone value, the deliverables that do not have stand-alone value are combined with the final deliverables within the arrangement and treated as a single unit of accounting. Revenues for arrangements treated as a single unit of accounting are recognized over the period of the contract commencing upon delivery of the final deliverable. As of September 30, 2012, we did not have stand-alone value for the professional services and training services. This is because we include professional services and training services with our subscription services and those services are not available from other vendors.

Stock-Based Compensation

We measure and recognize expense for stock-based compensation based on the grant date fair value of the award and generally recognize the expense, net of estimated forfeitures, on a straight-line basis over the requisite service period.

Because our stock is not publicly traded, we must estimate the fair value of our common stock for purposes of determining the fair value of our option awards, as discussed in “—Valuations of Common

 

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Stock” below. Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option pricing model to determine the fair value of our stock option awards. The determination of the grant date fair value of our stock option awards using an option pricing model is affected by the estimated fair value per share of the common stock underlying those options as well as assumptions regarding a number of other complex and subjective variables. These variables include our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

 

  Ÿ  

Expected Volatility.    Because we do not have a trading history for our common stock, we have estimated the expected stock price volatility for our common stock by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of public companies in the technology industry, primarily in the subscription software business. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

 

  Ÿ  

Risk-Free Interest Rate.    The risk-free interest rate assumption used is based on observed market interest rates appropriate for the term of employee options.

 

  Ÿ  

Expected Term.    We estimated the expected term for a “plain vanilla” option using the simplified method allowed under current guidance, which uses the midpoint between the graded vesting period and the contractual termination date since we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

 

  Ÿ  

Dividend Yield.    We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

We used the following assumptions in our application of the Black-Scholes option pricing model for the periods presented in the table below:

 

     Years Ended December 31,     Nine Months Ended
September  30,
 
     2009         2010         2011         2011         2012    

Dividend yield

     0     0     0     0     0

Expected volatility

     52     49     57     57     57

Risk-free interest rate

     2.52     1.83     2.02     2.02     0.97

Expected term (in years)

     5.96        5.92        6.25        6.25        6.25   

In addition, ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We apply an estimated forfeiture rate based on our historical forfeiture experience.

Future expense amounts for any particular period could be affected by changes in our assumptions or changes in market conditions.

 

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Stock-based compensation expense included in the consolidated financial statement line items is as follows:

 

     Years Ended December 31,      Nine Months Ended
September 30,
 
       2009          2010          2011            2011              2012      
     (in thousands)  

Cost of revenues

   $ 66       $ 90       $ 165       $ 119       $ 292   

Sales and marketing

     81         66         226         162         817   

Research and development

     26         58         163         120         648   

General and administrative

     19         1,172         143         82         2,490   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 192       $ 1,386       $ 697       $ 483       $ 4,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Costs for equity instruments issued in exchange for the receipt of goods or services from non-employees are measured at the fair market value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of the date on which there first exists a firm commitment for performance by the provider of goods or services or on the date performance is complete, using the Black-Scholes option pricing model.

Valuations of Common Stock

We are required to estimate the fair value of the common stock underlying our share-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair value of the common stock underlying our share-based awards was determined by our board of directors, with input from management and contemporaneous third-party valuations. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our common stock. Our board of directors determined the fair value of our common stock on the date of grant based on a number of factors including:

 

  Ÿ  

our performance, growth rate and financial condition at the approximate time of the option grant;

 

  Ÿ  

the value of companies that we consider peers based on a number of factors including, but not limited to, similarity to us with respect to industry, business model, stage of growth, financial risk or other factors;

 

  Ÿ  

changes in our business and our prospects since the last time the board approved option grants and made a determination of fair value;

 

  Ÿ  

amounts recently paid by investors for our convertible preferred stock in arm’s-length transactions;

 

  Ÿ  

the rights, preferences and privileges of preferred stock relative to those of our common stock;

 

  Ÿ  

future financial projections; and

 

  Ÿ  

valuation analyses.

For the periods presented, valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In valuing our common stock, our board of directors determined the equity value of our business generally using the income approach and market comparable approach valuation methods. When applicable, due to a recent preferred stock offering, the prior sale of company stock method was also utilized. The income approach estimates value based on the expectation of future cash flows that a company will generate, such as cash earnings, cost savings, tax deductions and the proceeds from a disposition. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable

 

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publicly traded companies in our industry or similar lines of business as of each valuation date and is adjusted to reflect the risks inherent in our cash flows. In addition, we also considered an appropriate discount adjustment to recognize the lack of marketability due to being a closely held entity.

The market comparable approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company’s operating results to estimate the value of the subject company. In our valuations, the multiple of the comparable companies was determined using a ratio of the market value of invested capital less cash to each of the last twelve month revenues and the forecasted future twelve month revenues. The estimated value was then discounted by a non-marketability factor due to the fact that stockholders of private companies do not have access to trading markets similar to those enjoyed by stockholders of public companies which impacts liquidity. To determine our peer group of companies, we considered public enterprise cloud-based application providers and selected those that are similar to us in size, stage of life cycle and financial leverage.

The prior sales of company stock method estimates value by considering any prior arm’s length sales of the subject company’s equity. When considering prior sales of the company’s equity, the valuation considers the size of the equity sale, the relationship of the parties involved in the transaction, the timing of the equity sale, and the financial condition of the company at the time of the sale.

In some cases, we considered the amount of time between the valuation date and the grant date to determine whether to use the latest common stock valuation determined pursuant to one of the methods described above or a straight-line calculation between the two valuation dates. This determination included an evaluation of whether the subsequent valuation indicated that any significant change in the valuation had occurred between the previous valuation and the grant date.

Once we determined an equity value, we used the option pricing method, or OPM, to allocate the equity value to each of our classes of stock. OPM values each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and strike prices of the derivatives. This method is generally preferred when future outcomes are difficult to predict and dissolution or liquidation is not imminent. Starting in December 2011, due to greater clarity on potential exit scenarios, we generally began using the Probability Weighted Expected Return Method, or PWERM, to allocate our equity value among the various outcomes.

Using the PWERM, the value of our common stock is estimated based upon an analysis of varying values for our common stock assuming the following possible future events for our company:

 

  Ÿ  

Initial public offering, or IPO;

 

  Ÿ  

Sale or merger;

 

  Ÿ  

Continuing as a private company; or

 

  Ÿ  

Bankruptcy or liquidation.

