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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Table of Contents

As filed with the Securities and Exchange Commission on July 2, 2013

Registration No. 333-          

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



YuMe, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  7311
(Primary Standard Industrial
Classification Code Number)
  27-0111478
(I.R.S. Employer
Identification Number)

1204 Middlefield Road
Redwood City, CA 94063
(650) 591-9400

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

Jayant Kadambi
Co-founder, Chairman of the Board, President and Chief Executive Officer
YuMe, Inc.
1204 Middlefield Road
Redwood City, CA 94063
(650) 591-9400

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



Please send all communications to:

Cynthia C. Hess, Esq.
Horace L. Nash, Esq.
Niki Fang, Esq.
Fenwick & West LLP
Silicon Valley Center
801 California Street
Mountain View, CA 94041
(650) 988-8500

 

Paul T. Porrini, Esq.
Executive Vice President,
General Counsel and Secretary
YuMe, Inc.
1204 Middlefield Road
Redwood City, CA 94063
(650) 591-9400

 

Douglas Smith, Esq.
Stewart McDowell, Esq.
Brandon W. Loew, Esq.
Gibson, Dunn & Crutcher LLP
555 Mission Street
Suite 3000
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.    o

          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.    o

          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.    o

          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. o

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 under the Securities Exchange Act of 1934. (Check one):

Large Accelerated Filer o   Accelerated Filer o   Non-accelerated Filer ý
(Do not check if a
smaller reporting company)
  Smaller Reporting Company o



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

  $65,000,000   $8,866

 

(1)
In accordance with Rule 457(o) under the Securities Act of 1933, as amended, the number of shares being registered and the proposed maximum offering price per share are not included in this table.

(2)
Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.



          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 that 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 Commission, acting pursuant to said Section 8(a), may determine.

   


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 2, 2013

PRELIMINARY PROSPECTUS

            Shares

LOGO

YuMe, Inc.

Common Stock
$      per share



        This is the initial public offering of our common stock. We are selling            shares of common stock and the selling stockholders named in this prospectus are selling            shares of common stock. We will not receive any proceeds from the sale of the shares by the selling stockholders. We currently expect the initial public offering price to be between $            and $            per share of common stock.

        We have granted the underwriters an option to purchase up to                        additional shares of common stock.

        We have applied to list our common stock on the New York Stock Exchange under the symbol "YUME."



        We are an "emerging growth company" as defined under federal securities laws. Investing in our common stock involves risks. See "Risk Factors" beginning on page 11.

        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
Public Offering Price   $   $
Underwriting Discount   $   $
Proceeds to Us (before expenses)   $   $
Proceeds to the Selling Stockholders (before expenses)   $   $

        The underwriters expect to deliver the shares to purchasers on or about                        , 2013 through the book-entry facilities of The Depository Trust Company.



Citigroup   Deutsche Bank Securities

Barclays

 

Needham & Company

 

Piper Jaffray

                        , 2013


LOGO


LOGO


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        We are responsible for the information contained in this prospectus. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the selling stockholders and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.




TABLE OF CONTENTS

 
  Page

Summary

  1

Risk Factors

  11

Special Note Regarding Forward-looking Statements

  34

Market, Industry and Other Data

  35

Glossary

  36

Use of Proceeds

  38

Dividend Policy

  39

Capitalization

  40

Dilution

  42

Selected Consolidated Financial Data

  44

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

  47

Business

  74

Management

  89

Executive Compensation

  97

Certain Relationships and Related Person Transactions

  106

Principal and Selling Stockholders

  109

Description of Capital Stock

  112

Shares Eligible for Future Sale

  117

Material U.S. Federal Income and Estate Tax Considerations for Non-U.S. Holders

  120

Underwriting

  125

Legal Matters

  132

Experts

  132

Where You Can Find Additional Information

  132

Index to Consolidated Financial Statements

  F-1



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SUMMARY

        This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes thereto and the information set forth under the sections "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in each case included in this prospectus. Unless the context otherwise requires, we use the terms "YuMe," "Company," "we," "us" and "our" in this prospectus to refer to YuMe, Inc. and, where appropriate, our consolidated subsidiaries.

Our Company

        We are a leading independent provider of digital video brand advertising solutions. Our proprietary technologies serve the specific needs of brand advertisers and enable them to find and target large, brand-receptive audiences across a wide range of Internet-connected devices and digital media properties. Our software is used by global digital media properties to monetize professionally-produced content and applications. We facilitate digital video advertising by dynamically matching relevant audiences available through our digital media property partners with appropriate advertising campaigns from our advertising customers. Our leadership, based on proprietary technologies, brand-specific advertising solutions, large software install base and data assets, is reflected in our wide audience reach, with over 257 million monthly unique viewers worldwide during May 2013, and our large customer base that includes 64 of the top 100 U.S. advertisers.

        We help our advertising customers overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where dispersed audiences use a growing variety of Internet-connected devices to access thousands of online and mobile websites and applications. In 2012, we delivered over eight billion video advertising impressions across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. Our video ads run when users choose to view video content on their devices. On each video advertising impression, we collect dozens of data elements that we use for our advanced audience modeling algorithms that continuously improve our brand-targeting effectiveness.

        We believe our digital video brand advertising solution exceeds the efficacy and enhances the reach of traditional television advertising. The global television advertising market was $202 billion in 2012, according to Magna Global. The digital video advertising market is expected to reach approximately $15 billion in global annual spend by 2016, according to Frost & Sullivan. We believe deployment of our solutions will accelerate the shift of advertising budgets from television to digital video. Additionally, we believe that audience fragmentation in the digital video market will continue, and technologies will continue to diverge, making delivery of television-like video advertisements to large-scale digital audiences increasingly difficult and complex. Our technology solutions address these challenges, enhancing the opportunity for brand advertisers to capture targeted, TV-scale digital audiences.

        Our solutions are purpose-built for the digital video brand advertising market and professional digital media property owners. As with traditional television, digital video enables brand advertisers to reach large audiences with impactful messages combining sight, sound and motion. We give digital media property owners the technology they need to deliver video advertisements to fragmented audiences across multiple devices, and we aggregate those audiences into cohesive, TV-scale audiences for brand advertisers. During May 2013, our technology enabled us to reach over 155 million monthly unique viewers in the United States and 257 million monthly unique viewers worldwide. To do this, our sophisticated data-science capabilities and advertising management platform and software are customized to deliver ads for a growing variety of Internet-connected devices. For example, our

 

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Placement Quality Index, or PQI, contextual scoring system uses data algorithms to assess the quality of ad placements and optimize placements to maximize brand advertising results. In addition, our Audience Amplifier machine-learning tool uses those brand results in its correlative data models to find audiences that we expect to be receptive to specific brand messages.

        Digital media properties license our technology to deliver digital video advertisements to their audiences, and we apply our data science capabilities to ascribe characteristics to those audiences that will be relevant to particular advertisers. In combination, these capabilities allow us to deliver ads to audiences that we expect to be receptive to specific brand messages. We generate results that are relevant to brand advertisers, such as brand awareness, message recall, brand favorability and purchase intent, based on the viewer data that we collect through viewer surveys and our YuMe Audience Aware Software Development Kits, or YuMe SDKs.

        Over our eight-year operating history we have amassed a vast amount of data derived from our large software installed base of YuMe SDKs that are embedded in online and mobile websites and entertainment applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices. This allows us to deliver television-like ads, enhanced and customized for each specific device type, and collect valuable advertisement viewership data. We estimate that we collected over 200 billion data points from ad impressions we delivered in 2012. As we grow our audience and advertiser footprint, we are able to collect even more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions and driving additional adoption.

        We generate revenue by delivering digital video advertisements on Internet-connected devices. Advertising customers submit ad insertion orders to us and we fulfill those orders by delivering their digital video advertisements to audiences available through digital media properties, a process that we refer to as an advertising campaign. From 2007 to 2012, we ran over 21,000 advertising campaigns. We are typically paid on a cost per thousand impressions, or CPM, basis, of which we generally pay digital media properties a negotiated percentage. Our customers primarily consist of large global brands and their advertising agencies. In the twelve months ended March 31, 2013, our customers included 64 of the top 100 U.S. advertisers in 2012 as ranked by Advertising Age magazine, or the AdAge 100, such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald's.

        During the three months ended March 31, 2013 our revenue was $26.6 million, a 33% increase over the same period in 2012, while our gross margin expanded to 45% from 43%. We recorded a net loss of $3.3 million and adjusted EBITDA of $(1.6) million for the three months ended March 31, 2013, compared with a net loss of $1.5 million and adjusted EBITDA of $(0.5) million for the three months ended March 31, 2012. In 2012, our revenue was $116.7 million, a 70% increase over 2011, while our gross margin expanded to 46% from 38%. We recorded net income of $6.3 million and adjusted EBITDA of $11.8 million in 2012, and a net loss of $11.1 million and adjusted EBITDA of $(7.4) million in 2011. For information on adjusted EBITDA, and a reconciliation of adjusted EBITDA to net income (loss) on the basis of accounting principles generally accepted in the United States, or GAAP, please refer to "Selected Consolidated Financial Data."

Key Factors Shaping the Digital Video Advertising Market

        We believe the key factors shaping the digital video advertising market include:

        Proliferation of video capable, Internet-connected devices.    Advances in video technology and ubiquitous high speed Internet access are driving increased access to digital video through personal computers, smartphones, tablets, Internet-connected TVs and other devices. These devices are accessible at different places and at different times of day, rather than concentrated in the home during "prime-time" hours, resulting in new opportunities for advertisers to use digital video ads.

 

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        Decline in television viewing share.    While traditional television still dominates video entertainment, the share of time spent watching television has declined over the past fifteen years in favor of digital screens. According to Magna Global, the TV share of weekly media time spent decreased to 45% in 2012 from 73% in 1995. This preference for video consumption other than through traditional television is most pronounced with multi-device owners and in the key demographic of 18 to 44 year olds, according to a 2012 study by Econsultancy on behalf of the Interactive Advertising Bureau.

        Large, diverse audiences.    With hundreds of millions of unique viewers worldwide, digital video reaches mass audiences. However, these audiences view a more diverse set of content compared to traditional TV audiences. Consumers watch hundreds of TV and cable channels but they view digital video content through tens of thousands of online and mobile websites and applications.

        Lack of unifying technologies.    The digital video ecosystem consists of digital media properties, network operators, hardware manufacturers and software providers and a multitude of different devices, operating systems, technologies and policies. While creating opportunities for advertisers, this complexity makes the deployment and measurement of advertising campaigns more difficult.

        Diminishing returns of TV advertising.    We believe that television advertising has diminishing returns in its ability to reach additional viewers. According to comScore, a brand trying to reach its audience through television alone will find that investing more advertising dollars merely increases frequency with the same audience rather than building incremental reach to new audiences.

The Challenges Facing Brand Advertisers

        Brand advertisers face multiple challenges in running effective digital video brand advertising campaigns, including:

        Accessing dispersed audiences.    While the audience for digital video is large in the aggregate, it is highly fragmented. Brand advertisers accustomed to running campaigns on TV and cable networks face the challenge of reaching digital video users across tens of thousands of online and mobile websites and applications. Further, these audiences use many different device types, formats and operating systems, creating challenges for brand advertisers to reach the audience scale they require with high impact advertisements.

        Identifying brand-receptive audiences at scale.    While online digital media affords a significantly greater degree of precision targeting capabilities compared to traditional media, identifying brand-receptive audiences on a large scale is vastly more complex.

        Delivering targeted ads with the desired context.    Diverse content, a multitude of device types, disparate consumption patterns and different levels of content quality are some of the factors that make contextual targeting more difficult in digital video than on television.

        Inadequacy of direct response digital ad solutions.    Brand advertisers seek digital video advertising solutions that are tailored to brand-oriented planning and measurement objectives such as brand awareness, message recall, brand favorability and purchase intent. However, most digital advertising solutions today were built to service the direct response market, which is designed to compel specific online actions. Digital video advertising solutions that have been adapted from those technologies make it difficult for brand advertisers to measure and optimize digital campaigns with brand-oriented goals.

        Conducting integrated campaigns.    Conducting integrated advertising campaigns that combine digital video and traditional media is complex. Integrated campaigns require advertisers to manage the complexity of disparate media buying and measurement systems in an efficient manner.

 

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The YuMe Solution

        Our solutions are built for brand advertisers and professional digital media property owners that produce content and applications. We have built our software solutions and data-science capabilities to deliver reliable results for brand advertisers and monetization for digital media property owners. Our video ads run when users choose to view video content on their devices. We deliver television-like video advertisements, the vast majority of which are prominently displayed before the chosen video content is displayed. We deliver these ads to audiences across Internet-connected devices and platforms. With our data-science capabilities, including data collection and sophisticated analytics, our advertiser customers reach large-scale, brand-receptive audiences, and digital media property owners capture brand advertising revenue with their content and applications.

        We have developed our solutions on three pillars: embed, learn and deliver. We embed our YuMe SDKs as part of online and mobile websites and applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices, yielding valuable data; we learn from that data to build our audience and contextual targeting models; and using our platform we deliver ads to audiences that we expect to be receptive to specific brand messages.

        We believe our comprehensive solutions have advantages that other solutions cannot offer. Our end-to-end solutions, including customized YuMe SDKs, first party data collection and data-science capabilities, a brand-centric video advertising platform and a consultative sales force, combine to make each component more valuable. Our Placement Quality Index expands the digital brand advertising market by identifying digital media properties whose content and applications have not previously captured brand adverting campaigns, enabling them to optimize their inventory to deliver brand value.

        Our solutions:

        Aggregate large fragmented audiences.    Through our embedded YuMe SDKs, we aggregate millions of digital video viewers on over 1,500 digital media properties, across personal computers, smartphones, tablets, Internet-connected TVs and other devices. The YuMe SDKs, which are customized for individual devices, allow us to deliver relevant and distinct video ad experiences to different devices and audiences, while simultaneously collecting device, content and audience-specific data on the brand performance of those ad placements.

        Reach brand-receptive audiences at scale.    Our Audience Amplifier tool applies machine-learning technology to first party data that we collect from the YuMe SDKs, in order to identify viewers within our aggregated audience who we expect to be receptive to specific brand messages. We refer to these viewers as brand-receptive audiences. We use characteristics of these audiences to identify additional viewers that may deliver similar or better brand receptivity.

        Deliver targeted ads in valuable brand contexts.    Our contextual targeting capabilities are designed to ensure that brand advertisements are delivered in the relevant context alongside high-quality content. At the core of our contextual targeting technology is our PQI, an extensible set of scoring and targeting algorithms that use data collected by our YuMe SDKs to optimize all aspects of video advertising.

        Help digital media property owners capture brand dollars.    Digital media property owners who use our YuMe for Publishers platform, or YFP, get a comprehensive system for creating, managing, monetizing and measuring cross-platform digital video brand advertising inventory. Using YFP, digital media property owners monitor, in real-time, how their content is valued, how it performs for brand advertising buyers and how much revenue they have generated based on that performance.

        Measure and optimize campaigns based on brand metrics.    Our YuMe SDKs enable us to collect first party campaign data, such as player size and completion rate, and to survey viewers for information about factors such as message recall and brand favorability.

 

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        Deliver impactful device-specific ads.    Our YuMe SDKs and video advertisements are customized for every digital device, so we can utilize specific characteristics of each device to deliver new and impactful video ads.

        Augment TV advertising spend.    When deployed as part of an integrated digital video and TV campaign, our solutions enable broader reach and better results than TV campaigns alone.

Our Competitive Strengths

        We believe the following competitive strengths differentiate us and serve as barriers for others seeking to enter our market:

        Brand-specific advertising solutions.    Since our founding, we have been solely focused on solving digital video brand advertising problems. We have invested significant resources to design and build our solutions to help brand advertisers reach appropriate brand-receptive audiences, and to measure and optimize their digital video campaigns using brand-centric metrics. In addition, through our eight-year operating history, we have amassed a depth of knowledge and expertise on brand advertising delivery and performance, embodied in our proprietary technologies and algorithms, that we believe is difficult to replicate. By contrast, some of our competitors offer solutions adapted from direct response and other traditional online advertising technologies that optimize around single variables, such as click-through-rate, and do not address the technical complexities and multiple variables associated with brand-receptivity.

        Large software installed base and data assets.    Our YuMe SDKs are distributed through online and mobile websites and applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices. As we grow our audience and advertiser footprint, we are able to collect more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions, and driving additional adoption.

        Differentiated data-science capabilities.    We have assembled a broad set of data collection, analytic and measurement capabilities tuned for the delivery of effective digital video brand advertisements to large, fragmented audiences. We believe our approach of combining first party data (collected by YuMe), second party data (collected by digital media properties) and third party data (licensed from third parties) with brand-centric machine learning techniques and sophisticated algorithms is unique in the market.

        First party data collection.    We believe our first party data, including survey and YuMe SDK generated data, positions us well compared to traditional digital advertising solutions that tend to rely on third party data. We believe first party data is a more accurate and dependable measurement of a particular audience than second and third party data, making it more valuable to brand advertisers.

        Top-tier brand advertisers.    In the twelve months ended March 31, 2013, our customers included 64 of the AdAge 100, such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald's. In 2012, the AdAge 100 spent $104.5 billion on advertising in the United States alone, according to Advertising Age magazine.

        Scalable business model with significant operating leverage.    We benefit from operating leverage through our technology, sales organization and digital media property relationships. As each customer spends more with us, and as we collect more data, our technology continuously optimizes brand results for that customer. This helps us improve return on investment for our customers and positions us to capture a larger share of their marketing spend in a cost-effective manner. In addition, we are able to improve the efficiency of our sales force and better manage our traffic acquisition costs to improve our margins.

 

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        Independent market position.    Our solutions are independent of market participants such as digital media property owners, device manufacturers, software developers and operating system providers. We believe this enables us to better serve brand advertisers, as we are able to offer them access to large-scale audiences, eliminating fragmentation, regardless of how those viewers consume digital video content.

Our Growth Strategy

        We seek to extend our leadership position in digital brand advertising by pursuing the following strategies:

        Continue to invest in YuMe SDK technology to amass large brand audiences.    We will continue to customize our YuMe SDKs to address different device types and device specific audiences in order to aggregate audiences in ways that are meaningful for brand advertisers and valuable for digital media properties.

        Enhance our PQI capabilities.    We utilize our core technologies to generate brand value and digital media property monetization. Over time, as we share the results of PQI-based campaigns, we believe we can further improve both brand value and digital media property monetization.

        Continue to enhance our audience and contextual targeting capabilities.    We believe there is significant untapped value in the first party data assets we have accumulated and we plan to continue to invest in data-mining capabilities and analytics to gain further insight and improve our targeting capabilities, enabling us to attract new advertisers and expand our business with existing customers.

        Increase share of advertising budgets with existing customers.    Many of our customers are in the early stages of deploying digital video advertising. We continuously work to capture a larger share of advertising budgets from our existing customers. Additionally, many of our advertisers and the agencies that represent them own or manage multiple distinct brands, and we seek to expand the portfolio of their brands for which we deploy campaigns.

        Acquire new customers.    Many brand advertisers have not yet deployed digital video advertising. We plan to continue to grow our sales force and our marketing efforts to reach new potential customers and expand awareness of our differentiated technology solutions.

        Expand our global footprint.    We plan to extend our success into new geographies where conditions favor development of a digital video brand advertising market.

        Pursue strategic acquisitions.    We may from time to time acquire complementary businesses and technologies that enhance our position in the digital video advertising markets in the U.S. and internationally.

Risks Associated with Our Business

        Our business is subject to a number of risks of which you should be aware before making an investment decision. These risks are discussed more fully in the "Risk Factors" section of this prospectus immediately following this prospectus summary. These risks include, among others:

    History of net losses that may make it difficult to achieve or maintain profitability in the future;

    Limited operating history that may make it difficult to evaluate our business and prospects;

    Quarterly operating results that fluctuate and are difficult to predict;

    Seasonal fluctuations in digital video advertising activity, which could adversely affect our cash flow;

 

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    Depending on a single customer for a substantial portion of our revenue;

    Depending on advertising agencies as intermediaries; and

    Intensely competitive nature of the industry.

Corporate Information

        We were incorporated under the laws of Delaware on December 16, 2004. Our principal executive office is located at 1204 Middlefield Road, Redwood City, CA 94063. Our telephone number is (650) 591-9400. Our website address is www.yume.com. Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this prospectus.

        "YuMe," the YuMe Y TV logo, "Audience Amplifier," "Audience-Aware SDK," "Placement Quality Index," "PQI" and our other logos or product names are our registered or common law trademarks in the United States and some other countries. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

 

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The Offering

Common stock offered by YuMe

                          shares

Common stock offered by the selling stockholders

                          shares

Common stock to be outstanding after this offering

                          shares

Total common stock to be outstanding after this offering

                          shares

Over-allotment option

                          shares

Use of proceeds

  We currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital. We may also use a portion of the net proceeds for the acquisition of, or investment in, complementary technologies, assets or businesses, although we have no present commitments or agreements to enter into any acquisitions or investments. See "Use of Proceeds" on page 38.

Proposed New York Stock Exchange symbol

  "YUME"

        The number of shares of common stock outstanding after this offering is based on 160,064,526 shares outstanding as of March 31, 2013, and excludes:

    26,363,370 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2013, with a weighted average exercise price of $0.67 per share;

    1,444,500 shares of common stock issuable upon exercise of options to purchase common stock granted between April 1 and June 30, 2013, with a weighted average exercise price of $1.41 per share;

    323,904 shares of common stock issuable upon the exercise of convertible preferred stock warrants outstanding as of March 31, 2013 that will convert into warrants to purchase shares of common stock upon closing of this offering, with a weighted average exercise price of $0.25 per share; and

                     shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan, which will become effective on the completion of this offering and will contain provisions that automatically increase the number of shares reserved for issuance each year, as more fully described in "Executive Compensation—Employee Benefit Plans."

