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MILLENNIAL MEDIA INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 10, 2014]

MILLENNIAL MEDIA INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


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



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the fiscal year ended December 31, 2013 appearing in our Annual Report on Form 10-K filed with the SEC on March 3, 2014.

Overview We are an independent mobile advertising platform company delivering market­leading products and services to advertisers and developers. We offer advertisers a suite of solutions that allow them to reach and connect with their target audiences across screens-from smartphones, tablets and other mobile devices to PCs-with the scale to make significant impact to their business. We offer developers the ability to maximize their advertising revenue and acquire new users for their apps. We operate a proprietary technology and data platform that allows advertisers and developers to interact with us in the way that suits them best. For clients that want to interact on a managed basis, meaning that they have a higher degree of customer service, we have dedicated account teams that use our technology platform to deliver highly engaging advertising campaigns for advertisers and optimized monetization solutions for developers.


Our platform offers tools to allow advertisers to buy ad inventory in a programmatic fashion through our ad exchange, MMX, and to allow developers the opportunity to manage and monetize their ad inventory through our supply side tool, mMedia.

One of the main strengths of our platform is that it accesses and analyzes mass volumes of data-including location, social, interest, and contextual data, as well as our own insights that we derive from measuring ad effectiveness-to provide a unique, multidimensional view of individual consumer profiles. We call this data asset our Relevance Graph. To date, we have developed more than 650 million active server­side unique user profiles, some of which link multiple mobile devices and PCs to a single specific user on an anonymous basis. These user profiles and the Relevance Graph, combined with third party data from our data partners and our proprietary data management platform, enable us to deliver more relevant, engaging and effective advertising to our advertising clients.

Our data asset also allows us to measure the impact of mobile advertising on consumer engagement, intent and action. We have developed a suite of solutions, which we call Omni Measurement, that measure several different areas of mobile advertising impact. As of September 30, 2014 our platform reached more than 650 million monthly unique users worldwide, including more than 175 million monthly unique users in the United States alone. Approximately 60,000 apps and mobile sites are enabled by their developers to receive ads delivered through our platform.

14 -------------------------------------------------------------------------------- Table of Contents Key Operating and Financial Performance Metrics We monitor the key operating and financial performance metrics set forth in the tables below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies.

Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 (in thousands, except percentages and per share amounts) Revenue $ 69,807 $ 56,061 $ 209,735 $ 162,508 Gross margin 37.8 % 39.6 % 39.7 % 41.2 % Net loss $ (109,435) $ (4,605) $ (137,471) $ (11,410) Adjusted EBITDA $ (6,888) $ 220 $ (17,656) $ 1,368 Basic and diluted net loss per share $ (1.02) $ (0.06) $ (1.28) $ (0.14) Diluted non-GAAP net income (loss) per share $ (0.07) $ 0.00 $ (0.16) $ 0.02 Gross margin is our gross profit, or revenue less cost of revenue, expressed as a percentage of our total revenue. Our gross margin has been and will continue to be primarily affected by our pricing terms with new and existing developers.

Adjusted EBITDA represents our earnings before interest, income taxes, depreciation and amortization, adjusted to eliminate impairment of goodwill and intangible assets, non­cash stock­based compensation expense and expenses related to acquisitions, such as costs for services of lawyers, investment bankers, accountants, and other third parties and acquisition related severance costs, bonuses, retention bonuses and accrual of retention payments that represent contingent compensation to be recognized as expense over a requisite service period. We do not consider the inclusion of these costs to be indicative of our core operating performance. Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short­ and long­term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period­to­period comparisons of our core business.

Additionally, adjusted EBITDA is a key financial measure used by the compensation committee of our board of directors in connection with the development of incentive­based compensation for our executive officers.

Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Diluted non-GAAP net income (loss) per share is calculated as adjusted EBITDA divided by the diluted weighted average number of shares outstanding during the period.

Adjusted EBITDA and diluted non-GAAP net income (loss) per share are not measures calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. In addition, these non-GAAP measures may not be comparable to similarly titled measures of other companies because other companies may not calculate them in the same manner that we do.

