UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2017

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-36039


YuMe, Inc.
(Exact Name of Registrant as Specified in Its Charter)


Delaware		27-0111478
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1204 Middlefield Road, Redwood City, CA		94063
(Address of Principal Executive Offices)		(Zip Code)

(650) 591-9400

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

Large accelerated filer ☐		Accelerated filer ☒

Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☐

Emerging Growth Company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~July~~October 31, 2017, there were 34,~~538~~946,~~221~~078 shares of the Registrant’s common stock outstanding.

Table of Contents

YuMe, Inc.

FORM 10-Q

Table of Contents

PART I. FINANCIAL INFORMATION		Page
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	1
	Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2931
Item 4.	Controls and Procedures	3032
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3133
Item 1A.	Risk Factors	3133
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5154
Item 3.	Defaults Upon Senior Securities	5154
Item 4.	Mine Safety Disclosures	5154
Item 5.	Other Information	5154
Item 6.	Exhibits	5255
Signature		5356

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

YuMe, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	As of June 30, 2017			As of December 31, 2016
	As of September 30, 2017			As of December 31, 2016
				~~(1)~~	(1)
Assets
Current assets:
Cash and cash equivalents	$	5828,~~185~~589		$	34,700
Marketable securities		1512,~~720~~732			25,751
Accounts receivable, net		46,~~438~~025			51,171
Prepaid expenses and other current assets		34,~~599~~273			3,591
Total current assets		~~123~~91,~~942~~619			115,213
Marketable securities, long-term		—			5,241
Property, equipment and software, net		1315,~~436~~821			11,726
Goodwill		3,902			3,902
Restricted cash, non-current		~~725~~739			710
Deposits and other assets		~~606~~603			587
Total assets	$	~~142~~112,~~611~~684		$	137,379
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	48,~~458~~839		$	10,775
Dividends payable		351,~~562~~045			—
Accrued digital media property owner costs		17,~~807~~924			16,385
Accrued liabilities		12,~~828~~124			12,192
Deferred revenue		~~234~~102			132
Capital leases, current		1,~~384~~819			8
Total current liabilities		7241,~~273~~853			39,492
Capital leases, non-current		10703			13
Other long-term liabilities		~~690~~707			631
Total liabilities		7243,~~973~~263			40,136
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock: $0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding as of June 30, 2017 and December 31, 2016		—			—
Preferred stock: $0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016		—			—
Common stock: $0.001 par value; 200,000,000 shares authorized as of June 30, 2017 and December 31, 2016; 34,525,871 and 33,946,820 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively		37			36
Common stock: $0.001 par value; 200,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 34,936,890 and 33,946,820 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		37			36
Treasury stock: 2,335,144 and 2,019,575 shares as of June 30, 2017 and December 31, 2016, respectively		(8,247	)		(7,105	)
Treasury stock: 2,335,144 and 2,019,575 shares as of September 30, 2017 and December 31, 2016, respectively		(8,247	)		(7,105	)
Additional paid-in-capital		127,~~458~~188			159,550
Accumulated deficit		(49,~~316~~320	)		(54,888	)
Accumulated other comprehensive loss		(~~294~~237	)		(350	)
Total stockholders’ equity		69,~~638~~421			97,243
Total liabilities and stockholders’ equity	$	~~142~~112,~~611~~684		$	137,379

(1)

The condensed consolidated balance sheet data as of December 31, 2016 was derived from audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See accompanying notes to condensed consolidated financial statements.

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YuMe, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenue	$	4235,~~818~~037		$	4034,~~675~~953		$	79114,~~272~~309		$	79114,~~908~~861
Cost of revenue		2119,~~045~~071			2018,~~111~~050			3857,~~446~~517			4058,~~592~~642
Gross profit		2115,~~773~~966			2016,~~564~~903			4056,~~826~~792			3956,~~316~~219
Operating expenses:
Sales and marketing		119,~~155~~360			1312,~~639~~730			2131,~~745~~105			2740,~~414~~144
Research and development		21,~~214~~719			2,~~947~~850			46,~~306~~025			58,~~612~~462
General and administrative		4,~~167~~733			65,~~216~~877			914,~~499~~232			1217,~~077~~954
Total operating expenses		1715,~~536~~812			2221,~~802~~457			3551,~~550~~362			4566,~~103~~560
Income (loss) from operations		~~4,237~~154			(24,~~238~~554	)		5,~~276~~430			(510,~~787~~341	)
Interest and other income (expense), net
Interest expense		(2	)		(21	)		(46	)		(56	)
Other income (expense), net		~~375~~105			~~(181~~26	)		~~677~~782			(~~172~~146	)
Total interest and other income (expense), net		~~373~~103			~~(183~~25	)		~~673~~776			(~~177~~152	)
Income (loss) before income taxes		~~4,610~~257			(24,~~421~~529	)		56,~~949~~206			(510,~~964~~493	)
Income tax expense		243			65			377			120
Income tax expense (benefit)		261			(65	)		638			55
Net income (loss)	$	(4~~,367~~	)	$	(24,~~486~~464	)	$	5,~~572~~568		$	(610,~~084~~548	)
Net income (loss) per share:
Basic	$	(0.1300	)	$	(0.0713	)	$	0.16		$	(0.1831	)
Diluted	$	(0.1200	)	$	(0.0713	)	$	0.16		$	(0.1831	)
Weighted-average shares used to compute net oncome (loss) per share:
Basic		34,~~281~~661			34,~~648~~314			33,~~983~~846			34,~~585~~524
Diluted		3534,~~009~~661			34,~~648~~314			34,~~775~~653			34,~~585~~524
Cash dividends declared per share	$	10.03		$	—		$	1.0306		$	—

See accompanying notes to condensed consolidated financial statements.

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YuMe, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Net income (loss)	$	(4~~,367~~	)	$	(24,~~486~~464	)	$	5,~~572~~568		$	(610,~~084~~548	)
Other comprehensive income (loss):
Foreign currency translation adjustments		4144			(4512	)		62107			(5769	)
Change in fair value of marketable securities		612			6(15	)		(6	)		9984
Other comprehensive income (loss)		4756			(3927	)		56113			4215
Comprehensive income (loss)	$	~~4,414~~52		$	(24,~~525~~491	)	$	5,~~628~~681		$	(610,~~042~~533	)

See accompanying notes to condensed consolidated financial statements.

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YuMe, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2017			2016
Operating activities:
Net income (loss)	$	5,~~572~~568		$	(610,~~084~~548	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		34,~~190~~599			35,~~408~~108
Stock-based compensation		23,~~753~~281			46,~~501~~638
Allowance for doubtful accounts receivable		~~360~~438			~~187~~825
Deferred income taxes		—			(~~114~~158	)
Amortization of premiums on marketable securities		2017			~~179~~246
Loss on disposal of fixed assets		39			1
Changes in operating assets and liabilities:
Accounts receivable		4,~~577~~909			1421,~~208~~425
Prepaid expenses and other current assets		16(634	)		(~~1,016~~979	)
Deposits and other assets		(93	)		(~~148~~181	)
Accounts payable		(61,~~343~~935	)		(~~194~~3,023	)
Accrued digital media property owner costs		1,~~422~~539			(32,~~539~~936	)
Accrued liabilities		~~589~~(135	)		(3,~~273~~674	)
Deferred revenue		~~102~~(30	)		—
Other liabilities		5976			~~446~~598
Net cash provided by operating activities		1217,~~308~~735			813,~~561~~342
Investing activities:
Purchases of property and equipment		(1,~~216~~864	)		(~~782~~2,014	)
Capitalized software development costs		(23,~~066~~122	)		(23,~~160~~130	)
Change in restricted cash		—			~~292~~(33	)
Purchases of marketable securities		(22,~~803~~816	)		(413,~~876~~024	)
Maturities of marketable securities		1720,~~919~~719			1622,~~010~~656
Sales of marketable securities		20,~~139~~340			—
Net cash provided by investing activities		1113,~~973~~257			84,~~484~~455
Financing activities:
Repayments of borrowings under capital leases		(3947	)		—
Proceeds from exercise of common stock options and employee stock purchase plan		~~746~~1,384			~~556~~1,070
Repurchases of common stock		(1,142	)		(24,~~716~~966	)
Cash used to net-share settle equity awards		(240	)		(299	)
Dividend payments		(35,562	)		—
Net cash used in financing activities		(639	)		(2,459	)
Cash used to net-share settle equity awards		(714	)		(666	)
Effect of exchange rate changes on cash and cash equivalents		(157	)		(57	)
Net cash used in financing activities		(36,981	)		(4,562	)
Change in cash and cash equivalents		23,485			14,529
Effect of exchange rate changes on cash and cash equivalents		(122	)		75
Change in cash and cash equivalents		(6,111	)		13,310
Cash and cash equivalents—Beginning of period		34,700			17,859
Cash and cash equivalents—End of period	$	5828,~~185~~589		$	3231,~~388~~169
Supplemental disclosures of cash flow information
Cash paid for interest	$	46		$	—
Cash paid for income taxes	$	~~487~~1,017		$	~~346~~499
Stock-based compensation capitalized for internal-use software	$	~~204~~289		$	~~275~~401
Non-cash investing and financing activities
Purchases of property and equipment recorded in accounts payable	$	26—		$	~~217~~24
Purchases of property and equipment under capital lease obligations	$	13,~~376~~390		$	—25
Increase in dividends payable	$	351,~~562~~045		$	—

See accompanying notes to condensed consolidated financial statements.

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Organization and Description of Business

Organization and Nature of Operations

YuMe, Inc. (the “Company”) was incorporated in Delaware on December 16, 2004. The Company, including its wholly-owned subsidiaries, is a leading independent provider of digital video brand advertising solutions. The Company's proprietary technologies serve the specific needs of brand advertisers and enable them to find and target large, brand-receptive audiences across a wide range of Internet-connected devices and digital media properties. The Company's software is used by global digital media properties to monetize professionally-produced content and applications. The Company facilitates digital video advertising by dynamically matching relevant audiences available through its digital media property partners with appropriate advertising campaigns from its advertising customers.

The Company helps its advertising customers overcome the complexities of delivering digital video advertising campaigns in a highly fragmented environment where dispersed audiences use a growing variety of Internet-connected devices to access thousands of online and mobile websites and applications. The Company delivers video advertising impressions across personal computers, smartphones, tablets, set-top boxes, game consoles, Internet-connected TVs and other devices. The Company's video ads run when users choose to view video content on their devices. On each video advertising impression, the Company collects dozens of data elements that it uses for its advanced audience modeling algorithms that continuously improve brand-targeting effectiveness.

For internally developed software, we perform regular recoverability assessments in order to evaluate any impairment indicators or changes to useful lives. During the fourth quarter of 2016, we determined not to allocate any future resources to market, develop and maintain our YFP 5.0 supply-side platform for publishers since it was not generating sufficient revenue to cover its related costs. Our assessment determined YFP 5.0 to be fully impaired and we recorded a one-time non-cash asset impairment charge of $0.9 million during the three months ended December 31, 2016 related to YFP 5.0 in operating expenses.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2017. The condensed consolidated balance sheet as of December 31, 2016, included herein was derived from the Company’s audited consolidated financial statements as of that date but does not include all disclosures required by GAAP, including notes to the financial statements.

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the interim periods stated.

Pending Transactions

On November 9, 2016, we announced the commencement of a comprehensive review of strategic alternatives and have engaged advisors related to such review. On September 4, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with RhythmOne PLC, a public limited company incorporated under the laws of England and Wales, Redwood Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of RhythmOne PLC and Redwood Merger Sub II, Inc., a Delaware corporation and a wholly owned subsidiary of RhythmOne PLC.

Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, RhythmOne PLC has agreed to commence an exchange offer (the “Offer”) to purchase all of the outstanding shares of common stock of the Company (the “YuMe Stock”), with each share of YuMe Stock accepted by Purchaser in the Offer to be exchanged for the right to receive (i) $1.70 in cash and (ii) 7.325 ordinary shares £0.01 each in the capital of RhythmOne PLC stock, plus cash in lieu of any fractional shares of RhythmOne PLC stock, in each case, without interest. If the conditions to the Offer are satisfied and the Offer closes, RhythmOne PLC would acquire any remaining YuMe Stock by a merger of RhythmOne PLC with and into YuMe (the “First Merger”), with YuMe surviving the First Merger. Immediately following the First Merger, YuMe, as the surviving company of the First Merger, will be merged with and into Merger Sub II (the “Second Merger”), with Merger Sub II surviving the Second Merger as a wholly owned subsidiary of RhythmOne PLC. As a result of the First and Second Mergers, it is expected that the former stockholders of YuMe will hold approximately 34% of RhythmOne PLC stock.

Further, on September 4, 2017, in connection with the Merger Agreement, certain directors, officers and stockholders of YuMe, solely in their respective capacities as stockholders of YuMe, entered into a Tender and Support Agreement with RhythmOne PLC, Redwood Merger Sub I, Inc., and Redwood Merger Sub II, Inc. (the “Support Agreement”) which provides, among other things, that the stockholders will not sell or dispose of their YuMe Stock except to participate in the Offer and to tender their shares within 10 business days of the commencement of the Offer, and that, for a period of six months after the Effective Time, they will not sell, transfer or otherwise dispose of any RhythmOne Stock, options or RSUs.

A copy of the Support Agreement is included as an exhibit to a Form 8-K we filed on September 5, 2017, to report the Support Agreement and the references in this report to the Support Agreement are qualified in their entirety by reference to the full text of the Support Agreement.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Certain Significant Risks and Uncertainties

The Company operates in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, the Company believes that changes in any of the following areas could have a significant negative effect on its future financial position, results of operations, or cash flows: rates of revenue growth; quality and volume of traffic to, and the pricing of such traffic on, the Company's network of digital media property owners; scaling and adaptation of existing technology and network infrastructure; adoption of the Company’s product and solution offerings; management of the Company's growth; new markets and international expansion; protection of the Company's brand, reputation and intellectual property; competition in the Company's markets; recruiting and retaining qualified employees and key personnel; intellectual property infringement and other claims; and changes in government regulation affecting the Company's business, among other things.

2.	Summary of Significant Accounting Policies

Use of Estimates

The preparation of the Company's condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management's estimates.

YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restructuring

On November 8, 2016, the Company’s board of directors approved a restructuring plan designed to reduce its operating expenses, realign its cost structure with revenue and more efficiently manage the business. The restructuring plan was implemented in the fourth quarter of 2016 and completed in the first quarter of 2017. Restructuring expenses totaled $1.6 million and were recorded as restructuring expenses on the Company's condensed consolidated statements of operations in the fourth quarter of 2016. Elements of the restructuring plan included a workforce reduction of approximately 7%, which included employee severance pay and related expenses, acceleration of the Company’s former chief executive officer’s stock-based compensation expense as a result of his termination without cause and facility exit expenses. The Company does not expect to incur any additional expenses under the restructuring plan.

The Company’s restructuring accrual activity for the three months ended ~~June~~September 30, 2017 is summarized in the table below (in thousands):

	Total
Restructuring accrual as of March 31, 2017(1)	$	71
Restructuring accrual as of June 30, 2017 (1)	$	18
Cash paid		(3714	)
Non-cash reversal(2)		(16	)
Restructuring accrual as of September 30, 2017 (2)	$	4
Restructuring accrual as of June 30, 2017(3)	$	18

	(1)	Consists of severance and post-employment COBRA insurance premiums included in accrued liabilities on the Company’s condensed consolidated balance sheet as of ~~March~~June 3130, 2017.
	(2)	~~Represents~~Consists ~~the~~of ~~reversal~~severance ofand post-employment COBRA insurance premiums ~~that~~included ~~were~~in ~~declined~~accrued byliabilities ~~certain~~on ~~terminated~~the ~~employees~~Company’s condensed consolidated balance sheet as of September 30, 2017.
	(3)	Consists of severance and post-employment COBRA insurance premiums included in accrued liabilities on the Company’s condensed consolidated balance sheet as of June 30, 2017.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including identifying performance obligations. The new standard, as amended, is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company does not plan to early adopt, and thus the new standard will become effective for the Company on January 1, 2018. As part of this plan, the Company is currently assessing the impact of the new guidance on its results of operations. However, further analysis is required and the Company will continue to evaluate this assessment in 2017. The Company currently expects to apply the modified retrospective method of adoption; however, it has not yet finalized its transition method, but expect to do so in 2017 upon completion of further analysis.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard.

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including identifying performance obligations. The new standard, as amended, is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company has completed an initial assessment to determine the impact on the Company’s condensed consolidated financial statements. The Company intends to adopt the standard in the first quarter of 2018 applying the modified retrospective method. While the Company is continuing to assess all potential impacts of the new standard, the Company currently does not believe this standard will have a material impact on revenue or customer acquisition costs recognized in the Company's condensed consolidated financial statements. The Company is in the process of evaluating the impact of the disclosure requirements relating to this standard.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This ASU amends Accounting Standards Codification (“ASC”) Topic 718 and was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This standard covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows and will be effective as of January 1, 2017, with early adoption permitted. Under this ASU, companies can continue to estimate forfeitures or they can elect to account for forfeitures as they occur. The Company adopted the standard January 1, 2017 and will continue to estimate forfeitures. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). This ASU is an update to the standard on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Upon adoption, entities will be required to apply the update prospectively. The Company does not expect the adoption of this standard to have a material effect on its consolidated financial statements.

Effective January 1, 2017, the Company adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the requirement for separate presentation of current and non-current portions of deferred tax. Subsequent to adoption, all deferred tax assets and deferred tax liabilities are presented as non-current on the balance sheet. The changes have been applied prospectively as permitted by the ASU and prior years have not been restated. The adoption of this standard did not have a material effect on the Company's consolidated financial statements.

Concentrations and Other Risks

Financial instruments that subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable securities and accounts receivable. Cash and cash equivalents are deposited with one domestic and five foreign highly rated financial institutions and cash equivalents are invested in highly rated money market funds. Periodically, such balances may be in excess of federally insured limits. Marketable securities generally consist of highly liquid corporate, government and agency bonds, commercial paper and certificates of deposits that comply with the Company’s minimum credit rating policy.

Credit risk with respect to accounts receivable is dispersed due to the large number of advertising customers. Collateral is not required for accounts receivable. The Company performs ongoing credit evaluations of customers’ financial condition, periodically evaluates its outstanding accounts receivable and establishes an allowance for doubtful accounts receivable based on the Company’s historical experience, the current aging and circumstances of accounts receivable and general industry and economic conditions. Accounts receivable are written off by the Company when it has been determined that all available collection avenues have been exhausted. During the three months ended June 30, 2017 and 2016, the Company wrote-off $0.4 million and $0.1 million of bad debt, respectively. During the six months ended June 30, 2017 and 2016, bad debt write-offs totaled $0.4 million and $0.3 million, respectively. If circumstances change, higher than expected bad debts may result in future write-offs that are greater than the Company’s estimates.

No customer accounted for 10% or more of the Company’s accounts receivable as of June 30, 2017 or December 31, 2016. One customer accounted for 10% of the company’s revenue in the three months ended June 30, 2017 and two customers accounted for 12% and 11% of the Company’s revenue in the six months ended June 30, 2017, respectively. No customer accounted for more than 10% of the Company's revenue in the three and six months ended June 30, 2016.

The following table presents the changes in the allowance for doubtful accounts (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Allowance for doubtful accounts receivable:
Balance – beginning of period	$	2,533		$	1,860		$	2,345		$	1,961
Allowance for doubtful accounts receivable		172			154			360			187
Bad debt write-offs		(416	)		(124	)		(416	)		(258	)
Balance – end of period	$	2,289		$	1,890		$	2,289		$	1,890

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Concentrations and Other Risks

Credit risk with respect to accounts receivable is dispersed due to the large number of advertising customers. Collateral is not required for accounts receivable. The Company performs ongoing credit evaluations of customers’ financial condition, periodically evaluates its outstanding accounts receivable and establishes an allowance for doubtful accounts receivable based on the Company’s historical experience, the current aging and circumstances of accounts receivable and general industry and economic conditions. Accounts receivable are written off by the Company when it has been determined that all available collection avenues have been exhausted. During the three months ended September 30, 2017 and 2016, the Company wrote-off $0.4 million and $0.1 million of bad debt, respectively. During the nine months ended September 30, 2017 and 2016, bad debt write-offs totaled $0.8 million and $0.4 million, respectively. If circumstances change, higher than expected bad debts may result in future write-offs that are greater than the Company’s estimates.

No customer accounted for 10% or more of the Company’s accounts receivable as of September 30, 2017 or December 31, 2016. One customer accounted for 12% of the company’s revenue in the three months ended September 30, 2017 and two customers accounted for 11% and 12% of the Company’s revenue in the nine months ended September 30, 2017, respectively. One customer accounted for 10% of the Company's revenue in the three months ended September 30, 2016. No customers accounted for 10% or more of the Company’s revenue in nine months ended September 30, 2016.

The following table presents the changes in the allowance for doubtful accounts (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Allowance for doubtful accounts receivable:
Balance – beginning of period	$	2,289		$	1,890		$	2,345		$	1,961
Allowance for doubtful accounts receivable		77			638			438			825
Bad debt write-offs		(419	)		(135	)		(836	)		(393	)
Balance – end of period	$	1,947		$	2,393		$	1,947		$	2,393

Cash, Cash Equivalents, Marketable Securities and Derivative Instruments

The Company’s cash equivalents consist of highly liquid fixed-income investments with original maturities of three months or less at the time of purchase. Short- and long-term marketable securities are comprised of highly liquid available-for-sale financial instruments (primarily corporate, government and agency bonds, commercial paper and certificates of deposit) with final maturities of at least three months but no more than 24 months from the date of purchase. The Company values these securities based on pricing from pricing vendors who may use inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. As such, the Company classifies all of its marketable securities as having Level 2 inputs. None of the Company’s marketable securities were in a continuous loss position for over twelve months as of ~~June~~September 30, 2017.

The Company enters into non-designated derivative instruments, specifically foreign currency forward contracts, to partially offset the foreign currency exchange gains and losses generated by the re-measurement of certain assets and liabilities denominated in non-functional currencies. The Company’s foreign currency forward contracts have terms of no more than 12 months, are classified as Level 2 and are valued using alternative pricing sources, such as spot currency rates, that are observable for the entire term of the asset or liability. These derivatives that are not designated as hedging instruments are adjusted to fair value through earnings in other income (expense), net in the condensed consolidated statement of operations.