For these possible events, a range of equity values is estimated based on a number of factors, which include market and income valuation approaches that factor in revenue multiples based on the performance of our public company comparables, along with estimates by, and expectations of, our board of directors and management. For each equity value scenario, we determined the appropriate aggregate value to be allocated to holders of our shares of common stock based on the rights and preferences of each class and series of our stock at that time. Next, we estimated the timing of possible future event dates and applied a discount rate, based on our estimated weighted average cost of capital, to the future equity values in the initial public offering and sale or merger scenarios to

 

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account for the time-value of money. We then multiplied the discounted value of common stock under each scenario by an estimated probability for each of the possible events, resulting in a probability-weighted value per share of common stock. Finally, we applied a discount for lack of marketability to the weighted value per share to determine a value per common share. As noted, application of this approach involves the use of estimates, judgment and assumptions, such as future cash flows and selection of comparable companies. Changes in our assumptions or the interrelationship of those assumptions impacted the valuations as of each valuation date.

Upon adoption of the PWERM in December 2011, we assigned an increasing probability to the initial public offering scenario at each valuation date than the other scenarios, assuming a 35% probability beginning December 31, 2011 and increasing substantially to 70% in September 2012 and 75% in December 2012. We have assumed a higher probability of an initial public offering because of our belief that consummating an initial public offering will increase awareness of our company among potential customers and improve our competitive position, thereby facilitating growth.

When considering comparable public companies for the purposes of valuing our common stock, from January 28, 2011 through September 30, 2012, we utilized comparable company sets, adjusted to remove companies sold or merged during the periods and add comparable companies that had completed initial public offerings. This set was primarily composed of technology companies that operated a subscription-based business. We believed these companies had cost structures generally similar to our own and we therefore believed these companies were comparable to us for the purposes of valuing our common stock. We evaluated our set of comparable companies as of each valuation date, particularly with respect to valuation in the initial public offering scenario. All the material factors considered as of each option grant date are explained below.

The following table summarizes, by grant date, information regarding stock options granted from January 1, 2011:

 

Option Grant Dates

   Number of
Shares
Subject to
Options
Granted
     Exercise
Price Per
Share
     Common
Stock Fair
Value Per
Share on
Grant Date
 

January 28, 2011

     767,718       $ 2.39       $ 2.39   

May 26, 2011

     348,389         2.70         2.70   

August 26, 2011

     282,556         2.70         3.98   

February 8, 2012

     161,486         5.20         5.20   

March 11, 2012

     34,000         5.20         5.20   

May 8, 2012

     1,208,388         7.05         7.05   

June 1, 2012

     117,500         7.05         7.55   

September 14, 2012

     293,887         7.55         10.20   

September 25, 2012

     20,000         7.55         10.20   

December 10, 2012

     211,000         12.15         12.15   

January 31, 2013

     963,089         12.15         12.15   

Based on an assumed initial public price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of stock options outstanding as of September 30, 2012 was $         million, of which $         million related to vested options.

 

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    Valuation inputs

January 28, 2011.    In estimating the fair value of our common stock to set the exercise price of such options, our board of directors considered a contemporaneous valuation analysis for our common stock. The valuation analysis reflected a fair value for our common stock of $2.39. The primary valuation considerations were:

 

  Ÿ  

an enterprise value determined from a weighted average of the market-based approach (50% weighting), income approach (25% weighting) and the implied enterprise value based upon the Series D preferred stock issuance which closed in May 2010 (25% weighting);

 

  Ÿ  

the market-based approach utilized a mean peer group multiple of 2.2x trailing 12 months’ revenues;

 

  Ÿ  

the income approach utilized a terminal value earnings multiple of 10.5x;

 

  Ÿ  

a discount rate of 38%, based on our estimated weighted average cost of capital; and

 

  Ÿ  

a lack of marketability discount of 37%.

May 26, 2011.    In estimating the fair value of our common stock to set the exercise price of such options, our board of directors reviewed and considered a contemporaneous valuation analysis for our common stock. The valuation analysis reflected a fair value for our common stock of $2.70. The primary valuation consideration was an enterprise value derived from the arm’s length Series E preferred stock financing completed at $9.19 per share in March 2011. Our indicated enterprise value was allocated to the shares of preferred stock, common stock, warrants and options using an option pricing method, or OPM. The OPM utilized the following assumptions: a time to liquidity event of two years; a risk free rate of 0.71%; and volatility of 60% over the time to a liquidity event. Estimates of the volatility of our common stock were based on available information on the volatility of common stock of comparable, publicly traded companies.

August 26, 2011.    At the time our board of directors approved the option grants, our most recent valuation analysis indicated a fair value of $2.70 per share. Our board of directors set the exercise price per share at $2.70, consistent with the indicated fair value reflected in the valuation analysis. Subsequently, a valuation analysis was completed in early 2012 that indicated a fair value per share of common stock of $5.20. We considered that both valuation analyses had similar proximity relative to the August 26, 2011 grant date and that the latter report estimated a significant change in value during the interim time period. Therefore, in connection with the preparation of our 2011 financial statements, we reassessed, for financial reporting purposes, the estimate of fair value per share for the August 26, 2011 grants. We applied a straight-line calculation using the valuation of $2.70 per share as of May 26, 2011 and $5.20 as of February 8, 2012, the date at which our next valuation was used for granting new options.

February 8, 2012.    In estimating the fair value of our common stock to set the exercise price of such options as of February 8, 2012, our board of directors reviewed and considered a contemporaneous valuation analysis for our common stock. The valuation analysis reflected a fair value for our common stock of $5.20. The primary valuation consideration was an enterprise value derived from the arm’s length Series F preferred stock financing completed at $12.30 per share in January 2012. Our indicated enterprise value was allocated to the shares of preferred stock, common stock, warrants and options using the OPM. The OPM utilized the following assumptions: a time to liquidity event of 1.5 years; a risk free rate of 0.19%; and volatility of 60% over the time to a liquidity event. Estimates of the volatility of our common stock were based on available information on the volatility of common stock of comparable, publicly traded companies. Additionally, we considered the potential outcome under an IPO scenario. For an IPO scenario, the value was estimated based on a multiple of our forecasted 2013 revenues. The value was discounted to the present value using a 20% rate of return over a 1.5 year holding period. This value was then adjusted downward by 28.5% to reflect a lack of marketability of our common stock. The final valuation assigned a 65% weighting to the OPM value and a 35% weighting to the IPO value.

