You should carefully consider the risks described below, together with all
of the other information included in this quarterly report on
Form 10-Q,
before making an investment decision. Our business, financial condition and results of operations could be materially and adversely
affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business, Industry and Financial Condition
Most of our revenues are currently generated by our Media Agency Business, and our effort to expand our AI Platform business may not
succeed.
In the first nine months of 2017 and fiscal years 2016 and 2015, most of our revenues were advertising-related revenues
generated from media placement services performed under advertising contracts with our media clients. We typically receive a percentage of the total advertising placement by these customers with selected media sources. We did not commence licensing
of our AI platform until April 2015, and SaaS licensing revenue from our AI platform was $1.0 million in the nine months ended September 30, 2017, and $0.5 million and less than $0.1 million in the years ended December 31,
2016 and 2015, respectively. In order for us to grow our business and achieve profitability, we must expand our revenue base by ramping up our SaaS licensing business and entering into additional licensing agreements. However, we are currently in
the early stages of developing our SaaS licensing business, and we may not be able to succeed with respect to these efforts.
Many factors
may adversely affect our ability to establish a viable and profitable SaaS licensing business, including but not limited to:
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Failure to add cognitive engines with sufficient levels of capability into our platform, difficulties integrating cognitive engines, or loss of access to cognitive engines;
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Inability to expand the automation capabilities of our Conductor technology to other types of cognitive engines;
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Inability to expand the number of cognitive engines in different classes that can operate in a network isolated manner, which would limit the capabilities of our hybrid on-premise/cloud version of aiWARE;
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Failure to add market-specific capabilities and analytics for each of our vertical markets;
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Failure to articulate the perceived benefits of our solution, or failure to persuade potential customers that such benefits justify the additional cost over competitive solutions or technologies;
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Introduction of competitive offerings by larger, better financed and more well-known companies;
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Inability to enter into satisfactory agreements relating to the integration of our platform with products of other companies to pursue particular vertical markets or the failure of such relationships to achieve their
anticipated benefits;
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Failure to provide adequate customer support;
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Long sales cycles for customers in the government and law enforcement markets;
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Failure to generate broad customer acceptance of or interest in our solutions;
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Increases in costs or lack of availability of certain cognitive engines;
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Challenges in operating our platform on secure government cloud platforms;
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Inability to continue to access public media for free;
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Higher data storage and computing costs; and
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Difficulties in adding technical capabilities to our platform and ensuring future compatibility of additional third party providers.
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If we fail to develop a successful SaaS licensing business, or if we are unable to ramp up our SaaS operations in a timely manner or at all,
our business, results of operations and financial condition will suffer.
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The AI market is new and unproven, and it may decline or experience limited growth, which
would adversely affect our ability to fully realize the potential of our platform.
The AI market is relatively new and evaluating
the size and scope of the market is subject to a number of risks and uncertainties. We believe that our future success will depend in large part on the growth of this market. The utilization of our platform by customers is still relatively new, and
customers may not recognize the need for, or benefits of, our platform, which may prompt them to cease use of our platform or decide to adopt alternative products and services to satisfy their cognitive computing search and analytics requirements.
In order to expand our business and extend our market position, we intend to focus our marketing and sales efforts on educating customers about the benefits and technological capabilities of our platform and the application of our platform to the
specific needs of customers in different market verticals. Our ability to access and expand the market that our platform is designed to address depends upon a number of factors, including the cost, performance and perceived value of our platform.
Market opportunity estimates are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis and industry experience. Assessing the market for our SaaS solutions in each of the vertical markets we
are competing in, or are planning to compete in, is particularly difficult due to a number of factors, including limited available information and rapid evolution of the market. The market for our platform, or for AI cognitive computing in general,
may fail to grow significantly or be unable to meet the level of growth we expect. As a result, we may experience lower than expected demand for our products and services due to lack of customer acceptance, technological challenges, competing
products and services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth, or if demand for our platform does not increase in line with our
projections, then our business, results of operations and financial condition will be adversely affected.
We rely on third parties
to develop cognitive engines for our platform and in some cases to integrate them with our platform.
A key element of our platform
is the ability to incorporate and integrate cognitive engines developed by multiple third-party vendors, and we plan to continue to increase the number of third-party cognitive engines incorporated into our platform in order to enhance the
performance and power of our platform. As we become increasingly dependent on third-party developers for new cognitive engines, we may encounter difficulties in identifying additional high-quality cognitive engines, entering into agreements for
their inclusion in our ecosystem on acceptable terms or at all and/or in coordinating and integrating their technologies into our system. We may incur additional costs to modify and adjust existing functionalities of our platform to accommodate
multiple classes of third-party cognitive engines, without the assurance that such costs can be recouped by the additional revenues generated by the new capabilities. As our platform becomes more complex due to the inclusion of various third-party
cognitive engines, we may not be able to integrate them in a seamless or timely manner due to a number of factors, including incompatible software applications, lack of cooperation from developers, insufficient internal technical resources, and the
inability to secure the necessary licenses or legal authorizations required. In addition, we currently use third-party providers to integrate such third party cognitive engines onto our platform. In the future, we plan to require such third party
developers to integrate their engines onto our platform, and we will be dependent in part upon their ability to do so effectively and quickly. We may not have full control over the quality and performance of third-party providers, and therefore, any
unexpected deficiencies or problems arising from these third-party providers may cause significant interruptions of our platform. The failure of third party developers to integrate their cognitive engines seamlessly into our platform and/or provide
reliable, scalable services may impact the reliability of our platform and harm our reputation and business, results of operations and financial conditions.
Our competitors, partners and others may acquire third party technologies, which could result in them blocking us from using the
technology in our platform, offering it for free to the public or making it cost prohibitive for us to continue to incorporate their technologies in our platform.
Our success depends in part on our ability to attract and incorporate the leading cognitive engines into our platform. If any third party
acquires a cognitive engine that is integral to our platform, they may preclude us from using it as a component of our platform or make it more expensive for us to utilize, and our revenues could decline if the interruption causes us to lose
customers. It is also possible that a third party acquirer of such technology could offer the cognitive engines and technologies to the public as a free add-on capability, in which case our customers would have less incentive to pay us for the use
of our platform. If a key third party technology becomes unavailable to us or is impractical for us to continue to use, the functionality of our platform could be interrupted and our expenses could increase as we search for an alternative
technology. As a result, our business, results of operations and financial condition could be adversely affected through the loss of customers, reputational harm and/or from increased operating costs.
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Our continuous access to public media may be restricted, disrupted or terminated, which
would reduce the effectiveness of our platform.