The cost, gross unrealized gains and losses and fair value of the Company’s marketable securities and foreign currency forward contracts consisted of the following as of June 30, 2017 and December 31, 2016 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2017:			(2)		(2)
Cash	$	22,709	$	—	$	—		$	22,709
Cash equivalents:
Money market funds		35,476		—		—			35,476
Total cash and cash equivalents		58,185		—		—			58,185
Marketable securities:
Corporate bonds		1,200		—		—			1,200
Government and agency bonds		14,550		—		(30	)		14,520
Total marketable securities		15,750		—		(30	)		15,720
Total cash, cash equivalents and marketable securities	$	73,935	$	—	$	(30	)	$	73,905
Foreign currency forward contracts, net (1)	$	—	$	—	$	(55	)	$	(55	)

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2016:			(2)		(2)
Cash	$	22,750	$	—	$	—		$	22,750
Cash equivalents:
Money market funds		10,653		—		—			10,653
Commercial paper		1,297		—		—			1,297
Total cash and cash equivalents		34,700		—		—			34,700
Marketable securities:
Corporate bonds		16,780		—		(17	)		16,763
Government and agency bonds		9,050		1		(8	)		9,043
Commercial paper		5,186		—		—			5,186
Total marketable securities		31,016		1		(25	)		30,992
Total cash, cash equivalents and marketable securities	$	65,716	$	1	$	(25	)	$	65,692
Foreign currency forward contracts, net (1)	$	—	$	11	$	(16	)	$	(5	)

	(1)	Included in “Accrued liabilities” in the accompanying condensed consolidated balance sheet as of June 30, 2017 and December 31, 2016.
	(2)	Unrealized gains and losses, net of taxes, are included in “Accumulated other comprehensive loss,” which is reflected as a separate component of stockholders’ equity (deficit) on the condensed consolidated balance sheets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The cost, gross unrealized gains and losses and fair value of the Company’s marketable securities and foreign currency forward contracts consisted of the following as of September 30, 2017 and December 31, 2016 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
				(2)		(2)
September 30, 2017:
Cash	$	25,647	$	—	$	—		$	25,647
Cash equivalents:
Money market funds		2,942		—		—			2,942
Total cash and cash equivalents		28,589		—		—			28,589
Marketable securities:
Government bonds		12,750		—		(18	)		12,732
Total marketable securities		12,750		—		(18	)		12,732
Total cash, cash equivalents and marketable securities	$	41,339	$	—	$	(18	)	$	41,321

Foreign currency forward contracts, net (1)	$	—	$	72	$	—		$	72

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
				(2)		(2)
December 31, 2016:
Cash	$	22,750	$	—	$	—		$	22,750
Cash equivalents:
Money market funds		10,653		—		—			10,653
Commercial paper		1,297		—		—			1,297
Total cash and cash equivalents		34,700		—		—			34,700
Marketable securities:
Corporate bonds		16,780		—		(17	)		16,763
Government and agency bonds		9,050		1		(8	)		9,043
Commercial paper		5,186		—		—			5,186
Total marketable securities		31,016		1		(25	)		30,992
Total cash, cash equivalents and marketable securities	$	65,716	$	1	$	(25	)	$	65,692

Foreign currency forward contracts, net (1)	$	—	$	11	$	(16	)	$	(5	)

	(1)	Included in “Accrued liabilities” in the accompanying condensed consolidated balance sheet as of September 30, 2017 and December 31, 2016.
	(2)	Unrealized gains and losses, net of taxes, are included in “Accumulated other comprehensive loss,” which is reflected as a separate component of stockholders’ equity (deficit) on the condensed consolidated balance sheets.

4.	Fair Value of Financial Instruments

The accounting guidance for fair value measurements prioritizes the inputs used in measuring fair value in the following hierarchy:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3 – Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The carrying amounts of accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.

Marketable securities with final maturities of at least three months but no more than 12 months from the date of purchase are classified as short-term and marketable securities with final maturities of more than one year but less than two years from the date of purchase are classified as long-term. The Company's marketable securities are classified as available-for-sale and consist of high quality, investment grade securities from issuers with predetermined minimum credit ratings. The Company values these securities based on pricing from pricing vendors who may use inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. As such, the Company classifies all of its marketable securities as having Level 2 inputs. The valuation techniques used to measure the fair value of the Company’s marketable securities having Level 2 inputs were derived from market prices that are corroborated by observable market data and quoted market prices for similar instruments.

The Company’s foreign currency forward contracts have terms of no more than 12 months, are classified as Level 2 and are valued using alternative pricing sources, such as spot currency rates, that are observable for the entire term of the asset or liability.

The following tables present information about the Company’s money market funds, marketable securities and foreign currency forward contracts, measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

	Fair Value Measurements at June 30, 2017
	Level 1		Level 2			Level 3		Total
Cash equivalents:
Money market funds	$	35,476	$	—		$	—	$	35,476
Total cash equivalents(1)	$	35,476	$	—		$	—	$	35,476
Marketable securities:
Corporate bonds	$	—	$	1,200		$	—	$	1,200
Government and agency bonds		—		14,520			—		14,520
Total marketable securities	$	—	$	15,720		$	—	$	15,720
Foreign currency forward contracts, net (2)	$	—	$	(55	)	$	—	$	(55	)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present information about the Company’s money market funds, marketable securities and foreign currency forward contracts, measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value (in thousands):

	Fair Value Measurements at September 30, 2017
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	2,942	$	—	$	—	$	2,942
Total cash equivalents (1)	$	2,942	$	—	$	—	$	2,942

Marketable securities:
Government bonds		—		12,732		—		12,732
Total marketable securities	$	—	$	12,732	$	—	$	12,732

Foreign currency forward contracts, net (2)	$	—	$	72	$	—	$	72

	Fair Value Measurements at December 31, 2016
	Level 1		Level 2			Level 3		Total
Cash equivalents:
Money market funds	$	10,653	$	—		$	—	$	10,653
Commercial paper		—		1,297			—		1,297
Total cash equivalents (1)	$	10,653	$	1,297		$	—	$	11,950

Marketable securities:
Corporate bonds	$	—	$	16,763		$	—	$	16,763
Government and agency bonds		—		9,043			—		9,043
Commercial paper		—		5,186			—		5,186
Total marketable securities	$	—	$	30,992		$	—	$	30,992

Foreign currency forward contracts, net (2)	$	—	$	(5	)	$	—	$	(5	)

(1) Included in “Cash and cash equivalents” in the accompanying condensed consolidated balance sheet as of ~~June~~September 30, 2017 and December 31, 2016.

(2) Included in “Accrued liabilities” in the accompanying condensed consolidated balance sheet as of ~~June~~September 30, 2017 and December 31, 2016.

5.	Foreign Currency Transaction Risk—Foreign Currency Forward Contracts

The Company transacts business in various foreign currencies and in the second quarter of 2015 established a program that utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, the Company enters into foreign currency forward contracts so that increases or decreases in foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with the Company’s foreign currency transactions. The Company may suspend this program from time to time. Foreign currency exposures typically arise from British pound and euro denominated transactions that the Company expects to cash settle in the near term, which are charged against earnings in the period incurred. The Company’s foreign currency forward contracts are short-term in duration.

The Company does not use foreign currency forward contracts for trading purposes nor does it designate forward contracts as hedging instruments pursuant to ASC 815. Accordingly, the Company records the fair values of these contracts as of the end of its reporting period to its condensed consolidated balance sheets with changes in fair values recorded to its condensed consolidated statement of operations. Given the short duration of the forward contracts, the amount recorded is not significant. The balance sheet classification for the fair values of these forward contracts is prepaid expenses and other current assets for a net unrealized gain position, and accrued liabilities for a net unrealized loss position. The statement of operations classification for changes in fair value of these forward contracts is other expense, net for both realized and unrealized gains and losses.

The Company expects to continue to realize gains or losses with respect to its foreign currency exposures, net of gains or losses from its foreign currency forward contracts. The Company’s ultimate realized gain or loss with respect to foreign currency exposures will generally depend on the size and type of cross-currency transactions that it enters into, the currency exchange rates associated with these exposures and changes in those rates, the net realized gain or loss on its foreign currency forward contracts and other factors. As of June 30, 2017, the notional amount and the aggregate fair value of the forward contracts the Company held to purchase U.S. dollars in exchange for British pounds and euros was $3.2 million. Net foreign exchange transaction gains (losses) relating to the Company’s British pound sterling and euro forward contracts are included in other income (expense), net in the Company’s condensed consolidated statements of operations. For the three months ended June 30, 2017 and 2016, net foreign exchange transaction gains (losses) included in other expense, net in the Company’s condensed consolidated statements of operations were $0.2 million and $(0.3) million, respectively, relating to the Company’s British pound sterling and euro forward contracts. For the six months ended June 30, 2017 and 2016, net foreign exchange transaction gains (losses) included in other expense, net in the Company’s condensed consolidated statements of operations were $0.4 million and $(0.3) million, respectively, relating to the Company’s British pound sterling and euro forward contracts.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company expects to continue to realize gains or losses with respect to its foreign currency exposures, net of gains or losses from its foreign currency forward contracts. The Company’s ultimate realized gain or loss with respect to foreign currency exposures will generally depend on the size and type of cross-currency transactions that it enters into, the currency exchange rates associated with these exposures and changes in those rates, the net realized gain or loss on its foreign currency forward contracts and other factors. As of September 30, 2017, the notional amount and the aggregate fair value of the forward contracts the Company held to purchase U.S. dollars in exchange for British pounds and euros was $4.4 million. Net foreign exchange transaction gains (losses) relating to the Company’s British pound sterling and euro forward contracts are included in other income (expense), net in the Company’s condensed consolidated statements of operations. For the three months ended September 30, 2017 and 2016, net foreign exchange transaction losses included in other expense, net in the Company’s condensed consolidated statements of operations were $(0.2) million and $11 thousand, respectively, relating to the Company’s British pound sterling and euro forward contracts. For the nine months ended September 30, 2017 and 2016, net foreign exchange transaction losses included in other expense, net in the Company’s condensed consolidated statements of operations were $(0.5) million and $0.4 million, respectively, relating to the Company’s British pound sterling and euro forward contracts.

6.	Commitments and Contingencies

Leases

The Company leases office facilities under various non-cancellable operating leases that expire on various dates through September 2027. Rent expense under operating leases totaled $0.98 million and $0.87 million for the three months ended ~~June~~September 30, 2017 and 2016, respectively, and totaled $12.75 million ~~and~~for ~~$1.8~~each ~~million~~of ~~for~~ the ~~six~~nine-month ~~months~~periods ended ~~June~~September 30, 2017 and 2016~~, respectively~~. The Company also has capital lease obligations that mature over various dates through July ~~2019~~2020. During the ~~three~~nine months ended ~~March~~September 3130, 2017, the Company entered into aseveral new ~~$1.4 million~~ capital lease ~~obligation~~obligations for computer equipment ~~that~~for ~~has~~ a total of approximately $3.4 million that have lease ~~term~~terms ofranging from one ~~year~~to three years.

Purchase Commitments

During the normal course of business, to secure adequate ad inventory and impressions for its sales arrangements, the Company enters into agreements with digital media property owners that require the Company to purchase a minimum number of impressions on a monthly or quarterly basis. Purchase commitments as of ~~June~~September 30, 2017 expire on various dates through December 2017.

Cash Dividends Declared

On June 22, 2017, the Company announced a special cash dividend in the amount of $1.00 per common share and a quarterly cash dividend in the amount of $0.03 per common share. The special and quarterly cash dividends were paid on July 7, 2017, to stockholders of record as of the close of business on July 3, 2017. Cash used to pay dividends was funded from available working capital. The Company recorded $35.6 million in “Dividends payable” in its condensed consolidated balance sheet as of June 30, 2017. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s board of directors.

On August 8, 2017, the Company announced a quarterly cash dividend in the amount of $0.03 per common share. This quarterly cash dividend was paid on October 9, 2017, to stockholders of record as of the close of business on September 29, 2017. The Company recorded $1.0 million in “Dividends payable” in its condensed consolidated balance sheet as of September 30, 2017.

Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s board of directors.

Legal Proceedings

From time to time the Company may be a party to various litigation matters incidental to the conduct of its business. There is no pending or threatened legal proceeding to which the Company is currently a party that, in management’s opinion, is likely to have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, or cash flows.

Indemnification Agreements

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

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Indemnification Agreements

While matters may arise as a result of claims under the indemnification agreements disclosed above, the Company, at this time, is not aware of claims under indemnification arrangements that could have a material adverse effect to the Company’s condensed consolidated financial position, results of operations, or cash flows.

7.	Stockholders’ Equity

Preferred Stock

In association with the Company’s initial public offering in 2013 (“IPO”), the board of directors authorized the Company to issue up to 20,000,000 shares of preferred stock, par value $0.001 per share. As of ~~June~~September 30, 2017 and December 31, 2016 no shares of preferred stock were outstanding.

Common Stock

At ~~June~~September 30, 2017 and December 31, 2016 there were 34,~~525~~936,~~871~~890 and 33,946,820 shares of common stock issued and outstanding, respectively. The following table summarizes common stock activity during the ~~six~~nine months ended ~~June~~September 30, 2017:

	Number of Shares
Outstanding at December 31, 2016		33,946,820
Option exercises		~~174~~229,~~601~~222
RSUs released, net of shares withheld for taxes		~~546~~797,~~077~~330
Common stock issued in connection with employee stock purchase plan		~~173~~279,~~942~~087
Repurchases of common stock		(315,569	)
Outstanding at June 30, 2017		34,525,871
Outstanding at September 30, 2017		34,936,890

Treasury Stock

In addition to the 315,569 shares repurchased during the ~~six~~nine months ended ~~June~~September 30, 2017, the Company repurchased 1,952,909 shares in 2016 representing a total of 2,268,478 shares repurchased under the Company’s Stock Repurchase Program. See Stock Repurchase Program below for additional information regarding the Company’s stock repurchases. Additionally, the Company holds 66,666 shares of treasury stock related to the acquisition of Crowd Science, for a total of 2,335,144 shares of treasury stock as of ~~June~~September 30, 2017. Treasury stock is carried at cost and could be re-issued if the Company determined to do so.

Equity Incentive Plans

The Company’s 2004 Stock Plan (the “2004 Plan”) authorized the Company to grant restricted stock awards or stock options to employees, directors and consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 85% of fair market value for non-statutory options. Option vesting schedules were determined by the board of directors at the time of issuance and they generally vest at 25% on the first anniversary of the grant (or the employment or service commencement date) and monthly over the next 36 months. Options generally expire ten years from the date of grant unless the optionee is a 10% stockholder, in which case the term will be five years from the date of grant. Unvested options exercised are subject to the Company’s repurchase right. Upon the effective date of the registration statement related to the Company’s IPO, the 2004 Plan was amended to cease the grant of any additional awards thereunder, although the Company will continue to issue common stock upon the exercise of stock options previously granted under the 2004 Plan.

In July 2013, the Company adopted a 2013 Equity Incentive Plan (the “2013 Plan”) which became effective on August 6, 2013. The 2013 Plan serves as the successor equity compensation plan to the 2004 Plan. The 2013 Plan will terminate on July 23, 2023. The 2013 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation rights, performance stock awards, restricted stock units (“RSUs”), stock bonus awards and performance cash awards to employees, directors and consultants. Stock options granted must be at prices not less than 100% of the fair market value at date of grant. Option vesting schedules are determined by the Company at the time of issuance and they generally vest at 25% on the first anniversary of the grant (or the employment or service commencement date) and monthly over the next 36 months. Options generally expire ten years from the date of grant unless the optionee is a 10% stockholder, in which case the term will be five years from the date of grant. Unvested options exercised are subject to the Company’s repurchase right. The Company initially reserved 2,000,000 shares of its common stock for issuance under the 2013 Plan, and shares reserved for issuance increase January 1 of each year by the lesser of (i) 5% of the number of shares issued and outstanding on December 31 immediately prior to the date of increase or (ii) such number of shares as may be determined by the board of directors. As of January 1, 2017, the board of directors determined the 2013 Plan had a sufficient number of shares reserved for the next twelve months and did not to increase the shares reserved as of that date.

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes option activity:

	Number of Shares (in thousands)			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (1) (in thousands)
Balance at December 31, 2016		3,754		$	5.08		4.96	$	1,671
Granted		—45		$	—4.19
Exercised		(~~175~~229	)	$	12.3409
Canceled and forfeited		(~~198~~329	)	$	5.3686
Balance at June 30, 2017		3,381		$	5.25		4.76	$	1,515
Balance at September 30, 2017		3,241		$	5.20		3.95	$	1,423
Vested as of June 30, 2017 and expected to vest thereafter (2)		3,361		$	5.25		4.74	$	1,510
Vested as of September 30, 2017 and expected to vest thereafter (2)		3,221		$	5.20		3.91	$	1,416
Vested and exercisable as of June 30, 2017		3,110		$	5.12		4.59	$	1,491
Vested and exercisable as of September 30, 2017		3,114		$	5.21		3.78	$	1,396

(1)

The aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock and the exercise price of outstanding in-the-money options as of those dates.

(2)

Options expected to vest reflect an estimated forfeiture rate.

The ~~Company did not grant any options during the six months ended June 30, 2017. The~~ weighted average grant date fair value of options granted during both the three and ~~six~~nine months ended ~~June~~September 30, 2017 and 2016 was $2.61 and $1.93, respectively. The aggregate intrinsic value represents the difference between the market value of the Company’s common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value of options exercised was ~~$0.2~~not ~~million~~material for ~~both~~ the three months ended September 30, 2017 and ~~six~~was $0.7 million for the nine months ended ~~June~~September 30, 2017. The total intrinsic value of options exercised during the three and ~~six~~nine months ended ~~June~~September 30, 2016 was not material.

The following table summarizes restricted stock unit activity:

	Number of Shares (in thousands)			Weighted Average Fair Value at Grant		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (1) (in thousands)
Balance at December 31, 2016		1,678		$	4.19		1.05	$	6,663
Granted		1,~~014~~067		$	3.6266
Released		(~~615~~913	)	$	4.6233
Canceled and forfeited		(~~131~~438	)	$	3.8886
Balance at June 30, 2017		1,946		$	3.78		1.24	$	9,147
Balance at September 30, 2017		1,394		$	3.79		1.28	$	6,455

(1) The intrinsic value of RSUs is based on the Company’s closing stock price as reported by the New York Stock Exchange on December 31, 2016 and ~~June~~September 30, 2017.

The total grant date fair value of restricted stock units vested during the three-month periods ended June 30, 2017 and 2016 was $0.7 million and $1.5 million, respectively. The total grant date fair value of restricted stock units vested during the six-month periods ended June 30, 2017 and 2016 was $2.8 million and $3.1 million, respectively. All of the Company’s RSUs that were released during the six months ended June 30, 2017 and 2016 were net share settled. As such, upon each release date, RSUs were withheld to cover the required withholding tax, which is based on the value of the RSU on the release date as determined by the closing price of the Company’s common stock on the trading day of the settlement date. The remaining amounts are delivered to the recipient as shares of Company common stock.

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The total grant date fair value of restricted stock units vested during the three-month periods ended September 30, 2017 and 2016 was $1.1 million and $2.7 million, respectively. The total grant date fair value of restricted stock units vested during the nine-month periods ended September 30, 2017 and 2016 was $4.0 million and $5.7 million, respectively. All of the Company’s RSUs that were released during the nine months ended September 30, 2017 and 2016 were net share settled. As such, upon each release date, RSUs were withheld to cover the required withholding tax, which is based on the value of the RSU on the release date as determined by the closing price of the Company’s common stock on the trading day of the settlement date. The remaining amounts are delivered to the recipient as shares of Company common stock.

Employee Stock Purchase Plan

In July 2013, the Company adopted a 2013 Employee Stock Purchase Plan (the “2013 Purchase Plan”) that became effective on August 6, 2013. The 2013 Purchase Plan is designed to enable eligible employees to periodically purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation, subject to any plan limitations. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of the offering period or on the last day of the offering period. Purchases are accomplished through participation in discrete offering periods. The 2013 Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. The Company initially reserved 500,000 shares of its common stock for issuance under the 2013 Purchase Plan and shares reserved for issuance increase January 1 of each year by the lesser of (i) a number of shares equal to 1% of the total number of outstanding shares of common stock on December 31 immediately prior to the date of increase or (ii) such number of shares as may be determined by the board of directors. In August 2017, the Company’s board of directors approved an addendum to the 2013 Purchase Plan requiring each participant to retain their shares purchased for a period of at least 90 calendar days after the purchase date beginning with the February 2018 purchase period.

The fair value of stock purchased through the 2013 Purchase Plan is estimated on the first trading day of the offering period using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the volatility of the Company’s common stock, a risk-free interest rate, expected dividends, and estimated forfeitures. To the extent actual results differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. Volatility is based on an average of the historical volatilities of the common stock of a group of entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for ~~six~~-month treasury notes corresponding with the length of the offering period. Expected forfeitures are based on the Company’s historical experience.

The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017				2016	~~2016~~
Expected term (years)		0.50			0.50			0.50	~~0.50~~			0.50		~~0.50~~
Volatility		47	%		56	%	47%	~~47%~~-	-56%	~~56%~~		56%		~~56%~~
Risk-free interest rate		01.6911	%		0.4544	%	0.44%	~~0.44%~~-	-1.11%	~~0.69%~~	0.44%	-	0.2145%	-	~~0.45%~~
Dividend yield		—2.86	%		—			2.86%	—			—		—

Stock Repurchase Program

On February 18, 2016, the Company announced its board of directors authorized a $10 million stock repurchase program. All purchases under the repurchase program have been subject to applicable rules and regulations, market conditions and other factors. Purchases under this repurchase program have been made in the open market and have complied with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The cost of the repurchased shares was funded from available working capital. For accounting purposes, common stock repurchased under the stock repurchase program is recorded based upon the repurchase date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method.

No shares of the Company’s stock were repurchased during the three months ended June 30, 2017. Stock repurchase activity under the Company’s stock repurchase program during the six months ended June 30, 2017 is summarized as follows (in thousands, except share and per share amounts):

	Total Number of Shares Repurchased		Average Price Paid per Share (1)		Amount of Repurchase
Cumulative balance at December 31, 2016		1,952,909	$	3.64	$	7,105
Repurchases of common stock		315,569	$	3.62		1,142
Cumulative balance at June 30, 2017		2,268,478	$	3.64	$	8,247

(1) Average price paid per share includes commission.