 

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In conjunction with our Series F preferred stock financing closed in January 2012, we sold 2,804,788 shares of our Series F preferred stock at $12.30 per share for gross proceeds of $34.5 million. Concurrently with the issuance of the preferred stock, we repurchased 365,008 shares of common stock from a group of employees including our Chief Executive Officer for aggregate consideration of $4.5 million. We determined that the per share repurchase price of the common stock of $12.30 was above the fair value for shares of our common stock of $5.20 per share at the time of the repurchase. Therefore, we recognized $2.6 million of stock-based compensation expense from this transaction during the first quarter of 2012.

March 11, 2012.    Given that the option grant made on March 11, 2012 occurred approximately 30 days after the option grant made on February 8, 2012 and that there were no significant changes to the business or our prospects during this period, we used the same analysis in assessing the fair value of our common stock as of March 11, 2012 that we did for our assessment as of February 8, 2012.

May 8, 2012.    In estimating the fair value of our common stock to set the exercise price of such options, our board of directors reviewed and considered a contemporaneous valuation analysis for our common stock. The valuation analysis reflected a fair value for our common stock of $7.05, an increase from the fair value of our common stock on March 11, 2012 resulting, in part, from the continued growth and financial performance of our business. During the three months ended March 31, 2012, our revenues grew 14% and our gross profit increased 24% sequentially. Additionally, we continued to rapidly expand our employee base, increasing headcount to 302 as of March 31, 2012, a 6% increase compared to December 31, 2011. The primary valuation considerations were:

 

  Ÿ  

the valuation reflected a 40% probability of an IPO, 30% probability of remaining a private company, 25% probability of a strategic merger or sale, and 5% probability of dissolution;

 

  Ÿ  

a fourteen month time to liquidity in the IPO scenario and a two year holding period in the strategic merger or sale scenario;

 

  Ÿ  

the market-based approach utilized mean peer group multiples of 4.5x trailing twelve months’ revenue and 3.2x projected twelve months’ revenue;

 

  Ÿ  

the income approach utilized a terminal value earnings multiple of 18.0x;

 

  Ÿ  

a discount rate of 25%, based on our estimated weighted average cost of capital; and

 

  Ÿ  

a lack of marketability discount of 24%.

June 1, 2012.    At the time our board of directors approved the option grants, our most recent valuation analysis indicated a fair value of $7.05 per share. Our board of directors set the exercise price per share at $7.05, consistent with the indicated fair value reflected in the valuation analysis. However, shortly thereafter, another contemporaneous valuation analysis was finalized and reflected a fair value for our common stock of $7.55. Therefore, for financial reporting purposes, we utilized the latter analysis as it better reflected our valuation considerations as of the grant date. The primary valuation considerations were:

 

  Ÿ  

the valuation reflected a 60% probability of an IPO, 20% probability of remaining a private company, 15% probability of a strategic merger or sale, and 5% probability of dissolution;

 

  Ÿ  

a fifteen month holding period in the IPO scenario and a 1.5 year holding period in the strategic merger or sale scenario;

 

  Ÿ  

the market-based approach utilized mean peer group multiples of 4.0x trailing twelve months’ revenue and 2.8x projected twelve months’ revenue. This decrease as compared to the previous valuation was representative of the general decrease in valuations of the peer group companies during this period;

 

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  Ÿ  

the income approach utilized a terminal value earnings multiple of 18.0x;

 

  Ÿ  

a discount rate of 20%, based on our estimated weighted average cost of capital;

 

  Ÿ  

a lack of marketability discount of 24%; and

 

  Ÿ  

while our financial forecast reflected a longer time period until achieving sustained profitability relative to the forecast used to value the May 8, 2012 grants, the increase in the fair value of our common stock as compared to the prior valuation resulted principally from the increased probability of an initial public offering as we undertook activities in this area.

September 14, 2012 and September 25, 2012.    At the time our board of directors approved the option grants, our most recent valuation analysis indicated a fair value of $7.55 per share. Our board of directors set the exercise price per share at $7.55, consistent with the indicated fair value reflected in the valuation analysis. However, shortly thereafter, another contemporaneous valuation analysis was finalized and reflected a fair value for our common stock of $10.20. Therefore, for financial reporting purposes, we utilized the latter analysis as it better reflected our valuation considerations as of the grant date. Given that the September 14, 2012 and September 25, 2012 grants occurred within a span of eleven days and there were no material changes to the business during that time, we used the same sets of assumptions in assessing the valuation for both dates. The increase from the fair value of our common stock on June 1, 2012 resulted, in part, from the continued growth and financial performance of our business, our progress made towards a potential IPO and an increase in the probability of an IPO relative to other exit alternatives. During the three months ended September 30, 2012, our revenues grew 10% and our gross profit increased 12% sequentially. Additionally, we continued to rapidly expand our employee base, increasing headcount to 386 as of September 30, 2012, an 8% increase compared to June 30, 2012. The primary valuation considerations were:

 

  Ÿ  

the valuation reflected a 70% probability of an IPO, 15% probability of remaining a private company, 10% probability of a strategic merger or sale and 5% probability of dissolution;

 

  Ÿ  

a twelve month holding period in the IPO scenario and a 1.5 year holding period in the strategic merger or sale scenario;

 

  Ÿ  

a discount rate of 20%, based on our estimated weighted average cost of capital;

 

  Ÿ  

the market-based approach utilized mean peer group multiples of 4.3x trailing twelve months’ revenue and 3.4x projected twelve months’ revenue;

 

  Ÿ  

the income approach utilized a terminal value earnings multiple of 14.0x. This terminal value is lower than that reflected in the previous valuation due to higher growth and profit margins over the projection period; and

 

  Ÿ  

a lack of marketability discount of 24%.

