S-1/A 1 ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
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As filed with the Securities and Exchange Commission on August 4, 2010

Registration No. 333-165379

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 4

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MEDIAMIND TECHNOLOGIES INC.*

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   7389   52-2266402

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

135 West 18th Street, 5th Floor

New York, NY 10011

(646) 202-1320

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

GAL TRIFON

President and Chief Executive Officer

c/o Sarit Firon, Chief Financial Officer

MediaMind Technologies Inc.

135 West 18th Street, 5th Floor

New York, NY 10011

(646) 202-1320

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

MICHAEL KAPLAN

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, NY 10017

(212) 450-4000

  

COLIN DIAMOND

JOSHUA G. KIERNAN

White & Case LLP

1155 Avenue of the Americas

New York, NY 10036

(212) 819-8200

 

 

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

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

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

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

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

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

Large accelerated filer  ¨                  Accelerated filer  ¨                   Non-accelerated filer  x                  Smaller reporting company  ¨

(Do not check if a smaller reporting company)

 

 

CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of Securities to be Registered   Amount to be
Registered (1)
  Proposed Maximum
Offering Price Per
Share (2)
 

Proposed

Maximum
Aggregate

Offering Amount

  Amount of
Registration Fee (3)

Common Stock, par value $0.001 per share

  5,750,000   $16.00   $92,000,000   $6,559.60
 
 
(1) Includes shares which the underwriters have the right to purchase to cover over-allotments.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Previously paid.

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

 

 

 

* Formerly known as Eyeblaster, Inc.


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholder 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 neither we nor the selling stockholder are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 4, 2010

Preliminary Prospectus

5,000,000 shares

LOGO

 

 

Common Stock

 

 

This is the initial public offering of shares of common stock of MediaMind Technologies Inc. Prior to this offering, there has been no public market for our common stock. We are offering 5,000,000 shares of our common stock. The initial public offering price of our common stock is expected to be between $14.00 and $16.00 per share.

We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “MDMD.”

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.

 

     Per share    Total

Initial public offering price

   $                 $             

Underwriting discounts and commissions

   $                 $             

Proceeds to MediaMind, before expenses

   $                 $             

The underwriters have an option to purchase a maximum of 358,423 additional shares of common stock from the selling stockholder identified in this prospectus and 391,577 shares of common stock from us (with shares purchased first from the selling stockholder) at the public offering price, less underwriting discounts and commissions, to cover over-allotment of shares, if any. The underwriters can exercise this option at any time within 30 days from the date of this prospectus. We will not receive any proceeds from the sale of shares by the selling stockholder.

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.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2010.

 

J.P. Morgan    Deutsche Bank Securities

 

 

 

Stifel Nicolaus Weisel   Pacific Crest Securities

 

 

ThinkEquity LLC

                    , 2010


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LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   11

Special Note Regarding Forward-Looking Statements

   30

Use of Proceeds

   31

Dividend Policy

   31

Capitalization

   32

Dilution

   33

Selected Consolidated Financial and Other Data

   35

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

   38

Business

   61

Management

   74

Executive Compensation

   81

Certain Relationships and Related Party Transactions

   93

Principal and Selling Stockholders

   95

Description of Capital Stock

   97

Shares Eligible for Future Sale

   100

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

   102

Underwriting

   104

Legal Matters

   108

Experts

   108

Where You Can Find More Information

   108

Index to Consolidated Financial Statements

   F-1

 

 

We have not authorized anyone to provide any information other than that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by or on behalf of us. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholder are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements and notes to those consolidated financial statements, before making an investment decision.

MediaMind

We are a leading global provider of digital advertising campaign management solutions to advertising agencies and advertisers. Our goal is to enable digital media advertisers to engage consumers of digital media with more impact and efficiency.

Our integrated campaign management platform, MediaMind, helps advertisers and agencies simplify the complexities of managing their advertising budgets across multiple digital media channels and formats, including online, mobile, rich media, in-stream video, display and search. MediaMind provides our customers with an easy-to-use, end-to-end solution to enhance planning, creation, delivery, measurement and optimization of digital media advertising campaigns. As a result, our customers are able to enhance brand awareness, strengthen communications with consumers, increase website traffic and conversion, and improve online and offline sales. Our solutions are delivered through a scalable technology infrastructure that allows delivery of digital media advertising campaigns of any size.

We are the only major provider of integrated campaign management solutions not committed to, or affiliated with, a particular publisher, agency or agency group, or advertising network. We believe our independence allows us to provide our customers with unbiased insight and analysis regarding the implementation and effectiveness of their digital media advertising campaigns.

In 2009, we delivered campaigns for approximately 7,000 brand advertisers using approximately 3,350 media agencies and creative agencies across approximately 5,150 global web publishers in 55 countries throughout North America, South America, Europe, Asia Pacific, Africa and the Middle East. We derive our revenue from customers who pay fees to create, execute and measure advertising campaigns on our platform. Substantially all of our revenues are generated from services using a pricing model based on cost per thousand impressions delivered by our platform. An “impression” is a single instance of sending an advertisement for display on a web browser or other connected Internet application. Our revenue has increased from $44.7 million in 2007 to $65.1 million in 2009. Our Adjusted EBITDA, which we define as EBITDA excluding stock-based compensation expense, grew from $9.3 million in 2007 to $16.7 million in 2009 and our net income grew from $7.4 million to $9.8 million during the same period.

Industry Background

Over the last decade, the consumption of media has increasingly moved from traditional media channels, such as television, radio and print media, to digital media channels. Digital media channels offer consumers significant flexibility and choice relative to traditional media channels, and as such, present advertisers with new opportunities to reach a global audience with highly targeted, interactive and measurable advertising campaigns. Additionally, consumers are accessing digital media through a variety of entry points, including computers, mobile devices and other web-enabled devices, further driving the constant evolution of the digital media landscape.

As more consumers access information and purchase products and services through digital media channels, advertisers are increasingly allocating a greater portion of their spending to digital media. However, the transition of advertising budgets to online media channels has lagged relative to consumer time spent online. Internet advertising represented only 13.9% of the total U.S. advertising market in 2009 according to eMarketer, while 50% of weekly media consumption among U.S. adults is via the Internet according to Forrester Research.

 

 

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The transition to digital media introduces unique challenges and complexities for advertisers. The process of planning and executing digital media advertising campaigns differs significantly from the traditional process to which advertisers have grown accustomed. Digital media advertising requires a heavy reliance on sophisticated technologies. It also requires the integration of creative and media buying processes which necessitates a transformation in agencies’ and advertisers’ underlying business models and can be a highly complex and costly endeavor. This creates a unique opportunity for an integrated digital advertising campaign management platform to address the underlying complexities associated with digital media advertising and to enable delivery and management of campaigns with more impact and efficiency.

The Challenges of Digital Media Advertising

The core challenges faced by advertisers and advertising agencies in delivering digital advertising campaigns and migrating more of their budgets to digital media include:

Fragmentation. Digital media channels provide consumers with access to a virtually unlimited array of content targeted to an individual’s unique interests and enable a high degree of control over when, where and how the media is consumed. However, the growing availability of the Internet and the proliferation of emerging digital media formats and channels, such as mobile devices, social networks and other forms of user-generated media, has led to an increasingly fragmented user base.

Digital advertising inventory has evolved to include multiple formats, delivery specifications, metrics and targeting capabilities. This variety and lack of standardization creates additional fragmentation and presents a significant challenge for advertisers to effectively reach a broad audience of consumers and optimize their digital media advertising campaigns.

Consumer engagement. Advertisers are struggling to reach and engage consumers in a digital media environment overloaded with ad messages. Advertising redundancy and ineffective creative content often result in underperforming campaigns that fail to meet advertisers’ goals. When compared to traditional media consumers, digital media consumers have a greater degree of control and interaction with digital content, thereby making it more challenging for advertisers to draw attention to their marketing campaigns.

Effective use of data. In order to enhance the effectiveness of their online campaigns and determine the optimal allocation of their advertising budgets, advertisers need to integrate, compare and analyze campaign performance data in real-time from multiple sources. The abundance of data and discrepancies across different platforms requires significant time and effort to aggregate, process and report data accurately. Many existing systems and technologies deliver and measure only specific types of advertising formats or channels, thereby providing advertisers with limited visibility into and conflicting data about their overall campaign performance.

Global campaign management. While the Internet presents an opportunity for advertisers to reach a global audience, advertisers have been challenged by the need to tailor creative content to specific end markets, geographies, languages or user preferences, and to aggregate and compare campaign results on a global basis. With multiple technologies, standards and processes, advertisers are increasingly seeking solutions that will enable them to reach a global audience with localized messaging, provide consistent delivery measurements and analytics and facilitate coordination and collaboration among multiple agencies across different geographies.

The MediaMind Solution

Our MediaMind platform provides an easy-to-use, end-to-end solution to help advertisers and agencies manage digital media campaigns throughout their lifecycle. We have designed MediaMind to benefit each of the key constituencies across the digital media advertising ecosystem as follows:

 

   

advertisers benefit from improved advertising return on investment due to increased reach, impact, relevancy and measurement of their online campaigns across a variety of channels and formats;

 

 

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advertising agencies benefit from an integrated campaign management platform that simplifies the complexity of digital media advertising and enables them to focus on more strategic objectives;

 

   

web publishers benefit from increased demand due to the enhanced value of their advertising inventory; and

 

   

consumers benefit from an improved user experience due to more engaging and targeted advertising.

We believe that our platform addresses the core challenges of digital media advertising in the following ways:

Fragmentation. Our integrated platform simplifies the numerous complexities of managing digital media advertising campaigns across multiple websites, advertising formats and channels with varying publisher-imposed creative content restrictions. Through a single web-based campaign management dashboard, agencies and advertisers can manage campaign creation, delivery, real-time measurement, analysis and optimization while scheduling and monitoring numerous campaigns.

Our open architecture technology, which is designed to accommodate new and emerging digital media channels, enables the placement of ads through multiple formats and media types. Our technology is designed to integrate with other solutions used by our customers, such as planning, reporting, billing and workflow solutions.

Consumer engagement. Our platform facilitates consumer engagement by providing advertisers with the tools to create immersive and interactive experiences for consumers with reduced costs and time to market. Our rich media, video and emerging media capabilities enable advertisers to interact with their target audience more effectively, yielding higher engagement, performance and recall rates. Our solutions also facilitate real-time targeting and creative optimization, enabling advertisers to reach specific consumer segments by assigning the best performing and most relevant creative content throughout the campaign.

Effective use of data. We believe the measurement, targeting and optimization features of our solutions, combined with our analytics tools, exceed the features of other online advertising solutions. Our platform provides actionable and real-time advertising performance statistics that improves our ability to measure various levels of users’ engagement and enhances our customers’ ability to optimize the performance of their campaigns. Our platform also provides a systematic approach to measuring return on investment, which allows our customers to use a consistent methodology to compare performance across multiple formats, channels and publisher websites.

Global campaign management. We leverage our presence across multiple geographies and end markets to provide customized and integrated global campaign management solutions. In 2009, we delivered over 27,000 campaigns across approximately 5,150 global web publishers in 55 countries throughout North America, South America, Europe, Asia Pacific, Africa and the Middle East. Our technology platform is accepted and supported by thousands of publishers worldwide, including all of the major portals. Our local sales and support, unique product capabilities and broad publisher acceptance enable us to deliver global or pan-regional advertising campaigns and streamline coordination and collaboration across agencies while providing more efficient localization of campaigns.

Our Strategy

Our goal is to enable advertisers to engage consumers with more impact and efficiency across a variety of digital media formats and channels by expanding our position as a leading global provider of digital advertising campaign management solutions. Key elements of our strategy include:

Growing the share of total digital media advertising managed through our solutions by:

 

   

expanding existing relationships with advertisers and advertising agencies to manage a greater portion of their digital advertising campaigns and transitioning them to use more capabilities of our MediaMind platform;

 

 

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accessing additional advertising budgets by establishing new agency relationships and creating partnerships with global advertising agency holding companies, leading digital media publishers and technology companies; and

 

   

increasing our global footprint by expanding into new geographic markets.

Increasing the value and efficiency of our customers’ advertising spend and leveraging our technology expertise by:

 

   

empowering creative innovation and interactivity to maximize user engagement;

 

   

enabling more targeted, efficient and performance-driven campaigns with immediate and actionable analytics;

 

   

investing in emerging digital media formats and channels to create new opportunities for our customers to deliver high impact advertising campaigns to consumers; and

 

   

emphasizing ease-of-use, enabling real-time control and facilitating effective collaboration between advertisers, advertising agencies and publishers throughout the entire campaign management cycle.

Reinforcing the advantages of partnering with an independent provider of campaign management solutions by:

 

   

remaining focused primarily on the needs of advertisers and advertising agencies;

 

   

refraining from owning or selling any advertising inventory;

 

   

protecting our customers’ proprietary data and providing unbiased insights and analytics; and

 

   

extending our open technology architecture to allow for additional customization of our offerings and further integration into our customers’ workflows.

Risks

Investing in our common stock involves significant risks. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment. Below is a summary of some of the principal risks we face.

 

   

We face significant competition from Google and Microsoft and may not be able to compete successfully with such powerful competitors.

 

   

We face intense and increasing competition from other companies within our industry and may not be able to compete successfully with such competitors.

 

   

The loss of a major customer, including Microsoft, or a reduction in any such customer’s Internet advertising or marketing budget could significantly reduce our revenue and profitability.

 

   

We may be adversely affected by cyclicality or an extended downturn in the United States, European or worldwide economy in or related to the industries we serve.

 

 

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Our Corporate Information

Our principal executive offices are located at 135 West 18th Street, 5th Floor, New York, New York 10011 and our telephone number is (646) 202-1320. Our website address is www.mediamind.com and the information contained therein or connected thereto shall not be deemed to be incorporated into this prospectus or the registration statement of which it forms a part.

On June 15, 2010, we changed our name from Eyeblaster, Inc. to MediaMind Technologies Inc.

In this prospectus, the terms “we,” “us,” “our” and “the company” refer to MediaMind Technologies Inc. (formerly known as Eyeblaster, Inc.) and our consolidated subsidiaries. The term “MediaMind” refers to us or to our MediaMind campaign management platform, as the context requires.

 

 

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THE OFFERING

 

Common stock offered by MediaMind

5,000,000 shares

 

Common stock to be outstanding after this offering

17,901,592 shares (18,293,169 shares if the underwriters exercise their over-allotment option in full)

 

Over-allotment option.

We and the selling stockholder named in this prospectus have granted the underwriters a 30-day option to purchase up to 750,000 additional shares of our common stock (with shares purchased first from the selling stockholder) at the initial public offering price solely to cover over-allotments, if any.

 

Use of proceeds

We estimate that we will receive net proceeds from the offering of approximately $67.6 million, or approximately $73.0 million if the underwriters exercise their overallotment option in full, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, based on an assumed offering price of $15.00 per share, the midpoint of the range set forth on the cover page of this prospectus. We intend to use the net proceeds for general corporate purposes, including working capital and capital expenditures. Our capital expenditure budget for 2010 is approximately $3 million and includes spending on information technology infrastructure to support the deployment of additional advertising campaigns and our ongoing operations. We may also use a portion of the net proceeds to help us execute our strategic plans, either through the acquisition of companies or by other means, although we currently do not have any acquisition or investment planned. We will not receive any proceeds from the shares of common stock to be sold by the selling stockholder if the underwriters exercise their overallotment option.

 

Nasdaq Global Select Market symbol

“MDMD”

The number of shares of common stock to be outstanding after this offering is based on (i) 8,514,694 shares of common stock outstanding as of June 30, 2010 and (ii) 4,386,898 shares of common stock issuable immediately prior to the closing of this offering upon the conversion of preferred stock and the exercise of warrants as set forth below, and excludes (i) 6,401,142 shares of common stock reserved for issuance under our equity incentive plan, of which options to purchase 5,539,472 shares of common stock at a weighted average exercise price of $4.91 per share had been granted and were outstanding as of June 30, 2010 and (ii) 317,758 shares of common stock reserved for issuance under warrants granted to certain of our current and former employees and others at an exercise price of $0.001 per share.

Unless otherwise indicated, all information in this prospectus:

 

   

reflects a 2:1 stock split of our common stock effected on July 23, 2010;

 

 

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other than historical information, assumes (i) the conversion of our issued and outstanding preferred stock into 4,358,898 shares of common stock at a ratio of 1:2.1068 immediately prior to the closing of this offering and (ii) the issuance upon the closing of this offering of 28,000 shares of common stock upon the exercise of certain warrants that would otherwise expire upon closing of this offering, and the receipt by us of $16,940 from such exercise;

 

   

assumes no exercise of the underwriters’ option to purchase up to 750,000 additional shares of common stock from the selling stockholder and us; and

 

   

assumes an initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus).

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents summary consolidated financial and operating data derived from our consolidated financial statements. You should read this data along with the sections of this prospectus entitled “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2007     2008     2009     2009     2010  
                      (unaudited)  
    (U.S. dollars in thousands, except per share data)  

Consolidated Statements of Income Data:

         

Revenues

  $ 44,737      $ 63,775      $ 65,075      $ 27,412      $ 37,225   

Cost of revenues

    3,243        3,520        3,306        1,649        1,942   
                                       

Gross profit

    41,494        60,255        61,769        25,763        35,283   
                                       

Operating expenses:

         

Research and development

    4,525        7,443        6,844        3,289        4,498   

Selling and marketing

    23,484        34,936        36,530        16,063        21,602   

General and administrative

    5,990        10,292        6,201        3,139        3,856   
                                       

Total operating expenses

    33,999        52,671        49,575        22,491        29,956   
                                       

Operating income

    7,495        7,584        12,194        3,272        5,327   

Financial income (expenses), net

    1,077        753        80        (614     (477
                                       

Income before income taxes

    8,572        8,337        12,274        2,658        4,850   

Income taxes

    1,213        2,175        2,446        753        1,415   
                                       

Net income

    7,359        6,162        9,828        1,905        3,435   

Deemed dividend upon repurchase of preferred stock

    (3,469     —          —          —          —     

Accretion of preferred stock dividend preference (1)

    (558     (821     (1,617     (643     (1,049
                                       

Net income attributable to common stockholders

  $ 3,332      $ 5,341      $ 8,211      $ 1,262      $ 2,386   
                                       

Net income per share:

         

Basic

  $ 0.52      $ 0.64      $ 0.98      $ 0.15      $ 0.28   
                                       

Diluted

  $ 0.29      $ 0.43      $ 0.68      $ 0.13      $ 0.21   
                                       

Weighted average number of shares of common stock used in computing net income per share (in thousands):

         

Basic

    6,391        8,380        8,397        8,390        8,482   
                                       

Diluted

    13,212        14,358        14,352        9,661        16,034   
                                       

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

         

Basic

      $ 0.77        $ 0.27   
                     

Diluted

      $ 0.68        $ 0.21   
                     

Weighted average number of shares of common stock used in computing pro forma net income per share (in thousands) (unaudited):

         

Basic

        12,784          12,869   
                     

Diluted

        14,354          16,034   
                     

 

 

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    Year Ended
December 31,
    Six Months Ended
June 30,
 
    2007     2008   2009     2009     2010  
                    (unaudited)  
    (U.S. dollars in thousands, except per share data)  

Other Data:

         

Adjusted EBITDA (3)

  $ 9,343      $ 11,393   $ 16,697      $ 5,383      $ 8,121   

Capital expenditures

    1,447        1,425     1,251        777        2,386   

Consolidated Statements of Cash Flow Data:

         

Net cash provided by operating activities

  $ 5,758      $ 8,737   $ 10,311      $ 5,030      $ 2,910   

Net cash provided by (used in) investing activities

    (13,278     13,164     (21,633     (1,077     (5,355

Net cash provided by (used in) financing activities

    7,839        121     45        10        (304

 

     June 30, 2010
     Actual    Pro Forma As
Adjusted (4)
     (unaudited)
     (U.S. dollars in thousands)

Consolidated Balance Sheet Data:

     

Cash and cash equivalents

   $ 12,464    $ 80,033

Short-term deposits

     20,031      20,031

Trade receivables

     23,586      23,586

Total assets

     72,726      140,295

Total stockholders’ equity

     60,004      127,573

 

(1) Represents dividends accrued on preferred stock. Following this offering, we will have no outstanding preferred stock.
(2) Pro forma net income per share and pro forma weighted average shares outstanding assumes the conversion of preferred stock into common stock, which will occur immediately prior to the closing of this offering, but does not include the issuance of shares in connection with this offering. The conversion rate applicable to our preferred stock adjusts to reflect the accrual of dividends on the preferred stock. Pro forma net income per share reflects a 1:2.1068 conversation rate of our preferred stock. For additional information on the conversion of the preferred stock see footnote 3 to Note 8a to our consolidated financial statements included elsewhere in this prospectus.
(3) The following table reconciles net income to Adjusted EBITDA for the periods presented and is unaudited:

 

     Year Ended
December 31,
     Six Months Ended
June 30,
        2007         2008      2009         2009          2010   
                          (unaudited)
     (U.S. dollars in thousands)

Reconciliation of Net Income to Adjusted EBITDA:

              

Net income

   $ 7,359       $ 6,162       $ 9,828       $ 1,905    $ 3,435

Financial (income) expenses, net

     (1,077      (753      (80      614      477

Income taxes

     1,213         2,175         2,446         753      1,415

Depreciation

     825         1,053         1,211         577      841
                                        

EBITDA

   $ 8,320       $ 8,637       $ 13,405       $ 3,849    $ 6,168
                                        

Stock-based compensation

     1,023         2,756         3,292         1,534      1,953
                                        

Adjusted EBITDA

   $ 9,343       $ 11,393       $ 16,697       $ 5,383    $ 8,121
                                        

Adjusted EBITDA is a metric used by management to measure operating performance. EBITDA represents net income before financial income, net, income tax expense and depreciation. We do not have any amortization expense. Adjusted EBITDA represents EBITDA excluding non-cash stock-based compensation expense. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting financial income, net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), and the impact of non-cash stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from

 

 

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operating activities as a measure of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

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

 

   

although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

(4) Pro forma as adjusted amounts give effect to the issuance and sale of 5,000,000 shares of common stock by us in this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus) and the application of the net proceeds of the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as set forth under “Use of Proceeds.” See “Use of Proceeds” and “Capitalization.”

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors that may affect our business, future operating results and financial condition, as well as other information set forth in this prospectus before making a decision to invest in our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

We face significant competition from Google and Microsoft and may not be able to compete successfully with such powerful competitors.

We face formidable competition in every aspect of our business from other companies that provide solutions and services similar to ours. Currently, our primary competitors are DoubleClick and Atlas, a technology and service division of aQuantive. In March 2008, Google acquired DoubleClick and in May 2007, Microsoft acquired aQuantive. DoubleClick and Atlas offer solutions and services similar to ours and compete directly with us. While we continue to do business with Google and Microsoft as publishers and with Microsoft as an advertising agency, they may use their substantial financial and engineering resources to expand the DoubleClick and Atlas businesses and increase their ability to compete with us.

Google and Microsoft have significantly greater name recognition and greater financial, technical and marketing resources than we do. Microsoft also has a longer operating history and more established relationships with customers. In addition, we believe that both Google and Microsoft have a greater ability to attract and retain customers due to numerous competitive advantages, including their ability to offer and provide their marketing and advertising customers with a significantly broader range of related solutions and services than us. Google or Microsoft may elect not to work with us or may use their experience and resources to compete with us in a variety of ways, including through acquisitions of competitors or related businesses, research and development, and marketing for new customers more aggressively. Furthermore, Google or Microsoft could use campaign management solutions as a loss leader or may provide campaign management solutions or portions of such solutions without charge or below cost in order to encourage customers to use their other product offerings. If Google and Microsoft are successful in providing solutions or services that are better than ours, or in leveraging platforms more effectively than ours or that are perceived by customers as being more cost-effective, we could experience a significant decline in our customers’ use of our solutions and services. Such a decline could have a material adverse effect on our business, financial condition and results of operations.

We face intense and increasing competition from other companies within our industry and may not be able to compete successfully with such competitors.

In addition to Google and Microsoft, we face competition from other companies. Among our competitors are rich-media solutions companies (such as Pointroll, owned by Gannett, Eyewonder, which was acquired by Limelight Networks in December 2009, Unicast, which is owned by DG FastChannel, and Flashtalking) and ad serving companies (such as MediaPlex, a division of ValueClick). We also may experience competition from companies that provide web analytics or web intelligence. Other companies are also developing campaign management solutions. Our competitors may develop services that are equal or superior to our services or that achieve greater market acceptance than ours. Many of our competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than us.