        Except as otherwise indicated, information in this prospectus reflects or assumes:

    the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 131,043,397 shares of common stock, which will occur automatically upon the closing of this offering;

    the conversion of all outstanding warrants to purchase 323,904 shares of convertible preferred stock into warrants to purchase 323,904 shares of common stock;

    a                for                reverse split of common stock, to be effected in                        , 2013;

    the filing of our restated certificate of incorporation and the effectiveness of our restated bylaws, which will occur immediately prior to the closing of this offering; and

    no exercise of the underwriters' over-allotment option.

 

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Summary Financial and Other Data

        The following tables summarize our consolidated financial and other data. You should read this summary consolidated financial data together with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

        We have derived the consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2012 and 2013 and the consolidated balance sheet data as of March 31, 2013 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. We have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future.

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
  (in thousands, except per share data)
 

Consolidated Statement of Operations Data:

                               

Revenue

  $ 51,872   $ 68,565   $ 116,744   $ 20,069   $ 26,612  

Cost of revenue(1)

    31,565     42,787     62,985     11,489     14,553  
                       

Gross profit

    20,307     25,778     53,759     8,580     12,059  

Operating expenses:

                               

Sales and marketing(1)

    13,212     23,416     31,385     7,102     10,217  

Research and development(1)

    1,862     2,734     2,766     652     1,000  

General and administrative(1)

    5,263     10,596     12,466     2,349     3,938  
                       

Total operating expenses

    20,337     36,746     46,617     10,103     15,155  

Income (loss) from operations

   
(30

)
 
(10,968

)
 
7,142
   
(1,523

)
 
(3,096

)

Other income (expense), net:

                               

Interest expense

    (54 )   (164 )   (117 )   (34 )   (19 )

Other income (expense), net

    (171 )   (19 )   (147 )       (192 )
                       

Total other expense, net

    (225 )   (183 )   (264 )   (34 )   (211 )
                       

Income (loss) before income taxes

    (255 )   (11,151 )   6,878     (1,557 )   (3,307 )

Income tax (expense) benefit

   
(111

)
 
62
   
(612

)
 
65
   
(31

)
                       

Net income (loss)

  $ (366 ) $ (11,089 ) $ 6,266   $ (1,492 ) $ (3,338 )
                       

Net income (loss) attributable to common stockholders

  $ (366 ) $ (11,089 ) $ 89   $ (1,492 ) $ (3,338 )
                       

Net income (loss) per share attributable to common stockholders:

                               

Basic

  $ (0.02 ) $ (0.51 ) $ 0.00   $ (0.05 ) $ (0.12 )

Diluted

  $ (0.02 ) $ (0.51 ) $ 0.00   $ (0.05 ) $ (0.12 )

Weighted-average number of shares used in computing net income (loss) per share attributable to common stockholders:

                               

Basic

   
19,558
   
21,898
   
28,296
   
27,160
   
28,971
 

Diluted

    19,558     21,898     33,272     27,160     28,971  

Pro forma net income (loss) per share (unaudited)(2):

                               

Basic

              $ 0.04         $ (0.02 )

Diluted

              $ 0.04         $ (0.02 )

Weighted average shares used in computing pro forma net income (loss) per share (unaudited):

                               

Basic

                155,422           158,777  

Diluted

                160,398           158,777  

 

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  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
  (in thousands, except per share data)
 

Other Financial Data:

                               

Adjusted EBITDA(3)

  $ 1,585   $ (7,422 ) $ 11,820   $ (460 ) $ (1,617 )

(1)
Employee and non-employee stock-based compensation expense included in the consolidated statement of operations data above was as follows:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
  (in thousands)
 

Cost of revenue

  $ 14   $ 68   $ 128   $ 25   $ 30  

Sales and marketing

    554     981     1,215     294     341  

Research and development (excluding capitalized internally developed software)

    13     65     184     17     70  

General and administrative

    279     354     515     93     204  
                       

Total employee stock-based compensation

  $ 860   $ 1,468   $ 2,042   $ 429   $ 645  
                       
(2)
Pro forma basic and diluted net income per share have been calculated assuming the conversion of all outstanding shares of convertible preferred stock into shares of common stock as of the beginning of the applicable period or the original issuance, if later. See Note 14, "Net Income (Loss) per Share and Unaudited Pro Forma Net Income (Loss) per Share," in Notes to Consolidated Financial Statements for a description of the method used to compute basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share.

(3)
We define adjusted EBITDA as net income (loss) plus income tax (expense) benefit, interest expense, depreciation and amortization, and stock based compensation. Please see "Selected Consolidated Financial Data—Adjusted EBITDA" for more information and for the reconciliation of adjusted EBITDA to net income (loss), which is the most directly comparable financial measure calculated in accordance with GAAP.

 
  As of March 31, 2013  
 
  Actual   Pro Forma(1)   Pro Forma
As Adjusted(2)
 
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

  $ 26,834   $ 26,834        

Property, equipment and software, net

    5,657     5,657     5,657  

Working capital

    45,400     45,400        

Total assets

    80,472     80,472        

Capital lease obligations, long term

    159     159     159  

Convertible preferred stock

    76,191          

Total stockholders' equity (deficit)

    (17,878 )   58,642        

(1)
The pro forma column reflects (i) the automatic conversion of all outstanding shares of preferred stock into 131,043,397 shares of common stock, and (ii) the reclassification of the preferred stock warrant liability to additional paid-in capital, each to be effective immediately prior to the closing of this offering.

(2)
The pro forma as adjusted column reflects all adjustments included in the pro forma column and gives effect to the sale by us of            shares of common stock offered by this prospectus at an assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) each of cash and cash equivalents, working capital, total assets, additional paid-in capital, and total stockholders' equity by approximately $            , 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. The pro forma as adjusted information presented in the summary balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the following risk factors, as well as general economic and business risks, and all of the other information contained in this prospectus. Any of the risks or uncertainties described below could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto. Also note that the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties of which we are unaware, or that we currently believe are not material, also may become important factors that negatively affect us.

Risks Related to Our Business and Our Industry

    We have incurred significant net losses, and we may not be profitable in the future.

        We incurred net losses of $0.4 million, $11.1 million, $1.5 million and $3.3 million in 2010 and 2011 and for the three months ended March 31, 2012 and 2013, respectively. We had net income of $6.3 million in 2012. We had an accumulated deficit of $25.3 million as of March 31, 2013. In past periods we have not generated sufficient revenue to offset operating expenses, which may occur in future periods as well. Although our revenue has increased substantially in recent periods, it is likely that we will not be able to maintain this rate of revenue growth as a result of a variety of factors, including increased competition and the maturation of our business, and we cannot assure you that our revenue will continue to grow or will not decline. We expect to invest heavily in our operations to support anticipated future growth; as a result, our operating expenses will increase substantially and to be profitable we will need to increase our revenue sufficiently to offset these higher expenses. You should not consider our historical revenue growth or operating expenses as indicative of our future performance. If our revenue growth rate declines or our operating expenses exceed expectations, our financial performance will be adversely affected. Further, if our future growth and operating performance fail to meet investor or analyst expectations, it could have a materially negative effect on our stock price.

    Our limited operating history makes it difficult to evaluate our business and prospects and may increase your investment risk.

        We commenced operations in 2004 and, as a result, we have only a limited operating history upon which you can evaluate our business and prospects. Although we have experienced significant revenue growth in recent periods, it is likely that we will not be able to sustain this growth. Because the digital video advertising industry is relatively new, we will encounter risks and difficulties frequently encountered by early-stage companies in rapidly evolving industries, including the need to:

    Maintain our reputation and build trust with advertisers and digital media property owners;

    Offer competitive pricing to advertisers and digital media properties;

    Maintain and expand our advertising inventory;

    Deliver advertising results that are superior to those that advertisers or digital media property owners could achieve through the use of competing providers or technologies;

    Continue to develop and upgrade the technologies that enable us to provide our solutions;

    Respond to evolving government regulations relating to the Internet, telecommunications, mobile, privacy, marketing and advertising aspects of our business;

    Identify, attract, retain and motivate qualified personnel; and

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    Manage expanding operations, including our international expansion.

        If we do not successfully address these risks, our revenue could decline, our costs could increase, and our ability to pursue our growth strategy and attain profitability could be compromised.

    Our quarterly operating results fluctuate and are difficult to predict, and our results are likely to fluctuate and be unpredictable in the future, so our operating results could fall below our expectations or investor expectations.

        Our operating results are difficult to predict, particularly because we generally do not have long-term arrangements with our customers, and have historically fluctuated. Our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond 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 operating results as an indication of our future performance. Factors that may affect our quarterly operating results include:

    Seasonal patterns in advertising;

    The addition and loss of new advertisers and digital media properties;

    Our variable and unpredictable transaction-based sales cycle;

    Changes in demand for our solutions;

    Advertiser cancellation of insertion orders;

    Changes in the amount, price and quality of available advertising inventory from digital media properties;

    The timing and amount of sales and marketing expenses incurred to attract new advertisers and digital media properties;

    Changes in the economic prospects of advertisers or the economy generally, which could alter advertisers' spending priorities, or could increase the time it takes us to close sales with advertisers;

    Changes in our pricing policies or the pricing policies of our competitors, and changes in the pricing of digital video advertising generally;

    Changes in governmental regulation of the Internet, wireless networks, mobile platforms, digital video brand or mobile advertising, or the collection, use, processing or disclosure of device or user data;

    Costs necessary to improve and maintain our technologies;

    Timing differences between our payments to digital media property owners for advertising inventory and our collection of advertising revenue related to that inventory; and

    Costs related to acquisitions of other businesses.

        Our operating results may fall below the expectations of market analysts and investors in some future periods. If this happens, even temporarily, the market price of our common stock may fall.

    Seasonal fluctuations in digital video advertising activity could adversely affect our cash flows.

        Our cash flows from operations vary from quarter to quarter due to the seasonal nature of advertiser spending. For example, many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. In addition, we acquire advertising inventory on a guaranteed basis, or at a fixed price, in order to meet the anticipated increased demand in the fourth quarter. To date, these seasonal effects

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have been masked by our rapid revenue growth and other factors, such as episodic political campaign advertising spending. However, if and to the extent that seasonal fluctuations become more pronounced, or are not offset by other factors, our operating cash flows could fluctuate materially from period to period as a result.

    We depend on a single agency customer and a single advertiser for a substantial portion of our revenue, and a reduction in digital advertising purchased by that customer or advertiser could significantly reduce our revenue.

        Brand advertisers represented by Omnicom Media Group Holdings Inc., or OMG, accounted for more than 10% of our revenue in 2011, 2012 and the three months ended March 31, 2013. A significant reduction for any reason in our revenue from digital advertising purchased by OMG or one or more brand advertisers that it represents would materially harm our financial condition and results of operations.

    We generally do not have long-term agreements with our customers, and we may be unable to retain key customers, attract new customers, or replace departing customers with customers that can provide comparable revenue to us.

        Our success requires us to maintain and expand our current customer relationships and to develop new relationships. Our contracts and relationships with advertising agencies on behalf of advertisers generally do not include long-term obligations requiring them to purchase our solutions and are cancelable upon short or no notice and without penalty. As a result, we may have limited visibility as to our future advertising revenue streams. We cannot assure you that our customers will continue to use our solutions, or that we will be able to replace, in a timely or effective manner, departing customers with new customers that generate comparable revenue. If a major customer representing a significant portion of our business decides to materially reduce its use of our solutions or to cease using our solutions altogether, our revenue could be significantly reduced. Any non-renewal, renegotiation, cancellation or deferral of large advertising contracts, or a number of contracts that in the aggregate account for a significant amount of revenue, could cause an immediate and significant decline in our revenue and harm our business.

    We are highly dependent on advertising agencies as intermediaries, and this may adversely affect our ability to attract and retain business.

        Nearly all of our revenue comes from executing brand advertising campaigns for advertising agencies that purchase our solutions on behalf of their advertiser clients. Advertising agencies are instrumental in assisting brand owners to plan and purchase advertising, and each advertising agency will allocate advertising spend from brands across numerous channels. We do not have exclusive relationships with advertising agencies and we depend on agencies to work with us as they embark on marketing campaigns for brands. While in some cases we are invited by advertising agencies to present directly to their advertiser clients or otherwise have developed a relationship directly with an advertiser, we nevertheless depend on advertising agencies to present to their advertiser clients the merits of our digital video advertising solutions. Inaccurate descriptions of our digital video advertising solutions by advertising agencies, over whom we have no control, negative recommendations to use our service offerings or failure to mention our solutions at all could hurt our business. In addition, if an advertising agency is disappointed with our solutions on a particular marketing campaign or generally, we risk losing the business of the advertiser for whom the campaign was run, and of other advertisers represented by that agency. With advertising agencies acting as intermediaries for multiple brands, our customer base is more concentrated than might be reflected by the number of brand advertisers for which we conduct marketing campaigns. Since many advertising agencies are affiliated with other agencies in a larger corporate structure, if we fail to maintain good relations with one agency in such an organization, we may lose business from the affiliated agencies as well.

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        Our sales could be adversely impacted by industry changes relating to the use of advertising agencies. For example, if advertisers seek to bring their marketing campaigns in-house rather than using an advertising agency, we would need to develop direct relationships with the advertisers, which we might not be able to do and which could increase our sales and marketing expense. Moreover, as a result of dealing primarily with advertising agencies, we have a less direct relationship with advertisers than would be the case if advertisers dealt with us directly. This may drive advertisers to attribute the value we provide to the advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with advertisers. Advertisers may move from one advertising agency to another, and, accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying business when an advertiser switches to a new agency. The presence of advertising agencies as intermediaries between us and the advertisers thus creates a challenge to building our own brand awareness and affinity with the advertisers that are the ultimate source of our revenue.

        In addition, advertising agencies that are our customers also offer or may offer some of the components of our solutions, including selling digital video advertising inventory through their own trading desks. As such, these advertising agencies are, or may become, our competitors. If they further develop their capabilities they may be more likely to offer their own solutions to advertisers and our ability to compete effectively could be significantly compromised and our business, financial condition and operating results could be adversely affected.

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

        The digital video advertising market is highly competitive, with many companies providing competing solutions. We compete with Hulu and Google (YouTube and DoubleClick) as well as many privately-owned ad exchanges, demand side advertiser platforms and ad networks. Many of our competitors are significantly larger than we are and have more capital to invest in their businesses. We also face competition from direct response advertisers who also seek to target brands. They, or other companies that offer competing digital video brand advertising solutions, may establish or strengthen cooperative relationships with their digital media property partners and brand advertisers or other parties, thereby limiting our ability to promote our solutions and generate revenue. Competitors could also seek to gain market share from us by reducing the prices they charge to advertisers, introducing products and solutions that are the same or similar to ours, or introducing new technology tools for advertisers and digital media properties. Moreover, increased competition for video advertising inventory from digital media properties could result in an increase in the portion of advertiser revenue that we must pay to digital media property owners to acquire that advertising inventory. Brand advertisers may prefer traditional TV advertising over our solutions.

        Some large advertising agencies that represent our current customers have their own relationships with digital media properties and can directly connect advertisers with digital media properties. Our business will suffer to the extent that our advertisers and digital media properties purchase and sell advertising inventory directly from one another or through other companies that act as intermediaries between advertisers and digital media properties. Other companies that offer analytics, mediation, exchange or other third party solutions may also become intermediaries between advertisers and digital media properties and thereby compete with us. Any of these developments would make it more difficult for us to sell our solutions and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share.

    The digital video market may deteriorate or develop more slowly than we expect, which could harm our business.

        Digital video advertising is an emerging market. Advertisers have historically spent a smaller portion of their advertising budgets on digital advertising than on traditional advertising methods, such as television, newspapers, radio and billboards, and spending on digital advertising has historically been

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primarily for performance-based advertising, or relatively simple display advertising such as banner ads on websites. Advertiser spending in the emerging digital video advertising market is uncertain. Many advertisers still have limited experience with digital video advertising and may continue to devote larger portions of their limited advertising budgets to more traditional offline or online performance-based advertising, instead of shifting resources to digital video advertising. In addition, our current and potential future customers may ultimately find digital video advertising to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and solutions, and they may reduce their spending on digital video advertising as a result. If the market for digital video advertising deteriorates, or develops more slowly than we expect, we may not be able to increase our revenue and our business would suffer.

    Due to our significant level of international operations, including our development and ad operations work conducted in Chennai, India, we are subject to international operational, financial, legal and political risks that could harm our operating results.

        Most of our research and development and ad operations work is conducted in Chennai, India, where we have a significant presence. In addition, we have operations in Europe and may continue to expand our international operations into other countries. We expect to continue to rely on significant cost savings obtained by concentrating our research and development and ad operations work in Chennai, India, rather than in the San Francisco Bay Area. However, the rate of wage inflation has historically been higher in India than in the United States, and we may not be able to maintain these cost savings in the future. If the cost of development and engineering work in Chennai were to significantly increase or the labor environment in Chennai were to change unfavorably, we would no longer be able to rely on these cost savings or may need to move our development, engineering and ad operations work elsewhere. Accordingly, if we are unable to rely on these significant cost savings, we would lose a competitive advantage, we may not be able to sustain our growth and our profits may decline.

        Other risks associated with our international operations include:

    The difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations, particularly labor, environmental, data privacy and other laws and regulations that govern our operations in those countries;

    The challenge of managing a development team in geographically disparate locations;

    Potential customer perceptions about receiving ad operations support services from Chennai, India, where our ad operations team is based;

    Legal uncertainties regarding foreign taxes, tariffs, quotas, export controls, export licenses, import controls and other trade barriers;

    Economic and political instability and high levels of wage inflation;

    Changes or volatility in currency exchange rates;

    Potentially adverse tax consequences;

    Legal requirements for transfer, processing and use of data generated through our operations in foreign countries;

    Weaker intellectual property protection in some countries; and

    Difficulties and costs in recruiting and retaining talented and capable individuals in foreign countries.

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        Any of these factors could harm our international operations and businesses and impair our ability to continue expanding into international markets.

    Expanding our international operations subjects us to new challenges and risks.

        We expect to expand our international operations by opening offices in new countries and regions. For example, we expanded into the United Kingdom with the acquisition of Appealing Media in the second half of 2011 and launched operations in Canada, France and Spain in 2012. However, we have a limited sales operations history as a company 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 the challenges of supporting a rapidly growing business in an environment of multiple cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Expanding internationally may subject us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

    Establishing and maintaining effective controls at foreign locations and the associated increased costs;

    Providing digital video advertising solutions among different cultures, including potentially modifying our solutions and features to ensure that we deliver ads that are culturally relevant in different countries;

    Variations in traffic access costs and margins, region by region;

    Increased competition from local providers of digital video advertising solutions;

    Longer sales or collection cycles in some countries;

    Credit risk and higher levels of payment fraud;

    Compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act;

    Compliance with foreign data privacy frameworks, such as the EU Data Privacy Directive;

    Currency exchange rate fluctuations;

    Foreign exchange controls that might prevent us from repatriating cash earned outside the United States;

    Economic instability in some countries, particularly those in Europe where we have recently expanded;

    Political instability;

    Compliance with the laws of numerous taxing jurisdictions where we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws;

    The complexity and potential adverse consequences of U.S. tax laws as they relate to our international operations; and

    Overall higher costs of doing business internationally.

        Further expansion of our international operations may require significant management attention and financial resources and may place burdens on our management, administrative, operational and financial infrastructure. Further, if our revenue from our international operations, and particularly from our operations in the countries and regions on which we have focused our spending, do not exceed the expense of establishing and maintaining these operations, our business and operating results will suffer.

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    We depend on the proliferation of digital video advertisements and anything that prevents this proliferation, including the possibility to opt out of services and functionality, will negatively impact our business model.

        The success of our business model depends on our ability to deliver digital video advertisements to consumers on a wide variety of Internet-connected devices. We believe that digital video advertising is most successful when targeted primarily through analysis of data. This data might include a device's location or data collected when device users view an ad or video or when they click on or otherwise engage with an ad, or it could include demographic or other data about users' interests or activities that is licensed in or acquired from third parties. Users may elect not to allow data sharing for targeted advertising for a number of reasons, such as privacy concerns, or pricing mechanisms that may charge the user based upon the amount or types of data consumed on the device. In addition, the design of Internet-connected devices and operating systems is controlled by third parties. Users may opt out of interest-based advertising by YuMe through the opt-out feature on YuMe's website or the Network Advertising Initiative's consumer choices website. Internet-connected device operating systems and Internet browsers increasingly contain features that allow device users to disable functionality that allows for the delivery of ads on their devices, and device and browser manufacturers may include or expand these features as part of their standard device specifications. In addition, many advertising companies may participate in self-regulatory programs, such as the Network Advertising Initiative, through which they agree to offer users the ability to opt out of behavioral advertising. If any of these developments were to occur, or if users elected to utilize the opt-out mechanisms in greater numbers, our ability to deliver effective advertising campaigns on behalf of our advertisers would suffer, which could hurt our ability to generate revenue and become profitable.