These non-GAAP measures have limitations as an analytical tool, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are: ? although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; ? adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect changes in, or cash requirements for, our working capital needs; ? adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; ? adjusted EBITDA and diluted non-GAAP net income (loss) per share do not reflect tax payments that may represent a reduction in cash available to us; and ? other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

Because of these and other limitations, you should consider adjusted EBITDA and diluted non-GAAP net income (loss) per share alongside other GAAP-based financial performance measures, including various cash flow metrics, net loss and our other GAAP financial results. The following table presents reconciliations of net loss to adjusted EBITDA for each of the periods indicated: 15 -------------------------------------------------------------------------------- Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 (in thousands) Net loss $ (109,435) $ (4,605) $ (137,471) $ (11,410) Adjustments: Interest expense, net 36 15 99 36 Income tax (benefit) expense 67 (6) 95 31 Goodwill and intangible asset impairment 93,479 - 93,479 - Depreciation and amortization expense 4,539 1,142 12,750 3,144 Acquisition-related costs 1,505 1,787 2,756 2,268 Deferred compensation - 250 250 500 Stock-based compensation expense 2,921 1,637 10,386 6,799 Total net adjustments 102,547 4,825 119,815 12,778 Adjusted EBITDA $ (6,888) $ 220 $ (17,656) $ 1,368 The following table presents reconciliations of GAAP net loss per share attributable to common stockholders to diluted non-GAAP net income (loss) per share for each of the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 Net loss per share $ (1.02) $ (0.06) $ (1.28) $ (0.14) Adjustments: Interest expense, net 0.00 0.00 0.00 0.00 Income tax (benefit) expense 0.00 0.00 0.00 0.00 Goodwill and intangible asset impairment 0.87 - 0.87 - Depreciation and amortization expense 0.04 0.02 0.12 0.04 Acquisition-related costs 0.01 0.02 0.03 0.03 Deferred compensation - 0.00 0.00 0.01 Stock-based compensation expense 0.03 0.02 0.10 0.08 Total net adjustments 0.95 0.06 1.12 0.16 Diluted non-GAAP net income (loss) per share $ (0.07) $ 0.00 $ (0.16) $ 0.02 Components of Operating Results Jumptap Acquisition On November 6, 2013, we completed our acquisition of Jumptap, Inc. The three and nine month periods ended September 30, 2014 include the impact of the results of operations from Jumptap, which has been fully integrated into our business. The three and nine month periods ended September 30, 2013 do not include the results of operations from Jumptap.

Revenue We generate revenue by charging advertisers to deliver ads to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Our fees from advertisers are commonly based on the number of ads delivered, views, clicks or actions by users on mobile advertisements we deliver, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell ads on several bases: cost per thousand 16 -------------------------------------------------------------------------------- Table of Contents impressions, or CPM, on which we charge advertisers for each ad delivered to a consumer; cost per click, or CPC, on which we charge advertisers for each ad clicked on by a user; and cost per action, or CPA, on which we charge advertisers each time a consumer takes a specified action, such as downloading an app.

We classify our advertiser clients as "brand" advertisers or "performance" advertisers, depending on the intent of the advertiser. When an advertiser purchases on a CPM basis, we consider them a brand advertiser. When an advertiser purchases on a CPA basis, we consider them a performance advertiser. When a brand or performance advertiser purchases on a CPC basis, we use various metrics, such as CPC rates and measurement goals, to determine which campaigns are brand or performance. The goal of a brand advertiser, such as a large automobile manufacturer, is primarily to promote recognition and awareness of its brand among potential consumers and to induce those consumers to purchase a product or service over time. On the other hand, a performance advertiser, such as a social gaming company, typically seeks to cause a specific action by the viewer of the ad, such as clicking on the ad to be taken to a mobile website, downloading an app on the viewer's mobile device or registering the viewer's email address in order to receive further communications from the provider of a product or service.

Most of our brand advertiser clients, whether based in the United States or internationally, pay us on a CPM basis, as their primary goal is to maximize the number of ad impressions being viewed, although some brand advertisers may use CPC pricing terms from time to time. On the other hand, U.S. and international performance advertisers generally pay us on a CPC or CPA basis, in which case we are only paid when a viewer takes the specified action, such as clicking on the ad or downloading an app.