The success of our platform for certain users depends substantially on our ability
to continuously ingest and process large amounts of data available in the public media, and any interruption to our free access to such public media will adversely affect the performance and quality of our platform for such users. Public media
sources may change their policies to restrict access or implement procedures to make it more difficult or costly for us to maintain access. Free access to certain public media has also been challenged in courts as a potential violation of laws. In a
recent case, Fox News v. TVEyes, Fox News filed a lawsuit in the Southern District of New York against a media-monitoring service company for alleged violation of copyright laws. The District Court held that TVEyes indexing, viewing and
archiving capabilities constituted fair use, but that its downloading, emailing and date-time search capabilities did not. Both parties have appealed the decision to the Court of Appeals for the Second Circuit. If the Court of Appeals overturns the
lower court decision as requested by Fox News, or other broadcasters pursue similar legal actions, our free access to some or all public media could be limited or eliminated entirely, which will severely reduce the effectiveness and capabilities of
our platform and cause us to lose customers. If we no longer have free access to public media, our online media library and the capability and quality of our platform for some users will be significantly reduced. Furthermore, we may be forced to pay
significant fees to public media sources in order to maintain access, which would adversely affect our financial condition and results of operations.
If we are not able to develop a strong brand for our platform and increase market awareness of our company and our platform, then our
business, results of operations and financial condition may be adversely affected.
We believe that the success of our platform
will depend in part on our ability to develop a strong brand identity for our Veritone, Veritone Platform, aiWARE and other service marks and to increase the market awareness of our platform and its capabilities.
The successful promotion of our brand will depend largely on our continued marketing efforts and our ability to offer high quality cognitive engines on our platform and ensure that our technology provides the expected benefits to our customers. We
also believe that it is important for us to be thought leaders in the AI-based cognitive computing market. Our brand promotion and thought leadership activities may not be successful or produce increased revenue. In addition, independent industry
analysts often provide reviews of our platform and of competing products and services, which may significantly influence the perception of our platform in the marketplace. If these reviews are negative or not as positive as reviews of our
competitors products and services, then our brand may be harmed.
The promotion of our brand also requires us to make substantial
expenditures, and we anticipate that these expenditures will increase as our industry becomes more competitive and as we seek to expand into new markets. These higher expenditures may not result in any increased revenue or in revenue that is
sufficient to offset the higher expense levels. If we do not successfully maintain and enhance our brand, then our business may not grow, we may see our pricing power reduced relative to competitors and we may lose customers, all of which would
adversely affect our business, results of operations and financial condition.
We expect that our brand and reputation may also be
affected by customer reviews and reactions, including reviews and feedback received through online social media channels. We must consistently provide high quality services to ensure that our customers have a positive experience using our platform.
If customers complain about our services, if we do not handle customer complaints effectively or if we cannot generate positive reviews and feedback on social media channels, then our brand and reputation may suffer, and our customers may lose
confidence in us and reduce or cease their use of our platform.
We may not be able to expand the capabilities of our proprietary
Conductor technology to optimize our AI platform.
We recently enhanced the performance of our platform by adding our proprietary
Conductor technology, which automates the selection of cognitive engines available on our platform within a class from the engines available on our platform. Our Conductor technology is designed to optimize data processing by choosing the best
cognitive engine to deploy to generate the ideal results for each individual search based on performance, cost and speed. Our Conductor technology currently only works with transcription engines. While we are working on expanding our Conductor
technology to other cognitive classes, we cannot guarantee that such expansion will be completed on a timely basis or at all. We may not be able to develop the technology to effectively and navigate and process multiple complex classes of cognitive
engines, particularly those developed by third parties. Even if we are able to do so, we may not be able to develop Conductor technology for those other classes that achieves the expected performance, which would have an adverse effect on our
customer experience and satisfaction. In addition, we expect to incur significant costs in the development and deployment of our proprietary Conductors, and if we cannot achieve our expected performance goals, it could have an adverse effect on our
financial condition and results of operations.
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We currently generate significant revenue from a limited number of key customers and the
loss of any of our key customers may harm our business, results of operations and financial results.
Our ten largest customers by
revenue accounted for approximately 66.0% of our net revenues in the first nine months of 2017 and 72.2% and 81.0% in fiscal years 2016 and 2015, respectively. If any of our key customers decides not to renew its contract with us or renews on less
favorable terms, or if any such customer decides to develop its own platform, our business, revenue and reputation could be materially and adversely affected.
For example, our two largest customers by revenue in 2015, LifeLock, Inc. and DraftKings, Inc., collectively accounted for approximately 42.7%
of our net revenues in 2015, but only 10.5% of our net revenues in 2016. In September 2015, our agreement with LifeLock, Inc. was terminated, which contributed to the reduction in our net revenues in 2016 compared with the prior year. Furthermore,
as a result of certain legal proceedings in which it was involved, DraftKings, Inc. reduced its marketing spend in 2016, and our net revenues related to our agreement with DraftKings, Inc. declined significantly. If we lose business with additional
key customers, and are not able to gain additional customers or increase our revenue from other customers to offset the reduction of revenues from those key customers, our business, results of operations and financial condition would be harmed.
Media Agency clients periodically review and change their advertising requirements and relationships. If we are unable to remain
competitive or retain key clients, our business, results of operations and financial position may be adversely affected.
The media
placement industry is highly competitive, and certain advertising clients periodically put their advertising, marketing and corporate communications business up for competitive review. Clients also review the cost and benefit of servicing all or a
portion of their advertising and marketing needs in-house. We have won and lost accounts in the past as a result of these reviews. In addition, from time to time, customers cancel media campaigns for their internal business reasons. Because our
Media Agency contracts generally can be cancelled by our customers upon 30- to 90- days prior written notice, clients can easily change media providers or cancel media commitments on short notice without any penalty. In order to retain existing
clients and win new clients, we must continue to develop solutions that meet client needs, provide quality and effective client service, and achieve clients requirements for return on advertising investment and pricing. In addition, our Media
Agency Business is primarily engaged in the placement of endorsed media, and we may face increased competition in this business in the future from other advertising agencies that provide a more comprehensive range of advertising services to their
customers. To be able to offer a broader range of services, we would need to add additional capabilities, such as television buying, and we may not be able to do so effectively. To the extent that we are not able to remain competitive or retain key
clients, our revenue may be adversely affected, which could have a material and adverse effect on our business, results of operations and financial position.
Our Media Agency Business is dependent on growth in demand for endorsed media and the availability of sufficient media personalities to
deliver such content.
Our Media Agency Business is primarily engaged in the placement of endorsed media, which depends on the
availability of media personalities to deliver the endorsed media content. The endorsed media market is still at a relatively early stage of development, and its future growth is uncertain. Our ability to grow our sales in this business will be
dependent in part upon the level of interest in endorsed media among advertisers, and upon the number of available media personalities and our ability to identify and engage an increasing number of such personalities on a cost effective basis. If
demand for endorsed media fails to grow, or if we are unable to identify sufficient appropriate media personalities to deliver the endorsed media content, our ability to grow our Media Agency Business would be impacted materially.