Cash Dividends Declared

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

No shares of the Company’s stock were repurchased during the three months ended September 30, 2017. Stock repurchase activity under the Company’s stock repurchase program during the nine months ended September 30, 2017 is summarized as follows (in thousands, except share and per share amounts):

	Total Number of Shares Repurchased		Average Price Paid per Share (1)		Amount of Repurchase
Cumulative balance at December 31, 2016		1,952,909	$	3.64	$	7,105
Repurchases of common stock		315,569	$	3.62		1,142
Cumulative balance at September 30, 2017		2,268,478	$	3.64	$	8,247

(1)

Average price paid per share includes commission.

Cash Dividends Declared

Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s board of directors.

Shares Reserved for Future Issuance

At ~~June~~September 30, 2017 and December 31, 2016, the Company had reserved the following shares of common stock for future issuance:

	June 30, 2017		December 31, 2016
	September 30, 2017		December 31, 2016
Common stock reserved:
Common stock options		3,~~380~~241,~~638~~110		3,754,122
Restricted stock units		1,~~946~~394,~~271~~268		1,678,448
Shares available for future issuance under the 2013 Plan		4,~~337~~722,~~237~~894		4,952,254
Employee stock purchase plan		~~501~~396,~~510~~372		335,984
		10,165,656		10,720,808
		9,754,644		10,720,808

Stock-Based Compensation

The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), volatility of the Company’s common stock, a risk-free interest rate, expected dividends, and the estimated forfeitures of unvested stock options. To the extent actual results differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. The Company uses the simplified calculation of expected life, and volatility is based on an average of the historical volatilities of the common stock of a group of entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The Company will continue to estimate forfeitures as permitted by ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718), which the Company adopted on January 1, 2017. Expected forfeitures are based on the Company’s historical experience.

The ~~Company did not grant any options during the six months ended June 30, 2017. The~~ fair value of options granted to employees in the three and ~~six~~nine months ended ~~June~~September 30, 2017 and 2016 was determined using the Black-Scholes option valuation model with the following assumptions:

	Three and Six Months Ended June 30, 2016
	Three and Nine Months Ended September 30, 2017		Three and Nine Months Ended September 30, 2016
Expected term (years)		6.00		6.00
Volatility		5647.0%		56.0%
Risk-free interest rate		1.~~895~~965%		1.895%
Dividend yield		—2.86%		—
Weighted-average fair value	$	1$2.9361		$1.93

The following table summarizes the effects of stock-based compensation related to vesting stock-based awards included in the condensed consolidated statements of operations (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Cost of revenue	$	32	$	50	$	69	$	95
Sales and marketing		388		728		890		1,447
Research and development(1)		179		319		393		620
General and administrative		613		1,232		1,400		2,339
Total employee stock-based compensation	$	1,212	$	2,329	$	2,752	$	4,501

(1) Excludes $98,000 and $128,000 of stock-based compensation expense that was capitalized as part of internal-use software development costs for the three months ended June 30, 2017 and 2016, respectively. Excludes $204,000 and $275,000 of stock-based compensation expense that was capitalized as part of internal-use software development costs for the six months ended June 30, 2017 and 2016, respectively.

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options during the three and six months ended June 30, 2016. An immaterial amount of income tax benefit was recognized in the three and six months ended June 30, 2017 for the sale of employee stock acquired through the 2013 Purchase Plan. As of June 30, 2017, there was $5.6 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards, which will be recognized over a weighted average period of 2.11 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the effects of stock-based compensation related to vesting stock-based awards included in the condensed consolidated statements of operations (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Cost of revenue	$	26	$	49	$	95	$	144
Sales and marketing		237		706		1,128		2,152
Research and development (1)		142		304		535		924
General and administrative		123		1,078		1,523		3,418
Total employee stock-based compensation	$	528	$	2,137	$	3,281	$	6,638

(1)

Excludes $85,000 and $126,000 of stock-based compensation expense that was capitalized as part of internal-use software development costs for the three months ended September 30, 2017 and 2016, respectively. Excludes $289,000 and $401,000 of stock-based compensation expense that was capitalized as part of internal-use software development costs for the nine months ended September 30, 2017 and 2016, respectively.

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options during the three and nine months ended September 30, 2016. An immaterial amount of income tax benefit was recognized in the three and nine months ended September 30, 2017 for the sale of employee stock acquired through the 2013 Purchase Plan. As of September 30, 2017, there was $4.2 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards, which will be recognized over a weighted average period of 2.08 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

401(k) Plan

The Company’s 401(k) Plan (the “401(k) Plan”) is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating U.S. employees may defer a portion of their pre-tax earnings, up to the IRS annual contribution limit of $18,000 for calendar years 2017 and 2016. The Company began matching employee contributions in April 2014. The Company matches 50% of each participating employee’s contributions up to a maximum of 6% of each employee’s eligible earnings with an annual maximum match of $2,500 per employee per year.

8.	Income Taxes

The Company’s provision for income taxes consists of federal and state income taxes in the U.S. and income taxes in certain foreign jurisdictions, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards. For the three and ~~six~~nine months ended ~~June~~September 30, 2017, income tax expense was primarily related to alternative minimum tax, state minimum taxes and taxes due in foreign jurisdictions. For the three and ~~six~~nine months ended ~~June~~September 30, 2016, income tax expense was primarily related to state minimum taxes and taxes due in foreign jurisdictions.

The following table summarizes our income tax expense (benefit) and our effective tax rates for the three and ~~six~~nine months ended ~~June~~September 30, 2017 and 2016 (in thousands, except effective tax rate):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Income (loss) before income taxes	$	~~4,610~~257		$	(24,~~421~~529	)	$	56,~~949~~206		$	(510,~~964~~493	)
Income tax expense	$	243		$	65		$	377		$	120
Income tax expense (benefit)	$	261		$	(65	)	$	638		$	55
Effective tax rate		5101.36	%		(21.74	)%		610.3	%		(2.0.5	)%

A valuation allowance is provided when it is more likely than not that the Company’s deferred tax assets will not be realized. The Company’s practice is to establish a full valuation allowance to offset domestic net deferred tax assets. At December 31, 2016, consistent with prior periods, the Company concluded that a full valuation allowance was required on its domestic net domestic deferred tax assets due to the uncertainty of realizing future tax benefits from the Company’s net operating loss carryforwards and other deferred tax assets. As of ~~June~~September 30, 2017, the Company continues to view this conclusion as appropriate.

We periodically assess the likelihood that we will be able to recover our net deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a full valuation allowance against our net U.S. deferred tax assets should be applied as of June 30, 2017. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company periodically assesses the likelihood that it will be able to recover our net deferred tax assets. The Company considers all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, the Company concluded that a full valuation allowance against its net U.S. deferred tax assets should be applied as of September 30, 2017. To the extent the Company determines that all or a portion of our valuation allowance is no longer necessary, the Company will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on the Company's reported results of operations.

9.	Net Income (Loss) per Share

The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):

Net Income (Loss) per Share Attributable to Common Stockholders	Three Months Ended ~~June~~September 30,						~~Six~~Nine Months Ended ~~June~~September 30,
	2017			2016			2017		2016
Numerator:
Net income (loss)	$	(4~~,367~~	)	$	(24,~~486~~464	)	$	5,~~572~~568	$	(610,~~084~~548	)
Denominator:
Weighted-average shares used in computing net income (loss) per share:
Basic		34,~~281~~661			34,~~648~~314			33,~~983~~846		34,~~585~~524
Weighted-average effect of potentially dilutive shares:
Stock options		~~321~~—			—			~~327~~293		—
Restricted stock units		~~383~~—			—			~~446~~488		—
Employee stock purchase plan		24—			—			1926		—
Diluted		3534,~~009~~661			34,~~648~~314			34,~~775~~653		34,~~585~~524
Net income (loss) per share:
Basic	$	(0.1300	)	$	(0.0713	)	$	0.16	$	(0.1831	)
Diluted	$	(0.1200	)	$	(0.0713	)	$	0.16	$	(0.1831	)

The following weighted-average equity shares were excluded from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive for the periods presented (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Stock options		31,~~064~~750		4,~~348~~084		3,~~115~~064		4,~~312~~235
Restricted stock units		~~161~~10		~~295~~562		~~169~~5		~~1,118~~507
Employee stock purchase plan		—		4431		—3		6552
		3,225		4,687		3,284		5,495
		1,760		4,677		3,072		4,794

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YuMe, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.

Segments and Geographical Information

The Company considers operating segments to be components of the Company in which separate financial information is available that is reviewed regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in evaluating performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Company has only one business activity and one operating and reporting segment. There are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated level. The Company reported $0.1 million and $0.2 million of interest income during the three months ended ~~June~~September 30, 2017 and 2016, respectively, and reported $0.34 million and $0.5 million of interest income during ~~both~~ the ~~six-month~~nine ~~periods~~months ended ~~June~~September 30, 2017 and 2016, respectively. The following table summarizes total revenue generated through sales personnel employed in the respective locations (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2017

2016

2017

2016

Domestic

4032,~~308~~850

3832,~~031~~584

74107,~~839~~689

72105,~~910~~494

Foreign

2,~~510~~187

2,~~644~~369

46,~~433~~620

69,~~998~~367

Total revenue

4235,~~818~~037

4034,~~675~~953

79114,~~272~~309

79114,~~908~~861

The Company’s long-lived assets are primarily located in the United States.

11.

Subsequent Event

~~The~~On October 2, 2017, the Company’s ~~board~~approved a ofplan ~~directors~~to ~~declared~~restructure aand ~~quarterly~~streamline ~~cash~~certain ~~dividend~~of inits operations to further reduce the ~~amount~~Company’s ofoperating $0expenses and streamline and focus its European operations on its programmatic business.03 ~~per~~The ~~share~~Company ofanticipates ~~common~~that ~~stock~~the torestructuring beplan ~~paid~~will focus on ~~October~~its 9operations in the United Kingdom, ~~2017~~will tobe ~~all~~implemented ~~common~~before ~~stockholders~~the end of ~~record~~the asfirst quarter of ~~September~~2018 ~~29,~~and ~~2017.~~is ~~Future~~currently ~~declarations~~expected ofto ~~quarterly~~result ~~dividends~~in ~~and~~fourth ~~the~~quarter ~~establishment~~2017 ofcost ~~future~~savings ~~record~~between ~~and~~approximately ~~payment~~$0.4 ~~dates~~million ~~are~~and ~~subject~~$0.6 tomillion. ~~the~~The ~~final~~main ~~determination~~elements of the Company’s ~~board~~restructuring ofplan ~~directors~~include a workforce reduction and real estate consolidation focused in the United Kingdom.

17As part of the restructuring plan, the Company expects to reduce its workforce by approximately 3% by the end of 2017. The changes to the workforce will be governed by local legal requirements, as appropriate. In the fourth quarter of 2017, the Company currently expects the workforce reduction to result in one-time severance costs of approximately $0.2 million and all other actions under the plan, including the real estate consolidation, to result in costs between approximately $0.1 million and $0.3 million.

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ITEM 2.

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

You should read the following discussion and analysis of our consolidated financial condition and results of operations in conjunction with the condensed consolidated financial statements and the related notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and in our audited consolidated financial statements and related notes thereto and the Management’s Discussion and Analysis and Results of Operations for the year ended December 31, 2016 appearing in our Annual Report on Form 10-K filed with the SEC on March 10, 2017.

Forward Looking Information

This Quarterly Report on Form 10-Q including but not limited to statements about the Merger Agreement and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The statements that are not purely historical fact are forward-looking statements and are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in this section and those discussed in the section titled “Risk Factors” included under Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2016. Furthermore, such forward-looking statements speak only as of the date of this report. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Unless expressly indicated or the context requires otherwise, the terms “YuMe,” “Company,” “Registrant,” “we,” “us” and “our” in this document refer to YuMe, Inc., and, where appropriate, its wholly-owned subsidiaries.

Overview

YuMe is a leading independent provider of multi-screen programmatic video advertising technology, connecting brand advertisers, digital media property owners and consumers of video content across a growing range of internet-connected devices. YuMe offers advertising customers full service marketing solutions by combining programmatic buying tools and data-driven technologies with deep insight into audience behavior. In 2015, we announced the launch of YuMe for Advertisers (“YFA”), which is our demand-side platform for advertisers, to find relevant audiences and deliver targeted advertising. YuMe technologies also provide monetization opportunities for global digital media property owners.

Our digital video advertising solutions are purpose-built for brand advertisers, advertising agencies and digital media property owners. Through a sophisticated platform of proprietary embedded software, data science, machine-learning algorithms, and programmatic tools we deliver video advertising campaigns to relevant, brand-receptive digital audiences. We aggregate these audiences across a wide range of internet-connected devices, which include personal computers, smartphones, tablets, set-top boxes, game consoles and internet-connected TVs, by providing global digital media property owners with proprietary software that monetizes their professionally produced content and applications with our advertising campaigns. Our industry leadership is reflected in our wide audience reach, advanced programmatic capabilities, large customer base and scale in data derived from our large embedded software base.

For our advertising customers, we overcome the complexities of delivering digital video brand advertising campaigns in a highly fragmented environment where audiences use an increasing variety of internet-connected devices to access thousands of online and mobile websites and applications. Our solutions deliver brand-optimized video advertising campaigns seamlessly across internet-connected devices, and we deliver those solutions to customers through direct sales and through our programmatic buying platform (both managed and self-service). Our platform optimizes advertising campaign results that are relevant to brand advertisers, such as brand awareness, message recall, brand favorability, and purchase intent. We believe brand advertisers and brand-focused agencies can find particular benefit in our private marketplace programmatic offering through which brand advertisers are able to programmatically manage the audiences and digital media properties where their campaigns will run.

For global digital media property owners that supply advertising inventory, we offer technologies that enable us to make their inventory available to advertising customers and deliver digital video ads to the audiences that are optimized for specific advertising customer needs. In order to categorize these audiences we gather first party data through our cross-device Software Development Kit (“SDK”) and incorporate third party data from partners. We then apply our data science capabilities to aggregate audiences that will be relevant to brand advertisers. In combination, these capabilities allow us to deliver ads to audiences that we expect to be receptive to specific brand messages, which drives better monetization for digital media property owners.

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The core of our business relies on our sophisticated platform that encompasses customized embedded software, programmatic advertising buying tools and data science capabilities. Our YuMe SDKs are embedded by our digital media property owners and collect data that we use for our advanced audience modeling algorithms, continuously improving our ability to optimize advertising campaigns around results that are relevant to brand advertisers. Our Placement Quality Index (“PQI”) inventory scoring system uses YuMe SDKs and other data sources to assess through algorithms the quality of ad placements and optimize placements for maximum brand advertising results. Our Audience Amplifier machine-learning tool uses data gathered by YuMe SDKs in its correlative data models to find audiences that we expect to be receptive to specific brand messages.

Over our thirteen-year operating history we have amassed a vast amount of data derived from our large installed base of YuMe SDKs that are embedded in online and mobile websites and entertainment applications residing on millions of internet-connected devices. This allows us to deliver TV-like ads, enhanced and customized for each specific device type, and collect valuable advertisement viewership data. We collect billions of data points each year from ad impressions we deliver. As we grow our audience and advertiser footprint, we are able to collect even more data, which in turn enables us to improve the efficacy of our targeting models, further improving the utility of our solutions and driving increased adoption of our technology.

Our customers primarily consist of large global brands and their advertising agencies. We generate revenue by delivering digital video ads on internet-connected devices. Our ads run when users choose to view video content on their devices. Advertising campaigns occur when customers submit orders to us directly through our programmatic software or in a managed service and we fulfill those orders by delivering their digital video ads to audiences available through digital media properties and third party ad exchanges. Advertising customers typically pay us on a cost-per-thousand (“CPM”) basis, of which we generally pay digital media property owners a negotiated percentage. In cases where our programmatic buying platform is used by our advertising customers to source inventory from a third party ad exchange, we may collect a transaction fee. During the three months ended ~~June~~September 30, 2017, we had ~~426~~410 customers, including 5754 of the top 100 U.S. advertisers as ranked by Advertising Age magazine in 2016 (“the AdAge 100”), such as American Express, AT&T, GlaxoSmithKline, Home Depot and McDonald'’s.

In June 2015 we announced the launch of YFA which is our demand-side programmatic video buying technology platform providing advertisers with access to multi-screen video audiences at scale with a full suite of unique branding solutions. YFA is a comprehensive demand-side platform that connects brand advertising buyers to relevant digital media property audiences and inventory. YFA delivers an intuitive user interface, multi-screen breadth, brand performance-driving advertising products and integrated third party technologies to support video branding objectives. In addition to buying inventory in real-time, advertising customers using YFA can create private marketplaces to customize the digital media properties and owners relevant for their specific brands.

YFA allows advertising customers to access our programmatic platform and use our sales or managed services team to assist in creating, optimizing and running campaigns. Our YFA programmatic platform can run campaigns across multiple internet-connected devices and through multiple digital media property owners and aggregators. When using YFA, advertising customers can access differentiated audiences from YuMe digital media properties and other audiences through third party supply-side platforms, or SSPs, and ad exchanges. This gives customers the flexibility to extend their objectives as needed.

On November 8, 2016, our board of directors approved a restructuring plan designed to reduce our operating expenses, realign our cost structure with revenue, better manage our costs and more efficiently manage our business. The restructuring plan was implemented in the fourth quarter of 2016 and completed in the first quarter of 2017. Restructuring expenses totaled $1.6 million and were recorded as restructuring expenses on our consolidated statements of operations in the fourth quarter of 2016. Elements of the restructuring plan included a workforce reduction of approximately 7%, which included employee severance pay and related expenses of $1.2 million, acceleration of our former chief executive officer’s stock-based compensation expense of $0.3 million as a result of his termination without cause and facility exit expenses of $0.1 million. We do not expect to incur any additional expenses under the restructuring plan.

On October ~~November 9~~2, ~~2016~~2017, weour ~~announced~~board ~~the commencement~~ of directors approved a ~~comprehensive~~plan ~~review~~to restructure and streamline certain of ~~strategic~~our ~~alternatives~~operations to further reduce our operating expenses and ~~have~~streamline ~~engaged~~and ~~advisors~~focus ~~related~~our toEuropean ~~such~~operations ~~review~~on our programmatic business. We ~~have~~anticipate that ~~not~~the ~~made~~restructuring ~~any~~plan ~~determination~~will tofocus ~~enter~~on ~~into~~our ~~any~~operations ~~strategic~~in ~~transaction~~the United Kingdom, ~~and~~will ~~there~~be isimplemented nobefore ~~assurance~~the ~~that~~end ~~our~~of ~~review~~the first quarter of ~~strategic~~2018 ~~alternatives~~and ~~will~~is currently expected to result in ~~any~~fourth ~~transaction~~quarter ~~being~~2017 ~~entered~~cost ~~into~~savings orbetween ~~consummated~~approximately $0.4 million and $0.6 million. The main elements of our restructuring plan include a workforce reduction and real estate consolidation focused in the United Kingdom.

As part of the restructuring plan, we expect to reduce our workforce by an additional 3% by the end of 2017. The changes to the workforce will be governed by local legal requirements, as appropriate. In the fourth quarter of 2017, we currently expect the workforce reduction to result in one-time severance costs of approximately $0.2 million and all other actions under the plan, including the real estate consolidation, to result in costs between approximately $0.1 million and $0.3 million.

On November 9, 2016, we announced the commencement of a comprehensive review of strategic alternatives and engaged advisors related to such review. On September 4, 2017, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with RhythmOne PLC, a public limited company incorporated under the laws of England and Wales, Redwood Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of RhythmOne PLC and Redwood Merger Sub II, Inc., a Delaware corporation and a wholly owned subsidiary of RhythmOne PLC.

Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, RhythmOne PLC has agreed to commence an exchange offer (the “Offer”) to purchase all of the outstanding shares of common stock of the Company (the “YuMe Stock”), with each share of YuMe Stock accepted by Purchaser in the Offer to be exchanged for the right to receive (i) $1.70 in cash and (ii) 0.7325 ordinary shares £0.01 each in the capital of RhythmOne PLC stock, plus cash in lieu of any fractional shares of RhythmOne PLC stock, in each case, without interest. If the conditions to the Offer are satisfied and the Offer closes, RhythmOne PLC would acquire any remaining YuMe Stock by a merger of RhythmOne PLC with and into YuMe (the “First Merger”), with YuMe surviving the First Merger. Immediately following the First Merger, YuMe, as the surviving company of the First Merger, will be merged with and into Merger Sub II (the “Second Merger”), with Merger Sub II surviving the Second Merger as a wholly owned subsidiary of RhythmOne PLC. As a result of the First and Second Mergers, it is expected that the former stockholders of YuMe will hold approximately 34% of RhythmOne PLC stock.

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Cash Dividends Declared

On June 22, 2017, we announced a special cash dividend in the amount of $1.00 per common share and a quarterly cash dividend in the amount of $0.03 per common share. The special and quarterly cash dividends were paid on July 7, 2017, to stockholders of record as of the close of business on July 3, 2017. Cash used to pay dividends was funded from available working capital. We recorded $35.6 million in “Dividends payable” in our condensed consolidated balance sheet as of June 30, 2017. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of our board of directors.

On August 8, 2017, we announced a quarterly cash dividend in the amount of $0.03 per common share. This quarterly cash dividend was paid on October 9, 2017, to stockholders of record as of the close of business on September 29, 2017. We recorded $1.0 million in “Dividends payable” in our condensed consolidated balance sheet as of September 30, 2017.

Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of our board of directors.

Critical Accounting Policies and Estimates

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

We believe that the assumptions and estimates associated with revenue recognition, internal-use software development costs, income taxes and stock-based compensation have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

For further information on all of our critical accounting policies and estimates, refer to our 2016 Annual Report on Form 10-K, which was filed with the SEC on March 10, 2017.

Goodwill

As of ~~June~~September 30, 2017 goodwill recorded on our condensed consolidated balance sheet totaled $3.9 million. YuMe, Inc. is a single reporting unit for the purposes of reviewing impairment and recoverability of goodwill. Goodwill is not amortized, but is tested for impairment at least annually or as circumstances indicate the value may no longer be recoverable. We evaluate goodwill for impairment annually in the fourth quarter of our fiscal year as of December 31, or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a decrease in market capitalization, increasing cost structure, a significant adverse change in customer demand or business climate that could affect the value of goodwill, a significant decrease in expected cash flows, restructuring activities undertaken to reduce increasing future operating expenses, the loss of key personnel, whether voluntarily or involuntarily, and/or a decline revenue forecasts. If we determine any of these qualitative triggering events exist, or that in aggregate they might indicate a goodwill impairment exists, we would then proceed to performing the two-step goodwill impairment test as needed to determine if an impairment exists. As of December 31, 2016, we performed the first step of the goodwill impairment test and determined that the fair value of our goodwill was greater than its carrying value and no impairment of goodwill existed.