December 10, 2012 and January 31, 2013.    In estimating the fair value of our common stock to set the exercise price of such options, our board of directors reviewed and considered a contemporaneous valuation analysis for our common stock. Given that the December 10, 2012 and January 31, 2013 grants occurred in close proximity and there were no material changes to the business during that time, we used the same sets of assumptions in assessing the valuation for both dates. The valuation analysis reflected a fair value for our common stock of $12.15, an increase from the fair value of our common stock on September 25, 2012 resulting, in part, from the continued growth and financial performance of our business, our progress made towards a potential IPO and the closing of our Series F-1 preferred stock financing. Our revenues continued to increase month over month consistent with management’s expectations and we achieved our highest monthly revenues to date during the month of November 2012. We continued to rapidly expand our employee base, increasing

 

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headcount to 424 as of November 30, 2012, a 10% increase compared to September 30, 2012. Additionally, in November 2012, we closed our Series F-1 preferred stock financing. The primary valuation considerations were:

 

  Ÿ  

the valuation reflected a 75% probability of an IPO, 15% probability of remaining a private company and 10% probability of a strategic merger or sale;

 

  Ÿ  

the value under the IPO scenario was estimated by applying a 10% premium above the enterprise value implied from the Series F-1 preferred stock financing completed in November 2012;

 

  Ÿ  

a ten month holding period in the IPO scenario and a one year holding period in the strategic merger or sale scenario;

 

  Ÿ  

a discount rate of 20%, based on our estimated weighted average cost of capital;

 

  Ÿ  

the market-based approach utilized mean peer group multiples of 4.5x trailing twelve months’ revenue and 3.4x projected twelve months’ revenue;

 

  Ÿ  

the income approach utilized a terminal value earnings multiple of 14.0x; and

 

  Ÿ  

a lack of marketability discount of 20%, which was lower than the rate utilized in the previous valuation as we decreased the expected time to liquidity.

Provision for Income Taxes

As a result of our current net operating loss position in the United States, income tax expense consists primarily of corporate income taxes resulting from profits generated in foreign jurisdictions by wholly-owned subsidiaries, along with state income taxes payable in the United States. As we have incurred operating losses in all periods to date and recorded a full valuation allowance against our deferred tax assets, we have not historically recorded a provision for federal income taxes. Realization of any of our deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets.

Utilization of our net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the Code and similar state provisions. An analysis was conducted through 2011 to determine whether an ownership change had occurred since inception. The analysis indicated that although ownership changes occurred in prior years, the net operating losses would not expire before estimated utilization. In the event we have subsequent changes in ownership or profitability is delayed, net operating losses and research and development credit carryovers could be limited and may expire unutilized.

Allowance for Doubtful Accounts

We assess collectability based on a number of factors, including credit worthiness of the customer along with past transaction history; in addition, we perform periodic evaluations of our customers’ financial condition. Certain contracts with advertising agencies contain sequential liability provisions, where the agency does not have an obligation to pay until payment is received from the agency’s customers. In these circumstances, we evaluate the credit worthiness of the agency’s customers, in addition to the agency itself. Credit losses historically have not been material, which is directly attributable to our subscription-based services model, enabling us to immediately discontinue the availability of the services in question in the event of non-payment. Through September 30, 2012, we have not experienced any significant credit losses.

 

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Capitalized Software Costs

We capitalize certain development costs incurred in connection with our internal-use software platform in accordance with ASC 350-40, Internal-Use Software. These capitalized costs are mostly related to our hosted platform, which is accessed by our customers on a subscription basis. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, we capitalize direct internal and external costs until the software is substantially complete and ready for its intended use. We cease capitalizing these costs upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. We expense maintenance and training costs as they are incurred. We amortize capitalized internal-use software development costs on a straight-line basis over its estimated useful life, which is generally two to three years, into cost of revenues. Through September 30, 2012, we had capitalized costs of approximately $3.3 million in aggregate under ASC 350-40. Based on our current plans, we expect to continue to capitalize a portion of our development costs in the future.

Recent Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-05, Comprehensive Income. This guidance requires entities to have more detailed reporting of comprehensive income. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted. The guidance should be applied retrospectively. The adoption of this guidance on January 1, 2012 did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement. This guidance requires entities to change certain measurements and disclosures about fair value measurements. The guidance is effective during interim and annual periods beginning after December 15, 2011. We adopted this new guidance on January 1, 2012.

Quantitative and Qualitative Disclosures about Market Risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large customers and limit credit exposure by setting credit limits as we deem appropriate. In addition, our investment strategy has been to invest in financial instruments that are highly liquid and readily convertible into cash, with maturity dates within three months from the date of purchase. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. Our investments are considered cash equivalents and primarily consist of money market funds, corporate debt securities and a certificate of deposit. As of September 30, 2012, we had cash and cash equivalents of $17.0 million. In November 2012, we raised $19.9 million in proceeds, net of related issuance costs, from the sale of our Series F-1 preferred stock. The carrying amount of our cash and cash equivalents reasonably approximates fair value, due to the short maturities of these investments. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates,

 

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which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we believe only dramatic fluctuations in interest rates would have a material effect on our investments. As such we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

As of September 30, 2012 we had borrowings outstanding in the aggregate of $10.2 million. Our outstanding long-term borrowings consist of fixed and variable interest rate financial instruments. The interest rates of our borrowings range from 4.0% to 5.5%. A hypothetical 10% increase or decrease in interest rates relative to our current interest rates would not have a material impact on the fair values of all of our outstanding borrowings. Changes in interest rates would, however, affect operating results and cash flows, because of the variable rate nature of our borrowings. A hypothetical 10% increase or decrease in interest rates relative to interest rates as of December 31, 2011 would result in an insignificant impact to interest expense for 2012.

Foreign Currency Exchange Risk

We have foreign currency risks related to our revenues and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro, British Pound Sterling, Singapore Dollar, Japanese Yen, Chinese Yuan, and Australian Dollar. Revenues outside of the United States as a percentage of consolidated revenues was 7%, 20%, and 26% in fiscal 2009, 2010 and 2011, respectively, and 26% during the nine month period ended September 30, 2012. Changes in exchange rates may negatively affect our revenues and other operating results as expressed in U.S. Dollars.

The functional currency for our wholly-owned foreign subsidiaries is the U.S. Dollar. Accordingly, the subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while nonmonetary items are remeasured at historical rates. Income and expense accounts are remeasured at the average exchange rates in effect during the year. Remeasurement adjustments are recognized in the statement of operations as foreign currency transaction gains or losses in the year of occurrence. Aggregate foreign currency transaction losses included in determining net loss were not significant in 2009, 2010, 2011, or for the nine months ended September 30, 2011 and 2012. Transaction gains and losses are included in other income (expenses), net.

As our international operations grow, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. Dollar can increase the costs of our international expansion. To date, we have not entered into any foreign currency hedging contracts, since exchange rate fluctuations have not had a material impact on our operating results and cash flows. Based on our current international structure, we do not plan on engaging in hedging activities in the near future.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

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BUSINESS

Company Overview

We provide a leading cloud-based digital advertising management platform that enables advertisers and agencies to improve financial performance, realize efficiencies and time savings, and make better business decisions. Our Revenue Acquisition Management platform is an analytics, workflow, and optimization solution for marketing professionals, enabling them to effectively manage their digital advertising spend across search, display, social and mobile advertising channels. Our solution is designed to help our customers:

 

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measure the effectiveness of their advertising campaigns through our proprietary reporting and analytics capabilities;

 

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manage and execute campaigns through our intuitive user interface and underlying technology that streamlines and automates key functions, such as ad creation and bidding, across multiple publishers and channels; and

 

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optimize campaigns across multiple publishers and channels in real time based on market and business data to achieve desired revenue outcomes using our predictive bid management technology.