In addition, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties and several of our competitors have combined or may combine in the future with larger companies with greater resources than ours. This growing trend of cooperative relationships and consolidation within our industry may result in fewer, but more powerful and aggressive, competitors that may engage in more extensive research and development, undertake more far-reaching

 

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marketing campaigns and make more attractive offers to existing and potential employees and customers than we are able to. They may also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings. Any increase in the level of competition from these, or any other competitor, is likely to result in price reductions, reduced margins, or loss of market share and a potential decline in our revenues. We cannot assure you that we will be able to compete successfully with our existing or future competitors. If we fail to withstand competitive pressures and compete successfully, our business, financial condition and results of operations could be materially adversely affected.

We face competition from traditional media companies, and our services may not be included in the advertising budgets of large advertisers, which could harm our operating results.

In addition to Internet companies, such as Google and Microsoft, rich-media solutions companies and ad serving companies, we face competition from companies that offer traditional media advertising opportunities, such as television, radio, cable and print. Most large advertisers have pre-determined advertising budgets, of which a very small portion is allocated to Internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media. Advertisers, including current and potential customers, may also find Internet advertising or marketing to be less effective than traditional media advertising or marketing methods for promoting their products and services, and therefore may decrease the portion of their budget allocated to Internet advertising or may shift their advertising away from the Internet. If we fail to convince these companies to spend a portion of their advertising budgets with us to advertise online, or if our existing advertisers reduce the amount they spend on our solutions and services, our business, financial condition or results of operations could be materially adversely affected.

The loss of a major customer, including Microsoft, or a reduction in any such customer’s Internet advertising or marketing budget could significantly reduce our revenue and profitability.

Our top 20 paying customers, including our largest customer, Microsoft, accounted for 46%, 49% and 38% of our revenues in the years ended December 31, 2009, 2008 and 2007, respectively. If one or more of these major customers decides not to continue purchasing services from us or significantly reduces its spending with us, we may not be able to make up the lost revenue. This could have a material adverse affect on our business, financial condition and results of operations.

We derive our revenues related to Microsoft, which totaled approximately 22%, 28% and 19% of our total revenues for fiscal 2009, 2008 and 2007, respectively, in two primary ways. First, we are engaged by Microsoft’s internal advertising group to provide our solutions for specific campaigns, consistent with how we provide solutions to other customers. This accounted for $8.5 million, or 13%, of our revenues in 2009.

In addition, we also provide solutions to advertising agency and advertiser customers that advertise on Microsoft online properties. However, while we are selected by the advertising agency or advertiser customer and not by Microsoft, in certain jurisdictions the fee for our services is paid to us by Microsoft as publisher. Because Microsoft is the one that pays our fee in those jurisdictions, we account for such revenues as coming from Microsoft (even though the decision to hire us is made by the advertising agency), and these revenues accounted for $5.9 million, or 9%, of our revenues in 2009. In other jurisdictions, such as the United Kingdom and Spain, we derive our revenues increasingly from agencies and customers who pay us directly for serving ads on Microsoft online properties, consistent with how they pay us for serving ads on other publisher properties; these revenues are not included in the figures above.

Microsoft’s internal advertising group does not partner with us exclusively and has not committed to provide us a minimum level of business. We face significant competition for Microsoft’s business from other campaign management service providers, including Atlas, which was acquired by Microsoft in May 2007. Microsoft is continuing to expand its relationships with other campaign management service providers and, as a result, we cannot provide any assurance that we will succeed in maintaining or growing this portion of our revenues from Microsoft. In addition, we have reduced, and may continue, to reduce the cost per thousand

 

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impressions (“CPM”) rate for ads of the same format. A decline in the volume of impressions or the CPM rate, whether generally or from one or more major customers (including Microsoft), could materially and adversely affect our revenues and profitability.

Consolidation of Internet advertising networks, web portals, Internet search engine sites and web publishers may impair our ability to serve advertisements and to collect campaign data and could lead to a loss of significant customers.

The growing trend of consolidation of Internet advertising networks, web portals, Internet search engine sites and web publishers, and increasing industry presence of a small number of large companies, such as Google, Microsoft and, most recently, Apple, with the announcement of its iAd platform for placing ads on Apple’s applications, could harm our business. We are currently able to serve, track and manage advertisements for our customers in a variety of networks and websites, which is a major benefit to our customers’ overall campaign management. Concentration of advertising networks could substantially impair our ability to serve advertisements if these networks or websites decide not to permit us to serve, track or manage advertisements on their websites, if they develop ad placement systems that are incompatible with our ad serving systems, or if they use their market power to force their customers to use certain vendors on their networks or websites. These networks or websites could also prohibit or limit our aggregation of advertising campaign data if they use technology that is not compatible with our technology. In addition, concentration of desirable advertising space in a small number of networks and websites could result in pricing pressures and diminish the value of our advertising campaign databases, as the value of these databases depends to some degree on the continuous aggregation of data from advertising campaigns on a variety of different advertising networks and websites. Additionally, major networks and publishers can terminate our ability to serve advertisements on their properties on short notice. If we are no longer able to serve, track and manage advertisements on a variety of networks and websites, our ability to service campaigns effectively and aggregate useful campaign data for our customers will be limited.

We may be adversely affected by cyclicality or an extended downturn in the United States, European or worldwide economy in or related to the industries we serve.

Our revenues are generated primarily from providing online campaign management solutions and services to advertising agencies and advertisers across various formats and digital media channels. Demand for these services tends to be tied to economic cycles, reflecting overall economic conditions as well as budgeting and buying patterns. We cannot assure you that advertising budgets and expenditures by advertising agencies and advertisers will not decline in any given period or that advertising spending will not be diverted to more traditional media or other online marketing products and services, which would lead to a decline in the demand for our campaign management solutions and services. For example, during the recent economic crisis, our revenue growth slowed due to weaker advertising spend and increased price pressure. A decline in the economic prospects of advertisers or the economy in general could alter current or prospective customers’ spending priorities. As a result, our revenues may not increase or may decline significantly in any given period. Additionally, in 2010, due in large part to uncertainty in the European sovereign debt markets, the European economy has been under stress. An extended downturn in the European economy could adversely affect our results of operations.

The Internet advertising or marketing market may deteriorate, or develop more slowly than expected, which could have a material adverse affect on our business, financial condition or results of operations.

If the market for Internet advertising or marketing deteriorates, or develops more slowly than we expect, our business could suffer. Our future success is highly dependent on an increase in the use of the Internet, the commitment of advertisers and advertising agencies to the Internet as an advertising and marketing medium, the advertisers’ implementation of advertising campaigns and the willingness of current or potential customers to outsource their Internet advertising and marketing needs. The Internet advertising and marketing market is relatively new and rapidly evolving. As a result, demand and market acceptance for Internet advertising solutions and services is uncertain.

 

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If we do not continue to innovate and provide high quality solutions and services, as well as increase our revenues from more traditional solutions and services, we may not remain competitive, and our business, financial condition or results of operations could be materially adversely affected.

Our success depends on providing high quality solutions and services that make online campaign management easier and more efficient for our customers. Our competitors are constantly developing innovations in online advertising and campaign management, and therefore the prices that we charge for existing services and solutions generally decline over time. As a result, we must continue to invest significant resources in research and development in order to enhance our technology and our existing solutions and services and introduce new high-quality solutions and services. If we are unable to predict user preferences or industry changes, or if we are unable to modify our solutions and services on a timely basis, and as a result are unable to provide quality solutions and services that run without complication or service interruptions, our customers may become dissatisfied and we may lose customers to our competitors and our reputation in the industry may suffer, making it difficult to attract new customers. Our operating results would also suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with market opportunity or are not effectively brought to market. As online advertising and campaign management technologies continue to develop, our competitors may be able to offer solutions that are, or that are perceived to be, substantially similar or better than those offered by us. Customers will not continue to do business with us if our solutions do not deliver advertisements in an appropriate and effective manner, if the advertiser’s investment in advertising does not generate the desired results, or if our campaign management tools do not provide our customers with the help they need to manage their campaigns. If we are unable to meet these challenges or if we over expend our resources in our research and development of new solutions and services, our business, financial condition and results of operations could be materially adversely affected. Recently, we began to emphasize our standard display ads, which generate lower revenue per impression than other formats but represent a large and profitable market, and which helped offset pricing pressure in other formats, such as rich media, in 2009. If we are unable to grow our market share in this area significantly, our revenue could decrease.

Our business depends on a strong brand reputation, and if we are not able to maintain and enhance our brand, our business, financial condition and results of operations could be materially adversely affected.

We believe that maintaining and enhancing the “MediaMind” brand is critical to expanding our base of customers and maintaining brand loyalty among customers, particularly in North America where brand perception can impact the competitive position in other markets worldwide, and that the importance of brand recognition will increase due to the growing number of competitors providing similar services and solutions. Maintaining and enhancing our brand may require us to make substantial investments in research and development and in the marketing of our solutions and services, and these investments may not be successful. If we fail to promote and maintain the “MediaMind” brand, or if we incur excessive expenses in this effort, our business, financial condition and results of operations could be materially adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend largely on our ability to be a technology leader and to continue to provide high quality solutions and services, which we may not do successfully. In 2009, we released our next generation integrated MediaMind campaign management platform, which all our customers now use. Any defect or error in this platform could materially adversely affect our brand reputation, customer relationships and results of operations.

We operate in an emerging and rapidly evolving market. This makes it difficult to evaluate our future prospects and may increase the risk of your investment.

The online advertising industry is an immature industry that has undergone rapid and dramatic changes in its short history. You must consider our business and prospects in light of the risks and difficulties we will encounter in a new and rapidly evolving market. We may not be able to successfully address new risks and difficulties as they arise, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Our operating results fluctuate and, as a result, our historical operating results may not be indicative of our future performance, and the failure to meet certain expectations with respect to our operating results may cause our stock price to decline.

Our operating results have historically fluctuated on a quarterly basis due to the seasonal nature of Internet advertising, and we expect this fluctuation to continue. Our fourth calendar quarter is typically the strongest, generating approximately 34%, 26% and 39% of our revenues for the years ended December 31, 2009, 2008 and 2007 respectively. Our first quarter is often the weakest quarter, generating approximately 18%, 21% and 16% of our revenues for the years ended December 31, 2009, 2008 and 2007, respectively. The increase in revenue in the fourth quarter is primarily the result of heavy advertising and online shopping during November and December due to the holidays. The drop in revenues in the first quarter is linked to the drop in online advertising and shopping that occurs at the beginning of each year. Revenue prediction could be impacted by unexpected demand for our services during a particular quarter and consequently impact that quarter. Quarterly and annual expenses as a percentage of net revenues may also be significantly different from historical or projected rates. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on past results as an indication of future performance. If our operating results fail to meet expectations, the market price of our common stock could decline.

New advertisement blocking technologies could limit or block the delivery or display of advertisements by our solutions, which could undermine the viability of our business.

Advertisement blocking technologies, such as “filter” software programs, that can limit or block the delivery or display of advertisements delivered through our solutions are currently available for Internet users and are continuing to be developed. If these technologies become widespread, the commercial viability of the current Internet advertisement model may be undermined. As a result, ad-blocking technology could, in the future, have a material adverse effect on our business, financial condition and results of operations.

More individuals are using non-personal computer devices to access the Internet, and the solutions developed for these devices may not be widely deployed.

The number of people who access the Internet through devices other than personal computers (“PCs”), including mobile devices, game consoles and television set-top devices, has increased dramatically in the past few years. The lower resolution, functionality and memory associated with alternative devices make the use of our solutions and services through such devices difficult. If we are unable to deliver our solutions and services to a substantial number of alternative device users or if we are slow to develop solutions and technologies that are more compatible with non-PC communications devices, we will fail to capture a significant share of an increasingly important portion of the market. For instance, while we have developed Channel Connect for Mobile™ which provides customers with the ability to manage mobile ad campaigns with the MediaMind integrated platform, we cannot ensure widespread integration and acceptance of our solution. Our failure to deliver our solutions and services to a substantial number of alternative device users, or failure to develop in a timely manner solutions and technologies that are more compatible with non-PC communications devices, could have a material adverse effect on our business, financial condition and results of operations.

We may have difficulty scaling and adapting our existing network infrastructure to accommodate increased systems traffic and technology advances or changing business requirements.

All of our solutions and services are delivered through our network. For our business to be successful, our network infrastructure must perform well and be reliable. We will need significantly more computing power as traffic within our systems increases and our solutions and services become more complex. We expect to continue spending significant amounts to purchase or lease data centers and equipment, and to upgrade our technology and network infrastructure to handle increased Internet traffic and roll out new solutions and services, many of which internal improvements were delayed during the recent financial crisis. This expansion will be expensive and

 

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complex and could result in inefficiencies or operational failures. The costs associated with these necessary adjustments to our network infrastructure could harm our operating results. In addition, cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements associated with our network infrastructure could also have a material adverse effect on our business, financial condition and results of operations.

Problems with content delivery services, bandwidth providers, data centers or other third parties could harm our business, financial condition or results of operations.

Our business relies significantly on third-party vendors, such as data centers, content delivery services and bandwidth providers. For example, we have entered into an agreement (as amended) to use a third-party, Akamai Technologies, Inc. (“Akamai”), to provide content delivery services to assist us in serving advertisements and have committed to a minimum revenue amount to Akamai during the calendar year and to using Akamai for at least 75% of our delivery needs, excluding China, provided Akamai meets our service requirements. The term of our agreement with Akamai is until December 31, 2010. Akamai may terminate this agreement if we materially breach the agreement and such breach continues unremedied for 30 days following Akamai’s notice to us. If Akamai or other third-party vendors fail to provide their services or if their services are no longer available to us for any reason and we are not immediately able to find replacement providers, our business, financial conditions or results of operations could be materially adversely affected.

Additionally, any disruption in network access or co-location services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business operations. If our service is disrupted, we may lose revenues directly related to the impressions we fail to serve and we may be obligated to compensate clients for their loss. Our reputation may also suffer in the event of a disruption. Any financial or other difficulties our providers face may negatively impact our business and we are unable to predict the nature and extent of any such impact. We exercise very little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We license technologies from third-parties to facilitate aspects of our data center and connectivity operations including, among others, Internet traffic management services. We have experienced and expect to continue to experience interruptions and delays in service and availability for such elements. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services could negatively impact our customer relationships and materially adversely affect our brand reputation and our business, financial condition or results of operations and expose us to liabilities to third parties.

Our data centers are vulnerable to natural disasters, terrorism and system failures that could significantly harm our business operations and lead to client dissatisfaction.

In delivering our solutions, we are dependent on the operation of our data centers, which are vulnerable to damage or interruption from earthquakes, terrorist attacks, war, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our system, and similar events. In particular, two of our data centers, in Tokyo, Japan and Los Angeles, California, are located in areas with a high risk of major earthquakes and others are located in areas with high risk of terrorist attacks, such as New York, New York. Our insurance policies have limited coverage in such cases and may not fully compensate us for any loss. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a terrorist attack, a provider’s decision to close a facility we are using without adequate notice or other unanticipated problems at our data centers could result in lengthy interruptions in our service. Any damage to or failure of our systems could result in interruptions in our service. Interruptions in our service could reduce our revenues and profits, and our brand reputation could be damaged if customers believe our system is unreliable, which could have a material adverse affect on our business, financial condition and results of operations.

We have in the past experienced, and may in the future experience, system failures. For example, during the fourth quarter of 2006, we experienced two incidents in which our then DNS (Domain Name System, which

 

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translates human-readable computer hostnames into the relevant IP addresses) provider experienced global downtime of its system, which resulted in a failure to broadcast approximately 50% of the ads on our platform for up to six hours in each incident. Following these incidents, we replaced our DNS provider and have not since experienced any major system failures. Any unscheduled interruption in our service would put a burden on our entire organization and would result in an immediate loss of revenue. If we experience frequent or persistent system failures, our reputation and brand could be permanently harmed. The steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin and may not be successful in reducing the frequency or duration of unscheduled downtime.

Our business may be adversely affected by malicious third-party software applications that interfere with the function of our technology.

Our business may be adversely affected by malicious software applications that make changes to our users’ computers and interfere with our technology. These applications may attempt to change users’ experience in using our services, including altering or replacing advertisements delivered by our platform, changing configurations of our user interface, or otherwise interfering with our ability to connect with users. The interference may occur without disclosure to or consent from users, resulting in a negative experience that users may associate with our solutions. These software applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. The ability to reach users on behalf of our customers and provide them with a superior experience is critical to our success. If our efforts to combat these malicious software applications are unsuccessful, our reputation may be harmed, and the communications with certain users on behalf of our customers could be impaired. This could result in a decline in usage of our solutions and corresponding revenues, which would have a material adverse effect on our business, financial condition and results of operations.

If we fail to detect click-through fraud or other invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer.

We are exposed to the risk of fraudulent and other invalid clicks on advertisements delivered by us from a variety of potential sources. Invalid clicks are clicks that we have determined are not intended by the user to link to the underlying content, such as inadvertent clicks on the same ad twice and clicks resulting from click fraud. Click fraud occurs when a user intentionally clicks on an ad displayed on a web site for a reason other than to view the underlying content. These types of fraudulent activities could harm our business and our brand. If fraudulent clicks are not detected, the data that our solutions provide to our customers is inaccurate and the affected advertisers may lose confidence in our solutions to deliver a return on their investment. If advertisers become dissatisfied with our solutions, they may choose to do business with our competitors or reduce their Internet advertising spending, which would have a material adverse effect on our business, financial condition and results of operations.

If we fail to manage our growth effectively, our business, financial condition and results of operations could be materially adversely affected.

We have experienced, and continue to experience, rapid growth in our operations and headcount, which has placed, and will continue to place, significant demands on our management, operational and financial infrastructure. If we do not effectively manage our growth, the quality of our solutions and services could suffer, which could negatively affect our brand and operating results. To effectively manage this growth, we will need to continue to improve, among other things:

 

   

our information and communication systems to ensure that our offices around the world are well coordinated and that we can effectively communicate with our growing base of customers;

 

   

our systems of internal controls to ensure timely and accurate reporting of all of our operations;

 

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our documentation of our information technology systems and our business processes for our advertising and billing systems; and

 

   

our information technology infrastructure to maintain the effectiveness of our systems.

In order to enhance and improve these systems we will be required to make significant capital expenditures and allocation of valuable management resources. If the improvements are not implemented successfully, our ability to manage our growth will be impaired and we may have to make additional expenditures to address these issues, which could materially adversely affect our business, financial condition and results of operations.

In order to facilitate our sales growth and ability to deliver quality service worldwide, we have entered into strategic relationships with local selling agents in various countries. The termination of any of these strategic relationships could limit our ability to grow in those jurisdictions and have a material adverse effect on our business, financial condition and results of operations.

We have entered into strategic relationships with local selling agents in several countries and regions around the world, including Belgium, Dubai, Greece, Hong Kong, India, Indonesia, Israel, Italy, Japan, Korea, Malaysia, the Netherlands, Pakistan, the Philippines, Poland, Romania, Russia, Singapore, South Africa, Thailand and Turkey to help expand our business internationally and intend to continue to do so as part of our strategy. These strategic relationships are important to help us better understand our international markets and local preferences in order to expand internationally. In order to define the terms of the relationships, we have entered into agreements with these entities pursuant to which they sell and distribute our solutions and services in their local jurisdiction, usually on an exclusive basis. Our agreements are typically at least one year in term, with automatic renewal in most cases, unless one party provides the other with prior written notice or if we and the local selling agent are unable to agree upon sales targets. However, a few agreements have longer terms of three to five years. We also generally agree that during the term of the contract and for 12 months afterward (although sometimes for shorter or longer periods) the local selling agent will not: (i) acquire, develop, market, sell or promote any product, service, system, platform or technology reasonably deemed to be competitive with our products, services, systems, platforms or technologies; (ii) engage in, have any financial interest or management position in, or solicit to anyone else to engage in, any business that competes directly with our business operations; or (iii) solicit any of our employees to work for an entity in which the local selling agent has a financial interest or management position. Upon the expiration of the non-compete provisions, the local selling agent will not be prevented from conducting business with our competitors and our competitors may benefit from the knowledge our local selling agent gained through our strategic relationship, although the local selling agent must surrender any records and files immediately upon termination of the agreement. We generally pay the local selling agent a commission based on sales they generate. In the year ended December 31, 2009, these strategic relationships generated approximately $13.3 million, or 20% of our revenues. In the six months ended June 30, 2010, these strategic relationships generated approximately $7.4 million, or 20% of our revenues. If any of our local selling agents terminates its relationship with us, we could lose a significant portion, and in some cases all, of the revenue from that jurisdiction. If any of our strategic relationships were terminated or if our local selling agents failed to effectively aid in the growth of our business, our business, financial conditions and results of operations could be materially adversely affected.

Expansion into international markets is important to our long-term success, and our limited experience in operating our business in certain locations outside the United States increases the risk that our international expansion efforts will not be successful.

Other than our Israeli research and development facility, we opened our first office outside the United States in 2002. Expansion into new international markets requires additional management attention and resources in order to tailor our solutions to the unique aspects of each country. As of December 31, 2009 and June 30, 2010, we had approximately 75% of our employees located outside the United States. In the year ended December 31, 2009 and the six months ended June 30, 2010, we generated approximately 74% of our revenues from our operations outside the United States. In addition, we face the following additional risks associated with our expansion into locations outside the United States:

 

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challenges caused by distance, language and cultural differences;

 

   

longer payment cycles in some countries;

 

   

credit risk and higher levels of payment fraud;

 

   

legal and regulatory restrictions;

 

   

currency exchange rate fluctuations;

 

   

foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States;

 

   

political and economic instability and export restrictions;

 

   

potentially adverse tax consequences; and

 

   

higher costs associated with doing business internationally.

These risks could harm our international expansion efforts, which could have a materially adverse effect on our business, financial condition or results of operations.

Our inability to protect our intellectual property rights could reduce the value of our solutions, services and brand or permit competitors to more easily compete with us and have a material adverse effect on our business, financial condition and results of operations.

Our know-how and trade secrets related to the Internet advertising industry are an important aspect of our intellectual property rights. To protect our know-how and trade secrets, we customarily require our employees, customers, and third-party collaborators to execute confidentiality agreements or otherwise agree to keep our proprietary information confidential when their relationship with us begins. Typically, our employment contracts also include clauses requiring our employees to assign to us all inventions and intellectual property rights they develop in the course of their employment and to agree not to disclose our confidential information. Despite our efforts, our know-how and trade secrets could be disclosed to third parties, which could cause us to lose any competitive advantage resulting from such know-how or trade secrets. Because software is stored electronically and thus is highly portable, we attempt to reduce the portability of our software by physically protecting our servers through the use of closed networks and with physical security systems which prevent their external access. We also seek to minimize disclosure of our source code to customers or other third parties. We cannot be certain, however, that such measures will adequately prevent third parties from accessing our software, code or proprietary information.

From time to time, we may discover that third parties are infringing or otherwise violating our intellectual property rights. We are also aware of third parties that use trademarks or names similar to ours and there may be other third parties using trademarks or names similar to ours of whom we are unaware. Monitoring unauthorized use of intellectual property is difficult and protecting our intellectual property rights could be costly and time consuming. To protect our intellectual property rights, we may become involved in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays, materially disrupt the conduct of our business or adversely affect our revenue, financial condition and results of operations. We may choose not to pursue patents or other protection for innovations that later turn out to be important or we may choose not to enforce our intellectual property rights. Some foreign laws do not protect intellectual property rights to the same extent as the laws of the United States. If we are unable to adequately protect our trademarks, third parties may use our brand names or trademarks similar to ours in a manner that may cause confusion to our customers and confusion in the market, which could decrease the value of our brand. Any infringement of our intellectual property rights by third parties may eliminate any competitive advantage such intellectual property rights provide and harm our operating results.

 

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We have a limited patent portfolio. We have no trademark registrations. While we plan to protect our intellectual property with, among other things, copyright, trade secret, patent and trademark protection, there can be no assurance that:

 

   

current or future United States or foreign registrations of our intellectual property rights will be approved;

 

   

our issued patents and trademarks will adequately protect the intellectual property rights we use in our business or that such patents and trademarks will not be held invalid or unenforceable if challenged by third parties;

 

   

third parties do not have blocking patents that could be used to prevent us from marketing our own patented products and practicing our own technology;

 

   

we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate; or

 

   

others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.

