Item 1. Legal Proceedings.
We, certain of our officers and directors, and certain investment banking firms who acted as underwriters in connection with our initial public offering, have been named as defendants in a putative class action lawsuit filed August 31, 2015 in the United States District Court for the Southern District of New York. The complaint alleges that the defendants violated Sections 11, 12 and 15 of the Securities Act by not including information regarding customer concentration, which the complaint characterizes as a known trend and/or significant factor required to be disclosed under federal securities regulations. The complaint seeks unspecified damages, interest and other costs.
The Court appointed a Lead Plaintiff on November 18, 2015, and on January 19, 2016 the Lead Plaintiff filed a First Amended Complaint that repeats the same substantive allegations included in the initial complaint and continues to seek unspecified damages. We filed a motion to dismiss the First Amended Complaint on March 24, 2016. The Lead Plaintiff filed an opposition to that motion on May 9, 2016, and we filed a reply brief on June 8, 2016.
On February 13, 2017, the United States District Court for the Southern District of New York filed a Memorandum Opinion and Order dismissing the First Amended Complaint against us, the individual defendants and the underwriter defendants. The Plaintiff filed a motion with the Court to reconsider the Order of dismissal and reinstate the claims against the defendants on February 27, 2017. We filed an opposition brief on March 13, 2017.
We dispute the claims alleged in the lawsuit and will continue to defend this matter vigorously.
In addition, from time to time, we are involved in legal proceedings and subject to claims incident to the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, including the matters noted above, we believe we are not currently party to any legal proceedings the outcome of which would individually or taken together have a material effect on our business, operating results, cash flows or financial condition. Regardless of the outcome, such proceedings can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this report, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment.
Risks Related to Our Business and Industry
Our limited operating history makes it difficult to evaluate our business and prospects and may increase the risks associated with your investment.
We commenced operations in 2006 and, as a result, have only a limited operating history upon which our business and future prospects may be evaluated. Although we have experienced revenue growth in recent years, we may not be able to sustain this rate of growth or even maintain our current revenue levels. Our rate of intra-quarter revenue growth (the quarterly revenue growth rate as compared to the quarterly growth rate from the prior year’s respective quarter) declined for three of the four quarters for the year ended December 31,
2016
versus the year ended December 31,
2015
. In addition, for our fiscal quarter ended
March 31, 2017
, our total revenues
decreased
5%
compared to the same quarterly period from our prior fiscal year. We may not be able to slow or reverse these trends, and we may not be able to maintain our current revenue levels. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries. Our business prospects will depend in large part on our ability to:
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build a reputation for superior solutions and create trust and long-term relationships with customers and advertising agencies;
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develop and launch additional product and service offerings that meet our customers’ evolving needs;
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distinguish ourselves from competitors in our industry;
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offer a competitive technology platform;
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achieve our operating plans;
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maintain access to financing arrangements, as needed, and comply with the covenants within our current loan and security agreement;
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maintain and expand our relationships with the real-time bidding, or RTB, exchanges and other programmatic or direct media sources through which we execute our customers’ digital marketing campaigns;
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respond to evolving industry standards and government regulations that impact our business, particularly in the areas of data collection and consumer privacy;
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prevent or otherwise mitigate failures or breaches of security or privacy;
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expand our business internationally; and
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attract, hire, integrate and retain qualified and motivated employees.
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We may need to adapt our current operations to scale our business and achieve long-term profitability. If we are unable to meet one or more of these objectives or fail to implement these changes effectively and on a timely basis, or if we are unable to implement them at all, our revenue may decline, we may not be able to achieve further growth or long-term profitability and our business may suffer.
We have experienced a slowing, and significant fluctuations, in our rate of revenue growth since the fourth quarter of 2015, as compared to historical trends. Our future growth rate of revenues may decline or further contract, as it did for the fiscal quarter ended
March 31, 2017
as compared to the same quarterly period from our prior fiscal year, if we do not improve our level of engagement from new customers and encourage existing customers to allocate a greater portion of their marketing spend to us.
In our fiscal years ended December 31,
2014
,
2015
and
2016
, our total revenues grew by
61%
,
32%
and
6%
, respectively, as compared to total revenues from the prior fiscal years. In our fiscal quarter ended
March 31, 2017
, our total revenues
decreased
by
5%
as compared to the same quarterly period from our prior fiscal year. Our revenues may decline in future periods which may adversely impact the value of our common stock.
Our operating results and key metrics fluctuate, which make our future results difficult to predict and could cause our operating results or key metrics to fall below analysts’ and investors’ expectations.
Our quarterly and annual operating results and key metrics have fluctuated in the past, and we expect this to continue for the foreseeable future. These fluctuations could cause our performance to fall below the expectations of securities analysts and investors, and adversely affect the price of our common stock. Because our business is evolving rapidly, our historical operating results and key metrics may not be useful in predicting our future operating results. Factors that may increase the volatility of our operating results and key metrics include the factors set forth in this “Risk Factors” section, as well as the following:
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changes in our customers’ advertising budget allocations, agency affiliations or marketing strategies;
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changes in the economic prospects of our customers or the economy generally, which could alter current or prospective customers’ spending priorities, or increase the time or costs required to complete sales;
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the addition or loss of customers, particularly enterprise customers;
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the growth or reduction of business with current customers or advertising agencies that act on their behalf;
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changes in demand for and pricing of our products and services;
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the impact of seasonality on our customers’ businesses and budgets for digital marketing campaigns, particularly our consumer product and retail customers;
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the introduction of new technologies, products or service offerings by us or our competitors;
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unpredictable sales cycles;
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the impact of macroeconomic, market and political factors and trends, including in light of “Brexit,” and other recent political developments;
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changes in the availability of media inventory through RTB exchanges;
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changes in our pricing policies, or the pricing policies of our competitors, RTB exchanges or other third-party service providers;
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changes and uncertainty in the regulatory environment, especially with respect to data privacy and data protection, for us or our customers;
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changes in our operating expenses and capital expenditures; and
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costs related to acquisitions of people, businesses or technologies.
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Based upon all of the factors described above, many of which are beyond our control, and others that we may not anticipate, we have a limited ability to forecast our future revenue, costs and expenses, and as a result, our operating results may fall below our estimates or the expectations of securities analysts and investors.
If we are unable to attract new customers, if our existing customers do not allocate a greater portion of their marketing spend to us, or if we are unable to further penetrate new industries, our revenue growth will be adversely affected.
To sustain or increase our revenue, we must add new customers and encourage existing customers to allocate a greater portion of their marketing spend to us. As the digital advertising industry matures and competitors introduce lower cost or differentiated products or services, our ability to sell our solution could be impaired. Even after a successful digital marketing campaign or series of campaigns with an existing customer, we frequently must compete to win further business from that customer. We may reach a point of saturation where we cannot continue to grow our revenue from existing customers because of, among other things, internal limits that they may place on their advertising budgets for digital media, particular digital marketing campaigns, local advertising or a particular provider. If we are unable to attract new customers or obtain new business from existing customers, our revenue, growth and business will be adversely affected.
Historically, we have focused primarily on serving national brands in three industries: consumer products, retail and automotive. We have also expanded into four other industries: financial services, healthcare, telecommunications and entertainment. Our plan is to continue to penetrate these industries and pursue opportunities in additional industries. If we are unable to continue to penetrate our existing industries and to penetrate new industries successfully, our revenue, growth and business will be adversely affected.
If the MaxPoint Intelligence Platform does not accurately predict the most likely local buyers for specific products, we could lose revenue, which would have a material adverse impact on our operating results and financial condition.
Our solution depends on the ability of the MaxPoint Intelligence Platform to accurately predict the most likely communities of local buyers for specific products and to serve advertisements for those products to those communities. We do not have long-term commitments from our customers and it is relatively easy for our customers or the advertising agencies acting on their behalf to seek alternative providers of digital marketing solutions, as there are no significant switching costs. Thus, we must continuously deliver satisfactory results for our customers to maintain or increase revenue, which depends in part on the continued performance of the MaxPoint Intelligence Platform. Our failure to continuously innovate and improve on the algorithms underlying the MaxPoint Intelligence Platform could result in poor performance, which could in turn result in our customers ceasing to use our solution, which would have a material adverse impact on our operating results and financial condition.