    Our business depends on our ability to collect and use data to deliver ads, and to disclose data relating to the performance of our ads, and any limitation on these practices could significantly diminish the value of our solutions and cause us to lose customers and revenue.

        When we deliver an ad to an Internet-connected device, we are able to collect information about the placement of the ad and the interaction of the device user with the ad, such as whether the user visited a landing page or watched a video. We are also able to collect information about the user's IP address, device, mobile location and some demographic characteristics. We may also contract with one or more third parties to obtain additional anonymous information about the device user who is viewing a particular ad, including information about the user's interests. As we collect and aggregate this data provided by billions of ad impressions, we analyze it in order to optimize the placement and scheduling of ads across the advertising inventory provided to us by digital media properties.

        Although the data we collect does not enable us to determine the actual identity of any individual, our customers or end users might decide not to allow us to collect some or all of the data or might limit our use of it. For example, a digital media property might not agree to provide us with data generated by interactions with the content on its apps, or device users might not consent to share their information about device usage. Additionally, we collect substantially more data from digital media properties using our YuMe SDKs instead of industry standard technologies such as IAB's Video Ad Serving Template, or VAST. If more digital media property owners choose to use VAST or other industry standard technologies rather than our proprietary YuMe SDKs, our ability to collect valuable data may be impaired, negatively affecting our business and revenue. Any limitation on our ability to collect data about user behavior and interaction with content could make it more difficult for us to deliver effective digital video advertising programs that meet the demands of our customers. This in turn could hurt our revenue and impair our business.

        Although our contracts with advertisers generally permit us to aggregate data from advertising campaigns, sometimes an advertiser declines to permit the use of this data, which limits the usefulness of the data that we collect. Furthermore, advertisers may request that we discontinue using data obtained from their campaigns that have already been aggregated with other advertisers' campaign

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data. It would be difficult, if not impossible, to comply with these requests, and complying with these kinds of requests could also cause us to spend significant amounts of resources. Interruptions, failures or defects in our data collection, mining, analysis and storage systems, as well as privacy concerns and regulatory restrictions regarding the collection, use and processing of data, could also limit our ability to aggregate and analyze the data from our customers' advertising campaigns. If that happens, we may not be able to optimize the placement of advertising for the benefit of our customers, which could make our solutions less valuable, and, as a result, we may lose customers and our revenue may decline.

    Our business practices with respect to data could give rise to liabilities, restrictions on our business or reputational harm as a result of evolving governmental regulation, legal requirements or industry standards relating to consumer privacy and data protection.

        In the course of providing our solutions, we transmit and store information related to Internet-connected devices, user activity and the ads we place. Federal, state and international laws and regulations govern the collection, use, processing, retention, sharing and security of data that we collect across our advertising solutions. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data collection, processing use and disclosure. However, the applicability of specific laws may be unclear in some cases and domestic and foreign government regulation and enforcement of data practices and data tracking technologies is expansive, not clearly defined and rapidly evolving. In addition, it is possible that these requirements may be interpreted and applied in a manner that is new or inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any actual or perceived failure by us to comply with U.S. federal, state or international laws, including laws and regulations regulating privacy, data, security or consumer protection, or disclosure or unauthorized access by third parties to this information, could result in proceedings or actions against us by governmental entities, private parties or others. Any proceedings or actions against us alleging violations of consumer protection laws or asserting privacy-related theories could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our solutions and ultimately result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of litigation resulting from using our solutions or from the disclosure of confidential information, which could damage our reputation among our current and potential customers, require significant expenditures of capital and other resources and cause us to lose business and revenue.

        The regulatory framework for privacy issues is evolving worldwide, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the digital advertising industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to collection or use of data to target ads and communication with consumers. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. The Federal Trade Commission has also adopted revisions to the Children's Online Privacy Protection Act that seek to expand liability for the collection of information by operators of websites and other electronic solutions that are directed to children. In addition, the European Union has adopted the Data Protection Directive and the Privacy and Electronics Communications Directive and is in the process of proposing reforms to its existing data protection legal framework, which may result in a greater compliance burden for us in the course of delivering ads in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy.

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        In addition to compliance with government regulations, we voluntarily participate in trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of Internet advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. If we fail to abide by or are perceived as not operating in accordance with industry best practices or any industry guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertisers and digital media properties.

    We depend on digital media properties for advertising inventory to deliver our customers' advertising campaigns, and any decline in the supply of advertising inventory from these digital media properties could hurt our business.

        We depend on digital media properties to provide us with inventory within their sites and apps on which we deliver ads. The digital media property owners that supply their advertising inventory to us are not required to provide any minimum amounts of advertising inventory to us, nor are they contractually bound to provide us with a consistent supply of advertising inventory. The tools that we provide to digital media properties allow them to make decisions as to how to allocate advertising inventory among us and other advertising technology providers, some of which may be our competitors. An ad exchange, or other third party acting as an intermediary on behalf of digital media properties, could pressure us to increase the prices we pay to digital media property owners for that inventory, which may reduce our operating margins, or otherwise block our access to that inventory, without which we would be unable to deliver ads on behalf of our customers.

        In most instances, digital media properties can change the amount of inventory they make available to us at any time. Digital media properties may seek to change the terms at which they offer inventory to us, or they may elect to make advertising inventory available to our competitors who offer ads to them on more favorable economic terms. Supply of advertising inventory is also limited for some digital media properties, such as special sites or new technologies, and these digital media properties may request higher prices, fixed price arrangements or guarantees. In addition, digital media properties sometimes place significant restrictions on our use of their advertising inventory. These restrictions may prohibit ads from specific advertisers or specific industries, or they could restrict the use of specified creative content or format.

        If digital media properties decide not to make advertising inventory available to us for any of these reasons, or decide to increase the price of inventory, or place significant restrictions on our use of their advertising inventory, we may not be able to replace this with inventory from other digital media properties that satisfy our requirements in a timely and cost-effective manner. In addition, significant digital media properties in the industry may enter into exclusivity arrangements with our competitors, which could limit our access to a meaningful supply of advertising inventory. If any of this happens, our revenue could decline or our cost of acquiring inventory could increase, lowering our operating margins.

    Our business model is dependent on the continued growth in usage of the Internet, computers, smartphones, tablets, Internet-connected TVs and other devices, as well as continued audience fragmentation as a result of this continued growth.

        Our business model depends on the continued proliferation of the Internet, computers and Internet-connected devices, such as smartphones, tablets and Internet-connected TVs, as well as the increased consumption of digital media content on the Internet through those devices resulting in

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increased audience fragmentation. However, consumer usage of these Internet-connected devices and resulting audience fragmentation may be inhibited for a number of reasons, such as:

    Inadequate network infrastructure to support advanced features;

    Users' concerns about the security of these devices and the privacy of their information;

    Inconsistent quality of cellular or wireless connections;

    Unavailability of cost-effective, high-speed Internet service;

    Changes in network carrier pricing plans that charge device users based on the amount of data consumed; and

    Government regulation of the Internet, telecommunications industry, mobile platforms and related infrastructure.

        For any of these reasons, users of the Internet and Internet-connected devices may limit the amount of time they spend and the type of activities they conduct on these devices. In addition, technological advances may standardize or homogenize the way users access digital video content, making brand receptive audiences easier for advertisers to reach without use of our solutions. Our total addressable market size may be significantly limited if user adoption of the Internet and Internet-connected devices and consumer consumption of content on those devices and resulting audience fragmentation do not continue to grow. These conditions could compromise our ability to increase our revenue and to become profitable.

    We may not be able to integrate, maintain and enhance our advertising solutions to keep pace with technological and market developments.

        The market for digital video advertising solutions is characterized by rapid technological change, evolving industry standards and frequent new product and service introductions. To keep pace with technological developments, satisfy increasing advertiser and digital media property requirements, maintain the attractiveness and competitiveness of our advertising solutions and ensure compatibility with evolving industry standards and protocols, we will need to anticipate and respond to varying product lifecycles and regularly enhance our current advertising solutions and to develop and introduce new solutions and functionality on a timely basis, and this requires significant expenditures of financial and other resources.

        For example, we are required to invest significant resources into integrating our solutions with multiple forms of Internet-connected devices in order to maintain a comprehensive advertising platform. We have periodically experienced difficulty integrating with some digital media properties. We may continue to experience similar difficulties and these difficulties will consume financial, engineering and managerial resources and we may not have the financial resources to make investments across all new forms of Internet-connected devices in the future. Additionally, Internet-connected TV is a relatively new market opportunity, from which we have realized only limited revenue, that requires us to apply financial, development, engineering and managerial resources to ensure that our advertising solutions remain compatible with the technological and market developments. Similarly, advertising exchanges and other technological developments may displace us or introduce an additional intermediate layer between us and our customers and digital media properties that could impair our relationships with those customers. Our inability, for technological, business or other reasons, to enhance, develop, introduce and deliver compelling advertising solutions in response to changing market conditions and technologies or evolving expectations of advertisers, digital media properties or consumers of digital video advertising could hurt our ability to grow our business and could result in our advertising solutions becoming obsolete.

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    We may be unable to deliver advertising in a context that is appropriate for digital advertising campaigns, which could harm our reputation and cause our business to suffer.

        It is very important to advertisers that their brand advertisements not be placed in or near content that is unlawful or would be deemed offensive or inappropriate by their customers. Unlike advertising on television, where the context in which an advertiser's ad will appear is highly predictable and controlled, digital media content is more unpredictable, and we cannot guarantee that digital video advertisements will appear in a context that is appropriate for the brand. If we are not successful in delivering context appropriate digital video advertising campaigns for advertisers, our reputation will suffer and our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our customers may seek to avoid payment or demand future credits for inappropriately placed advertisements, any of which could harm our business, financial condition and operating results.

    Any inability to deliver successful digital video advertising campaigns due to technological challenges or an inability to persuasively demonstrate success will prevent us from growing or retaining our current advertiser base.

        It is critical that we deliver successful digital video advertising campaigns on behalf of our advertisers. Factors that may adversely affect our ability to deliver successful digital video advertising campaigns include:

    Inability to accurately process data and extract meaningful insights and trends, such as the failure of our Audience Amplifier to accurately process data to place ads effectively at digital media properties;

    Faulty or out-of-date algorithms that fail to properly process data or result in inability to capture brand-receptive audiences at scale;

    Technical or infrastructure problems causing digital video not to function, display properly or be placed next to inappropriate context; and

    Unavailability of standard digital video audience ratings and brand receptivity measurements for brand advertisers to effectively measure the success of their campaigns.

        Our ability to deliver successful advertising campaigns also depends on the continuing and uninterrupted performance of our own internal systems, which we utilize to place ads, monitor the performance of advertising campaigns and manage our advertising inventory. Our revenue depends on the technological ability of our solutions to deliver ads and measure them. Sustained or repeated system failures that interrupt our ability to provide solutions to customers, including technological failures affecting our ability to deliver ads quickly and accurately and to collect and process data in connection with these ads, could significantly reduce the attractiveness of our solutions to advertisers and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures. Also, advertisers may perceive any technical disruption or failure in ad performance on digital media properties' platforms to be attributable to us, and our reputation could similarly suffer, or advertisers may seek to avoid payment or demand future credits for disruptions or failures, any of which could harm our business and results of operations. If we are unable to deliver successful advertising campaigns, our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed and our business, financial condition and operating results could be adversely affected.

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    The impact of worldwide economic conditions, including effects on advertising spending by brand advertisers, may adversely affect our business, operating results and financial condition.

        Our financial performance is subject to worldwide economic conditions and their impact on advertising spending by brand advertisers, which may be disproportionately affected by economic downturns. Expenditures by advertisers generally tend to reflect overall economic conditions, and to the extent that the current economic slowdown continues, or worldwide economic conditions materially deteriorate or change, our existing and potential advertisers may reduce current or projected advertising budgets and the use of our advertising solutions. In particular, digital video advertising may be viewed by some of our existing and potential advertisers as a lower priority and could cause advertisers to reduce the amounts they spend on advertising, terminate their use of our digital video advertising solutions or default on their payment obligations to us, which could have a material adverse effect on our business, financial condition and results of operations.

    Our sales efforts with advertisers and digital media properties require significant time and expense.

        Attracting new advertisers and digital media properties requires substantial time and expense, and we may not be successful in establishing new relationships or in maintaining or advancing our current relationships. For example, it may be difficult to identify, engage and market to potential advertisers who do not currently spend on digital video advertising or are unfamiliar with our current solutions. Furthermore, many of our customers' purchasing and design decisions typically require input from multiple internal constituencies, including those units historically responsible for a larger TV brand campaign. As a result, we must identify those persons involved in the purchasing decision and devote a sufficient amount of time to presenting our solutions to each of those persons.

        The novelty of our solutions and our business model often requires us to spend substantial time and effort educating potential advertisers, advertising agencies and digital media properties about our offerings, including providing demonstrations and comparisons against other available solutions. This process can be costly and time-consuming. If we are not successful in targeting, supporting and streamlining our sales processes, our ability to grow our business may be adversely affected.

    If our pricing model is not accepted by our advertisers, we could lose customers and our revenue could decline.

        We offer our solutions to advertisers based principally on a fixed-rate pricing model under which the fee is based on the number of times the ad is shown, known as an impression, without regard to immediate performance. Alternative pricing models, such as cost-per-click, cost-per-action and cost-per-engagement, have proliferated in the marketplace and may make it more difficult for us to convince advertisers that our pricing model is superior. We do not employ pricing models under which advertisers pay only if some specific viewer action is taken, for instance, clicking through to a website or installing a mobile application. Our ability to generate significant revenue from advertisers will depend, in part, on the advertisers' belief in the brand uplift and recall value proposition of digital video advertising compared to either traditional TV advertising or performance-based advertising and pricing models. In addition, it is possible that new pricing models that are not compatible with our business model may be developed and gain widespread acceptance. If advertisers do not understand or accept the benefits of our pricing model, then the market for our solutions may decline or develop more slowly than we expect, limiting our ability to grow our revenue and profits.

    Our business may be adversely affected if we encounter difficulties in implementing an enterprise resource planning system.

        We are in the process of implementing an enterprise resource planning, or ERP, system for our company. The ERP system is intended to combine and streamline the management of our financial,

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accounting, human resources, sales and marketing and other functions, enabling us to manage operations and track performance more effectively. However, the ERP system will require us to complete many processes and procedures for the effective use of this system or to run our business using this system, which may result in substantial costs. Additionally, during the conversion process, we may be limited in our ability to convert any business that we acquire to the ERP. Until we have completed the implementation and have experience with its operation, the implementation poses a risk to our disclosure controls, internal control over financial reporting and business operations. Any disruptions or difficulties in implementing this system could adversely affect our controls and harm our business, including our ability to forecast or make sales and collect our receivables. Moreover, such disruption or difficulties could result in unanticipated costs and diversion of management attention.

    Failure to manage growth properly could seriously harm our business.

        We have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of our solutions may suffer, which could negatively affect our reputation and demand for our solutions. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. Among other things, this will require us to:

    Implement additional management information systems;

    Further develop our operating, administrative, legal, financial and accounting systems and controls;

    Hire additional personnel;

    Develop additional levels of management within our company;

    Locate additional office space;

    Maintain and improve coordination among our engineering, product, operations, legal, finance, sales, marketing and customer service and support organizations; and

    Manage our expanding international operations.

        Moreover, as our sales increase, we may be required to concurrently deploy our advertising technologies infrastructure at multiple additional locations and/or provide increased levels of customization. As a result, we may lack the resources to deploy our advertising solutions on a timely and cost-effective basis. Failure to accomplish any of these requirements could impair our ability to deliver our advertising solutions in a timely fashion, fulfill existing customer commitments or attract and retain new customers.

    Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.

        Our systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. For example, a significant natural disaster, such as a tornado, earthquake, fire or flood, could have a material adverse effect on our business, results of operations and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices and one of our data centers are located in California, a region known for earthquakes and one of our data centers is located in New Jersey, a region susceptible to hurricane activity. Our development and ad operations work is located in Chennai, India, a region susceptible to tsunamis and typhoons. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our advertisers'

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businesses or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins, denial-of-service attacks and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California, New Jersey or Chennai, India. As we rely heavily on our data centers, computer and communications systems and the Internet to conduct our business and provide high-quality customer service, such disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt our advertisers' businesses, which could have a material adverse effect on our business, results of operations and financial condition.

    If we do not retain our senior management team and key employees, or attract additional sales and technology talent, we may not be able to sustain our growth or achieve our business objectives.

        Our future success is substantially dependent on the continued service of our senior management team. We do not maintain key-person insurance on any of these employees. Our future success also depends on our ability to continue to attract, retain and motivate highly skilled employees, particularly employees with technical skills that enable us to deliver effective advertising solutions and sales and customer support representatives with experience in digital video advertising and strong relationships with brand advertisers, agencies and digital media properties. Competition for these employees, and for sales personnel, in our industry is intense. Many of the companies with which we compete for experienced personnel also have greater resources than we have. Competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located, and in Chennai, India, where our engineering and research and development resources are primarily located. As a result, we may be unable to attract or retain these management, technical, sales, marketing and customer support personnel that are critical to our success, resulting in harm to our key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.

    If we cannot foster or maintain an effective corporate culture as we grow and evolve, our future success could be negatively impacted.

        We believe that fostering and maintaining an effective corporate culture that promotes innovation, creativity and teamwork has been and will be in the future a critical contributor to our success. In the past, it has been difficult to foster a corporate culture that effectively mixes the media and technology sides of our business. Fostering and maintaining an effective corporate culture will become increasingly difficult as we grow and implement the more complex organizational management structures necessary to support our growth and to comply with the requirements imposed on public companies. Failure to foster, maintain and further develop our culture could negatively impact our future success.

    Acquisitions or investments may be unsuccessful and may divert our management's attention and consume significant resources.

        A part of our growth strategy is to pursue additional acquisitions or investments in other businesses or individual technologies where the acquisition fits within our strategic goals and we could complete it at an attractive valuation. Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions involve many risks, any of which could harm our business, including:

    Difficulties in integrating the operations, technologies, solutions and personnel of acquired businesses, especially if those businesses operate outside of our core competency of delivering digital video advertising;

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    Cultural challenges associated with integrating employees from the acquired company into our organization;

    Ineffectiveness or incompatibility of acquired technologies or solutions;

    Potential loss of key employees of acquired businesses;

    Inability to maintain the key business relationships and the reputations of acquired businesses;

    Diversion of management's attention from other business concerns;

    Litigation for activities of the acquired company, including claims from terminated employees, customers, former stockholders or other third parties;

    In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

    Costs necessary to establish and maintain effective internal controls for acquired businesses;

    Failure to successfully further develop the acquired technologies in order to recoup our investment; and

    Increased fixed costs.

    Activities of our customers and digital media properties with which we do business could damage our reputation or give rise to legal claims against us.

        We do not monitor or have the ability to control whether our customers' advertising of their products and solutions complies with federal, state, local and foreign laws. Failure of our customers to comply with federal, state, local or foreign laws or our policies could damage our reputation and expose us to liability under these laws. We may also be liable to third parties for content in the ads we deliver if the content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. A third party or regulatory authority may file a claim against us even if our customer has represented that its ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in an ad. Any of these claims could be costly and time-consuming to defend and could also hurt our reputation within the advertising industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our solutions or otherwise expend significant resources. Similarly, we do not monitor or have the ability to control whether digital media property owners with which we do business are in compliance with applicable laws and regulations, or intellectual property rights of others, and their failure to do so could expose us to legal liability,

    Our software could be susceptible to errors, defects, or unintended performance problems that could result in loss of reputation, lost inventory or liability.

        We develop and offer complex software that is embedded by digital media properties in devices, video technologies, software and operating systems. Complex software often contains defects, particularly when first introduced or when new versions are released. Determining whether our software has defects may occur after versions are released into the market and distributed to digital media properties. Defects, errors or unintended performance problems with our software could unintentionally jeopardize the performance of digital media properties' products. This could result in injury to our reputation, loss of revenue, diversion of development and technical resources, increased insurance costs and increased warranty costs. If our software contains any undetected defects, errors or unintended performance problems, digital media properties may refuse to embed our software into their products and we may be

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unable to collect data or acquire advertising inventory from digital media properties. These defects, errors and unintended performance problems could also result in product liability or warranty claims. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and limitation of liability clauses in our agreements, these contractual provisions may not be enforceable in every instance. Furthermore, although we maintain errors and omissions insurance, this insurance may not adequately cover these claims. If a court refused to enforce the liability-limiting provisions of our contracts for any reason, or if liabilities arose that were not contractually limited or adequately covered by insurance, our business could be materially harmed.

    Our inability to use software licensed from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt our business.

        Our technologies incorporate software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that these licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our solutions to our customers. In the future, we could be required to seek licenses from third parties in order to continue offering our solutions, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our solutions or discontinue use of portions of the functionality provided by our solutions. In addition, the terms of open source software licenses may require us to provide software that we develop using this software to others on unfavorable license terms. Further, if a digital media property owner who embeds our software in their devices, video technologies, software and operating systems incorporates open source software into its software and our software is integrated with such open source software in the final product, we could, under some circumstances, be required to disclose the source code to our software. While we carefully monitor the use of all open source software and try to ensure that no open source software is used in such a way as to require us to disclose the source code to our software, such use could inadvertently occur. Our inability to use third-party software or the requirement to disclose the source code to our software could result in disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could impair our business.

    Software and components that we incorporate into our advertising solutions may contain errors or defects, which could harm our reputation and hurt our business.