Historically, brand advertisers typically represented about 60% of our annual revenues, with performance advertisers generating the remainder. Following our acquisition of Jumptap, Inc. in November 2013, this split between brand and performance revenue shifted to approximately 50% brand and 50% performance where it remained until the second quarter of 2014. During the second quarter of 2014, we experienced another shift in this trend primarily caused by lower than expected performance revenue which resulted in our brand revenue representing approximately 60% of our total revenue. We have not generally experienced meaningful trends in the mix of our annual revenue between these types of advertisers; however, the composition of revenue from brand and performance advertisers on our platform often changes throughout the year. For example, we typically see a larger proportion of our revenue derived from brand advertisers in the second and fourth quarters, reflecting what we believe to be traditional seasonality in the advertising industry due to increased consumer spending going into the summer and winter holiday seasons. We tend to see the lowest percentage of brand advertising and the highest percentage of performance advertising in the first quarter of the year. Following these seasonal trends, brand advertising typically represents between one­half and two­thirds of our revenue in any particular quarter. Many brand advertisers spend the largest portion of their advertising budgets during the fourth quarter, in preparation for the holiday season. In addition, based on our historical experience, a higher percentage of our international revenue is derived from performance advertisers than is the percentage for domestic revenues, although there is a wide variation from country to country, even within a global region, of the mix between performance and brand advertising in any particular quarter.

Cost of Revenue Cost of revenue consists primarily of the payments we make to developers for their advertising space on which we deliver mobile ads. These payments are typically determined as either a percentage of the advertising revenue we earn from mobile ads placed on the developer's app or as a fixed fee for the ad space or fees paid to win bids for advertising inventory purchased from auction­based marketplace exchanges. We recognize cost of revenue on a developer­by­developer basis at the same time as we recognize the associated revenue. Costs owed to developers but not yet paid are recorded on our consolidated balance sheets as accrued cost of revenue. For our network business, the use of CPM, CPC, or CPA pricing, whether by U.S. or international advertisers, does not directly affect the gross margin percentage we earn because we pay the same percentage or fixed fee to a developer regardless of what pricing model generated the revenue for us. The cost of revenue for ads delivered through auction­based exchanges can vary depending on our ability to purchase inventory at competitive rates to win the auction bid. In addition, the geographic location of our developers is not a factor in determining the percentage or fixed fee we pay for ad space. We expect that our exchange business may generate a lower gross margin for us than our network business, as is typical in the industry.

Operating Expenses Operating expenses consist of sales and marketing, technology and development and general and administrative expenses. Salaries and personnel costs are the most significant component of each of these expense categories. We include stock­based compensation expense in connection with the grant of any equity instrument in the applicable operating expense category based on the respective equity award recipient's function. Additionally, with the closing of the acquisition of Jumptap and our assumption of the Jumptap sales and marketing, technology and development and general and administrative functions, we saw an immediate increase in our operating expenses beginning in the fourth quarter of 2013.

17 -------------------------------------------------------------------------------- Table of Contents Sales and marketing expense. Sales and marketing expense consists primarily of salaries and personnel costs for our advertiser­focused sales and marketing employees, including stock­based compensation, commissions and bonuses.

Additional expenses include marketing programs, consulting, amortization of customer relationship intangible assets, travel and other related overhead. We expect our sales and marketing expense to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities.

Technology and development expense. Technology and development expense primarily consists of salaries and personnel costs for development employees, including stock­based compensation and bonuses. Technology and development employees are focused on new product and technology development. Additional expenses include costs related to the development, quality assurance and testing of new technology and enhancement of existing technology, amortization of technology intangible assets and internally developed software related to our technology infrastructure, consulting, travel and other related overhead. Other general information technology, or IT, costs are included in general and administrative expenses. We engage third party consulting firms for various technology and development efforts, such as documentation, quality assurance and support. We intend to continue to invest in our technology and development efforts by hiring additional development personnel and by using outside consulting firms for various technology and development efforts. We believe continuing to invest in technology and development efforts is essential to maintaining our competitive position.

General and administrative expense. General and administrative expense primarily consists of salaries and personnel costs for product, operations, developer support, business development, administration, finance and accounting, legal, information systems and human resources employees, including stock­based compensation and bonuses. Additional expenses include consulting and professional fees, travel, bad debt expense, insurance and other corporate expenses. We expect our general and administrative expenses to increase in the foreseeable future to support our continued growth.