We have historically relied, and expect to continue to rely, on a small number of customers for a substantial majority of our revenue, and the loss of any of these customers may significantly harm our business, results of operations and financial condition.
Our customers are primarily enterprises with national brands in a number of industries. We sell our solution either directly to our customers or through advertising agencies that act on behalf of our customers. A relatively small number of customers have historically accounted for a substantial majority of our revenue. For the years ended December 31,
2014
,
2015
and
2016
, our top ten customers accounted for approximately
30%
,
29%
and
30%
of our revenue, respectively. For the years ended December 31,
2014
,
2015
and
2016
,
no
single customer represented more than 10% of our revenue. We expect that we will continue to depend upon a relatively small number of customers for a substantial majority of our revenue for the foreseeable future while we continue to broaden our customer base. As a result, if we fail to successfully attract or retain customers, or if existing customers reduce or delay their marketing spend with us, our business, results of operations and financial condition would be harmed. Moreover, a significant portion of our customers’ products are purchased at a limited number of large national retailers. Any material decline in these customers’ sales at the physical retail locations of these large national retailers may adversely impact our business.
We rely on advertising agencies that act on behalf of our customers for a substantial majority of our revenue. The loss of any such relationships or increased competition from such advertising agencies or agency trading desks could materially harm our business.
We rely on advertising agencies that act on behalf of our customers for a substantial majority of our revenue. Multiple advertising agencies operating within
one
global advertising network represented numerous customers accounting for approximately
13%
of our revenue for the year ended
December 31, 2016
. In addition, for reasons specific to individual agencies, some agencies may not recommend us to the national brands they represent, even if our solution is more effective than alternative solutions. Certain of those agencies have created or are creating their own competitive solutions, referred to as agency trading desks. Agency trading desks are independent units within agency holding companies that centralize the buying and optimization of programmatic or biddable media to serve advertising agencies within the holding company. If agency trading desks are successful in leveraging agency relationships with our customers or agencies assist our customers in transitioning to other self-service platforms, we may be unable to compete successfully even if our solution is more effective. In addition, agencies are increasingly helping the advertisers they represent select self-service platforms.
If we fail to develop new solutions and services or enhance our existing solution and services, we may not attract and retain customers, and our revenue and results of operations may decline.
We compete for customers that want to execute digital marketing campaigns. Our industry is subject to rapid changes in standards, technologies, products and service offerings, as well as advertiser expectations. We continuously need to invest in our technology and research and development to develop new solutions and services and enhance our existing solution and services to meet advertiser demands and respond to industry changes. For example, in the third quarter of 2016, we announced Customer Catalyst, an enhanced service offering linking permission-based customer relationship marketing data to specific household devices, and PathPoint, a wireless activity-sensing device offering which gathers data on consenting shoppers’ in-store activity. Customer demands, superior competitive offerings or new industry standards or legal requirements could render our new or existing solutions unattractive, unmarketable or obsolete and require us to make substantial changes to our technology platform or business model. Our failure to adapt to a rapidly changing market, to anticipate customer demand, successfully launch recently announced product offerings or effectively utilize third party relationships could harm our business and our financial performance.
Our loan and security agreement contains covenants that may restrict our business and financing activities.
Borrowings under our loan and security agreement are secured by substantially all of our assets. Our loan and security agreement also restricts our ability to, among other things:
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dispose of or sell assets;
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make material changes in our business or management;
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consolidate or merge with or acquire other entities;
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incur additional indebtedness;
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incur liens on our assets;
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pay dividends or make distributions on our capital stock;
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make certain investments;
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enter into transactions with our affiliates; and
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make any payment in respect of any subordinated indebtedness.
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These restrictions are subject to certain exceptions. In addition, our loan and security agreement requires us to maintain and comply with certain financial covenants, including: (i) maintaining specified quarterly Adjusted EBITDA, which is defined for this purpose, with respect to any trailing twelve-month period, as an amount equal to the sum of net income, plus (a) interest expense, plus (b) to the extent deducted in the calculation of net income, depreciation expense and amortization expense, plus (c) income tax expense, plus or minus (d) change in deferred revenue, less, (e) capitalized software development expenses, plus (f) any non-cash items such as stock-compensation expense (and other mutually agreed upon non-cash items), plus one-time non-recurring charges subject to the lenders approval; and (ii) maintaining at all times a 1.0 monthly minimum Adjusted Quick Ratio, which is defined as the ratio of cash held at the lender and cash equivalents plus net accounts receivables to current liabilities (including all debt outstanding under the revolving line of credit) minus the current portion of deferred revenue. All cash collections from accounts receivable directly reduce the outstanding balance of the revolving credit facility. If our Adjusted Quick Ratio were to fall below 1.0, our ability to pay the costs of our operations would likely be materially impacted.
The covenants in our loan and security agreement, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control, and future breaches of any of these covenants could result in a default under our loan and security agreement. If not waived, potential future defaults could cause all of the outstanding indebtedness under our loan and security agreement to become immediately due and payable and terminate all commitments to extend further credit.
If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. This could materially and adversely affect our business.
We may require additional capital to support our operations, and such capital might not be available on terms acceptable to us, if at all, which may in turn hamper our growth and adversely affect our business.
We intend to continue to make investments to support our business and may require additional funds to respond to business challenges, including the need to develop new features or enhance our platform, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in additional public or private equity, equity-linked or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we secure in the future could involve additional restrictive covenants relating to our capital raising activities and other financial and operational matters, including the ability to pay dividends. This may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business and respond to business challenges could be significantly impaired, and our business may be adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Operating and Capital Expenditure Requirements.”
If we do not manage our development effectively, the quality of our solution may suffer, and our operating results may be negatively affected.
We may continue to experience growth in our operations, which may continue to place significant demands on our management, operational and financial infrastructure. To manage our business effectively, we must continue to improve and expand our infrastructure, including our IT systems, financial and administrative systems and controls. We must also continue to manage our employees, operations, finances, research and development and capital investments efficiently. Our productivity and the quality of our solution may be adversely affected if we do not integrate and train our new employees, particularly our sales and account management personnel, quickly and effectively. If we continue our growth, we may incur significant additional expenses, and our growth may continue to strain our management, resources, infrastructure and ability to maintain the quality of our solution. If the current and future members of our management team do not effectively scale with our business, the quality of our solution may suffer and our corporate culture may be harmed. Failure to manage our future growth effectively could cause our business to suffer, which, in turn, could have an adverse impact on our results of operations and financial condition.
Technologies have been developed that may block the display of our advertisements, which could adversely affect our financial results.
Technologies have been developed, and will likely continue to be developed, that may block the display of our advertisements, particularly advertising displayed on personal computers and mobile platforms. Some consumers download and use “ad-blocking” software, which can prevent web browsers (for example, Firefox, Google Chrome and others) from interacting with or downloading advertising, or preventing advertisements from being displayed once served. Revenue generated from the display of advertisements on personal computers and mobile platforms may be impacted by these technologies from time to time. If the use of ad blocking technologies becomes more prevalent, it could hamper our ability to optimally serve advertisements for marketing campaigns, and may have an adverse effect on our financial results in the future.
We may not be able to compete successfully against current and future competitors, which may result in declining revenue or inability to grow our business.
Competition for our customers’ advertising budgets is intense, and we expect competition to increase in the future with more advertising occurring online.
We compete with traditional local marketing channels, which include television, newspaper, magazine and radio advertising, as well as mailers, free-standing inserts and coupons. Our competition in these channels includes traditional advertising and direct marketing companies, such as Gannett Company, Inc., The McClatchy Company, News America Marketing, Valassis Communications, Inc. and Valpak Direct Marketing Systems, Inc.