Third parties may claim we infringe on their intellectual property rights, forcing us to expend substantial resources in resulting litigation, the outcome of which would be uncertain. Any unfavorable outcome of such litigation could have a material adverse effect on our business, financial condition and results of operations.

Companies in the Internet advertising industry often enter into litigation based on allegations of infringement or other violations of intellectual property rights. From time to time we have received and may in the future receive notices or inquiries from third parties regarding our services or the manner in which we conduct our business suggesting that we may be infringing or violating a patent, trademark or other intellectual property right. While we are not currently party to any infringement proceedings with respect to any patents or other intellectual property rights or aware of any third parties planning to pursue such litigation, there can be no assurance that third parties will not pursue claims against us in the future if they believe their intellectual property rights are being infringed. Any intellectual property claims, with or without merit, could be time consuming, expensive to litigate or settle and could divert management resources and attention.

We may not be successful in defending any third-party infringement claims, and as a result of such claims we may have to pay substantial damages or stop conducting our business in the manner that is found to be in violation of such third party’s rights. Further, we may have to seek a license for such intellectual property, which may not be available on reasonable terms, or at all, and may significantly increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for the infringing aspects of our business, we may be forced to limit our solution and service offerings and may be unable to fulfill our obligations to our customers or to compete effectively. Any of these results could have a material adverse effect on our brand name, business, financial condition and results of operations.

In addition, many of our agreements with customers require us to indemnify such customers for third-party intellectual property infringement claims against them. Pursuant to such agreements we may be required to defend such customers against certain claims which could cause us to incur additional costs. An adverse determination in any such proceeding could require that we cease offering the solutions or services that are the subject of such of a determination, procure or develop substitute solutions or services for such customers and/or pay any damages such customers incur as a result of such determination.

In addition, we use open source software in connection with our solutions and services. Some open source licenses require users who distribute software containing open source software to make available all or part of such software, which in some circumstances could include valuable proprietary source code of the user. We

 

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monitor the use of open source software in our solutions and services to ensure that none is used in a manner that requires us to disclose or grant licenses for our proprietary source code; however, such use could inadvertently occur, in part because open source license terms are often ambiguous. Companies that incorporate open source software into their products have, in the past, faced claims seeking enforcement of open source license provisions and claims asserting ownership of open source software incorporated into their products. Defending such claims or being required to disclose or make available our proprietary source code pursuant to an open source license could adversely affect our business.

Uncertainty regarding a variety of United States and foreign laws may expose us to liability and adversely affect our ability to offer our solutions and services.

The laws relating to the liability of providers of online services for activities of their customers and users are currently unsettled both within the United States and abroad. Claims have been threatened and filed under both United States and foreign law for defamation, libel, invasion of privacy and other data protection claims, tort, unlawful activity, copyright or trademark infringement, or other theories based on the nature and content of the advertisements posted or the content generated by our customers. From time to time we have received notices from individuals who do not want to be exposed to advertisements delivered by us on behalf of our customers. If one of these complaints results in liability to us, it could be costly, encourage similar lawsuits, distract management and harm our reputation and possibly our business. In addition, increased attention focused on these issues and legislative proposals could harm our reputation or otherwise negatively affect the growth of our business.

There is also uncertainty regarding the application to us of existing laws regulating or requiring licenses for certain advertisers’ businesses, including, for example, distribution of pharmaceuticals, adult content, financial services, alcohol or firearms. Existing or new legislation could expose us to substantial liability, restrict our ability to deliver services to our customers and post ads for various industries, limit our ability to grow and cause us to incur significant expenses in order to comply with such laws and regulations.

Several other federal laws could also expose us to liability and impose significant additional costs on us. For example, the Digital Millennium Copyright Act has provisions that limit, but do not eliminate, our liability for listing or linking to third-party web sites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of the Act. In addition, the Children’s Online Privacy Protection Act restricts the ability of online services to collect information from minors and the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances. Compliance with these laws and regulations is complex and any failure on our part to comply with these regulations may subject us to additional liabilities.

Privacy concerns could lead to legislative and other limitations on our ability to collect usage data from Internet users, including limitations on our use of cookie or conversion tag technology and user profiling, which is crucial to our ability to provide our solutions and services to our customers.

Our ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies for our customers depends on the use of “cookies” and “conversion tags” to track Internet users and their online behavior, which allows us to build anonymous user profiles and measure an advertising campaign’s effectiveness. A cookie is a small file of information stored on a user’s computer that allows us to recognize that user’s browser when we serve advertisements. A conversion tag functions similarly to a banner advertisement, except that the conversion tag is not visible. Our conversion tags may be placed on specific pages of clients of our customers’ or prospective customers’ websites. Government authorities inside the United States concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, conversion tags or user profiling. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in U.S. Congress and many state legislatures. Attempts to regulate spyware may be drafted in such a way as to include technology like cookies and conversion tags in the definition of spyware, thereby creating

 

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restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy.

Our foreign operations may also be adversely affected by regulatory action outside the United States. For example, the European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic communications directive that imposes certain restrictions on the use of cookies and conversion tags and also places restrictions on the sending of unsolicited communications. Each European Union member country was required to enact legislation to comply with the provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has also enacted additional laws limiting the use of user profiling, and other countries, both in and out of the European Union, may impose similar limitations.

Internet users may also directly limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software. Internet browser software upgrades may also result in limitations on the use of cookies or conversion tags. Technologies like the Platform for Privacy Preferences Project (P3P) may limit collection of cookie and conversion tag information. Individuals have also brought class action suits against companies related to the use of cookies and several companies, including companies in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission regarding the collection and use of Internet user information. We may be subject to such suits in the future, which could limit or eliminate our ability to collect such information.

If our ability to use cookies or conversion tags or to build user profiles were substantially restricted due to the foregoing, or for any other reason, we would have to generate and use other technology or methods that allow the gathering of user profile data in order to provide our services to our customers. This change in technology or methods could require significant reengineering time and resources, and may not be complete in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially reasonable terms, if at all. If the use of cookies and conversion tags are prohibited and we are not able to efficiently and cost effectively create new technology, our business, financial condition and results of operations would be materially adversely affected.

In addition, any compromise of our security that results in the release of Internet users’ and/or our customers’ data could seriously limit the adoption of our solutions and services as well as harm our reputation and brand, expose us to liability and subject us to reporting obligations under various state laws, which could have an adverse effect on our business. The risk that these types of events could seriously harm our business is likely to increase as the amount of data we store for our customers on our servers (including personal information) and the number of countries where we operate has been increasing, and we may need to expend significant resources to protect against security breaches, which could have an adverse effect on our business, financial condition or results of operations.

The loss of key personnel or the inability to attract and retain the necessary qualified personnel could materially and adversely affect our business, financial condition or results of operations or our ability to grow.

Our future success depends in a large part upon the continued service of key personnel and members of our senior management team. In particular, members of our senior management team are critical to the overall successful management of MediaMind as well as the development of our technology, culture and strategic direction. All of our executive officers and key personnel are employed at-will and we do not maintain key-person life insurance policies for any members of our senior management team (except for our Chief Executive Officer, Mr. Gal Trifon). The loss of key personnel or members of our management team could have a material adverse effect on our business, financial condition and results of operations.

 

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Our future success will also depend in a large part upon our ability to attract, retain and motivate highly skilled managerial, research, selling and marketing, information technology, software engineering and other technical personnel. Competition for qualified employees in our industry is intense and we are aware that certain of our competitors have directly targeted our employees. As our business grows, it may be more difficult to recruit the additional number of highly skilled personnel we need in a timely manner. In addition, as we become a more mature company, we may find our recruiting efforts more challenging. The incentives to attract, retain and motivate employees provided by our option grants or by future arrangements, such as through cash bonuses, may not be as effective as in the past. If we do not succeed in attracting excellent personnel or retaining or motivating existing personnel, we may be unable to grow effectively, which could have a material adverse effect on our business, financial condition and results of operations.

The options held by some of our senior management and key employees are fully vested or will substantially vest upon the closing of this offering. Consequently, these employees may not have sufficient financial incentive to stay with us.

Some of our senior management personnel and other key employees have become substantially vested in their initial stock option grants. In addition, the options held by certain members of our senior management personnel, including our Chief Executive Officer, Chief Financial Officer, Chief Solutions Officer and Vice President, Global Sales will substantially vest upon the closing of this offering or during the 12-month period following it. While we often grant additional stock options to management personnel and other key employees after their hire dates to provide additional incentives to remain employed by us, their initial grants are usually much larger than follow-on grants. Employees may be more likely to leave us after their initial option grants fully vest, especially if the shares underlying the options have significantly appreciated in value relative to the option exercise price. If a significant number of employees or a group of key personnel or members of the management team no longer have an incentive to remain employed by us, they may leave and it may be difficult to replace these employees in a timely manner, which could have a material adverse effect on our business, financial condition and results of operations.

The unsuccessful integration of any businesses in future acquisitions could result in operating difficulties, dilution and other harmful consequences on our results of operations.

We do not have a great deal of experience acquiring companies and the companies we have acquired have all been small acquisitions of our selling agents in particular countries. We have in the past evaluated, and expect to continue to evaluate, a wide array of potential strategic acquisitions and, from time to time, we may engage in discussions regarding potential acquisitions. Any of these transactions could be material to our business, financial condition and results of operations. Future acquisitions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition. In addition, the process of integrating an acquired company, business or technology is risky and may create unforeseen operating difficulties and expenditures, including:

 

   

difficulties in integrating the operations, technologies, services and personnel of acquired businesses;

 

   

ineffectiveness or incompatibility of acquired technologies or services;

 

   

additional financing required to make contingent payments;

 

   

unavailability of favorable financing for future acquisitions;

 

   

potential loss of key employees of acquired businesses and cultural challenges associated with integrating employees from the acquired company into our organization;

 

   

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

 

   

responsibility for liabilities of acquired businesses;

 

   

diversion of management’s attention from other business concerns;

 

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inability to maintain our standards, controls, procedures and policies, which could affect our ability to receive an unqualified attestation from our independent accountants regarding management’s required assessment of the effectiveness of our internal control structure and procedures for financial reporting; and

 

   

increased fixed costs.

Foreign acquisitions involve additional risks to those described above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. Additionally, the anticipated benefit of many of our future acquisitions may not materialize. If we are unsuccessful in smoothly integrating an acquired company, our business, financial condition and results of operations may be materially adversely affected.

We may need additional financing in the future, which we may be unable to obtain.

We may need additional funds to finance our operations in the future, as well as to enhance our solutions and services, respond to competitive pressures or acquire complementary businesses or technologies. We may be unable to obtain financing on terms favorable to us, if at all. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we currently expect. If we raise additional funds through the issuance of equity or convertible debt securities, this may reduce the percentage ownership of our existing stockholders, and these securities might have rights, preferences or privileges senior to those of our common stock. Debt financing may also require us to comply with restrictive covenants that could impair our business and financial flexibility. If adequate funds are not available or are not available on acceptable terms, our ability to enhance our solutions and services, respond to competitive pressures or take advantage of business opportunities would be significantly limited, and we might need to significantly restrict our operations.

Fluctuations in currency exchange rates may affect our results of operations.

We conduct business in a large number of countries in the Americas, Europe, Asia, Australia, Latin America and the Middle East. Most of our revenues are generated in U.S. dollars, the euro, the Australian dollar and the British pound sterling. Most of our expenses are denominated in U.S. dollars, the new Israeli shekel, the British pound sterling and the euro. In the future, the percentage of our revenues earned in other currencies may increase as we further expand our sales internationally. Accordingly, we are subject to the risk of exchange rate fluctuations between such other currencies and the dollar. In 2010, the European economy has been under stress due in large part to uncertainty in the European sovereign debt markets, and the U.S. dollar has appreciated significantly against the euro and the British pound sterling.

We currently do not use hedging instruments to mitigate foreign currency exchange risks except to hedge our expenses denominated in new Israeli shekels, and this hedging program, as well as any other hedging programs we may implement in the future to mitigate currency exchange rate risk, may not eliminate our exposure to foreign exchange fluctuations.

We may have exposure to greater than anticipated tax liabilities.

The amount of income tax that we pay could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates. In particular, we have endeavored to structure our activities in a manner so that most of our income is not subject to tax outside of Israel. Taxing authorities outside of Israel, however, could contend that a larger portion of such income is subject to tax in their jurisdictions, which may have higher tax rates than the rates applicable to such income in Israel. In addition, we have entered into transfer pricing arrangements that establish transfer prices for our intercompany operations. However, our transfer pricing procedures are not

 

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binding on the applicable taxing authorities. No official authority in any country has made a determination as to whether or not we are operating in compliance with its transfer pricing laws. Accordingly, taxing authorities in any of these countries could challenge our transfer prices and require us to adjust them to reallocate our income. Any change to the allocation of our income as a result of review by such taxing authorities could have a negative effect on our operating results and financial condition. In addition, the determination of our worldwide provision for income taxes and other uncertain tax liabilities requires significant judgment and there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our estimates are reasonable, the ultimate outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

The Israeli tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future, which would increase our taxes, possibly with a retroactive effect.

Some of our investments in Israeli facilities have been granted “Approved Enterprise” status by the Investment Center in the Israeli Ministry of Industry Trade and Labor. In addition, we have elected to treat some of our investments in Israeli facilities as a “Privileged Enterprise” under the Law for Encouragement of Capital Investments, 1959, or the Investment Law. Income that is attributable to an Approved Enterprise or Privileged Enterprise (if it meets the relevant qualification requirements of applicable law) is eligible for tax benefits under the Investment Law. The availability of the tax benefits is subject to certain requirements, including, among other things, making specified investments in fixed assets and equipment, financing a percentage of those investments with our capital contributions, filing certain reports with the Investment Center and complying with Israeli intellectual property laws.

Generally, income attributed to the Approved Enterprise and Privileged Enterprise is exempt from tax for a certain period, or the Exemption Period, subject to certain conditions and limitations, and may qualify for a reduced corporate tax rate of 10% to 25% for additional limited periods after the Exemption Period, depending on, among other things, the percentage of foreign investment in a company and the location of its facilities. If we do not meet the relevant eligibility requirements for the tax benefits discussed above, these tax benefits may be cancelled (possibly with retroactive effect) and our Israeli taxable income would be subject to regular Israeli corporate tax rates. Under current law, in certain cases, starting 2011, the standard Israeli corporate tax rate may be lower than the rate applicable to income of Approved Enterprises and Privileged Enterprises after the Exemption Period. The standard corporate tax rate for Israeli companies in 2006 was 31% of their taxable income. It declined to 29% in 2007, 27% in 2008, 26% in 2009, 25% in 2010 and is scheduled to decline to 24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter. In addition, we could be required to refund any tax benefits that we have already received plus interest and penalties thereon. The tax benefits that our current Approved Enterprise and Privileged Enterprise programs receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase as we would be subject to regular Israeli corporate tax rates, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs. Finally, in the event of a distribution of a dividend from the above mentioned exempt income, the amount distributed will be subject to corporate tax at the rate applicable to the Approved Enterprise’s and Privileged Enterprise’s income during the Exemption Period absent exemption in addition to withholding tax. Distribution of dividends attributable to income that was not exempt as described above will be subject, in Israel, only to withholding tax.

The obligations associated with being a public company will require significant resources and management attention.

As a public company, we will incur significant legal, accounting and other expenses that we did not previously incur. We will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Securities Exchange Act of 1934, as amended, (the “Exchange Act”), requires that we file annual, quarterly and current reports with respect to our business and

 

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financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements.

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we file with the SEC, and will require in the same report, a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. If we fail to comply with Section 404, we could be subject to regulatory scrutiny and sanctions, our ability to raise revenue could be impaired, investors may lose confidence in the accuracy and completeness of our financial reports and our stock price could be adversely affected.

It may be difficult to enforce a U.S. judgment against us, our directors and officers and the Israeli experts named in this prospectus outside the United States, or to assert U.S. securities laws claims outside of the United States.

The majority of our directors and executive officers are not residents of the United States, and the majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or foreign court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the United States. Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim. Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides. As a result of the difficulty associated with enforcing a judgment against us, you may not be able to collect any damages awarded by either a U.S. or foreign court.

We have significant operations in Israel, which may be adversely affected by acts of terrorism or major hostilities.

We are subject to a number of risks and challenges that specifically relate to our Israeli operations, which includes our primary research and development facilities located in Ra’anana, Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel or any acts of terrorism or other major hostilities in the Middle East could harm our Israeli operations and make it more difficult to conduct our operations in Israel. Any such effects may also not be covered by insurance. Our Israeli operations may not be successful if we are affected by these challenges, which could limit the growth of our business and may have a material adverse effect on our business, financial condition and results of operations as a whole.

 

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Risks Related to this Offering and Ownership of Our Common Stock

The market price of our common stock may be volatile, which could result in substantial losses for you.

The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our common stock after the offering. Some of the factors that may cause the market price of our common stock to fluctuate include:

 

   

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

 

   

changes in estimates of our financial results or recommendations by securities analysts;

 

   

failure of any of our solutions and services to achieve or maintain market acceptance;

 

   

failure to develop or deliver our solutions and services;

 

   

changes in market valuations of similar companies;

 

   

success of competitive solutions and services;

 

   

changes in our capital structure, such as future issuances of securities or the incurrence of debt;

 

   

sales of large blocks of our common stock;

 

   

announcements by us or our competitors of significant solutions and services, contracts, acquisitions or strategic alliances;

 

   

regulatory developments in the United States, foreign countries or both;

 

   

litigation involving our company, our general industry or both;

 

   

additions or departures of key personnel;

 

   

investors’ general perception of us, including any perception of misuse of sensitive information;

 

   

changes in general economic, industry and market conditions;

 

   

our ability to forecast revenue and control our costs; and

 

   

changes in regulatory and other dynamics.

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

An active trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or be sustained following this offering. As a result, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock 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. The price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

 

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You will incur immediate and substantial dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate and substantial dilution of net tangible book value of $7.87 per share, representing the difference between the assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), and our pro forma net tangible book value per share after giving effect to this offering. Please see “Dilution.”

Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.

After this offering, we will have 17,901,592 shares of common stock outstanding. This includes the 5,000,000 shares of common stock we are selling in this offering, which may be resold in the public market immediately after this offering. We expect that the remaining 12,901,592 shares of common stock, representing 72% of our total outstanding shares of common stock following this offering, will become available for resale in the public market as set forth under the heading “Shares Eligible for Future Sale.” All of our directors and executive officers, and the holders of approximately 95% of our common stock (excluding shares sold in this offering), have signed lock-up agreements for a period of 180 days following the date of this prospectus, subject to extension in the case of an earnings release or material news or a material event relating to us. The underwriters may, in their sole discretion and without notice, release all or any portion of the common stock subject to lock-up agreements. As restrictions on resale end, the market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our common stock or other securities.

In addition, immediately following this offering, we intend to file a registration statement registering under the Securities Act of 1933, as amended (“the Securities Act”), the shares of common stock reserved for issuance in respect of incentive awards to our directors and certain of our employees. This would result in 3,774,108 shares of common stock underlying options exercisable as of June 30, 2010 being available for resale into the public markets after the expiration of lock-up agreements to which the substantial majority of these shares are subject.

Provisions in our Amended and Restated Certificate of Incorporation and By-laws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Provisions of our amended and restated certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

 

   

provisions relating to creating a board of directors that is divided into three classes with staggered terms;

 

   

limitations on the removal of directors;

 

   

advance notice requirements for stockholder proposals and director nominations;

 

   

the inability of stockholders to act by written consent or to call special meetings;

 

   

the ability of our board of directors to make, alter or repeal our by-laws; and

 

   

the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.

Generally, the amendment of our amended and restated certificate of incorporation requires approval by our board of directors and a majority vote of stockholders. However, certain material amendments (including

 

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amendments with respect to provisions governing board composition, actions by written consent, and special meetings) require the approval of at least 66 2/3% of the votes entitled to be cast by the outstanding capital stock in the election of our board of directors. Any amendment to our by-laws requires the approval of either a majority of our board of directors or at least 66 2/3% of the votes entitled to be cast by the holders of our outstanding capital stock in the election of our board of directors.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividend on our capital stock. We do not intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, including growth through acquisitions. The payment of any future dividends will be determined by the board of directors in light of conditions then existing, including our earnings, financial condition and capital requirements, business conditions, corporate law requirements and other factors.

We may apply the proceeds of this offering to uses that do not improve our operating results or increase the value of your investment.

We currently intend to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures. We may also use a portion of the net proceeds for the execution of our strategic plans, either through the acquisition of companies or by other means that we believe will complement our business. However, we do not have more specific plans for the net proceeds from this offering. Our management will have broad discretion in how we use the net proceeds of this offering and may spend the proceeds in a manner that our stockholders do not deem desirable. These proceeds could be applied in ways that do not improve our operating results or increase the value of your investment.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. We have made these forward-looking statements based on our current expectations and projections about future events. The statements include but are not limited to statements regarding:

 

   

our plans to grow our business and customer base;

 

   

our planned capital expenditures in 2010;

 

   

our ability to respond to new market development;

 

   

our intent to migrate our non-platform customers to platform customers;

 

   

our expectations that our revenues will continue to increase;

 

   

our belief in the sufficiency of our cash flows to meet our needs for the next year;

 

   

our plans to invest in emerging media solutions;

 

   

our plans to continue to expand our international presence;

 

   

our expectations regarding our future product mix; and

 

   

our intended use of proceeds from this offering.

These statements may be under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” Many of these factors are beyond our ability to predict or control. You should specifically consider the numerous risks outlined under “Risk Factors.”

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. You should not put undue reliance on any forward looking statement. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any of these forward-looking statements after the date of this prospectus.

 

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USE OF PROCEEDS

Assuming an initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), we estimate that we will receive net proceeds from this offering of approximately $67.6 million, or approximately $73.0 million if the underwriters exercise their over-allotment option in full, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $4.65 million, assuming the number of shares offered, 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.

We intend to use the net proceeds for general corporate purposes, including working capital and capital expenditures. Our capital expenditure budget for 2010 is approximately $3 million and includes spending on information technology infrastructure to support the deployment of additional advertising campaigns and our ongoing operations. We may also use a portion of the net proceeds to execute our strategic plans, either through the acquisition of companies or by other means, although we currently do not have any acquisition or investment planned. We will have broad discretion in the way that we use the net proceeds of this offering. The amounts that we actually spend for the purposes described above may vary significantly and will depend, in part, on the timing and amount of our future revenues.

The primary purposes of this offering are to raise additional capital, create a U.S. public market for our common stock, allow potential future access to the U.S. public markets should we need more capital in the future, increase the profile and prestige of our company with existing and possible future customers, vendors and strategic partners and make our stock more valuable and attractive to our employees and potential employees for compensation purposes.

We will not receive any proceeds from the shares of common stock to be sold by the selling stockholder if the underwriters exercise their over-allotment option.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We do not intend to pay any dividends in the foreseeable future and currently intend to retain all future earnings to finance the operation of our business and to expand our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, contractual restrictions, financial condition and future prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2010:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to (i) the assumed conversion of our issued and outstanding preferred stock into 4,358,898 shares of common stock at a ratio of 1:2.1068 immediately prior to the closing of this offering and (ii) the issuance of 28,000 shares of common stock upon the assumed exercise of certain warrants and the receipt by us of $16,940 from such exercise; and

 

   

on a pro forma as adjusted basis to give effect to the issuance by us of 5,000,000 shares of common stock pursuant to this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), and the receipt by us of estimated net proceeds of $67.6 million after deducting the underwriting discounts and commissions and the estimated offering expenses.

This table should be read in conjunction with “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

     June 30, 2010  
     Actual     Pro Forma     Pro Forma As
Adjusted (1)
 
     (unaudited)  
     (U.S. dollars in thousands,
except per share data)
 

Cash and cash equivalents

   $ 12,464      $ 12,481      $ 80,033   
                        

Stockholders’ equity:

      

Series A-1 Convertible Preferred Stock, $0.001 par value per share, 2,100,000 shares authorized, actual, and zero shares authorized, pro forma and pro forma as adjusted, 2,068,966 shares issued and outstanding, actual, and zero shares issued and outstanding, pro forma and pro forma as adjusted (2)(3)

     2                 

Common Stock, $0.001 par value per share, 19,200,000 shares authorized, actual, pro forma and pro forma as adjusted, 11,676,398 shares issued and 8,514,694 outstanding, actual, and 16,063,296 shares issued and 12,901,592 outstanding, pro forma and 21,063,296 shares issued and 17,901,592 outstanding, pro forma as adjusted (2)(3)

     12        16        21   

Additional paid-in capital

     50,725        50,740        118,287   

Treasury stock at cost

     (23,213     (23,213     (23,213

Accumulated other comprehensive loss

     (1,079     (1,079     (1,079

Retained earnings

     33,557        33,557        33,557   
                        

Total stockholders’ equity

     60,004        60,021        127,573   
                        

Total capitalization

   $ 60,004      $ 60,021      $ 127,573   
                        

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of total stockholders’ equity and total capitalization by $4.65 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.
(2) All shares, options, warrants and earnings per share amounts have been retroactively adjusted for all periods presented to reflect the 2:1 stock split effected on July 23, 2010.
(3) Upon the closing of this offering, we will file an amended and restated certificate of incorporation, whereby our authorized shares will consist of 88,000,000 shares of common stock and 1,000,000 shares of preferred stock.