Goodwill and Intangible Asset impairment charges. We recorded a goodwill impairment charge of $57.1 million and an intangible asset impairment charge of $36.4 million for the three and nine months ended September 30, 2014. The goodwill impairment amount is based on our best estimate of the impairment. We have not yet finalized our measurement of the goodwill impairment, so it is possible that we will need to adjust the amount of this charge upon the completion of the measurement. An adjustment, if any, would be recognized in the fourth quarter of 2014.

Interest and Other Income (Expense) Interest expense, net consists primarily of interest expense, offset by interest income. Interest expense consists primarily of interest from capital leases and commitment fees on loans. We have not borrowed under our existing credit facility to date.

Income Tax Benefit (Expense) Income tax expense consists of U.S. federal, state and foreign income taxes. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses. We incurred minimal state and foreign income tax expenses for the three and nine month periods ended September 30, 2014 and 2013.

Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with U.S. GAAP.

The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. During the nine months ended September 30, 2014, there were no material changes 18 -------------------------------------------------------------------------------- Table of Contents to our critical accounting policies and use of estimates, other than the information provided below, which are disclosed in the section called Critical Accounting Policies and Estimates in Item 7 of our Annual Report on Form 10-K filed with the SEC on March 3, 2014.

Intangible Asset Impairment We review long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets are not recoverable, the impairment to be recognized, if any, is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets or asset group. As we operate as one business unit and our long-lived assets do not have identifiable cash flows that are independent of the other assets and liabilities of this business unit, the intangible asset test is performed at the entity level.

During the three months ended September 30, 2014, we determined that our technology and customer relationship assets were not fully recoverable due to lower projected revenue levels from associated products and customers. As a result, we recognized an impairment charge of $36.4 million to reduce the carrying values of these intangible assets to their estimated fair values. Fair value was estimated using the income approach based on management's forecast of future cash flows to be derived from the asset's use.

Goodwill Impairment Goodwill is tested annually for impairment on October 1 of each year or more frequently if impairment indicators arise. Goodwill is tested for impairment at the reporting unit level using a two­step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit's carrying value, step two is performed to measure the amount of the impairment, if any.

During the three months ended September 30, 2014, we determined sufficient indication existed to require performance of an interim goodwill impairment analysis as of September 30, 2014 for our reporting unit. This indicator was a decrease in our market capitalization below the carrying value of our net assets. In this interim goodwill impairment test, the reporting unit failed step one.

The combination of the lower reporting unit fair value calculated in step one and the identification of unrecognized fair value changes to the carrying values of other assets and liabilities in the second step of the interim goodwill impairment test, resulted in an implied fair value of goodwill below the carrying value of goodwill. As a result, we recorded our best estimate of the goodwill impairment loss of $57.1 million. We have not yet finalized step two of the test, so it is possible that we will need to adjust the amount of this charge upon the completion of the measurement. We expect that the adjustment, if any, would be recognized in the fourth quarter of 2014.

19 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013 Three Months Ended September 30, 2014 2013 (in thousands) Period-to-Period Change Consolidated Statement of Percentage of Percentage of Operations Data: Amount Revenue Amount Revenue Amount Percentage Revenue $ 69,807 100.0 % $ 56,061 100.0 % $ 13,746 24.5 % Cost of revenue 43,397 62.2 33,860 60.4 9,537 28.2 Gross profit 26,410 37.8 22,201 39.6 4,209 19.0 Operating expenses: Sales and marketing 13,163 18.9 8,626 15.4 4,537 52.6 Technology and development 7,483 10.7 3,939 7.0 3,544 90.0 General and administrative 21,617 31.0 14,232 25.4 7,385 51.9 Goodwill and intangible asset impairment 93,479 133.9 - - 93,479 100.0 Total operating expenses 135,742 194.5 26,797 47.8 108,945 406.6 Loss from operations (109,332) (156.7) (4,596) (8.2) (104,736) 2,278.9 Other income (expense): Interest expense, net (36) (0.1) (15) - (21) 140.0 Total other income (expense) (36) (0.1) (15) - (21) 140.0 Loss before income taxes (109,368) (156.8) (4,611) (8.2) (104,757) 2,271.9 Income tax expense (67) (0.1) 6 - (73) (1,216.7) Net loss $ (109,435) (156.9) % $ (4,605) (8.2) % $ (104,830) 2,276.4 Revenue. Revenue was $69.8 million for the quarter ended September 30, 2014, compared to $56.1 million for the quarter ended September 30, 2013, an increase of $13.7 million, or 24.5%. This growth was primarily attributable to our acquisition of Jumptap and an increase in spending from our existing advertiser clients, as well as an increase in the number of advertiser clients using our platform. Revenue from our existing advertiser clients increased by 19.2% during the quarter ended September 30, 2014 as compared to the quarter ended September 30, 2013 and represented 73.5% of total revenue for the quarter ended September 30, 2014. This increase was primarily driven by more spending from brand advertisers on our new product offerings. Revenue from our new advertiser clients increased by 40.3% during the quarter ended September 30, 2014 as compared to the quarter ended September 30, 2013 and represented 26.5% of total revenue for the quarter ended September 30, 2014.