We also compete or may compete with online/digital local marketing channels or traditional national channels with localized offerings, including:
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digital advertising services offered by other companies, including those owned by traditional advertising and direct marketing companies;
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ERP vendors such as Adobe, Oracle, Salesforce.com and IBM;
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companies that offer demand-side platforms that allow customers to purchase inventory directly from RTB exchanges or other third parties;
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advertising networks and advertising agencies, including agency trading desks;
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digital services offered through large online platforms, such as Yahoo! Inc., Google Inc. and Facebook, Inc.;
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in-house solutions used by our customers;
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companies providing online search advertising, for which we do not offer a solution; and
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technology companies providing online marketing platforms focused on local businesses.
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Many current and potential competitors have advantages, such as longer operating histories, greater name recognition, larger customer bases, greater access to media inventory, more access to Internet user data, the perception of having a more complete solution and significantly greater financial, technical, sales and marketing resources. Increased competition may result in reduced pricing for our solution, longer sales cycles or a decrease of our market share, any of which could negatively affect our revenue and future operating results and our ability to grow our business.
Our sales cycle can be unpredictable, which may cause our operating results to fluctuate.
The sales cycle for our solution, from initial contact with a potential lead to agreement execution and implementation, varies widely by customer, and typically ranges from one to six months. Some of our customers undertake an evaluation process that involves not only our solution but also those of our competitors, which can delay purchase decisions. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our solution. If sales expected from a customer are not realized in the time period expected or not realized at all, if a customer terminates its agreement with us or changes its advertising budget allocations, agency affiliations or marketing strategies, our business, operating results and financial condition could be adversely affected.
We have been named as a party to a lawsuit and we may be named in additional litigation in the future.
We have been named as a party in a lawsuit described under “Legal Proceedings” and we may be named in additional litigation in the future, all of which could result in an unfavorable outcome and have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities. Under certain circumstances, we have contractual and other legal obligations to indemnify and to incur legal expenses on behalf of current and former directors and officers, and on behalf of our current or former underwriters, in connection with the litigation described in “Legal Proceedings” and in connection with any future lawsuits. The ultimate outcome of the litigation described in “Legal Proceedings,” and any future litigation, may have a material adverse effect on our business and the trading price for our securities. Litigation may be time-consuming, expensive, and disruptive to normal business operations, and the outcome of litigation is difficult to predict. The defense of the litigation described in “Legal Proceedings,” and any future lawsuits, may result in significant expenditures and the continued diversion of our management’s time and attention from the operation of our business, which could impede our business. In the event we were to receive an unfavorable outcome in any lawsuit, our business, financial condition, results of operations, cash flows and the trading price of our securities may be materially and adversely affected.
If mobile connected devices, their operating systems or content distribution channels, including those controlled by our competitors, develop in ways that prevent our digital marketing campaigns from being delivered to the users of these devices, our ability to grow our business will be impaired.
Our success in the mobile channel depends upon the continued ability of our technology platform to integrate with mobile inventory suppliers and provide advertising for most mobile connected devices, as well as integrate with the major operating systems that run on them and the thousands of applications that are downloaded onto them. The design of mobile devices and operating systems is controlled by third parties with which we do not have any formal relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating systems or modify existing ones. Technologies have been developed, and will likely continue to be developed, that can block the display of our advertisements, in particular with respect to mobile platforms. Network carriers may also impact the ability to access specified content on mobile devices or to identify the specific location of such devices. If our solution is or becomes unable to work on these devices or operating systems, either because of technological constraints or because a maker of these devices or developer of these operating systems wishes to impair our ability to provide advertisements on them, our ability to generate revenue could be significantly harmed.
Legal claims resulting from the actions of our customers could damage our reputation and be costly to defend.
We do not independently verify whether the content of the advertisements we deliver is legally permitted. We typically receive representations from customers that the content of the advertising that we place on their behalf is lawful. We also rely on representations from our customers that they have obtained all necessary permissions, and maintain adequate privacy policies that allow us to place cookies and other tracking mechanisms on their websites and collect data from users that visit those websites to aid in delivering our solution. If any of these representations are untrue and our customers do not abide by federal, state, local or foreign laws governing their content or privacy practices we may become subject to legal claims, we will be exposed to potential liability (for which we may or may not be indemnified), and our reputation may be damaged.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with customers and other third parties may include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our solution or other contractual obligations. The term of these indemnity provisions generally survives termination or expiration of the applicable agreement. Large indemnity payments could harm our business, operating results and financial condition.
We may be exposed to product liability claims for which our insurance may be inadequate.
Our business and potential future service offerings may expose us to potential product liability risks. Although we maintain insurance policies, there can be no assurance, that such insurance will be sufficient to cover potential claims or that the present level of coverage will be available in the future at a reasonable cost. Further, we cannot provide any assurance that our insurance will provide adequate coverage against potential liabilities if a future product causes harm or fails to perform as promised, adequate product liability insurance will continue to be available in the future or our insurance can be maintained on acceptable terms. The obligation to pay any product liability claim in excess of whatever insurance we are able to obtain would increase our expenses and could harm our business, operating results and financial condition.
Our historical revenue growth has masked seasonal fluctuations in advertising activity. If growth declines, as it did for the fiscal quarter ended March 31, 2017 as compared to the same quarterly period from our prior fiscal year, or seasonal patterns become more pronounced, seasonality could have a material impact on our results.
We expect our revenue, operating results, cash flow from operations and other key operating and performance metrics to vary from quarter to quarter in part due to the seasonal nature of our customers’ spending on digital marketing campaigns. For example, many advertisers tend to devote a significant portion of their advertising budgets to the fourth quarter of the calendar year to coincide with consumer holiday spending. Moreover, media inventory in the fourth quarter may be more expensive due to increased demand for media inventory. Our historical revenue growth has partially masked the impact of seasonality, but if our growth rate declines, as it did for the fiscal quarter ended March 31, 2017 as compared to the same quarterly period from our prior fiscal year, or seasonal spending by our customers on marketing campaigns becomes more pronounced, seasonality could have a material impact on our revenue, operating results, cash flow from operations and other key operating and performance metrics from period-to-period.
We have a history of losses and we may not achieve or sustain profitability in the future.
We incurred net losses of
$13.0 million
,
$22.5 million
and
$17.9 million
in
2014
,
2015
and
2016
, respectively, and a net loss of
$9.2 million
for the
three
months ended
March 31, 2017
. As of
March 31, 2017
, we had an accumulated deficit of
$78.4 million
. Although our revenue has increased in recent years, we may not be able to achieve or sustain profitability or this revenue growth rate. If we do not achieve and sustain profitability, our revenue growth rate declines or our expenses exceed expectations, our financial performance will be adversely affected.
Any forecasts that we have utilized, provided or may provide in the future may prove to be inaccurate, and even if the markets in which we compete achieve forecasted growth, we cannot assure you our business will grow at similar rates, if at all.
Forecasts are subject to significant uncertainty and are based on assumptions and estimates, which may not prove to be accurate. Forecasts relating to the expected growth in advertising and other markets may prove to be inaccurate. Even if these markets experience the forecasted growth, we may not grow our business at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties.
We do not have long-term commitments from our customers, and we may not be able to retain customers or attract new customers to sustain or grow current revenue.
Most of our customers do business with us by placing insertion orders for particular digital marketing campaigns, either directly or through advertising agencies that act on their behalf. We rarely have any commitment from a customer beyond the campaign governed by a particular insertion order, and we frequently must compete to win further business from a customer. In accordance with the Interactive Advertising Bureau our insertion orders may also be cancelled by customers or their advertising agencies prior to the completion of the campaign without penalty. As a result, our success is dependent upon our ability to outperform our competitors and win repeat business from existing customers, while continually expanding the number of customers for which we provide services. Because we rarely have long-term agreements, we may not accurately predict future revenue streams, and we cannot guarantee that our current customers will continue to use our solution, or that we will be able to replace departing customers with new customers that provide us with comparable revenue.
The digital advertising market is relatively new and dependent on growth in various digital advertising channels. If this market develops more slowly or differently than we expect, our business, growth prospects and financial condition would be adversely affected.