Acquiring and retaining Media Agency clients depends on our ability to avoid and manage conflicts of interest arising from other client
relationships and attracting and retaining key personnel.
Our ability to acquire new Media Agency clients and to retain existing
clients may, in some cases, be limited by clients perceptions of, or policies concerning, conflicts of interest arising from other client relationships. If we are unable to manage these client relationships and avoid potential conflicts of
interest, our business, results of operations and financial position may be adversely affected.
Our ability to acquire new Media Agency
clients and to retain existing clients is dependent in large part upon our ability to attract and retain our key personnel in that business, who are an important aspect of our competitiveness. If we are unable to attract and retain key personnel,
our ability to provide our services in the manner clients have come to expect may be adversely affected, which could harm our reputation and result in a loss of clients, which could have a material adverse effect on our business, results of
operations and financial position.
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Our quarterly results may fluctuate significantly and period-to-period comparisons of our
results may not be meaningful.
Our quarterly results, including the levels of our revenue, our operating expenses and other costs,
and our operating margins, may fluctuate significantly in the future, and period-to-period comparisons of our results may not be meaningful. Accordingly, the results of any one period should not be relied upon as an indication of our future
performance. In addition, our quarterly results may not fully reflect the underlying performance of our business. Factors that may cause fluctuations in our quarterly results include, but are not limited to:
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the timing of new advertising program wins with our Media Agency customers;
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our ability to retain our existing customers and to expand our business with our existing customers;
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our ability to attract new customers, the type of customers we are able to attract, the size and needs of their businesses and the cost of acquiring these new customers;
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the timing and market acceptance of our SaaS solutions and other products introduced by us and our competitors;
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variations in the timing of licensing revenues from our SaaS solutions as a result of trends impacting our target vertical markets;
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changes in our pricing policies or those of our competitors;
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the timing of our recognition of revenue and the mix of our revenues during the period;
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the amount and timing of operating expenses and other costs related to the maintenance and expansion of our business, infrastructure and operations;
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the amount and timing of operating expenses and other costs associated with assessing or entering new vertical markets;
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the amount and timing of operating expenses and other costs related to the development or acquisition of businesses, services, technologies or intellectual property rights;
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the timing and impact of security breaches, service outages or other performance problems with our technology infrastructure and software solutions;
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the timing and costs associated with legal or regulatory actions;
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changes in the competitive dynamics of our industry, including consolidation among competitors, strategic partners or customers;
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loss of our executive officers or other key employees;
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industry conditions and trends that are specific to the vertical markets in which we sell or intend to sell our SaaS solutions; and
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general economic and market conditions.
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Fluctuations in quarterly results may negatively
impact the value of our common stock, regardless of whether they impact or reflect the overall performance of our business. If our quarterly results fall below the expectations of investors or any securities analysts who follow our stock, or below
any guidance we may provide, the price of our common stock could decline substantially.
If we are not able to enhance or introduce
new products that achieve market acceptance and keep pace with technological developments, our business, results of operations and financial condition could be harmed.
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Our ability to attract new customers and increase revenue from existing customers depends in part
on our ability to enhance and improve our platform, increase adoption and usage of our products and introduce new products and features, including products and services designed for operation on a network-isolated basis, behind the users
firewall, or in a mobile user environment. The success of any enhancements or new products depends on several factors, including timely completion, adequate quality testing, actual performance quality, market-accepted pricing levels and overall
market acceptance and demand. Enhancements and new products that we develop may not be introduced in a timely or cost-effective manner, may contain defects, may have interoperability difficulties with our platform or may not achieve the market
acceptance necessary to generate significant revenue. If we are unable to successfully enhance our existing platform and capabilities to meet evolving customer requirements, increase adoption and usage of our platform, develop new products, or if
our efforts to increase the usage of our products are more expensive than we expect, then our business, results of operations and financial condition could be harmed.
The success of our business depends on our ability to expand into new vertical markets and attract new customers in a cost-effective
manner.
In order to grow our business, we plan to drive greater awareness and adoption of our platform from enterprises across new
vertical markets, including Legal, Government and Retail. We intend to increase our investment in sales and marketing, as well as in technological development, to meet evolving customer needs in these and other markets. There is no guarantee,
however, that we will be successful in gaining new customers from any or all of these markets. We have limited experience in marketing and selling our products and services generally, and in particular in these new markets, which may present unique
and unexpected challenges and difficulties. For example, in order for us to offer our hosted, cloud-based products and services to certain government customers, we will be required to operate our platform in secure government cloud environments in
order to enable our customers to maintain compliance with applicable regulations that govern the use, storage and transfer of certain government data. However, due to the secure nature of these government cloud environments, we may not be able to
fully perform all functionalities and features of our platform or make available all of the third party cognitive engines within our non-government cloud platform ecosystem, which may limit or reduce the performance and quality of our services.
Furthermore, we may incur additional costs to modify our current platform to conform to the cloud providers requirements, and we may not be able to generate sufficient revenue to offset these costs. We will also be required to comply with
certain regulations required by government customers, such as FedRAMP and CJIS, which will require us to incur costs, devote management time and modify our current platform and operations. If we are unable to comply with those regulations
effectively and in a cost-effective manner, our financial results could be adversely affected.
We use a variety of marketing channels to
promote our products and platform, such as digital, print and social media advertising, email campaigns, industry events and public relations. If the costs of the marketing channels we use increase dramatically, then we may choose to use alternative
and less expensive channels, which may not be as effective as the channels we currently use. As we add to or change the mix of our marketing strategies, we may need to expand into more expensive channels than those we are currently in, which could
adversely affect our business, results of operations and financial condition. In addition, we have limited experience marketing our products and platform and we may not be successful in selecting the marketing channels that will provide us with
exposure to customers in a cost-effective manner. As part of our strategy to penetrate the new vertical markets, we will incur marketing expenses before we are able to recognize any revenue in such markets, and these expenses may not result in
increased revenue or brand awareness. We have made in the past, and may make in the future, significant expenditures and investments in new marketing campaigns, and these investments may not lead to the cost-effective acquisition of additional
customers. If we are unable to maintain effective marketing programs, then our ability to attract new customers or enter into new vertical markets could be adversely affected.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating
results.
Our continued growth depends in part on the ability of customers to access our platform at any time and within an
acceptable amount of time. We have experienced, and may in the future experience, disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, introductions of new applications and functionality,
software errors and defects, capacity constraints due to an increasing number of users accessing our platform simultaneously, or security related incidents. In addition, from time to time we may experience limited periods of server downtime due to
server failure or other technical difficulties (as well as maintenance requirements). Because we also incorporate diverse software and hosted services from many third party vendors, we may encounter difficulties and delays in integrating and
synthesizing these applications and programs, which may cause downtimes or other performance problems. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our platform becomes more
complex and our user traffic increases. If our platform is unavailable or if our users are unable to access our platform within a reasonable amount of time or at all, our business would be adversely affected and our brand
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could be harmed. In the event of any of the factors described above, or certain other failures of our infrastructure, customer or consumer data may be permanently lost. To the extent that we do
not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, customers and consumers may cease to use our
platform and our business and operating results may be adversely affected.