Our revenue from international operations decreased to $10.7 million, or 15.3% of total revenue, for the quarter ended September 30, 2014, from $15.1 million, or 27.0% of total revenue, for the quarter ended September 30, 2013. The decrease in revenue in our international operations during the quarter ended September 30, 2014 as compared to the quarter ended September 30, 2013 was primarily attributable to decreases in revenue from some of our larger performance advertiser clients.

We classify revenue based on the geographic location where the advertising was sold. Performance advertising often is displayed globally. For example, we may sell a campaign to a large performance advertiser from one location, such as Europe, and principally deliver ads for that campaign to consumers located in the United States.

Cost of revenue. Cost of revenue was $43.4 million, or 62.2% of revenue, for the quarter ended September 30, 2014, an increase of $9.5 million, or 28.2%, from $33.9 million, or 60.4% of revenue, for the quarter ended September 30, 2013.

The increase in cost of revenue in absolute dollars was the direct result of the increase in our revenue, as we pay a percentage of that revenue to developers for use of their ad space in delivering mobile ads for our advertiser clients. The increase in cost of revenue as a percentage of revenue is the result of us strategically increasing developer revenue share to drive additional performance revenue.

Sales and marketing. Sales and marketing expense was $13.2 million, or 18.9% of revenue, for the quarter ended September 30, 2014, an increase of $4.6 million, or 52.6%, from $8.6 million, or 15.4% of revenue, for the quarter ended September 30, 2013. The increase in sales and marketing expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $2.6 20 -------------------------------------------------------------------------------- Table of Contents million increase in salaries and personnel-related costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap. The number of full-time sales and marketing employees increased to 219 at September 30, 2014 from 152 at September 30, 2013. We also incurred an additional $1.3 million in depreciation and amortization expense, primarily related to intangible assets acquired in 2013. In addition, we experienced a $440,000 increase in travel expense and a $282,000 increase in office lease costs.

Technology and development. Technology and development expense was $7.5 million, or 10.7% of revenue, for the quarter ended September 30, 2014, an increase of $3.6 million, or 90.0%, from $3.9 million, or 7.0% of revenue, for the quarter ended September 30, 2013. The increase in technology and development expense, both in absolute dollars and as a percentage of revenue, was attributable to a $1.4 million increase in salaries and personnel costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap. The number of full-time technology and development employees increased to 144 at September 30, 2014 from 91 at September 30, 2013. We also incurred an additional $1.7 million in depreciation and amortization expense primarily related to intangible assets acquired in 2013 and a $286,000 increase in office lease costs.

General and administrative. General and administrative expense was $21.6 million, or 31.0% of revenue, for the quarter ended September 30, 2014, an increase of $7.4 million, or 51.9%, from $14.2 million, or 25.4% of revenue, for the quarter ended September 30, 2013. The increase in general and administrative expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $2.7 million increase in salaries and personnel-related costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap, and a related $1.3 million increase in stock-based compensation expense. The number of full-time general and administrative employees increased to 239 at September 30, 2014 from 194 at September 30, 2013. In addition, we experienced a $1.8 million increase in IT expenses and a $1.3 million increase in other operating expenses. We also incurred an additional $427,000 in amortization and depreciation expense primarily related to intangible assets acquired in 2013 and $406,000 in increased travel expense, offset by a $359,000 decrease in acquisition-related costs and a $269,000 decrease in bad debt expense.