        We use a combination of custom and third party software, including open source software, in building our advertising solutions. Although we test software before incorporating it into our solutions, we cannot guarantee that all of the third party technologies that we incorporate will not contain errors, bugs or other defects. We continue to launch enhancements to our advertising solutions, and we cannot guarantee any of these enhancements will be free from these kinds of defects. If errors or other defects occur in technologies that we utilize in our advertising solutions, it could result in damage to our reputation and losses in revenue, and we could be required to spend significant amounts of additional research and development resources to fix any problems.

    Our failure to protect our intellectual property rights could diminish the value of our solutions, weaken our competitive position and reduce our revenue.

        We regard the protection of our intellectual property, which includes patents and patent applications, trade secrets, copyrights, trademarks and domain names, as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with parties, with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.

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        In the United States, we have five patents issued, 17 non-provisional patent applications pending and five provisional patent applications pending. We also have nine foreign patent applications pending. There can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, or that these patents will not be challenged by third parties or found to be invalid or unenforceable. We have five registered trademarks in the United States, six registered trademarks in foreign jurisdictions and are also pursuing the registration of additional trademarks and service marks in the United States and in locations outside the United States. Effective trade secret, copyright, trademark and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming.

        Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Further, our competitors may independently develop technologies that are similar to ours but which avoids the scope of our intellectual property rights. In addition, the laws of many countries, such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property could result in competitors offering solutions that incorporate our most technologically advanced features, which could seriously reduce demand for our advertising solutions. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not the litigation results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be able to stop our competitors from infringing our intellectual property rights.

    We could incur substantial costs and disruption to our business as a result of any claim of infringement of another party's intellectual property rights, which could harm our business and operating results.

        In recent years, there has been significant litigation in the United States over patents and other intellectual property rights. From time to time, we face allegations that we or customers who use our products have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including allegations made by our competitors or by non-practicing entities. We cannot predict whether assertions of third party intellectual property rights or claims arising from these assertions will substantially harm our business and operating results. If we are forced to defend any infringement claims, whether they are with or without merit or are ultimately determined in our favor, we may face costly litigation and diversion of technical and management personnel. Some of our competitors have substantially greater resources than we do and are able to sustain the cost of complex intellectual property litigation to a greater extent and for longer periods of time than we could. Furthermore, an adverse outcome of a dispute may require us: to pay damages, potentially including treble damages and attorneys' fees, if we are found to have willfully infringed a party's patent or other intellectual property rights; to cease making, licensing or using products that are alleged to incorporate or make use of the intellectual property of others; to expend additional development resources to redesign our products; and to enter into potentially unfavorable royalty or license agreements in order to obtain the rights to use necessary technologies. Royalty or licensing agreements, if required, may be unavailable on terms acceptable to us, or at all. In any event, we may need to license intellectual property which would require us to pay royalties or make one-time payments. Even if these matters do

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not result in litigation or are resolved in our favor or without significant cash settlements, the time and resources necessary to resolve them could harm our business, operating results, financial condition and reputation.

        In addition, if our customers do not own the copyright for advertising content included in their advertisements or if digital media property owners do not own the copyright for content to the digital media next to which the advertisements appear, advertisers and digital media properties could receive complaints from copyright owners, which could harm our reputation and our business.

    If we fail to establish and maintain effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.

        Prior to this offering, we were a private company and were not required to test our internal controls on a systematic basis. In addition, we had limited accounting personnel and other resources with which to address our internal controls. We have not determined whether our internal control over financial reporting currently meets the standards that we will be required to meet in the course of preparing future financial statements as a public company. After the completion of this offering, we will be required to 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, to provide a management report on our internal control over financial reporting. This will require that we incur substantial additional internal costs to expand our accounting and finance functions, including costs associated with hiring additional accounting and administrative staff, and that we expend significant management efforts.

        A material weakness in our internal control over financial reporting existed as of December 31, 2012. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, detected and corrected on a timely basis. This material weakness arose primarily due to a lack of technical accounting skills and a lack of adequate review processes and controls within our accounting and finance organization. As a result, there were a number of post-close and audit-related adjustments that were material to the financial statements, including adjustments to publisher costs, commissions and goodwill. This material weakness also existed at December 31, 2010 and 2011, and resulted in a restatement of our previously issued consolidated financial statements for the year ended December 31, 2010 to correct for errors, including the proper capitalization of internal use software development costs, proper recording of stock-based compensation expense related to option modifications and performance-based options, the proper recording of a preferred stock warrant as a liability carried at fair value, and the overstatement of revenue due to errors in closing procedures.

        We have taken steps to remediate the material weakness, including building a more experienced accounting and finance organization, and designing and implementing improved processes and controls. However, our efforts to remedy this material weakness may not prevent future material weaknesses or significant deficiencies in our internal control over financial reporting.

        We have had significant operations both in the United States and India and we have recently expanded in Europe. Historically, we have had separate systems of internal controls covering our international operations, which may have included control deficiencies. We are in the process of consolidating these systems and remediating any control deficiencies, and we may experience difficulties with the consolidation that could harm our operations and cause our business to suffer.

        We may in the future discover areas of our internal controls that need improvement. Our internal control over financial reporting will not prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no

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evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

        If we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements, and we or our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities.

    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," as defined in the Jumpstart Our Business Startups Act, or JOBS Act. As an emerging growth company we are not required to obtain auditor attestation of our reporting on internal control over financial reporting, we have reduced disclosure obligations regarding executive compensation in this prospectus and in our periodic reports and proxy statements, and we are not required to hold nonbinding advisory votes on executive compensation. We cannot predict whether investors will find our common stock less attractive as a result of our reliance 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: the end of the fiscal year in which the market value of the shares of our common stock held by non-affiliates exceeds $700 million as of June 30, the end of the fiscal year in which we have total annual gross revenue of $1 billion, the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or five years from the date of this prospectus.

    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, or 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 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 Jumpstart Our Business Startups Act. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and will 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.

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    We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available on favorable terms, or at all, which could compromise our ability to meet our financial obligations and grow our business.

        While we anticipate that our existing cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing existing or future technologies and solutions, increasing working capital, acquiring businesses, expanding geographically and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or the continued development of new or existing technologies or solutions and geographic expansion.

    Our net operating loss carryforwards may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.

        We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal income tax purposes, including any limitations that may be imposed under Section 382 of the Internal Revenue Code as a result of this offering. At December 31, 2012, we had federal net operating loss carryforwards of $16.0 million, which expire at various dates beginning in 2025. Our gross state net operating loss carryforwards are equal to or less than the federal net operating loss carryforwards and expire over various periods beginning in 2015, based on individual state tax law.

        We periodically assess the likelihood that we will be able to recover our net deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a full valuation allowance against our net deferred tax assets should be applied as of December 31, 2012. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.

    Risks Related to this Offering and Ownership of Our Common Stock

    An active trading market for our common stock may not develop.

        Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations with the underwriters and may bear no relationship to the price at which the common stock will trade upon completion of this offering. Although we have applied to list our common stock on the New York Stock Exchange, an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop, it may be difficult to sell shares you purchase in this offering without depressing the market price for the shares or to sell your shares at all.

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    The trading price of the shares of our common stock is likely to be volatile, and purchasers of our common stock could incur substantial losses.

        Our stock price is likely to be volatile. The stock market in general and the market for technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:

    Actual or anticipated variations in quarterly operating results;

    Changes in financial estimates by us or by any securities analysts who might cover our stock;

    Conditions or trends in our industry;

    Stock market price and volume fluctuations of other publicly traded companies and, in particular, those that operate in the advertising, Internet or media industries;

    Announcements by us or our competitors of new product or service offerings, significant acquisitions, strategic partnerships or divestitures;

    Announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

    Capital commitments;

    Additions or departures of key personnel; and

    Sales of our common stock, including sales by our directors and officers or specific stockholders.

        In addition, in the past, stockholders have initiated class action lawsuits against technology companies following periods of volatility in the market prices of these companies' stock. If litigation is instituted against us, we could incur substantial costs and divert management's attention and resources.

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

        The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. Equity research analysts may elect not to provide research coverage of our common stock after the completion of this offering, and lack of research coverage may adversely affect the market price of our common stock. In the event we do have equity research analyst coverage, we will not have any control over the analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

    If you purchase shares of our common stock in this offering, you will suffer immediate dilution of your investment.

        We expect the initial public offering price of our common stock to be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. Based on an assumed initial public offering price of $            per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $            per share, representing the difference

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between our pro forma as adjusted net tangible book value per share after giving effect to this offering and the assumed initial public offering price.

        In addition, as of March 31, 2013, we had outstanding stock options to purchase an aggregate of 26,363,370 shares of common stock at a weighted-average exercise price of $0.67 per share and outstanding warrants to purchase an aggregate of 323,904 shares of common stock at a weighted average exercise price of $0.25 per share. To the extent these outstanding options and warrants are exercised, there will be further dilution to investors in this offering.

    A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

        Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market following this offering, the market price of our common stock could decline significantly.

        Upon completion of this offering, we will have        outstanding shares of common stock, assuming no exercise of outstanding options or warrants. Of these shares, the                         shares sold in this offering and                        additional shares will be freely tradable, and                        additional shares of common stock will be available for sale in the public market beginning 180 days after the date of this prospectus following the expiration of market standoff agreements and lock-up agreements between stockholders and the underwriters. Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. in their joint discretion may release these stockholders from their lock-up agreements with the underwriters at any time and without notice, which would allow for earlier sales of shares in the public market.

        In addition, promptly following the completion of this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of approximately        shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to vesting arrangements and exercise of options, the lock-up agreements described above, and the restrictions of Rule 144 in the case of our affiliates.

        Additionally, after this offering, the holders of an aggregate of 131,043,397 shares of common stock and 323,904 shares of common stock issuable upon the exercise of outstanding warrants, or their transferees, will have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register these shares for resale, they could be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

    Provisions in our corporate charter documents and under Delaware law may prevent or frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us, and the market price of our common stock may be lower as a result.

        There are provisions in our certificate of incorporation and bylaws as they will be in effect following this offering that may make it difficult for a third party to acquire, or attempt to acquire, control of our company, even if a change in control was considered favorable by you and other stockholders. For example, our board of directors will have the authority to issue shares of preferred stock, and to fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may delay or prevent a change in control transaction. As a result, the market price of our common stock and the

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voting and other rights of our stockholders may be adversely affected. An issuance of shares of preferred stock may result in the loss of voting control to other stockholders.

        Our charter documents will also contain other provisions that could have an anti-takeover effect, including that our board of directors will be divided into three classes with staggered three-year terms and stockholders will not be able to remove directors other than for cause, take actions by written consent or call a special meeting of stockholders. In addition, stockholders will be required to give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.

        In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions by prohibiting Delaware corporations from engaging in specified business combinations with particular stockholders of those companies. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are willing to pay for our stock.

    Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant corporate decisions.

        Upon completion of this offering, our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates will, in aggregate, beneficially own approximately        % of our outstanding common stock. These persons, acting together, would be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.

    We will have broad discretion in the use of proceeds from this offering and may invest or spend the proceeds in ways with which you do not agree and in ways that may not yield a return.

        We will have broad discretion over the use of proceeds from this offering. You may not agree with our decisions, and our use of the proceeds may not yield any return on your investment in us. Our failure to apply the net proceeds of this offering effectively could compromise our ability to pursue our growth strategy.

    Because we do not anticipate paying any cash dividends on our common stock in the foreseeable future, capital appreciation, if any, will be your sole source of gains.

        We have not declared or paid cash dividends on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are principally in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," but are also elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words "may," "might," "will," "could," "would," "should," "expect," "intend," "plan," "objective," "anticipate," "believe," "estimate," "predict," "project," "potential," "continue" and "ongoing," or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include, for example, statements about:

    Our growth strategy, including but not limited to employee hiring, global expansion and technological development;

    Anticipated trends and challenges in our industry, including but not limited to the increasing quantity, variety and fragmentation of digital video content, platforms and technologies;

    The expansion of the digital media advertising market in general and the digital video advertising market in particular;

    Our operating results, including revenue, cost of revenue, expenses and liquidity;

    Our competition;

    Market trends, including overall opportunities for digital media advertising and shifting advertising budgets;

    The ongoing improvement and refinement of our data-science capabilities;

    Developments in the regulatory framework applicable to our business; and

    Our intellectual property and proprietary technologies.

        You should refer to the "Risk Factors" section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us, the selling stockholders, the underwriters or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Neither we nor the selling stockholders nor the underwriters undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

        You should read this prospectus, and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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MARKET, INDUSTRY AND OTHER DATA

        Some of the market, industry and other data contained in this prospectus are based on independent industry publications, including those generated by Frost & Sullivan, Magna Global, Strategy Analytics, eMarketer, comScore, Deloitte, Advertising Age, Infonetics Research, Nielsen, Econsultancy, or other publicly available information. This information involves many assumptions and limitations. Although we believe that each source is reliable as of its respective date, neither we nor the underwriters have independently verified the accuracy or completeness of this information. 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," which could cause results to differ materially from those expressed in these independent publications.

        When we refer to publications generated by comScore in this prospectus, the term "video" means any streamed segment of audiovisual content, including progressive downloads, live streams and both user-initiated and auto-played videos that are viewed for longer than three seconds. For long-form, segmented content, such as television episodes with ad pods in the middle, each segment of the content is counted as a distinct video stream.

        When we refer to publications generated by comScore Video Metrix in this prospectus, our term "digital media properties" is equivalent to the term "entities" as used by comScore Video Metrix.

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GLOSSARY

        To assist you in reading this prospectus, we have provided definitions of some of the terms and acronyms that we use:

        "Advertising campaign"—the process by which we deliver a brand advertiser's digital video advertisements to audiences available through digital media properties, in order to fulfill ad insertion orders submitted to us by advertising customers.

        "Audience Amplifier"—Our machine-learning tool that uses correlative data models to find audiences that YuMe expects to be receptive to specific brand messages, based on data collected from the YuMe SDKs.

        "Brand advertising"—Advertising that features a particular company, product or service in a manner intended to establish long-term, positive attitudes toward it.

        "Brand attitudes"—A measure of a person's positivity or negativity towards a brand.

        "Brand awareness"—The extent to which a brand is recognized by potential customers and correctly associated with a particular product.

        "Brand favorability"—The number of people who view the brand positively.

        "Brand preference"—A measure of brand loyalty in which a consumer will choose a particular brand in presence of competing brands.

        "Brand recall"—A measure of advertising effectiveness in which a sample of respondents are exposed to an ad and at a later time are asked if they recall the brand that sponsored an ad.

        "CPM"—Cost per thousand impressions, a measure by which ad placements may be priced for advertisers on a digital media property. An impression is the exposure of the content to a viewer.

        "Direct response advertising"—Advertising that is designed to induce some specific action, such as search engine marketing, click-through banners, newspaper classifieds and coupons.

        "Lift"—The percentage improvement in a tested metric.

        "Message recall"—A measure of advertising effectiveness in which a sample of respondents are exposed to an ad and at a later time are asked if they recall the primary message of an ad.

        "PQI"—YuMe's Placement Quality Index, our contextual scoring system that assesses the quality of ad placements in order to optimize placements for brand results. PQI algorithms dynamically score advertising inventory based on prior calculations of brand related results and current campaign measures such as video completion rate, player size, player location, content relevancy and campaign objectives.

        "Purchase intent"—The likelihood that a person intends to buy a product in a given period of time.

        "Reach"—The number of individuals or households that are exposed to an ad in a given period of time.

        "Unique viewers"—When used in reference to YuMe, unique viewers means a measure of the number of individual devices through which a particular piece of video content was viewed online, on mobile, or through other Internet-connected device platforms over a period of time, typically one month. When used in reference to comScore data, unique viewers means a measure of the number of individuals who viewed a particular piece of video content online over a period of time, typically one month.

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        "YuMe SDKs"—YuMe's Audience Aware Software Development Kit, our proprietary software that digital media property owners embed in websites and applications residing on personal computers, smartphones, tablets, Internet-connected TVs and other devices, along with a related set of implementation tools. The data collected through YuMe SDKs feeds into our PQI and Audience Amplifier technologies to form the core of our data-science capabilities.

        "YFP"—YuMe for Publishers, our comprehensive platform system for creating, managing, monetizing and measuring cross-platform digital video brand advertising inventory.

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USE OF PROCEEDS

        We estimate that we will receive net proceeds from our sale of common stock of approximately $             million, based upon an assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' option to purchase additional shares of common stock is exercised in full, we estimate that we will receive net proceeds of approximately $             million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholders, although we will bear costs other than underwriting discounts and commissions associated with those sales.

        Each $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        We currently intend to use the net proceeds to us from this offering primarily for general corporate purposes, including working capital. We may also use a portion of the net proceeds for the acquisition of, or investment in, complementary technologies, assets or businesses, although we have no present commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds to us from this offering. Pending these uses, we intend to invest the net proceeds to us from this offering in short-term, investment-grade interest-bearing securities such as money market funds, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

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DIVIDEND POLICY

        We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our capital stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2013:

    On an actual basis;

    On a pro forma basis, giving effect to the automatic conversion of all outstanding shares of preferred stock into 131,043,397 shares of common stock, and the the reclassification of the preferred stock warrant liability to additional paid-in capital upon the conversion of all of our warrants to purchase shares of preferred stock into warrants to purchase shares of common stock, each to be effective immediately upon the consummation of this offering as if such conversion had occurred on March 31, 2013; and

    On a pro forma as adjusted basis to reflect, in addition, 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 listed on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

        You should read the information in this table together with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.

 
  As of March 31, 2013  
 
  Actual   Pro
Forma
  Pro Forma
As Adjusted(1)
 
 
  (in thousands, except share
and per share data)

 

Cash and cash equivalents

  $ 26,834   $ 26,834   $    
               

Convertible preferred stock, $0.001 par value; 130,130,239 authorized; 129,806,334 issued and outstanding, actual; no shares authorized, issued and outstanding pro forma and pro forma as adjusted

  $ 76,191   $   $  
               

Preferred stock warrant liability

  $ 329   $   $  

Stockholders' equity (deficit):

                   

Common stock, $0.001 par value: 192,939,347 shares authorized; 29,021,129 shares issued and outstanding, actual; 192,939,347 shares authorized, 160,064,526 shares issued and outstanding, pro forma;            shares authorized,            shares issued and outstanding, pro forma as adjusted

   
29
   
160
       

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

             

Additional paid-in capital

    7,487     83,876        

Accumulated deficit

    (25,336 )   (25,336 )   (25,336 )

Accumulated other comprehensive loss

    (58 )   (58 )   (58 )
               

Total stockholders' (deficit) equity

    (17,878 )   58,642        
               

Total capitalization

  $ 58,642   $ 58,642   $    
               

(1)
Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents,

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    additional paid-in capital, total stockholders' equity and total capitalization by approximately $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders' equity and total capitalization by approximately $        , assuming the assumed initial public offering price remains the same, and after deducting 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 initial public offering price and other terms of this offering determined at pricing.

            The number of shares of common stock outstanding in the table above is based on 160,064,526 shares outstanding as of March 31, 2013, and excludes:

    26,363,370 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2013, with a weighted-average exercise price of $0.67 per share;

    1,444,500 shares of common stock issuable upon exercise of options to purchase common stock granted between April 1 and June 30, 2013, with a weighted average exercise price of $1.41 per share;

    323,904 shares of common stock issuable upon the exercise of convertible preferred stock warrants outstanding as of March 31, 2013 that will convert into warrants to purchase shares of common stock upon closing of this offering, with a weighted average exercise price of $0.25 per share; and

    shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan, which will become effective on the completion of this offering and will contain provisions that automatically increase the number of shares reserved for issuance each year, 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 this offering. The historical net tangible book value of our common stock as of March 31, 2013 was $(25.8 million), or $(0.89) per share. The pro forma net tangible book value of our common stock as of March 31, 2013 was $50.7 million, or $0.32 per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities, divided by the number of outstanding shares of common stock, after giving effect to the pro forma adjustments referenced under "Capitalization".

        After giving effect to (i) the pro forma adjustments referenced under "Capitalization" and (ii) receipt of the net proceeds from our sale of                shares of common stock at an assumed initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2013 would have been approximately $                , or $            per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $                per share to our existing stockholders and an immediate dilution of $                per share to investors purchasing common stock in this offering.

        The following table illustrates this dilution on a per share basis to new investors:

Assumed initial public offering price per share

        $    

Pro forma as adjusted tangible book value per share as of March 31, 2013

  $          

Increase in pro forma net tangible book value per share attributed to new investors purchasing shares in this offering

             
             

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

             
             

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

        $    
             

        Each $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by $            per share and the dilution to new investors by $            per share, 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 underwriting discounts and commissions and estimated expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of common stock offered by us would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $            per share and the dilution to new investors by $            per share, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated expenses payable by us. If the underwriters exercise their option to purchase additional shares of common stock in full, the pro forma net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $            per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $            per share of common stock.

        The table below summarizes, as of March 31, 2013, on a pro forma as adjusted basis described above, the number of shares of common stock, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing common stock in this offering at an assumed initial public offering price of $            per share, the midpoint of

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the price range set forth on the cover page of this prospectus, before deducting 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

            % $         % $    

New investors

                               
                           

Total

          100.0 % $       100.0 %      
                         

        The number of shares of common stock outstanding reflected in the discussion and tables above is based on 160,064,526 shares outstanding as of March 31, 2013, and excludes:

    26,363,370 shares of common stock issuable upon the exercise of stock options outstanding as of March 31, 2013, with a weighted-average exercise price of $0.67 per share;

    1,444,500 shares of common stock issuable upon exercise of options to purchase common stock granted between April 1 and June 30, 2013, with a weighted average exercise price of $1.41 per share;

    323,904 shares of common stock issuable upon the exercise of convertible preferred stock warrants outstanding as of March 31, 2013 that will convert into warrants to purchase shares of common stock upon closing of this offering at a weighted average exercise price of $0.25 per share; and

                     shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan, which will become effective on the completion of this offering and will contain provisions that automatically increase the number of shares reserved for issuance each year, as more fully described in "Executive Compensation—Employee Benefit Plans."