Advertisers are increasingly focused on performance-based marketing and are seeking ways to gather, analyze and leverage data about the effectiveness of digital advertising to run more impactful and targeted campaigns. Our robust and flexible platform integrates with leading publishers, such as Baidu, Bing, Facebook, Google, Yahoo! and Yahoo! Japan, as well as leading web analytics and ad-serving solutions, and key enterprise applications to enable marketers to measure the return on investment of their marketing programs.

Our platform serves as a system-of-record for advertising performance, revenue and conversion data and allows advertisers to correlate advertising spend to subsequent revenue outcomes or business events. Through a single, intuitive interface, designed to meet the daily workflow requirements of online marketers, we enable our customers to simultaneously run large-scale digital advertising campaigns across multiple publishers and channels, making it easy for marketers to create, publish, modify and optimize campaigns in real time. Our predictive bid management and optimization technology also allows advertisers to forecast outcomes and optimize campaigns across multiple publishers and channels to achieve their business goals. Our optimization technology enables advertisers to easily and rapidly increase spend on those campaigns, publishers and channels that are performing while reducing investment in those that are not.

In December 2012, our customers collectively managed $             in annualized advertising spend on our platform and we had              active advertisers using our solution globally across a wide range of industries. We define an active advertiser as an advertiser from whom we recognized revenues in excess of $2,000 in the last month of a quarter. We market and sell our solutions to advertisers directly and through leading advertising agencies. We generate revenues from subscription contracts under which we charge fees generally based upon the amount of advertising spend that our customers manage through our platform. We have achieved 14 consecutive quarters of revenue growth. For 2009, 2010 and 2011, and for the nine months ended September 30, 2012, our revenues were $7.5 million, $19.0 million, $36.1 million and $42.5 million, representing period-over-period growth of 186%, 152%, 90% and 72%, respectively. We had net losses of $9.7 million in 2009, $10.9 million in 2010, $17.4 million in 2011 and $19.2 million for the nine months ended September 30, 2012.

 

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Industry Overview

Revenue Acquisition Management: The Competition for Revenue is Moving Online as Marketers Seek to Engage with the Growing Number of Digitally-Connected Consumers and Business Prospects

As audiences have increased their time spent online, the ability to acquire revenue through digital channels has emerged as a strategic priority for marketers. A growing number of consumers and businesses worldwide are relying on the Internet, social media and mobile devices to research products and services and make purchases. IDC estimates that, in 2012, 2.4 billion people and 3.3 billion devices will be connected to the Internet. As a result of this shift from offline to online engagement, the competition for revenue acquisition is moving to digital channels. Advertisers are shifting an ever larger portion of their marketing budgets to digital channels as they seek more effective and measurable ways to reach their target audiences, influence purchase decisions and acquire revenue. Forrester reported that U.S. web-influenced retail sales exceeded $1 trillion in 2011 and that by 2016 an estimated 52% of total online and offline retail sales will start with online research. These trends are causing an ongoing shift in advertising budgets to digital channels as enterprises increasingly compete to acquire customers and revenues online.

Digital advertising enables advertisers to measure and understand which channels and advertisements produce the best marketing results. Online advertisements can be tracked to assess consumer response, including behaviors such as purchase of products or services. As marketers gain more knowledge about which publishers, channels and ads are most effective for selling their products and services, they are seeking ways to adjust strategies dynamically to improve their financial returns from their digital advertising investments. They are also seeking solutions that improve their understanding of where, when and how much to invest to best achieve their desired revenue outcomes. This competition for revenue online is driving a need for a new category of enterprise software to help advertisers effectively measure, manage and optimize their digital advertising spend, which we refer to as Revenue Acquisition Management.

Significant Growth and Innovation in Digital Advertising

According to Magna Global, global spend on advertising is expected to grow from $480 billion in 2012 to $619 billion in 2017. Rapid growth in online activity and engagement is resulting in a significant ongoing shift in advertising spend to digital channels with global spend on digital advertising expected to grow from $98 billion in 2012 to $174 billion in 2017, according to Magna Global. As marketers increase spend on digital advertising, they are also increasing their investments in software, which allows them to measure, manage and optimize the effectiveness of that spend. Gartner, Inc. predicts that by 2017, the chief marketing officer will spend more on IT than the chief information officer.

As advertisers increasingly focus on performance-based marketing, they are seeking ways to gather, analyze and leverage data about the effectiveness of digital advertising to run more impactful and targeted campaigns, ultimately delivering higher rates of revenue acquisition. Furthermore, digital advertising provides advertisers with the ability to reach their audience across multiple channels, such as search, display and social, and multiple devices, including smartphones, tablets, personal computers, TVs and other connected devices. Each channel and device has unique characteristics and advertiser benefits, requiring advertisers to dynamically adapt their strategies and campaigns.

Digital advertising channels include:

Search.    Search advertising is the largest digital advertising channel today. According to Magna Global, search-based advertising is expected to grow from $45 billion in 2012 to $83 billion in 2017, representing a 13% compound annual growth rate, or CAGR. In 2012, spend on search advertising is expected to represent approximately 46% of all digital advertising spend, according to Magna Global.

 

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Search has become a critical digital advertising channel because it delivers relevant results to users actively searching for specific information and enables advertisers to efficiently track the success of their marketing campaigns based on click-through rates and conversion rates. Multiple search-driven publisher platforms exist today, including Baidu, Bing, Google, Naver, Yahoo! Japan, Yahoo! Search and Yandex, and additional publishers will develop search capabilities over time. These publishers continue to innovate by enhancing their advertising offerings. For example, search advertising is growing on mobile devices and publishers are optimizing their advertising offerings to address this demand.

Display.    Online display advertising has expanded over the years to include banner, rich media, video and text formats. According to Magna Global, display advertising is expected to grow from $41 billion in 2012 to $52 billion in 2017. The characteristics of measurability and relevance that have fueled the growth of the paid search market are being successfully introduced to the display advertising market. For example, dynamic and personalized targeting, rules-based placement, location-based awareness, and auction-based ad inventory purchasing are some of the innovations being used by publishers for display advertising. In turn, these innovations have increased complexity and the ability of advertisers to dynamically manage and maximize the impact of their display advertising spend.