Our business depends on customers increasing their use
of our services and/or platform, and we may experience loss of customers or decline in their use of our services and/or platform.
Our ability to grow and generate revenue depends, in part, on our ability to maintain and grow our relationships with existing customers and
convince them to increase their usage of our platform. If our customers do not increase their use of our platform, then our revenue may not grow and our results of operations may be harmed. Our revenue model for advertising contracts is generally
structured as a percentage of the total fees for the advertisement. If our customers reduce their spending on the placement of advertisements with media vendors, or if they decide to use other marketing or selling strategies, we will experience a
decline in our revenue. In addition, many of our SaaS licensing contracts include a usage-based license fee that is based upon our customers level of usage of our platforms cognitive engines. It is difficult to accurately predict
customers usage levels and the loss of customers or reductions in their usage levels may have a negative impact on our business, results of operations and financial condition. If a significant number of customers cease using, or reduce their
usage of, our platform, then we may be required to spend significantly more on sales and marketing than we currently plan to spend in order to maintain or increase revenue from customers. These additional expenditures could adversely affect our
business, results of operations and financial condition. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers may reduce or cease their use of our platform at any time without
penalty or termination charges.
We rely upon Amazon Web Services (AWS) and Iron.io to operate our platform, and any disruption of
or interference with our use of such third party services would adversely affect our business operations.
We use AWS to host our
platform and for our storage needs. We also utilize Iron.io (a unit of Oracle) for certain computing processes related to our services. Users of our platform need to be able to access our platform at any time, without interruption or degradation of
performance. AWS and Iron.io run their own platforms that we access, and we are, therefore, vulnerable to service interruptions at AWS and Iron.io. We do not have control over the operations of AWS or Iron.io, and we may experience interruptions,
delays and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions and capacity constraints. In addition, if our security, or that of
AWS or Iron.io, is compromised, our platform is unavailable to our customers, or our customers are unable to use our platform within a reasonable amount of time or at all, then our business, results of operations and financial condition could be
adversely affected. In some instances, we may not be able to identify the cause or causes of these performance problems within a period of time acceptable to our customers.
AWS and Iron.io provide us with hosting, computing and storage capacity pursuant to agreements that may be cancelled by providing 30
days prior written notice, and in some cases, the agreements can be terminated immediately for cause without notice. If any of these agreements are terminated with little or no notice, we could experience interruptions on our platform and in
our ability to make our platform available to customers, as well as delays and additional expenses in arranging alternative cloud infrastructure services.
While we have deployed our platform to work on Microsofts Azure government cloud, and are in the process of deploying it on AWS
secure government cloud, the secure nature of these secure government clouds limits certain features of our platform, which could impact a users experience on our site and may make it harder to achieve broad acceptance of the cloud-based
version of our platform among government users.
Any of the above circumstances or events may harm our reputation, cause customers to stop
using our platform, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business,
results of operations and financial condition.
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The security of our platform, networks or computer systems may be breached, and any
unauthorized access to our customer data will have an adverse effect on our business and reputation.
The use of our platform
involves the storage, transmission and processing of our clients private data as well as public media, and this private media may contain confidential and proprietary information of our clients or other personal or identifying information
regarding our clients, their employees or other persons. Individuals or entities may attempt to penetrate our network or platform security, or that of our third party hosting and storage providers, and could gain access to our clients private
media, which could result in the destruction, disclosure or misappropriation of proprietary or confidential information of our clients or their customers, employees and business partners. If any of our clients private media is leaked,
obtained by others or destroyed without authorization, it could harm our reputation, we could be exposed to civil and criminal liability, and we may lose our ability to access private media information, which will adversely affect the quality and
performance of our platform.
In addition, our platform may be subject to computer malware, viruses and computer hacking, fraudulent use
attempts and phishing attacks, all of which have become more prevalent in our industry. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, they may include the theft or destruction of
data owned by us or our customers, and/or damage to our platform. Any failure to maintain the performance, reliability, security and availability of our products and technical infrastructure to the satisfaction of our customers may harm our
reputation and our ability to retain existing customers and attract new users.
While we have implemented procedures and safeguards that
are designed to prevent security breaches and cyber-attacks, they may not be able to protect against all attempts to breach our systems, and we may not become aware in a timely manner of any such security breach. Unauthorized access to or security
breaches of our platform, network or computer systems, or those of our technology service providers or third party cognitive engines, could result in the loss of business, reputational damage, regulatory investigations and orders, litigation,
indemnity obligations, damages for contract breach, civil and criminal penalties for violation of applicable laws, regulations or contractual obligations, and significant costs, fees and other monetary payments for remediation. If customers believe
that our platform does not provide adequate security for the storage of sensitive information or its transmission over the Internet, our business will be harmed. Customers concerns about security or privacy may deter them from using our
platform for activities that involve personal or other sensitive information.
If we are not able to compete effectively, our
business and operating results will be harmed.
While the market for AI-based systems for search and analysis of audio, video and
other unstructured data is still in the early stages of development, we face competition from various sources, including large, well-capitalized technology companies such as Google and IBM. These competitors may have better brand name recognition,
greater financial and engineering resources and larger sales teams than we have. As a result, these competitors may be able to develop and introduce competing solutions and technologies that may have greater capabilities than ours or that are able
to achieve greater customer acceptance, and they may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, we may also compete with smaller
third-party developers of cognitive engines, who may develop their own platforms that perform similar services as our platform. We expect that competition will increase and intensify as we continue to expand our serviceable markets and improve our
platform and services. Increased competition may result in pricing pressures and require us to incur additional sales and marketing expenses, which could negatively impact our sales, profitability and market share.
Privacy and data security laws and regulations could require us to make changes to our business, impose additional costs on us and
reduce the demand for our software solutions.
Our business model contemplates that we will store, process and transmit both public
media and our clients private media. Our customers may store and/or transmit a significant amount of personal or identifying information through our platform. Privacy and data security have become significant issues in the United States and in
other jurisdictions where we may offer our software solutions. The regulatory framework relating to privacy and data security issues worldwide is evolving rapidly and is likely to remain uncertain for the foreseeable future. Federal, state and
foreign government bodies and agencies have in the past adopted, or may in the future adopt, laws and regulations regarding the collection, use, processing, storage and disclosure of personal or identifying information obtained from customers and
other individuals. In addition to government regulation, privacy advocates and industry groups may propose various self-regulatory standards that may legally or contractually apply to our business. Because the interpretation and application of many
privacy and data security laws, regulations and applicable industry standards are uncertain, it is possible that these laws, regulations and standards may
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be interpreted and applied in a manner inconsistent with our existing privacy and data management practices. As we expand into new jurisdictions or verticals, we will need to understand and
comply with various new requirements applicable in those jurisdictions or verticals.