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

        To the extent that any outstanding options are exercised, new options are issued under our stock-based compensation plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2004 Stock Plan as of March 31, 2013 were exercised, then our existing stockholders, including the holders of these options, would own        % and our new investors would own        % of the total number of shares of common stock outstanding upon the closing of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of these options, would be approximately $                , or        %, the total consideration paid by our new investors would be $                , or        %, the average price per share paid by our existing stockholders would be $                and the average price per share paid by our new investors would be $            .

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SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial and other data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes, which are included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 are derived from the audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2012 and 2013 and the consolidated balance sheet data as of March 31, 2013 are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. We have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected in the future, and our interim results are not necessarily indicative of the results to be expected for the full year or any other period.

 
  Years Ended December 31,   Three Months Ended
March 31,
 
 
  2010   2011   2012   2012   2013  
 
  (in thousands, except per share data)
 

Consolidated Statement of Operations Data:

                               

Revenue

  $ 51,872   $ 68,565   $ 116,744   $ 20,069   $ 26,612  

Cost of revenue(1)

    31,565     42,787     62,985     11,489     14,553  
                       

Gross profit

    20,307     25,778     53,759     8,580     12,059  

Operating expenses:

                               

Sales and marketing(1)

    13,212     23,416     31,385     7,102     10,217  

Research and development(1)

    1,862     2,734     2,766     652     1,000  

General and administrative(1)

    5,263     10,596     12,466     2,349     3,938  
                       

Total operating expenses

    20,337     36,746     46,617     10,103     15,155  

Income (loss) from operations

   
(30

)
 
(10,968

)
 
7,142
   
(1,523

)
 
(3,096

)

Other income (expense), net:

                               

Interest expense

    (54 )   (164 )   (117 )   (34 )   (19 )

Other income (expense), net

    (171 )   (19 )   (147 )       (192 )
                       

Total other expense, net

    (225 )   (183 )   (264 )   (34 )   (211 )
                       

Income (loss) before income taxes

    (255 )   (11,151 )   6,878     (1,557 )   (3,307 )

Income tax (expense) benefit

   
(111

)
 
62
   
(612

)
 
65
   
(31

)
                       

Net income (loss)

  $ (366 ) $ (11,089 ) $ 6,266   $ (1,492 ) $ (3,338 )
                       

Net income (loss) attributable to common stockholders

  $ (366 ) $ (11,089 ) $ 89   $ (1,492 ) $ (3,338 )
                       

Net income (loss) per share attributable to common stockholders:

                               

Basic

  $ (0.02 ) $ (0.51 ) $ 0.00   $ (0.05 ) $ (0.12 )

Diluted

  $ (0.02 ) $ (0.51 ) $ 0.00   $ (0.05 ) $ (0.12 )

Weighted-average number of shares used in computing net income (loss) per share attributable to common stockholders:

                               

Basic

   
19,558
   
21,898
   
28,296
   
27,160
   
28,971
 

Diluted

    19,558     21,898     33,272     27,160     28,971  

Pro forma net income (loss) per share (unaudited)(2):

                               

Basic

              $ 0.04         $ (0.02 )

Diluted

              $ 0.04         $ (0.02 )

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  Years Ended December 31,   Three Months Ended
March 31,
 
 
  2010   2011   2012   2012   2013  
 
  (in thousands, except per share data)
 

Weighted average shares used in computing pro forma net income (loss) per share (unaudited):

                               

Basic

                155,422           158,777  

Diluted

                160,398           158,777  

Other Financial Data:

                               

Adjusted EBITDA(3)

  $ 1,585   $ (7,422 ) $ 11,820   $ (460 ) $ (1,617 )

(1)
Employee and non-employee stock-based compensation expense included in the consolidated statement of operations data above was as follows:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
  (in thousands)
 

Cost of revenue

  $ 14   $ 68   $ 128   $ 25   $ 30  

Sales and marketing

    554     981     1,215     294     341  

Research and development (excluding capitalized internally developed software)

    13     65     184     17     70  

General and administrative

    279     354     515     93     204  
                       

Total employee stock-based compensation

  $ 860   $ 1,468   $ 2,042   $ 429   $ 645  
                       
(2)
Pro forma basic and diluted net income per share have been calculated assuming the conversion of all outstanding shares of convertible preferred stock into shares of common stock as of the beginning of the applicable period or the original issuance, if later. See Note 14, "Net Income (Loss) per Share and Unaudited Pro Forma Net Income (Loss) per Share," in Notes to Consolidated Financial Statements for a description of the method used to compute basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share.

(3)
We define adjusted EBITDA as net income (loss) plus income tax (expense) benefit, interest expense, depreciation and amortization, and stock based compensation. Please see "Selected Consolidated Financial Data—Adjusted EBITDA" for more information and for the reconciliation of adjusted EBITDA to net income (loss), which is the most directly comparable financial measure calculated in accordance with GAAP.

 
  As of December 31,    
 
 
  As of March 31,
2013
 
 
  2011   2012  
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

  $ 19,023   $ 27,909   $ 26,834  

Property, equipment and software, net

    5,227     5,551     5,657  

Working capital

    32,654     49,400     45,400  

Total assets

    58,814     90,614     80,472  

Long term debt, excluding current portion

    177          

Capital lease obligations, long term

    769     380     159  

Convertible preferred stock

    62,919     76,191     76,191  

Total stockholders' deficit

    (24,444 )   (15,329 )   (17,878 )

Adjusted EBITDA

        To provide investors with additional information regarding our financial results, we have presented within this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided below a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

        We have presented adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short and long-term operational

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plans. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

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

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

    Adjusted EBITDA does not reflect: (i) changes in, or cash requirements for, our working capital needs; (ii) the potentially dilutive impact of equity-based compensation; or (iii) tax payments that may represent a reduction in cash available to us; and

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

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

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
  (in thousands)
 
 
   
   
   
  (unaudited)
 

Net income (loss)

  $ (366 ) $ (11,089 ) $ 6,266   $ (1,492 ) $ (3,338 )

Adjustments:

                               

Interest expense

    54     164     117     34     19  

Income tax expense

    111     (62 )   612     (65 )   31  

Depreciation and amortization expense

    926     2,097     2,783     634     1,026  

Stock based compensation expense

    860     1,468     2,042     429     645  
                       

Total adjustments

    1,951     3,667     5,554     1,032     1,721  
                       

Adjusted EBITDA

  $ 1,585   $ (7,422 ) $ 11,820   $ (460 ) $ (1,617 )
                       

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

        You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes to the consolidated financial statements included later in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in "Risk Factors" and "Special Note Regarding Forward-Looking Statements."

Overview

        We are a leading independent provider of digital video brand advertising solutions. Our proprietary technologies serve the specific needs of brand advertisers and enable them to find and target large, brand-receptive audiences across a wide range of Internet-connected devices and digital media properties. Our software is used by global digital media properties to monetize professionally-produced content and applications. We facilitate digital video advertising by dynamically matching relevant audiences available through our digital media property partners with appropriate advertising campaigns from our advertising customers. Our leadership, based on proprietary technologies, brand-specific advertising solutions, large software install base and data assets is reflected in our wide audience reach, with over 257 million monthly unique viewers worldwide during May 2013, and our large customer base that includes 64 of the top 100 U.S. advertisers.

        We help our advertising customers overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where dispersed audiences of video consumers use a growing variety of Internet-connected devices to access thousands of online and mobile websites and applications. In 2012, we delivered over eight billion video advertising impressions across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. Our video ads run when users choose to view video content on their devices. On each video advertising impression, we collect dozens of data elements that we use for our advanced audience modeling algorithms that improve our brand-targeting efficacy.

        Over our eight-year operating history we have amassed a vast amount of data derived from our large software installed base of YuMe Audience Aware Software Development Kits, or YuMe SDKs, that are embedded in online and mobile websites and entertainment applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices. This allows us to deliver television-like ads, enhanced and customized for each specific device type, and collect valuable advertisement viewership data. We estimate that we collected over 200 billion data points from ad impressions we delivered in 2012. As we grow our audience and advertiser footprint, we are able to collect even more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions and driving additional adoption.

        We generate revenue by delivering digital video advertisements on Internet-connected devices. Advertising customers submit ad insertion orders to us, and we fulfill those orders by delivering their digital video advertisements to audiences available through digital media properties, a process that we refer to as an advertising campaign. From 2007 to 2012, we ran over 21,000 advertising campaigns. We are typically paid on a cost per thousand impressions, or CPM, basis, of which we generally pay digital media properties a negotiated percentage. Our customers primarily consist of large global brands and their advertising agencies. In the twelve months ended March 31, 2013, our customers included 64 of the top 100 U.S. advertisers in 2012 as ranked by Advertising Age magazine, or the AdAge 100, such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald's.

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Components of our Results of Operations

    Revenue

        We principally derive revenue from advertising solutions priced on a CPM basis and measured by the number of advertising impressions delivered to digital media properties. A substantial majority of our contracts with customers take the form of ad insertion orders placed by advertising agencies on behalf of their brand advertiser clients, which are typically one to three months in duration. Occasionally, we enter into longer term contracts with customers.

        We count direct advertising customers in accordance with the following principles: we count (i) each advertiser, not the advertising agencies through which its ad insertion orders may be placed, as the customer; and (ii) entities that are part of the same corporate structure are counted as a single customer. We also have other revenue (i) that is paid by digital media property owners, including platform fees, professional service fees and ad serving fees and (ii) from intermediaries that have relationships with advertising agencies and advertisers. In calculating revenue per direct advertising customer, we exclude this other revenue.

        Our revenue may fluctuate based on seasonal factors that affect the advertising industry. For example, many advertisers devote the largest portion of their budgets to the fourth quarter of the calendar year, to coincide with increased holiday purchasing. Historically, the fourth quarter of the year reflects the highest advertising activity and the first quarter reflects the lowest level of such activity.

    Cost of Revenue and Operating Expenses

        Cost of Revenue.    Our cost of revenue primarily consists of payments to digital media property owners, typically under revenue sharing arrangements. We refer to these payments as traffic acquisition costs. Generally, we become obligated to make payments for traffic acquisition costs in the period the advertising impressions are delivered. In limited circumstances, we are obligated to make payments based on minimum guaranteed impressions. Cost of revenue also includes ad delivery costs, such as labor and related costs, depreciation and amortization related to acquired and internally developed software, data center assets and Internet access costs. These expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized. We expect cost of revenues, including our traffic acquisition costs, to increase, but to remain relatively constant as a percentage of revenue in the near term.

        Sales and Marketing.    We sell to our customers primarily through our direct sales force personnel, who have established relationships with major ad agencies and direct relationships with advertisers. Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel and entertainment expenses, and incentive compensation for our sales and marketing employees. Sales and marketing expenses also include promotional, advertising and public relations costs, as well as allocated depreciation, facilities and other supporting overhead costs. We expect sales and marketing expenses to increase as we hire additional employees to expand our sales force and to support our marketing initiatives, and to decline as a percentage of revenue over time.

        Research and Development.    We engage in research and development efforts to create new, and enhance our existing, data-science capabilities and proprietary technologies. Our research and development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product management and information technology personnel. Research and development expenses also include outside services and consulting, allocated depreciation, facilities and other overhead costs. We capitalize a portion of our research and development costs attributable to internally developed software.

        As of December 31, 2010, 2011, 2012 and March 31, 2013, we had 44, 63, 82 and 88 research and development employees, respectively. As of March 31, 2013, 75 of our research and development employees were located in our Chennai, India office. We expect our research and development

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expenses to increase as we continue to invest in the development of our products, and to increase as a percentage of revenue in the short term. We believe that our eight-year operating history and our ability to attract and retain the large pool of engineering talent available in Chennai will help us expand our engineering resources and capabilities cost-effectively.

        General and Administrative.    Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, human resources and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, and facilities and other supporting overhead costs not allocated to other departments. We expect our general and administrative expenses to increase as we expand our financial, accounting, human resources, information technology and legal personnel and resources to support our anticipated public reporting requirements, and to decrease as a percentage of revenue over time.

        Interest Expense.    Interest expenses relate to our capital lease obligations and notes payable.

        Other Income (Expense), Net.    Other income (expense), net, consists primarily of the interest income earned on our cash and cash equivalents, re-measurement of our convertible preferred stock warrants accounted for as liabilities and foreign exchange gains and losses. We have foreign currency exposure related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, principally the British pound sterling, Indian rupee and the euro.

        Provision for Income Taxes.    The provision for income taxes consists of federal and state income taxes in the United States and income taxes in certain foreign jurisdictions, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carry forwards.

Acquisition Activity

        In June 2011, we acquired Appealing Media, Limited, a U.K.-based mobile advertising technology and services company, for an aggregate purchase price of $1.3 million in cash, excluding performance-related earn-outs. In December 2012, we acquired Crowd Science, Inc., a U.S.-based audience targeting technology company, for approximately $1.1 million in cash and 2,000,000 shares of Series D-1 preferred stock. We held back $49,000 in cash and 400,000 shares of Series D-1 convertible preferred stock until the second anniversary of the closing date, subject to the satisfaction of certain conditions.

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Results of Operations

        The following tables set forth our results of operations and our results of operations as a percentage of revenue for the periods presented (some items may not foot due to rounding).

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
  (in thousands, except per share data)
 
 
   
   
   
  (unaudited)
 

Consolidated Statement of Operations Data:

                               

Revenue

  $ 51,872   $ 68,565   $ 116,744   $ 20,069   $ 26,612  

Cost of revenue(1)

    31,565     42,787     62,985     11,489     14,553  
                       

Gross profit

    20,307     25,778     53,759     8,580     12,059  

Operating expenses:

                               

Sales and marketing(1)

    13,212     23,416     31,385     7,102     10,217  

Research and development(1)

    1,862     2,734     2,766     652     1,000  

General and administrative(1)

    5,263     10,596     12,466     2,349     3,938  
                       

Total operating expenses

    20,337     36,746     46,617     10,103     15,155  

Income (loss) from operations

    (30 )   (10,968 )   7,142     (1,523 )   (3,096 )

Other income (expense), net:

                               

Interest expense

    (54 )   (164 )   (117 )   (34 )   (19 )

Other income (expense), net

    (171 )   (19 )   (147 )       (192 )
                       

Total other expense, net

    (225 )   (183 )   (264 )   (34 )   (211 )
                       

Income (loss) before income taxes

    (255 )   (11,151 )   6,878     (1,557 )   (3,307 )

Income tax (expense) benefit

    (111 )   62     (612 )   65     (31 )
                       

Net income (loss)

  $ (366 ) $ (11,089 ) $ 6,266   $ (1,492 ) $ (3,338 )
                       

(1)
Employee and non-employee stock-based compensation expense included in the consolidated statement of operations data above was as follows:

 
  Years Ended
December 31,
  Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
  (in thousands)
 
 
   
   
   
  (unaudited)
 

Cost of revenue

  $ 14   $ 68   $ 128   $ 25   $ 30  

Sales and marketing

    554     981     1,215     294     341  

Research and development (excluding capitalized internally developed software)

    13     65     184     17     70  

General and administrative

    279     354     515     93     204  
                       

Total employee stock-based compensation

  $ 860   $ 1,468   $ 2,042   $ 429   $ 645  
                       

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  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  

Consolidated Statement of Operations Data (as a percentage of revenue):

                               

Revenue

    100 %   100 %   100 %   100 %   100 %

Cost of revenue

    61     62     54     57     55  
                       

Gross profit

    39     38     46     43     45  

Operating expenses:

                               

Sales and marketing

    25     34     27     35     38  

Research and development

    4     4     2     3     4  

General and administrative

    10     15     11     12     15  
                       

Total operating expenses

    39     54     40     50     57  

Income (loss) from operations

        (16 )   6     (8 )   (12 )

Income (loss) before income taxes

        (16 )   6     (8 )   (12 )
                       

Net income (loss)

    (1 )%   (16 )%   5 %   (7 )%   (13 )%
                       

Three Months Ended March 31, 2012 and 2013

    Revenue

 
  Three Months Ended March 31,    
   
 
 
  2012   2013   Change   % Change  
 
  (in thousands, except percentages)
 
 
  (unaudited)
 

Revenue

  $ 20,069   $ 26,612   $ 6,543     33 %

        The increase in revenue was due to an increase in the number of customers purchasing our digital video solutions, and an increase in the average revenue per direct advertising customer. We had 171 direct advertising customers with average revenue of $111 thousand per customer in the three months ended March 31, 2012 and 219 direct advertising customers with average revenue of $113 thousand per customer in the three months ended March 31, 2013. The increase in average revenue per direct advertising customer was the result of advertisers directing an increasing amount of their budgets to digital video advertising. Other revenue increased from $1.0 million in the three months ended March 31, 2012 to $2.0 million in the three months ended March 31, 2013, reflecting both increases in spend from our intermediary advertising relationships and higher platform and ad serving fees. Our top 20 customers in the three months ended March 31, 2012 accounted for $12.0 million, or approximately 59.6%, of our revenue compared to our top 20 customers in the three months ended March 31, 2013, which accounted for $15.0 million, or approximately 56.3% of our revenue.

    Cost of revenue and Gross profit

 
  Three Months Ended March 31,    
   
 
 
  2012   2013   Change   % Change  
 
  (in thousands, except percentages)
 
 
  (unaudited)
 

Cost of revenue

  $ 11,489   $ 14,553   $ 3,064     27 %

Gross profit

    8,580     12,059     3,479     41 %

Gross margin

    43 %   45 %            

        The increase in cost of revenue was attributable to an increase of $2.2 million in traffic acquisition costs primarily due to an increase in ad impressions delivered, as well as a $0.2 million increase in ad delivery costs. As a result of the growth in our business, we hired additional employees to support our

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ad operations department (including hires in Chennai, India) and experienced an increase in salaries and related costs of $0.3 million and depreciation and amortization of $0.3 million. Traffic acquisition costs represented approximately 49.4% and 45.3% of revenue for the three months ended March 31, 2012 and 2013, respectively. The decrease in traffic acquisition costs as a percentage of total revenue primarily related to the more effective management of our relationships with digital media properties, the implementation of a new system of inventory quality scoring, and to a lesser extent, the impact of an increase in other revenue for which there was no associated traffic acquisition cost.

    Sales and marketing

 
  Three Months Ended March 31,    
   
 
 
  2012   2013   Change   % Change  
 
  (in thousands, except percentages)
 
 
  (unaudited)
 

Sales and marketing

  $ 7,102   $ 10,217   $ 3,115     44 %

Percent of revenue

    35 %   38 %            

        The increase in sales and marketing expenses was attributable to an increase in headcount-related expenses of $1.1 million as we expanded our sales organization. As a result of our efforts to increase market awareness of our solutions, our general marketing expenditures increased $0.9 million and travel and entertainment increased $0.2 million. Additionally, as a result of our increase in revenue and increase in sales and marketing headcount, our commission expenses increased $0.2 million and recruiting expense increased $0.2 million. Allocated facilities expenses including depreciation expenses increased $0.4 million, reflecting our increased investment in infrastructure.

    Research and development

 
  Three Months Ended March 31,    
   
 
 
  2012   2013   Change   % Change  
 
  (in thousands, except percentages)
 
 
  (unaudited)
 

Research and development

  $ 652   $ 1,000   $ 348     53 %

Percent of revenue

    3 %   4 %            

        The increase in research and development expense was attributable to an increase in headcount-related expenses of $0.2 million, including an increase in stock-based compensation expense of $0.1 million, as we further invested in our research and development capabilities in the United States and Chennai, India. Allocated facilities expenses including depreciation expenses increased $0.2 million, reflecting our increased investment in infrastructure.

    General and administrative

 
  Three Months Ended March 31,    
   
 
 
  2012   2013   Change   % Change  
 
  (in thousands, except percentages)
 
 
  (unaudited)
 

General and administrative

  $ 2,349   $ 3,938   $ 1,589     68 %

Percent of revenue

    12 %   15 %            

        The increase in general and administrative expenses was attributable to an increase in outside services expense of $1.4 million as we invested in infrastructure to prepare for the growth of the business. In addition, there was an increase in headcount-related expenses of $0.7 million, including an increase in stock-based compensation expense of $0.1 million, as we continued to invest in key accounting, finance, legal and management positions within the organization. This was partially offset

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by higher allocated facilities costs to other departments of $0.4 million as well as $0.3 million decrease in acquisition earn out expenses relating to the Appealing Media acquisition in 2011.

    Other income (expense), net

 
  Three Months Ended March 31,    
   
 
 
  2012   2013   Change   % Change  
 
  (in thousands, except percentages)
 
 
  (unaudited)
 

Interest expense

  $ (34 ) $ (19 )            

Foreign currency transaction gains (losses)

    (1 )   (171 )            

Change in fair value of warrant liabilities

    1     (28 )            

Other non-operating loss, net

        7              
                       

Total other income (expense), net

  $ (34 ) $ (211 ) $ (177 )   521 %
                       

        The increase in other income (expense), net, reflects the increase losses on foreign currency transactions relating to the India and European operations as well as the revaluation of outstanding convertible preferred stock warrants offset in part by a decrease in interest expense as a result of principal payments on capital leases and notes payable.