Social.    Social media networks, such as Facebook, LinkedIn, Renren and Twitter, are rapidly emerging as an important new channel for digital advertisers. IDC projects that 75% of all Internet users will be active on social networks by 2014. According to Magna Global, advertising spend on social networks is expected to increase from $6 billion in 2012 to $23 billion in 2017, representing a 29% CAGR. Social networks offer advertisers the unique ability to target consumers based on their social graph, including relationships among network members and attributes of users.

Mobile.    Smartphones, tablets and other mobile devices are rapidly transforming how and where people consume media, conduct business, interact with brands and make purchase decisions. Adoption of mobile devices is also providing advertisers with the unique ability to target users based on real-time location data. As a result, digital advertisers are adapting their advertising strategies across search, display and social channels to mobile devices. According to Magna Global, the mobile advertising market is expected to grow from $6 billion in 2012 to $16 billion in 2017, representing a 23% CAGR.

Challenges Faced by Digital Advertisers

The evolution of a multi-channel and multi-device digital advertising ecosystem creates opportunities for advertisers to more effectively target and reach specific audiences to optimize revenue acquisition and other desired business results. However, as digital advertising becomes increasingly competitive and complex, digital advertisers are faced with several key challenges, including:

Fragmentation.    Advertisers have the opportunity to engage their target audiences online across a variety of digital channels, content publishers and delivery devices. Each channel, publisher and device has unique consumer engagement characteristics, targeting options, ad inventory, pricing, ad types, and buying interfaces. This fragmentation makes it significantly more challenging for advertisers to manage digital campaigns, measure their impact on revenue acquisition, and optimize them to achieve desired business results.

Scale.    As advertisers move more of their revenue acquisition activities online, increase advertising budgets, run more sophisticated online campaigns and significantly expand the number and types of ad units in use, they face significant scale challenges. Consumers are targeted through ad units, which may include keywords, ad types, ad placements, demographics, audience attributes and interests. Advertisers face increasing difficulty in tracking, analyzing and taking action across data sets

 

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that include thousands and often millions of ad units. Additional complexities include creating and orchestrating programs that span hundreds of accounts and thousands of campaigns, and managing diverse creative content across ad units. Advertisers are also challenged to frequently calculate and update bids across each of these ad units in response to fluctuations in advertising performance.

Innovation in Digital Advertising.    Publishers are constantly innovating by offering new ad formats and enhanced targeting options, adjusting ad inventory bidding mechanisms, as well as evolving their ad buying workflow and APIs. For example, recent innovations in digital technology offer the opportunity to retarget consumers who clicked on a search term, presenting them with relevant reminders of products or services they searched for as they continue to browse the Internet. While expanding the market for digital advertising, these innovations also make it much more complex and challenging for advertisers to efficiently and effectively manage and measure the revenue acquisition outcomes of their advertising campaigns across channels and publishers.

Dynamic Environment.    Digital advertisers operate in an intensely dynamic and fast moving environment. Auction-based bidding for ad inventory has become significantly more complex due to the proliferation of ad units and an expanding list of metrics and revenue acquisition outcomes which advertisers strive to optimize towards. Advertisers have varying business objectives ranging from increasing revenue to lowering cost per customer acquisition to increasing brand awareness with a certain customer profile, each requiring different strategies for bidding on ad inventory on various publisher platforms. Given the 24x7 nature of digital media and e-commerce, advertisers need to frequently refine their campaigns to react in real-time to availability of advertising inventory, auction-based pricing, user behavior, product inventory and competition.

Lack of Visibility.    Advertisers are focused on connecting advertising spend to revenue acquisition outcomes to quantify the return on their marketing investments. Digital advertising offers the opportunity to increase attribution and accountability for revenue acquisition outcomes. By effectively tying specific advertising campaigns to downstream online and offline revenue or other desired audience actions, advertisers can better manage and optimize to desired business results. Despite this potential, the lack of integration between data from publisher systems and data from web analytics, e-commerce, inventory, customer relationship management, call center, customer data warehouse and other enterprise applications makes it challenging for businesses to gain insights, make decisions and obtain better results from digital advertising. In order to measure success and maximize return on investments, advertisers need to access, correlate and analyze massive amounts of data across enterprise applications and publisher advertising platforms in real-time.

Impact of Social.    Increasing social engagement by consumers online provides advertisers with the unique opportunity to target prospects using a combination of the social graph, user interests and demographics. As a result, advertisers face additional complexity in effectively leveraging social networks to build awareness and engage prospective customers. Advertisers focused on social engagement also need to refresh and change their content more often to maintain relevance and drive response. In addition, advertisers are looking for more measurable and dynamic ways to track and manage the impact of social advertising.

Growth in Mobile.    The growth of mobile advertising is presenting new challenges for online advertisers, including screen and ad size limitations, differences in user context and location, and ad targeting options and formats that differ from traditional desktop campaigns. In order to successfully manage and optimize mobile campaigns, advertisers need to tailor ads to the needs of smartphone and tablet users and their context. In doing so, advertisers must manage the added complexity associated with location targeting, device targeting and mobile ad formats, as well as the difficulty of correlating mobile interactions with other online and offline interactions to appropriately attribute results to mobile advertising spend.

 

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Limitations of Existing Approaches

Existing digital advertising management approaches have a number of limitations, including:

Publisher Tools.    Publishers provide an online interface for purchasing their ad inventory. While effective in managing tasks on a particular publisher platform, these tools lack the capabilities to provide complete and accurate data on a marketer’s advertising performance across all publishers and channels.

Spreadsheets.    Many advertisers continue to use spreadsheets to manually manage ad units and bidding. Spreadsheets limit the ability to analyze the effectiveness of advertising campaigns due to difficulties in integrating data from publisher and revenue reporting systems. Moreover, this approach becomes unsustainable as the number of ad units managed proliferates, resulting in time consuming and error-prone workflows for advertisers as they attempt to make changes across publishers in bulk.

Proprietary Internal Systems.    Developing and maintaining proprietary systems requires ongoing investments in resources with specialized expertise in software architecture and development, data warehousing and analytics, integration with publisher APIs and algorithmic bid optimization. Advertisers who use this approach are forced to continually adjust their systems to the constantly shifting industry landscape with new ad formats and publishers, making these systems difficult to scale and expensive to maintain. Due to internal competition for development resources, over time proprietary systems often fail to keep pace with the needs of advertisers.