The digital advertising market is relatively new and our solution may not achieve or sustain high levels of demand and market acceptance. The future growth of our business depends not only on the growth of the digital display advertising market, but also the expansion of other digital advertising channels and our ability to gain market share within those channels. In addition, our growth will depend on the increased adoption by the advertising industry of automation in lieu of manual operations for order placement. Any expansion of the market for digital advertising solutions depends on a number of factors and the cost, performance and perceived value associated with digital advertising solutions. If demand for digital display advertising, the expansion of other digital advertising channels and adoption of advertising automation does not continue to grow, or if digital advertising solutions or advertising automation do not achieve widespread adoption, our revenue and results of operations could be harmed.
We have historically depended on display advertising. A decrease in the use of display advertising, or our inability to further penetrate display, mobile, social and video advertising channels would harm our business, growth prospects, operating results and financial condition.
Historically, our customers have predominantly used our solution for display advertising, and our revenue is derived from advertisers, typically through their agencies, that use our solution. We expect that display advertising will continue to be a significant channel for our customers. If our customers were to lose confidence in the value or effectiveness of display advertising, the demand for our solution may decline. In addition, our failure to achieve market acceptance of our solution for mobile, social and video advertising would harm our growth prospects, operating results and financial condition.
Potential “Do Not Track” standards or government regulation could negatively impact our business by limiting our access to the anonymous user data that the MaxPoint Intelligence Platform uses to predict local purchase demand and execute the digital marketing campaigns we run, and as a result may degrade our performance for our customers, which, in turn, may have a material adverse effect on our business.
As the use of cookies has received ongoing media attention over the past several years, some government regulators and privacy advocates have suggested creating a “Do Not Track” standard that would allow Internet users to express a preference, independent of cookie settings in their web browser, not to have their website browsing history recorded. All the major Internet browsers have implemented some version of a “Do Not Track” setting. In the past, Microsoft’s Internet Explorer 10 included a “Do Not Track” setting that was selected “on” by default. However, there is no definition of “tracking,” no consensus regarding what message is conveyed by a “Do Not Track” setting and no industry standards regarding how to respond to a “Do Not Track” preference. It is possible that we could face competing policy standards, or standards that put our business model at a competitive disadvantage to other companies that collect data from Internet users and may not be required to adhere to a Do Not Track policy standard, standards that reduce the effectiveness of our solution, or standards that require us to make costly changes to our solution. The Federal Trade Commission has stated that it will pursue a legislative solution if the industry cannot agree upon a standard. The “Do-Not-Track Online Act of 2015” was introduced in the United States Senate in December 2015. If a “Do Not Track” web browser setting is adopted by many Internet users, and the standard either imposed by state or federal legislation, or agreed upon by standard setting groups, requires us to recognize a “Do Not Track” signal and prohibits us from using non-personal data as we currently do, then that could hinder growth of advertising and content production on the web generally, and limit the quality and amount of data we are able to store and use, which would cause us to change our business practices and have a material adverse effect on our business.
Legislation and regulation of online businesses, including privacy and data protection regimes, could create unexpected costs, subject us to enforcement actions for compliance failures, or cause us to change our technology platform or business model, which may have a material adverse effect on our business.
Government regulation could increase the costs of doing business online. Both U.S. and foreign governments have enacted or are considering enacting legislation related to online advertising, and we expect to see an increase in legislation and regulation related to advertising online, the use of geo-location data to inform advertising, the collection and use of anonymous Internet user data and unique device identifiers, such as IP address or unique mobile device identifiers, and other data protection and privacy regulation. Revelations about bulk online data collection by the National Security Agency, and news articles suggesting that the National Security Agency may gather data from cookies placed by Internet advertisers to deliver interest-based advertising, may further interest governments in legislation regulating data collection by commercial entities, such as advertisers, publishers and technology companies that serve the advertising industry. Such legislation could affect the costs of doing business online and could reduce the demand for and/or efficacy of our solutions or otherwise harm our business, financial condition and results of operations. A wide variety of provincial, state, national and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of personal data. While historically we have not collected data that is traditionally considered personal data by U.S. regulators, such as name, email address, address, phone numbers, social security numbers, credit card numbers, financial or health data, we typically do collect and store IP addresses and other device identifiers, that are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation. Evolving and changing definitions of personal data and consumer consent within the EU, the United States and elsewhere, especially relating to classification of IP addresses, machine or device identifiers, location data and other information, have in the past, and could in the future, cause us to change our business practices or limit or inhibit our ability to operate or expand our business. For example, in February 2016, the European Commission and the U.S. reached a political agreement on the EU-US Privacy Shield, a new framework for data flows between the two jurisdictions. The EU-US Privacy Shield will impose more significant obligations on U.S. companies, including us, to protect the personal information of European citizens and also will require stronger monitoring and enforcement of personal privacy by the U.S. Department of Commerce and the Federal Trade Commission. Data protection and privacy-related laws and regulations are evolving and could result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. In addition, the European Union has adopted a General Data Protection Regulation, Regulation (EU) 2016/679 or the "GDPR," and associated e-privacy directives, that will supersede the EU Data Protection Directive. The GDPR sets out higher potential liabilities for certain data protection violations, as well as a greater compliance burden for us in the course of delivering our solution in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy.
While we take measures to protect the security of information that we collect, use and disclose in the operation of our business, and to offer certain privacy protections with respect to that information, our measures may not always be effective. In addition, while we take steps to avoid collecting personally identifiable information about consumers without consent, we may inadvertently receive this information from advertisers or advertising agencies or through the process of delivering advertising and new solutions we may develop or offer may rely on access or utilization of such information.
Our failure to comply with applicable laws and regulations, or to protect personal data, could result in enforcement action against us (including by numerous data protection authorities in the European Union), including fines, imprisonment of our officers and public censure, claims for damages by consumers and other affected individuals, loss of customers and damage to our reputation and loss of goodwill, any of which could have a material adverse impact on our business, financial condition and results of operations. Even the perception of privacy concerns, whether or not valid, could harm our reputation and inhibit adoption of our solutions by current and future advertisers and advertising agencies.
Our ability to generate revenue depends on our collection of significant amounts of data from various sources.
Our ability to deliver our business intelligence and marketing automation software solution depends on our ability to successfully leverage significant amounts of data, including data that we collect from our customers and acquire from third parties, as well as raw data captured by our proprietary consumer purchase intent model. The foundation of our local targeting is our proprietary Digital Zip architecture, a digital grid of households organized into specific neighborhoods, or Digital Zips. We have approximately
44,000
,
39,000
and
5,300
Digital Zips in the United States, Europe and Canada, respectively. We create a profile for each Digital Zip by using third-party data and proprietary data captured by our consumer purchase intent model, including IP addresses and consumer online browsing data, and any limit to our access or use of these types of data could impact our ability to match the most likely community of local buyers with specific products, which could have an adverse effect on our ability to successfully execute our customers’ digital marketing campaigns on a real-time basis. Our customers often share with us enterprise data, such as point of sale and spending information, and certain customers provide us with supply chain management and customer relationship management data, which may include household-level data. If our enterprise customers do not share their data, our ability to scale and provide our solution could be adversely affected. In addition, our ability to successfully leverage vast amounts of data is dependent upon our continued ability to access and utilize up-to-date data. Our ability to access and use such data could be restricted by a number of factors, including consumer choice, restrictions imposed by our customers, changes in technology and new developments in laws, regulations and industry standards. If the data we utilize is out-of-date or stale, our predictions, recommendations and business intelligence will be ineffective and our reputation will suffer. Further, we sometimes use cookies and other tracking mechanisms to deliver our solution, and certain widely adopted web browsers currently block or are planning to block some or all third-party cookies by default. As a result, we could be blocked from serving advertisements on the basis of cookies to users that utilize web browsers that block third-party cookies. Any limitation on our ability to collect data would make it more difficult for us to deliver effective solutions that meet the needs of national brands. This, in turn, could adversely affect our business and operating results.
We may experience outages and disruptions of our services or experience data security incidents if we fail to maintain adequate security and supporting infrastructure our systems, which may harm our brand and reputation, result in regulatory enforcement, actions or litigation and negatively impact our revenue and results of operations.