Goodwill and Intangible Asset Impairment. We recorded a goodwill impairment charge of $57.1 million and an intangible asset impairment charge of $36.4 million for the three months ended September 30, 2014. The goodwill impairment amount is based on our best estimate of the impairment. We have not yet finalized our measurement of the impairment, so it is possible that we will need to adjust the amount of this charge upon the completion of the measurement. We expect that any adjustment would be recognized in the fourth quarter of 2014.

21 -------------------------------------------------------------------------------- Table of Contents Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013 Nine Months Ended September 30, 2014 2013 (in thousands) Period-to-Period Change Consolidated Statement of Percentage of Percentage of Operations Data: Amount Revenue Amount Revenue Amount Percentage Revenue $ 209,735 100.0 % $ 162,508 100.0 % $ 47,227 29.1 % Cost of revenue 126,398 60.3 95,559 58.8 30,839 32.3 Gross profit 83,337 39.7 66,949 41.2 16,388 24.5 Operating expenses: Sales and marketing 40,133 19.1 25,119 15.5 15,014 59.8 Technology and development 22,450 10.7 12,203 7.5 10,247 84.0 General and administrative 64,552 30.8 40,970 25.2 23,582 57.6 Goodwill and intangible asset impairment 93,479 44.6 - - 93,479 100.0 Total operating expenses 220,614 105.2 78,292 48.2 142,322 181.8 Loss from operations (137,277) (65.5) (11,343) (7.0) (125,934) 1,110.2 Other income (expense): Interest expense, net (99) - (36) - (63) 175.0 Total other income (expense) (99) - (36) - (63) 175.0 Loss before income taxes (137,376) (65.5) (11,379) (7.0) (125,997) 1,107.3 Income tax expense (95) - (31) - (64) 206.5 Net loss $ (137,471) (65.5) % $ (11,410) (7.0) % $ (126,061) 1,104.8 Revenue. Revenue was $209.7 million for the nine months ended September 30, 2014, compared to $162.5 million for the nine months ended September 30, 2013, an increase of $47.2 million, or 29.1%. This growth was primarily attributable to an increase in spending from our existing advertiser clients, as well as an increase in the number of advertiser clients using our platform. Revenue from our existing advertiser clients increased by 21.9% during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 and represented 80.7% of total revenue for the nine months ended September 30, 2014. This increase was primarily driven by more spending from brand advertisers on our new product offerings. This increase is also driven by additional performance revenue primarily related to our acquisition of Jumptap.

Revenue from our new advertiser clients increased by 73.0% during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 and represented 19.3% of total revenue for the nine months ended September 30, 2014.

Our revenue from international operations decreased to $37.9 million, or 18.1% of total revenue, for the nine months ended September 30, 2014, from $39.8 million, or 24.5% of total revenue, for the nine months ended September 30, 2013. The decrease in revenue in our international operations during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 was primarily attributable to decreases in revenue from some of our larger performance advertiser clients.

We classify revenue based on the geographic location where the advertising was sold. Performance advertising often is displayed globally. For example, we may sell a campaign to a large performance advertiser in one location, such as Europe, and principally deliver ads for that campaign to consumers located in the United States.

We also increased the size of our overall sales force during the nine months ended September 30, 2014 compared to the same period in the prior year, allowing us to increase our number of advertising client relationships and the number of developer applications enabled to receive ads delivered through our platform.

Cost of revenue. Cost of revenue was $126.4 million, or 60.3% of revenue, for the nine months ended September 30, 2014, an increase of $30.8 million, or 32.3%, from $95.6 million, or 58.8% of revenue, for the nine months ended September 30, 2013. The increase in cost of revenue in absolute dollars was the direct result of the increase in our revenue, as we pay a percentage of that revenue to developers for use of their ad space in delivering mobile ads for our advertiser clients. The increase in cost of revenue as a percentage of revenue was the result of changes in revenue mix between performance and brand advertiser clients.