    Income tax (expense) benefit

 
  Three Months Ended March 31,    
   
 
 
  2012   2013   Change   % Change  
 
  (in thousands, except percentages)
 
 
  (unaudited)
 

Income tax (expense) benefit

  $ 65   $ (31 ) $ (96 )   (148 )%

        In the three months ended March 31, 2012 we recorded deferred tax assets for the United Kingdom in the amount of $0.1 million, resulting in a tax benefit. In the three months ended March 31, 2013, income tax expense primarily related to taxes due in foreign jurisdictions.

    Net loss

        We had a net loss of $1.5 million for the three months ended March 31, 2012 as compared to net loss of $3.3 million for the three months ended March 31, 2013. The increase in our net loss primarily reflects our investments in our sales organization and marketing to increase sales and awareness of our solutions, and to a lesser degree investment in accounting, finance and management, and increased use of outside professional services.

Years Ended December 31, 2011 and 2012

    Revenue

 
  Years Ended
December 31,
   
   
 
 
  2011   2012   Change   % Change  
 
  (in thousands, except percentages)
 

Revenue

  $ 68,565   $ 116,744   $ 48,179     70 %

        The increase in revenue was due to a significant increase in the number of customers purchasing our digital video solutions, and an increase in the average revenue per direct advertising customer. We had 261 direct advertising customers with average revenue of $241 thousand per customer in 2011 and 397 direct advertising customers with average revenue of $279 thousand per customer in 2012. The

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increase in average revenue per direct advertising customer was the result of advertisers directing an increasing amount of their budgets to digital video advertising. Other revenue remained flat at $5.6 million from 2011 to 2012, reflecting lower spend from our intermediary advertising relationships offset by higher platform and ad serving fees as well as professional services revenue. Our top 20 customers in 2011 accounted for $37.2 million, or approximately 54.2%, of our revenue, while our top 20 customers in 2012 accounted for $58.6 million, or approximately 50.2% of our revenue.

    Cost of revenue and Gross profit

 
  Years Ended
December 31,
   
   
 
 
  2011   2012   Change   % Change  
 
  (in thousands, except percentages)
 

Cost of revenue

  $ 42,787   $ 62,985   $ 20,198     47 %

Gross profit

    25,778     53,759     27,981     109 %

Gross margin

    38 %   46 %            

        The increase in cost of revenue was attributable to an increase of $17.0 million in traffic acquisition costs primarily due to an increase in ad impressions delivered, as well as a $1.3 million increase in ad delivery costs. As a result of the growth in our business, we hired additional employees to support our ad operations department (including hires in Chennai, India) and experienced an increase in salaries and related costs of $1.1 million and depreciation and amortization of $0.7 million. Traffic acquisition costs represented approximately 54.8% and 46.7% of revenue in 2011 and 2012, respectively. The decrease in traffic acquisition costs as a percentage of total revenue primarily related to the more effective management of our relationships with digital media properties, the implementation of a new system of inventory quality scoring, fewer ad hoc media buys during 2012, and to a lesser extent, the impact of an increase in other revenue for which there was no associated traffic acquisition cost.

    Sales and marketing

 
  Years Ended
December 31,
   
   
 
 
  2011   2012   Change   % Change  
 
  (in thousands, except percentages)
 

Sales and marketing

  $ 23,416   $ 31,385   $ 7,969     34 %

Percent of revenue

    34 %   27 %            

        The increase in sales and marketing expenses was attributable to an increase in headcount-related expenses of $2.9 million, including an increase in stock-based compensation of $0.2 million, as we expanded our sales organization. As a result of our increase in revenue and increase in sales and marketing headcount, our commission expenses also increased $3.8 million. Additionally, general marketing expenditures increased $0.2 million and travel and entertainment expense increased $0.4 million, to expand market awareness of our solutions. Allocated facilities expenses increased $0.5 million, reflecting our increased investment in infrastructure.

    Research and development

 
  Years Ended
December 31,
   
   
 
 
  2011   2012   Change   % Change  
 
  (in thousands, except percentages)
 

Research and development

  $ 2,734   $ 2,766   $ 32     1 %

Percent of revenue

    4 %   2 %            

        The slight increase in research and development expense was attributable to an increase in headcount-related expenses of $0.1 million, as we further invested in our research and development

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capabilities in Chennai, India. In addition, we benefited from a favorable fluctuation in the Indian rupee exchange rate.

    General and administrative

 
  Years Ended
December 31,
   
   
 
 
  2011   2012   Change   % Change  
 
  (in thousands, except percentages)
 

General and administrative

  $ 10,596   $ 12,466   $ 1,870     18 %

Percent of revenue

    15 %   11 %            

        The increase in general and administrative expenses was attributable to an increase in headcount-related expenses of $1.2 million, including an increase in stock-based compensation expense of $0.2 million, as we continued to invest in key accounting, finance, legal and management positions within the organization. We also invested in infrastructure to prepare for the growth of the business, which led to an increase in facility costs not allocated to other departments of $0.5 million and an increase in outside services expense of $0.2 million. In addition, bad debt expenses increased $0.5 million due to an increase in provisions for potential issues with collectability as we expand our customer base, particularly internationally. These increases were partially offset by decreases in recruiting and relocation costs of $0.6 million as we utilized internal resources for these efforts subsequent to building out a recruiting department in the three months ended June 30, 2011.

    Other income (expense), net

 
  Years Ended
December 31,
   
   
 
 
  2011   2012   Change   % Change  
 
  (in thousands, except percentages)
 

Interest expense

  $ (164 ) $ (117 )            

Foreign currency transaction gains (losses)

    (9 )   (34 )            

Change in fair value of warrants liability

    18     (102 )            

Other non-operating loss, net

    (28 )   (11 )            
                       

Total other income (expense), net

  $ (183 ) $ (264 ) $ (81 )   44 %
                       

        The increase in other income (expense), net, reflects the revaluation of outstanding convertible preferred stock warrants offset in part by a decrease in interest expense as a result of principal payments on capital leases and notes payable.

    Income tax (expense) benefit

 
  Years Ended
December 31,
   
   
 
 
  2011   2012   Change   % Change  
 
  (in thousands, except percentages)
 

Income tax (expense) benefit

  $ 62   $ (612 ) $ (674 )   (1,087 )%

        In 2011 we recorded deferred tax assets for the United Kingdom in the amount of $0.1 million, resulting in a tax benefit. In 2012, income tax expense relates to federal and state alternative minimum taxes as well as taxes due in foreign jurisdictions.

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    Net income (loss)

        We had a net loss of $11.1 million for the year ended December 31, 2011 as compared to net income of $6.3 million for the year ended December 31, 2012. The improvement in our operating results in 2012 primarily related to our improved management of traffic acquisition costs, the benefits received from making investments in the ad operations and research and development teams in Chennai, India, and our utilization of internal resources for general and administrative functions.

Years Ended December 31, 2010 and 2011

    Revenue

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

Revenue

  $ 51,872   $ 68,565   $ 16,693     32 %

        The increase in revenue was due to a significant increase in the number of customers purchasing our digital video solutions, and an increase in average revenue per direct advertising customer. We had 221 direct advertising customers with average revenue of $200 thousand per customer in 2010 and 261 direct advertising customers with average revenue of $241 thousand per customer in 2011. The increase in average revenue per direct advertising customer was the result of advertisers directing an increasing amount of their budgets to digital video advertising. Other revenue decreased from $7.6 million in 2010 to $5.6 million in 2011, reflecting lower spend from our intermediary advertising relationships while our platform and ad serving fees remained flat. Our top 20 customers in 2010 accounted for $26.9 million, or approximately 51.9%, of our revenue, while our top 20 customers in 2011 accounted for $37.2 million, or approximately 54.2%, of our revenue.

    Cost of revenue and Gross profit

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

Cost of revenue

  $ 31,565   $ 42,787   $ 11,222     36 %

Gross profit

    20,307     25,778     5,471     27 %

Gross margin

    39 %   38 %            

        The increase in cost of revenue was attributable to an increase of $9.0 million in traffic acquisition costs as well as a $0.6 million increase in our ad delivery costs. As a result of the growth in our business, we hired additional employees to support our ad operations department (including hires in Chennai, India) and experienced an increase in salaries and related costs of $0.5 million, and depreciation and amortization of $0.9 million. Traffic acquisition costs represented approximately 55% of revenue in both periods.

    Sales and marketing

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

Sales and marketing

  $ 13,212   $ 23,416   $ 10,204     77 %

Percent of revenue

    25 %   34 %            

        The increase in sales and marketing expenses was attributable to an increase in headcount-related expenses of $6.1 million, including an increase in stock-based compensation of $0.4 million, as we

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expanded our sales organization. As of December 31, 2010 and December 31, 2011, we had 25 and 49 quota-carrying direct sales personnel, respectively. As a result of our efforts to increase market awareness of our solutions, our general marketing expenditures increased $1.2 million and travel and related expense increased $1.3 million. Primarily as a result of our increase in revenue, our commission expenses also increased $0.6 million. In addition, allocated facilities costs increased $0.9 million.

    Research and development

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

Research and development

  $ 1,862   $ 2,734   $ 872     47 %

Percent of revenue

    4 %   4 %            

        The increase in research and development expenses was primarily attributable to an increase in headcount-related expenses of $0.6 million, including an increase in stock-based compensation of $0.1 million, as we continued to invest in our solutions and other technologies for service delivery. In addition, we experienced an increase in travel and related expenses of $0.1 million as a result of increased travel for employees involved in development of our proprietary technologies. In addition, allocated facilities costs increased $0.2 million.

    General and administrative

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

General and administrative

  $ 5,263   $ 10,596   $ 5,333     101 %

Percent of revenue

    10 %   15 %            

        The increase in general and administrative expenses was attributable to an increase in headcount-related expenses of $2.5 million, including an increase in stock-based compensation of $0.1 million, as we continued to invest in key accounting, finance and management positions within the organization. As a result of our efforts to hire these key individuals, we experienced an increase of $0.6 million for recruiting, hiring and relocation costs. Other legal, accounting and consulting expenses increased by $1.6 million primarily to supplement our infrastructure. In addition, costs related primarily to facilities, software and equipment (including depreciation and amortization) not allocated to other departments increased by $0.2 million. We also accrued $0.5 million for an earn-out related to hiring targets for our acquisition of Appealing Media in 2011.

    Other income (expense), net

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

Interest expense

  $ (54 ) $ (164 )            

Transaction gains (losses) on foreign exchange

        (9 )            

Change in fair value of warrants liability

    (194 )   18              

Other non-operating loss, net

    23     (28 )            
                       

Total other income (expense), net

  $ (225 ) $ (183 ) $ 42     19 %
                       

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        The decrease in other income (expense), net, reflects the revaluation of outstanding convertible preferred stock warrants, offset in part by an increase in interest expense as a result of taking on additional capital leases principally related to data center capacity expansion.

    Income tax (expense) benefit

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

Income tax (expense) benefit

  $ (111 ) $ 62   $ 173     156 %

        For 2011 we recorded deferred tax assets for the United Kingdom in the amount of $0.1 million, resulting in a tax benefit in 2011.

    Net loss

        We had a net loss of $0.4 million for the year ended December 31, 2010, compared to a net loss of $11.1 million for the year ended December 31, 2011. The increase in our net loss primarily reflects our investments in our sales organization and marketing to increase sales and awareness of our solutions, and to a lesser degree investment in accounting, finance and management, and increased use of outside professional services.

Quarterly Results of Operations

        The following tables set forth our unaudited quarterly consolidated statements of operations data and our unaudited statement of operations data as a percentage of total revenue for each of the nine quarters in the period ended March 31, 2013. We have prepared the quarterly data on a basis consistent with the audited consolidated financial statements included in this prospectus. In the opinion of management, the quarterly financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. Results for historical periods are not necessarily indicative of the results of operations for a full year or any future period.

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  Three Months Ended  
 
  Mar 31,
2011
  Jun 30,
2011
  Sept 30,
2011
  Dec 31,
2011
  Mar 31,
2012
  Jun 30,
2012
  Sept 30,
2012
  Dec 31,
2012
  Mar 31,
2013
 
 
  (in thousands, except per share data)
 
 
  (unaudited)
 

Consolidated Statement of Operations Data:

                                                       

Revenue

  $ 11,546   $ 13,639   $ 14,985   $ 28,395   $ 20,069   $ 25,196   $ 26,010   $ 45,469   $ 26,612  

Cost of revenue(1)

    7,409     8,542     9,852     16,984     11,489     13,652     14,402     23,442     14,553  
                                       

Gross profit

    4,137     5,097     5,133     11,411     8,580     11,544     11,608     22,027     12,059  

Operating expenses:

                                                       

Sales and marketing(1)

    4,638     4,986     6,266     7,526     7,102     7,958     7,339     8,986     10,217  

Research and development(1)

    738     640     631     725     652     523     716     875     1,000  

General and administrative(1)

    1,958     2,427     3,189     3,022     2,349     2,747     3,141     4,229     3,938  
                                       

Total operating expenses

    7,334     8,053     10,086     11,273     10,103     11,228     11,196     14,090     15,155  
                                       

Income (loss) from operations

    (3,197 )   (2,956 )   (4,953 )   138     (1,523 )   316     412     7,937     (3,096 )

Total other expense, net

    (6 )   (35 )   (35 )   (107 )   (34 )   (39 )   (61 )   (130 )   (211 )
                                       

Income (loss) before income taxes

    (3,203 )   (2,991 )   (4,988 )   31     (1,557 )   277     351     7,807     (3,307 )

Income tax (expense) benefit

        (16 )   (6 )   84     65     (150 )   125     (652 )   (31 )
                                       

Net income (loss)

  $ (3,203 ) $ (3,007 ) $ (4,994 ) $ 115   $ (1,492 ) $ 127   $ 476   $ 7,155   $ (3,338 )
                                       

Net income (loss) attributable to common stockholders

  $ (3,203 ) $ (3,007 ) $ (4,994 ) $   $ (1,492 ) $   $   $ 362   $ (3,338 )
                                       

Net income (loss) per share attributable to common stockholders:

                                                       

Basic

  $ (0.15 ) $ (0.14 ) $ (0.23 ) $ 0.00   $ (0.05 ) $ 0.00   $ 0.00   $ 0.01   $ (0.12 )

Diluted

  $ (0.15 ) $ (0.14 ) $ (0.23 ) $ 0.00   $ (0.05 ) $ 0.00   $ 0.00   $ 0.01   $ (0.12 )

Weighted-average number of shares used in computing net income (loss) per share attributable to common stockholders:

                                                       

Basic

    21,136     21,804     22,024     22,610     27,160     28,494     28,713     28,808     28,971  

Diluted

    21,136     21,804     22,024     32,073     27,160     33,474     33,751     35,038     28,971  
(1)
Employee and non-employee stock-based compensation expense included in the consolidated statement of operations data above was as follows:

 
  Three Months Ended  
 
  Mar 31,
2011
  Jun 30,
2011
  Sept 30,
2011
  Dec 31,
2011
  Mar 31,
2012
  Jun 30,
2012
  Sept 30,
2012
  Dec 31,
2012
  Mar 31,
2013
 
 
  (in thousands)
 
 
  (unaudited)
 

Stock based compensation

                                                       

Cost of revenue

  $ 5   $ 11   $ 26   $ 26   $ 25   $ 48   $ 31   $ 24   $ 30  

Sales and marketing

    188     220     291     282     294     400     324     197     341  

Research and
development (excluding
capitalized internally
developed software)

    6     1     23     35     17     22     29     116     70  

General and administrative

    60     93     109     92     93     125     131     166     204  
                                       

Total stock-based compensation

  $ 259   $ 325   $ 449   $ 435   $ 429   $ 595   $ 515   $ 503   $ 645  
                                       

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  Three Months Ended  
 
  Mar 31,
2011
  Jun 30,
2011
  Sept 30,
2011
  Dec 31,
2011
  Mar 31,
2012
  Jun 30,
2012
  Sept 30,
2012
  Dec 31,
2012
  Mar 31,
2013
 
 
  (as a percentage of revenue)
 

Consolidated Statement of Operations Data:

                                                       

Revenue

    100 %   100 %   100 %   100 %   100 %   100 %   100 %   100 %   100 %

Cost of revenue

    64     63     66     60     57     54     55     52     55  
                                       

Gross profit

    36     37     34     40     43     46     45     48     45  

Operating expenses:

                                                       

Sales and marketing

    40     37     42     27     35     32     28     20     38  

Research and development

    6     5     4     3     3     2     3     2     4  

General and administrative

    17     18     21     11     12     11     12     9     15  
                                       

Total operating expenses

    64     59     67     40     50     45     43     31     57  
                                       

Income (loss) from operations

    (28 )   (22 )   (33 )       (8 )   1     2     17     (12 )

Total other expense, net

                                    (1 )
                                       

Income (loss) before income taxes

    (28 )   (22 )   (33 )   0     (8 )   1     1     17     (12 )

Income tax (expense) benefit

                        1         1      
                                       

Net income (loss)

    (28 )%   (22 )%   (33 )%   0 %   (7 )%   1 %   2 %   16 %   (13 )%
                                       

        The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure for each of the periods indicated. Please see "Selected Consolidated Financial Data—Adjusted EBITDA" for more details on the limitations of using non-GAAP financial measures.

 
  Three Months Ended  
 
  Mar 31,
2011
  Jun 30,
2011
  Sept 30,
2011
  Dec 31,
2011
  Mar 31,
2012
  Jun 30,
2012
  Sept 30,
2012
  Dec 31,
2012
  Mar 31,
2013
 
 
  (in thousands, except per share data)
 
 
  (unaudited)
 

Net income (loss)

  $ (3,203 ) $ (3,007 ) $ (4,994 ) $ 115   $ (1,492 ) $ 127   $ 476   $ 7,155   $ (3,338 )

Adjustments

                                                       

Interest expense

    23     35     39     67     34     31     31     21     19  

Income tax expense (benefit)

        16     6     (84 )   (65 )   150     (125 )   652     31  

Depreciation and amortization

    383     514     597     603     634     693     718     738     1,026  

Stock based compensation

    259     325     449     435     429     595     514     504     645  
                                       

Total adjustments

    665     890     1,091     1,021     1,032     1,469     1,138     1,915     1,721  
                                       

Adjusted EBITDA

  $ (2,538 ) $ (2,117 ) $ (3,903 ) $ 1,136   $ (460 ) $ 1,596   $ 1,614   $ 9,070   $ (1,617 )
                                       

    Quarterly Trends and Seasonality

        Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside our control. We have experienced rapid growth since our inception, as well as other major corporate developments. For instance, we have significantly increased the number of digital media property owners in our network, entered into new international markets, made two acquisitions, and increased our advertiser client base over the last nine quarters. These changes have resulted in substantial growth in our revenue and corresponding increases in operating expenses to support our growth. Our growth has led to variable overall operating results due to changes in our investment in sales and marketing and general and administrative from quarter to quarter, increases in employee headcount and the impact of contractual relationships with new and existing digital media property owners. Our historical results should not be considered a reliable indicator of our future results of operations.

        Our quarterly revenue increased from $11.5 million in the quarter ended March 31, 2011 to $45.5 million in the quarter ended December 31, 2012 and gross margin increasing from 36% to 48% during this period. Our increase in quarterly revenue was mainly due to an increased number of

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advertiser clients as well as an increase in spending from our existing advertising clients. Our increase in gross margin has been largely the result of favorable pricing terms with new and existing digital media property owners as well as the implementation of a new system of inventory quality scoring.

        Our revenue also tends to be seasonal in nature, with the fourth quarter of each calendar year historically representing the largest percentage of our total revenue for the year. Many brand advertisers spend the largest portion of their advertising budgets during the fourth quarter, in preparation for the holiday season. In the quarter ending December 31, 2012, we also benefited from significant political advertising spend associated with the presidential and congressional elections in November 2012.

        Total operating expenses increased year over year for all periods presented primarily due to the addition of personnel in connection with the expansion of our business. The addition of headcount has been the primary cause of increases in operating expenses to date, and we expect this trend to continue as we have expanded our sales and marketing and research and development budgets to invest further in our growth and to capture additional market share. General and administrative expenses will continue to increase to support this growth as well as the additional costs of being a public company.

Liquidity and Capital Resources

        As of March 31, 2013, we had cash and cash equivalents of $26.8 million, notes payable pursuant to our Loan and Security Agreement with Silicon Valley Bank of $0.1 million and capital lease obligations of $0.9 million related to the purchase of property, equipment and software. Cash and cash equivalents consist of cash and money market funds. Cash held internationally as of December 31, 2012 was not material to our consolidated balance sheet. We did not have any short-term or long-term investments as of March 31, 2013.

        Since inception, we have financed our operations and capital expenditures through issuance of convertible notes and private sales of convertible preferred stock. Specifically, from 2005 to 2006, we received proceeds of $1.9 million related to the issuance of convertible notes to investors, which were converted into Series A-1 convertible preferred stock in July 2006. In addition, at various dates from 2006 to 2009, we raised approximately $18.8 million in net proceeds from the issuance of Series A-1, Series A-2, Series B and Series C convertible preferred stock. During 2010, we received additional net proceeds of $31.8 million from the issuance of Series D and Series D-1 convertible preferred stock. In 2011, we received additional net proceeds of $11.9 million from the issuance of Series D-1 convertible preferred stock. In 2012, we received additional net proceeds of $10.0 million from the issuance of Series D-1 convertible preferred stock.