Creating the appropriate support for our technology platform, including storing large amounts of data and managing our computational infrastructure, is expensive and complex, and our failure to create and maintain such support, particularly as we scale our system to support our business, could result in operational inefficiencies, disruptions or failures and increased vulnerability to cyber-attacks. Cyber-attacks could diminish the quality of our services and our performance for customers. Cyber-attacks could include denial-of-service attacks impacting service availability (including the ability to deliver advertisements) and reliability; the exploitation of software vulnerabilities in Internet-facing applications; social engineering of system administrators (tricking company employees into releasing control of their systems to a hacker) or the introduction of computer viruses or malware into our systems with a view to steal confidential or proprietary data. Cyber-attacks of increasing sophistication may be difficult to detect and could result in the theft of our intellectual property and our data or our customers’ data. In addition, we are vulnerable to unintentional errors or malicious actions by persons with authorized access to our systems that exceed the scope of their access rights, or unintentionally or intentionally alter parameters or otherwise interfere with the intended operations of our platform. The steps we take to increase the reliability, integrity and security of our systems as they scale may be expensive and may not prevent system failures or unintended vulnerabilities resulting from the increasing number of persons with access to our systems, complex interactions within our technology platform, the increasing number of connections with third-party partners and vendors’ technology and the increasing volume of data analyzed by our systems. If we experience a security incident involving consumer data, or we do not comply with legal requirements or industry standards concerning data security, we could face regulatory enforcement actions or private litigation. Operational errors or failures or successful cyber-attacks also could result in damage to our reputation and loss of customers and other business partners which could harm our business. In addition, we could be adversely impacted by outages and disruptions in the online platforms of our key business partners, such as the RTB exchanges, which we rely upon for access to inventory.
Changes in market standards applicable to our solution could require us to incur substantial additional development costs.
Market forces, competitors’ initiatives, regulatory authorities, industry organizations and security protocols are causing the emergence of demands and standards that are or could be applicable to our solution. We expect compliance with these kinds of standards to become increasingly important to our customers and the consumers they sell their products to, and conforming to these standards is expected to consume a substantial and increasing portion of our development resources. If our solution is not consistent with emerging standards, our market position and sales could be impaired. If we fail to conform with these standards, we will be at a disadvantage to our competitors, and we may face regulatory enforcement actions or private litigation.
If we fail to detect fraud or if we serve our customers’ advertisements on objectionable websites, our brand and reputation will suffer, which would negatively impact our business, financial condition and results of operations.
Our business depends in part on providing our customers with a service that they trust, and we have contractual commitments to take reasonable measures to prevent customers’ advertisements from appearing on undesirable websites or on certain websites that they identify. We use proprietary technology to detect click fraud and block inventory that we suspect to be fraudulent. We also use third-party services in an effort to prevent our customers’ advertisements from appearing on undesirable websites. Preventing and combating fraud requires constant vigilance, and we may not always be successful in our efforts to do so. We may serve advertising on web sites that are objectionable to our customers, and we may lose the trust of our customers, which would harm our brand and reputation and negatively impact our business, financial condition and results of operations. We may also inadvertently purchase inventory that proves to be unacceptable for digital marketing campaigns, such as advertising inventory on objectionable or undesirable websites, in which case we would be responsible for the cost and could not bill that cost to any customer.
Our revenue could decline and our operations could be impeded if our access to quality media inventory or impressions is diminished or if we fail to acquire new media inventory or impressions.
Our success depends on our ability to secure quality media inventory on reasonable terms across a broad range of advertising networks and exchanges, including RTB exchanges, such as Google’s DoubleClick Ad Exchange, OpenX, Rubicon Project, MoPub, PubMatic and AppNexus, as well as suppliers of video and mobile inventory.
The amount, quality and cost of inventory and impressions available to us can change at any time. For the year ended
December 31, 2016
,
five
RTB exchanges each provided 10% or more of our total impression purchases. These
five
exchanges together accounted for approximately
89%
of our total impression purchases, with the largest exchange accounting for approximately
24%
. If we are not able to access the impressions on any of these exchanges due to a change in our relationship with that exchange or the exchange experiences financial difficulty, our revenue could decline and growth could be impeded.
Our media inventory suppliers are generally not bound by long-term agreements. As a result, there is no guarantee that we will have access to a consistent supply of quality inventory. Moreover, the number of competing intermediaries that purchase advertising inventory from RTB exchanges continues to increase, which could put upward pressure on inventory costs. If we are unable to compete favorably for media inventory available on RTB exchanges, or if RTB exchanges decide not to make their media inventory available to us, we may not be able to place advertisements at competitive rates or find alternative sources of inventory with comparable traffic patterns and consumer demographics in a timely manner.
Suppliers control the real-time bidding process for the inventory they supply, and their processes may not always work in our favor. For example, suppliers may place restrictions on the use of their inventory, including prohibiting the placement of advertisements on behalf of certain customers. Through the bidding process, we may not win the media inventory that we have selected and may not be able to replace media inventory that is no longer made available to us. Moreover, any material changes to, or the disappearance of, the real-time bidding ecosystem could negatively impact our business by limiting our ability to target and selectively purchase impressions.
If we are unable to maintain a consistent supply of quality media inventory for any reason, our business, customer retention and loyalty, financial condition and results of operations could be harmed.
Our sales and marketing efforts may not yield returns in the foreseeable future, if at all.
We have developed our sales and marketing teams to educate potential and prospective customers, either directly or through the advertising agencies that act on their behalf, about the value of our solution. We are often required to explain how our solution can optimize brand and retail performance through digital marketing campaigns and measurement in real time. We often spend substantial time and resources responding to requests for proposals from potential customers or their advertising agencies, including developing material specific to the needs of such potential customers. We may not be successful in attracting new customers despite our efforts in our business development, sales and marketing organizations.
If we do not effectively develop our sales team, we may be unable to add new customers or increase sales to our existing customers and our business will be adversely affected.
We continue to be substantially dependent on our sales team to obtain new customers and to drive sales from our existing customers. We believe that there is significant competition for sales personnel with the skills and technical knowledge that we require. Our ability to achieve revenue growth will depend, in large part, on our success in recruiting, training, integrating and retaining sufficient numbers of sales personnel. New hires require significant training and it may take significant time before they achieve full productivity. Our recent hires and planned hires may not become productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. If we are unable to hire and train sufficient numbers of effective sales personnel, or the sales personnel are not successful in obtaining new customers or increasing sales to our existing customer base, either directly or through advertising agencies that act on their behalf, our business will be adversely affected.
Our growth depends, in part, on the success of our strategic relationships with third parties, including strategic data relationships to facilitate the delivery of our solution and reliable management of Internet traffic.
We anticipate that we will continue to depend on various third-party relationships to grow our business. We continue to pursue additional relationships with third parties, such as data integration alliances, technology and content providers, RTB exchanges, market research companies, co-location facilities and other strategic partners. Identifying, negotiating and documenting relationships with third parties requires significant time and resources as does integrating third-party data and services.
Our agreements with providers of technology, data, computer hardware, co-location facilities, RTB exchanges and our third-party data integration alliances are typically non-exclusive, do not prohibit them from working with our competitors or from offering competing services and do not typically have minimum purchase commitments. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce purchases of our solution. In addition, these third parties may not perform as expected under our agreements with them, and we may have disagreements or disputes with such third parties, which could negatively affect our brand and reputation.
In particular, our continued growth depends on our ability to source computer hardware, including servers built to our specifications, and the ability to locate those servers and related hardware in co-location facilities in the most desirable locations to facilitate the timely delivery of our services. Similarly, disruptions in the services provided at co-location facilities that we rely upon can degrade the level of services that we can provide, which may harm our business. We also rely on our integration with many third-party technology providers to execute our business on a daily basis. We must efficiently direct a large amount of network traffic to and from our servers to consider tens of billions of bid requests per day, and each bid typically must take place in approximately 100 milliseconds. We rely on a third-party domain name service, or DNS, to direct traffic to our closest data center for efficient processing. If our DNS provider experiences disruptions or performance problems, this could result in inefficient balancing of traffic across our servers as well as impair or prevent web browser connectivity to our site, which may harm our business.
Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition and results of operations.
Our business depends on the overall demand for advertising and on the economic health of the national brands that are our current and prospective customers. Economic downturns or instability in political or market conditions may cause current or new customers to reduce or reallocate their advertising budgets or choose lower cost alternative providers. Adverse economic conditions and general uncertainty about economic recovery are likely to affect our business prospects. Concern over such downturns or economic recovery could cause customers to delay, decrease or cancel purchases of our solution; and expose us to increased credit risk on customer orders, which, in turn, could negatively impact our business, financial condition and results of operations. In addition, concern over continued geopolitical turmoil in many parts of the world have and may continue to put pressure on global economic conditions, which could lead to reduced spending on advertising.
Failure to comply with industry standards could harm our reputation and our business.
If we make mistakes in the future, or our opt-out mechanisms fail to work as designed, or if Internet users misunderstand our technology, we may, as a result, be subject to negative publicity, government investigation, government or private litigation, or investigation by self-regulatory bodies or other accountability groups. Any such action against us could be costly and time consuming, require us to change our business practices, cause us to divert management’s attention and our resources and be damaging to our reputation and our business.
Real or perceived errors or failures in our software and systems could adversely affect our operating results and growth prospects and could cause us reputational harm.
We depend upon the sustained and uninterrupted performance of our technology platform to: operate over a thousand digital marketing campaigns at any given time; manage our inventory supply; bid on inventory for each campaign; serve or direct a third party to serve advertising; collect, process and interpret data; optimize campaign performance in real time and provide billing information to our financial systems. If our technology platform cannot scale to meet demand, or if there are errors in our execution of any of these functions on our platform, then our business may be harmed. Because our software is complex, undetected errors and failures may occur, especially when new versions or updates are made. We do not have the capability to test new releases or updates to our code on a small subset of digital marketing campaigns, which means that bugs or errors in code could impact all campaigns on our platform. Despite testing by us, errors or bugs in our software have in the past, and may in the future, not be found until the software is in our live operating environment. For example, we have experienced failures in our bidding system to recognize or respond to budget restrictions for digital marketing campaigns, resulting in overspending on media inventory, and we may in the future have failures in our systems that cause us to buy more media than our customers are contractually obligated to pay for, which could be costly and harm our operating results. Errors or failures in our software could also result in negative publicity, damage to our reputation, loss of or delay in market acceptance of our solution, increased costs or loss of revenue, loss of competitive position or claims by customers for losses sustained by them. In such an event, we may be required or choose to expend additional resources to help mitigate any problems resulting from errors in our software. We may make errors in the measurement of our digital marketing campaigns causing discrepancies with our customers’ measurements leading to a lack in confidence in our technology platform. If measurement errors or discrepancies relate to marketing campaigns for which we have billed amounts to customers, we may have the need to provide the customer with “make-goods,” or standard credits given to advertisers for campaigns that have not been delivered properly. Alleviating problems resulting from errors in our software could require significant expenditures of capital and other resources and could cause interruptions, delays or the cessation of our business, any of which would adversely impact our financial position, results of operations and growth prospects.
Our future success depends on the continuing efforts of our key employees, including our three founders, Joseph Epperson, Gretchen Joyce and Kurt Carlson, and on our ability to hire, retain and motivate additional key employees.
Our future success depends heavily upon the continuing services of our key employees, including our three founders, Joseph Epperson, our president and chief executive officer, Gretchen Joyce, our chief operating officer, and Kurt Carlson, our chief technology officer, and on our ability to attract and retain members of our management team and other highly skilled employees, including software engineers, analytics and operations employees and sales professionals. The market for talent in our key areas of operations is intensely competitive. None of our founders or other key employees has an employment agreement for a specific term, and any of our employees may terminate his or her employment with us at any time.
New employees often require significant training and, in many cases, take significant time to achieve full productivity. As a result, we may incur significant costs to attract and retain employees, including salaries, benefits and compensation expenses related to equity awards, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. Moreover, new employees may not become as productive as we expect, as we may face challenges in adequately or appropriately integrating them into our workforce and culture. In addition, if we move into new geographies, we will need to attract and recruit skilled employees in those areas. We have little experience with recruiting outside of the United States, and may face additional challenges in attracting, integrating and retaining international employees. In addition, job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards declines, it may adversely affect our ability to recruit and retain skilled employees.
Our corporate culture has contributed to our success, and if we cannot maintain it, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.
As of
March 31, 2017
, we had
369
employees in the United States and
11
employees in the United Kingdom, compared with
399
employees in the United States and
11
employees in the United Kingdom as of
March 31, 2016
. We believe our corporate culture has been a critical component of our success as we believe it fosters innovation, teamwork, passion for customers and focus on execution, while facilitating knowledge sharing across our organization. As we continue to develop and change, we may find it difficult to preserve our corporate culture, which could reduce our ability to innovate and operate effectively. In turn, the failure to preserve our culture could negatively affect our ability to attract, recruit, integrate and retain employees, continue to perform at current levels and effectively execute our business strategy.
We rely on advertising agencies that act on behalf of our customers, and we incur the cost of a digital marketing campaign before we bill for our services. Potential delays in payment or non-payment could have an adverse effect on our results of operations and financial condition.
A substantial majority of our revenue is sourced through advertising agencies, which act as agents for disclosed principals that are the advertisers. Typically, the advertising agency pays for our services once it has received payment from the advertiser for our services. However, we are obligated to pay for media inventory we have purchased from RTB exchanges before receiving such payments from the advertising agency. This delay in payment, which is typically more prolonged than the delay in payment we experience when we bill advertisers directly, could negatively impact our liquidity and financial condition. Contracting with these agencies could subject us to greater liquidity risk than when we contract with advertisers directly and to credit risk if an agency is unable to pay us once paid by the advertiser. These risks may vary depending on the nature of an advertising agency’s aggregated advertiser base and the related timing of payment to the agency by our customer. There can be no assurance that we will not experience significant delays in payment in the future. Our agreements with advertising agencies typically provide that if the advertiser does not pay the agency, the agency is not liable to us and we must seek payment solely from the advertiser. Any such delays in payment to the agency by our customer and any failure by the advertiser to pay the agency or the agency to pay us could have a material adverse effect on our results of operations.
Because we generally bill our customers over the term of the agreement, near-term declines in new or renewed agreements generating revenue may not be reflected immediately in our operating results.
Most of our revenue in each quarter is derived from agreements entered into with our customers during the previous three months. Consequently, a decline in new or renewed customer agreements in any one quarter may not be fully reflected in our revenue for that quarter. Such declines, however, would negatively affect our revenue in future periods and the effect of significant downturns in sales and market acceptance of our solution, and potential changes in our rate of renewals or renewal terms, may not be fully reflected in our results of operations until future periods. In addition, we may be unable to adjust our cost structure rapidly enough, or at all, to take account of reduced revenue. Our business model also makes it difficult for us to rapidly increase our total revenue through additional sales in any period, as revenue from new customers must be earned over the applicable agreement term based on the value of their monthly advertising spend.
We use co-location facilities to deliver our services. Any disruption of service at these facilities could harm our business.
We maintain servers at co-location facilities in San Jose, California; Santa Clara, California; Somerset, New Jersey; Austin, Texas; Ashburn, Virginia; and Amsterdam, the Netherlands, and expect to add other data centers at co-location facilities in the future. Although we control the actual computers, networks and storage systems upon which our platform runs, and deploy them to the data center facilities, we do not control the operation of the facilities. The owners of the facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew our agreements on commercially reasonable terms, we may be required to transfer to a new facility or facilities, and we may incur significant costs and possible service interruption in connection with doing so.
The facilities are vulnerable to damage or service interruption resulting from human error, intentional bad acts, earthquakes, hurricanes, tornadoes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism, any outages or vandalism or other misconduct, or a decision to close the facility without adequate notice or other unanticipated problems could result in lengthy interruptions in our services. If we were to lose the data stored in any of our co-location facilities, it could take several days, if not weeks, to recreate this data from multiple sources, which could result in significant negative impact on our business operations, and potential damage to our customer and advertising agency relationships. Our facilities would likely be costly to repair or replace, and any such efforts would likely require substantial time.