22 -------------------------------------------------------------------------------- Table of Contents Sales and marketing. Sales and marketing expense was $40.1 million, or 19.1% of revenue, for the nine months ended September 30, 2014, an increase of $15.0 million, or 59.8%, from $25.1 million, or 15.5% of revenue, for the nine months ended September 30, 2013. The increase in sales and marketing expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $7.6 million increase in salaries and personnel-related costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap, and a related $208,000 increase in stock-based compensation expense. The number of full-time sales and marketing employees increased to 219 at September 30, 2014 from 152 at September 30, 2013. We also incurred an additional $3.6 million in depreciation and amortization expense, primarily related to intangible assets acquired in 2013 and we experienced a $1.6 million increase in travel expenses. In addition, we experienced a $1.0 million increase in marketing expenses, mainly attributable to event marketing and an $886,000 increase in office lease costs.

Technology and development. Technology and development expense was $22.5 million, or 10.7% of revenue, for the nine months ended September 30, 2014, an increase of $10.3 million, or 84.0%, from $12.2 million, or 7.5% of revenue, for the nine months ended September 30, 2013. The increase in technology and development expense, both in absolute dollars and as a percentage of revenue, was attributable to a $5.4 million increase in salaries and personnel costs associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap. The number of full-time technology and development employees increased to 144 at September 30, 2014 from 91 at September 30, 2013. This increase was offset by a $994,000 decrease in stock-based compensation relating to lower compensation expense for the period for unvested restricted stock awards from the 2011 acquisition of Condaptive, Inc. We also incurred an additional $4.8 million in depreciation and amortization expense primarily related to intangible assets acquired in 2013 and a $628,000 increase in office lease costs.

General and administrative. General and administrative expense was $64.6 million, or 30.8% of revenue, for the nine months ended September 30, 2014, an increase of $23.6 million, or 57.6%, from $41.0 million, or 25.2% of revenue, for the nine months ended September 30, 2013. The increase in general and administrative expense, both in absolute dollars and as a percentage of revenue, was primarily attributable to a $9.0 million increase in salaries and personnel-related costs, associated with an increase in headcount, including employees added as a result of our acquisition of Jumptap, and a related $4.4 million increase in stock-based compensation expense. The number of full-time general and administrative employees increased to 239 at September 30, 2014 from 194 at September 30, 2013. In addition, we experienced a $5.0 million increase in IT expenses, and an additional $2.3 million in other operating expenses, mainly attributable to our increase in office lease costs. We also incurred an additional $1.3 million in travel expenses and $1.2 million in amortization and depreciation expense primarily related to intangible assets acquired in 2013.

Goodwill & Intangible Asset Impairment. We recorded a goodwill impairment charge of $57.1 million and intangible asset impairment charge of $36.4 million for the nine months ended September 30, 2014. The goodwill impairment amount is based on our best estimate of the impairment. We have not yet finalized our measurement of the impairment, so it is possible that we will need to adjust the amount of this charge upon the completion of the measurement. We expect that any adjustment would be recognized in the fourth quarter of 2014.

Liquidity and Capital Resources Sources of Liquidity As of September 30, 2014, we had cash and cash equivalents totaling $76.5 million. In August 2011, we entered into a line of credit with Silicon Valley Bank, or SVB, which allowed for borrowings up to $15.0 million. Amounts borrowed under the line of credit are secured by substantially all of our assets. The loan agreement was amended in May 2014, increasing allowed borrowings to $20.0 million. Advances under the line of credit bear interest at a floating rate equal to the prime rate published in the Wall Street Journal, with interest payable monthly. The line of credit agreement requires that we maintain a ratio of cash, cash equivalents and billed accounts receivable to current liabilities of at least 1.25 to 1.00. Additionally, the line of credit agreement contains an unused line fee of 0.25% per year, calculated based on the average unused portion of the loan, payable monthly. The line of credit is scheduled to mature on May 8, 2015. As of September 30, 2014, we had not yet drawn on this line of credit. As part of the line of credit, we have a maximum of $2.0 million in available letters of credit. As of September 30, 2014, we had $778,000 in standby letters of credit outstanding against the available balance under the line of credit and $600,000 in letters of credit with another bank.

Cash Flows Our cash and cash equivalents at September 30, 2014 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return.