To the extent applicable to our business or the
businesses of our customers, these laws, regulations and industry standards could have negative effects on our business, including by increasing our costs and operating expenses, and delaying or impeding our deployment of new core functionality and
products. Compliance with these laws, regulations and industry standards requires significant management time and attention, and failure to comply could result in negative publicity, subject us to fines or penalties or result in demands that we
modify or cease existing business practices. In addition, the costs of compliance with, and other burdens imposed by, such laws, regulations and industry standards may adversely affect our customers ability or desire to collect, use, process
and store personal information using our software solutions, which could reduce overall demand for them. Even the perception of privacy and data security concerns, whether or not valid, may inhibit market acceptance of our software solutions in
certain verticals. Furthermore, privacy and data security concerns may cause our customers clients, vendors, employees and other industry participants to resist providing the personal information necessary to allow our customers to use our
applications effectively. Any of these outcomes could adversely affect our business and operating results.
Failure to manage our
growth effectively could increase our expenses, decrease our revenue and prevent us from implementing our business strategy.
We
expect that our ability to achieve profitability will require substantial growth in our business, which will put a strain on our management and financial resources. To manage this and our anticipated future growth effectively, we must continue to
maintain and enhance our platform and information technology infrastructure, as well as our financial and accounting systems and controls. We also must attract, train and retain a significant number of qualified software developers and engineers,
technical and management personnel, sales and marketing personnel, customer support personnel and professional services personnel. Failure to effectively manage our rapid growth could lead us to over-invest or under-invest in development and
operations, result in weaknesses in our platform, systems or controls, give rise to operational mistakes, losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our
growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. If our management is unable to effectively manage our growth, our expenses might
increase more than expected, our revenue could decline or grow more slowly than expected, and we might be unable to implement our business strategy. The quality of our products and services might suffer, which could negatively affect our reputation
and harm our ability to retain and attract customers.
We intend to pursue the acquisition of other companies, businesses or
technologies, which could be expensive, divert our managements attention and/or fail to achieve the expected benefits.
As
part of our growth strategy, we intend to acquire businesses, services, technologies or intellectual property rights that we believe could complement, expand or enhance the features and functionality of our platform and our technical capabilities,
broaden our service offerings or offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions,
whether or not such acquisitions are consummated. Acquisitions also could result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results and financial condition. In addition, we may
experience difficulties in integrating the acquired personnel, operations and/or technologies successfully or effectively managing the combined business following the acquisition. We also may not achieve the anticipated benefits from the acquired
business and may incur unanticipated costs and liabilities in connection with any such acquisitions. If any of these results occurs, our business and financial result could be adversely affected.
Any failure to offer high-quality customer support may adversely affect our relationships with our customers.
Our ability to retain existing customers and attract new customers depends in part on our ability to maintain a consistently high level of
customer service and technical support. Our customers depend on our service support team to assist them in utilizing our platform effectively and to help them to resolve issues quickly and to provide ongoing support. If we are unable to hire and
train sufficient support resources or are otherwise unsuccessful in assisting our customers effectively, it could adversely affect our ability to retain existing customers and could prevent prospective customers from adopting our platform. We may be
unable to respond quickly enough to accommodate short-term increases in demand for customer support. We also may be unable to modify the nature, scope and delivery of our customer support to compete with changes in the support services provided by
our competitors. Increased demand for customer support, without corresponding revenue,
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could increase our costs and adversely affect our business, results of operations and financial condition. Our sales are highly dependent on our business reputation and on positive
recommendations from customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality customer support, could adversely affect our reputation, business, results of operations and financial
condition.
We plan to expand our international operations, which exposes us to significant risks.
As part of our growth strategy, we recently opened an office in the United Kingdom, and are also planning to expand in other countries to help
us increase our revenue from customers outside of the United States. We expect, in the future, to open additional foreign offices and hire employees to work at these offices in order to reach new customers and gain access to additional technical
talent. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks in addition to those we already face in the United States. Because of our limited
experience with international operations as well as developing and managing sales in international markets, our international expansion efforts may not be successful.
In addition, we will face risks in doing business internationally that could adversely affect our business, including, but not limited to:
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the difficulty of managing and staffing international operations and the increased operating, travel, infrastructure and legal compliance costs associated with numerous international locations;
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our ability to effectively price our products in competitive international markets;
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the need to adapt and localize our products for specific countries;
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the need to offer customer support in various languages;
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difficulties in understanding and complying with U.S. laws, regulations and customs relating to U.S. companies operating in foreign jurisdictions;
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difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions, particularly in the areas of data privacy and personal privacy;
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difficulties with differing technical and environmental standards, data privacy and telecommunications regulations and certification requirements outside the United States, which could prevent customers from deploying
our products or limit their usage;
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more limited protection for intellectual property rights in some countries; and
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political or social unrest or economic instability in a specific country or region in which we operate.
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Our failure to manage any of these risks successfully could harm our international operations, and adversely affect our business, results of
operations and financial condition.
We may be sued by third parties for alleged infringement of their proprietary rights, which
could adversely affect our business, results of operations and financial condition.
There has been considerable patent and other
intellectual property development activity in the AI industry, which has resulted in litigation based on allegations of infringement or other violations of intellectual property rights. Our future success depends, in part, on not infringing the
intellectual property rights of others. In the future, we may receive claims from third parties, including our competitors, alleging that our platform and underlying technology infringe or violate such third partys intellectual property
rights, and we may be found to be infringing upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any such claims or litigation could cause us to incur significant expenses
and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering some portion of our platform, or require that we comply with other unfavorable terms. We may also be
obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses or modify our platform, which could further exhaust our resources. Patent infringement, trademark infringement, trade secret
misappropriation and other intellectual property claims and proceedings brought against us, whether successful or not, could harm our brand, business, results of operations and financial condition. Litigation is inherently uncertain, and any
judgment or injunctive relief entered against us or any adverse settlement could negatively affect our business, results of operations and financial condition. In addition, litigation can involve significant management time and attention and be
expensive, regardless of the outcome. During the course of litigation, there may be announcements of the results of hearings and motions and other interim developments related to the litigation. If securities analysts or investors regard these
announcements as negative, the trading price of our common stock may decline.
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We could incur substantial costs in protecting or defending our intellectual property
rights, and any failure to protect our intellectual property could adversely affect our business, results of operations and financial condition.