 

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DILUTION

Our pro forma consolidated net tangible book value as of June 30, 2010 was $60.0 million, or $4.65 per share of common stock. Pro forma consolidated net tangible book value per share represents consolidated tangible assets, less consolidated liabilities, divided by the aggregate number of shares of common stock outstanding, assuming conversion of our issued and outstanding preferred stock into shares of common stock at a ratio of 1:2.1068 immediately prior to the closing of this offering and after giving effect to the issuance upon the closing of this offering of 28,000 shares of common stock upon the assumed exercise of certain warrants and the receipt by us of $16,940 from such exercise. Following the sale by us of the 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus) and the receipt and application of the net proceeds of $67.6 million, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma consolidated net tangible book value at June 30, 2010, as adjusted, would have been $127.6 million or $7.13 per share. This represents an immediate increase in pro forma consolidated net tangible book value to existing stockholders of $2.48 per share and an immediate dilution to new investors of $7.87 per share. Dilution per share represents the difference between the price per share to be paid by new investors for the shares of common stock sold in this offering and the pro forma consolidated net tangible book value per share immediately after this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price

      $ 15.00

Pro forma consolidated net tangible book value per share as of June 30, 2010

   4.65   

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

   2.48   
       

Pro forma consolidated net tangible book value per share, as adjusted for this offering

        7.13
         

Dilution per share to new investors

      $ 7.87
         

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), would increase (decrease) our pro forma consolidated net tangible book value after this offering by $4.65 million and the dilution per share to new investors by $0.74, in each case assuming the number of shares offered, 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.

The following table sets forth the number of shares of common stock purchased, the total consideration paid, or to be paid to us, and the average price per share paid, or to be paid, by existing stockholders and by the new investors, at an assumed initial public offering price of $15.00 per share, the midpoint of the 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

   12,901,592    72.1   $ 41,610,622    35.7   $ 3.23

New investors in this offering

   5,000,000    27.9        75,000,000    64.3        15.00
                          

Total

   17,901,592    100   $ 116,610,622    100  
                          

Sales by the selling stockholder in this offering pursuant to the over-allotment option will reduce the number of shares held by existing stockholders to 12,543,169 shares or approximately 70% of the total common stock outstanding after this offering if the over-allotment option is exercised in an amount equal to at least 358,423 shares and will increase the number of shares to be purchased by new investors to 5,358,423 shares or approximately 30% of the total common stock outstanding after the offering, if the over-allotment option is exercised in an amount equal to at least 358,423 shares.

 

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The foregoing tables exclude (i) 6,401,142 shares of common stock reserved for issuance under our equity incentive plan, of which options to purchase 5,539,472 shares of common stock at a weighted average exercise price of $4.91 per share had been granted and were outstanding as of June 30, 2010 and (ii) 317,758 shares of common stock reserved for issuance under warrants granted to certain of our current and former employees and others at an exercise price of $0.001 per share. To the extent these options and warrants are exercised, there will be further dilution to new investors.

If the underwriters’ over-allotment option to purchase common stock is exercised in full, the pro forma consolidated net tangible book value after giving effect to this offering would be $7.27 per share, and the dilution in pro forma consolidated net tangible book value per share to investors in this offering would be $7.73 per share.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial data of MediaMind should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this prospectus. The consolidated statements of income data for the years ended December 31, 2007, 2008, and 2009 and the consolidated balance sheet data as of December 31, 2008 and 2009 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of income data for the years ended December 31, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005, 2006 and 2007 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of income data for the six months ended June 30, 2009 and 2010 and the consolidated balance sheet data as of June 30, 2010 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus.

 

    Year Ended December 31,     Six Months Ended
June 30,
 
    2005     2006     2007     2008     2009     2009     2010  
                                  (unaudited)  
    (U.S. dollars in thousands, except per share data)  

Consolidated Statements of Income Data:

             

Revenues

  $ 18,829      $ 27,659      $ 44,737      $ 63,775      $ 65,075      $ 27,412      $ 37,225   

Cost of revenues

    1,907        2,700        3,243        3,520        3,306        1,649        1,942   
                                                       

Gross profit

    16,922        24,959        41,494        60,255        61,769        25,763        35,283   
                                                       

Operating expenses:

             

Research and development

    1,605        2,428        4,525        7,443        6,844        3,289        4,498   

Selling and marketing

    9,084        13,554        23,484        34,936        36,530        16,063        21,602   

General and administrative

    2,883        4,575        5,990        10,292        6,201        3,139        3,856   
                                                       

Total operating expenses

    13,572        20,557        33,999        52,671        49,575        22,491        29,956   
                                                       

Operating income

    3,350        4,402        7,495        7,584        12,194        3,272        5,327   

Financial income (expenses), net

    164        162        1,077        753        80        (614     (477
                                                       

Income before income taxes

    3,514        4,564        8,572        8,337        12,274        2,658        4,850   

Income taxes

    772        838        1,213        2,175        2,446        753        1,415   
                                                       

Net income

    2,742        3,726        7,359        6,162        9,828        1,905        3,435   

Deemed dividend upon repurchase of preferred stock

                  (3,469                   —          —     

Accretion of preferred stock dividend preference (1)

    (401     (401     (558     (821     (1,617     (643     (1,049
                                                       

Net income attributable to common stockholders

  $ 2,341      $ 3,325      $ 3,332      $ 5,341      $ 8,211      $ 1,262      $ 2,386   
                                                       

Net income per share:

             

Basic

  $ 0.84      $ 1.18      $ 0.52      $ 0.64      $ 0.98      $ 0.15      $ 0.28   
                                                       

Diluted

  $ 0.22      $ 0.29      $ 0.29      $ 0.43      $ 0.68      $ 0.13      $ 0.21   
                                                       

Weighted average number of shares of common stock used in computing net income per share (in thousands):

             

Basic

    2,791        2,829        6,391        8,380        8,397        8,390        8,482   
                                                       

Diluted

    12,437        12,854        13,212        14,358        14,352        9,661        16,034   
                                                       

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

             

Basic

          $ 0.77        $ 0.27   
                         

Diluted

          $ 0.68        $ 0.21   
                         

Weighted average number of shares of common stock used in computing pro forma net income per share (unaudited) (in thousands):

             

Basic

            12,784          12,869   
                         

Diluted

            14,354          16,034   
                         

 

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     Year Ended December 31,     Six Months
Ended June 30,
 
     2005     2006     2007     2008    2009     2009     2010  
                                  (unaudited)  
     (U.S. dollars in thousands, except per share data)  

Other Data:

               

Adjusted EBITDA (3)

   $ 3,802      $ 5,032      $ 9,343      $ 11,393    $ 16,697      $ 5,383      $ 8,121   

Capital expenditures

     965        927        1,447        1,425      1,251        777        2,386   

Consolidated Statements of Cash Flow Data:

               

Net cash provided by (used in) operating activities

   $ (204   $ 1,952      $ 5,758      $ 8,737    $ 10,311      $ 5,030      $ 2,910   

Net cash provided by (used in) investing activities

     157        (265     (13,278     13,164      (21,633     (1,077     (5,355

Net cash provided by (used in) financing activities

     7        10        7,839        121      45        10        (304

 

     December 31,    Six Months Ended
June 30,
     2005    2006    2007    2008    2009    2009    2010
                              (unaudited)
     (U.S. dollars in thousands)

Consolidated Balance Sheet Data:

                    

Cash and cash equivalents

   $ 2,689    $ 4,619    $ 4,895    $ 26,160    $ 15,363    $ 30,589    $ 12,464

Short-term deposits

                         18,357      500      20,031

Short-term marketable securities

     3,961      3,299      15,310      544           349     

Trade receivables

     8,546      12,628      16,872      15,779      22,104      15,043      23,586

Total assets

     17,467      23,411      42,028      49,452      66,890      54,728      72,726

Total stockholders’ equity

     4,955      9,228      33,791      40,586      54,815      45,162      60,004

 

(1) Represents dividends accrued on preferred stock. Following this offering, we will have no outstanding preferred stock.
(2) Pro forma net income per share and pro forma weighted average shares outstanding assumes the conversion of preferred stock into common stock, which will occur immediately prior to the closing of this offering. The conversion rate applicable to our preferred stock had been adjusted to reflect the accrual of dividends on the preferred stock. Pro forma net income per share reflects a 1:2.1068 conversation rate of our preferred stock and the issuance of 28,000 shares of common stock upon the assumed exercise of certain warrants and the receipt by us of $16,940 from such exercise. For additional information on the conversion of the preferred stock see footnote 3 to Note 8a to our consolidated financial statements included elsewhere in this prospectus.
(3) The following table reconciles net income to Adjusted EBITDA for the periods presented and is unaudited:

 

     Year Ended December 31,      Six Months
Ended June 30,
     2005     2006     2007     2008     2009      2009    2010
                                    (unaudited)
     (U.S. dollars in thousands)

Reconciliation of Net Income to Adjusted EBITDA:

                

Net income

   $ 2,742      $ 3,726      $ 7,359      $ 6,162      $ 9,828       $ 1,905    $ 3,435

Financial (income) expenses, net

     (164     (162     (1,077     (753     (80      614      477

Income taxes

     772        838        1,213        2,175        2,446         753      1,415

Depreciation

     435        524        825        1,053        1,211         577      841
                                                      

EBITDA

   $ 3,785      $ 4,926      $ 8,320      $ 8,637      $ 13,405       $ 3,849    $ 6,168
                                                      

Stock-based compensation

     17        106        1,023        2,756        3,292         1,534      1,953
                                                      

Adjusted EBITDA

   $ 3,802      $ 5,032      $ 9,343      $ 11,393      $ 16,697       $ 5,383    $ 8,121
                                                      

Adjusted EBITDA is a metric used by management to measure operating performance. EBITDA represents net income before financial income, net, income tax expense and depreciation. We do not have any amortization expense. Adjusted EBITDA represents EBITDA excluding non-cash stock-based compensation expense. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting financial income, net), tax positions (such as the impact on periods or companies of changes in effective tax rates), the age and book depreciation of fixed assets (affecting relative depreciation expense), and the impact of non-cash stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of operating performance on a more consistent basis, we also use Adjusted EBITDA in measuring our performance relative to that of our competitors. Adjusted EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with GAAP or as an alternative to cash flow from

 

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operating activities as a measure of our profitability or liquidity. We understand that although Adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

   

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

 

   

although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

   

other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading global provider of digital advertising campaign management solutions to advertising agencies and advertisers. Our goal is to enable advertisers to engage consumers of digital media with more impact and efficiency.

Our integrated campaign management platform, MediaMind, helps advertisers and agencies simplify the complexities of managing their advertising budgets across multiple digital media channels and formats, including online, mobile, rich media, in-stream video, display and search. MediaMind provides our customers with an easy-to-use, end-to-end solution to enhance planning, creative, delivery, measurement and optimization of digital media campaigns. As a result, our customers are able to enhance brand awareness, strengthen communications with their customers, increase website traffic and conversion, and improve online and offline sales. Our solutions are delivered through a scalable technology infrastructure that allows delivery of digital media advertising campaigns of any size.

We have been in the digital marketing solutions market since our founding in September 1999 and began recognizing revenues in 2001. Since then, we have increased our revenues every year through increased market share, the introduction of new products and geographic expansion. In 2009, we delivered campaigns for approximately 7,000 advertisers using approximately 3,350 media agencies and creative agencies across approximately 5,150 global web publishers in 55 countries throughout North America, South America, Europe, Asia Pacific, Africa and the Middle East.

We became profitable in 2002 and our scalable operating model has enabled us to improve our profitability through 2009, while continuing to invest for future growth. In 2009, despite challenging economic conditions and pricing pressure, we were able to increase our revenues and profits through growth in our customer base, significant growth in the volume of impressions delivered and the introduction of new services. We do not have any debt.

Our Revenues and Expenses

Revenues

We derive our revenues from customers who pay fees to create, execute and measure digital advertising campaigns on MediaMind, our integrated campaign management platform.

Our primary pricing model is based on cost per thousand impressions (“CPM”) delivered by our platform. An “impression” is a single instance of sending an advertisement for display on a web browser or other connected Internet application. Under our primary pricing model, our revenue is the result of multiplying the volume of impressions delivered by the applicable CPM rates. Therefore, we consider growth in the volume of impressions delivered to be a key indicator of our financial condition and operating performance. We have benefited from significant growth in the volume of impressions delivered over time.

Our CPM rates vary based upon a number of factors, including the ad format, the media channel in which the ad is delivered and the geographical location of our customers. Certain of our formats, including rich media and video, generate higher CPMs than others, such as standard display (static design) ads. We do not track our aggregate blended CPM rate since we have found that it does not serve as a meaningful metric due to the variance between the relative volume of impressions delivered in different formats over different periods.

 

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As in many technology businesses, prices in our industry decrease over time for ads delivered in long-existing formats as newer formats gain in popularity. Our ability to provide new and enhanced formats, which can be priced at higher CPM rates than long-existing formats, is important to ensuring that we are able to continue generating revenue and profit growth.

In addition to our focus on delivering new and enhanced CPM formats, we are also focused on growing the standard display format portion of our business, which has grown rapidly in recent years, as part of our strategy to have our customers use us as their full campaign management solution. By providing a full suite of solutions, including standard display, we are able to deliver more impressions, increase our market share and increase our exposure to new and existing customers, thereby creating additional opportunities for upselling of our solutions. While standard display ads generate lower revenues per impression compared with rich media and video formats, they provide an incremental revenue stream to which we were not exposed before we implemented this strategy. The addition and growth of standard display has not impacted our gross margins and we do not expect it to impact gross margins in the near future. Revenue from standard display represented 10% of our revenues in 2009 and in the six months ended June 30, 2010.

In certain circumstances, we charge fees that are based on a charge for each click-through, which we refer to as cost per click or CPC. These fees accounted for approximately 2% of our revenues in 2009 and in the six months ended June 30, 2010.

Media agencies are the paying parties for the majority of our services, but in some cases other parties, including publishers or advertisers, may pay our fees. In all cases, our fees cover use of our platform and tools by all parties involved in the campaign, including creative agencies, media agencies and publishers, irrespective of the paying party.

We monitor a number of additional metrics that we consider to be important revenue drivers, including:

 

   

Any change in the number of advertisers and agencies using our services.

 

   

The extent to which our customers use our services. Customers may choose to adopt MediaMind as an end-to-end solution for all campaigns they run and across different channels of digital media they use (which customers we refer to as “platform customers”), or they can select MediaMind to run specific campaigns on a specific channel or specific publisher, or may only use us for a portion of the services that we offer (which customers we refer to as “non-platform customers”). Our customer engagements, with both platform and non-platform customers, could be pursuant to long-term agreements (usually twelve months) or on a per-campaign basis. We believe platform customers are more likely to buy additional services from us as they have increased exposure to the value of the capabilities and services that we provide. We have increased our revenues in standard display ads, as a result of a strategy to provide additional services to existing platform customers.

 

   

The geographic distribution of our revenues. We deliver campaigns across publishers in 55 countries and believe that geographic diversification is an important strength. In 2009 and in the six months ended June 30, 2010, 54% and 52% of our revenues were from Europe, the Middle East and Africa (“EMEA”), 28% and 29% were from North America, 15% were from Asia Pacific and 3% and 4% were from Latin America. In some territories, we sell our services utilizing local selling agents. We generally add a local selling agent in new territories where we believe that we will be able to achieve faster penetration utilizing a local selling agent than through the buildout of our own infrastructure. When we provide services through a local selling agent, we recognize as gross revenues all sales of our service offerings to the media agencies in the territory and pay a commission to such representative as an expense.

 

   

Our estimated market share relative to the addressable campaign management opportunity. We measure the total digital media that our clients manage through our solutions and the estimated share that it represents of total digital media spend. Based on our estimates, we have gained market share in recent years.

 

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Our revenues have grown from $44.7 million in 2007 to $65.1 million in 2009 and from $17.0 million in the six months ended June 30, 2007 to $37.2 million in six months ended June 30, 2010. The key factors influencing our revenues over this period include:

 

   

The rate of online advertising spending. Overall advertising spending has historically correlated with economic growth, but online advertising spending has generally increased at a faster rate than overall advertising spending. According to ZenithOptimedia, worldwide online advertising spending increased from $30.3 billion in 2006 to $55.4 billion in 2009, representing a compound annual growth rate (“CAGR”) of 22.3%, while overall advertising decreased from $460.0 billion in 2006 to $446.3 billion in 2009, a CAGR of -1.0%.

 

   

Our innovation and technological strength. We have been able to achieve higher revenues through the provision of more advanced features and functionalities, which generally command higher CPM rates.

 

   

Increased volume of impressions delivered. We have been able to increase usage of our services through the addition of new customers and through the delivery of additional campaigns and an increased impression volume for existing customers. We increased the number of advertisers we service from approximately 4,000 in 2007 to approximately 7,000 in 2009 and from approximately 2,100 in the six months ended June 30, 2007 to approximately 5,600 in six months ended June 30, 2010. We typically measure advertisers per advertising budget, so if a corporation assigns separate budgets, or appoints agencies to manage separate brands or to serve separate countries, we will count each brand advertising budget as a single advertiser. We have also been able to increase our volume of impressions delivered by penetrating new geographies through expanding our own sales force or through strategic relationships with local selling agents in new territories. As a result, we have generated volume increases over the last several years, which have offset CPM declines (measured on a given format basis). For example, in 2009, we increased our volume of rich media impressions by 44% and increased our volume of standard display impressions by 139% compared to 2008. In the six months ended June 30, 2010, we increased our volume of rich media impressions by 31% and increased our volume of standard display impressions by 64% compared to the six months ended June 30, 2009. We expect to continue to gain market share from increased use of our existing solutions and continued innovation and to benefit if market conditions improve to further increase our revenue in the future.

We do not have any deferred revenues or backlog because we generally recognize revenues at the time the advertising impressions are delivered or click-through occurs. See “Critical Accounting Policies and Estimates—Revenue Recognition.”

Cost of Revenues

Cost of revenues primarily consists of fees we pay to service providers that enable the delivery of advertising campaigns online, principally Akamai, a provider of caching and web acceleration services. The fees include monthly fixed fees and additional fees that are paid in proportion to the bandwidth that is used or the number of impressions that we deliver. Cost of revenues also includes depreciation expense relating to our servers, which are located in several data centers around the world, and which enable us to better support campaign delivery on a global basis, as well as the ongoing maintenance cost of our servers.

Operating Expenses

Operating expenses consist of selling and marketing expenses, research and development expenses, and general and administrative expenses. The largest component of our expenses is personnel costs, which were approximately 66% and 65% of our operating expenses in 2009 and in the six months ended June 30, 2010, respectively. Personnel costs consist of salaries, benefits, and incentive compensation for our employees, including commissions for sales people. Personnel costs are categorized in our statements of operations based on each employee’s principal function.

Research and development expenses primarily consist of costs for personnel involved in research and development activities. Selling and marketing expenses primarily consist of costs related to sales and marketing

 

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personnel, as well as branding and advertising expenditures and commissions paid to our local selling agents. General and administrative expenses primarily consist of personnel costs for our management, as well as other expenses such as accounting and legal expenses.

We expect that our operating expenses will increase over time as we grow our company but at a slower pace than our revenue growth. We expect to continue to expand our sales force, hire new employees and build our network infrastructure to support our growth. However, if we are unable to increase our revenues as expected, or need to increase our operating expenses beyond our expectations in order to maintain our competitive position, our operating margins may decrease.

Historically, our operating margins have not been negatively impacted by the relative mix of rich media, video, and standard display ad services that we provide.

We believe that our general and administrative expenses following the completion of this offering will increase as a result of becoming a public company. This increase will be due to the cost of filing annual and quarterly reports with the SEC, increased audit fees, consulting fees, investor relations, directors’ fees, directors’ and officers’ insurance, legal fees, registrar and transfer agent fees and other costs that we might not have incurred as a private company, which we expect to incur after the completion of this offering. This will be partially offset by termination in 2009 of the management fee agreement with Sycamore Technologies Ventures L.P. See “Certain Relationships and Related Party Transactions—Management Agreement.”

Financial Income, net

In addition to our operating revenues and expenses, we record financial income, net, which to date has consisted primarily of interest income earned on our cash and cash equivalents and marketable securities and foreign currency translation gains and losses. We expect financial income to increase as we temporarily invest the proceeds of this offering in cash, cash equivalents and marketable securities pending their application to grow our business.

Income Taxes

We also record income tax expenses. Our consolidated provision for income taxes and deferred tax assets and liabilities is computed based on a combination of the United States tax rates on our United States income, the Israeli tax rates on our Israeli income, as well as the tax rates of other jurisdictions where we conduct business. We indirectly own all of our subsidiaries through our wholly-owned subsidiary, MediaMind Technologies Ltd. (formerly Eyeblaster Ltd.), an Israeli company. The standard corporate tax rate for Israeli companies in 2006 was 31% of their taxable income. It declined to 29% in 2007, 27% in 2008, 26% in 2009, 25% in 2010 and is scheduled to gradually decline to 24% in 2011, 23% in 2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 and thereafter. However, the effective tax rate payable by a company that derives income from an “Approved Enterprise” or a “Privileged Enterprise” designated as set forth under the Investment Law may be less in certain cases. Some of our investments in Israeli facilities have been granted “Approved Enterprise” status by the Investment Center in the Israeli Ministry of Industry Trade and Labor. In addition, we have elected to treat some of our investments in Israeli facilities as a “Privileged Enterprise” under the Law for Encouragement of Capital Investments, 1959, or the Investment Law. For description of the risks related to the possible termination of certain tax benefits under the Investment Law, see above under “Risk Factors—Risks Related to our Business and Industry.”

Since part of our taxable income in Israel is not entitled to tax benefits under the Investment Law and is taxed at the regular tax rate, our effective tax rate is the result of a weighted combination of the various applicable rates and tax exemptions, and the computation is made for income derived from each program on the basis of formulas specified in the Investment Law and in the applicable governmental approvals.

Accretion of Preferred Stock Dividends

In periods prior to this offering, we have also recognized accretion of preferred stock dividends relating to our outstanding preferred stock. All of our preferred stock will be converted into common stock in connection with this offering, and we will no long recognize such accretion in future periods.

 

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Acceleration of Stock Option Expense Upon IPO

As of June 30, 2010, options to purchase 160,063 shares of common stock held by certain of our executive officers would have vested immediately upon an IPO and options to purchase an additional 160,063 shares of common stock held by certain of our executive officers would have vested in twelve equal monthly installments. Approximately 24,438 of these options vested after June 30, 2010 and prior to the closing of this offering. As a result, options to purchase 147,844 shares of common stock held by certain of our executive officers will vest immediately upon the closing of this offering and an additional 147,844 shares of common stock held by certain of our executive officers will vest in twelve equal monthly installments until the one-year anniversary of this offering. As a result, we will record stock-based compensation expenses of $515,444 in the quarter in which the offering occurs and an additional $515,444 of stock-based compensation expenses over the subsequent twelve months.