Bid Management Tools.    Bid management tools offer approaches to automate the process of calculating bids for online media and optimize the outcomes based on statistical analysis. These tools lack the end-to-end workflow capabilities advertisers require to maximize results through campaign management and optimization. Additionally, these tools do not address advertiser needs for data integration to understand the business impact of their campaigns, and generally have limited reporting and analytics functionalities.

The inadequacy of these existing approaches, coupled with a growing shift in budgets to digital advertising and demand for performance-based marketing, has created the need for Revenue Acquisition Management solutions. This category of solutions enables businesses to intelligently and efficiently measure, manage, and optimize their digital advertising spend for desired business results. We believe there is significant demand for Revenue Acquisition Management solutions among advertisers worldwide.

Our Solution

We provide a leading cloud-based digital advertising management platform that enables advertisers and agencies to improve financial performance, realize efficiencies and time savings, and make better business decisions. Our Revenue Acquisition Management platform is an analytics, workflow, and optimization solution for marketing professionals, enabling them to effectively manage their digital advertising spend across search, display, social and mobile advertising channels. Our solution is designed to help our customers:

 

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measure the effectiveness of their advertising campaigns through our proprietary reporting and analytics capabilities;

 

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manage and execute campaigns through our intuitive user interface and underlying technology that streamlines and automates key functions, such as ad creation and bidding, across multiple publishers and advertising channels; and

 

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optimize campaigns across multiple publishers and channels in real time based on market and business data to achieve desired revenue outcomes using our predictive bid management technology.

 

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Marin Revenue Acquisition Management Platform

 

LOGO

We believe our Revenue Acquisition Management platform enables advertisers to significantly improve their ability to acquire revenue through digital advertising campaigns.

Business Benefits

Financial lift.    As a result of optimization of advertising spend, efficiencies in workflow and better decision making, our customers are able to create and execute successful campaigns that lead to increased revenue and other desired business outcomes. Based on our internal customer surveys, we believe that our customers typically realize financial lift from using our platform through a variety of means such as increased volumes of revenues or leads, higher profits, improved advertising return on investment, and lower costs of customer acquisition.

To understand the performance lift that our clients experience, we studied data from 39 active advertisers with consistent spend and revenue tracking that archived data for over a year. While this is a small number of customers compared to our overall customer base, we believe that the customers included provide a representative sample of our customer base and the sample size was sufficiently large to draw conclusions regarding the effectiveness of our platform. For purposes of the study, we compared data from these advertisers’ first full month of using our platform with the data for the same month in the next calendar year. Year-over-year, we measured that advertisers increased their average return on investment (ROI) by 39%, and increased their average revenue per click by 8%. These increases coincided with an average decrease in cost-per-click and cost-per-acquisition by 16% and 14%, respectively. However, the metrics above are averages of the active advertisers included in

 

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the study and the performance lift that a particular customer may experience using our platform could be less than the average results. There are other limitations and uncertainties inherent in any study. As a result, you should not give undue weight to the results of this customer data study.

Efficiencies and time savings.    Utilizing our solution, customers are able to automate manual tasks such as reporting, analysis, campaign creation and bidding. Many of our customers previously relied upon publisher tools and spreadsheets to accomplish basic workflow, which limited productivity and resulted in errors. Our solution streamlines many of these time-intensive tasks to allow advertisers to focus on campaign strategy, expansion and optimization. In June 2012, we conducted an internal survey of employees of our customers that had used our platform at least four times in the last 365 days. Of the 250 responses, representing 149 unique customers, half of respondents reported time savings of 25% or greater from using our solution. However, as a result of the voluntary nature of the data gathering process, including that customers that recognized significant time savings may have been more favorably inclined to respond to the survey, and other limitations and uncertainties inherent in any statistical survey, we caution you not to give undue weight to the results of this survey.

Better business decision making.    Our Revenue Acquisition Management platform enables advertisers to manage campaigns to their business objectives. Using our platform, they can identify campaign elements for segmentation and analysis in order to easily categorize and compare data sets that are important to their business. In addition, through our proprietary recommendation engine, we are able to proactively suggest modifications to optimize marketing campaigns. By integrating with advertisers’ enterprise applications, we allow advertisers to correlate digital advertising spend to a subsequent business event, such as a purchase, a completed lead form, or a measure of advertising influence. Leveraging these insights, advertisers can adjust campaigns to meet their individual business goals and deliver measurable business results.

Key Strengths

Robust and flexible integration.    Our platform is architected to enable our customers to aggregate key data from internal or third-party sources. Our platform integrates with leading publishers such as Baidu, Bing, Facebook, Google, Yahoo! Japan and Yahoo! Search. We also integrate with leading web analytics and ad-serving providers, and key enterprise applications, such as revenue and inventory systems, customer relationship management systems and call center solutions. This integration framework enables our platform to be the system-of-record for our customers’ marketing, revenue and conversion data. Using the integration capabilities of our platform, advertisers can attribute revenue to specific marketing spend, gain visibility into the path to purchase, and assess customer lifetime value.

Big data analytics.    Our platform provides sophisticated analytics functionality that can parse through massive and constantly-expanding publisher and enterprise applications data sets to offer critical insight to advertisers. We offer visualization tools and dashboards, automated reporting, trend analysis, and forecasting tools for better decision making. Advertisers can aggregate and analyze data by dimensions such as business unit, product, or geography, providing insight into business-level revenue outcomes. Our alerting and comparative analysis capabilities allow advertisers to easily identify outliers and trends in order to take appropriate action. Our platform enables our customers to understand the return on investment on their advertising spend and to quickly act on analytical insights to adjust campaign targeting, bids and budget allocation across various channels, geographies and publisher platforms.

Real-time, cross-publisher campaign management.    Our solution enables customers to simultaneously run large-scale digital advertising campaigns across multiple publishers and channels, making it easy for marketers to create, publish, modify and optimize campaigns in real time using a

 

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single interface. We provide automated campaign generation, management and tracking tools as well as a testing suite that can automatically identify the best performing strategies. Our solution also provides tools for campaign targeting by publisher, geography, device, and audience to increase relevance and effectiveness of campaigns.

Predictive bid management and optimization.    Our bid management technology allows advertisers to optimize campaigns by dynamically managing bids on any number of ad units across multiple publishers and channels. Users can organize campaigns into and set bid goals based on defined groupings, providing complete visibility and control over business outcomes. We enable advertisers to automatically transmit changes to bids in bulk to the relevant publishers. Our algorithms help advertisers to determine and continuously recalculate the optimum bids for each ad unit. We also offer advertisers the ability to forecast and adjust bidding outcomes using our predictive bidding technology. Our optimization technology enables advertisers to easily and rapidly increase spend on those campaigns, publishers and channels that are performing while reducing investment in those that are not.