Our success depends, in part, on our ability to protect our brand and the proprietary methods and technologies that we develop under patent and
other intellectual property laws of the United States and foreign jurisdictions so that we can prevent others from using our inventions and proprietary information. As of September 30, 2017, in the United States, we had nine issued patents,
which expire between 2028 and 2031, 29 patent applications pending for examination, and 20 patent applications pending for examination in foreign jurisdictions. We may not be issued any additional patents and any patents that have been issued or
that may be issued in the future may not provide significant protection for our intellectual property. In addition, as of September 30, 2017, we had five registered trademarks in the United States, and we have filed applications to register
several additional marks. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology and our business, results of operations and financial condition may be adversely affected. The
particular forms of intellectual property protection that we seek, or our business decisions about when to file patent applications and trademark applications, may not be adequate to protect our business. We could be required to spend significant
resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights, determine the validity and scope of our proprietary rights or those of others, or defend
against claims of infringement or invalidity. Such litigation could be costly, time-consuming and distracting to management, result in a diversion of significant resources, lead to the narrowing or invalidation of portions of our intellectual
property and have an adverse effect on our business, results of operations and financial condition. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and
enforceability of our intellectual property rights or alleging that we infringe the counterclaimants own intellectual property. Any of our patents, copyrights, trademarks or other intellectual property rights could be challenged by others or
invalidated through administrative process or litigation.
We also rely, in part, on confidentiality agreements with our business
partners, employees, consultants, advisors, customers and others in our efforts to protect our proprietary technology, processes and methods. These agreements may not effectively prevent disclosure of our confidential information, and it may be
possible for unauthorized parties to copy our software or other proprietary technology or information, or to develop similar software independently without our having an adequate remedy for unauthorized use or disclosure of our confidential
information. In addition, others may independently discover our trade secrets and proprietary information, and in these cases we would not be able to assert any trade secret rights against those parties. Costly and time-consuming litigation could be
necessary to enforce and determine the scope of our proprietary rights, and the failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
In addition, the laws of some countries do not protect intellectual property and other proprietary rights to the same extent as the laws of
the United States. To the extent we expand our international activities, our exposure to unauthorized copying, transfer and use of our proprietary technology or information may increase.
Our means of protecting our intellectual property and proprietary rights may not be adequate or our competitors could independently develop
similar technology. If we fail to meaningfully protect our intellectual property and proprietary rights, our business, results of operations and financial condition could be adversely affected.
We depend on our executive officers and other key employees, and the loss of one or more of these employees or an inability to attract
and retain highly skilled employees could adversely affect our business.
Our success depends largely upon the continued services
of our Chief Executive Officer, Chad Steelberg, our President, Ryan Steelberg, and our other executive officers. We rely on our leadership team in the areas of strategy and implementation, research and development, operations, security, marketing,
sales, support and general and administrative functions. We do not currently have any employment agreements with our executive officers that require them to continue to work for us for any specified period, and, therefore, they could terminate their
employment with us at any time. The loss of Chad Steelberg or Ryan Steelberg, or one or more of the members of our management team, could adversely impact our business and operations and disrupt our relationships with our key customers.
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If we are unable to hire, retain and motivate qualified personnel, our business will
suffer.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. We believe
that there is, and will continue to be, intense competition for highly skilled management, engineering, data science, sales and other personnel with experience in our industry. We must provide competitive compensation packages and a high-quality
work environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the
development, marketing and sale of our products, which could adversely affect our business, results of operations and financial condition. To the extent we hire personnel from competitors, we also may be subject to allegations that they have been
improperly solicited or that they have divulged proprietary or other confidential information.
Volatility in, or lack of performance of,
our stock price may also affect our ability to attract and retain key personnel. Many of our key personnel are, or will soon be, vested in a substantial number of shares of common stock or stock options. Employees may be more likely to terminate
their employment with us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or, conversely, if
the exercise prices of the options that they hold are significantly above the trading price of our common stock. If we are unable to retain our employees, our business, results of operations and financial condition could be adversely affected.
We expect to require additional capital to support our business, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business and may require additional funds. In particular, we expect to
seek additional funds to develop new products and enhance our platform, expand our operations, including our sales and marketing organizations and our presence outside of the United States, improve our infrastructure or acquire complementary
businesses, technologies, services, products and other assets. Accordingly, we expect to engage in equity and/or debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt
securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing that we may secure in the
future could involve debt service obligations and restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue
business opportunities. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to
support our business growth, scale our infrastructure, develop product enhancements and to respond to business challenges could be significantly impaired, and our business, results of operations and financial condition may be adversely affected.
Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand
for our products.
The future success of our business depends upon the continued use of the Internet as a primary medium for
commerce, communications and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes
in these laws or regulations could require us to modify our products and platform in order to comply with these changes. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees or other charges
for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based products and services
such as our platform. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security,
reliability, cost, ease-of-use, accessibility and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by viruses, worms and similar malicious programs. If the
use of the Internet is reduced as a result of these or other issues, then demand for our products could decline, which could adversely affect our business, results of operations and financial condition.
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We have a limited operating history, which makes it difficult to evaluate our current
business and future prospects.
We were founded in 2014 and launched our platform in April 2015. As a result of our limited
operating history, our ability to forecast our future results of operations is limited and subject to a number of uncertainties, including our ability to plan for future growth. We have encountered and will encounter risks and uncertainties
frequently experienced by growing companies in rapidly changing industries, such as:
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market acceptance of our platform and new products;
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reliability and scalability of our platform and services;
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adding new customers and new vertical markets;
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retention of customers;
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the successful expansion of our business;
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our ability to control costs, particularly our product development and sales and marketing expenses;
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network outages or security breaches and any associated expenses;
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executing acquisitions and integrating acquired businesses, technologies, services, products and other assets; and
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general economic and political conditions.
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If we do not address these risks successfully, our
business, results of operations and financial condition may be adversely affected.
We have had a history of losses and we may be
unable to achieve or sustain profitability.
We experienced net losses of $46.8 million in the first nine months of 2017 and
$27.0 million and $6.2 million in fiscal years 2016 and 2015, respectively. As of September 30, 2017 and December 31, 2016, we had an accumulated deficit of approximately $96.5 million and $45.2 million, respectively.
We may not achieve profitability in the near future or at all. We expect to continue to expend substantial financial and other resources on, among other things:
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investments to expand and enhance our platform and technology infrastructure, make improvements to the scalability, availability and security of our platform, and develop new products;
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sales and marketing, including expanding our direct sales organization and marketing programs, and expanding our programs directed at increasing our brand awareness among current and new customers;
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hiring additional employees;
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expansion of our operations and infrastructure, both domestically and internationally; and
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general administration, including legal, accounting and other expenses related to being a public company.
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These investments may not result in increased revenue or growth of our business. We may not be able to generate net revenues sufficient to
offset our expected cost increases and planned investments in our business and platform. As a result, we may incur significant losses for the foreseeable future, and may not be able to achieve and sustain profitability. If we fail to achieve and
sustain profitability, then we may not be able to achieve our business plan, fund our business or continue as a going concern.
Our
business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as power disruptions, computer viruses, data security breaches or terrorism.