Results of Operations

The following table sets forth our results of operations as a percentage of revenues for the periods indicated:

 

    Year Ended December 31,     Six Months Ended June 30,  
    2007     2008     2009     2009     2010  
    Amount   % of
revenues
    Amount   % of
revenues
    Amount   % of
revenues
    Amount     % of
revenues
    Amount     % of
revenues
 
                                  (unaudited)  
    (U.S. dollars in thousands, except percentages)  

Revenues

  $ 44,737   100   $ 63,775   100   $ 65,075   100   $ 27,412      100   $ 37,225      100

Cost of revenues

    3,243   7        3,520   6        3,306   5        1,649      6        1,942      5
  
                                                               

Gross profit

  $ 41,494   93   $ 60,255   94   $ 61,769   95     $25,763      94   $ 35,283      95
                                                               

Operating expenses:

                   

Research and development

  $ 4,525   10   $ 7,443   12   $ 6,844   11   $ 3,289      12   $ 4,498      12

Selling and marketing

    23,484   53        34,936   55        36,530   56        16,063      59        21,602      58   

General and administrative

    5,990   13        10,292   16        6,201   9        3,139      11        3,856      10   
                                                               

Operating expenses

    33,999   76        52,671   83        49,575   76        22,491      82        29,956      80   
                                                               

Operating income

    7,495   17        7,584   12        12,194   19        3,272      12        5,327      14   

Financial income (expenses), net

    1,077   2        753   1        80   0        (614   (2     (477   (1
                                                               

Income before income taxes

    8,572   19        8,337   13        12,274   19        2,658      10        4,850      13   

Income taxes

    1,213   3        2,175   3        2,446   4        753      3        1,415      4   
                                                               

Net income

  $ 7,359   16   $ 6,162   10   $ 9,828   15   $ 1,905      7   $ 3,435      9
                                                               

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues

The following table sets forth our revenues during each of the six months ended June 30, 2010 and 2009 by geographic area:

 

     2009     2010     Period over
Period
Change
 
     Amount    % of revenues     Amount    % of revenues    
     (unaudited)  
     (U.S. dollars in thousands, except percentages)  

EMEA

               

United Kingdom

   $ 5,636    21   $ 5,687    15   $ 51    1

France

     2,353    8        2,637    7        284    12   

Other

     7,331    27        10,966    30        3,635    50   
                                   

Total EMEA

     15,320    56        19,290    52        3,970    26   

North America

               

United States

     6,284    23        9,939    27        3,655    58   

Canada

     763    3        791    2        28    4   
                                   

Total North America

     7,047    26        10,730    29        3,683    52   

Asia Pacific (APAC)

     4,205    15        5,641    15        1,436    34   

Latin America

     840    3        1,564    4        724    86   
                                   
   $ 27,412    100   $ 37,225    100   $ 9,813    36
                                   

 

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Revenues increased by $9.8 million, or 36%, to $37.2 million in the six months ended June 30, 2010, from $27.4 million in the six months ended June 30, 2009. We were able to significantly increase our revenue in all regions compared with the six months ended June 30, 2010 as a result of a 70% increase in the volume of impressions delivered, driven primarily by increased market share and general growth of the industry, as well as the improving global economic environment. Revenue growth was higher in our new locations, where we believe there is the greatest potential for expansion, than in our established locations.

Cost of revenues and gross margin

The following table sets forth our cost of revenue in each of the six months ended June 30, 2010 and 2009:

 

      2009      2010     Period over
 Period Change 
 
     (unaudited)  
     (U.S. dollars in thousands, except percentages)  

Cost of revenues

   $ 1,649    $ 1,942    $ 293    18
                       

Cost of revenues increased by $0.3 million, or 18%, to $1.9 million in the six months ended June 30, 2010 from $1.6 million in the six months ended June 30, 2009. While fees due to service providers decreased on a per impression basis, overall cost of revenues increased due to the significant increase in the volume of impressions we delivered. Gross margin increased slightly from 94% in the six months ended June 30, 2009 to 95% in the six months ended June 30, 2010.

Operating expenses

The following table sets forth our operating expenses in each of the six months ended June 30, 2010 and 2009:

 

      2009      2010     Period over
 Period Change 
 
     (unaudited)  
     (U.S. dollars in thousands, except percentages)  

Research and development

   $ 3,289    $ 4,498    $ 1,209    37

Selling and marketing

     16,063      21,602      5,539    34  

General and administrative

     3,139      3,856      717    23  
                       

Total operating expenses

   $ 22,491    $ 29,956    $ 7,465    33
                       

Research and development. Research and development expenses increase by $1.2 million, or 37%, to $4.5 million in the six months ended June 30, 2010, from $3.3 million in the six months ended June 30, 2009. The increase was primarily the result of growth in headcount and increased compensation and related costs for personnel associated with research and development activities. The increase in research and development expenses was also attributable to growth in all other research and development expenses, including travel, training, and overhead expenses. Research and development expenses as a percentage of revenues remained constant.

Selling and marketing. Selling and marketing expenses increased by $5.5 million, or 34%, to $21.6 million in the six months ended June 30, 2010, from $16.1 million in the six months ended June 30, 2009. The increase was primarily attributable to an increase in compensation expenses relating to growth in headcount associated with supporting the revenue increase in the six months ended June 30, 2010 compared with the six months ended June 30, 2009, and the expansion of our recently established subsidiaries in Brazil and Mexico, previously operated through a local selling agent. In addition, we increased salaries following salary reductions we initiated in the first half of 2009, as we focused on cutting costs given the uncertain global economic environment. The increase in selling and marketing expenses was also attributable to an increase in all other selling and marketing expenses, including commission paid to selling agents, travel, training, recruiting and marketing. Selling and marketing expenses as a percentage of revenues decreased to 58% in the six months ended June 30, 2010, from 59% in the six months ended June 30, 2009.

 

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General and administrative. General and administrative expenses increased by $0.7 million, or 23%, to $3.8 million in the six months ended June 30, 2010, from $3.1 million in the six months ended June 30, 2009. This increase was primarily due to an increase in headcount and salaries and related recruiting expenses, partially offset by a decrease in management fees to Sycamore. The management agreement obligated us to pay $1.0 million to Sycamore each year until the agreement terminated in the second quarter of 2009. General and administrative expenses as a percentage of revenues decreased to 10% in the six months ended June 30, 2010, from 11% in the six months ended June 30, 2009.

Financial expenses, net

The following table sets forth our financial expenses, net, in each of the six months ended June 30, 2010 and 2009:

 

      2009      2010     Period over
  Period Change  
 
     (unaudited)  
     (U.S. dollars in thousands, except percentages)  

Financial expenses, net

   $ 614    $ 477    $ (137    (22 )% 
                         

Financial expenses, net, includes net interest consisted of earnings on our cash, cash equivalents and marketable securities, and foreign currency translation gains and losses. In the six months ended June 30, 2009, in addition to earnings on our cash, cash equivalents and marketable securities, we recorded financial income resulting from dividends received from investments in marketable securities. Foreign currency translation gains and losses arise from the translation adjustments on net assets held by our subsidiaries in euros and in new Israeli shekels to U.S. dollars during consolidation.

The decrease in financial expenses, net, resulted from an increase in interest income earned due to an increase in the average interest rate on our investments, and a decrease in currency translation losses.

Income tax expense

The following table sets forth our tax expense in each of the six months ended June 30, 2010 and 2009:

 

 

       2009        2010     

Period over
  Period Change  

 
     (unaudited)  
     (U.S. dollars in thousands, except percentages)  

Income taxes

   $ 753    $ 1,415    $ 662    88
                       

Our consolidated provision for income taxes and our deferred tax assets and liabilities are computed based on a combination of the United States tax rates on United States income, the Israeli tax rates on Israeli income as well as the tax rates of other wholly-owned subsidiaries in Australia, the United Kingdom, France, Germany, Spain, Mexico, Brazil and Hong Kong.

 

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Income tax expense for the six months ended June 30, 2010 and 2009 totaled $1.4 million and $0.8 million, respectively. The increase was a result of an increase in non-deductible expenses resulting mainly from stock-based compensation and the establishment of Mexican and Brazilian subsidiaries with relatively high tax rates. Our effective tax rate increased from 20% in the year 2009 to 29% in the six months ended June 30, 2010 due to non-deductible expenses resulting mainly from stock-based compensation which are spread equally throughout the year as opposed to our taxable income which fluctuates on a quarterly basis and is historically higher in the rest of the year than in the first six months.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Revenues

The following table sets forth our revenues during each of 2008 and 2009 by geographic area:

 

     2008     2009     Year over
Year Change
 
     Amount    % of revenues     Amount    % of revenues    
     (U.S. dollars in thousands, except percentages)  

EMEA

              

United Kingdom

   $ 12,558    20   $ 11,559    18   $ (999   (8 )% 

France

     6,155    10        5,612    9        (543   (9

Other

     16,368    25        17,758    27        1,390      8   
                                    

Total EMEA

     35,081    55        34,929    54        (152   0   

North America

              

United States

     15,760    25        16,776    26        1,016      6   

Canada

     1,491    2        1,510    2        19      1   
                                    

Total North America

     17,251    27        18,286    28        1,035      6   

Asia Pacific

     9,755    15        9,676    15        (79   (1

Latin America

     1,688    3        2,184    3        496      29   
                                    
   $ 63,775    100   $ 65,075    100   $ 1,300      2
                                    

Revenues increased by $1.3 million, or 2%, to $65.1 million in 2009, from $63.8 million in 2008. Excluding the impact of the appreciation of the U.S. dollar relative to foreign currencies, revenues increased by approximately 5.5%. In spite of the economic slowdown we were able to increase our revenue compared to 2008 as a result of a 103% increase in the volume of impressions delivered, driven primarily by increased market share, partially offset by pricing pressure. We were particularly successful in increasing the utilization of standard display ads by platform customers, as standard display volumes increased 139% in 2009. Pricing pressure was primarily the result of general industry conditions, including economic weakness, and also reflected a discount in pricing given to one customer in expectation of higher volume that did not fully materialize due to economic conditions.

Cost of revenues and gross margin

The following table sets forth our cost of revenues during each of 2008 and 2009:

 

         2008            2009        Year over
Year Change
     (U.S. dollars in thousands, except
percentages)

Cost of revenues

   $ 3,520    $ 3,306    $ (214   (6)%
                        

Cost of revenues decreased by $0.2 million, or 6%, to $3.3 million in 2009 from $3.5 million in 2008, primarily reflecting lower fees due to service providers. Gross margin increased slightly from 94% in 2008 to 95% in 2009.

 

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Operating expenses

The following table sets forth our operating expenses in each of 2008 and 2009:

 

     2008    2009    Year over
Year Change
     (U.S. dollars in thousands, except
percentages)

Research and development

   $ 7,443    $ 6,844    $ (599   (8)%

Selling and marketing

     34,936      36,530      1,594      5    

General and administrative

     10,292      6,201      (4,091   (40)   
                        

Total operating expenses

   $ 52,671    $ 49,575    $ (3,096   (6)%
                        

Research and development. Research and development expenses decreased by $0.6 million, or 8%, to $6.8 million in 2009 from $7.4 million in 2008. This decrease primarily resulted from a decrease in headcount and a reduction in salaries that we experienced in the first half of 2009, as we focused on cutting costs given the uncertain global economic environment.

Selling and marketing. Selling and marketing expenses increased by $1.6 million, or 5%, to $36.5 million in 2009 from $34.9 million in 2008. This increase was primarily due to an increase in headcount associated with the establishment of subsidiaries in Brazil and Mexico in 2009, previously operated through a local selling agent, and an increase in commissions paid to employees, partially offset by a decrease in marketing expenses. The commission rate paid to employees includes an accelerator rate which is effective once targets are met. Because actual revenues in 2009 exceeded targeted revenues, commission payments were $1.3 million higher than in 2008. Selling and marketing expenses as a percentage of revenues increased to 56% in 2009 from 55% in 2008. This increase was primarily due to an expansion in foreign markets in which we previously operated utilizing local selling agents, as the margin on revenue we generate from such markets is generally lower at first due to start-up expenses.

General and administrative. General and administrative expenses decreased by $4.1 million, or 40%, to $6.2 million in 2009 from $10.3 million in 2008. This decrease was primarily due to a decrease in headcount and a reduction in salaries we experienced in the first half of 2009 as we focused on cutting costs given the uncertain global economic environment, and a decrease in accounting and legal fees, which were higher in 2008 due to the commencement of an initial public offering process in January 2008, after which costs of $1.1 million were expensed following the withdrawal of our registration statement in December 2008. This decrease was also the result of the termination of a management agreement with one of our investors. The management agreement obligated us to pay $1.0 million in management fees to the investment group each year until the agreement terminated in the first half of 2009, which resulted in expense of $0.3 million in 2009, compared to $1.0 million in 2008. General and administrative expenses as a percentage of revenues decreased to 9% in 2009 from 16% in 2008.

Financial income, net

The following table sets forth our financial income, net, in each of 2008 and 2009:

 

      2008       2009      Year over
Year Change
     (U.S. dollars in thousands, except percentages)

Financial income, net

   $ 753    $ 80    $ (673    (89)%
                         

Financial income, net, includes net interest, dividends received and foreign currency translation gains and losses. In 2008, net interest consisted of earnings on our cash, cash equivalents and marketable securities. In 2009, in addition to earnings on our cash, cash equivalents and marketable securities, we recorded financial

 

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income resulting from a tax refund (including interest) for overpayment in the previous year. Foreign currency translation gains and losses arise from the translation adjustments on net assets held by our subsidiaries in euros and in new Israeli shekels to U.S. dollars during consolidation.

Financial income, net decreased by $0.7 million, or 89%, to $0.1 million in 2009 from $0.8 million in 2008. This decrease resulted primarily from currency translation losses of $0.6 million in 2009. During 2008 and 2009, we recognized foreign currency translation net gains of $0.2 million and loss of $0.4 million, respectively. In addition, we generated lower interest income in 2009, due to a decrease in the average interest rate on our investments. The decrease was partially offset by the interest received in connection with the tax refund discussed above.

Income tax expense

The following table sets forth our tax expense in each of 2008 and 2009:

 

     2008    2009    Year over
Year Change
     (U.S. dollars in thousands, except percentages)

Income taxes

   $ 2,175    $ 2,446    $ 271    12%
                       

Income tax expense increased by $0.3 million, or 12%, to $2.5 million in 2009 from $2.2 million in 2008. Our effective tax rate decreased from 26% in 2008 to 20% in 2009 due to tax benefits under our Approved and Privilege Enterprise programs in Israel, which were higher in 2009 compared to 2008, as well as a reduction of the tax rate in Israel, and a tax refund in respect of previous years.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenues

The following table sets forth our revenues during each of 2007 and 2008 by geographic region:

 

     2007     2008     Year over
Year Change
     Amount    % of revenues     Amount    % of revenues    
     (U.S. dollars in thousands, except percentages)

EMEA

               

United Kingdom

   $ 9,250    21   $ 12,558    20   $ 3,308    36%

France

     4,898    11        6,155    10        1,257    26   

Other

     9,942    22        16,368    25        6,426    65   
                                   
Total EMEA      24,090    54        35,081    55        10,991    46   

North America

               

United States

     12,843    29        15,760    25        2,917    23   

Canada

     806    2        1,491    2        685    85   
                                   
Total North America      13,649    31        17,251    27        3,602    26   

Asia Pacific (APAC)

     6,299    14        9,755    15        3,456    55   

Latin America

     699    2        1,688    3        989    141   
                                   
   $ 44,737    100   $ 63,775    100   $ 19,038    43%
                                   

Revenues increased by $19.0 million, or 43%, to $63.8 million in 2008, as compared to $44.7 million in 2007. The increase was primarily attributable to significant growth in Europe and Asia Pacific markets, as well as penetrating new territories in these markets and in Latin America. Currency fluctuations did not have a material impact on revenues between 2007 and 2008. The increase was also attributable to generating higher revenues from existing accounts through more campaigns and higher volume campaigns. The growth in the number of impressions from 2007 to 2008 was 121%.

 

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Cost of revenues and gross margin

The following table sets forth our cost of revenues in each of 2007 and 2008:

 

     2007    2008    Year over
Year Change
 
                 (U.S. dollars in thousands, except  percentages)              

Cost of revenue

   $ 3,243    $ 3,520    $ 277    9
                       

Cost of revenues increased by $0.3 million, or 9%, to $3.5 million in 2008 from $3.2 million in 2007. This increase resulted primarily from increased fees due to higher volumes. Gross margin increased from 93% in 2007 to 94% in 2008. This increase resulted from a reduction in content delivery network costs and growth in revenues at a faster rate than the increase in expenses.

Operating expenses

The following table sets forth our operating expenses in each of 2007 and 2008:

 

     2007    2008    Year over
Year Change
 
     (U.S. dollars in thousands, except percentages)  

Research and development

   $ 4,525    $ 7,443    $ 2,918    64

Selling and marketing

     23,484      34,936      11,452    49   

General and administrative

     5,990      10,292      4,302    72   
                       

Total operating expenses

   $ 33,999    $ 52,671    $ 18,672    55
                       

Research and development. Research and development expenses increased by $2.9 million, or 64%, to $7.4 million in 2008 from $4.5 million in 2007. The increase resulted primarily from an increase in headcount resulting in increased compensation and related costs for personnel associated with research and development activities, and higher allocated overhead, including rent and depreciation. Research and development expenses as a percentage of revenues increased to 12% in 2008 from 10% in 2007.

Selling and marketing. Selling and marketing expenses increased by $11.4 million, or 49%, to $34.9 million in 2008 from $23.5 million in 2007. This increase was due to an increase in commission costs associated with increased revenues in territories serviced utilizing local selling agents, increased employee salaries and benefits, stock-based compensation and related costs associated with an increase in sales, and hiring of additional account management personnel and the formation of our global services team in anticipation of further growth. Selling and marketing expenses as a percentage of revenues increased to 55% in 2008 from 53% in 2007 as payroll and salary-related expenses increased at a higher rate than the increase in revenue.

General and administrative. General and administrative expenses increased by $4.3 million, or 72%, to $10.3 million in 2008 from $6.0 million in 2007. This increase resulted primarily from the hiring of employees to help expand our infrastructure and manage our growth as well as an increase in stock-based compensation expenses due to additional stock options grants. In addition, we expensed $1.1 million of accounting and legal fees due to the discontinuation of the initial public offering process in December 2008. General and administrative expenses as a percentage of revenues increased to 16% in 2008 from 13% in 2007.

Financial income, net

The following table sets forth our financial income, net in each of 2007 and 2008:

 

     2007    2008    Year over
Year Change
 
    

(U.S. dollars in thousands,

except percentages)

 

Financial income, net

   $ 1,077    $ 753    $ (324   (30 )% 
                        

 

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Financial income, net for the years 2007 and 2008 was $1.1 million and $0.8 million, respectively, consisting primarily of earnings on our cash, cash equivalents and marketable securities and foreign currency translation gains and losses.

Financial income, net decreased by $0.3 million, or 30%, to $0.8 million in 2008 from $1.1 million in 2007. This decrease was primarily the result of a decrease in currency translation gains of $0.3 million in 2008. During 2008 and 2007, we recognized foreign currency translation net gains of $0.2 million and $0.4 million, respectively.

Income tax expense

The following table sets forth our tax expense in each of 2007 and 2008:

 

     2007    2008    Year over
Year Change
 
    

(U.S. dollars in thousands,

except percentages)

 

Income taxes

   $ 1,213    $ 2,175    $ 962    79
                       

Income tax expense increased by $1.0 million, or 79%, to $2.2 million in 2008 from $1.2 million in 2007. Our effective tax rate increased from 14% in 2007 to 26% in 2008 resulting primarily from an increase of non-deductible expenses in 2008 and higher tax benefits in 2007 under the “Approved Enterprise” and “Privileged Enterprise” programs in Israel.

Liquidity and Capital Resources

We have financed our operations primarily through cash flows generated by operations and, to a lesser extent, private issuances of equity. We believe that our cash flows from operations and current cash and cash equivalents will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next twelve months. Our principal sources of liquidity are expected to be our existing cash and cash equivalents, which totaled $15.4 million and $26.2 million as of December 31, 2009 and 2008, respectively, and $12.5 million as of June 30, 2010 as well as the cash flow that we generate from our operations and the proceeds from this offering.

Our cash and cash equivalents are highly liquid investments with original maturities of 90 days or less at date of issuance and consist of time deposits and investments in money market funds with commercial banks and financial institutions.

As of December 31, 2009 and June 30, 2010, our short-term deposits were $18.4 million and $20.0 million, respectively. We had no short-term deposits as of December 31, 2008. Our short-term deposits consist of deposits with a contractual maturity of more than three months and less than one year.

As of December 31, 2009 and June 30, 2010, our long-term marketable securities were $2.1 million, as compared to short-term marketable securities of $0.5 million at December 31, 2008. Our marketable securities consist of highly rated government and corporate debt securities and none of them are auction rate securities. Securities with a contractual maturity of less than one year are classified as short-term, and those with maturities of more than one year are classified as long-term.

Operating activities. Cash provided by operating activities consists primarily of net income adjusted for certain non-cash items including depreciation, stock-based compensation, and the effect of changes in working capital. Net cash generated by operating activities in the year ended December 31, 2009 was $10.3 million and was generated primarily by our net profit. Adjustments for non-cash items were fully offset by a significant increase in trade receivables, reflecting higher revenues in the fourth quarter, and a decrease in payables and

 

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payroll accruals. Net cash provided by operating activities for the years ended December 31, 2008 and 2007 were $8.7 million and $5.8 million, respectively, reflecting net profit adjusted for non-cash items being offset by an increase in trade receivables, reflecting higher revenues in the fourth quarter which fourth quarter increase was more significant in 2007 than 2008. Net cash provided by operating activities in the six months ended June 30, 2010 was $2.9 million, reflecting net income, adjusted for non-cash items, offset by an increase in working capital. Net cash provided by operating activities in the six months ended June 30, 2009 were $5.0 million, reflecting net income adjusted for non-cash items and a decrease in working capital.

Investing activities. Net cash used in investing activities in the year ended December 31, 2009 was $21.6 million, consisted of the purchase of short-term deposits, marketable securities and capital expenditures. Capital expenditures are generally comprised of computer hardware, software, and leasehold improvement for our facilities. Net cash provided by investing activities in 2008 was $13.2 million which consisted primarily of the redemption of marketable securities, offset by capital expenditures. Net cash used in investing activities in the year ended December 31, 2007 was $13.3 million, consisted of the purchase of marketable securities and capital expenditures. Net cash used in investing activities in the six months ended June 30, 2010 was $5.4 million, consisting of the purchase of short-term deposits, an increase in restricted cash and capital expenditures. Net cash used in investing activities in the six months ended June 30, 2009 was $1.1 million, which consisted of the purchase of short term deposits and capital expenditures, partially offset by the sale of marketable securities. Our capital expenditures were $1.3 million in 2009, and we expect to invest higher amounts in 2010 to support our expansion.

Financing activities. Net cash provided by financing activities for the years ended December 31, 2009 and 2008 and for the six months ended June 30, 2009, were $45 thousand, $121 thousand and $10 thousand, respectively, generated by the exercise of stock options under our equity incentive plan. Net cash provided by financing activities for the year ended December 31, 2007 was $7.8 million, primarily attributed to an equity round of financing in April 2007, when we issued preferred stock to several new investors for total consideration of $30.0 million, partially offset by $22.4 million paid to repurchase shares from certain existing stockholders. Net cash used in financing activities for the six months ended June 30, 2010 were $304 thousand paid in respect of issuance cost, partially offset by cash provided by the exercise of stock options under our equity incentive plan.

Commitments and Contingencies

The following table presents minimum payments due under contractual obligations with minimum firm commitments as of December 31, 2009:

 

         For the year ended December 31,     
    Total    2010    2011    2012    2013    2014    Thereafter
    (U.S. dollars in thousands)

Rent, motor vehicle and other services

  $ 7,346    $ 3,118    $ 1,848    $ 978    $ 813    $ 469    $ 120
                                               

Due to the uncertainty of the timing of future cash flows associated with our uncertain income tax position (see Note 7f, “Income Taxes,” to the consolidated financial statements included in this prospectus), we are unable to make reasonably reliable estimates for the period of cash settlement, if any, with the respective taxing authorities.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet financing arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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Seasonality and Fluctuations in Quarterly Operation Results

Our operating results have historically fluctuated on a quarterly basis due to the seasonal nature of Internet advertising, and we expect this fluctuation to continue. Our fourth calendar quarter is typically the strongest, generating approximately 34% and 39% of our revenues for the years ended December 31, 2009 and 2007, respectively. Revenue in the fourth quarter of 2008 generated approximately 26% of our annual revenue, as a result of the economic slowdown in 2008. Our first quarter is often the weakest quarter, generating approximately 18%, 21% and 16% of our revenues for the years ended December 31, 2009, 2008 and 2007, respectively. The increase in revenue in the fourth quarter is primarily the result of heavy digital media advertising and online shopping during November and December due to the holidays. The drop in revenues in the first quarter is linked to the drop in digital media advertising and shopping that occurs at the beginning of each year. Prior to 2008, our growth largely masked most of the cyclicality and seasonality effects on our business. Cyclicality and seasonality may have a more pronounced effect on our operating results in the future, as our growth slows, and may in the future cause our operating results to fluctuate.