        We believe that our existing cash and cash equivalents balance will be sufficient to meet our working capital requirements for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under "Risk Factors" in this prospectus. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain needed additional funds, we will have to reduce our operating expenses, which would impair our growth prospects and could otherwise negatively impact our business.

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    Cash Flows

        The following table summarizes our cash flows for the periods presented (in thousands):

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
   
   
   
  (unaudited)
 

Consolidated Statements of Cash Flows Data:

                               

Cash flows provided by (used in) operating activities

  $ (1,508 ) $ (17,557 ) $ 2,683   $ 2,739   $ 309  

Cash flows used in investing activities

    (2,752 )   (3,455 )   (3,599 )   (279 )   (828 )

Cash flows provided by (used in) financing activities

    31,391     11,426     9,871     248     (616 )

    Operating Activities

        We generated $0.3 million of cash from operating activities during the three months ended March 31, 2013, primarily resulting from our net loss of $3.3 million, offset by:

    Depreciation and amortization of $1.0 million;

    Stock-based compensation of $0.6 million; and

    Bad debt expense of $0.1 million.

        In addition, significant changes in our operating assets and liabilities resulted from the following:

    A decrease in accounts receivable of $10.5 million due to a decrease in billings for advertising campaigns as well as timing of payments from these customers;

    A decrease in accounts payable, accrued liabilities and accrued traffic acquisition costs of $8.2 million primarily relating to payments made for bonuses and commissions in the three months ended March 31, 2013 relating to 2012 and a decrease in traffic acquisition costs; and

    An increase in prepaid expenses and other current assets of $0.3 million primarily due to the timing of payments for rent, insurance and other operating costs.

        We generated $2.7 million of cash from operating activities during the three months ended March 31, 2012, primarily resulting from our net loss of $1.5 million, offset by:

    Depreciation and amortization of $0.6 million; and

    Stock-based compensation of $0.4 million.

        In addition, significant changes in our operating assets and liabilities resulted from the following:

    A decrease in accounts receivable of $4.0 million due to a decrease in billings for advertising campaigns as well as timing of payments from these customers;

    A decrease in accounts payable, accrued liabilities and accrued traffic acquisition costs of $0.5 million primarily relating to payments made for bonuses and commissions in the three months ended March 31, 2012 relating to 2011; and

    An increase in prepaid expenses and other current assets of $0.4 million primarily due to the timing of payments for rent, insurance and other operating costs.

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        We generated $2.7 million of cash from operating activities during 2012, primarily resulting from our net income of $6.3 million, increased by:

    Depreciation and amortization of $2.8 million;

    Stock-based compensation of $2.0 million; and

    Bad debt expense of $0.4 million.

        In addition, significant changes in our operating assets and liabilities resulted from the following:

    An increase in accounts receivable of $16.5 million due to an increase in billings for advertising campaigns as well as timing of payments from these customers;

    An increase in accounts payable, accrued liabilities and accrued traffic acquisition costs of $7.8 million relating to the growth in the business; and

    An increase in prepaid expenses and other current assets of $0.4 million primarily due to the timing of payments for rent, insurance and other operating costs.

        We used $17.6 million of cash in operating activities during 2011, primarily resulting from our net loss of $11.1 million, offset by:

    Depreciation and amortization of $2.1 million; and

    Stock-based compensation of $1.5 million.

        In addition, significant changes in our operating assets and liabilities resulted from the following:

    An increase in accounts receivable of $12.2 million due to an increase in billings for advertising campaigns as well as timing of payments from these customers; and

    An increase in accounts payable, accrued liabilities and accrued traffic acquisition costs of $2.9 million relating to the growth in the business.

        We used $1.5 million of cash in operating activities during 2010, primarily resulting from our net loss of $0.4 million, offset by:

    Depreciation and amortization of $0.9 million; and

    Stock-based compensation of $0.9 million.

        In addition, significant changes in our operating assets and liabilities resulted from the following:

    An increase in accounts receivable of $9.9 million due to an increase in billings for advertising campaigns as well as timing of payments from these customers;

    An increase in accounts payable, accrued liabilities and accrued traffic acquisition costs of $7.1 million relating to the growth in the business and amounts owed to digital media property owners; and

    An increase in prepaid expenses and other current assets of $0.5 million primarily due to the timing of payments for rent, insurance and other operating costs.

    Investing Activities

        Our primary investing activities have consisted of purchases of property, equipment and software to support our delivery of solutions, infrastructure and employees. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and development of enhancements and increased functionality of our proprietary technologies.

        We used $0.8 million of cash in investing activities during the three months ended March 31, 2013. We used $0.8 million to purchase property, equipment and software.

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        We used $0.3 million of cash in investing activities during the three months ended March 31, 2012. We used $0.3 million to purchase property, equipment and software.

        We used $3.6 million of cash in investing activities during 2012. We used $2.5 million to purchase property, equipment and software and $0.8 million for the acquisition of Crowd Science, Inc. In addition, we had an increase in restricted cash of $0.3 million relating to a letter of credit for our New York City office lease.

        We used $3.5 million of cash in investing activities during 2011. We used $2.2 million to purchase property, equipment and software and $1.3 million for the acquisition of Appealing Media, Limited.

        We used $2.8 million of cash in investing activities during 2010. We used $2.8 million to purchase property, equipment and software.

    Financing Activities

        Our financing activities have consisted primarily of net proceeds from the issuance of convertible preferred stock, notes payable with a bank and the issuance of common stock related to the exercise of stock options.

        We used $0.6 million of cash from financing activities for the three months ended March 31, 2013. We made payments of $0.4 million for deferred offering costs and repayments of $0.2 million of borrowings under notes payable and capital leases.

        We generated $0.3 million of cash from financing activities for the three months ended March 31, 2012. We received $0.5 million from proceeds from the exercise of common stock options. This was offset by repayments of $0.2 million of borrowings under notes payable and capital leases.

        We generated $9.9 million of cash from financing activities for 2012. We issued 7,612,087 shares of Series D-1 preferred stock for net proceeds of $10.0 million and we received $0.7 million from proceeds from the exercise of common stock options. This was offset by repayments of $0.9 million of borrowings under notes payable and capital leases.

        We generated $11.4 million of cash from financing activities for 2011. We issued 9,134,503 shares of Series D-1 preferred stock for net proceeds of $11.9 million and we received $0.2 million from proceeds from the exercise of common stock options. This was offset by repayments of $0.7 million of borrowings under notes payable and capital leases.

        We generated $31.4 million of cash from financing activities for 2010. We issued 24,876,609 shares of Series D and 5,328,462 shares of Series D-1 preferred stock for total net proceeds of $31.8 million. We also received net proceeds from the issuance of notes payable from Silicon Valley Bank of $1.0 million and we used $1.6 million to repurchase 1,801,182 shares of Series A-1 convertible preferred stock from existing investors.

Off Balance Sheet Arrangements

        We did not have any off balance sheet arrangements as of December 31, 2011, December 31, 2012 or March 31, 2013 other than the indemnification agreements described below.

Indemnification Agreements

        In the ordinary course of business, we provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, solutions to be provided by us or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.

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Contractual Obligations

        We lease various office facilities, including our corporate headquarters in Redwood City, California, under operating lease agreements that expire through October 2016. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods.

        We also have notes payable, capital lease obligations, and enter into agreements with digital media property owners that require the purchase of a minimum number of impressions on a monthly or quarterly basis. Our notes payable and capital leases obligations mature at various dates through June 2015, while purchase commitments expire on various dates through December 2013.

        Our future minimum payments under these arrangements as of December 31, 2012 are as follows (in thousands):

 
  Payments Due by Period  
 
  Total   Less Than
1 Year
  1 - 3
Years
  3 - 5
Years
  More Than
5 Years
 

Operating lease obligations

  $ 5,662   $ 1,913   $ 3,052   $ 697   $  

Notes payable

    192     192              

Capital lease obligations

    1,061     674     387          

Traffic acquisition costs and other purchase commitments

    1,925     1,925              
                       

Total minimum payments

  $ 8,840   $ 4,704   $ 3,439   $ 697   $  
                       

        The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Critical Accounting Policies and Estimates

        Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

        We believe that the assumptions and estimates associated with revenue recognition, internal-use software development costs, business combinations, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see note 3 of the notes to our consolidated financial statements.

    Revenue Recognition

        Our revenue is principally derived from advertising services measured by the number of advertising impressions displayed on digital media properties owned and controlled by third party digital media property owners and priced on a CPM basis. We recognize revenue when: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. For all revenue transactions, we consider a signed agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement. Our arrangements generally do not include a provision for cancellation, termination, or refunds that would significantly impact revenue recognition. Arrangements for these

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services generally have a term of up to three months and in some cases the term may be up to one year.

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

        We generally recognize revenue based on delivery information from a combination of third party reporting and our proprietary campaign tracking systems.

        Multiple-element Arrangements.    We enter into arrangements with customers to sell advertising packages that include different media placements or ad services that are delivered at the same time, or within close proximity of one another.

        For 2010, because we have not yet established the fair value for each element and adopted a single unit of accounting for these arrangements, advertising sales revenue was recognized as the lesser of (1) revenue calculated on a time-based straight-line basis over the term of the contract, or (2) revenue earned on the delivered media and price as specified on the applicable insertion order.

        Beginning on January 1, 2011, we adopted new authoritative guidance on multiple element arrangements, using the prospective method for all arrangements entered into or materially modified from the date of adoption. Under this new guidance, at the inception of an arrangement, we allocate arrangement consideration in multiple-deliverable revenue arrangements to all deliverables, based on the relative selling price method in accordance with the selling price hierarchy, which includes: (1) vendor-specific objective evidence, or VSOE, if available; (2) third party evidence, or TPE, if VSOE is not available; and (3) best estimate of selling price, or BESP if neither VSOE nor TPE is available.

        VSOE—We evaluate VSOE based on our historical pricing and discounting practices for the specific product or service when sold separately. In determining VSOE, we require that a substantial majority of the standalone selling prices for these services fall within a reasonably narrow pricing range. We historically have not entered into a large volume of single element arrangements, so we have not been able to establish VSOE for any of our advertising products.

        TPE—When VSOE cannot be established for deliverables in multiple element arrangements, we apply judgment with respect to whether we can establish a selling price based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. Generally, our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of services cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor services' selling prices are on a standalone basis. As a result, we have not been able to establish selling price based on TPE.

        BESP—When we are unable to establish selling price using VSOE or TPE, we use BESP in our allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the service were sold on a standalone basis. BESP is generally used to allocate the selling price to deliverables in our multiple element arrangements. We determine BESP for deliverables by considering multiple factors including, but not limited to, prices we charge for similar offerings, class of advertiser, size of transaction, seasonality, observed pricing trends, available online inventory, industry pricing strategies, market conditions and competitive landscape. We limit the

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amount of allocable arrangement consideration to amounts that are fixed or determinable and that are not contingent on future performance or future deliverables. We will regularly review BESP. Changes in assumptions or judgments or changes to the elements in the arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

        We recognize the relative fair value of the media placements or ad services as they are delivered assuming all other revenue recognition criteria are met.

        Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition

    Internal-use Software Development Costs

        We capitalize certain costs related to software developed for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Such costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in product development expenses on our consolidated statements of operations. Costs incurred for enhancements that are expected to result in additional features or functionality are capitalized and expensed over the estimated useful life of the enhancements, generally three years.

    Business Combinations

        When we acquire a business, we determine the acquisition purchase price as the sum of the consideration we provide. When we issue stock-based awards to an acquired company's selling stockholders, we evaluate whether the awards are contingent consideration or compensation for post-business combination services. Our evaluation includes, among other things, whether the vesting of the stock-based awards is contingent on the continued employment of the selling stockholder beyond the acquisition date. If continued employment is required for vesting, the awards are treated as compensation for post-acquisition services and recognized as future compensation expense over the required service period.

        We allocate the purchase price in a business combination to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. To date, the assets acquired and liabilities assumed in our business combinations have primarily consisted of acquired working capital and definite-lived intangible assets. The carrying value of acquired working capital is assumed to be equal to its fair value, given the short-term nature of these assets and liabilities.

    Income Taxes

        We account for income taxes in accordance with authoritative guidance, which requires the use of the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based upon the difference between the consolidated financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed.

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. We established a full valuation allowance to offset domestic net deferred tax assets

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as of December 31, 2011 and 2012 due to the uncertainty of realizing future tax benefits from our net operating loss carry forwards and other deferred tax assets. Our valuation allowance as of December 31, 2012 was attributable to the uncertainty of realizing future tax benefits from U.S. net operating losses, foreign timing differences and other deferred tax assets.

        As of December 31, 2012, we had U.S. federal net operating loss carry forwards of approximately $16.0 million, expiring beginning in 2025. As of December 31, 2012, we had U.S. state net operating loss carry forwards of approximately $18.0 million, expiring beginning in 2015. As of December 31, 2011 we had federal research and development tax credits of approximately $0.4 million, expiring beginning in 2025. We also had other tax credits of $18,000, which carries forward indefinitely. As of December 31, 2012, we had state research and development tax credits of approximately $0.4 million which carries forward indefinitely.

    Stock-based Compensation

        We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award.

        Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option valuation model to determine the fair value of stock options. The determination of the grant date fair value of options using an option valuation model is affected by our estimated common stock fair value 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:

        Fair Value of Our Common Stock.    Because our stock is not publicly traded, we must estimate the fair value of common stock, as discussed in "Common Stock Valuation" below.

        Expected Term.    The expected term was estimated using the simplified method allowed under SEC guidance.

        Volatility.    As we do not have a trading history for our common stock, the expected stock price volatility for our common stock was estimated 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 several public companies in the technology industry similar in size, stage of life cycle and financial leverage. We did not rely on implied volatilities of traded options in our industry peers' common stock because the volume of activity was relatively low. 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.

        Risk-free Rate.    The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

        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.

        If any of the assumptions used in the Black-Scholes model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

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        The following table presents the assumptions used to estimate the fair value of options granted to employees during the periods presented:

 
  Years Ended December 31,   Three Months Ended March 31,  
 
  2010   2011   2012   2012   2013  
 
   
   
   
  (Unaudited)
 

Expected term (years)

    5.66 - 6.08     5.88 - 6.08     5.60 - 6.07         5.98 - 6.08  

Volatility

    66.8 - 69.7 %   63.9 - 66.2 %   65.3 - 90.0 %   %   80.0 %

Risk-free interest rate

    1.35 - 3.00 %   1.03 - 2.84 %   0.73 - 1.09 %   %   1.14 - 1.17 %

Dividend yield

                     

        The following table summarizes by grant date the number of shares of common stock subject to stock options granted from January 1, 2011 through June 30, 2013, as well as the associated per share exercise price and the estimated fair value per share of our common stock on the grant date:

Option Grant Dates
  Number of
Shares
Underlying
Options
  Exercise
Price
Per
Share
  Common
Stock
Fair Value Per
Share at
Grant Date
 

February 1, 2011

    432,000   $ 0.77   $ 0.77  

May 27, 2011

    5,036,000     0.77     0.77  

June 6, 2011

    1,981,465     0.77     0.77  

June 15, 2011

    2,100,000     0.77     0.77  

July 18, 2011

    467,500     0.77     0.77  

December 16, 2011

    724,500     0.74     0.74  

April 27, 2012

    1,632,270     0.74     0.74  

June 17, 2012

    44,000     0.74     0.74  

July 26, 2012

    1,855,000     0.78     0.78  

August 24, 2012

    717,500     0.78     0.78  

December 21, 2012

    1,228,500     0.99     0.99  

January 29, 2013

    2,568,240     1.07     1.07  

May 6, 2013

    1,444,500     1.41     1.41  

    Determination of Fair Value of Common Stock on Grant Dates Prior to IPO

        The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant. The 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. The assumptions we used in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

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

    The prices of our common stock sold by stockholders in arm's length transactions;

    The prices of our preferred stock sold to outside investors in arms-length transactions;

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    Our operating and financial performance;

    Current business conditions and projections;

    The hiring of key personnel;

    Our history and the introduction of new solutions;

    Our stage of development;

    Third party valuations of our common stock performed as of August 2009, February 2010, March 2011, October 2011, April 2012, September 2012, December 2012 and March 2013;

    The likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of our company, given prevailing market conditions;

    Any adjustment necessary to recognize a lack of marketability for our common stock;

    The market performance of comparable publicly traded companies; and;

    The U.S. and global capital market conditions.

        The dates of our contemporaneous valuations did not always coincide with the dates of our stock-based compensation grants. In such instances, management's estimates were based on the most recent contemporaneous valuation of shares of our common stock and our assessment of additional objective and subjective factors we believed were relevant as of the grant date. The additional factors considered when determining any changes in fair value between the most recent contemporaneous valuation and the grant dates included, when available, the prices paid in recent transactions involving our equity securities, as well as our stage of development, our operating and financial performance, current business conditions, and the market performance of comparable publicly traded companies.

        There were significant judgments and estimates inherent in these contemporaneous valuations. These judgments and estimates included assumptions regarding our future operating performance, the time to completing an initial public offering or other liquidity event, and the determinations of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per common share could have been significantly different.

    Common Stock Valuation

        For the contemporaneous valuations of our common stock, our management estimated, as of each valuation date, our enterprise value on a continuing operations basis, using one or a weighted combination of the following acceptable valuation approaches:

    1.
    Income approach (discounted cash flows)—The discounted free cash flow method is based on the premise that our enterprise value as of the respective valuation date is equal to the projected future free cash flows and expected terminal value of the business, discounted by a required rate of return that investors would demand given the risks of ownership and the risks associated with achieving the stream of projected future free cash flows.

    2.
    Market approach (guideline public companies)—The guideline company methodology involves the selection of publicly-traded guideline companies, whose operations are considered to be similar to ours, in order to measure the relative values being accorded by the investing public to the earnings, book values, and revenue of those comparable companies. These measures are then applied to our operations to derive a value. In selecting the guideline companies used in our analysis, we applied several criteria, including companies in the online advertising industry, companies displaying economic and financial similarity in certain aspects of primary importance in the eyes of the investing public, and businesses that entail a similar degree of investment risk.

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    3.
    Market approach (prior sales of our stock)—The prior sales of our stock considers arm's-length sales of common or preferred stock to new investors, when the price derived from this transaction can be relied upon in calculating the fair value of our common stock.

    Determination of the Fair Value of Stock-based Compensation Grants

        Significant factors considered by our board of directors in determining the fair value of our common stock at these grant dates include:

        February 2011 Stock Option Grants.    In February 2011, we granted stock options with an exercise price of $0.77 per share. In determining the fair value of our common stock on this grant date, the board of directors considered the issuance of Series D-1 Preferred Stock in the third and fourth quarters of 2010 for $1.3137 per share as well as the latest valuation report completed in February 2010. The February 2010 valuation was driven by the contemporaneous issuance of Series D Preferred Stock at $1.00496 per share using the market approach. Although the transaction involved another class of stock (Series D Preferred Stock) and included other considerations in the investment decision, the transaction involved a new investor in us and occurred on the valuation date. Based on all of these considerations, the board of directors concluded that the fair value of our common stock was $0.77 per share for the February 2011 stock option grants.

        May 2011 through July 2011 Stock Option Grants.    From May 2011 through July 2011, we continued to grant stock options with an exercise price of $0.77 per share. In determining the fair values of our common stock on these grant dates, the board of directors considered the contemporaneous valuation performed as of March 31, 2011, which was solely based on the income approach. While we experienced revenue growth during the period following March 31, 2011, we also undertook operational changes as we transitioned regional sales personnel. Based on all of these considerations, the board of directors concluded that the fair value of our common stock was $0.77 per share for options granted from April 2011 through July 2011, consistent with the March 31, 2011 valuation.

        December 2011 through June 2012 Stock Option Grants.    From December 2011 through June 2012, we granted stock options with an exercise price of $0.74 per share. In determining the fair values of our common stock on these grant dates, the board of directors considered the valuation performed as of October 31, 2011, which was solely based on the income approach. In addition, during October 2011 and April 2012, we issued additional shares of Series D-1 Preferred Stock for $1.3137 per share. While our revenue grew during this period, we also experienced significant operational changes leading to a CEO transition. Based on all of these considerations, the board of directors concluded that the fair value of our common stock was $0.74 per share for options granted from December 2011 through June 2012, consistent with the October 31, 2011 valuation.

        July 2012 through August 2012 Stock Option Grants.    During July 2012 through August 2012, we granted stock options with an exercise price of $0.78 per share. In determining the fair value of our common stock on these grant dates, the board of directors considered the valuation performed as of April 30, 2012, which was equally based on the income approach and the market approach utilizing guideline public companies. In the first half of 2012, we experienced improving revenue and profitability trends as our sales team became more productive. Based on these considerations, the board of directors concluded that the fair value of our common stock was $0.78 per share for options granted from July 2011 through August 2012, consistent with the April 30, 2012 valuation.

        December 2012 Stock Option Grants.    In December 2012, we granted stock options with an exercise price of $0.99 per share. In determining the fair value of our common stock on this grant date, the board of directors considered the valuation performed as of September 30, 2012, which was equally based on the income approach and the market approach utilizing guideline public companies. In the first nine months of 2012, we experienced improving revenue and profitability trends as our sales team became more productive. During this period our board of directors began to consider an initial public

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offering of our common stock as a possibility. As our first step, we selected investment bankers and conducted an organizational meeting in December 2012. As a result, we began to consider the fair value of our common stock in the case of an initial public offering and increased the frequency at which we conduct stock valuations to quarterly. Based on these considerations, the board of directors concluded that the fair value of our common stock was $0.99 per share for options granted in December 2012, consistent with the September 30, 2012 valuation.