Any changes in service levels at the co-location facilities or any errors, defects, disruptions or other performance problems at or related to the facilities that affect our services could harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenue, subject us to potential liability, or result in reduced usage of our platform.
We also depend on third-party Internet-hosting providers and continuous and uninterrupted access to the Internet through third-party bandwidth providers to operate our business. If we lose the services of one or more of our Internet-hosting or bandwidth providers for any reason or if their services are disrupted, for example due to viruses or “denial-of-service” or other attacks on their systems, or due to human error, intentional bad acts, power loss, hardware failures, telecommunications failures, fires, wars, terrorist attacks, floods, earthquakes, hurricanes, tornadoes or similar events, we could experience disruption in our ability to offer our solution or we could be required to retain the services of replacement providers, which could increase our operating costs and harm our business and reputation.
Our planned international expansion subjects us to additional costs and risks, may not yield returns in the foreseeable future, and may not be successful.
Currently, we have operations in the United Kingdom, which began in 2014. While non-U.S. operations are not currently material, we expect to expand our international operations in the future, and our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful.
Our international expansion presents challenges and risks to our business and requires significant attention from our management, finance, analytics, operations, sales and engineering teams to support digital marketing campaigns abroad. We may incur significant operating expenses as a result of our international expansion, and it may not be successful. Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business abroad, may interfere with our ability to offer our solution competitively to customers in one or more countries, or at all, and may expose us or our employees to fines and penalties. Laws and regulations that may impact us include tax laws, employment laws, regulations related to data privacy and security, U.S. laws such as the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments to governmental officials and private entities, such as the U.K. Bribery Act. Violations of these laws or regulations could result in monetary damages, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business.
Our international business also subjects us to the impact of global and regional recessions and economic and political instability, including instability surrounding “Brexit,” costs and difficulties in managing a distributed workforce, potentially adverse tax consequences in the United States and abroad and restrictions on the repatriation of funds to the United States. Our failure to manage these risks and challenges successfully could materially and adversely affect our business, financial condition and results of operations.
Fluctuations in the exchange rates of foreign currencies could negatively impact our financial results.
We anticipate international sales and operations to become an increasingly important part of our business. Such sales and operational expenses may be subject to unexpected regulatory requirements and other barriers. Any fluctuation in the exchange rates of these foreign currencies, particularly in light of the “Brexit” vote and other recent political developments, may negatively impact our business, financial condition and results of operations. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets. In addition, those activities may be limited in the protection they provide us from foreign currency fluctuations and can themselves result in losses.
Our proprietary rights may be difficult to enforce, which could enable others to copy or use aspects of our solution without compensating us, thereby eroding our competitive advantages and harming our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the intellectual property laws of the United States, so that we can prevent others from using our inventions and proprietary information. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business might be adversely affected. We rely on trademark, copyright, trade secret and patent laws, confidentiality procedures and contractual provisions to protect our proprietary methods and technologies. Our patent strategy is still in its early stages and while we have a small number of pending patent applications, valid patents may not be issued from our pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to protect our technology or offerings and services. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States, including the America Invents Act, and other national governments and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain adequate patent protection, or to prevent third parties from infringing upon or misappropriating our intellectual property.
Unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary. We generally enter into confidentiality and/or license agreements with our employees, consultants, vendors and customers, and generally limit access to and distribution of our proprietary information. However, we cannot assure you that any steps taken by us will prevent misappropriation of our technology and proprietary information. Policing unauthorized use of our technology is difficult. In addition, the laws of some foreign countries may not be as protective of intellectual property rights as those of the United States, and mechanisms for enforcement of our proprietary rights in such countries may be inadequate. From time to time, legal action by us may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation could result in substantial costs and the diversion of limited resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our proprietary rights (including aspects of our technology platform) we may find ourselves at a competitive disadvantage to others that have not incurred the same level of expense, time and effort to create and protect their intellectual property.
We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
Third parties may assert claims of infringement of intellectual property rights in proprietary technology against us or against our customers for which we may be liable or have an indemnification obligation. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, limit our ability to use certain technologies and could distract our management from our business.
Although such third parties may offer a license to their technology, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could cause our business, results of operations or financial condition to be materially and adversely affected. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and ultimately may not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from providing certain solutions or services or that requires us to pay substantial damages, including treble damages if we are found to have willfully infringed such claimant’s patents or copyrights, royalties or other fees. Any of these events could seriously harm our business, operating results and financial condition.
Our solution relies on third-party open source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our solution or cause us to make generally available portions of our proprietary code.
Our platform relies on software licensed to us by third-party authors under “open source” licenses. The use of open source software may entail greater risks than the use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar solutions with lower development effort and time and ultimately put us at a competitive disadvantage.
Although we monitor our use of open source software to avoid subjecting our solution to conditions we do not intend, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our services. Moreover, we cannot guarantee that our processes for controlling our use of open source software will be effective. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue operating our platform on terms that are not economically feasible, to re-engineer our platform or the supporting computational infrastructure to discontinue use of certain code, or to make generally available, in source code form, portions of our proprietary code, any of which could adversely affect our business, operating results and financial condition.
If our assumptions or estimates relating to our critical accounting policies change or prove to be incorrect, our operating results could fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation, internal-use software, accrued liabilities and income taxes.
We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our results of operations.
As part of our business strategy, we may make investments in or acquisitions of complementary companies, products or technologies. However, we have not made any acquisitions to date, and as a result, our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner is unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our customers, the advertising agencies that represent them, and investors or could subject us to class action lawsuits that often follow public company acquisitions. In addition, if we are unsuccessful at integrating employees or technologies acquired, our revenue and results of operations could be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or use the acquired technology or employees, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale of equity or issuance of convertible debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations, could weaken our financial position and the agreements governing such indebtedness could include covenants or other restrictions that would impede our ability to manage our operations or pay dividends on our common stock.
We are subject to government regulations concerning our employees, including wage-hour laws and taxes.
We are subject to applicable rules and regulations relating to our relationship with our employees, including health benefits, unemployment and similar taxes, overtime and working conditions, immigration status and classification of employee benefits for tax purposes. Legislated increases in additional labor cost components, such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines, as well as the cost of litigation in connection with these regulations, would increase our labor costs. Moreover, we are subject to various laws and regulations in federal, state and foreign jurisdictions that impose varying rules and obligations on us with respect to the classification of employee benefits for income tax and other purposes and that require us to report and/or withhold in respect of such items. In addition, many employers nationally have been subject to actions brought by governmental agencies and private individuals under wage-hour laws on a variety of claims, such as improper classification of workers as exempt from overtime pay requirements and failure to pay overtime wages properly, with such actions sometimes brought as class actions, and these actions can result in material liabilities and expenses. Should we be subject to employment litigation, such as actions involving wage-hour, overtime, break and working time, it may distract our management from business matters and result in increased labor costs.
We may be subject to governmental export, import and sanctions requirements that could subject us to liability or impair our ability to compete in international markets.
Our operations may be subject to U.S. export controls, including the Export Administration Regulations, or EAR, as well as economic sanctions enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control, or OFAC. To the extent that we export proprietary software that contains or is secured by encryption technology, the EAR may require us to meet various compliance responsibilities, including complying with encryption registration, classification requests, and export licensing requirements. Furthermore, EAR and OFAC compliance requirements prohibit the shipment of certain products and services to designated countries, entities and individuals targeted by U.S. sanctions. These EAR and OFAC obligations could impact our ability to pursue business opportunities outside the United States and subject us to liability for failure to meet applicable compliance requirements.