The following is a summary of our quarterly results in each of the last ten fiscal quarters:

 

    Quarter ended  
    March 31,
2008
  June 30,
2008
  September 30,
2008
    December 31,
2008
  March 31,
2009
    June 30,
2009
    September 30,
2009
  December 31,
2009
  March 31,
2010
  June 30,
2010
 
    (unaudited)   (unaudited)   (unaudited)     (unaudited)   (unaudited)     (unaudited)     (unaudited)   (unaudited)   (unaudited)   (unaudited)  
    (U.S. dollars in thousands)      

Revenues

  $ 13,589   $ 17,549   $ 16,240      $ 16,397   $ 11,403      $ 16,009      $ 15,231   $ 22,432   $ 16,001   $ 21,224   

Cost of revenues

    623     875     997        1,025     780        869        819     838     881     1,061   
                                                                   

Gross profit

    12,966     16,674     15,243        15,372     10,623        15,140        14,412     21,594     15,120     20,163   
                                                                   

Operating Expenses:

                   

Research and development

    1,715     1,961     1,973        1,794     1,571        1,718        1,795     1,760     2,261     2,237   

Selling and marketing

    7,644     9,402     9,294        8,596     7,230        8,833        9,134     11,333     10,048     11,554   

General and administrative

    2,476     2,627     2,183        3,006     1,614        1,525        1,448     1,614     1,975     1,881   
                                                                   

Operating expenses

    11,835     13,990     13,450        13,396     10,415        12,076        12,377     14,707     14,284     15,672   
                                                                   

Operating income

    1,131     2,684     1,793        1,976     208        3,064        2,035     6,887     836     4,491   

Financial income (expenses), net

    404     141     (261     469     (580     (34     528     166     82     (559
                                                                   

Income before income taxes

    1,535     2,825     1,532        2,445     (372     3,030        2,563     7,053     918     3,932   

Income taxes

    449     651     283        792     101        652        618     1,075     358     1,057   
                                                                   

Net income

  $ 1,086   $ 2,174   $ 1,249      $ 1,653   $ (473   $ 2,378      $ 1,945   $ 5,978   $ 560     2,875   
                                                                   

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse change in financial market prices and rates. In the course of our normal operations, we are exposed to market risks, including fluctuations in foreign currency exchange rates and interest rates.

Foreign Exchange Risk

We conduct business in a large number of countries in the Americas, Europe, Asia, Australia, Latin America and the Middle East. Most of our revenues are generated in U.S. dollars, the euro, the Australian dollar and the British pound sterling. Based on our results for the year ended December 31, 2009, a 1% increase (decrease) in the value of the euro, the Australian dollar and the British pound sterling against the U.S. dollar would have increased (decreased) our revenues by $156 thousand, $41 thousand and $86 thousand, respectively. Based on our results for the six months ended June 30, 2010, a 1% increase (decrease) in the value of the euro, the Australian dollar and the British pound sterling against the U.S. dollar would have increased (decreased) our revenues by $103 thousand, $23 thousand and $35 thousand, respectively. Most of our expenses are denominated in U.S. dollars, the new Israeli shekel, the British pound sterling and the euro. Based on our results

 

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for the year ended December 31, 2009, a 1% increase (decrease) in the value of the new Israeli shekel, the British pound sterling and the euro against the dollar would have increased (decreased) our expenses by $93 thousand, $48 thousand and $50 thousand, respectively. Based on our results for the six months ended June 30, 2010, a 1% increase (decrease) in the value of the new Israeli shekel, the British pound sterling and the euro against the dollar would have increased (decreased) our expenses by $21 thousand, $27 thousand and $42 thousand, respectively. In the future, the percentage of our revenues earned in other currencies may increase as we further expand our sales internationally. Accordingly, we are subject to the risk of exchange rate fluctuations between such other currencies and the dollar. In 2010, the European economy has been under stress, due in large part to uncertainty in the European sovereign debt markets, and the U.S. dollar has appreciated significantly against the euro and the British pound sterling. Our expenses in currencies other than the new Israeli shekel tend to be hedged by revenues being denominated in the same currency, which helps reduce the impact of currency fluctuations on our profit margins. We hedge our expenses denominated in new Israeli shekels. The sensitivity analysis provided above does not give effect to this cash flow hedging program.

Interest Rate Risk

As of June 30, 2010, we had no outstanding debt, and accordingly were not subject to interest rate risk on debt. We invest our cash in a combination of cash equivalents and marketable securities, all of which marketable securities are at least AA+ rated U.S. corporate bonds. Our cash throughout the world is affected by changes in interest rates. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions.

Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenue and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue, the allowance for doubtful accounts, stock-based compensation and income taxes. We based our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Our actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this prospectus.

We believe the following critical accounting policies require our more significant judgments in preparing our consolidated financial statements:

Revenue Recognition

We generate revenues primarily from monthly transaction volume-based fees earned by us for making MediaMind available to our customers on an Application Service Provider, or ASP, basis. Accordingly, such revenue is recognized in accordance with ASC 605, “Revenue Recognition” and Staff Accounting Bulletin No. 104, “Revenue Recognition”, in the month that the advertising impressions or click-throughs occur, provided the following four criteria are met:

 

   

Persuasive evidence of an arrangement exists. We generally require a purchase order from a customer specifying the terms and conditions of the services to be delivered. Alternately, we have entered into long term agreements with certain of our customers specifying the terms and conditions of the services provided by us to such customers.

 

   

Delivery. We deem delivery of our services to have occurred when the advertising impressions or click-throughs are delivered by our platform.

 

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The fees are fixed and determinable. We consider the fees to be fixed and determinable if they are not subject to a refund or adjustment. Our services are of a type that are not subject to a refund or customer acceptance provisions.

 

   

Collection is probable. Probability of collection is assessed on a customer-by-customer basis based on a number of factors including credit-worthiness and our transaction history with the customer. Customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay.

Our customers do not have the right to take possession of our software at any time during or after the term of the relevant customer agreement. Accordingly, as prescribed by ASC 605-30 (formerly: EITF Issue No. 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware”) our revenue recognition is outside the scope of ASC 985-605 “Software, Revenue Recognition” and within the scope of ASC 605, “Revenue Recognition” and Staff Accounting Bulletin No. 104, “Revenue Recognition”.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from our customers’ inability to pay us which is accounted for in accordance with ASC 450, Contingencies (formerly FAS 5). The provision is based on our historical experience with specific customers and an assessment of whether they are probable to default on our receivables from them. In order to identify these customers, we perform ongoing reviews of all customers that have breached their payment terms, as well as those that have filed for bankruptcy or for whom information has become available indicating a significant risk of non-recoverability. Historically, we have not experienced any material losses on our accounts receivable. If our historical collection experience does not reflect our future ability to collect outstanding accounts receivables, our future provision for doubtful accounts could be materially affected.

Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We adopted ASC 740 (formerly: FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, an Interpretation of FASB Statement No. 109”). ASC 740 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. ASC 740 also prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate as well as the related net interest.

Stock-based Compensation

We recognize stock-based compensation expenses in accordance with ASC 718 (formerly: SFAS No. 123 (revised 2004), “Share-Based Payment”) which requires the measurement and recognition of compensation

 

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expense based on estimated fair values for all stock-based payment awards made to employees and directors. In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 (“SAB 110”) relating to ASC 718. We applied the provisions of SAB 110 in our adoption of ASC 718.

We determine the fair value of stock-based awards on the dates of grant using the Black-Scholes option-pricing model. The valuation model takes into account the exercise price of the stock option, the fair value of the common stock underlying the stock option as measured on the date of grant and an estimation of the volatility of the common stock underlying the stock option. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method.

We consider many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Actual results, and future changes in estimates, may differ substantially from current estimates. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term.

The fair value of stock options granted to employees and directors for the years ended December 31, 2007, 2008 and 2009 and the six months ended June 30, 2010 was estimated using the weighted average assumptions in the table below. Because our stock was not publicly traded during these periods, the expected volatility was calculated based upon peer public companies in the past one to four years. The expected option term represents the period that stock options are expected to be outstanding and was determined based on the simplified method permitted by SAB 110 as the average of the vesting period and the contractual term. The risk-free interest rate is based on the yield from U.S. Treasury zero- coupon bonds with an equivalent term. We have historically not paid dividends and have no plans to pay dividends in the foreseeable future. Based on an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover page of this prospectus), the intrinsic value of all vested and unvested stock options as of June 30, 2010 was $46.0 million and $14.6 million, respectively.

 

    Year ended December 31,     Six Months
Ended June 30,
    2007     2008     2009     2009    2010
                      (unaudited)

Risk free interest

    4.27   2.46%-5.68   2.23%-3.6   2.88%-3.6%    4.43%-5.33%

Dividend yields

    0   0   0   0%    0%

Volatility

    85   85   80%-85   85%    80%

Expected term (in years)

    6.08      5-10      4.8-7      5-7    5-7

Weighted average fair value at grant date

  $ 5.62      $6.82      $6.54      $5.11    $13.10

Information on stock options granted to employees, directors, consultants and advisors since January 1, 2007 is set forth in the following table:

 

Grant Date

   Options
Granted
   Exercise
Price

October 9, 2007

   2,270,136    $ 5.65

March 13, 2008

   820,328      7.05

April 7, 2008

   50,000      7.05

November 21, 2008

   396,230      6.32

February 11, 2009

   727,950      5.11

April 1, 2009

   600      5.11

July 28, 2009

   259,200      5.11

November 11, 2009

   476,800      8.75

March 2, 2010

   93,500      13.10

March 22, 2010

   16,000      13.10

July 8, 2010

   295,000      16.88

July 16, 2010

   30,000      16.88

 

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Significant Factors, Assumptions and Methodologies Used in Determining the Fair Value of our Capital Stock. In order to determine the fair value of our common stock with respect to most grants of stock options during the periods ended December 31, 2007, 2008, 2009 and March 31, 2010, we engaged BDO Ziv Haft Consulting & Management Ltd., or BDO, an independent valuation firm.

The analyses that BDO performed provided an estimate of the fair value of a minority interest in our common equity as of the valuation dates. First, BDO determined the present value of the total stockholders’ equity, and then BDO allocated this value to the different stockholders, with regard to the preference of each stock.

In November 2007, we obtained from BDO a valuation report regarding the fair value of our common stock as of June 30, 2007. In estimating the fair value of our common stock, BDO considered that we were in the fifth stage of development as set forth in the AICPA Practice Aid, Valuation of Privately-held Company Securities Issued as Compensation (the “AICPA Practice Aid”), characterized by financial success such as operating profitability and positive cash flows. A liquidity event of some sort is also typical to this stage. Given this stage of development, BDO used the income approach to determine that our total company value was $94.2 million as of June 30, 2007. BDO also took into account the implied valuation from our April 2007 financing. Our revenue forecasts assumed an annual growth rate that was initially consistent with the increase in revenues experienced between the years 2005 and 2007, and assumed that such growth rate would decline over time until reaching the market’s annual growth. Our forecasts at that time also assumed that we would continue to make improvements to our gross margins. The assumptions underlying the forecasts were consistent with our business plan.

BDO used the option-pricing method to allocate our total company value of $94.2 million between our preferred and common stock. The option-pricing method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock. The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. Under this method, the common stock has value only if the funds available for distribution to stockholders exceed the value of the liquidation preference at the time of a liquidity event (for example, merger or sale), assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. Accordingly, BDO first derived the following ranges of company values: (i) the range of values in which the preferred stockholders would receive proceeds and common stockholders would not, (ii) the range of values in which proceeds to common stockholders increase and the proceeds to the preferred stockholders remain constant because at that range, BDO assumed that the preferred stockholders would choose not to convert and therefore would not participate in the additional proceeds generated in that range and (iii) the range of values in which the proceeds to the preferred and common stockholders increase. After deriving these different ranges of values, BDO determined the value of each segment using the Black-Scholes pricing model, including a maturity assumption of three years from June 30, 2007, a volatility assumption based on the volatility of peer public companies, and an assumed risk-free rate based on a three-year U.S. treasury bond. The discount rate was determined with reference to our weighted average cost of capital (“WACC”) of 25.0%. According to BDO, such a discount rate reflects the stage of the company and the risks associated with achieving our forecasts. If a different discount rate had been used, the valuation would have been different. During the third quarter of 2007, our management determined that our overall value had not changed since the valuation of our common stock as of June 30, 2007, and accordingly there was no need to obtain an updated independent valuation for our common stock. It was management’s belief that the estimated fair value of our common stock during the third quarter of 2007 remained constant based on our results of operations. In particular, actual revenues in the third quarter of 2007 were flat with the second quarter of 2007. As a result, based on the determination of management, our board of directors continued to use $5.65 as the exercise price of our common stock for the option grants made on October 7, 2007.

After exploring various strategic opportunities in May 2007, we began seriously considering the possibility of an initial public offering in November 2007. Following the commencement of an initial public offering process in January 2008, we determined that the possibility of such an offering or other liquidity event had increased.

 

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In February 2008, we engaged BDO to perform a contemporaneous valuation of our common stock due to the commencement of an initial public offering process. In estimating the fair value of our common stock as of February 29, 2008, BDO considered that we had progressed from the fifth to the sixth stage of development as set forth in the AICPA Practice Aid, typically characterized by financial history of profitable operations or generation of positive cash flows. An initial public offering could also occur during this stage. Given this stage of development, BDO used the weighted-probability method approach based on four possible future scenarios: initial public offering (“IPO”), merger or sale, dissolution or remaining a private company. Based on our assessment of our business and prospects, BDO assigned a probability of 30% to an IPO, 20% to a merger or sale, 10% to dissolution and 40% to remaining a private company. The probability of an IPO at this time remained relatively low due to global economic dynamics and the early stage of valuation discussions with the underwriters. Our revenue forecasts assumed an annual growth rate that was initially consistent with the increase in revenues we experienced in the years 2006 and 2007, and assumed that such growth rate would decline over time until reaching the market’s annual growth. Our forecasts also assumed that our gross margins would decline somewhat after 2008. Following this analysis, BDO discounted to present value the weighted company values of each scenario to determine our total value. BDO then determined the value of our common stock, based on the economic impact of the conversion rights and liquidation preferences of our preferred shares. For each scenario, the fair value of the common stock was calculated by deducting the present value allocated to company’s debt to the preferred stockholders from the present value of the company under such scenario. Under the IPO scenario, a value of zero was allocated to the present value of the debt to the preferred stockholders, because the liquidation preference amount per share to be accrued as of the date of the valuation was lower than the estimated IPO value. As a result, the valuation assumes, as do our pro forma equity calculations (see Note 8 to our consolidated financial statements included in this prospectus), that those shares of preferred stock will be converted into common stock. Under the merger or sale scenario, a value of zero was allocated to the present value of the debt to the preferred stockholders, based on the assumption that all preferred stockholders would elect to convert their preferred stock, because the liquidation preference amount per preferred share accrued as of the date of the valuation would be lower than the estimated proceeds under the merger or sale scenario. Under the dissolution scenario, the entire present value of the company, which was lower than the accrued liquidation preference amount per share as of the date of the valuation, was allocated to the present value of the debt to preferred stockholders. Under the private company scenario, an amount in cash equal to the liquidation preference at the valuation date was allocated to the present value of the debt to preferred stockholders. Based on the weighted values of these scenarios, BDO estimated that our present value as of February 29, 2008 was $121 million. The discount rate was determined with reference to the company’s WACC of 25.0%, assuming no material change in the risks associated with achieving our forecasts had occurred since the November 2007 valuation. BDO therefore determined that the fair value of our common stock was $7.05 per share as of February 29, 2008.

The increase in valuation as of February 2008 as compared to the June 2007 valuation was principally due to improved management projections which resulted in a higher discounted cash flow valuation in the private company scenario and the increased likelihood and proximity of an IPO. We experienced strong revenue growth in the fourth quarter of 2007 and at the beginning of 2008. Actual revenue in the fourth quarter of 2007 totaled $17.4 million representing an increase of 70% from revenues of $10.3 million in the third quarter of 2007. Fourth quarter growth was reinforced by continued strong revenue growth through the valuation date in the first quarter of 2008.

In March and April 2008, we granted options to purchase 820,328 and 50,000 shares of our common stock, respectively, at an exercise price of $7.05 per share based on the valuation report provided by BDO.

In July 2008, we engaged BDO to perform a valuation of our common stock as of June 30, 2008. Since there was no change in our stage of development, BDO used the same method in estimating the fair value of our common stock as was used for the February 2008 valuation. Based on an assessment of our business and prospects, BDO assigned a probability of 50% to an IPO, 20% to a merger or sale, 10% to dissolution and 20% to remaining a private company. The probability of an IPO at this time increased due to management’s increased focus on completing an IPO and improved financial performances that validated and exceeded our projections.

 

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Based on the weighted values of these scenarios, BDO estimated that our present value as of June 30, 2008 was $217 million. The discount rate was determined with reference to the company’s WACC of 23.9%, assuming the risks associated with achieving our forecasts had decreased since the February 2008 valuation, based on the 20-year bond yield and the expected equity risk premium. BDO therefore determined that the fair value of our common stock was $12.52 per share as of June 30, 2008. We did not grant options based on this valuation.

As a result of the global economic slowdown experienced in late 2008, it was management’s belief that the estimated fair value of our common stock during the second quarter of 2008 was not representative of our present value. We therefore retained BDO in November 2008 to perform a valuation of our common stock as of September 30, 2008. Since there was no change in our stage of development, BDO used the same method in estimating the fair value of our common stock as was used for the June 2008 valuation. Based on an assessment of our business and prospects, BDO assigned a probability of 30% to an IPO, 20% to a merger or sale, 10% to dissolution and 40% to remaining a private company. The probability of an IPO at this time decreased due to the economic slowdown and a decrease in our revenues in comparison to our projections. Based on the weighted values of these scenarios, BDO estimated that our present value as of September 30, 2008 was $116 million. The discount rate was determined with reference to the company’s WACC of 23.9%, assuming the risks associated with achieving our forecasts remained the same since the June 2008 valuation, based on the 20-year bond yield and the expected equity risk premium. BDO therefore determined that the fair value of our common stock was $6.32 per share as of September 30, 2008.

In November 2008, we granted options to purchase 396,230 shares of our common stock at an exercise price of $6.32 per share, based on the valuation report provided by BDO.

In February 2009, we engaged BDO to perform a valuation of our common stock as of December 31, 2008. Since there was no change in our stage of development, BDO used the same method in estimating the fair value of our common stock as was used for the September 2008 valuation. There was no change to the assessment of our business and prospects; therefore BDO assigned the same probabilities used in September valuation. Based on the weighted values of these scenarios, BDO estimated that our present value as of December 31, 2008 was $97 million. The discount rate was determined with reference to the company’s WACC of 23.9%, assuming the risks associated with achieving our forecasts remained the same since the November 2008 valuation, based on the 20-year bond yield and the expected equity risk premium. BDO therefore determined that the fair value of our common stock was $5.11 per share as of December 31, 2008.

The decrease in valuation as of December 2008 as compared to the September 2008 valuation was principally due to a decrease in management projections regarding the expected value and likelihood of an IPO and a merger or sale. We experienced a revenue decline in the fourth quarter of 2008 and at the beginning of 2009. Actual revenue in the fourth quarter of 2008 totaled $16.4 million representing a decrease of 6% from revenues of $17.4 million in the fourth quarter of 2007. The fourth quarter revenue decline was followed by a continued decline in revenues through the valuation date in the first quarter of 2009. Our projections, on which BDO based their discounted cash flow estimations, were consistent with the economic slowdown and our results which were lower than 2008 and therefore presented a lower value for the company.

In February, April and July 2009, we granted options to purchase 727,950, 600 and 259,200 shares of our common stock, respectively, at an exercise price of $5.11 per share, which was based on the valuation report provided by BDO referred to above.

During the second and third quarter of 2009, our management determined that our overall value had not changed since the valuation of our common stock as of December 31, 2008, and accordingly there was no need to obtain an updated independent valuation for our common stock. It was management’s belief that the estimated fair value of our common stock during the second and third quarter of 2009 remained constant based on our results of operations. As a result, based on the determination of management, our board of directors continued to use $5.11 as the exercise price of our common stock for the option grants made in April and July 2009.

 

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In October 2009, we engaged BDO to perform a valuation of our common stock as of August 31, 2009. Since there was no change in our stage of development, BDO used the same method in estimating the fair value of our common stock as was used for the December 2008 valuation. Based on our assessment of our business and prospects, BDO assigned the same probabilities used in the December valuation. Based on the weighted values of these scenarios, BDO estimated that our present value as of August 31, 2009 was $118 million. The discount rate was determined with reference to the company’s WACC of 22.0%, based on the 20-year bond yield and the expected equity risk premium. The decrease in the discount rate reflected, in BDO’s opinion, the mix of an improvement in general market conditions and the stability of our financial results compared to those of traded companies. BDO therefore determined that the fair value of our common stock was $6.53 per share as of August 31, 2009.

The increase in valuation as of August 31, 2009 as compared to the December 2008 valuation (which reflected, based on management’s belief, the valuation as of April 2009 as well), was principally due to improved management projections. This resulted in a higher discounted cash flow valuation in the private company scenario and the increased estimated value of an IPO or merger or sale scenarios. The decrease in the discount rate BDO used in this valuation as compared to the discount rate BDO used in the December 2008 valuation also contributed to the increase in valuation. Based on the August 31, 2009 valuation, it was management’s belief that it was reasonable to assume our overall value had increased during the end of the second quarter, and as a result we recognized compensation expenses based on a fair value of our common stock of $6.53 per share.

We experienced strong revenue growth beginning in September 2009. Actual revenue in September and October 2009 totaled $6.5 million and $6.4 million, respectively, representing an increase of 21% and 26% from revenues of $5.4 million and $5.1 million in September and October, 2008, respectively.

On November 11, 2009, we granted options to purchase 476,800 shares of our common stock. The strong revenue growth that began in September continued through the grant date. Actual revenue in the fourth quarter of 2009 totaled $22.4 million, representing an increase of 37% from revenues of $16.4 million in the fourth quarter of 2008. Considering the strong results we experienced in late 2009, it was management’s belief that the estimated fair value of our common stock as of August 31, 2009 was no longer representative of our present value in connection with the November grant. For the November grant, we estimated the fair value of our common stock without the use of an independent expert, and assigned a probability of 40% to an IPO, 30% to a merger or sale, 10% to dissolution and 20% to remaining a private company. Considering the strong revenue experiences in late 2009, we also increased the value estimated for each scenario. Based on our valuation, we determined that the fair value of our common stock was $8.75 per share as of October 31, 2009. The options we granted on November 11, 2009 were at an exercise price of $8.75 per share based on the internal valuation.

We started contemplating the possibility of an initial public offering in December 2009 and we determined that the increased possibility of such an offering or other liquidity event meant that our business had advanced and that it was appropriate to reassess our valuation. We engaged BDO in December 2009 to perform a valuation of our common stock as of November 30, 2009. Since that there was no change in our stage of development, BDO used the same method in estimating the fair value of our common stock as was used for the August 2009 valuation. Based on our assessment of our business and prospects, BDO assigned a probability of 45% to an IPO, 25% to a merger or sale, 10% to dissolution and 20% to remaining a private company. The probability of an IPO at this time increased due to management’s increased focus on completing an IPO and improved financial performances that validated and exceeded our projections. The discount rate was determined with reference to the company’s WACC of 22.0%, assuming the risks associated with achieving our forecasts had decreased since the August 2009 valuation, based on the 20-year bond yield and the expected equity risk premium. BDO determined the discount rate remained the same since although there was an overall improvement in the global economy and specific improvement in the market of peer public companies since the previous valuation in November 2009, BDO believed there was still uncertainty enveloping the global markets which increased the risks associated with achieving our forecasts. Based on the weighted values of these scenarios, BDO estimated that our present value as of November 30, 2009 was $200 million. BDO therefore determined that the fair value of our common stock was $10.70 per share as of November 30, 2009. We have not granted options based on this valuation.