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Recent Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including identifying performance obligations. The new standard, as amended, is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. We dohave completed ~~not~~an ~~plan~~initial assessment to ~~early~~determine ~~adopt,~~the ~~and~~impact ~~thus~~on ~~the~~our condensed ~~new~~consolidated ~~standard~~financial ~~will~~statements. We ~~become~~intend ~~effective~~to ~~for~~adopt usthe onstandard ~~January~~in 1,the ~~2018.~~first Asquarter ~~part~~ of ~~this~~2018 ~~plan,~~applying wethe ~~are~~modified ~~currently~~retrospective ~~assessing~~method. ~~the~~While ~~impact~~we ofare ~~the~~continuing ~~new~~to ~~guidance~~assess onall ~~our~~potential ~~results~~impacts of ~~operations.~~the ~~However~~new standard, ~~further analysis is required and~~ we ~~will~~currently ~~continue~~do tonot ~~evaluate~~believe this ~~assessment~~standard inwill ~~2017. We~~have ~~currently~~a ~~expect~~material toimpact ~~apply~~on ~~the~~revenue ~~modified~~or customer ~~retrospective~~acquisition ~~method~~costs ofrecognized ~~adoption;~~in ~~however,~~our wecondensed ~~have~~consolidated ~~not~~financial ~~yet~~statements. We ~~finalized~~are ~~our~~in ~~transition~~the ~~method,~~process ~~but~~of ~~expect~~evaluating tothe doimpact soof inthe ~~2017~~disclosure ~~upon~~requirements ~~completion~~relating ofto ~~further~~this ~~analysis~~standard.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the standard clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We are currently evaluating the impact of adopting this standard.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires entities that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The standard is effective for fiscal years and the interim periods within those fiscal years beginning after December 15, 2018. The guidance is required to be applied by the modified retrospective transition approach. Early adoption is permitted. We are currently evaluating the impact of adopting this standard.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This ASU amends ASC Topic 718 and was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. This standard covers accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows and will be effective as of January 1, 2017, with early adoption permitted. Under this ASU, companies can continue to estimate forfeitures or they can elect to account for forfeitures as they occur. We adopted the standard January 1, 2017 and we will continue to estimate forfeitures. The adoption of this standard did not have a material effect on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). This ASU is an update to the standard on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. Upon adoption, entities will be required to apply the update prospectively. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

Effective January 1, 2017, we adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the requirement for separate presentation of current and non-current portions of deferred tax. Subsequent to adoption, all deferred tax assets and deferred tax liabilities are presented as non-current on the balance sheet. The changes have been applied prospectively as permitted by the ASU and prior years have not been restated. The adoption of this standard did not have a material effect on our consolidated financial statements.

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Results of Operations

The following tables set forth our results of operations for the periods presented in dollars and as a percentage of revenue (certain items may not foot due to rounding). The period-to-period comparison of financial results is not necessarily indicative of future results. These tables include all adjustments, consisting only of normal recurring adjustments that we consider necessary for the fair statement of our condensed consolidated financial position and operating results for the quarters presented. Seasonality has caused, and is likely to continue to cause, fluctuations in our quarterly results.

	Three Months Ended June 30,										Six Months Ended June 30,
	Three Months Ended September 30,										Nine Months Ended September 30,
	2017					2016					2017				2016
Condensed Consolidated Statements of Operations Data:	(dollars in thousands)
Revenue	$	4235,~~818~~037		100.0	%	$	4034,~~675~~953		100.0	%	$	79114,~~272~~309	100.0	%	$	79114,~~908~~861		100.0	%
Cost of revenue		2119,~~045~~071		4954.14			2018,~~111~~050		4951.46			3857,~~446~~517	4850.53			4058,~~592~~642		5051.81
Gross profit		2115,~~773~~966		5045.96			2016,~~564~~903		5048.64			4056,~~826~~792	5149.57			3956,~~316~~219		4948.29
Operating expenses
Sales and marketing		119,~~155~~360		26.17			1312,~~639~~730		3336.54			2131,~~745~~105	27.42			2740,~~414~~144		3435.30
Research and development		21,~~214~~719		54.29			2,~~947~~850		78.2			46,~~306~~025	5.43			58,~~612~~462		7.04
General and administrative		4,~~167~~733		913.75			65,~~216~~877		1516.38			914,~~499~~232	12.05			1217,~~077~~954		15.16
Total operating expenses		1715,~~536~~812		4145.01			2221,~~802~~457		5661.14			3551,~~550~~362	44.89			4566,~~103~~560		5658.40
Income (loss) from operations		~~4,237~~154		90.94			(24,~~238~~554	)	(513.50	)		5,~~276~~430	64.78			(510,~~787~~341	)	(79.20	)
Income (loss) before income taxes		~~4,610~~257		100.87			(24,~~421~~529	)	(613.0	)		56,~~949~~206	7.5.4			(510,~~964~~493	)	(79.51	)
Net income (loss)	$	(4~~,367~~	)	10(0.20	)%	$	(24,~~486~~464	)	(612.18	)%	$	5,~~572~~568	74.09	%	$	(610,~~084~~548	)	(79.62	)%

Revenue

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

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

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

	Three Months Ended June 30,				Change					Six Months Ended June 30,				Change
	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2017		2016		$		%			2017		2016		$			%
	(dollars in thousands)
Revenue	$	35,037	$	34,953	$	84		0.2	%	$	114,309	$	114,861	$	(552	)		(0.5	)%
Revenue	$	42,818	$	40,675	$	2,143		5.3	%	$	79,272	$	79,908	$	(636	)		(0.8	)%

For the three months ended ~~June~~September 30, 2017, revenue increased $20.1 million, or 50.32%, compared to the three months ended ~~June~~September 30, 2016. The increase in revenue was primarily driven by a $20.3 million increase in domestic revenue, partially offset by a $0.2 million decrease in international revenue. We had ~~426~~410 advertising customers during the three months ended ~~June~~September 30, 2017, a decrease of 106.34%, compared to ~~475~~438 during the three months ended ~~June~~September 30, 2016. The average revenue per advertising customer for the three months ended ~~June~~September 30, 2017 was $9984,~~200~~600, an increase of 187.28%, compared to $8378,~~900~~400 for the three months ended ~~June~~September 30, 2016. The increase in average revenue per advertising customer was primarily the result of the decrease in the number of new advertising customers, which tend to deploy smaller digital video advertising budgets through our solutions, while established customers ~~are~~may be more likely to maintain advertising spend consistent with prior quarters. Our top 20 advertising customers for the three months ended ~~June~~September 30, 2017 accounted for $2116.97 million, or 5147.17%, of our revenue, compared to $1815.68 million, or 45.83%, of our revenue for the three months ended ~~June~~September 30, 2016.

For the six months ended June 30, 2017, revenue decreased $0.6 million, or 0.8%, compared to the six months ended June 30, 2016. The decrease in revenue was primarily driven by a $2.6 million decrease in international revenue, partially offset by a $1.9 million increase in domestic revenue. We had 533 advertising customers during the six months ended June 30, 2017, a decrease of 16.5%, compared to 638 during the six months ended June 30, 2016. The average revenue per advertising customer for the six months ended June 30, 2017 was $146,700, an increase of 19.4%, compared to $122,600 for the six months ended June 30, 2016. The increase in average revenue per advertising customer was primarily the result of the decrease in the number of new advertising customers, which tend to deploy smaller digital video advertising budgets through our solutions, while established customers are more likely to maintain advertising spend consistent with prior periods. Our top 20 advertising customers for the six months ended June 30, 2017 accounted for $38.1 million, or 47.9%, of our revenue, compared to $36.1 million, or 45.2%, of our revenue for the six months ended June 30, 2016.23

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For the nine months ended September 30, 2017, revenue decreased $0.6 million, or 0.5%, compared to the nine months ended September 30, 2016. The decrease in revenue was primarily driven by a $2.7 million decrease in international revenue, partially offset by a $2.2 million increase in domestic revenue. We had 638 advertising customers during the nine months ended September 30, 2017, a decrease of 13.9%, compared to 741 during the nine months ended September 30, 2016. The average revenue per advertising customer for the nine months ended September 30, 2017 was $176,900, an increase of 16.4%, compared to $151,900 for the nine months ended September 30, 2016. The increase in average revenue per advertising customer was primarily the result of the decrease in the number of new advertising customers, which tend to deploy smaller digital video advertising budgets through our solutions, while established customers may be more likely to maintain advertising spend consistent with prior periods. Our top 20 advertising customers for the nine months ended September 30, 2017 accounted for $51.6 million, or 45.1%, of our revenue, compared to $50.1 million, or 43.6%, of our revenue for the nine months ended September 30, 2016.

Cost of Revenue and Gross Profit

Our cost of revenue primarily consists of costs incurred with digital media property owners, typically under revenue-sharing arrangements. We refer to these costs as traffic acquisition costs. Generally, we incur traffic acquisition costs in the period the advertising impressions are delivered. In limited circumstances, we incur costs based on minimum guaranteed impressions. Cost of revenue also includes ad delivery costs such as labor and related costs, depreciation and amortization related to acquired technologies, internally developed software and data center assets, and Internet access costs. These expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized. As a percentage of revenue, we expect cost of revenues, including our traffic acquisition costs, to be in the 48% to 5052% range in 2017.

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2017			2016			$			%			2017			2016			$			%
	(dollars in thousands)
Cost of revenue	$	2119,~~045~~071		$	2018,~~111~~050		$	~~934~~1,021			45.67	%	$	3857,~~446~~517		$	4058,~~592~~642		$	(21,~~146~~125	)		(51.39	)%
Percent of revenue		4954.14	%		4951.46	%								4850.53	%		5051.81	%
Gross profit	$	2115,~~773~~966		$	2016,~~564~~903		$	~~1,209~~(937	)		(5.95	)%	$	4056,~~826~~792		$	3956,~~316~~219		$	~~1,510~~573			31.80	%
Percent of revenue		5045.96	%		5048.64	%								5149.57	%		4948.29	%

22For the three months ended September 30, 2017, cost of revenue increased $1.0 million, or 5.7%, compared to the three months ended September 30, 2016. The increase was primarily attributable to a $0.8 million increase in traffic acquisition costs, third party service and ad delivery costs as a result of the cost mix of advertising products delivered for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. Additionally, other cost of revenue increased $0.2 million. For the three months ended September 30, 2017, cost of revenue, as a percentage of revenue, increased 2.8% to 54.4% from 51.6% for the three months ended September 30, 2016, primarily as a result of inventory pricing for the mix of advertising products we delivered.

For the ~~three~~nine months ended ~~June~~September 30, 2017, cost of revenue ~~increased~~decreased $01.9 1 million, or 41.69%, compared to the ~~three~~nine months ended ~~June~~September 30, 2016. The ~~increase~~decrease was primarily attributable to a $01.5 9 million ~~increase~~decrease in ~~data~~traffic ~~center~~acquisition ~~depreciation expense. Additionally~~costs, third party service and ad delivery costs ~~increased~~as ~~$0.4 million~~a ~~corresponding~~result toof ~~the~~a ~~increase~~favorable incost ~~revenue~~mix of ~~5.3%~~advertising products delivered for the ~~three~~nine months ended ~~June~~September 30, 2017, especially earlier in the period, compared to the ~~three~~nine months ended ~~June~~September 30, 2016. This decrease was partially offset by a $0.6 million increase in data center depreciation expense and a $0.2 million increase in other costs of revenue. For the ~~three~~nine months ended ~~June~~September 30, 2017, cost of revenue, as a percentage of revenue, decreased 0.38% to 4950.13% from 4951.41% for the ~~three~~nine months ended ~~June~~September 30, 2016, primarily as a result of favorable inventory pricing mix for the mix of advertising products we delivered, especially earlier in the period.

For the six months ended June 30, 2017, cost of revenue decreased $2.1 million, or 5.3%, compared to the six months ended June 30, 2016. The decrease was primarily attributable to a $2.8 million decrease in traffic acquisition costs, third party service and ad delivery costs as a result of a favorable cost mix of advertising products delivered for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. This decrease was partially offset by a $0.5 million increase in data center depreciation expense. For the six months ended June 30, 2017, cost of revenue, as a percentage of revenue, decreased 2.3% to 48.5% from 50.8% for the six months ended June 30, 2016, primarily as a result of favorable inventory pricing for the advertising products we delivered.24

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Sales and Marketing

We sell to our customers primarily through our direct sales force personnel, who have established relationships with major advertising agencies and direct relationships with advertisers. Our sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel and entertainment expenses, and incentive compensation for our sales and marketing employees. Sales and marketing expenses also include promotional, advertising and public relations costs, as well as depreciation, facilities and other supporting overhead costs. In absolute dollars and as a percentage of revenue, we expect sales and marketing expenses to decline in 2017 compared to 2016 as a result of our restructuring activities that we announced in November 2016 and October 2017 and from a decrease in discretionary spending for marketing and advertising.

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2017			2016			$			%			2017			2016			$			%
	(dollars in thousands)
Sales and marketing	$	119,~~155~~360		$	1312,~~639~~730		$	(23,~~484~~370	)		(1826.25	)%	$	2131,~~745~~105		$	2740,~~414~~144		$	(59,~~669~~039	)		(2022.75	)%
Percent of revenue		26.17	%		3336.54	%								27.42	%		3435.30	%

For the three months ended ~~June~~September 30, 2017, sales and marketing expenses decreased $23.54 million, or 1826.25%, compared to the three months ended ~~June~~September 30, 2016. The decrease was primarily attributable to a decrease of $12.75 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, primarily due to a decrease in the number of employees within our sales and marketing organization resulting from our restructuring activities announced in November 2016. Additionally, other sales and marketing expenses including advertising, promotions, tradeshows, sponsorships and consulting services, decreased $0.89 million primarily as a result of a decrease in discretionary marketing and advertising spending. For the three months ended ~~June~~September 30, 2017, sales and marketing expenses, as a percentage of revenue, decreased by 79.47% to 26.17% from 3336.54% for the three months ended ~~June~~September 30, 2016, primarily as a result of the decrease in the number of sales and marketing employees and a decrease in discretionary marketing and advertising spending.

For the ~~six~~nine months ended ~~June~~September 30, 2017, sales and marketing expenses decreased $59.70 million, or 2022.75%, compared to the ~~six~~nine months ended ~~June~~September 30, 2016. The decrease was primarily attributable to a decrease of $36.72 million in employee compensation, benefits and other employee-related expenses, including stock-based compensation, primarily due to a decrease in the number of employees within our sales and marketing organization resulting from our restructuring activities announced in November 2016. Additionally, other sales and marketing expenses including advertising, promotions, tradeshows, sponsorships and consulting services, decreased $2.08 million primarily as a result of a decrease in discretionary marketing and advertising spending. For the ~~six~~nine months ended ~~June~~September 30, 2017, sales and marketing expenses, as a percentage of revenue, decreased by 67.98% to 27.42% from 3435.30% for the ~~six~~nine months ended ~~June~~September 30, 2016, primarily as a result of the decrease in the number of sales and marketing employees and a decrease in discretionary marketing and advertising spending.

Research and Development

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

As of ~~June~~September 30, 2017 and 2016, we had ~~137~~139 and ~~155~~147 research and development employees, respectively. As of ~~June~~September 30, 2017, ~~108~~112 research and development employees were located in our Chennai and Pune, India offices. We expect research and development expenses to decrease in 2017 compared to 2016 in both absolute dollars and as a percentage of revenue as a result of our restructuring activities that we announced in November 2016 and October 2017 and as a result of a decrease in other ongoing spending.

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2017			2016			$			%			2017			2016			$			%
	(dollars in thousands)
Research and development	$	21,~~214~~719		$	2,~~947~~850		$	(~~733~~1,131	)		(2439.97	)%	$	46,~~306~~025		$	58,~~612~~462		$	(12,~~306~~437	)		(2328.38	)%
Percent of revenue		54.29	%		78.2	%								5.43	%		7.04	%

For the three months ended ~~June~~September 30, 2017, research and development expenses decreased $01.71 million, or 2439.97%, compared to the three months ended ~~June~~September 30, 2016. The decrease was attributable to a $0.57 million decrease in equipment maintenance and support. Additionally, employee compensation, benefits and other employee-related expenses, including stock-based compensation, decreased $0.24 million as a result of a decrease in the number of employees within our research and development organization due to our restructuring activities. For the three months ended ~~June~~September 30, 2017, research and development expenses, as a percentage of revenue, decreased by 23.03% to 54.29% from 78.2% for the three months ended ~~June~~September 30, 2016, primarily as a result of the decreases in equipment maintenance and support and employee compensation, benefits and other employee-related expenses, including stock-based compensation.

For the six months ended June 30, 2017, research and development expenses decreased $1.3 million, or 23.3%, compared to the six months ended June 30, 2016. The decrease was attributable to a $0.9 million decrease in equipment maintenance and support. Additionally, employee compensation, benefits and other employee-related expenses, including stock-based compensation, decreased $0.4 million as a result of a decrease in the number of employees within our research and development organization due to our restructuring activities. For the six months ended June 30, 2017, research and development expenses, as a percentage of revenue, decreased by 1.6% to 5.4% from 7.0% for the six months ended June 30, 2016, primarily as a result of the decreases in equipment maintenance and support and employee compensation, benefits and other employee-related expenses, including stock-based compensation.25

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For the nine months ended September 30, 2017, research and development expenses decreased $2.4 million, or 28.8%, compared to the nine months ended September 30, 2016. The decrease was attributable to a $1.4 million decrease in equipment maintenance and support and a $0.2 million decrease in depreciation and amortization. Additionally, employee compensation, benefits and other employee-related expenses, including stock-based compensation, decreased $0.8 million as a result of a decrease in the number of employees within our research and development organization due to our restructuring activities. For the nine months ended September 30, 2017, research and development expenses, as a percentage of revenue, decreased by 2.1% to 5.3% from 7.4% for the nine months ended September 30, 2016, primarily as a result of the decreases in equipment maintenance and support and employee compensation, benefits and other employee-related expenses, including stock-based compensation.

General and Administrative

Our general and administrative expenses primarily consist of salaries, benefits and stock-based compensation for our executive, finance, legal, human resources and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, and facilities and other supporting overhead costs. We expect general and administrative expenses to decrease in 2017 compared to 2016 in both absolute dollars and as a percentage of revenue due to our restructuring activities that we announced in November 2016 and October 2017 and from a decrease in other ongoing spending.

	Three Months Ended June 30,						Change						Six Months Ended June 30,						Change
	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
	2017			2016			$			%			2017			2016			$			%
	(dollars in thousands)
General and administrative	$	4,~~167~~733		$	65,~~216~~877		$	(21,~~049~~144	)		(3319.05	)%	$	914,~~499~~232		$	1217,~~077~~954		$	(23,~~578~~722	)		(2120.37	)%
Percent of revenue		913.75	%		1516.38	%								12.05	%		15.16	%

For the three months ended ~~June~~September 30, 2017, general and administrative expenses decreased $21.01 million, or 3319.05%, compared to the three months ended ~~June~~September 30, 2016. The decrease was primarily attributable to a $1.16 million decrease in employee compensation, benefits and other employee-related expenses as a result of our ~~recent~~ restructuring activities. ~~Additionally,~~Partially ~~other~~offsetting ~~general~~this ~~and~~decrease ~~administrative~~was ~~expenses,~~an ~~including~~increase ~~legal~~of ~~and third-party consulting services, decreased~~ $0.95 million ~~primarily~~in asother ageneral ~~result~~and ofadministrative expenses, ~~related~~including tolegal ~~our~~expenses ~~2016~~as ~~proxy~~a ~~contest~~result ~~which~~of ~~occurred~~our ~~during~~merger activities in the three months ended ~~June~~September 30, ~~2016~~2017. For the three months ended ~~June~~September 30, 2017, general and administrative expenses, as a percentage of revenue, decreased by 53.63% to 913.75% from 1516.38% for the three months ended ~~June~~September 30, 2016, primarily as a result of the decrease in employee compensation, benefits and other employee-related expenses ~~and non-recurring expenses in the three months ended June 30, 2016 related to the 2016 proxy contest~~.

24For the nine months ended September 30, 2017, general and administrative expenses decreased $3.7 million, or 20.7%, compared to the nine months ended September 30, 2016. The decrease was primarily attributable to a $3.2 million decrease in employee compensation, benefits and other employee-related expenses as a result of our restructuring activities. Additionally, other general and administrative expenses, including legal and third-party consulting services, decreased $0.5 million primarily as a result of expenses relating to our 2016 proxy contest which occurred during the nine months ended September 30, 2016. For the nine months ended September 30, 2017, general and administrative expenses, as a percentage of revenue, decreased by 3.1% to 12.5% from 15.6% for the nine months ended September 30, 2016, primarily as a result of the decrease in employee compensation, benefits and other employee-related expenses.

For the six months ended June 30, 2017, general and administrative expenses decreased $2.6 million, or 21.3%, compared to the six months ended June 30, 2016. The decrease was primarily attributable to a $1.6 million decrease in employee compensation, benefits and other employee-related expenses as a result of our recent restructuring activities. Additionally, other general and administrative expenses, including legal and third-party consulting services, decreased $1.0 million primarily as a result of expenses relating to our 2016 proxy contest which occurred during the six months ended June 30, 2016. For the six months ended June 30, 2017, general and administrative expenses, as a percentage of revenue, decreased by 3.1% to 12.0% from 15.1% for the six months ended June 30, 2016, primarily as a result of the decrease in employee compensation, benefits and other employee-related expenses and non-recurring expenses in the six months ended June 30, 2016 related to the 2016 proxy contest.

Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of interest income earned on our cash equivalents and marketable securities, interest expense on our capital lease obligations, accretion and amortization on marketable securities, gains and losses on our derivative instruments and foreign exchange gains and losses.