Our corporate headquarters are located in Southern California, a region known for seismic activity. A significant natural disaster, such as an
earthquake, fire or a flood, occurring at our headquarters, at one of our other facilities or where a business partner is located could adversely affect our business, results of operations and financial condition. Further, if a natural disaster or
man-made problem were to affect Iron.io and/or AWS, our network service providers or Internet service providers, this could adversely affect the ability of our customers to use our products and platform. In addition, natural disasters and acts of
terrorism could cause disruptions in our business, or the businesses of our customers or service providers. We also rely on our network and third-party infrastructure and enterprise applications and internal technology systems for our engineering,
sales and marketing and operations activities. Although we maintain incident management and disaster response plans, in the event of a major disruption caused by a natural disaster or man-made problem, we may be
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unable to continue our operations and may endure system interruptions, reputational harm, delays in our development activities, lengthy interruptions in service, breaches of data security and
loss of critical data, any of which could adversely affect our business, results of operations and financial condition.
Our
officers, directors and principal stockholders have significant voting power and control over our company and may take actions that could conflict with the interests of our other stockholders.
Our officers, directors and principal stockholders that hold more than 5% of our common stock, collectively control approximately 76% of our
voting securities. If any of our officers, directors and principal stockholders purchases additional shares of common stock, the aggregate percentage of their equity ownership may increase further. As a result, these stockholders, if they act
together, will be able to control the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may
have the effect of delaying or preventing a change of control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of our other stockholders. Due to such concentration of
ownership, we may take actions with respect to our business that may conflict with the desire of other stockholders.
Furthermore,
pursuant to a voting agreement (Voting Agreement), Acacia and entities affiliated with our executive officers and directors (the Holders) have the right to designate all nine directors on our board of directors (the
Board). In addition, pursuant to the Voting Agreement, each of Acacia and the Holders has the right to appoint three designees to attend and participate in the meetings of our Board in a non-voting capacity. In addition, so long as our
Board includes three directors designated by Acacia, unless approved by a majority of our Board, including at least one director designated by Acacia, we cannot take any corporate action, and the Holders cannot take any stockholder action, to effect
any (i) merger, consolidation or other business combination involving our company, (ii) sale, transfer or other disposition of any capital stock or assets of our company, or (iii) acquisition, license out of the ordinary course of
business, or merger or other business combination with a subsidiary of our company, in each case of (i) through (iii), in which the transaction value exceeds $50 million. As a result of these arrangements, Acacia and the Holders will be able to
exercise significant control over our business operations and on all matters requiring stockholder approval. This voting control may also discourage transactions involving a change-of-control of our company, including transactions in which our
stockholders might otherwise receive a premium for their shares.
We are a controlled company within the meaning of the
NASDAQ Marketplace Rules and, as a result, are exempt from certain corporate governance requirements. Therefore, our stockholders may not have the same protections afforded to stockholders of companies that are subject to such requirements.
Acacia and the Holders collectively beneficially own more than 50% of our voting power. Pursuant to the Voting Agreement, Acacia
and the Holders (acting as a group) can designate and elect all nine directors on our Board. As a result, we are considered a controlled company within the meaning of the corporate governance standards of NASDAQ. Under these rules, a listed company
of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain of NASDAQs corporate governance requirements, including, the
requirements that, among others:
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a majority of our Board consist of independent directors as defined by the applicable rules and regulations of NASDAQ;
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the compensation of our executive officers be determined, or recommended to our Board for determination, by independent directors constituting a majority of the independent directors of our Board in a vote in which only
independent directors participate or by a Compensation Committee comprised solely of independent directors; and
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director nominees be selected, or recommended to our Board for selection, by independent directors constituting a majority of the independent directors of our Board in a vote in which only independent directors
participate or by a nomination committee comprised solely of independent directors.
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At this time, we are unable to comply
with certain of NASDAQs corporate governance requirements with respect to our Board, as a majority of our Board does not consist of independent directors, and as such, are electing to avail ourselves to the exemptions afforded to controlled
companies. We intend that our Compensation Committee and our Corporate Governance and Nominating Committee will continue to be comprised solely of independent directors. We may not be able to comply with all of NASDAQs other corporate
governance requirements. As a controlled company, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of NASDAQs corporate governance requirements.
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If Acacia or the Holders sell a controlling interest in our company to a third-party in a
private transaction, our other stockholders may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third-party.
Acacia and the Holders will continue to control a majority of the voting power of our outstanding common stock. In the future, Acacia and the
Holders will have the ability to sell some or all of their shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change-of-control of our company without the approval of other stockholders
and without providing for a purchase of their shares. The ability of Acacia and the Holders to privately sell their shares of our common stock, with no requirement for a concurrent offer to be made to acquire the shares of other stockholders, could
prevent other stockholders from realizing any change-of-control premium of their shares of our common stock that may otherwise accrue to Acacia and the Holders on their private sale of our common stock. Additionally, if either Acacia or the Holders
privately sell their equity interest in our company, we may become subject to the control of a presently unknown third-party. Such third-party may have conflicts of interest with those of other stockholders. In addition, if Acacia or the Holders
sell a controlling interest in our company to a third-party, any future indebtedness we have may be subject to acceleration, and our other commercial agreements and relationships could be impacted, all of which may adversely affect our ability to
run our business as described herein and may have a material adverse effect on our operating results and financial condition.
Our
common stock price has been extremely volatile and could continue to fluctuate widely in price, which could result in substantial losses for investors.
The market price of our common stock has been, and we expect will continue to be, subject to extreme fluctuations over short periods of time.
For example, the closing price of our common stock since May 12, 2017, has ranged from a low of $7.76 to a high of $65.91. These fluctuations may be due to various factors, many of which are beyond our control, including:
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the volume and timing of our revenues and quarterly variations in our results of operations or those of others in our industry;
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announcement of new contracts with customers or termination of contracts with customers;
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the introduction of new services, content or features by us or others in our industry;
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disputes or other developments with respect to our or others intellectual property rights;
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media exposure of our products or of those of others in our industry;
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changes in governmental regulations;
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additions or departures of key personnel;
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sales of our common stock;
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speculative trading practices of certain market participants;
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changes in earnings estimates or recommendations by securities analysts; and
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general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.
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In recent years, the stock markets generally have experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of the listed companies. Broad market and industry factors may significantly affect the market price of our common stock, regardless of our actual operating performance. These fluctuations have been, and
may continue to be, even more pronounced in the trading market for our common stock shortly following our IPO.
In addition, in the past,
class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or
ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert managements attention and resources from our business.
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If securities or industry analysts do not publish or cease publishing research or reports
about us, our business, our market or our competitors, or if such analysts adversely change their recommendations regarding our common stock, the market price and trading volume of our common stock could decline.