 

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The increase in valuation as of November 30, 2009 as compared to October 31, 2009 was due in part to an increase in the probability of an IPO to 45% (from 40%) and a decrease in the probability of a merger or sale to 25% (from 30%), but resulted principally from an increase in the expected valuation for each scenario. At October 31, 2009, we estimated the expected value of an IPO to be within a range of $250 million to $300 million, but for the November 30, 2009 valuation, this was increased to a range of $300 million to $400 million. At October 31, 2009, we estimated the expected value of a merger or sale to be within a range of $200 million to $250 million, but for the November 30, 2009 valuation, this was increased to a range of $250 million to $300 million. It was management’s belief that it was reasonable to assume our probable value for each scenario had increased due to the improvement in our results since the previous valuation and the overall improvement in the global economy. This improvement was followed by an update of our future projections, which reflected a discounted cash flow value of $200 million at November 30, 2009 compared to $157 million at October 31, 2009. The discounted cash flow value represents the value of the company assuming we remain a private company.

Following commencement of the initial public offering process in January 2010, we determined that the increased possibility of such an offering or other liquidity event meant that our business had advanced and that it was appropriate to reassess our valuation. We retained BDO to conduct such valuation as of January 31, 2010. Since there was no change in our stage of development, BDO used the same method in estimating the fair value of our common stock as was used for the November 2009 valuation. Based on an assessment of our business and prospects, BDO assigned a probability of 50% to an IPO, 20% to a merger or sale, 10% to dissolution and 20% to remaining a private company. Based on the weighted values of these scenarios, BDO estimated that our present value as of January 31, 2010 was $245 million. The discount rate was determined with reference to the company’s WACC of 20.0%, assuming the risks associated with achieving our forecasts has decreased since the November 2009 valuation, based on the 20-year bond yield and the expected equity risk premium. BDO therefore determined that the fair value of our common stock was $13.10 per share as of January 31, 2010.

The increase in valuation as of January 31, 2010 as compared to November 30, 2009 resulted from various factors.

We started contemplating the possibility of an initial public offering in December 2009, followed by discussions we held with multiple potential advisors in December 2009. As a result, the probability of an IPO increased to 50% (from 45% at November 30, 2009) and the probability of a merger or sale decreased to 20% (from 25%). Additionally the expected valuation for each scenario changed. At November 30, 2009, we estimated the expected value of an IPO to be within a range of $300 million to $400 million. For the January 31, 2010 valuation, this was increased to a range of $350 million to $425 million. At November 30, 2009, we estimated the expected value of a merger or sale to be within a range of $250 million to $300 million. For the January 31, 2010 valuation, this was increased to a range of $275 million to $325 million. It was management’s belief that it was reasonable to assume our probable value for each scenario had increased as a result of the improvement in our results in November and December 2009, followed by the strong results we experienced in January 2010. Additionally, our projections as of January 31, 2010 were higher than our projections as of November 30, 2009, resulting from both our financial results for the previous two months and the overall improvement in the global economy. This improvement was reflected in a discounted cash flow value of $245 million at January 31, 2010, compared to $200 million at November 30, 2009.

In addition, for the January 31, 2010 valuation BDO used a discount rate of 20%, which is lower than the discount rate they had used for the previous company valuations. The decrease of the discount rate was based on an overall improvement in the global economy and specific improvement in the internet advertising market.

On March 2, 2010 and March 22, 2010, we granted options to purchase 93,500 shares and 16,000 shares of our common stock, respectively, at an exercise price of $13.10 per share, based on the valuation report provided by BDO.

 

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On July 8, 2010 and July 16, 2010, we granted options to purchase 295,000 shares and 30,000 shares of our common stock, respectively, at an exercise price of $16.88 per share, based on the anticipated public valuation of the Company.

The difference between the fair value of our underlying common stock as of January 31, 2010 and the midpoint of the range set forth on the cover page of this prospectus is explained by our improved performance year-to-date in 2010 compared to our forecast, stronger expectations for future results and a decrease in the discount rate (from 20% to 17%) as compared to January 31, 2010, as well as a liquidity premium for becoming a publicly traded company.

We believe that BDO used reasonable methodologies, approaches and assumptions consistent with the AICPA Practice Aid to determine the fair value of our common stock. Nevertheless, determining the fair value of our common stock requires making complex and subjective judgments. The approach to valuation uses estimations which are consistent with the plans and estimates that we use to manage our business. There is inherent uncertainty in making these estimates. Although it is reasonable to expect that the completion of our initial public offering will add value to our common stock because they will have increased liquidity and marketability, the amount of additional value cannot be measured with absolute precision or certainty.

 

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BUSINESS

We are a leading global provider of digital advertising campaign management solutions to advertising agencies and advertisers. Our goal is to enable advertisers to engage consumers of digital media with more impact and efficiency.

Our integrated campaign management platform, MediaMind, helps advertisers and agencies simplify the complexities of managing their advertising budgets across multiple digital media channels and formats, including online, mobile, rich media, in-stream video, display and search. MediaMind provides our customers with an easy-to-use, end-to-end solution to enhance planning, creative, delivery, measurement and optimization of digital media campaigns. As a result, our customers are able to enhance brand awareness, strengthen communications with their customers, increase website traffic and conversion, and improve online and offline sales. Our solutions are delivered through a scalable technology infrastructure that allows delivery of digital media advertising campaigns of any size.

We are the only major provider of integrated campaign management solutions not committed to, or affiliated with, a particular publisher, agency or agency group, or advertising network. We believe our independence allows us to provide our customers with unbiased insight and analysis regarding the implementation and effectiveness of their digital media campaigns.

In 2009, we delivered campaigns for approximately 7,000 brand advertisers using approximately 3,350 media agencies and creative agencies across approximately 5,150 global web publishers in 55 countries throughout North America, South America, Europe, Asia Pacific, Africa and the Middle East. We derive our revenue from customers who pay fees to create, execute and measure advertising campaigns on our platform. Our revenue has increased from $44.7 million in 2007 to $65.1 million in 2009. Our Adjusted EBITDA, which we define as EBITDA excluding stock-based compensation expense, grew from $9.3 million in 2007 to $16.7 million in 2009 and our net income grew from $7.4 million to $9.8 million during the same period.

Industry Background

Over the last decade, the consumption of media has increasingly moved from traditional media channels, such as television, radio and print media, to digital media channels. Digital media channels offer consumers significant flexibility and choice relative to traditional media channels, and as such, present advertisers with new opportunities to reach a global audience with highly targeted, interactive and measurable advertising campaigns. The transition to digital media also introduces unique challenges and complexities for advertisers, including fragmentation of the audience base and advertising inventory, limited consumer engagement and lack of standardization. The process of planning and executing digital media advertising campaigns differs significantly from the traditional process to which advertisers have grown accustomed. This creates a unique opportunity for an integrated digital advertising campaign management platform to address the underlying complexities and challenges associated with digital media advertising and to enable delivery and management of campaigns with more impact and efficiency.

Media consumption is moving from offline to online

Consumers are increasingly using digital channels for their communication, media intake and shopping needs. Consumers that historically read newspapers or magazines for the latest news now get their news from websites, portals or blogs, and increasingly turn to social networks and other forms of user-generated media for their entertainment and communication needs. Online video, previously a user-generated space, has evolved to serve premium video content, affecting the traditional TV model. Consumers are also accessing the Internet through a variety of entry points, including computers, mobile devices, gaming consoles and web-enabled televisions. The large number of websites visited by consumers, combined with the multiple access points for digital content, has resulted in significant audience fragmentation and is disrupting how advertisers reach and engage consumers.

 

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Advertising budgets are migrating online

Advertisers are allocating a greater portion of their spending online as more consumers use the Internet as a preferred medium for accessing information and purchasing products and services. According to International Data Corporation’s Worldwide Digital Marketplace Model and Forecasts Database, worldwide online advertising spend is expected to grow from $60.5 billion in 2009 to $102.6 billion in 2013. However, the transition of advertising budgets to online media channels has lagged relative to consumer time spent online. Internet advertising represented only 13.9% of the total U.S. advertising market in 2009 according to eMarketer, while 50% of weekly media consumption among U.S. adults is via the Internet according to Forrester Research.

Traditional brand advertisers, such as consumer packaged goods companies, have been slower to transition their budgets online; however, we believe they are increasingly recognizing the unique benefits offered by the Internet and are allocating more of their marketing budgets to digital channels. We expect this trend to accelerate in the future as advertisers can more effectively measure success, standardization improves and innovative advertising formats allow more engaging brand experiences.

New distribution channels and advertising formats continue to emerge

The digital media landscape is rapidly evolving with the introduction of new distribution channels, such as mobile devices and gaming consoles, and new advertising formats, such as online video. Advertising spend on these channels and formats in the United States is projected to increase significantly. For example, according to eMarketer, mobile advertising spend is expected to grow from $416 million in 2009 to $1.6 billion in 2013, a compound annual growth rate of 39.2%, while online video advertising spend is expected to grow during the same period from $1.0 billion to $4.2 billion, a compound annual growth rate of 42.1%. Digital channels and formats provide unique opportunities for advertisers to not only strengthen their engagement with target audiences in innovative ways, but also to create an increasingly dispersed and fragmented user base. Digital media is expected to continue to fragment with the introduction of new devices such as tablet computers and web-connected TV sets. While this fragmentation improves aspects of a consumer’s experience and may allow for improved audience segmentation, we believe it will continue to create substantial challenges for advertisers.

Changes in media planning, buying and delivery

Advertisers have historically relied on external expertise from creative agencies to design their advertising campaigns and from media agencies to plan media and purchase inventory from media publishers across different regions and advertising channels. The traditional media planning, buying and creative design and production processes typically involved limited use of technology and automation and relied on a small number of parties for each campaign. Digital media advertising requires a heavy reliance on sophisticated technologies. It also requires the integration of creative and media buying processes which necessitates a transformation in agencies’ and advertisers’ practices and can be a highly complex and costly endeavor. For example, advertisers seeking to launch a digital media advertising campaign must allocate their spending across multiple advertising formats and channels, select relevant inventory and target audiences, understand the technical capabilities of different publisher websites and platforms and aggregate and analyze massive amounts of data in real-time.

The Challenges of Digital Media Advertising

The core challenges faced by advertisers and advertising agencies in delivering digital advertising campaigns and migrating more of their budgets to digital media include:

Fragmentation. Unlike traditional mass reach media, digital media provides consumers with access to a virtually unlimited array of content targeted to an individual’s unique interests. The Internet also provides consumers with a greater degree of control over when media is consumed, as well as the devices and platforms used. However, the growing availability of media online and the proliferation of emerging digital media formats and channels, such as mobile devices, social networks and other forms of user-generated media, has led to an increasingly fragmented user base.

 

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The diversity of digital media options available to consumers results in advertising inventory with multiple formats, delivery specifications, metrics and targeting capabilities. This variety and lack of standardization creates additional fragmentation and presents a significant challenge for advertisers to effectively reach a broad audience of consumers and optimize their digital media campaigns. Advertisers must also navigate through decentralized workflow processes involving numerous constituencies to deliver an effective campaign.

Consumer engagement. Advertisers are struggling to reach and engage consumers in a digital media environment overloaded with ad messages. Advertising redundancy and ineffective creative content often result in underperforming campaigns that fail to meet advertisers’ goals. When compared to traditional media consumers, digital media consumers have a greater degree of control and interaction with digital content, thereby making it more challenging for advertisers to draw attention to their marketing campaigns. For example, standard display advertisements, which are static by nature, are experiencing an ongoing decline in click-through rates. Additionally, while digital media users increasingly spend more of their online time on social networks, consumer engagement and monetization of advertising inventory on these sites has been challenging for advertisers.

Effective use of data. In order to enhance the overall effectiveness of their online campaigns and determine the optimal allocation of their advertising budgets, advertisers need to integrate, compare and analyze campaign performance data in real-time from multiple sources. Advertisers also require comprehensive and reliable campaign performance data to target consumers with more relevant ads. The abundance of data and discrepancies across different platforms requires significant time and effort to aggregate, process and report data accurately. Many existing systems and technologies deliver and measure only specific types of advertising formats or channels, thereby providing advertisers with limited visibility into and conflicting data about their overall campaign performance. Finally, many third-party technology providers are affiliated with an advertising network or specific publisher website which can lead to advertisers’ concern about the handling of their proprietary data and the neutrality of measurement.

Global campaign management. While the Internet presents an opportunity for advertisers to reach a global audience, advertisers have been challenged by the need to tailor creative content to specific end markets, geographies or user preferences, and to aggregate and compare campaign results on a global basis. With multiple technologies, standards and processes, advertisers are increasingly seeking solutions that will enable them to reach a global audience with localized messaging, provide consistent delivery measurements and analytics and facilitate coordination and collaboration among multiple agencies across different geographies.

The MediaMind Solution

We believe that advertisers and their agency partners seeking to enhance planning, delivery, measurement and optimization of their digital media campaigns need an independent, integrated campaign management platform with robust functionality and scalability. Our MediaMind platform provides an easy-to-use, end-to-end solution to manage digital media campaigns throughout their lifecycle. We have designed MediaMind to benefit each of the key constituencies across the digital media advertising ecosystem as follows:

 

   

advertisers benefit from improved advertising returns due to increased reach, impact, relevancy and measurement of their online campaigns across a variety of channels and formats;

 

   

advertising agencies benefit from an integrated campaign management platform that simplifies the complexity of digital media advertising and enables them to focus on more strategic objectives;

 

   

web publishers benefit from increased demand due to the enhanced value of their advertising inventory; and

 

   

consumers benefit from an improved user experience due to more engaging and targeted advertising.

 

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We believe that our platform addresses the core challenges of digital media advertising in the following ways:

Fragmentation. Our integrated platform simplifies the numerous complexities of managing digital media advertising campaigns across multiple websites, advertising formats and channels with varying publisher-imposed creative content restrictions. Through a single web-based campaign management dashboard, agencies and advertisers can manage campaign creation, delivery, real-time measurement, analysis and optimization while scheduling and monitoring numerous campaigns.

Our open architecture technology, which is designed to accommodate new and emerging digital media channels, enables the placement of ads through multiple formats and media types. The formats we support include a variety of banners, in-stream video ads, full page ads, button links and text links, and the media types we support include rich media and video, static media and text. As a result, our customers benefit from an integrated cross-channel platform that maximizes publisher acceptance and streamlines campaign management, which mitigates fragmentation. Our technology is designed to integrate with other solutions used by our customers, such as planning, reporting, billing and workflow.

Consumer engagement. Our platform facilitates consumer engagement by providing advertisers with the tools to create immersive and interactive experiences for consumers with reduced costs and time to market. Our rich media, video and emerging media capabilities enable advertisers to interact with their target audience more effectively and yield higher engagement, performance and recall rates. Our solutions also facilitate real-time targeting and creative optimization, enabling advertisers to reach specific consumer segments by assigning the best performing and most relevant creative throughout the campaign.

Effective use of data. We believe the measurement, targeting and optimization features of our solutions, combined with our analytics tools, exceed the features of other online advertising solutions. Our platform provides actionable and real-time advertising performance statistics with numerous metrics, such as display time, interaction rate and interaction time. This improves our ability to measure various levels of users’ engagement and brand awareness and enhances our customers’ ability to optimize the performance of their campaigns. Our platform also provides a systematic approach to measuring return on investment, or ROI, which allows advertisers and agencies to compare campaign performance using a consistent methodology across multiple formats, channels and publisher websites. As a result, advertisers are able to allocate their budgets more efficiently and maximize their return.

We are the only major provider of integrated campaign management solutions not committed to, or affiliated with, a particular publisher, agency or agency group, or advertising network. We believe our neutral position has numerous benefits, such as eliminating potential conflicts with advertisers since we do not own or sell any advertising inventory, allowing us to provide unbiased insight and analysis, and ensuring the protection and proper use of our customers’ proprietary data.

Global campaign management. We leverage our presence across multiple geographies and end markets to provide customized and integrated global campaign management solutions. In 2009, we delivered over 27,000 campaigns across approximately 5,150 global web publishers in 55 countries throughout North America, South America, Europe, Asia Pacific, Africa and the Middle East. Our technology platform is accepted and supported by thousands of publishers worldwide, including all of the major portals. Our local sales and support, unique product capabilities and broad publisher acceptance enable us to deliver global or pan-regional advertising campaigns and streamline coordination and collaboration across agencies while providing more efficient localization of campaigns.

 

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Our Strategy

Our goal is to enable advertisers to engage consumers with more impact and efficiency across a variety of digital media formats and channels by expanding our position as a leading global provider of digital advertising campaign management solutions. Key elements of our strategy include:

Growing the share of total digital media advertising managed through our solutions by:

 

   

expanding existing relationships with advertisers and advertising agencies to manage a greater portion of their digital advertising campaigns and transitioning them to use more capabilities of our MediaMind platform;

 

   

accessing additional advertising budgets by establishing new agency relationships and creating partnerships with global advertising agency holding companies, leading digital media publishers and technology companies; and

 

   

increasing our global footprint by expanding into new geographic markets.

Increasing the value and efficiency of our customers’ advertising spend and leveraging our technology expertise by:

 

   

empowering creative innovation and interactivity to maximize user engagement;

 

   

enabling more targeted, efficient and performance-driven campaigns with immediate and actionable analytics;

 

   

investing in emerging digital media formats and channels to create new opportunities for our customers to deliver high impact advertising campaigns to consumers; and

 

   

emphasizing ease-of-use, enabling real-time control and facilitating effective collaboration between advertisers, advertising agencies and publishers throughout the entire campaign management cycle.

Reinforcing the advantages of partnering with an independent provider of campaign management solutions by:

 

   

remaining focused primarily on the needs of advertisers and advertising agencies;

 

   

refraining from owning or selling any advertising inventory;

 

   

protecting our customers’ proprietary data and providing unbiased insights and analytics; and

 

   

extending our open technology architecture to allow for additional customization of our offerings and further integration into our customers’ workflows.

Our Solutions and Services – The MediaMind Platform

Our MediaMind technology platform is used by media buyers, creative agencies and publishers in a shared workflow environment to manage advertising campaigns across multiple digital media channels. Our customers may adopt MediaMind as an end-to-end solution for all their campaigns and across all channels of media in use. Alternatively, customers can select MediaMind to run specific campaigns on a specific channel or publisher, or to use a portion of the services that our solution provides. Our MediaMind tools are easy to use and are designed to seamlessly integrate with other tools used by our customers to facilitate the deployment of advertising campaigns.

MediaMind Capabilities

MediaMind offers shared capabilities for automating and enhancing advertising campaigns throughout their lifecycles, including:

Planning and Trafficking

An effective media plan involves a detailed selection of digital advertising placements and respective budget allocations to meet campaign objectives. The planning process takes into consideration previously accumulated

 

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data about the advertising activities of the specific brand or other brands in the same industry. Trafficking is the process of entering the media plan and the associated creative into the campaign management system and supplying such information to publishers for implementation.

Our platform:

 

   

provides advertisers with relevant historic performance data across different publishers to enable them to leverage prior experience to optimize new campaigns;

 

   

enables our customers to compare campaigns’ specifications and results and assist in the creation of a media plan and campaign strategy, including design, placement and timing of advertisements using our central database of publishers’ mandatory guidelines for ad design;

 

   

analyzes specific media plans and determines the common denominator for creative guidelines so customers can design a campaign for different publishers with different formats; and

 

   

offers multiple options to complete the trafficking process, which involves inputting and editing significant amounts of data across multiple publishers.

Creative Management

We provide creative designers and producers with the tools and services to manage a campaign’s creative development lifecycle, from initial design, to inclusion of interactive features, to adaptation for analytics and ad insertion, and finally, integration with campaign management and ad serving processes. MediaMind offers an integrated tool for creative designers, which is embedded within common development platforms and provides efficiencies during ad production. This tool facilitates collaboration and communication among various teams and experts to promote an innovative, improved consumer experience and brand communication. Additional capabilities include optimal video encoding and a testing and approval workflow.

Delivery and Targeting

MediaMind enables seamless delivery of advertisements to the target audience using several methods:

 

   

Ad serving. Our platform transmits ad content into ad insertions on publisher websites, ensuring a seamless consumer experience. Our network infrastructure delivers ads to the majority of global Internet users while handling a significant load with high performance and quality.

 

   

Targeting. Our tools enable our customers to deliver tailored messages to a specific consumer segment, which increases the relevancy of the advertisement and improves the consumer experience. Our targeting capabilities include the ability to deliver ads based on preference, geography, context, sequence, time of exposure and capabilities of a user’s computer and network connection.

 

   

Optimization. We offer several tools to improve the consumer experience and the ROI of the campaign. These tools enable our customers to test ad performance on defined groups of consumers and adjust campaigns to show the audience the best performing ads in real-time time based on various performance objectives such as consumer engagement or conversions.

Analytics and Monitoring

MediaMind enables clear and comprehensive real-time monitoring and reporting of campaign execution, delivery and performance in multi-channel campaigns to achieve campaign optimization and insights.

 

   

Real-time campaign monitoring. The availability of relevant, real-time information is essential to improving a campaign’s performance. Our campaign monitor tool provides a quick snapshot of key performance indicators, which are available in real-time at 15-minute intervals and enables our customers to quickly adjust their advertising campaigns.

 

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Campaign performance and reporting. Comprehensive campaign performance and delivery data is monitored and stored in our databases. The data monitored includes the status of campaign execution, delivery of ad impressions, duration of ad view, user clicks and advance interactions and post-click and post-view activity on the advertiser website. We offer a broad range of standard account and campaign reports that can be viewed online or scheduled for automatic email delivery quickly and easily. The reports measure:

 

   

Delivery: progress of an impression’s delivery against the plan;

 

   

Frequency: user interaction rates and performance by exposure frequency and reach;

 

   

Engagement: standard and custom interaction rates and duration;

 

   

Creative comparison: relative effectiveness of various creative units across multiple channels and different publisher websites;

 

   

Conversion: post-click and post-view online activities on the advertiser website, conversion rates and conversion value; and

 

   

ROI: effectiveness of the campaign by using pre-defined campaign objectives.

 

   

Flexible reporting formats. Our analytics solutions generate reports and data in multiple forms. We can provide a broad range of formats, including pre-defined reports, summary presentation reports that highlight multiple aspects of campaign performance or custom-built reports tailored to the specific needs of our advertisers and agency partners. We also make campaign data dynamically available to users and offer additional tools that enable the highest level of flexibility in evaluating and presenting campaign data.

Unique Design Aspects

MediaMind is uniquely designed to enable advertisers to deliver campaigns across multiple markets globally or within a specific region, in an easy-to-use manner that can integrate with other tools.

Global campaign management. MediaMind is able to address and support the unique requirements of global or pan-regional campaigns where multiple media agencies and creative agencies can be involved in the campaign process. Our platform enables our customers to:

 

   

allow collaboration between multiple media and creative agencies in the different countries served;

 

   

aggregate and segment campaign data in a variety of ways including regional (region, sub-region, country) and lingual (region, country, language);

 

   

automate the localization process with local languages and local campaign information such as pricing or launch date; and

 

   

gain immediate reach for their global advertising campaigns due to MediaMind’s acceptance by publishers worldwide.

Ease-of-use. MediaMind simplifies control of highly complex campaigns, with hundreds of placements, hundreds of creative versions, and a large number of publishers per campaign. The workflow for delivering such campaigns is complicated and requires a wide variety of campaign management features. Usability has been an important area of focus for us and we continue to invest in our user interface and workflow tools to meet our customers’ evolving needs.

Integration. The MediaMind platform integrates with other tools already used by the advertiser or its agency. MediaMind Application Programming Interfaces (“APIs”) can connect the platform to other services for data sharing, campaign workflow and creative setup, and advertising tools such as search engine marketing services. We offer integration services to utilize these APIs for a tailored workflow according to agency and advertiser requirements.

 

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Formats and Channels

Our solutions enable our customers to use a wide range of digital media channels and formats to maximize reach and optimize engagement with consumers. Digital media channels include a combination of the device through which the ad is delivered and the content in which the ad is delivered. Devices today include personal computers and increasingly mobile devices, and in the future, may include digital out-of-home media and on-demand television. Delivered content includes websites, streaming video, games, instant messaging, web search, applications and downloadable applications or gadgets. Our solutions enable the placement of advertisements through multiple ad formats, such as a variety of banners, in-stream video ads, full page ads, including ads that float or overlap web pages, button links and text links, using a variety of media types, including interactive animation, video, static media and text.

The formats, channels and advertising functionalities supported by MediaMind include:

Rich Media Advertising

Rich media advertising typically includes more extensive graphics, animation and interactivity, and in some cases, audio and video within the advertisement. Unlike standard display advertisements, which are static in their design, rich media advertisements often enable users to interact with the banner without leaving the page on which it appears. Our rich media advertising options enable our customers to create, deliver, and manage the rich media portion of their digital campaigns. When creating and producing ads, our customers can choose from a wide range of interactive advertising formats to engage their audience.