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2017			2016			Change $			2017			2016			Change $
	(in thousands)
Interest income	$	~~138~~79		$	~~154~~147		$	(1668	)	$	~~270~~349		$	~~337~~485		$	(67136	)
Interest expense		(2	)		(21	)		—(1	)		(46	)		(56	)		1—
Accretion and amortization on marketable securities		(4—	)		(7766	)		7366			(19	)		(~~178~~244	)		~~159~~225
Transaction gain (loss) on foreign exchange		~~437~~253			(~~457~~66	)		~~894~~319			~~733~~986			(~~676~~742	)		1,~~409~~728
Gain (loss) on derivative instruments		(~~196~~186	)		~~199~~11			(~~395~~197	)		(~~306~~492	)		~~346~~357			(~~652~~849	)
Other non-operating income (loss), net		—			—			—			(1	)		(1	)		—
Loss on disposal of asset		(40	)		—			(40	)		(42	)		(2	)		(40	)
Interest and other income (expense), net	$	373		$	(183	)	$	556		$	673		$	(177	)	$	850
Other non-operating income (loss), net		(1	)		—			(1	)		—			—			—
Interest and other income (expense), net	$	103		$	25		$	78		$	776		$	(152	)	$	928

For the three months ended June 30, 2017, interest and other income (expense), net was $0.4 million compared to $(0.2) million for the three months ended June 30, 2016. The change was primarily due to a net gain of $0.2 million during the three months ended June 30, 2017 in foreign transaction exchange and derivative instrument gains/(losses) as a result of fluctuations in the U.S. dollar against the British pound sterling and euro, compared to a net loss of $(0.3) million during the three months ended June 30, 2016. In addition, we realized immaterial accretion and amortization expense on our marketable securities during the three months ended June 30, 2017, compared to an expense of $(0.1) million during the three months ended June 30, 2016, as we reduced our investments in marketable securities in June 2017 to raise cash for our dividends payable to common stockholders on July 7, 2017. Our investments in derivative instruments are intended to mitigate a portion of our foreign transaction exchange gains and losses reported as income or expense on our statements of operations. 26

~~For~~Table the six months ended June 30, 2017, interest and other income (expense), net was $0.7 million compared to $(0.2) million for the six months ended June 30, 2016. The change was primarily due to a net gain of $0.4 million during the six months ended June 30, 2017 in foreign transaction exchange and derivative instrument gains/(losses) as a result of fluctuations in the U.S. dollar against the British pound sterling and euro, compared to a net loss of $(0.3) million during the six months ended June 30, 2016. In addition, we realized immaterial accretion and amortization expense on our marketable securities during the six months ended June 30, 2017, compared to an expense of $(0.2) million during the six months ended June 30, 2016, as we reduced our investments in marketable securities in June 2017 to raise cash for our dividends payable to common stockholders on July 7, 2017. Contents

For the three months ended September 30, 2017, interest and other income (expense), net was $0.1 million compared to $25 thousand for the three months ended September 30, 2016. The change was primarily due to a net gain of $0.1 million during the three months ended September 30, 2017 in foreign transaction exchange and derivative instrument gains/(losses) as a result of fluctuations in the U.S. dollar against the British pound sterling and euro, compared to a net loss of $(0.1) million during the three months ended September 30, 2016. In addition, we realized $0.1 million of accretion and amortization expense on our marketable securities during the three months ended September 30, 2016, compared to no accretion and amortization expense during the three months ended September 30, 2017, as we reduced our investments in marketable securities in June 2017 to raise cash for our dividends payable to common stockholders on July 7, 2017. Our investments in derivative instruments are intended to mitigate a portion of our foreign transaction exchange gains and losses reported as income or expense on our statements of operations.

For the nine months ended September 30, 2017, interest and other income (expense), net was $0.8 million compared to $(0.2) million for the nine months ended September 30, 2016. The change was primarily due to a net gain of $0.5 million during the nine months ended September 30, 2017 in foreign transaction exchange and derivative instrument gains/(losses) as a result of fluctuations in the U.S. dollar against the British pound sterling and euro, compared to a net loss of $(0.4) million during the nine months ended September 30, 2016. In addition, we realized immaterial accretion and amortization expense on our marketable securities during the nine months ended September 30, 2017, compared to an expense of $(0.2) million during the nine months ended September 30, 2016, as we reduced our investments in marketable securities in June 2017 to raise cash for our dividends payable to common stockholders on July 7, 2017.

Provision for Income Taxes

Provision for income taxes consists of federal and state income taxes in the U.S. and income taxes in certain foreign jurisdictions, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards.

	Three Months Ended June 30,							Six Months Ended June 30,
	Three Months Ended September 30,							Nine Months Ended September 30,
	2017		2016			Change $		2017		2016		Change $
	(in thousands)
Income tax expense	$	243	$	65		$	178	$	377	$	120	$	257
Income tax expense (benefit)	$	261	$	(65	)	$	326	$	638	$	55	$	583

25For the three and nine months ended September 30, 2017, income tax expense was primarily related to federal alternative minimum tax, state minimum taxes and taxes due in foreign jurisdictions. For the three and nine months ended September 30, 2016, income tax expense was primarily related to state minimum taxes and taxes due in foreign jurisdictions.

For the three and six months ended June 30, 2017, income tax expense was primarily related to alternative minimum tax, state minimum taxes and taxes due in foreign jurisdictions. For the three and six months ended June 30, 2016, income tax expense was primarily related to state minimum taxes and taxes due in foreign jurisdictions.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss), adjusted to exclude expenses for: interest, income taxes, depreciation and amortization, stock-based compensation, merger-related costs and in the ~~three~~nine- ~~and six-~~month ~~periods~~ period ended ~~June~~September 30, 2016, non-recurring proxy contest expenses. We believe that adjusted EBITDA provides useful information to investors in understanding and evaluating our operating results in the same manner as management and the board of directors. This non-GAAP information is not necessarily comparable to non-GAAP information of other companies. Non-GAAP information should not be viewed as a substitute for, or superior to, net income (loss) prepared in accordance with GAAP as a measure of our profitability or liquidity. Users of this financial information should consider the types of events and transactions for which adjustments have been made. The following is a reconciliation of adjusted EBITDA to net income (loss) for the periods indicated below (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017		2016
Net income (loss)	$	(4~~,367~~	)	$	(24,~~486~~464	)	$	5,~~572~~568	$	(610,~~084~~548	)
Adjustments:
Interest expense		2			21			46		56
Income tax expense		~~243~~261			(65	)		~~377~~638		~~120~~55
Depreciation and amortization expense		1,~~794~~409			1,~~708~~682			34,~~190~~599		35,~~408~~090
Stock-based compensation expense		~~1,212~~528			2,~~329~~137			23,~~753~~281		46,~~501~~638
Proxy contest expenses		—			658			—		815
Merger-related costs (1)		1,413			—			1,800		—
Total Adjustments		3,251			4,762			6,324		8,849
Proxy contest expenses		—			—			—		815
Adjusted EBITDA	$	7,618		$	2,276		$	11,896	$	2,765
Total Adjustments		3,613			3,755			10,324		12,604
Adjusted EBITDA income (loss)	$	3,609		$	(709	)	$	15,892	$	2,056

We(1) ~~have included adjusted EBITDA in this Quarterly Report on Form 10~~Merger-Qrelated ~~because~~costs itincurred isduring ~~a key measure used by us and~~ the ~~board~~six ofmonths ~~directors~~ended toJune ~~understand~~30, ~~and~~2017 ~~evaluate~~were ~~our~~related ~~core operating performance and trends,~~ to ~~prepare and approve~~ our ~~annual~~comprehensive ~~budget~~review ~~and to develop short- and long-term operational plans. In particular, the exclusion~~ of ~~certain~~strategic ~~expenses~~alternatives inleading ~~calculating~~up ~~adjusted EBITDA can provide a useful measure for period-~~to~~-period~~ ~~comparisons of~~ our ~~core~~announcement ~~business.~~of ~~Accordingly,~~the weMerger ~~believe~~Agreement ~~that~~with ~~adjusted~~RhythmOne ~~EBITDA~~PLC ~~provides useful information~~ in ~~understanding and evaluating our operating results in~~ the ~~same~~three ~~manner~~months asended ~~our~~September ~~management~~30, ~~and board of directors~~2017.

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We have included adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measure used by us and our board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA has limitations as a financial measure, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•

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

•

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

•

adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

•

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

•

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, adjusted EBITDA should be considered alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash, cash equivalents, and marketable securities. As of ~~June~~September 30, 2017 and December 31, 2016, we had $7341.93 million and $65.7 million in cash, cash equivalents, and marketable securities, respectively. Cash equivalents and marketable securities as of ~~June~~September 30, 2017 are comprised of money market funds, ~~corporate bonds~~ and U.S. government ~~and agency~~ bonds. Cash held internationally as of ~~June~~September 30, 2017 totaled $65.49 million.

26On February 18, 2016, we announced a $10 million stock repurchase program. The repurchase program is subject to market conditions and other factors. Purchases under this repurchase program have been made in the open market and have complied with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The cost of the repurchased shares was funded from available working capital. Such repurchased shares are held in treasury and are presented using the cost method. From February 18, 2016 through September 30, 2017, we purchased 2,268,478 shares of our common stock for $8.2 million at an average price of $3.64 per share.

On ~~February~~June 1822, ~~2016~~2017, we announced a ~~$10~~special ~~million~~cash ~~stock~~dividend ~~repurchase~~in ~~program~~the amount of $1.00 ~~The~~per ~~repurchase~~common ~~program~~share isand ~~subject~~a toquarterly ~~market~~cash ~~conditions~~dividend ~~and~~in ~~other~~the ~~factors~~amount of $0.03 ~~Purchases~~per ~~under~~common ~~this~~share. ~~repurchase~~The ~~program~~special ~~have~~and ~~been~~quarterly ~~made~~cash individends ~~the~~were ~~open~~paid ~~market~~on ~~and~~July ~~have~~7, ~~complied~~2017, ~~with~~to ~~Rule~~stockholders ~~10b-18~~of ~~under~~record ~~the~~as ~~Securities~~of ~~Exchange~~the ~~Act~~close of ~~1934,~~business ason ~~amended~~July 3, 2017. ~~The~~ ~~cost~~Cash ofused ~~the~~to ~~repurchased~~pay ~~shares~~dividends was funded from available working capital. On ~~Such~~August ~~repurchased~~8, ~~shares~~2017, ~~are~~we ~~held~~announced ina ~~treasury~~quarterly ~~and~~cash ~~are~~dividend ~~presented~~in ~~using~~ the ~~cost~~amount ~~method~~of $0.03 ~~From~~per ~~February~~common ~~18,~~share. ~~2016~~This ~~through~~quarterly ~~June~~cash 30dividend was paid on October 9, 2017, we ~~had~~to ~~purchased~~stockholders ~~2,268,478~~of ~~shares~~record as of ~~our~~the ~~common~~close ~~stock~~of ~~for~~business on September 29, 2017. We recorded $81.20 million atin an“Dividends ~~average~~payable” ~~price~~in our condensed consolidated balance sheet as of $3September 30, 2017.64 Future ~~per~~declarations ~~share~~of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of our board of directors.

On June 22, 2017, we announced a special cash dividend of $1.00 per share and a quarterly cash dividend of $0.03 per share. The special and quarterly cash dividends were paid on July 7, 2017, to stockholders of record as of the close of business on July 3, 2017. Cash used to pay dividends was funded from available working capital. We recorded $35.6 million in “Dividends payable” in our condensed consolidated balance sheet as of June 30, 2017. The cash dividends paid on July 7, 2017 reduced our cash and cash equivalents balance by $35.6 million. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of our board of directors.

Our future capital requirements will depend on many factors, including our rate of revenue growth, the cost of maintaining and improving our technologies, our operating expenses related to the development and marketing of our solutions and the amount of cash required for expected future dividends. We believe that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to meet our anticipated cash requirements through at least the next 12 months. However, our liquidity and operating cash assumptions may prove to be incorrect, and we could utilize our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under Part II, Item 1A: “Risk Factors” in this Quarterly Report on Form 10-Q. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted. If we raise additional financing by the incurrence of indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If we are unable to obtain needed additional funds, we will have to reduce our operating expenses, which would impair our growth prospects and could otherwise negatively impact our business.

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The following table summarizes our cash flows for the periods presented:

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2017			2016
Condensed Consolidated Statements of Cash Flows Data:	(in thousands)
Net cash provided by operating activities	$	1217,~~308~~735		$	813,~~561~~342
Net cash provided by investing activities	$	1113,~~973~~257		$	84,~~484~~455
Net cash used in financing activities	$	(~~639~~36,981	)	$	(24,~~459~~562	)

Operating Activities

Our primary source of cash from operating activities is receipts from the sale of our advertising solutions to our customers. Our primary uses of cash from operating activities are payments to publishers and other vendors for the purchase of digital media inventory and related costs, employee compensation and related expenses, sales and marketing expenses, general operating expenses, and the purchase of property and equipment.

We generated $1217.37 million of cash from operating activities during the ~~six~~nine months ended ~~June~~September 30, 2017, primarily resulting from our net income of $5.6 million, adjusted for non-cash charges related to:

• Depreciation and amortization of $34.26 million;

• Stock-based compensation of $2.8 million; and

	•	Stock-based compensation of $3.3 million; and
	•	Allowance for doubtful accounts receivable of $0.4 million.

• Allowance for doubtful accounts receivable of $0.4 million.

In addition, certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows:

• $4.69 million from a decrease in accounts receivable due to the timing of receipts from advertising customers; $(0.6) million from an increase in prepaid expenses and other current assets; and

• $(40.35) million from a net decrease in accounts payable, accrued digital media property owner costs and other accrued liabilities as a result the timing of payments to our vendors~~; and~~.

•We generated $013.13 million of cash from anoperating ~~increase~~activities induring ~~deferred~~the ~~revenue~~nine months ended September 30, 2016, primarily resulting from our net loss of $10.5 million, adjusted for non-cash charges related to:

We• ~~generated~~Depreciation ~~$8.6~~and ~~million~~amortization of ~~cash from operating activities during the six months ended June 30, 2016, primarily resulting from our net loss of~~ $65.1 million~~, adjusted for non-cash charges related to:~~;

• ~~Depreciation~~Stock-based ~~and~~compensation ~~amortization~~ of $36.46 million;

• ~~Stock-based~~Allowance ~~compensation~~for doubtful accounts receivable of $40.58 million;

• Allowance for doubtful accounts receivable of $0.2 million;

•

Amortization of premiums on marketable securities, net of $0.2 million; and

• Deferred income taxes of $(0.12) million.

In addition, certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows:

	•	$1421.24 million from a decrease in accounts receivable due to the timing of receipts from advertising customers;
	•	$(1.0) million from an increase in prepaid expenses and other current assets;

	•	$(79.06) million from a decrease in accounts payable, accrued digital media property owner costs and other accrued liabilities as a result the timing of payments to our vendors; and
	•	$0.46 million from an increase in other liabilities.

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Investing Activities

Our primary investing activities consist of (i) purchases of property and equipment to support the build out of our data centers and software to support website development and operations, and our corporate infrastructure, and (ii) purchases of marketable securities, net of sales and maturities. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and website and internal-use software and development.

We generated $1213.03 million of cash from investing activities during the ~~six~~nine months ended ~~June~~September 30, 2017. Significant cash increases (decreases) are as follows:

• $(1.29) million to purchase property, equipment and software;

• $(23.21) million to develop software for internal use;

•

$(22.8) million to purchase marketable securities; and

• $3841.1 million of proceeds from the sales and maturities of marketable securities.

We generated $84.65 million of cash from investing activities during the ~~six~~nine months ended ~~June~~September 30, 2016. Significant cash increases (decreases) are as follows:

	•	$(02.80) million to purchase property, equipment and software;
	•	$(23.1) million to develop software for internal use;

• $(413.90) million to purchase marketable securities; and

	•	$16.0 million of proceeds from the maturities of marketable securities; and
	•	$0.3 million from a decrease in restricted cash.

•

$22.7 million of proceeds from the maturities of marketable securities.

Financing Activities

Our financing activities consist primarily of the issuance of common stock upon the exercise of stock options and pursuant to our employee stock purchase plan, and repurchases of our common stock.

We used $037.60 million of cash in financing activities during the ~~six~~nine months ended ~~June~~September 30, 2017. We used $35.6 million for dividend payments, $1.1 million to repurchase the Company’s stock, $0.9 million for repayments of borrowings under capital leases and $0.27 million to net-share settle equity awards, partially offset by $01.74 million received from the issuance of common stock in association with our employee stock purchase plan and from the exercise of stock options.

We used $24.56 million of cash in financing activities during the ~~six~~nine months ended ~~June~~September 30, 2016. We received $01.61 million of proceeds for the issuance of common stock in association with our employee stock purchase plan and from the exercise of stock options, offset by $25.70 million used for repurchases of common stock and $0.37 million used to net-share settle equity awards.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of ~~June~~September 30, 2017 and December 31, 2016.

Cash Dividends Declared

Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of our board of directors.

Contractual Obligations

We lease various office facilities, including our corporate headquarters in Redwood City, California, under non-cancellable operating lease agreements that expire on various dates through September 2027. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. Rent expense under operating leases totaled $0.98 million and $0.87 million for the three months ended ~~June~~September 30, 2017 and 2016, respectively, and totaled $12.75 million ~~and~~for ~~$1.8~~each ~~million~~of ~~for~~ the ~~six~~nine-month ~~months~~periods ended ~~June~~September 30, 2017 and 2016~~, respectively~~. We also have capital lease obligations that mature over various dates through July ~~2019~~2020. During the ~~six~~nine months ended ~~June~~September 30, 2017, we entered into aseveral new ~~$1.4 million~~ capital lease ~~obligation~~obligations for computer equipment ~~that~~for ~~has~~ a total of approximately $3.4 million that have lease ~~term~~terms ofranging from one ~~year~~to three years.

We also occasionally enter into agreements with digital media property owners that require us to purchase a minimum number of impressions on a monthly or quarterly basis. In the three months ended June 30, 2017, we entered in to purchase commitments with two additional digital media property owners representing an additional commitment of $3.1 million. Our purchase commitments expire on various dates through December 2017.

~~Our~~Table ~~future minimum payments under these arrangements as~~ of ~~June 30, 2017 were as follows (in thousands):~~ Contents

	Payments Due by Period
	Total		Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years
Operating lease obligations	$	15,685	$	3,349	$	5,903	$	3,087	$	3,346
Capital lease obligations		1,394		1,384		10		—		—
Traffic acquisition costs and other purchase commitments		3,256		3,256		—		—		—
Total minimum payments	$	20,335	$	7,989	$	5,913	$	3,087	$	3,346

We also occasionally enter into agreements with digital media property owners that require us to purchase a minimum number of impressions on a monthly or quarterly basis. In the three months ended June 30, 2017, we entered in to purchase commitments with two additional digital media property owners representing an additional commitment of $3.1 million, of which $1.6 million is remaining as of September 30, 2017. Our purchase commitments expire on various dates through December 2017.

Our future minimum payments under these arrangements as of September 30, 2017 were as follows (in thousands):

	Payments Due by Period
	Total		Less Than 1 Year		1 – 3 Years		3 – 5 Years		More Than 5 Years
Operating lease obligations	$	14,601	$	3,277	$	5,472	$	3,016	$	2,836
Capital lease obligations		2,522		1,819		703		—		—
Traffic acquisition costs and other purchase commitments		1,611		1,611		—		—		—
Total minimum payments	$	18,734	$	6,707	$	6,175	$	3,016	$	2,836

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have operations in the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks include primarily interest rate and foreign exchange risks and inflation.

Interest Rate Fluctuation Risk

Our cash and cash equivalents consist of cash and highly liquid, short-term money market funds. Our marketable securities are classified as available-for-sale and generally consist of highly liquid corporate bonds, commercial paper and certificates of deposits that comply with our minimum credit rating policy. Short-term marketable securities consist of investments with final maturities of at least three months from the date of purchase that we intend to own for up to 12 months. Long-term marketable securities consist of investments with final maturities of more than 12 months that we intend to own for at least 12 months, but not more than 24 months. By policy, the final maturity for each security within the portfolio shall not exceed 24 months from the date of purchase and the weighted average maturity of the portfolio shall not exceed 12 months at any point in time. Our borrowings under notes payable and capital lease obligations are generally at fixed interest rates.

The primary objective of our investment activities is to preserve principal while maintaining liquidity and maximizing income without significantly increasing risk. Because our cash and cash equivalents have short maturities of less than three months, our cash and cash equivalents fair value is relatively insensitive to interest rate changes.

29To provide a meaningful assessment of the interest rate risk within our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our portfolio. Based on investment positions as of September 30, 2017 a hypothetical 100 basis point increase in interest rates across all maturities in our portfolio would result in an immaterial incremental decline in the fair market value of our portfolio. Such losses would only be realized if we sold the investments prior to maturity. As such, we do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives. We do not enter into investments for trading or speculative purposes.

To provide a meaningful assessment of the interest rate risk within our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of our portfolio. Based on investment positions as of June 30, 2017 a hypothetical 100 basis point increase in interest rates across all maturities in our portfolio would result in an immaterial incremental decline in the fair market value of our portfolio. Such losses would only be realized if we sold the investments prior to maturity. As such, we do not believe that an increase or decrease in interest rates of 100-basis points would have a material effect on our operating results or financial condition. In future periods, we will continue to evaluate our investment policy in order to ensure that we continue to meet our overall objectives. We do not enter into investments for trading or speculative purposes.

Foreign Currency Exchange Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, principally the British pound sterling and Euro. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We have experienced and we expect we will continue to experience fluctuations in our net income (loss) as a result of transaction gains (losses) related to revaluing certain cash balances, trade accounts receivable balances and intercompany balances that are denominated in currencies other than the U.S. dollar.

We established a program that utilizes foreign currency forward contracts to offset the risks associated with changes in the exchange rates of the currencies in which we do business, including the British pound sterling and the euro. Under this program, we enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Our foreign currency forward contracts are short-term in duration. To the degree that our foreign revenues and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. During the three months ended June 30, 2017 and 2016, foreign exchange transaction gain/(loss), net of foreign currency forward contracts, recorded to our condensed consolidated statements of operations totaled $0.2 million and $(0.3) million, respectively. During the six months ended June 30, 2017 and 2016, foreign exchange transaction gain/(loss), net of foreign currency forward contracts, recorded to our condensed consolidated statements of operations totaled $0.4 million and $(0.3) million, respectively.31

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We established a program that utilizes foreign currency forward contracts to offset the risks associated with changes in the exchange rates of the currencies in which we do business, including the British pound sterling and the euro. Under this program, we enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in order to mitigate the risks and volatility associated with our foreign currency transactions. Our foreign currency forward contracts are short-term in duration. To the degree that our foreign revenues and expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. During the three months ended September 30, 2017 and 2016, foreign exchange transaction gain/(loss), net of foreign currency forward contracts, recorded to our condensed consolidated statements of operations totaled $(0.2) million and $11 thousand, respectively. During the nine months ended September 30, 2017 and 2016, foreign exchange transaction gain/(loss), net of foreign currency forward contracts, recorded to our condensed consolidated statements of operations totaled $(0.5) million and $0.4 million, respectively.