Intuitive interface offering visibility and control.    Our intuitive interface is designed to simplify the daily workflow requirements of digital advertisers allowing them to rapidly analyze campaign data and act on it. Users can easily filter data in real time to perform iterative analysis and manage across data sets. The search, replace, and multi-edit capabilities of our platform simplify the management of large scale campaigns. The interface also enables advertisers to save and share views with team members, providing a unified workflow for multi-user teams.

Experienced team committed to customer success.    We have assembled a global team experienced in the areas of digital advertising and enterprise software. Our customer-oriented corporate culture is defined by a commitment to customer success and characterized by an emphasis on transparency, collaboration and candor. Our customer-facing teams possess hands-on experience in managing large-scale digital advertising programs, enabling us to provide best-practice advice as well as reliable and responsive technology support to our customers.

Highly-scalable and extensible cloud-based architecture.    We deliver our cloud-based platform using a purpose-built technology foundation that leverages recent advances in cloud computing and data management. Our infrastructure is designed to support enterprise-scale data sets and transaction volumes and allows our customers to aggregate, store and process large amounts of data while maintaining high application availability and responsiveness. This flexible and extensible architecture enables us to serve organizations of all sizes from a single platform.

Our Growth Strategy

Our goal is to extend our lead in and grow the Revenue Acquisition Management category. Key elements of our growth strategy include:

Enhancing our leadership position by innovating and expanding our platform.    We intend to continue innovating and enhancing the value of our Revenue Acquisition Management platform. This includes developing new functionality and add-on modules, optimizing our feature set and platform capabilities, and expanding support for additional publishers and data sources.

Acquiring new advertisers.    We intend to continue to make investments to acquire new advertisers. In order to expand our customer base, we intend to expand our sales organization by adding sales executives globally and plan to continue to market our platform to new advertisers and agencies.

 

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Expanding within our existing advertiser base.    As our advertisers experience success on our platform, we often see increases in the advertising spend they manage on our platform. In order to expand within our existing advertising base, we intend to expand our current capabilities as well as offer new features and functionality, provide best practices support and demonstrate our ability to help our advertisers to obtain financial lift, time savings and better business results. We believe there is a significant opportunity for us to capture additional advertising spend on our platform from our existing advertiser base as they grow spend on existing channels, adopt new channels and expand to additional publishers.

Further penetrating display, social and mobile opportunities.    We believe that we have a significant opportunity to expand our customer relationships to include additional advertising spend on mobile, social and display campaigns. As these channels grow in scale and continue to become more complex, we believe our customers will require a sophisticated solution to manage advertising campaigns and revenue acquisition across all available digital channels. We intend to continue to optimize our solution to handle unique complexities associated with display, social and mobile advertising channels.

Continuing to expand internationally.    We operate internationally with offices in Australia, France, Germany, Japan, Singapore and the United Kingdom. In our quarter ended September 30, 2012, approximately 26% of our revenues were generated outside of the United States and we believe there is potential for additional growth internationally. IDC estimates that, in 2012, approximately 58% of global digital advertising spend will occur outside of the United States. We plan to grow the contribution of our international business by supporting additional regional publishers, expanding our global sales team and working with leading agencies and advertisers worldwide.

Growing our partner ecosystem and selectively pursuing acquisitions.    We intend to further develop our partner ecosystem to expand the breadth of our platform and acquire additional customers. We plan to establish additional relationships with leading publishers, technology partners, advertising agencies and other sales channel partners. In addition, we intend to selectively pursue acquisitions of complementary businesses and technologies that we believe will strengthen our competitive advantage in the Revenue Acquisition Management category, expand our platform and accelerate our customer and revenue growth.

Our Revenue Acquisition Management Platform

Our cloud-based Revenue Acquisition Management platform enables our customers to measure, manage and optimize their digital marketing campaigns to improve financial performance, realize efficiencies and time savings, and make better business decisions. We currently offer two editions of our platform that leverage the same underlying technology.

 

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Enterprise Edition.    Targeting large advertisers and agencies, Marin Enterprise is designed to provide digital advertisers with the power, scale and flexibility required to manage large-scale advertising campaigns.

 

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Professional Edition.    Targeting mid-market advertisers and agencies, Marin Professional is designed for rapid deployment and offers customers a complete workflow, analysis and optimization solution for managing digital advertising.

 

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Marin Revenue Acquisition Management Platform

 

LOGO

Our platform is comprised of the following modules:

Revenue Connect.    Our Revenue Connect module helps advertisers automate and streamline their ability to capture revenue data from a range of sources such as ad servers, analytics systems, CRM platforms, and third party databases. Through proprietary integration methods deployed across multiple data sources, our Revenue Connect module simplifies revenue tracking, leading to better bidding outcomes and significant time savings. Key capabilities of our Revenue Connect module include:

 

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APIs.    Advertisers often use proprietary or third party tracking methods to correlate ad clicks with revenue reporting. Our Revenue Connect module synchronizes with existing customer tracking methods, allowing users to deploy our platform without modification to existing processes or systems, and resulting in minimal disruption.

 

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Revenue Tracking.    We have optimized our software for robust integration of revenue data from a variety of third-party systems such as Adobe Site Catalyst, BrightTag, ClearSaleing, Demandware, DoubleClick, Google Analytics, IBM Coremetrics, Microsoft Atlas, Mongoose Metrics, RevTrax, salesforce.com and TagMan, allowing our customers to obtain accurate revenue reporting related to their advertising campaigns.

 

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Marin Tracker.    We provide advertisers with a proprietary tracking mechanism that can be leveraged either independently to track revenue outcomes, or in conjunction with a customer’s existing tracking mechanisms.

 

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Table of Contents

Campaign Management.    Our Campaign Management module provides the digital advertiser with a unified interface to create, manage and optimize campaigns across a broad range of publishers, leading to greater efficiencies and increased flexibility. Key capabilities of our Campaign Management module include:

 

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Cross-Publisher Editing.    Allows advertisers to create and edit campaigns, creative, bids, and budgets in bulk across publishers and accounts.

 

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Audience Targeting.    Allows advertisers to target specific audiences across a variety of dimensions such as age, gender, region, interests, device and the social graph.