Video Advertising

Video advertising includes in-banner video formats displayed within rich media banners, as well as, in-stream video formats displayed within or alongside video content on a publisher website. Our video advertising options enable our customers to easily integrate video components across different advertising formats and include a set of tools designed to maximize the performance of the video ads. These tools include easy-to-use drag and drop templates, different delivery options, automatic encoding and optimization of quality of video per user bandwidth capabilities.

Standard Display Advertising

We offer a complete solution for managing standard display banner campaigns. A low-cost, high-volume marketing tool, standard display represents the majority of banners viewed online and is often combined with conversion tags placed on advertisers’ web pages. Our solution offers one of the most advanced suites of tools for setup, optimization and analysis of standard display campaigns.

Search Engine Advertising

Our search engine advertising product, which we launched in 2008, analyzes the performance of search engine marketing campaigns, integrated with display campaigns by the same advertisers. This combination allows marketers to understand a consumer’s path of interactions and analyze the mutual impact of search and display advertising. Our solutions offer our customers a holistic view of their campaigns across channels, offering a range of advertising metrics and easy-to-use reports, and our product is seamlessly compatible with multiple search engine marketing tools and does not require the customer to use a specific product.

Mobile Advertising

Our mobile advertising product provides our customers with the ability to manage mobile ad campaigns with all the benefits of third-party ad serving and the MediaMind integrated platform. The solution delivers, optimizes and tracks ads on multiple mobile sites and networks and across multiple mobile devices. It also provides advanced, independent analytics on campaign delivery, performance and receiving devices.

 

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Dynamic Creative Optimization

We offer Smart Versioning, a powerful tool for improving ad relevancy by dynamically changing ad messaging in real-time. Our Smart Versioning solution automates the personalization of ads, the localization to different languages and the dynamic updating of advertisement messaging.

Customized Services

We offer our customers a range of optional customized professional services based on their specific needs. These services include trafficking, creative production and quality assurance, research and analysis, custom reporting and data integration.

Customer Support

We believe that superior customer support is critical to retaining and expanding our customer base. Our customer support program assists our customers in the use of our services and identifies, analyzes and solves problems or issues with our services. Our customer support group is available to customers by telephone or e-mail or through our website 24 hours per day, seven days per week during the campaign period. We offer specialized support for our different customer types – media, creative and publisher. We also operate an advanced support group for more complex support requests in numerous languages.

Technology, Infrastructure and Research and Development

Technology and Infrastructure

We have developed a proprietary set of modules and technologies that collectively serve as the foundation for our integrated campaign management platform. The modular design of our solutions allows for high scalability, availability and extensibility of our platform while enabling seamless integration with our customers’ existing technologies and systems. The following modules enable the delivery of a variety of features within our solutions:

 

   

Ad serving and targeting. Our ad serving and targeting technology is based on a set of proprietary server side applications and databases that serve ads based on predefined or customized configurations that can be changed in real-time. Our servers include modules for creative optimization, creative rotation, behavioral targeting, ad delivery and filtering. Each of our servers is designed to ensure high availability and performance.

 

   

Ad display. Our ad display module includes technologies for displaying ads on a variety of consumer devices, such as PC web browsers and mobile phones. The display modules use proprietary code for detecting user display capabilities and present ads based on the specific configuration of each user. Our ad display modules enable targeting and optimization of ads.

 

   

Analytics. Our analytics module has a robust and scalable architecture that enables high-speed processing of large amounts of data for reporting purposes and online campaign optimization. Our platform captures, processes and aggregates campaign performance data in an efficient manner that allows for real-time campaign monitoring and optimization. Our analytics module is designed to allow third-party analytics tools to interface with our systems. We are certified by the Media Rating Council as compliant with measurement guidelines defined by the Internet Advertising Bureau.

 

   

Web-based administrative interface. Our technology includes an advanced interface layer for performing the full range of ad campaign management administrative operations. The interface includes a proprietary web user interface infrastructure that enables the rapid creation and customization of web base management applications. The infrastructure complies with World Wide Web Consortium standards and supports all major web browser applications. The administrative interface is connected to our other architectural modules in a manner that allows real-time updates to campaign configuration. The administrative interface is accessed daily by thousands of media agencies, creative agencies and publishers, and is designed for high availability and global accessibility.

 

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Creative authoring. We have developed a rich media creative authoring application that is integrated into the development programs used by our creative agency customers. This application provides easy-to-use add-on components that enrich the ad creative, as well as a full workflow with connectivity to our backend systems to allow uploading, previewing and testing of new ads created.

 

   

APIs. Some of our developed modules include application programming interfaces, or APIs, that allow extensibility and integration with other systems. MediaMind has four types of APIs, including a media plan setup and trafficking API, a creative setup API, a data feed API and an ad display API.

 

   

Distributed global network. We have developed a backend system that enables the deployment of our ad servers in different locations around the globe with full real-time synchronization of data. The backend system is connected to our central databases and synchronizes every data change to a local data cache that exists in every location of our global network. This system allows real-time control over global campaign execution without compromising performance or redundancy.

We have programmed the majority of our applications using industry-standard software programming languages, such as C++ and .NET, to maximize performance and scalability while allowing for easy integration with other systems and technologies and reducing our overall time to market.

Our hardware consists primarily of Intel-based servers from various vendors, networked behind firewalls and networking load balancers in eight different third-party data centers in New York, New Jersey, Los Angeles, Amsterdam (2), Tokyo, Beijing and Singapore. Our servers, storage and networking hardware are clustered to ensure high availability, redundancy and scalability. The modular design of our systems allows us to grow capacity incrementally by adding servers and network equipment as necessary with little additional cost.

Our systems are monitored 24 hours a day, seven days a week, 365 days a year using proprietary and non-proprietary monitoring systems and are managed by highly experienced teams of system and network technicians and engineers. In 2009, we maintained uptime on our systems of over 99.9%.

Research and Development

Our research and development center is based in Israel. The focus of our research and development activities is to enhance our existing products and develop new products to meet our customers’ changing digital marketing needs. Our research and development team has expertise in database programming, high load server, web application, browser, desktop, gaming and mobile technologies. Most of our engineers have been with us for many years and have contributed significantly to building the foundations of our architecture.

Customers

Our campaign management solutions and services are used by media agencies, creative agencies and publishers who collaborate with advertisers to deliver better ad campaign results. Online media campaigns are generally managed by an advertising agency for an advertiser. We are generally hired and paid by the media agency to manage the online campaign and coordinate with the media agency, the creative agency and the publishers to deliver the ad.

While we generally are paid by agencies, in some situations publishers, advertisers, or other constituents decide to retain us. For instance, publishers may opt to sponsor our fees and bundle them with the media fees that they charge to the agency and advertiser.

We provide services to all relevant parties, and we serve a diversified base consisting of a great majority of the online advertising industry in all key markets. In 2009, we served:

 

   

approximately 3,350 media agencies and creative agencies worldwide, including Mediacom, Mindshare, ZenithOptimedia, OMD, Zed Media, MEC and Media Contacts;

 

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over 5,150 global web publishers who are MediaMind-enabled, including Yahoo!, MSN, MySpace, AOL, Real Networks and Kelley Blue Book; and

 

   

nearly 7,000 brand advertisers in every major product vertical, including Nike, Sony, Toyota, Ford, McDonalds, Vodafone and MasterCard.

Our largest customer is Microsoft. We derive our revenues related to Microsoft, which totaled approximately 22%, 28% and 19% of our total revenues for fiscal 2009, 2008 and 2007, respectively, in two primary ways. First, we are engaged by Microsoft’s internal advertising group to develop innovative custom products for specific campaigns and for global campaign delivery. This accounted for $8.5 million, or 13%, of our revenues in 2009.

We also provide ad-serving and rich media services to advertising agency and advertiser customers that advertise on Microsoft online properties, which accounted for $5.9 million, or 9%, of our revenues in 2009. In this case, we are selected by the advertising agency or advertiser customer and not by Microsoft, although the fee for our services is usually paid to us by Microsoft as publisher.

We derive an increasing portion of our revenues directly from agencies and customers who pay us directly for serving ads on Microsoft online properties which revenues are not included in the figures above. See “Risk Factors—The loss of Microsoft or another major customer or a reduction in any such customer’s Internet advertising or marketing budget could significantly reduce our revenue and profitability.”

No other customer accounted for more than 10% of our revenues in 2007, 2008 or 2009.

Sales and Marketing

We sell our offerings primarily through a direct sales force or through third-party selling agents that employ a direct sales force. The MediaMind sales organization consists of local sales teams, including sales managers and sales engineers, who cover agencies and advertisers in an effort to increase their awareness and utilization of our solutions and services.

In 2009, we delivered campaigns in 55 countries. Our sales and services organization is globally organized and our offices and partners are coordinated and supported through four regional offices covering North America, EMEA, Asia Pacific, and Latin America. We believe this is an important advantage which allows us to offer global advertisers a consistent pan-regional service.

We sell directly in countries including Argentina, Australia, Austria, Brazil, Canada, Colombia, Denmark, Finland, France, Germany, Japan (where we also sell through a local selling agent), Mexico, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, the United States and Venezuela. We are transitioning to direct sales in China and Taiwan.

We sell through local selling agents in countries and regions that include Belgium, Dubai, Greece, Hong Kong, India, Indonesia, Israel, Italy, Japan, Korea, Malaysia, the Netherlands, Pakistan, the Philippines, Poland, Romania, Russia, Singapore, South Africa, Thailand and Turkey. We typically maintain a long-term, strategic relationship with our local selling agents. Our agreements are typically at least one year in term, with automatic renewals in most cases, unless one party provides the other with prior written notice or if we and the local selling agent are unable to agree upon sales targets. The agreements generally provide our agents with the exclusive right to promote us in a certain region and are generally terminable only for cause or if the local selling agent does not meet the agreed upon sales targets. We also agree as to provisions regarding non-competition, non-disclosure and the protection of our intellectual property.

Our client services organization assumes responsibility and account management for active relationships with clients, and handles management of campaigns and ongoing adoption of our solutions. The client services organization includes specialist representatives for our different categories of clients, including media agencies, creative agencies and publishers.

 

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Our business development team supports our sales efforts by developing strategic relationships with agency holding groups, key publishers and media companies, as well as technology partners.

Our marketing efforts are focused on enhancing the MediaMind brand, thought leadership research, lead generation, sales support and product marketing. We support these objectives with activities that include public relations, industry events, advertising, social media, web sites, blogs and research publications.

Competition

The markets in which we operate are rapidly evolving and highly competitive. We expect this competitive environment to continue. We believe that the principal competitive factors affecting the market for digital advertising services and tools are existing strategic relationships with customers and vendors globally; ease-of- use, integration and customization; innovation; technology; quality and breadth of service, including local language support; data analysis; price and independence.

With respect to these significant competitive factors, we believe that our solutions and services are stronger than those of our competitors in the areas of ease-of-use, integration and customization; innovation; technology; quality and breadth of service; data analysis and independence. For example, we are the only provider offering real-time monitoring capabilities and additional unique custom analytics tools that allow us to measure various levels of users’ engagement and brand awareness. We have an advantage that many of our competitors lack because our technology platform is accepted and supported by thousands of publishers worldwide, including the major portals, and we are able to customize our services and solutions to meet our customers’ specific competitive needs. In addition, we believe that our integrated platform is a significant advantage when compared to some of our competitors who only offer point solutions.

We compete against other integrated campaign management and ad serving providers, stand-alone rich media companies, and channel-specific niche providers. Our main competitors in the campaign management and ad serving category are DoubleClick (which was acquired by Google in March 2008), Atlas (which was acquired by Microsoft in May 2007) and MediaPlex, a division of ValueClick. Our main competitors in the stand-alone rich media category are niche players, such as PointRoll (which is owned by Gannett), Eyewonder (which was acquired by Limelight Networks in December 2009), Unicast (which is owned by DG FastChannel) and FlashTalking. Google and Microsoft have significantly greater name recognition and greater financial, technical and marketing resources than we do. In addition, many of our other competitors have longer operating histories, greater name recognition, larger client bases or greater financial, technical and marketing resources than we do. We believe that we maintain a competitive position in the markets in which we operate.

The consolidation of some of our competitors into larger publishing organizations with increased resources is a relatively recent trend in the industry. The effects of such acquisitions on the market are still unclear. We believe that our independent position in the industry is one of our competitive advantages, and see the consolidation trend as an opportunity to offer agnostic, independent solutions that support multiple channels, formats and publishers equally and focus on the needs of advertisers.

Intellectual Property

Our intellectual property rights are important to our business. We believe that the complexity of our products and the know-how incorporated in them makes it difficult to copy them or replicate their features. We rely on a combination of confidentiality clauses, copyrights and, to a lesser extent, patents and trademarks to protect our intellectual property and know-how.

To protect our know-how and trade secrets, we customarily require our employees, customers, and third-party collaborators to execute confidentiality agreements or otherwise agree to keep our proprietary information confidential when their relationship with us begins. Typically, our employment contracts also include clauses

 

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requiring our employees to assign to us all inventions and intellectual property rights they develop in the course of their employment and agree not to disclose our confidential information. Because software is stored electronically and thus is highly portable, we attempt to reduce the portability of our software by physically protecting our servers through the use of closed networks and with physical security systems which prevent their external access. We also seek to minimize disclosure of our source code to customers or other third parties.

The online advertising industry is characterized by ongoing product changes resulting from new technological developments, performance improvements, and decreasing costs. We believe that our future growth depends to a large extent on our ability to profoundly understand our clients and their needs and to be an innovator in the development and application of technology. As we develop next generation products, we intend to pursue patent and other intellectual property rights protection, when practical, for our core technologies. As we continue to move into new markets, we will evaluate how best to protect our technologies in those markets.

We have a limited patent portfolio. We currently have two issued U.S. patents and six pending U.S. patent applications. We also have one registered Israeli patent and one pending Israeli patent application. We cannot be certain that patents will be issued as a result of the patent applications we have filed.

Although we have no registered trademarks, we have three trademark applications pending.

Employees

As of June 30, 2010, we employed approximately 348 employees. None of our employees is represented by unions. We consider our relationship with our employees to be good and have not experienced significant interruptions of operations due to labor disagreements.

Facilities

Our headquarters are in New York, New York, where we currently lease approximately 11,000 square feet under a lease expiring in January 2015. We also lease office space in Ra’anana, Israel; London, England; Chicago, Illinois; Los Angeles, California; San Francisco, California; Paris, France; Sydney, Australia; Barcelona, Spain; Madrid, Spain; Hamburg, Germany; Sao Paulo, Brazil; Mexico City, Mexico and Tokyo, Japan under leases expiring at various times between July 2010 and August 2015. We believe that our properties are in good operating condition and adequately serve our current business operations. We anticipate that suitable additional or alternative space, including those under lease options, will be available at commercially reasonable terms for future expansion.

Legal Proceedings

From time to time we are a party to various litigation matters incidental to the conduct of our business. There is no pending or threatened legal proceeding to which we are a party that, in our opinion, is likely to have a material adverse effect on our future financial results.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding the executive officers and directors of MediaMind, as of the date of this prospectus:

 

Name

   Age   

Position

Gal Trifon

   41    Chief Executive Officer, President and Director

Ofer Zadikario

   37    Chief Solutions Officer

Sarit Firon

   43    Chief Financial Officer

Andrew Bloom

   40    Vice President, Strategic Business Development

Joe Girling

   47    Vice President, Global Sales

Amit Rahav

   40    Vice President, Marketing

Eli Barkat

   46    Director

Guy Gamzu

   44    Director

Michael J. Kelly

   53    Director

Timothy I. Maudlin

   59    Director

Deven Parekh

   41    Director

James Warner

   57    Director

Gal Trifon has served as President, Chief Executive Officer and director since August 2001. From January 2002 through January 2008 and since November 2008, Mr. Trifon has served as the Chairman of our Board of Directors. Mr. Trifon is one of our co-founders and was the original technology architect of the MediaMind Rich Media Platform. From December 2000 to June 2001, Mr. Trifon served as Vice President of Business Development and from September 1999 to December 2000 as Vice President for Research and Development. Prior to co-founding MediaMind, Mr. Trifon served as research and development team manager in VCON, a provider of video, audio and data conferencing solutions, from 1996 to 1999. Mr. Trifon holds a B.Sc. in Computer Science and Economics from Tel Aviv University, Israel. Mr. Trifon has extensive experience in business development and in product research and development, and has strong skills in technology sector management, technology design and vision and strategic planning.

Ofer Zadikario has served as Chief Solutions Officer since October 2007. Mr. Zadikario is one of our co-founders and the main architect of MediaMind’s original Rich Media Platform. From August 2001 to October 2007, Mr. Zadikario served as Vice President of Research and Development and from September 2001 to April 2008 served as one of our directors. Prior to co-founding MediaMind, Mr. Zadikario served as an information systems engineer developing decision support systems for Intel from 1997 to September 1999. Mr. Zadikario holds a B.Sc. in Information Systems Engineering from Ben-Gurion University of the Negev, Israel.

Sarit Firon has served as Chief Financial Officer since October 2007. Prior to joining us, Ms. Firon served as Chief Financial Officer and Vice President of Finance of Olive Software, a provider of digital publishing solutions, from May 2005 to October 2007. From January 2000 to October 2004, Ms. Firon served as the Chief Financial Officer of P-Cube, a provider of IP service control solutions (which was acquired by Cisco Systems). From January 1995 to December 1999, Ms. Firon served as the Chief Financial Officer of RADCOM (NASDAQ: RDCM), a provider of probe-based network monitoring solutions. From November 1991 to December 1994, Ms. Firon served as a senior auditor with Kesselman and Kesselman, a member of PricewaterhouseCoopers. From October 2000 to December 2006, Ms. Firon served as a director and a member of the audit committee of Metalink (NASDAQ: MTLK), a global provider and developer of high performance wireline and wireless broadband communication silicon solutions for telecommunication, networking and home broadband equipment makers. Ms. Firon holds a B.A. in Accounting and Economics from Tel-Aviv University, Israel, and is a Certified Public Accountant.

 

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Andrew Bloom has served as Vice President for Strategic Business Development since August 2009. Prior to joining MediaMind, Mr. Bloom served as Vice President of Agency Sales and Partner Development at Spot Runner, a technology company developing next generation TV advertising platforms, from May 2006 to July 2009. From March 2002 to April 2006, Mr. Bloom served as Director of Business Development at Getty Images, a leading global digital media business. From December 1999 to October 2001, Mr. Bloom served as a senior associate at the Accelerator Group, a New York-based management and investment company. From September 1997 to December 1999, Mr. Bloom worked as a corporate lawyer at the law firm of Davis Polk & Wardwell LLP. Prior to that Mr. Bloom started his career as a corporate lawyer at Slaughter and May where he worked from September 1993 to August 1997. Mr. Bloom holds a B.A. and an M.A. in law from Cambridge University in England.

Joe Girling has served as Vice President of Global Sales since December 2008, and prior to that served as General Manager of International Operations since September 2006. Prior to joining us, Mr. Girling served as a Regional Manager, Central and East Europe, Africa and the Middle East for Adobe Systems from September 2000 to June 2006. From 1996 to 2000, Mr. Girling was U.K. Corporate Sales Director for Adobe Systems. From 1993 to 1996, Mr. Girling was Region Sales Manager, Western Europe for Frame Technology. Mr. Girling holds an HND in Production Engineering from Kingston University, U.K.

Amit Rahav has served as Vice President for Marketing since January 2007. Prior to joining us, Mr. Rahav served as Vice President for Marketing at Orbotech during 2006. From 2005 to 2006, Mr. Rahav served as Vice President of Marketing of Commil Ltd. From 2004 to 2005, Mr. Rahav served as Vice President of Marketing at Emblaze Mobile. From 2000 to 2004, Mr. Rahav served as Vice President for Marketing of MessageVine. From 1991 to 2000, Mr. Rahav served in various marketing roles at BMC Software, including most recently as Director of Marketing. Mr. Rahav holds an LL.B. from Tel-Aviv University, Israel.

Eli Barkat has served as a director since April 2007. Mr. Barkat was nominated as a director by Sycamore Technologies Ventures L.P. (“Sycamore”) based on a stockholders’ agreement that will terminate upon the closing of this offering. In 1988, Mr. Barkat co-founded BRM Group (formerly BRM Technologies), which developed an anti-virus technology that was sold to Symantec in 1992. Following the sale, Mr. Barkat was involved in turning BRM Group into an incubator venture firm that invested in several internet infrastructure and software companies. In 2000, BRM Capital I was founded and Mr. Barkat held an advisory position there from 2000 to 2003. In January 2004, Mr. Barkat formally rejoined BRM Capital, assuming the position of Managing Partner. Mr. Barkat co-founded BackWeb in 1995 and served as Chief Executive Officer from 1996 to 2004 and as Chairman of BackWeb from 1996 to 2008. Today, BRM Group is a privately-held holding company that invests in hi-tech, financial markets and established industries. Mr. Barkat currently serves as Chief Executive Officer and Chairman of BRM Group, Chairman of Pudding Media and as a director of GigaSpaces, SupportSpace, Pando and Dash-Apex Holdings. Mr. Barkat holds a B.Sc. in Computer Science and Mathematics from the Hebrew University of Jerusalem, Israel. Mr. Barkat has extensive experience in the technology sector and capital markets, and has strong skills in management and governance.

Guy Gamzu has served as a director since January 2000. In 1998, Mr. Gamzu founded Cubit Investments, a privately owned investment company, specializing in early stage venture finance. Mr. Gamzu has served as Cubit’s Managing Director since inception. Mr. Gamzu currently serves as Chairman of Cubit and as a director of Sycamore, Eyeclick, Tradonomi, Mirtemis and MarketGuru Inc. Mr. Gamzu holds a B.S. in Business Studies, Marketing and Finance from City University Business School in London, U.K. Mr. Gamzu has extensive experience in the venture capital and technology sectors and has strong skills in management and governance.

Michael J. Kelly has served as a director since February 2008. Mr. Kelly has served as President and Chief Executive Officer of The Weather Channel Companies (TWCC) since July 2009. Mr. Kelly was President of AOL Media Networks from February 2004 to October 2007. From September 2002 to February 2004, Mr. Kelly was the President of Global Marketing at Time Warner. From March 2000 to September 2002, Mr. Kelly served as the Chief Executive Officer of America Town Network, which he founded. From 1983 to 2000, Mr. Kelly held

 

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various executive positions at Time, Inc., and performed management assignments at Fortune magazine and Entertainment Weekly. From 1996 to 2000, Mr. Kelly served as the Publisher of Entertainment Weekly. Mr. Kelly holds a B.A. in Political Science from the University of Illinois. Mr. Kelly has extensive experience in the advertising and the publishing sectors, and has strong skills in management and marketing.

Timothy I. Maudlin has served as a director since August 2008. From 1989 through 2007, Mr. Maudlin was a Managing Partner of Medical Innovation Partners, a venture capital firm. Mr. Maudlin also served as President and Chief Executive Officer of KMN Inc. from 1985 to 2007 and as Chief Financial Officer of Venturi Group, LLC from 1999 to 2001. Mr. Maudlin currently serves on the board of directors of WEB.com and Sucampo Pharmaceuticals, Inc. Mr. Maudlin holds a B.A. from St. Olaf College and a M.M. from the Kellogg School of Management at Northwestern University. Mr. Maudlin has extensive experience in the venture capital sector and in corporate finance and accounting, and has strong skills in management and governance.

Deven Parekh has served as a director since January 2004. Mr. Parekh joined Insight Venture Partners in January 2000, and has served as a Managing Director of the firm since January 2001. Prior to joining Insight, Mr. Parekh was with Berenson Minella & Company, a New York-based merchant banking firm, from 1992 to 2000. In 1992, Mr. Parekh was with The Blackstone Group. Mr. Parekh currently serves as a director of Chegg.com, Connexus, eCommerce Industries, eVestment Alliance, Football Fanatics, Hayneedle, Newegg.com, Punch! Software, Seevast and Syncsort. Mr. Parekh holds a B.S. in Economics from the Wharton School at the University of Pennsylvania. Mr. Parekh has extensive experience in venture capital, the technology sector, the capital markets and corporate governance.

James Warner joined our board of directors on May 26, 2010. Mr. Warner has served as Principal of Third Floor Enterprises, a media and marketing advisory firm, since January 2009. From January 2000 through June 2008, Mr.&nbs