Inflation Risk

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of ~~June~~September 30, 2017. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2017 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the most recent fiscal quarter ended ~~June~~September 30, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time we may be a party to various litigation matters incidental to the conduct of our business. There is no pending or threatened legal proceeding to which we are currently a party that, in management’s opinion, is likely to have a material adverse effect on our financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you make an investment decision regarding our common stock, you should carefully consider the following risks, as well as general economic and business risks, and all of the other information contained in this Quarterly Report on Form 10-Q. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations.

Risks Related to our Pending Merger with RhythmOne:

Our proposed merger with RhythmOne is subject to a number of conditions beyond our control. Failure to complete the merger within the expected timeframe or at all could materially and adversely affect our future business, results of operations, financial condition and stock price.

On September 4, 2017, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with RhythmOne, PLC, a public limited company incorporated under the laws of England and Wales (“RhythmOne”), Redwood Merger Sub I, Inc., a Delaware corporation and a wholly owned subsidiary of RhythmOne (“Purchaser”), and Redwood Merger Sub II, Inc., a Delaware corporation and a wholly owned subsidiary of RhythmOne (“Merger Sub II”).

Pursuant to the Merger Agreement, and upon the terms and subject to the conditions described therein, Purchaser has agreed to commence an exchange offer (the “Offer”) to purchase all of the outstanding shares of common stock of YuMe (the “YuMe Stock”), with each share of YuMe Stock accepted by Purchaser in the Offer to be exchanged for the right to receive (i) $1.70 in cash (the “Cash Consideration”) and (ii) 7.325 ordinary shares £0.01 each in the capital of RhythmOne (“RhythmOne Stock”), plus cash in lieu of any fractional shares of RhythmOne Stock (the “Stock Consideration”), in each case, without interest ((i) and (ii) together, the “Transaction Consideration”). If the conditions to the Offer are satisfied and the Offer closes, Purchaser would acquire any remaining YuMe Stock by a merger of Purchaser with and into YuMe (the “First Merger”), with YuMe surviving the First Merger. Immediately following the First Merger, YuMe, as the surviving company of the First Merger, will be merged with and into Merger Sub II (the “Second Merger” and together with the First Merger, the “Mergers” and together with the Offer, the “Transactions”), with Merger Sub II surviving the Second Merger as a wholly owned subsidiary of RhythmOne.

As a result of the Mergers, it is expected that the former stockholders of YuMe will hold approximately 34% of RhythmOne. The Offer and the Mergers, taken together, may qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and the parties intend for the Second Merger, whether standing alone or together with the Offer and the First Merger, to so qualify. The Merger Agreement is therefore intended to constitute a “plan of reorganization” for purposes of Sections 354, 361 and 368 of the Code and Treas. Reg. Sec. 1.368-2(g).

The obligation of RhythmOne and Purchaser to consummate the Offer is subject to customary closing conditions, including (i) Purchaser having accepted for payment all of the YuMe Stock validly tendered pursuant to the Offer and not validly withdrawn and which represent at least a majority of the then-outstanding shares of YuMe Stock, (ii) the absence of any judgment issued by a court of competent jurisdiction or governmental authority, or a law or other legal restraint which would, in each case, make the mergers illegal or otherwise prohibit or prevent them from occurring, (iii) YuMe having at least $32 million in cash and cash equivalents at the consummation of the Offer and (iv) other customary conditions set forth in Exhibit B of the Merger Agreement. Accordingly, no vote of YuMe stockholders will be required in connection with the Mergers if RhythmOne and Purchaser consummate the Offer. The Merger Agreement contemplates that, if the Offer is completed, the First Merger will be effected pursuant to Section 251(h) of the General Corporation Law of the State of Delaware, which permits completion of the First Merger upon the acquisition by RhythmOne of one share more than 50% of the number of shares of YuMe Stock that are then issued and outstanding.

A copy of the Merger Agreement is included as an exhibit to a Form 8-K we filed on September 5, 2017, to report the Merger Agreement, and the references in this report to the Merger Agreement are qualified in their entirety by reference to the full text of the Merger Agreement. The discussion of risks below is not an offer to sell or the solicitation of an offer to buy any securities or otherwise participate in the Offer.

We cannot predict whether and when conditions in the Merger Agreement will be satisfied. If one or more of these conditions is not satisfied, and as a result, we do not complete the Transactions, or in the event the proposed Transactions are not completed or are delayed for any other reason, our business, results of operations, financial condition and stock price may be harmed because:

	•	The failure to, or delays in, consummating the Transactions may result in a negative impression of YuMe with customers, potential customers or the investment community and may negatively impact our business and stock price;
	•	Management’s and our employees’ attention may be diverted from our day-to-day operations as they focus on matters related to preparing for integration of our operations with those of RhythmOne;

•

We could potentially lose customers, new customer contracts could be delayed or decreased and we may have difficulty hiring and retaining employees;

•

We could potentially lose key employees if such employees experience uncertainty about their future roles with us and decide to pursue other opportunities in light of the proposed Transactions;

•

We have agreed to restrictions in the Merger Agreement that limit how we conduct our business prior to the consummation of the Merger, including, among other things, restrictions on our ability to make certain capital expenditures, investments and acquisitions, sell, transfer or dispose of our assets, amend our organizational documents and incur indebtedness. These restrictions may not be in our best interests as an independent company, and may disrupt or otherwise adversely affect our business and our relationships with our customers, prevent us from pursuing otherwise attractive business opportunities, limit our ability to respond effectively to competitive pressures, industry developments and future opportunities, and otherwise harm our business, financial results and operations;

•

We have incurred and expect to continue to incur expenses related to the Transactions, such as legal, financial advisory and accounting fees, and other expenses that are payable by us whether or not the proposed Transactions are completed;

•

We may be required to pay a termination fee to RhythmOne if the Merger Agreement is terminated under certain circumstances, which would negatively affect our financial results and liquidity;

	•	We may be required to pay RhythmOne's expenses up to $500,000 if the minimum tender condition set forth in the Merger Agreement cannot be met by March 31, 2018 (which may be extended to April 30, 2018) and the Merger Agreement terminates in accordance with its terms;
	•	We may be required to pay a activities related to the Transactions and related uncertainties may lead to a loss of revenue and market position that we may not be able to regain if the proposed Transactions do not occur; and
	•	Our stock price may fluctuate significantly based on announcements by us, RhythmOne or other third parties regarding the proposed Transactions.

The occurrence of these or other events individually or in combination could have a material adverse effect on our business, results of operations, financial condition and stock price.

Because the market price of RhythmOne ordinary shares and the exchange rate of pounds sterling to U.S. dollars may fluctuate, YuMe stockholders cannot be sure of the value of the consideration they will receive in the Transactions.

Upon completion of the Offer and the First Merger, each YuMe share of common stock will be converted into the right to receive $1.70 of cash per share of YuMe common stock and a specified number of RhythmOne ordinary shares based on an exchange ratio that was fixed at the time we executed the Merger Agreement. The value of the RhythmOne ordinary shares upon completion of the Offer and the First Merger may differ from the value of the RhythmOne ordinary shares at the signing of the Merger Agreement due to changes in the market value of RhythmOne ordinary shares and the comparative value of the pound sterling and the U.S. dollar. As a result, our stockholders may receive less value in the total consideration if the market price of the ordinary shares of RhythmOne declines from the time we executed the Merger Agreement.

After completion of the Offer and the First Merger, former YuMe stockholders will own a smaller percentage of RhythmOne than they currently own of YuMe and as such will have diminished ability to affect the outcome of matters submitted to the RhythmOne shareholders.

After the completion of the Offer and the First Merger, former YuMe stockholders will own a smaller percentage of RhythmOne than they currently own of YuMe. If all of the issued and outstanding YuMe Shares are validly tendered and exchanged pursuant to the terms of the Offer, the former YuMe stockholders will own approximately 34% of the RhythmOne ordinary shares, and holders of existing RhythmOne ordinary shares will own approximately 66% of the RhythmOne ordinary shares. As a result, former YuMe stockholders would be a minority of the RhythmOne shareholders with limited ability, if any, to influence the outcome on any matters that are or may be subject to shareholder approval, including the appointment of directors, the issuance of shares or other equity securities, the payment of dividends and the acquisition or disposition of substantial assets.

YuMe stockholders may decide to sell their YuMe Shares or RhythmOne ordinary shares, which could cause a decline in their market prices and the value of the stock consideration to be received in the Transactions.

Some YuMe stockholders may decide they do not want to own shares of a company that has its primary listing outside the United States or decide they do not want to hold RhythmOne ordinary shares for other reasons. This could result in the sale of YuMe shares prior to the completion of the Offer and the First Merger or the sale of RhythmOne ordinary shares received in the Offer and the First Merger after the completion of the Offer and the First Merger, as the case may be. These sales, or the prospects of such sales in the future, could adversely affect the market price for YuMe shares, and the ability to sell YuMe shares in the market before the Offer and the First Merger is completed as well as RhythmOne ordinary shares before and after the Offer and the First Merger is completed. This could, in turn, adversely affect the dollar value of the RhythmOne ordinary shares that YuMe stockholders will receive upon completion of the Offer and the First Merger.

There will be material differences between a YuMe stockholder’s current rights as a holder of YuMe shares and the rights one can expect as a holder of RhythmOne ordinary shares, some which may adversely affect you.

Upon completion of the Transactions, YuMe stockholders will no longer be stockholders of YuMe, a corporation incorporated under the laws of Delaware, but will be shareholders of RhythmOne, a corporation incorporated under the laws of England and Wales. There will be material differences between the current rights of YuMe stockholders and the rights you can expect to have as a holder of RhythmOne ordinary shares, some which may adversely affect you.

Furthermore, RhythmOne is a foreign private issuer under the rules and regulations of the SEC. As a result, RhythmOne is exempt from a number of rules under the Exchange Act and is permitted to file different, and in many instances less comprehensive, information with the SEC, and to file such information less frequently than YuMe is currently required to file. For example, RhythmOne would not be required to furnish Quarterly Reports on Form 10-Q, proxy statements pursuant to Sections 14(a) or 14(c) of the Exchange Act or reports on “insider” trading pursuant to Section 16 of the Exchange Act, nor will the “short swing” profit recovery provisions of Section 16(b) of the Exchange Act be applicable. Accordingly, if a YuMe stockholder continues to hold RhythmOne ordinary shares after the consummation of the Transactions, it may receive less information about RhythmOne than it currently receives about YuMe and may be afforded less protection under the U.S. federal securities laws than it is currently afforded. In addition, as an AIM listed company, there are differences in the corporate governance practices adopted by RhythmOne compared with those of a NYSE listed company, like YuMe, including the application of different tests for the independence of board members.

Additionally, liquidity in AIM-traded shares tends to be significantly lower than that of NYSE-traded shares. This could make it more difficult for YuMe stockholders to sell their RhythmOne ordinary shares following the closing of the Transactions and could adversely affect the price of those shares. Reduced liquidity also could result in increased volatility, and the price for the RhythmOne ordinary shares may vary significantly in the future.

The Transactions will result in RhythmOne becoming subject to U.S. regulations that are different from the regulations to which RhythmOne is currently subject, including additional regulatory requirements related to internal control over financial reporting.

Following the Transactions, as a result of the registration of the issuance of the RhythmOne ordinary shares with the SEC, RhythmOne will be subject to U.S. securities laws and other U.S. laws and regulations, including the Sarbanes-Oxley Act of 2002 as a foreign private issuer. These regulations are different from the regulations to which RhythmOne is currently subject; and therefore, pose an increased compliance burden on RhythmOne. There can be no assurance that RhythmOne will be able to comply with the increased burden of U.S. laws and regulations. Any failure to comply or any disclosures required as a result of RhythmOne’s efforts to comply with these new laws and regulations, including the potential disclosure of any material weaknesses in RhythmOne’s internal control over financial reporting and other disclosure controls and procedures, could result in a lack of investor confidence and adversely impact RhythmOne’s stock price, which in turn could decrease the value of the stock consideration to be received by YuMe stockholders in the Transactions.

The Merger Agreement contains provisions that could discourage a potential competing acquiror.

The Merger Agreement contains “no solicitation” provisions that, subject to exceptions, restrict our ability to solicit, initiate, or knowingly encourage, facilitate or induce third party proposals for the acquisition of our common stock. In addition, RhythmOne has an opportunity to modify the terms of the Transactions in response to any competing acquisition proposals before our board of directors may withdraw or change its recommendation with respect to the Transactions. Upon the termination of the Merger Agreement, including in connection with a “superior proposal”, we may be required to pay $5,536,790 as a termination fee.

These provisions could discourage a potential third party acquiror from considering or proposing an acquisition transaction, even if it were prepared to pay a higher per share price than what would be received in the Transactions. These provisions might also result in a potential third party acquiror proposing to pay a lower price per share to our stockholders than it might otherwise have proposed to pay because of the added expense of the $5,536,790 termination fee that may become payable. Additionally, if the minimum tender condition set forth in the Merger Agreement cannot be met by March 31, 2018 (which may be extended to April 30, 2018) and the Merger Agreement terminates in accordance with its terms, YuMe will pay RhythmOne for their reasonable expenses in connection with the Merger Agreement up to $500,000. If RhythmOne is unable to obtain shareholder approval by March 31, 2018 and the Merger Agreement terminates in accordance with its terms, RhythmOne will pay YuMe for their reasonable expenses in connection with the Merger Agreement up to $500,000.

If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Transactions.

Our executive officers and directors have interests in the Transactions that may be different from, or in addition to, the interests of our stockholders generally.

Our executive officers and members of our board of directors may be deemed to have interests in the Transactions that may be different from or in addition to those of our stockholders, generally. These interests may create potential conflicts of interest. Our board of directors was aware of these potentially differing interests and considered them, among other matters, in evaluating and negotiating the Merger Agreement and in reaching its decision to approve the Merger Agreement and the transactions thereunder. These interests relate to or arise from, among other things:

•

The consideration to be received in respect of options to purchase shares of YuMe and restricted stock unit awards held by our executive officers and members of our board of directors;

•

The receipt of certain payments and benefits to which certain executive officers may become entitled pursuant to our Executive Severance Plan and other incentive agreements and in connection with the completion of the Merger; and

•

The right to continued indemnification and insurance coverage for our directors and executive officers following the completion of the Merger.

We may be targets of securities class action and derivative lawsuits relating to the Mergers, which could result in substantial costs and may delay or prevent the Mergers from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting consummation of the Transactions, then that injunction may delay or prevent the Mergers from being completed. Currently, we are not aware of any securities class action lawsuits or derivative lawsuits being filed in connection with the Transactions.

We have obligations under certain circumstances to hold harmless and indemnify our directors (including VIEX Capital Advisors, LLC, an affiliate of one of our directors, and its affiliates), and officers against judgments, fines, settlements and expenses related to claims against such directors and officers and otherwise to the fullest extent permitted under Delaware law and our bylaws and certificate of incorporation. Such obligations may apply to any lawsuits that relate to the Transactions and any other potential litigation. If we are required to pay any judgments, fines, settlements and expenses as a result of these indemnification obligations, our results of operations and liquidity could be significantly harmed.

We will incur significant costs in connection with the Transactions, whether or not they are consummated.

We will incur substantial expenses related to the Transactions, whether or not they are completed. Payment of these expenses by us as a standalone entity would adversely affect our operating results and financial condition and would likely adversely affect our stock price. Additionally, if the minimum tender condition set forth in the Merger Agreement cannot be met by March 31, 2018 (which may be extended to April 30, 2018) and the Merger Agreement terminates in accordance with its terms, YuMe will pay RhythmOne for their reasonable expenses in connection with the Merger Agreement up to $500,000. If RhythmOne is unable to obtain shareholder approval by March 31, 2018 and the Merger Agreement terminates in accordance with its terms, RhythmOne will pay YuMe for their reasonable expenses in connection with the Merger Agreement up to $500,000.

The announcement and pendency of the Transactions could cause disruptions to our business, which could have an adverse effect on our financial results and consequently on the combined company.

YuMe and RhythmOne have operated and, until the consummation of the First Merger (as described in the Merger Agreement), will continue to operate, independently. Uncertainty about the effect of the Mergers on customers, investors, suppliers and employees may have an adverse effect on YuMe and consequently on the combined company. In response to the announcement of the Offer and Mergers, existing or prospective customers or suppliers of YuMe may:

	•	Delay, defer or cease using our solutions, providing products or services to YuMe or the combined company;
	•	Delay or defer other decisions concerning YuMe or the combined company; or
	•	Otherwise seek to change the terms on which they do business with YuMe or the combined company.

Any such delays or changes to terms could materially and adversely affect the business, results of operations and financial condition of YuMe or, if the Transactions are completed, the combined company.

In addition, as a result of the Transactions, current and prospective employees could experience uncertainty about their future with YuMe or the combined company. These uncertainties may impair the ability of YuMe to retain, recruit or motivate key personnel.

Risks Related to Our Business and Our Industry:

Our revenue has declined, we have incurred significant net losses, and we may not be profitable in the future.

We incurred net losses of $7.7 million, $16.7 million and $8.7 million in 2016, 2015 and 2014, respectively. We had an accumulated deficit of $49.3 million as of ~~June~~September 30, 2017. In 2016, 2015 and 2014, we did not generate sufficient revenue to offset ~~operating~~ expenses, which may occur in future periods as well. Our revenue has declined in recent periods as a result of a variety of factors, including intense competition and difficulties extending our geographical reach and our offerings, and we cannot assure you that our revenue will not decline further. You should not consider our historical revenue growth or ~~operating~~ expenses prior to recent periods as indicative of our future performance. If our revenue growth rate continues to decline or our ~~operating~~ expenses exceed expectations, our financial performance will be adversely affected. Further, if our future growth and operating performance fail to meet investor or analyst expectations, it could have a materially negative effect on our stock price.

A substantial portion of our revenue depends on a small number of advertising agency customers representing a limited number of advertisers and a reduction in digital advertising purchased by those customers or advertisers could significantly reduce our revenue.

Brand advertisers represented by a limited number of advertising agencies account for a significant portion of our revenue. Specifically, a single brand advertiser represented by an advertising agency within the Omnicom Media Group (“OMG”) corporate structure accounted for approximately 12% of our revenue during the nine months ended September 30, 2017 and during the year ended December 31, 2016. A significant reduction in our revenue from digital advertising purchased by these advertising agency customers or by one or more of the brand advertisers that they represent could materially harm our financial condition and results of operations.

Our rapidly evolving industry makes it difficult to evaluate our business and prospects and may increase your investment risk.

The digital video advertising industry is rapidly evolving. As a result, we will encounter risks and difficulties frequently encountered in rapidly evolving industries, particularly in light of our size and relatively short operating history compared to some of our larger and more established competitors, including the need to:

	•	Maintain our reputation and build trust with advertisers and digital media property owners;
	•	Offer competitive pricing to advertisers (including periodic discounting) and digital media properties;
	•	Compete with larger, better capitalized competitors in addressing industry trends such as programmatic buying and real-time bidding;
	•	Maintain quality and expand quantity of our advertising inventory;
	•	Deliver advertising results that are superior to those that advertisers or digital media property owners could achieve through the use of competing providers or technologies;
	•	Continue to develop, launch and upgrade the technologies that enable us to provide our solutions;
	•	Respond to evolving government regulations relating to the internet, telecommunications, mobile, privacy, marketing and advertising aspects of our business;
	•	Identify, attract, retain and motivate qualified personnel; and
	•	Cost-effectively manage our operations, including our international operations.

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

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Our quarterly operating results fluctuate and are difficult to predict, and our results are likely to fluctuate and be unpredictable in the future. As such, our operating results have fallen short of our expectations in the past and could fall below our expectations or investor expectations in the future.

Our operating results are difficult to predict, particularly because we generally do not have long-term arrangements with our customers, and have historically fluctuated. Our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past operating results as an indication of our future performance. Factors that may affect our quarterly operating results include:

	•	Seasonal patterns in advertising;
	•	The addition and loss of new advertisers and digital media properties;
	•	Our variable and unpredictable transaction-based sales cycle;
	•	Changes in demand for our solutions;
	•	Advertising budgets of our advertiser customers;
	•	Advertiser cancellation of insertion orders;
	•	Changes in the amount, price and quality of available advertising inventory from digital media properties;
	•	Changes in how digital advertising inventory is bought and sold;
	•	The timing and amount of sales and marketing expenses incurred to attract new advertisers and digital media properties;
	•	Changes in the economic prospects of advertisers or the economy generally, which could alter advertisers' spending priorities, or could increase the time it takes us to close sales with advertisers;
	•	Changes in our pricing policies or the pricing policies of our competitors, and changes in the pricing of digital video advertising generally;
	•	Changes in governmental regulation of the internet, wireless networks, mobile platforms, digital video brand or mobile advertising, or the collection, use, processing or disclosure of device or user data;
	•	Costs necessary to improve and maintain our technologies;
	•	Discounts on our products offered to new and existing customers;
	•	Timing differences between our payments to digital media property owners for advertising inventory and our collection of advertising revenue related to that inventory; and
	•	Costs related to acquisitions of other businesses.

As a result of these and other factors, our revenue, margins and overall operating results may fall below the expectations of market analysts and investors in future periods. If this happens, even temporarily, the market price of our common stock may fall.

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

Our cash flows from operations vary from quarter to quarter due to the seasonal nature of advertiser spending. For example, many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. In addition, we acquire advertising inventory on a guaranteed basis, or at a fixed price, in order to meet the anticipated increased demand in the fourth quarter. These seasonal effects have been partially masked by our historical revenue growth and other factors, such as episodic political campaign advertising spending. However, if and to the extent that seasonal fluctuations become more pronounced, or are not offset by other factors, our operating cash flows could fluctuate materially from period to period as a result.

AOur ~~substantial~~ongoing ~~portion~~restructuring ofand ~~our~~other ~~revenue~~cost ~~depends~~reduction onplans amay ~~small~~not ~~number~~produce ofanticipated ~~advertising~~benefits ~~agency customers representing a limited number of advertisers~~ and amay ~~reduction~~lead into ~~digital~~charges ~~advertising~~that ~~purchased~~will byadversely ~~those~~affect ~~customers~~our orresults ~~advertisers~~of ~~could significantly reduce our revenue~~operations.