The trading market for our common stock will be influenced by the research and reports that securities or industry analysts may publish about
us, our business, our market or our competitors. If any of the analysts who may cover us adversely change their recommendations regarding our common stock or provide more favorable recommendations about our competitors, the market price of our
common stock may decline. If any of the analysts who cover us were to cease coverage of us or fail to publish reports on us regularly, visibility of our company in the financial markets could decrease, which in turn could cause the market price or
trading volume of our common stock to decline. These concerns may be exacerbated by the relatively small size of our public float, which limits the trading volume of our common stock.
We have incurred and will continue to incur increased costs as a result of becoming a public company, including costs related to
compliance with the Sarbanes-Oxley Act and other regulations.
As a public company, we have incurred and will continue to incur
significant legal, accounting, insurance and other expenses that we had not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with compliance
with the Sarbanes-Oxley Act and related rules implemented by the SEC. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to continue to
increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and
other regulatory action and potentially civil litigation.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the
effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our
internal control over financial reporting in the later of our second annual report on Form 10-K or the first annual report on Form 10-K following the date on which we are no longer an emerging growth company. Our compliance with Section 404 of
the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies
in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which
would require additional financial and management resources.
Our ability to successfully implement our business plan and comply with
Section 404 requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our
business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over
financial reporting is effective and/or to obtain an unqualified report on internal control our financial reporting from our auditors as may be required under Section 404 of the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on
trading prices for our common stock, and could adversely affect our ability to access the capital markets.
We had identified a
material weakness in our internal control over financial reporting for the years ended December 31, 2016 and 2015, and we may not be able to successfully maintain effective internal control over financial reporting.
We identified control deficiencies in our financial reporting process that constituted a material weakness for the years ended
December 31, 2016 and 2015. The material weakness related to the lack of competent accounting personnel with the appropriate level of knowledge, experience and training in generally accepted accounting principles and SEC reporting requirements
with respect to equity transactions, resulting in several adjustments to the interim financial statements and also a restatement of our previously issued financial statements as of and for the years ended December 31, 2016 and 2015.
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We have implemented certain measures to remediate this material weakness. For example, we hired a
new Chief Financial Officer in October 2016, a new Corporate Controller in March 2017 and a new Senior Director of Financial Reporting in June 2017. We have also engaged outside consultants with requisite experience to assist us in the financial
reporting process and utilized interim professionals to strengthen our accounting and financial reporting team. We believe that the actions we have taken remediated the material weakness.
However, we may suffer from other material weaknesses in the future. If we fail to maintain effective internal control over financial
reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose
confidence in our financial statements, limit our ability to raise capital and have a negative effect on the trading price of our common stock. Additionally, failure to maintain effective internal control over financial reporting may also negatively
impact our operating results and financial condition, impair our ability to timely file our periodic and other reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in
future periods relating to the implementation of remedial measures.
Substantial future sales of our common stock, or the perception
in the public markets that these sales may occur, may depress our stock price.
Our common stock is traded on NASDAQ and, despite
certain increases of trading volume from time to time, there have been periods when our common stock could be considered thinly-traded, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given
time may be relatively small. Equity or equity-related financing transactions that result in a large amount of newly issued shares that become readily tradable, or other events that cause current stockholders to sell shares, could place downward
pressure on the trading price of our stock. In addition, the lack of a robust resale market may require a stockholder who desires to sell a large number of shares of common stock to sell the shares in increments over time to mitigate any adverse
impact of the sales on the market price of our stock.
If our stockholders sell, or the market perceives that our stockholders intend to
sell (for various reasons, including the ending of restrictions on resale), substantial amounts of our common stock in the public market, including shares issued upon the exercise of any outstanding options or warrants, the market price of our
common stock could fall. Sales of a substantial number of shares of our common stock may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. In the event
that the price of our stock falls, we may become involved in securities class action litigation that could divert managements attention and harm our business.
Certain holders of our common stock are subject to the lock-up restrictions relating to our IPO, which expire after the close of trading on
November 7, 2017. As these lockup restrictions expire, the market price of our common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them.
Further, we have registered all common stock issuable under our 2014 Plan and all common stock that we may issue under our 2017 Plan and our
ESPP. As a result, these shares can be freely sold in the public market once vested and exercised. If a large number of these shares are sold in the public market, the sales could reduce our trading price.
In the future, we may also issue our securities if we need to raise additional capital or in connection with acquisitions. The number of
shares of our common stock issued in connection with a financing or acquisition could constitute a material portion of our then-outstanding shares of our common stock.
We are an emerging growth company and a smaller reporting company under the U.S. federal securities laws, and
the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies could make our common stock less attractive to investors.
We are an emerging growth company and a smaller reporting company under U.S. federal securities laws. For as long as we
continue to be an emerging growth company and/or a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies or smaller
reporting companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
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compensation in our periodic reports and proxy statements and (to the extent we continue to qualify as an emerging growth company) exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status
earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 date before that time, in which case, we would no longer be an emerging growth company as of the following
December 31. Even if we do not qualify as an emerging growth company, we may still qualify as a smaller reporting company, which would allow us to take advantage of many of the same exemptions from disclosure requirements that are applicable to
emerging growth companies. Investors may not find our common stock attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common
stock and our stock price may be more volatile.
We do not currently expect to pay any cash dividends.
The continued operation and expansion of our business will require substantial funding. Accordingly, we do not currently expect to pay any cash
dividends on shares of our common stock. Any determination to pay dividends in the future will be at the discretion of our Board and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by
applicable law and other factors our Board deems relevant. Additionally, we expect these restrictions to continue in the future. Accordingly, realization of a gain on an investment in our common stock will depend on the appreciation of the price of
our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
Our anti-takeover provisions could prevent or delay a change in control of our company, even if such change in control would be
beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and amended and restated
bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our stockholders. These include:
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authorizing the issuance of blank check preferred stock that could be issued by our Board to increase the number of outstanding shares and thwart a takeover attempt;
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a provision for a classified board of directors so that not all members of our Board are elected at one time;
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the removal of directors only for cause;
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no provision for the use of cumulative voting for the election of directors;
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limiting the ability of stockholders to call special meetings;
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requiring all stockholder actions to be taken at a meeting of our stockholders (i.e. no provision for stockholder action by written consent); and
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establishing advance notice requirements for nominations for election to our Board or for proposing matters that can be acted upon by stockholders at stockholder meetings.
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In addition, the Delaware General Corporation Law prohibits us, except under specified circumstances, from engaging in any mergers,
significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and
exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other
employees.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of
an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for:
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any derivative action or proceeding brought on our behalf;
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any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or to our stockholders;
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any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws; or
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any action asserting a claim against us governed by the internal affairs doctrine.
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Any person
or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to this provision of our amended and restated certificate of incorporation. This choice-of-forum provision may
limit a stockholders ability to bring a claim in a judicial forum that it finds favorable or convenient for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors,
officers and other employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or
proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
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