In addition, various foreign countries regulate the import of certain encryption technology, including through import permit and license requirements, and have enacted laws that could limit our ability to deploy our technology or could limit our customers’ ability to use our solution in those countries. Changes in our technology or in applicable import and export regulations may create delays in the introduction or deployment of our technology in international markets, prevent our customers with international operations from using our solution globally or, in some cases, prevent certain transactions with designated countries, entities or individuals. Such changes in applicable import, export and sanctions laws, including possible shifts in the manner in which respective governments enforce such requirements, could result in decreased use of our solution by, or in our decreased ability to export our technology to, international markets. Any decreased use of our solution or limitation on our ability to export our technology or to sell our solution would likely adversely affect our business, financial condition and results of operations.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations which could subject our business to higher tax liability.
We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. At
December 31, 2016
, we had U.S. federal net operating loss carryforwards, or NOLs, of
$57.2 million
, state NOLs of
$48.8 million
and foreign operating loss carry forwards of
$7.1 million
. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We believe that we experienced an ownership change under Section 382 of the Code in prior years that may limit our ability to utilize a portion of the NOLs. In addition, future changes in our stock ownership, including future offerings, as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be impaired under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other net deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets. Our NOLs may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Our tax liabilities may be greater than anticipated.
The U.S. and non-U.S. tax laws applicable to our business activities are subject to interpretation. We are subject to audit by the Internal Revenue Service and by taxing authorities of the state, local and foreign jurisdictions in which we operate. Our tax obligations are based in part on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and sell our solution, the jurisdictions in which we operate, how tax authorities assess revenue-based taxes such as sales and use taxes, the scope of our international operations and the value we ascribe to our intercompany transactions. Taxing authorities may challenge our tax positions and methodologies for valuing developed technology or intercompany arrangements, as well as our positions regarding jurisdictions in which we are subject to certain taxes, which could expose us to additional taxes and increase our worldwide effective tax rate. Any adverse outcomes of such challenges to our tax positions could result in additional taxes for prior periods, interest, and penalties as well as higher future taxes. In addition, our future tax expense could increase as a result of changes in tax laws, regulations or accounting principles, or as a result of earning income in jurisdictions that have higher tax rates. An increase in our tax expense could have a negative effect on our financial position and results of operations. Moreover, the determination of our provision for income taxes and other tax liabilities requires significant estimates and judgment by management, and the tax treatment of certain transactions is uncertain. Although we believe we will make reasonable estimates and judgments, the ultimate outcome of any particular issue may differ from the amounts previously recorded in our financial statements and any such occurrence could materially affect our financial position and results of operations.
Risks Related to Ownership of Our Common Stock
The market price of our common stock has been and may be volatile and the value of our common stock could decline.
The trading price of our common stock has been and may be volatile for the foreseeable future. For example, since shares of our common stock were sold in our initial public offering in March 2015, the price of our common stock on the New York Stock Exchange, or beginning May 13, 2016 on the Nasdaq Global Market, or Nasdaq, as adjusted for a
1-for-4
reverse stock split of our outstanding capital stock on April 25, 2016, has ranged from a low of
$3.85
to a high of
$44.96
through
May 3, 2017
. In addition, the trading prices of the securities of technology companies in general have been highly volatile. Accordingly, the market price of our common stock is likely to be subject to wide fluctuations. Factors that could cause fluctuations in the trading price of our common stock, in addition to those in this “Risk Factors” section, include the following:
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announcements of new offerings, products, services or technologies, commercial relationships, acquisitions or other events by us or our competitors;
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price and volume fluctuations in the overall stock market from time to time;
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significant volatility in the market price and trading volume of technology companies in general and of companies in the digital advertising industry in particular;
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fluctuations in the trading volume of our shares or the size of our public float;
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actual or anticipated changes or fluctuations in our results of operations or key metrics;
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whether our results of operations or key metrics meet our forecasts or the expectations of securities analysts or investors or those expectations change;
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litigation involving us, our industry, or both;
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regulatory developments in the United States, foreign countries, or both;
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the impact of macroeconomic, market and political factors and trends, including in light of “Brexit,” and other recent political developments;
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major catastrophic events;
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sales of large blocks of our common stock;
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departures of key employees;
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our ability to raise capital when required or refinance our debt or both; or
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an adverse impact on the company from any of the other risks cited in this report.
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In addition, if the market for technology stocks or the stock market, in general, experience a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation, and we are presently the target of the securities litigation described under “Legal Proceedings.” Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, results of operations and financial condition.
Insiders will continue to have substantial control over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
Our directors and executive officers and their affiliates, in the aggregate, beneficially own approximately
57%
of the outstanding shares of our common stock, based on the number of shares outstanding as of
March 31, 2017
. As a result, these stockholders will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a manner that is adverse to your interests. This concentration of ownership may have the effect of deterring, delaying or preventing a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
If securities or industry analysts do not publish research or reports about our business, or publish unfavorable research reports about our business, our share price and trading volume could decline.
The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us publishes unfavorable commentary about us or changes their opinion of our business prospects, our share price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Sales of substantial amounts of our common stock in the public markets, or the perception that sales might occur, could reduce the price of our common stock and may dilute your voting power and your ownership interest in us.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate.
We may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.
The requirements of being a public company may strain our resources, divert our management’s attention and affect our ability to attract and retain qualified board members.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Compliance with these rules and regulations involves legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and increases demand on our systems and resources. Among other things, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and results of operations and maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal controls over financial reporting, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire even more employees in the future, which will increase our costs and expenses.
Being a public company and these rules and regulations may make it more expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the Nasdaq. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting and to report any material weaknesses in such internal control. Beginning with the fiscal year ended December 31, 2016, we performed system and process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting in our 2016 Annual Report on Form 10-K, as required by Section 404 of the Sarbanes-Oxley Act. Although we have determined that our internal control over financial reporting was effective as of December 31, 2016, as disclosed in Item 9A of our 2016 Annual Report on Form 10-K, we must continue to monitor and assess our internal control over financial reporting.
As a result, we incurred, and anticipate that we will continue to incur, additional professional fees and internal costs to develop our accounting and finance functions and that we will continue to expend significant management efforts.
We may discover weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
If we identify material weaknesses in our internal control over financial reporting, if we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, if we are unable to maintain proper and effective internal controls, if we are unable to assert that our internal control over financial reporting are effective, or if we are not able to produce timely and accurate financial statements, investors may lose confidence in our financial reports and the market price of our common stock could be negatively affected. We could also then be subject to sanctions or investigations by the Nasdaq, the Securities and Exchange Commission, or SEC, or other regulatory authorities.
We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
For so long as we remain an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we may take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies,” including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for so long as we are an “emerging growth company,” which could be until December 31, 2020. Investors may find our common stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile and may decline.
In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of an extended transition period for complying with new or revised accounting standards. However, we chose to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Our stock repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.
On
March 4, 2016
, our board of directors approved a stock repurchase program of up to
$4.0 million
. For the year ended December 31, 2016,
15,197
shares were repurchased for
$0.1 million
under this program. For the three months ended
March 31, 2017
, the Company repurchased
13,081
shares for $0.1 million under this program. As of
March 31, 2017
we had the ability to repurchase up to
$3.8 million
of common stock under the program. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, an assessment by management and our board of directors of cash availability and other market conditions. The program may be suspended or discontinued at any time without prior notice. Repurchases pursuant to our stock repurchase program could affect the price of our common stock and increase its volatility. The existence of our stock repurchase program could also cause the price of our common stock to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our common stock. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased such shares. Any failure to repurchase shares after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our stock price. Although our stock repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.
We do not intend to pay dividends for the foreseeable future 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 dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases. In addition, our loan and security agreement contains a restriction on our ability to pay dividends.
Our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it difficult for stockholders to elect directors that are not nominated by the current members of our board of directors or take other corporate actions, including effecting changes in our management. These provisions include:
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a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;
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the ability of our board of directors to issue shares of convertible preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;
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the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
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a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
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the requirement that a special meeting of stockholders may be called only by a majority vote of our entire board of directors, the chairman of our board of directors or our chief executive officer, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
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the requirement for the affirmative vote of holders of at least 66
2
/
3
% of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror to effect such amendments to facilitate an unsolicited takeover attempt; and
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advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.
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In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.