~~Brand~~Commencing ~~advertisers~~in ~~represented~~the byfourth aquarter ~~limited~~of ~~number~~2016, ofwe ~~advertising~~implemented ~~agencies~~restructuring ~~account~~and ~~for~~other acost-reduction ~~significant~~plans ~~portion~~designed ofto better align our operating expenses with our revenue., ~~Specifically~~better manage our costs, aand ~~single~~more ~~brand~~efficiently ~~advertiser~~manage ~~represented~~our bybusiness anas ~~advertising~~disclosed ~~agency~~in ~~within~~our ~~the~~Form ~~Omnicom~~8-K ~~Media~~filing ~~Group~~on ~~(“OMG”)~~November ~~corporate~~9, ~~structure~~2016. ~~accounted~~In ~~for~~the ~~approximately~~fourth ~~12%~~quarter of ~~our~~2017, ~~revenue~~we ~~during~~implemented ~~the~~further ~~six~~restructuring ~~months~~and ~~ended~~other ~~June~~cost-reduction 30plans as disclosed in our form 8-K filing on October 6, 2017. Such actions have resulted in disruptions and ~~during~~could ~~the~~continue ~~year~~to ~~ended~~result ~~December~~in 31disruptions to our operations and workforce, ~~2016~~and could adversely affect our business. AThese restructuring ~~significant~~plans ~~reduction~~resulted in, among other things, a reduction of approximately 10% of our ~~revenue~~workforce. ~~from~~Actual ~~digital~~costs ~~advertising~~related ~~purchased~~to bysuch ~~these~~restructuring ~~advertising~~plans ~~agency~~may ~~customers~~exceed orthe byamounts ~~one~~that orwe ~~more~~previously ofestimated, leading to additional charges as actual costs are incurred. We expect to continue to actively monitor our operating expenses; however, if we do not fully realize the ~~brand~~anticipated ~~advertisers~~benefits ~~that~~of ~~they~~any ~~represent~~expense reduction initiatives, our business could ~~materially~~be ~~harm~~adversely affected. We cannot be sure that our ~~financial~~efforts ~~condition~~to manage expenses and ~~results~~improve our operating leverage will be successful. If our operating expenses are higher than we expect or if we do not maintain adequate control of ~~operations~~our costs and expenses, our operating results will suffer.

~~Our restructuring and other cost reduction plans may not produce anticipated benefits and may lead to charges that will adversely affect our results of operations.~~34

~~Commencing~~Table ~~in the fourth quarter~~ of 2016, we implemented restructuring and other cost-reduction plans designed to better align our operating expenses with our revenue, better manage our costs, and more efficiently manage our business. Such actions have resulted in disruptions and could continue to result in disruptions to our operations and workforce, and could adversely affect our business. This plan resulted, among other things, in a reduction of approximately 7% of our workforce. Actual costs related to such restructuring plans may exceed the amounts that we previously estimated, leading to additional charges as actual costs are incurred. We expect to continue to actively monitor our operating expenses; however, if we do not fully realize the anticipated benefits of any expense reduction initiatives, our business could be adversely affected. We cannot be sure that our efforts to manage expenses and improve our operating leverage will be successful. If our operating expenses are higher than we expect or if we do not maintain adequate control of our costs and expenses, our operating results will suffer.Contents

In 2016 we announced commencement of a comprehensive review of strategic alternatives to enhance stockholder value. There can be no assurance that this review process will result in a transaction, or that if a transaction does occur, that it will successfully enhance stockholder value. In addition, our business could be negatively affected by the announcement that we are exploring strategic alternatives.

On November 9, 2016, we announced that we have commenced a comprehensive review of strategic alternatives and have retained advisors to assist us during that review. There can be no assurance that this review process will result in a transaction, or that if a transaction does occur, that it will successfully enhance stockholder value. In addition, the announcement that we have commenced a review of strategic alternatives may create uncertainty about our prospects as an independent business entity, cause concern to our current or potential customers and partners, and make it more difficult to attract and retain qualified executive and other key personnel. If customers choose to reduce spending with us or do business with our competitors instead of us because of any such issues or perceptions, then our business, operating results and financial condition would be adversely affected. The review process may also be costly, time-consuming, disrupt our operations, divert the attention of management and our employees or result in changes in our management team or our board of directors, all of which could materially and adversely affect our operations and operating results. In addition, our stock price may experience periods of increased volatility as a result of these activities or related rumors and speculation.

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

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

	•	Difficulties in integrating the operations, technologies, solutions and personnel, especially if those businesses operate outside of our core competency of delivering digital video advertising;
	•	Cultural challenges associated with integrating employees;
	•	Ineffectiveness or incompatibility of acquired technologies or solutions;
	•	Potential loss of key employees;
	•	Inability to maintain the key business relationships and the reputations of the involved businesses;
	•	Diversion of management's attention from other business concerns;
	•	Litigation for activities of the involved companies, including claims from terminated employees, customers, former stockholders or other third parties;
	•	In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
	•	Costs necessary to establish and maintain effective internal controls for the involved businesses;
	•	Failure to successfully further develop the acquired technologies in order to achieve appropriate returns on investment; and
	•	Increased fixed costs.

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

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

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

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

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

In addition, our advertising agency customers may offer components of our solutions, including selling digital video advertising inventory through their own trading desks. As a result, these advertising agencies are, or may become, our competitors. If they further develop their capabilities they may be more likely to offer their own solutions to advertisers, which could compromise our ability to compete effectively and adversely affect our business, financial condition and operating results.

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

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

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

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

The market for digital video advertising solutions is characterized by rapid technological change, evolving industry standards and frequent introductions of new products and services. To keep pace with technological developments, satisfy increasing advertiser and digital media property requirements, maintain the attractiveness and competitiveness of our advertising solutions and ensure compatibility with evolving industry standards and protocols, we will need to anticipate and respond to varying product lifecycles, regularly enhance our current advertising solutions and develop and introduce new solutions and functionality on a timely basis. This requires significant investment of financial and other resources. For example, we are required to invest significant resources into integrating our solutions with multiple forms of internet-connected devices in order to maintain a comprehensive advertising platform. We have periodically experienced difficulty integrating our solutions with some digital media properties, advertising agencies and third parties. We may continue to experience similar difficulties and these difficulties will consume financial, engineering and managerial resources and we may not have the financial resources to make investments across all new forms of internet-connected devices in the future. Ad exchanges and other technological developments may displace us or introduce an additional intermediate layer between us and our advertising customers and digital media properties that could impair our relationships with those customers. Our inability, for technological, business or other reasons, to enhance, develop, introduce and deliver compelling advertising solutions in response to changing market conditions and technologies or evolving expectations of advertisers, digital media properties or consumers of digital video advertising could hurt our ability to deliver successful digital video campaigns which could result in our advertising solutions becoming obsolete and a failure to grow or retain our current advertiser base.

Digital video advertising is shifting, in part, to programmatic buying, real-time bidding (“RTB”) and header bidding systems. Programmatic buying is the automated purchase of digital advertising inventory through a combination of machine-based transactions, data and algorithms. RTB, a subset of programmatic buying, is the real-time purchase and sale of advertising inventory on an impression-by-impression basis on ad exchanges. Header bidding refers to the process by which digital media property owners offer inventory to multiple ad exchanges or other buyers prior to communicating with the digital media property owner’s ad server. Programmatic buying, RTB and header bidding are emerging and growing trends in the buying and selling of digital advertising inventory. The recognition by advertisers that an increased use of programmatic buying, RTB and header bidding systems may constitute an effective way to achieve their campaign goals and cost savings, and the recognition by digital media property owners that they may achieve greater returns from an increased use of programmatic buying, RTB and header bidding systems is challenging our traditional pricing model. There can be no assurance that such trends, or the acceleration of such trends, will not erode our revenue. In 2014, we introduced Video Reach, our first generation demand-side programmatic buying solution which had limited revenue impact. We have continued to invest resources in expanding our programmatic products. In June 2015, we launched YFA, which is our second generation demand-side programmatic buying solution. We may be unable to successfully sell, integrate or maintain this solution and there can be no assurance that our advertising customers or our network of digital media property owners will embrace or adopt our programmatic solution. The acceleration of these programmatic trends along with the lack of customer adoption of our programmatic solution would cause our revenue to decrease and our business to suffer. In addition, the adoption of header bidding and resulting changes in advertiser and digital media property owner behavior may lead to greater competition for available inventory, rapidly changing pricing dynamics and greater volatility in our operating results.

If we fail to detect advertising fraud or other actions that impact our advertising campaign performance, we could harm our reputation with advertisers or agencies, which would cause our revenue and business to suffer.

Our business relies on our ability to deliver successful and effective video advertising campaigns. Some of those campaigns may experience fraudulent and other invalid impressions, clicks or conversions that advertisers may perceive as undesirable, such as non-human traffic generated by machines that are designed to simulate human users and artificially inflate user traffic on websites. These activities could overstate the performance of any given video advertising campaign and could harm our reputation. It may be difficult for us to detect fraudulent or malicious activity because we do not own content and rely in part on our digital media properties to control such activity. These risks become more pronounced as the digital video industry shifts to programmatic buying. Industry self-regulatory bodies, the U.S. Federal Trade Commission (the “FTC”) and certain influential members of Congress have increased their scrutiny and awareness of, and have taken recent actions to address, advertising fraud and other malicious activity. While we routinely review the campaign performance on our digital media properties’ inventory, such reviews may not detect or prevent fraudulent or malicious activity. If we fail to detect or prevent fraudulent or other malicious activity, the affected advertisers may experience or perceive a reduced return on their investment and our reputation may be harmed. High levels of fraudulent or malicious activity could lead to dissatisfaction with our solutions, refusals to pay, refund or future credit demands or withdrawal of future business. In addition, advertisers increasingly rely on third party vendors to measure campaigns against audience guarantee, viewability and other requirements and to detect fraud. If we are unable to successfully integrate our technology with such vendors, or our measurement and fraud detection differs from their findings, our customers could lose confidence in our solutions, we may not get paid for certain campaigns, traffic acquisition costs could increase and our revenues could decline. Further, if we are unable to detect fraudulent or other malicious activities and advertisers demand fraud-free inventory, our supply could fall drastically, making it impossible to sustain our current business model. If we fail to detect fraudulent or other malicious activities that impact the performance of our brand advertising campaigns, we could harm our reputation with our advertisers or agencies and our revenue and business would suffer.

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

The success of our business model depends on our ability to deliver digital video advertisements to consumers on a wide variety of internet-connected devices. We believe that digital video advertising is most successful when targeted primarily through analysis of data. This data might include a device's location or data collected when device users view an ad or video or when they click on or otherwise engage with an ad, or it could include demographic or other data about users' interests or activities that is licensed in or acquired from third parties. Users may elect not to allow data sharing for targeted advertising for many reasons, such as privacy concerns, or to avoid usage charges based on the amount or type of data consumed on the device. Users may opt out of interest-based advertising by YuMe through the opt-out feature on YuMe's website or the Network Advertising Initiative's consumer choices website or other opt-out features that may be developed. In addition, internet-connected devices and operating systems controlled by third parties increasingly contain features that allow device users to disable functionality that allows for the delivery of ads on their devices. Device and browser manufacturers may include or expand these features as part of their standard device specifications. For example, when Apple announced that its Unique Device Identifier (“UDID”), a standard device identifier used in some applications, was being superseded and would no longer be supported application developers were required to update their apps to utilize alternative device identifiers such as universally unique identifier, or, more recently, identifier-for-Advertising, which simplify the process for Apple users to opt out of behavioral targeting. In addition, many advertising companies may participate in self-regulatory programs, such as the Network Advertising Initiative or Digital Advertising Alliance, through which they agree to offer users the ability to opt out of behavioral advertising. If users elect to utilize the opt-out mechanisms in greater numbers, our ability to deliver effective advertising campaigns on behalf of our advertisers would suffer, which could hurt our ability to generate revenue and become profitable.

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

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

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

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

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Other risks associated with our international operations include:

	•	The difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations, particularly labor, environmental, data privacy and other laws and regulations that govern our operations in those countries;
	•	The challenge of managing a development team in geographically disparate locations;
	•	Changes or volatility in currency exchange rates, especially the euro and British pound sterling, which are the functional currencies for most of our European operations;
	•	Potential customer perceptions about receiving ad operations support services from India, where our ad operations team is based;
	•	Legal uncertainties regarding foreign taxes, tariffs, quotas, export controls, export licenses, import controls and other trade barriers;
	•	Economic and political instability and high levels of wage inflation;
	•	Potentially adverse tax consequences;
	•	Legal requirements for transfer, processing and use of data generated through our operations in foreign countries;
	•	Greater difficulty in enforcing contracts;
	•	Heightened risks of unethical, unfair or corrupt business practices, actual or alleged, in certain regions;
	•	Weaker intellectual property protection in some countries; and
	•	Difficulties and costs in recruiting and retaining talented and capable individuals in foreign countries.

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

The Vote by the United Kingdom to leave the European Union could adversely affect us.

In June 2016, the United Kingdom (the “U.K.”) held a referendum in which voters approved the U.K.'s withdrawal from membership of the European Union (the “E.U.” or “EU”) (“Brexit”). Brexit has resulted in significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. As described elsewhere in this report, we translate revenue denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported international revenue is reduced because foreign currencies translate into fewer U.S. dollars. The ~~announcement~~implementation of Brexit may also create global economic uncertainty, which may cause our customers to closely monitor their costs and reduce their spending budget on our products and services.

The U.K. ishas ~~expected~~commenced ~~to commence~~ negotiations to determine the future terms of the U.K.’s relationship with the E.U., including the terms of trade between the U.K. and the E.U. The effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. The measures could potentially disrupt the markets we serve and may cause us to lose customers and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate.

Our dynamic international operations subject us to new challenges and risks.

Despite our international operations, we have a limited sales operations history as a company outside the United States, and our ability to manage our business and conduct our operations internationally requires considerable management attention and resources and is subject to the challenges of multiple cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. International expansion will require us to invest significant funds and other resources. Expanding internationally subjects us to new risks that we have not faced before or increase risks that we currently face, including risks associated with:

• Establishing and maintaining effective controls at foreign locations and the associated increased costs; • Challenges inherent to efficiently managing a number of employees over large geographic distances; • Providing digital video advertising solutions among different cultures, including potentially modifying our solutions and features to ensure that we deliver ads that are culturally relevant in different countries; • Variations in traffic access costs and margins, region by region; • Increased competition from local providers of digital video advertising solutions; • Longer sales or collection cycles in some countries; • Credit risk and higher levels of payment fraud; • Compliance with anti-bribery laws, such as the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act; • Compliance with foreign data privacy frameworks, such as the EU Data Privacy Directive (and from May 25, 2018, the successor to the Directive, the General Data Protection Regulation); • Currency exchange rate fluctuations; • Foreign exchange controls that might prevent us from repatriating cash earned outside the United States; • Economic and political instability in some countries; • Compliance with the laws of numerous taxing jurisdictions where we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws; • The complexity and potential adverse consequences of U.S. tax laws as they relate to our international operations; and • Overall higher costs of doing business internationally.

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•Table Currency exchange rate fluctuations; • Foreign exchange controls that might prevent us from repatriating cash earned outside the United States; • Economic and political instability in some countries; • Compliance with the laws of numerous taxing jurisdictions where we conduct business, potential double taxation of our international earnings and potentially adverse tax consequences due to changes in applicable U.S. and foreign tax laws; • The complexity and potential adverse consequences of U.S. tax laws as they relate to our international operations; and • Overall higher costs of doing business internationally.Contents

Further expansion or contraction of our international operations may require significant management attention and financial resources and may place burdens on our management, administrative, operational and financial infrastructure. Additionally, in most instances digital media properties can change the terms and supply of ad inventory they make available to us at any time and if digital media properties increase the cost and/or reduce the supply of inventory available to us in international markets, our growth forecasts in these markets may suffer. Further, if our revenue from our international operations, and particularly from our operations in the countries and regions on which we have focused our spending, do not exceed the expense of establishing and maintaining these operations, our business and operating results will suffer. 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. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer.

Our growth forecasts may suffer if we fail to gather sufficient data in a particular international market and effectively coordinate the demand for and supply of advertising inventory.

The performance in a particular geographical market depends on having sufficient advertiser clients and publishers in that market utilizing our solution and our ability to coordinate the demand for and supply of advertising inventory in that market. In most instances digital media properties can change the terms and supply of ad inventory they make available to us at any time and if digital media properties increase the cost and/or reduce the supply of inventory available to us in international markets we may not be coordinated for optimization. As such, as we target new geographic markets, a failure to effectively manage demand for and the supply of advertising inventory could impair our growth forecasts in these markets and could result in lost revenue.

We have experienced foreign currency gains and losses and expect to continue to experience those gains and losses. Fluctuations in currency exchange rates can adversely affect our profitability.

We incur foreign currency transaction gains and losses, primarily related to foreign currency exposures that arise from British pound and euro denominated transactions that we expect to cash settle in the near term, which are charged against earnings in the period incurred. We have a program which utilizes foreign currency forward contracts designed to offset the risks associated with certain foreign currency transaction exposures. We may suspend the program from time to time. As a part of this program, we enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in an effort to mitigate the risks and volatility associated with our foreign currency transaction gains or losses. We expect that we will continue to realize gains or losses with respect to our foreign currency exposures, net of gains or losses from our foreign currency forward contracts. For example, we will experience foreign currency gains and losses in certain instances if it is not possible or cost effective to mitigate our foreign currency exposures, if our mitigation efforts are ineffective, or if we suspend our foreign currency forward contract program. Our ultimate realized loss or gain with respect to currency fluctuations will generally depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into foreign currency forward contracts to offset these exposures and other factors. All of these factors could materially impact our results of operations, financial position and cash flows.

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

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

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

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Although our contracts with advertisers generally permit us to aggregate data from advertising campaigns, sometimes an advertiser declines to permit the use of this data, which limits the usefulness of the data that we collect. Furthermore, advertisers may request that we discontinue using data obtained from their campaigns that have already been aggregated with other advertisers' campaign data. It would be difficult, if not impossible, to comply with these requests, and complying with these kinds of requests could cause us to spend significant amounts of resources. Interruptions, failures or defects in our data collection, mining, analysis and storage systems, as well as privacy concerns and regulatory restrictions regarding the collection, use and processing of data, could also limit our ability to aggregate and analyze the data from our customers' advertising campaigns. If that happens, we may not be able to optimize the placement of advertising for the benefit of our advertising customers, which could make our solutions less valuable, and, as a result, we may lose customers and our revenue may decline.

If the use of “third party cookies” is rejected by internet users, restricted or otherwise subject to unfavorable regulation, our performance could decline and we could lose advertisers and revenue.

Cookies (small text files) are used to gather data to help support our products. These cookies are placed through an internet browser on an internet user’s computer and correspond to certain data sets on our servers. Cookies collect anonymous information, such as when an internet user views an ad, clicks on an ad, or visits one of our advertisers’ websites.

Cookies may easily be deleted or blocked by internet users. All of the most commonly used internet browsers allow internet users to modify their browser settings to prevent first party or third party cookies from being accepted by their browsers. Internet users can also delete cookies and/or download “ad blocking” software that prevents cookies from being stored on a user’s computer. If more internet users adopt these settings or delete their cookies more frequently than they currently do, our business could be harmed. In addition, the Safari browser blocks third party cookies by default, and other browsers may do so in the future. Unless such default settings in browsers are altered by internet users, we will be able to set fewer of our cookies in browsers, which could adversely affect our business. There have also been announcements that prominent advertising platforms plan to replace cookies with alternative web tracking technologies. These alternative mechanisms have not been described in technical detail, and have not been announced with any specific stated time line. It is possible that these companies may rely on proprietary algorithms or statistical methods to track web users without the deployment of cookies, or may utilize log-in credentials entered by users into other web properties owned by these companies, such as their digital email services, to track web usage without deploying third party cookies. Alternatively, such companies may build alternative and potentially proprietary user tracking methods into their widely-used web browsers.

If and to the extent that cookies are blocked and/or replaced by proprietary alternatives, our continued use of cookies may face negative consumer sentiment, reduce our market share, or otherwise place us at a competitive disadvantage. If cookies are replaced, in whole or in part, by proprietary alternatives, we may be obliged to license proprietary tracking mechanisms and data from companies that have developed them, which also compete with us as advertising networks, and we may not be able to obtain such licenses on economically favorable terms. If such proprietary web-tracking standards are owned by companies that compete with us, they may be unwilling to make that technology available to us.

In addition, in the EU, Directive 2002/58/EC (as amended by Directive 2009/136/EC), commonly referred to as the “Cookie Directive,” directs EU member states to ensure that storing or accessing information on an internet user’s device, such as through a cookie, is allowed only if the internet user has given his or her consent. Because we lack a direct relationship with internet users, we rely on our digital media property owners, both practically and contractually, to obtain such consent. Some member states have adopted and implemented, and may continue to adopt and implement, legislation that negatively impacts the use of cookies for digital advertising. Some of these member states also require prior express user consent, as opposed to merely implied consent, to permit the placement and use of cookies. Where member states require prior express consent, our ability to deliver advertisements on certain websites or to certain users may be impaired. Furthermore, there are proposals to replace the current Cookie Directive with a new ePrivacy Regulation, slated to take effect in May 2018. If adopted, the Regulation will standardize the currently disparate cookie consent laws across Europe. However, if adopted in its current draft form, it could create significant challenges for digital advertising models as it introduces enhanced cookie consent and transparency requirements, in particular proposing that browser (and similar internet access software) manufacturers should offer users the ability to accept or refuse cookies upon installation of their software.

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

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

The regulatory framework for privacy issues is evolving worldwide, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the digital advertising industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to collection or use of data to target ads and communication with consumers and the international transfer of data from Europe to the U.S. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. In Europe, in October 2015 the Court of Justice of the European Union invalidated the “US-EU Safe Harbor framework,” which created a safe harbor under the European Data Protection Directive for certain European data transfers to the U.S. We had not self-certified under this regime, and therefore were not directly affected by this decision. In July 2016, the European Commission approved the Privacy Shield, which is a set of principles and related rules that are intended to replace the US-EU Safe harbor framework. The Company is in the process of determining whether to join the Privacy Shield program. Stricter regulation of European data transfers to U.S. in future may impact our ability to serve European customers effectively, or require us to open and operate datacenters in the European Union which would result in a higher cost of doing business in these jurisdictions.

In particular, Europe's new General Data Protection Regulation (“GDPR”) (which comes into force in May 2018) extends the jurisdictional scope of European data protection law. As a result, we will be subject to the GDPR when we provide our targeting services in Europe. The GDPR imposes stricter data protection requirements that may necessitate changes to our services and business practices. Potential penalties for non-compliance with the GDPR include administrative fines of up to 4% of annual worldwide turnover. 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.