        January 2013 Stock Option Grants.    In January 2013, we granted stock options with an exercise price of $1.07 per share. In determining the fair value of our common stock on this grant date, the board of directors considered the valuation performed as of December 31, 2012, which was equally based on the income approach and the market approach utilizing guideline public companies. In 2012, we experienced improving revenue and profitability. After the organizational meeting for our proposed initial public offering, we continued to take steps toward the filing of our registration statement. As a result, we applied a lower discount for the lack of marketability of our common stock. Based on these considerations, the board of directors concluded that the fair value of our common stock was $1.07 per share for options granted in January 2013, consistent with the December 31, 2012 valuation.

        May 2013 Stock Option Grants.    In May 2013, we granted stock options with an exercise price of $1.41 per share. In determining the fair value of our common stock on this grant date, the board of directors considered the valuation performed as of March 31, 2013, which was based on the income approach and the market comparable approach utilizing guideline public companies. In 2013, we continued to experience improving revenue and profitability and continued to take steps towards our initial public offering. In April 2013, we confidentially submitted our registration statement on Form S-1 to the Securities and Exchange Commission. As a result, a probability weighted expected return was applied to the two approaches above, giving greater weight to the probability of an initial public offering. In addition, our cost of capital was lowered in both approaches. Based on these considerations, the board of directors concluded that the fair value of our common stock was $1.41 per share for options granted in May 2013, consistent with the March 31, 2013 valuation.

Recently Issued and Adopted Accounting Pronouncements

        Under the Jumpstart Our Business Startups Act, or JOBS Act, we meet the definition of an "emerging growth company." We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not "emerging growth companies."

        In May 2011, the Financial Accounting Standards Board, or FASB, issued Topic 820—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, or Topic 820. Topic 820 changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between GAAP and International Financial Reporting Standards, or IFRS. Topic 820 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. Topic 820 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements.

        In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, or ASU 2011-05, to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of stockholders' equity. This standard only affected the way we present the components of comprehensive income and did not affect our financial

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position, results of operations or cash flows. In December 2011, the FASB further amended its guidance to defer changes related to the presentation of reclassification adjustments indefinitely as a result of concerns raised by stakeholders that the new presentation requirements would be difficult for preparers and add unnecessary complexity to financial statements. Companies, however, would still be required to adopt the other requirements of this pronouncement. ASU No. 2011-05, which should be applied retrospectively, is effective for annual or interim periods beginning after December 15, 2011 with early adoption permitted. We adopted ASU 2011-05 effective January 1, 2011 and have retrospectively applied the provisions of ASU 2011-05 for all periods presented. This adoption did not have an impact on our financial position, results of operations or cash flows.

Quantitative and Qualitative Disclosure 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 include primarily interest rate, foreign exchange risks and inflation.

    Interest Rate Fluctuation Risk

        Our cash and cash equivalents consist of cash and money market funds. Our borrowings under notes payable and capital lease obligations are generally at fixed interest rates.

        The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash and cash equivalents have a relatively short maturity, our portfolio's fair value is relatively insensitive to interest rate changes. During 2012, we determined that the nominal difference in basis points for investing our cash and cash equivalents in longer-term investments did not warrant a change in our investment strategy. We do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives.

    Foreign Currency Exchange Risk

        We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, principally the British pound sterling, Indian Rupee and the euro. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Although we have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains (losses) related to revaluing certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in currencies other than the U.S. dollar, we believe such a change will not have a material impact on our results of operations. In the event our foreign sales and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. At this time we do not, but we may in the future, enter into derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the impact hedging activities would have on our results of operations.

    Inflation Risk

        We do not believe that inflation has had a material effect on our business, financial condition or results of operations. 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

Overview

        We are a leading independent provider of digital video brand advertising solutions. Our proprietary technologies serve the specific needs of brand advertisers and enable them to find and target large, brand-receptive audiences across a wide range of Internet-connected devices and digital media properties. Our software is used by global digital media properties to monetize professionally-produced content and applications. We facilitate digital video advertising by dynamically matching relevant audiences available through our digital media property partners with appropriate advertising campaigns from our advertising customers. Our leadership, based on proprietary technologies, brand-specific advertising solutions, large software install base and data assets, is reflected in our wide audience reach, with over 257 million monthly unique viewers worldwide during May 2013, and our large customer base that includes 64 of the top 100 U.S. advertisers.

        We help our advertising customers overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where dispersed audiences use a growing variety of Internet-connected devices to access thousands of online and mobile websites and applications. In 2012, we delivered over eight billion video advertising impressions across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. Our video ads run when users choose to view video content on their devices. On each video advertising impression, we collect dozens of data elements that we use for our advanced audience modeling algorithms that continuously improve our brand-targeting effectiveness.

        We believe our digital video brand advertising solution exceeds the efficacy and enhances the reach of traditional television advertising. The global television advertising market was $202 billion in 2012, according to Magna Global. The digital video advertising market is expected to reach approximately $15 billion in global annual spend by 2016, according to Frost & Sullivan. We believe deployment of our solutions will accelerate the shift of advertising budgets from television to digital video. Additionally, we believe that audience fragmentation in the digital video market will continue, and technologies will continue to diverge, making delivery of television-like video advertisements to large-scale digital audiences increasingly difficult and complex. Our technology solutions address these challenges, enhancing the opportunity for brand advertisers to capture targeted, TV-scale digital audiences.

        Our solutions are purpose-built for the digital video brand advertising market and professional digital media property owners. As with traditional television, digital video enables brand advertisers to reach large audiences with impactful messages combining sight, sound and motion. We give digital media property owners the technology they need to deliver video advertisements to fragmented audiences across multiple devices, and we aggregate those audiences into cohesive, TV-scale audiences for brand advertisers. During May 2013, our technology enabled us to reach over 155 million monthly unique viewers in the United States and 257 million monthly unique viewers worldwide. To do this, our sophisticated data-science capabilities and advertising management platform and software are customized to deliver ads for a growing variety of Internet-connected devices. For example, our Placement Quality Index, or PQI, contextual scoring system uses data algorithms to assess the quality of ad placements and optimize placements to maximize brand advertising results. In addition, our Audience Amplifier machine-learning tool uses those brand results in its correlative data models to find large audiences that we expect to be receptive to specific brand messages.

        Digital media properties license our technology to deliver digital video advertisements to their audiences, and we apply our data science capabilities to ascribe characteristics to those audiences that will be relevant to particular advertisers. In combination, these capabilities allow us to deliver ads to audiences that we expect to be receptive to specific brand messages. We generate results that are relevant to brand advertisers such as brand awareness, message recall, brand favorability and purchase

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intent, based on the viewer data that we collect through viewer surveys and our YuMe Audience Aware Software Development Kits, or YuMe SDKs.

        Over our eight-year operating history we have amassed a vast amount of data derived from our large software installed base of YuMe SDKs that are embedded in online and mobile websites and entertainment applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices. This allows us to deliver television-like ads, enhanced and customized for each specific device type, and collect valuable advertisement viewership data. We estimate that we collected over 200 billion data points from ad impressions we delivered in 2012. As we grow our audience and advertiser footprint, we are able to collect even more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions and driving additional adoption.

        We generate revenue by delivering digital video advertisements on Internet-connected devices. Advertising customers submit ad insertion orders to us, and we fulfill those orders by delivering their digital video advertisements to audiences available through digital media properties, a process we refer to as an advertising campaign. From 2007 to 2012, we ran over 21,000 advertising campaigns. We are typically paid on a cost per thousand impressions, or CPM, basis, of which we generally pay digital media properties a negotiated percentage. Our customers primarily consist of large global brands and their advertising agencies. In the twelve months ended March 31, 2013, our customers included 64 of the top 100 U.S. advertisers in 2012 as ranked by Advertising Age magazine, or the AdAge 100, such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald's.

        During the three months ended March 31, 2013 our revenue was $26.6 million, a 33% increase over the same period in 2012, while our gross margin expanded to 45% from 43%. We recorded a net loss of $3.3 million and adjusted EBITDA of $(1.6) million for the three months ended March 31, 2013, compared with a net loss of $1.5 million and adjusted EBITDA of $(0.5) million for the three months ended March 31, 2012. In 2012, our revenue was $116.7 million, a 70% increase over 2011, while our gross margin expanded to 46% from 38%. We recorded net income of $6.3 million and adjusted EBITDA of $11.8 million in 2012, and a net loss of $11.1 million and adjusted EBITDA of $(7.4) million in 2011. For information on adjusted EBITDA, and a reconciliation of adjusted EBITDA to net income (loss) on the basis of accounting principles generally accepted in the United States, or GAAP, please refer to "Selected Consolidated Financial Data."

Industry Background

        Brand advertisers have historically used television, print and other traditional media to promote their brands, with limited opportunities for digital brand advertising. These traditional media accounted for approximately 82% of worldwide advertising spending in 2012, according to Strategy Analytics. Brand advertising refers to advertising that features a particular company, product or service in a way intended to establish long-term, positive attitudes towards that company, product or service. In contrast, direct response advertising, such as search engine marketing, click-through banners, newspaper classifieds and coupons, is designed to induce some specific action. We believe digital advertising remains underpenetrated by brand advertisers relative to traditional media. According to eMarketer, only 40% of spending on online advertising was for brand advertising in 2012, and the balance was spent on direct response ads.

        As brand advertisers realize the promise of digital advertising, we expect them to allocate more of their budgets to digital brand advertising. Deloitte has forecasted a 50% year over year growth rate for online brand advertising in 2012, significantly outpacing the approximately 11% growth rate for online advertising overall forecasted by Magna Global. We believe that growing consumption of digital video will be a key driver of that brand advertising growth as advertisers follow viewers to digital video. Frost & Sullivan estimates that the worldwide digital video advertising market is expected to reach

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approximately $15 billion in annual spend by 2016. As new solutions address challenges advertisers face with deploying digital video brand campaigns in a fragmented ecosystem, we believe this market is poised to capture increasing amounts of TV advertising dollars.

        Increasingly, audiences are spending less time with traditional television and more time viewing entertainment on Internet connected devices. comScore reported that 182 million U.S. Internet users watched over 40 billion online content videos in May 2013. According to Magna Global, traditional television share of weekly media time spent has declined to 45% in 2012 from 55% in 2003. Conversely, the share of weekly media time spent on mobile and other Internet-connected devices increased to 21% in 2012 from 8% in 2003.

Key Factors Shaping the Digital Video Advertising Market

        We believe the key factors shaping the digital video advertising market include:

        Proliferation of video capable, Internet-connected devices.    Advances in video technology and ubiquitous high speed Internet access are driving increased access to digital video through personal computers, smartphones, tablets, Internet-connected TVs and other devices. Infonetics Research has reported that the number of smartphones and tablets worldwide increased by approximately 44% and 67%, respectively, from the end of 2011 to the end of 2012. Also because these devices are accessible at different places and at different times of day, viewing is no longer as concentrated in the home during "prime-time" hours. These trends have resulted in new viewing opportunities on devices capable of delivering digital video ads and more times available during the day to view digital video ads.

        Decline in television viewing share.    While traditional television still dominates video entertainment, the share of time spent watching television has declined over the past fifteen years in favor of digital screens. According to Magna Global, the TV share of weekly media time spent decreased to 45% in 2012 from 73% in 1995. The preference for video consumption other than through traditional television is most pronounced with multi-device owners and in the key demographic of 18 to 44 year olds, according to a 2012 study by Econsultancy on behalf of the Interactive Advertising Bureau, or IAB.

        Large, diverse audiences.    With hundreds of millions of unique viewers worldwide, digital video reaches mass audiences. However, these audiences view a more diverse set of content compared to traditional TV audiences. Consumers watch hundreds of TV and cable channels but they view digital video content through tens of thousands of online and mobile websites and applications. According to comScore Video Metrix, in December 2012, there were over 2,000 digital media properties worldwide with over half a million monthly unique viewers.

        Lack of unifying technologies.    The digital video ecosystem consists of digital media properties, network operators, hardware manufacturers and software providers and a multitude of different devices, operating systems, technologies and policies. While creating opportunities for advertisers, this complexity makes the deployment and measurement of advertising campaigns more difficult. Further, proponents of any given technology have no incentive to conform to standards that might diminish the differentiation and innovation that they believe will help grow their business. As a result, we expect this fragmentation to continue as the digital video market continues to grow.

        Diminishing returns of TV advertising.    We believe that television advertising has diminishing returns in its ability to reach additional viewers. According to comScore, a brand trying to reach its audience through television alone will find a point where investing more advertising dollars merely increases frequency with the same audience rather than building incremental reach to new audiences. In addition, ad exposure is concentrated on heavy TV viewers. AdAge reports that the 20% of television viewers consuming the most TV programming receive 60% to 80% of national TV advertising campaign impressions.

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The Promise of Digital Video Brand Advertising

        Digital video offers brand advertisers a compelling combination of benefits and superior return on advertising spend that is not available through other advertising media. These benefits include:

        Large and unduplicated audiences.    Digital video reaches large audiences at a scale comparable to television. According to comScore, more than 80% of U.S. Internet users consumed online video content in March 2012, including 87% of the 18 to 24 year-old demographic segment. Further, a portion of that audience is unduplicated with television audiences. In 2011, comScore analyzed the audience of a major TV network that were consumers of both television and online digital video in metropolitan areas of 22 states and found that 19% of that audience watched content exclusively online.

        Attentive audiences.    Compared to television, digital video audiences are more attentive to brand advertising. According to a 2012 study by Nielsen on behalf of IAB that measured audiences of men and women ages 18 to 49, online video ads outperform TV ads on all measured effectiveness metrics, including general recall, brand recall, message recall and ad likeability. Moreover, this effect was seen across every audience demographic measured.

        Enhanced and efficient reach.    A study of 18 TV advertising schedules by Nielsen on behalf of IAB found that brands could achieve more efficient results by shifting their TV advertising budgets to digital video. According to the study, shifting 15% of television advertising budgets to digital video resulted in approximately 4% of incremental audience reach. But according to eMarketer, digital video accounted for less than 5% of U.S. TV advertising spending in 2012.

        Advanced brand audience targeting.    Compared to television, digital video can target brand-receptive audiences and provide advertisers with more actionable user data. A 2012 comScore study compared the targeting effectiveness of television and digital video advertising and found that digital video advertising was more than twice as likely to reach the right demographic for campaigns targeting the 18 to 34 years demographic.

        Impactful advertisements.    Unlike Internet search and display advertising, digital video campaigns create a rich user experience employing sight, sound and motion. This impact can be heightened by customizing the advertising for specific device platforms and contexts, for instance by delivering different ad types to mobile and online devices.

The Challenges Facing Brand Advertisers

        Brand advertisers face multiple challenges in running effective digital video brand advertising campaigns, including:

        Accessing dispersed audiences.    While the audience for digital video is large in the aggregate, it is highly fragmented. Brand advertisers accustomed to running campaigns on TV and cable networks face the challenge of reaching digital video users across tens of thousands of online and mobile websites and applications. Further, these audiences use many different device types, formats and operating systems, creating challenges for brand advertisers to reach the audience scale they require with high impact advertisements.

        Identifying brand-receptive audiences at scale.    While online digital media affords a significantly greater degree of precision targeting capabilities compared to traditional media, identifying brand-receptive audiences on a large scale is vastly more complex. Finding large audiences with characteristics sought by brands from among users of digital media across personal computers, smartphones, tablets, set-top boxes, game consoles and Internet-connected TVs is vastly more complex than broadcasting advertisements during brand-favorable TV programming.

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        Delivering targeted ads with the desired context.    Diverse content, a multitude of device types, disparate consumption patterns and different levels of content quality are some of the factors that make contextual targeting more difficult in digital video than on television. In contrast to television, where advertisers have a select few programs and concentrated consumption, digital video consumers view content through tens of thousands of online and mobile websites and applications, at many different times of day, broadly diffusing their consumption. Because of this, managing, tracking and measuring this distribution is a daunting task for brand advertisers.

        Inadequacy of direct response digital ad solutions.    Brand advertisers seek digital video advertising solutions that are tailored to brand-oriented planning and measurement objectives such as brand awareness, message recall, brand favorability and purchase intent. However, most digital advertising solutions today were built to service the direct response market, which is designed to compel specific online actions, such as receiving a discount offer, signing up for an e-newsletter or buying a book online. Digital video advertising solutions that have been adapted from those technologies (e.g., reporting metrics such as online conversion rates and click-through rates) make it difficult for brand advertisers to measure and optimize digital campaigns with brand-oriented goals.

        Conducting integrated campaigns.    Conducting integrated advertising campaigns that combine digital video and traditional media is complex. Integrated campaigns require advertisers to manage the complexity of disparate media buying and measurement systems in an efficient manner. Conducting integrated campaigns using legacy point solutions that were built to service digital direct response advertising requires complex software, data and platform integrations that make speedy, efficient and accountable brand campaigns difficult to achieve.

The YuMe Solution

        Our solutions are built for brand advertisers and professional digital media property owners that produce content and applications. We have built our software solutions and data-science capabilities to deliver reliable results for brand advertisers and monetization for digital media property owners. Our video ads run when users choose to view video content on their devices. We deliver television-like advertisements, the majority of which are prominently displayed before the chosen video content is displayed. We deliver these ads to audiences across Internet-connected devices and platforms. With our data-science capabilities, including data collection and sophisticated analytics, our advertiser customers reach large-scale, brand-receptive audiences, and digital media property owners capture brand advertising revenue with their content and applications.

        We have developed our solutions on three pillars: embed, learn and deliver. We embed our YuMe SDKs as part of online and mobile websites and applications residing on millions of personal computers, smartphones, tablets, Internet-connected TVs and other devices, yielding valuable data; we learn from that data to build our audience and contextual targeting models; and using our platform we deliver ads to audiences that we expect to be receptive to specific brand messages.

        We believe our comprehensive solutions have advantages that other solutions cannot offer. Our end-to-end solutions, including customized YuMe SDKs, first party data collection and data-science capabilities, a brand-centric video advertising platform and a consultative sales force, combine to make each component more valuable. Our Placement Quality Index expands the digital brand advertising market by identifying digital media properties whose content and applications have not previously captured brand adverting campaigns, enabling them to optimize their inventory to deliver brand value. We believe our advertising customers prefer an integrated brand solution as it offers the opportunity for cost efficiency, speed of campaign execution and a single point of performance accountability.

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        Our solutions:

        Aggregate large fragmented audiences.    Through our embedded YuMe SDKs, we aggregate millions of digital video viewers on over 1,500 digital media properties, across personal computers, smartphones, tablets, Internet-connected TVs and other devices. The YuMe SDKs, which are customized for individual devices, allow us to deliver relevant and distinct video ad experiences to different devices and audiences, while simultaneously collecting device, content and audience-specific data on the brand performance of those ad placements. In this way, we typically run large-scale, cohesive, impactful brand campaigns across many digital media properties to reach otherwise fragemented digital populations.

        Reach brand-receptive audiences at scale.    Our Audience Amplifier tool applies machine-learning technology to first party data we collect from the YuMe SDKs, in order to identify viewers within our aggregated audience who we expect to be receptive to specific brand messages. We refer to these viewers as brand-receptive audiences. We use characteristics of these audiences to identify additional viewers that may deliver similar or better brand receptivity.

        Deliver targeted ads in valuable brand contexts.    Our contextual targeting capabilities are designed to ensure that brand advertisements are delivered in the relevant context alongside high-quality content. At the core of our contextual targeting technology is our PQI, an extensible set of scoring and targeting algorithms that use data collected by our YuMe SDKs to optimize all aspects of video advertising. Using sophisticated algorithms, PQI dynamically scores advertising inventory based on prior calculations of brand related results and current campaign measures such as video completion rate, player size, player location, content relevancy and campaign objectives. Based on PQI scoring of different digital media properties, we place advertising in contexts, and at times, that meet customer campaign objectives. By doing this, we expand the brand advertising market by identifying a broad range of digital media property owners with content and applications that are capable of delivering brand advertising value.

        Help digital media property owners capture brand dollars.    Digital media property owners who use our YuMe for Publishers, or YFP, platform get a comprehensive system for creating, managing, monetizing and measuring cross-platform digital video brand advertising inventory. Using YFP, digital media property owners monitor, in real-time, how their content is valued, how it performs for brand advertising buyers and how much revenue they have generated based on that performance.

        Measure and optimize campaigns based on brand metrics.    Our YuMe SDKs enable us to collect first party campaign data, such as player size and completion rate, and to survey viewers for information about factors such as message recall and brand favorability. We believe first-party data allows us to tune our systems, in real-time, to the needs of specific brand advertisers, and to deliver superior brand results. In addition, PQI algorithms use that data to track and optimize campaign performance.

        Deliver impactful device-specific ads.    Our YuMe SDKs and video advertisements are customized for every digital device, so we can utilize specific characteristics of each device to consistently deliver new and impactful video ads. For example, a video ad might use the accelerometer on an iPhone to display additional ad-related information, and might use swiping gestures on an Android tablet to display that additional ad-related information. We then measure and optimize audience reactions to specific device ad innovations.

        Augment TV advertising spend.    When deployed as part of an integrated digital video and TV campaign, our solutions enable broader reach and better results than TV campaigns alone. We work on a consultative basis with our advertising customers to plan and deploy the most appropriate digital video advertising strategy in consideration of their already existing television spending and performance.

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