23 -------------------------------------------------------------------------------- Table of Contents Of our total cash and cash equivalents, less than 3% was held outside of the United States at September 30, 2014 and December 31, 2013. Our international operations consist of selling and marketing functions supported by our U.S.

operations, and we are dependent on our U.S. operations for our international working capital needs. If our cash and cash equivalents held outside of the United States were ever needed for our operations inside the United States, we may be required to accrue and pay U.S. taxes to repatriate these funds. We currently intend to permanently reinvest these foreign amounts outside the United States, and our current plans do not demonstrate a need to repatriate the foreign amounts to fund our U.S. operations.

The following table summarizes our cash flows for the nine months ended September 30, 2014 and 2013: Nine Months Ended September 30, 2014 2013 (in thousands) Cash provided by (used in): Operating activities $ (10,057) $ (1,240) Investing activities (13,730) (15,815) Financing activities 1,200 812 Operating Activities For the nine months ended September 30, 2014, our net cash used in operating activities of $10.1 million consisted of a net loss of $137.5 million offset by $9.4 million of cash provided by changes in working capital and $118.0 million of non-cash items. Non-cash items primarily consisted of goodwill and intangible asset impairment charges of $93.5 million, depreciation and amortization expense of $12.8 million, stock compensation expense of $10.4 million, and bad debt expense of $761,000. Depreciation and amortization expense primarily related to increased capital expenditure requirements and amortization of our intangible assets resulting from acquisitions. The cash provided by working capital changes primarily consisted of a decrease in accounts receivable of $34.8 million due to timing of collections. In addition, there was an increase in other long-term liabilities of $747,000. These cash inflows were offset by a $23.1 million decrease in accrued cost of revenues resulting from payments to our developers, as well as an increase in prepaid expenses and other current assets of $1.2 million and an increase in other assets of $1.7 million.

For the nine months ended September 30, 2013, our net cash used in operating activities of $1.2 million consisted of a net loss of $11.4 million and $898,000 of cash used to fund changes in working capital, which was primarily driven both by the domestic and international expansion of our operations and by our investment in technology and development and personnel to facilitate our growth, offset by $11.1 million in non-cash items. Non-cash items primarily consisted of stock compensation expense of $6.8 million, depreciation and amortization expense of $3.1 million and bad debt expense of $1.2 million.

Depreciation and amortization expense primarily related to increased capital expenditure requirements and our intangible assets resulting from the acquisition of a business. The changes in working capital primarily consisted of a decrease in accounts receivable of $419,000, primarily the result of timing of cash collections and changes in prepaid expense and other current assets of $1.3 million, as we had a number of annual contracts that began in the second half of 2013, and the deferred compensation recorded as part of our acquisition of Metaresolver in April 2013, offset by $2.4 million of changes in accounts payable and accrued expenses. The primary drivers for this change in accounts payable and accrued expenses were $340,000 in higher accounts payable due to timing of payments, increases in additional accrued audit and tax fees of $481,000, $1.2 million in additional accrued legal costs primarily related to the Metaresolver and Jumptap acquisitions, $268,000 in additional accrued travel costs and an additional $111,000 in deferred tax liabilities.

Investing Activities For the nine months ended September 30, 2014, net cash used in investing activities was $13.7 million and was primarily the result of purchases of network equipment and the build out of office space for our Baltimore, Maryland corporate headquarters.

For the nine months ended September 30, 2013, net cash used in investing activities was $15.8 million, consisting of purchases of property and equipment of $4.1 million and $11.7 million paid for the acquisition of Metaresolver, net of cash acquired.

24 -------------------------------------------------------------------------------- Table of Contents Financing Activities For the nine months ended September 30, 2014, net cash provided by financing activities was $1.2 million, consisting of $2.1 million in proceeds received upon the exercise of stock options, offset by cash used for payment of employee withholding taxes related to restricted stock unit vesting of $865,000.

For the nine months ended September 30, 2013, net cash provided by financing activities was $812,000 consisting of $1.2 million in proceeds received upon the exercise of stock options, offset by cash used for payment of employee withholding taxes related to restricted stock unit vesting of $414,000.

Operating and Capital Expenditure Requirements and Contractual Obligations We believe our existing cash balances and the interest income we earn on these balances, together with the amounts available to us under our existing line of credit, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. There have been no material changes in our commitments under contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on March 3, 2014, other than $22.5 million in cash consideration subject to certain contractual adjustments to be paid for the acquisition of Nexage, Inc.

Off-Balance Sheet Arrangements As of September 30, 2014, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.

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