The FTC has also adopted revisions to the Children's Online Privacy Protection Act (“COPPA”) that expand liability for the collection of information by operators of websites and other electronic solutions that are directed to children. Questions exist as to how regulators and courts may interpret the scope and circumstances for potential liability under COPPA, and the FTC continues to provide guidance and clarification as to its 2013 revisions of COPPA. FTC guidance or enforcement precedent may make it difficult or impractical for us to provide advertising on certain websites, services or applications. In addition, the FTC recently fined an ad network for certain methods of collecting and using data from mobile applications, including certain applications directed at children, and failing to disclose the data collection to mobile application developers in their network.

While we have not collected data that is traditionally considered personal data, such as name, email address, physical address, phone numbers or social security numbers, we typically collect and store IP addresses, geo-location information, and device or other persistent identifiers that are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation. For example, some jurisdictions in the EU regard IP addresses as personal data, and certain regulators, such as the California Attorney General’s Office, have advocated for including IP addresses, GPS-level geolocation data, and unique device identifiers as personal data under California law. Furthermore, when it enters into effect in May 2018, Europe's GDPR indicates that online identifiers (such as IP addresses and other device identifiers) will be treated as “personal data” going forward and therefore subject to stricter data protection rules.

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Evolving definitions of personal data within the EU, the United States and elsewhere, especially relating to the classification of IP addresses, machine or device identifiers, geo-location data and other such information, may cause us to change our business practices, diminish the quality of our data and the value of our solution, and hamper our ability to expand our offerings into the EU or other jurisdictions outside of the United States. Our failure to comply with evolving interpretations of applicable laws and regulations, or to adequately protect personal data, could result in enforcement action against us or reputational harm, which could have a material adverse impact on our business, financial condition and results of operations.

In addition to compliance with government regulations, we voluntarily participate in trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of internet advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. For instance, new guidelines, codes, or interpretations, by self-regulatory organizations or government agencies, may require additional disclosures, or additional consumer consents, such as “opt-in” permissions to share, link or use data, such as health data from third parties, in certain ways. If we fail to abide by, or are perceived as not operating in accordance with, industry best practices or any industry guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertisers and digital media properties.

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

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

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

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

If our customers fail to pay for ad requests that we have delivered, we would generally still be required to pay the supply source for the ad inventory.

Digital media property owners supply the ad inventory on which we run advertising campaigns for customers through our products. Generally, under the terms of our agreements with such digital media property owners, if a customer fails to pay for ad requests we have delivered, we would generally still be required to pay the digital media property owners for their ad inventory. Any significant failure by customers to pay us could adversely affect our operating results.

Our gross margins vary across our quarterly periods and across products and services.

Our gross margins reflect a variety of factors, including competitive pricing, inventory costs and the volume and relative mix of products used by our customers. Changing customer demands may lead to unanticipated fluctuations in quarterly inventory costs. Furthermore, even if we are able to accurately forecast the anticipated spend across our products and services, we may have limited visibility regarding the product mix. For example, customers can purchase video advertising programmatically, on a managed service or self-service basis, or through our direct IO business. Each of these methods of buying has a different associated gross margin profile. Increased inventory costs, pricing pressures and the relative and varying mix of products and supply sources selected by our customers could cause our gross margins and earnings to decrease notwithstanding an increase in the total spend transacted through our platforms.

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

Our business model depends on the continued proliferation of the internet, computers and internet-connected devices, such as smartphones, tablets and internet-connected TVs, as well as the increased consumption of digital video content on the internet through those devices resulting in increased audience fragmentation. However, consumer usage of these internet-connected devices and resulting audience fragmentation may be inhibited for a number of reasons, such as:

	•	Inadequate network infrastructure to support advanced features;
	•	Users' concerns about the security of these devices and the privacy of their information;
	•	Inconsistent quality of cellular or wireless connections;
	•	Unavailability of cost-effective, high-speed internet service;
	•	Changes in network carrier pricing plans that charge device users based on the amount of data consumed; and
	•	Government regulation of the internet, telecommunications industry, mobile platforms and related infrastructure.

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

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

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

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

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

	•	Inability to accurately process data and extract meaningful insights and trends, such as the failure of our Audience Amplifier to accurately process data to place ads effectively at digital media properties;
	•	Faulty or out-of-date algorithms that fail to properly process data or result in inability to capture brand-receptive audiences at scale;
	•	Technical or infrastructure problems causing digital video not to function, display properly or be placed next to inappropriate context;
	•	Inability to control video completion rates, maintain user attention or prevent end users from skipping advertisements;
	•	Inability to detect and prevent advertising fraud and other malicious activity;
	•	Inability to fulfill audience guarantee or viewability requirements of our advertiser customers;
	•	Inability to integrate with third parties that measure our campaigns against audience guarantee or viewability requirements;
	•	Unavailability of standard digital video audience ratings and brand receptivity measurements for brand advertisers to effectively measure the success of their campaigns; and
	•	Access to quality inventory at sufficient volumes to meet the needs of our advertisers’ campaigns.

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

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

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

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

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

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

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

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

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Failure to properly manage our future growth could seriously harm our business.

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

	•	Implement additional management information systems;
	•	Further develop our operating, administrative, legal, financial and accounting systems and controls;
	•	Hire additional personnel;
	•	Develop additional levels of management within our company;
	•	Locate additional office space;
	•	Maintain and improve coordination among our engineering, product, operations, legal, finance, sales, marketing and customer service and support organizations; and
	•	Manage our expanding international operations.

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

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

Our systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. For example, a significant natural disaster, such as a tornado, earthquake, fire or flood, could have a material adverse effect on our business, results of operations and financial condition, and our insurance coverage may be insufficient to compensate us for losses that may occur. Our corporate offices and one of our data centers are located in California, a region known for earthquakes and one of our data centers is located in New Jersey, a region susceptible to hurricane activity. A significant amount of our development and ad operations work is located in Chennai, India, a region susceptible to tsunamis and typhoons. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our advertisers' businesses or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins, denial-of-service attacks and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California, New Jersey or Chennai, India. As we rely heavily on our data centers, computer and communications systems and the internet to conduct our business and provide high-quality customer service, such disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt our advertisers' businesses, which could have a material adverse effect on our business, results of operations and financial condition.

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

We have experienced and in the future we may periodically experience attrition in key executive management positions. For example, on November 9, 2016, Jayant Kadambi (former President and Chief Executive Officer), James Soss (former Executive Vice President, North American Operations) and Hardeep Bindra (former Executive Vice President, Operations) terminated employment with the Company. The loss of members of our senior management team and other key employees, whether voluntarily or involuntarily, could significantly limit our ability to achieve our strategic objectives. We do not maintain key-person insurance on any of these employees. Our future success also depends on our ability to continue to attract, retain and motivate highly skilled employees, particularly employees with technical skills that enable us to deliver effective advertising solutions and sales and customer support representatives with experience in digital video advertising and strong relationships with brand advertisers, agencies and digital media properties. Competition for these employees in our industry is intense and we have experienced difficulty in recruiting and retaining them. Many of the companies with which we compete for experienced personnel also have greater resources than we have. Competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located, and in Chennai, India, where our engineering and research and development resources are primarily located. As a result, we may be unable to attract or retain these management, technical, sales, marketing and customer support personnel that are critical to our success, resulting in harm to our key customer relationships, loss of key information, expertise or know-how and unanticipated recruitment and training costs. Additionally, our ability to achieve revenue growth in the future will depend, in part, on our success in recruiting, retaining and training sufficient numbers of sales personnel. These new employees require training in order to achieve full productivity. The timing of these activities may continue to negatively impact sales productivity. Additionally, the loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.

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

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

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

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

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

We develop and offer complex software platforms and other software that is used or embedded by our customers and digital media properties in devices, video technologies, software and operating systems. Complex software often contains defects, particularly when first introduced or when new versions are released. Determining whether our software has defects may occur after versions are released into the market. Defects, errors or unintended performance problems with our software could unintentionally jeopardize the performance of advertising campaigns and digital media properties' products. This could result in injury to our reputation, loss of revenue, diversion of development and technical resources, increased insurance costs and increased warranty costs. If our software contains any undetected defects, errors or unintended performance problems, our advertising customers may refuse to use it, digital media properties may refuse to embed it into their products and we may be unable to collect data or acquire advertising inventory from digital media properties. These defects, errors and unintended performance problems could also result in product liability claims. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and limitation of liability clauses in our agreements, these contractual provisions may not be enforceable in every instance. Furthermore, although we maintain errors and omissions insurance, this insurance may not adequately cover these claims. If a court refused to enforce the liability-limiting provisions of our contracts for any reason, or if liabilities arose that were not contractually limited or adequately covered by insurance, our business could be materially harmed.

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

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

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

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

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

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

In the United States, we have 12 13 patents issued and 10 9 non-provisional patent applications pending. We also have ~~three~~five foreign patents issued and 1513 foreign patent applications pending. There can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property, or that these patents will not be challenged by third parties or found to be invalid or unenforceable. We have nine registered trademarks in the United States, 52 54 registered trademarks in foreign jurisdictions and are also pursuing the registration of additional trademarks and service marks in the United States and in locations outside the United States. Effective trade secret, copyright, trademark and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. We may be required to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time-consuming.

45Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Further, our competitors may independently develop technologies that are similar to ours but which avoids the scope of our intellectual property rights. In addition, the laws of many countries, such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property could result in competitors offering solutions that incorporate our most technologically advanced features, which could seriously reduce demand for our advertising solutions. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the attention of our technical staff and managerial personnel, which could harm our business, whether or not the litigation results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be able to stop our competitors from infringing our intellectual property rights.

Monitoring unauthorized use of our intellectual property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. We may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Further, our competitors may independently develop technologies that are similar to ours but which avoids the scope of our intellectual property rights. In addition, the laws of many countries, such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could adversely affect us and our intellectual property. Our failure to meaningfully protect our intellectual property could result in competitors offering solutions that incorporate our most technologically advanced features, which could seriously reduce demand for our advertising solutions. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the attantion of our technical staff and managerial personnel, which could harm our business, whether or not the litigation results in a determination that is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be able to stop our competitors from infringing our intellectual property rights.48

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Our agreements with partners, employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

We rely in part on confidentiality agreements and other restrictions with our customers, partners, employees, consultants and others to protect our proprietary technology and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Despite our efforts to protect our proprietary technology, processes and methods, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. Moreover, policing unauthorized use of our technologies, products and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where applicable laws may be less protective of intellectual property rights than those in the United States, and where enforcement mechanisms for intellectual property rights may be weak. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

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

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

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

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

As a public company we are required to evaluate and determine the effectiveness of our internal control over financial reporting and to provide a management report on our internal control over financial reporting. This requires that we incur substantial internal costs to maintain and expand our accounting and finance functions and that we expend significant management efforts.

We have had significant operations both in the United States and India and more limited operations in Europe and Latin America. Historically, we have had separate systems of internal controls covering our international operations, which may have included control deficiencies. We are in the process of consolidating these systems and remediating any control deficiencies, and we may experience difficulties with the consolidation that could harm our operations and cause our business to suffer. There are inherent limitations in all control systems, no evaluation of controls can provide assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur due to simple error or mistake. Also, controls can be circumvented by individual acts, by collusion of two or more people, or by management override of the controls. Any system of controls is designed in part based on certain assumptions on the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals for the potential future conditions. Over time, controls can become inadequate due to changes in conditions or deterioration in the degree of compliance with policies and procedures.

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We may in the future discover areas of our internal controls that need improvement. Our internal control over financial reporting will not prevent or detect all 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 errors or fraud will not occur or that all control issues and instances of errors and fraud will be detected.

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

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

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). As an emerging growth company we are not required to obtain auditor attestation of our reporting on internal control over financial reporting, we have reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and we are not required to hold nonbinding advisory votes on executive compensation. We cannot predict whether investors will find our common stock less attractive as a result of our reliance on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earliest of: the end of the fiscal year in which the market value of the shares of our common stock held by non-affiliates exceeds $700 million as of June 30, the end of the fiscal year in which we have total annual gross revenue of $1.0 billion, the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period, or December 31, 2018.

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

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we are and will continue to be subject to the reporting requirements of the Exchange Act and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC and the New York Stock Exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Compliance with these requirements has increased our legal and financial compliance costs and has made some activities more time consuming and costly, while also diverting management attention. In particular, we expect to continue to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which will increase when we are no longer an emerging growth company as defined by the JOBS Act.

Operating as a public company has made it more expensive for us to obtain director and officer liability insurance. As a public company, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

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

While we anticipate that our existing cash, cash equivalents, marketable securities and cash generated from operations will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. On June 22, 2017, we announced a special cash dividend in the amount of $1.00 per common share and a quarterly cash dividend in the amount of $0.03 per common share. The special and quarterly cash dividends were paid on July 7, 2017, ~~which~~to ~~reduced~~stockholders ~~our~~of ~~cash~~record as of the close of business on July 3, 2017. Cash used to pay dividends was funded from available working capital. On August 8, 2017, we announced a quarterly cash ~~equivalents~~dividend ~~and~~in ~~marketable~~the ~~securities~~amount byof $350.603 ~~million~~per common share. This quarterly cash dividend was paid on October 9, 2017, to stockholders of record as of ~~that~~the ~~date~~close of business on September 29, 2017. We ~~may~~recorded ~~declare~~$1.0 million in “Dividends payable” in our condensed consolidated balance sheet as of September 30, 2017. Future declarations of quarterly dividends and ~~pay~~the establishment of future ~~cash~~record ~~dividends,~~and payment dates are subject to ~~approval~~the byfinal determination of our board of directors.

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

In November 2016, we let our line of credit with Silicon Valley Bank expire. We cannot be certain that additional financing from lenders will be available to us as needed on acceptable terms, or at all.

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

We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal income tax purposes, including any limitations that may be imposed under Section 382 of the Internal Revenue Code as a result of our IPO. As of December 31, 2016, we had federal net operating loss carryforwards of $26.7 million, which expire at various dates beginning in 2027. As of December 31, 2016 we had state and local net operating loss carryforwards of $20.5 million, which begin to expire in 2017. Our gross state net operating loss carryforwards are separate from our federal net operating loss carryforwards and expire over various periods beginning in 2017, based on individual state tax law.

We periodically assess the likelihood that we will be able to recover our net deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a full valuation allowance against our net U.S. deferred tax assets should be applied as of ~~June~~September 30, 2017. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.

Risks Related to Ownership of Our Common Stock:

An active trading market for our common stock may not be sustained and investors may not be able to resell their shares at or above the price at which they purchased them.

We have a limited history as a public company. An active trading market for our shares may not be sustained. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the price they paid or at the time that they would like to sell. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could harm our business.

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

Our stock price has been and is likely to remain volatile. Since shares of our common stock were sold in our IPO at a price of $9.00 per share, our stock price has ranged from $2.35 to $12.08 through ~~July~~October 31, 2017. The stock market in general and the market for technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price paid for the shares. The market price for our common stock may be influenced by many factors, including:

• Actual or anticipated variations in quarterly operating results; • Changes in financial estimates by us or by any securities analysts who might cover our stock; • Conditions or trends in our industry; • Stock market price and volume fluctuations of other publicly traded companies and, in particular, those that operate in the advertising, internet or media industries; • Announcements by us or our competitors of new product or service offerings, significant acquisitions, strategic partnerships or divestitures; • Announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; • Capital commitments; • Business disruption and costs related to stockholder activism; • Additions or departures of key personnel; • Stock repurchase programs; • Sales of our common stock, including sales by our directors and officers or specific stockholders; and • Expectations of future cash dividend declarations and payments.

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•Table ~~Business disruption and costs related to stockholder activism; • Additions or departures~~ of key personnel; • Stock repurchase programs; • Sales of our common stock, including sales by our directors and officers or specific stockholders; and • Expectations of future cash dividend declarations and payments.Contents

In addition, in the past, stockholders have initiated class action lawsuits against technology companies following periods of volatility in the market prices of these companies' stock. If litigation is instituted against us, we could incur substantial costs and divert management's attention and resources. We have failed in the past, and may fail in the future, to meet our publicly announced guidance or other expectations about our business and future operating results. Such past failures have caused, and future failures would likely cause, our stock price to decline.

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

Currently we are not aware of any securities analysts following the Company. The trading market for our common stock is likely to respond to the presence or absence of equity research published about us and our business, and to the content of any such research. If no or few equity research analysts elect to provide research coverage of our common stock, the lack of research coverage may adversely affect the market price of our common stock. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If any or all equity research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.

A sale of a substantial number of shares of our common stock in the public market could occur at any time. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

We had approximately 34.59 million shares of common stock outstanding as of ~~June~~September 30, 2017. Sales of a substantial number of shares of our common stock in the public market could occur at any time. If our stockholders sell, or the market perceives that our stockholders intend to sell, substantial amounts of our common stock in the public market, the market price of our common stock could decline significantly.

As of ~~June~~September 30, 2017, approximately 109.27 million shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans have been registered under registration statements on Form S-8 and, subject to grants, vesting arrangements and exercise of options and the restrictions of Rule 144 in the case of our affiliates, may become available for sale in the public market.

Additionally, the holders of a certain number of shares of common stock have rights, subject to certain conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. If we were to register these shares for resale, they could be freely sold in the public market. Further, the stockholders may decide to sell such shares without registration. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

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

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

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

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

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

Our executive officers, directors and current beneficial owners of 5% or more of our common stock and their respective affiliates, in aggregate, beneficially own approximately 4136% of our outstanding common stock. These persons, acting together, are able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.

Actions of activist stockholders against us have been and may continue to be disruptive and costly to us and the possibility that activist stockholders may wage costly future proxy contests or gain additional representation on or control of our board of directors could cause uncertainty about the strategic direction of our business.

Stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or board nominations or otherwise attempt to effect changes, assert influence or acquire some level of control over us. While our board of directors and management team strive to maintain constructive, ongoing communications with all of our stockholders, including activist stockholders, and welcomes their views and opinions with the goal of enhancing value for all stockholders, including any suggestions they may have for enhancing the depth and breadth of our board of directors, activist campaigns that contest, or conflict with, our strategic direction or seek changes in the composition of our board of directors could have an adverse effect on us because:

	•	Responding to proxy contests, litigation and other actions by activist stockholders can disrupt our operations, be costly and time-consuming, and divert the attention of our board of directors and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition;
	•	Perceived uncertainties as to our future direction as a result of changes to the composition of our board of directors may lead to the perception of a change in the direction of the business, instability or lack of continuity which may be exploited by our competitors, cause concern to our current or potential clients, may result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners; and
	•	These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.

We added five new directors to our board of directors in the last 18 months, a new majority of our eight-member board of directors, which may lead to changes in the execution of our business strategies and objectives.

In connection with our annual meetings of stockholders in May of 2016 and July 2017, five new directors were elected to our board of directors and constitute a majority of our eight-member board of directors. Because of these additions, our board of directors has not worked together as a group for an extended period of time. This may lead to changes in the execution of our business strategies and objectives as these new directors analyze our business and contribute to the formulation of our business strategies and objectives.

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.53

InTable ~~February 2016, our board~~ of directors approved a stock repurchase program of up to $10.0 million. Since announcing the $10 million share repurchase program on February 18, 2016 through June 30, 2017, the Company acquired approximately 2.3 million shares of its common stock for $8.2 million, at an average price per share of $3.64. The timing and actual number of shares repurchased depend on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements such as our ability to effectuate a trading plan under the requirements of SEC Rule 10b5-1, an assessment by management and our board of directors of cash availability and other market conditions. 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. Additionally, repurchases under our stock repurchase program will diminish our cash reserves. 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.Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Sale of Unregistered Securities

None

Use of Proceeds from Public Offering of Common Stock

None.

Issuer Purchases of Equity Securities

On February 18, 2016, we announced a $10.0 million stock repurchase program. The repurchase program is subject to market conditions and other factors. Purchases under this repurchase program have been made in the open market and have complied with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The cost of the repurchased shares was funded from available working capital. Such repurchased shares are held in treasury and are presented using the cost method. As of ~~June~~September 30, 2017, we had purchased 2,268,478 shares of our common stock for $8.2 million at an average price of $3.64 per share. For accounting purposes, common stock repurchased under our Stock Repurchase Program is recorded based upon the purchase date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS

Exhibit		Description of Exhibit
2.1†		Agreement and Plan of Merger and Reorganization, dated September 4, 2017, by and among RhythmOne, PLC, Redwood Merger Sub I, Inc., Redwood Merger Sub II, Inc. and YuMe, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed September 5, 2017)
10.18*		2017 Cash Incentive Plan
10.19*		Amended and Restated Indemnification Agreement
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
99.1		Advertising Metrics (furnished herewith)
99.2		Form of Tender and Support Agreement (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on September 5, 2017)
101 INS**		XBRL Instance Document
101 SCH**		XBRL Taxonomy Extension Schema
101 CAL**		XBRL Taxonomy Extension Calculation
101 DEF**		XBRL Taxonomy Extension Definition
101 LAB**		XBRL Taxonomy Extension Labels
101 PRE**		XBRL Taxonomy Extension Presentation

†

Schedules to the Agreement and Plan of Merger and Reorganization have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant will furnish copies of any such schedules to the U.S. Securities and Exchange Commission upon request.

Filed herewith.

As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of YuMe, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filings.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

YuMe, Inc. /s/ TONY CARVALHO Tony Carvalho Chief Financial Officer (Principal Financial and Accounting Officer) Date: ~~August~~November 8, 2017

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INDEX TO EXHIBITS

Exhibit		Description of Exhibit
2.1†		Agreement and Plan of Merger and Reorganization, dated September 4, 2017, by and among RhythmOne, PLC, Redwood Merger Sub I, Inc., Redwood Merger Sub II, Inc. and YuMe, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed September 5, 2017)
10.18*		2017 Cash Incentive Plan
10.19*		Amended and Restated Indemnification Agreement
31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
99.1		Advertising Metrics (furnished herewith)
99.2		Form of Tender and Support Agreement (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed September 5, 2017)
101 INS**		XBRL Instance Document
101 SCH**		XBRL Taxonomy Extension Schema
101 CAL**		XBRL Taxonomy Extension Calculation
101 DEF**		XBRL Taxonomy Extension Definition
101 LAB**		XBRL Taxonomy Extension Labels
101 PRE**		XBRL Taxonomy Extension Presentation

†

Filed herewith.

Filing Compare · YuMe Inc