TELARIA, INC. You should read the following discussion of our financial condition and results of operations in conjunction with the information set forth in Part II, Item 6. "Selected Consolidated Financial Data" and the consolidated financial statements and the related notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in "Special Note Regarding Forward-Looking Statements" and "Risk Factors."Telaria, Inc. provides a fully programmatic software platform for premium publishers to manage and monetize their video advertising. The Company's platform is built specifically for digital video and to support the unique requirements of connected TV, mobile and over-the-top content. The Company provides publishers with real-time analytics, data and decisioning tools to control their video advertising business and offer a holistic monetization solution to optimize yield across a publisher's entire supply of digital video inventory. Our technology enables publishers to manage and deliver their video inventory through a single platform, allowing them to get a complete picture of their sales efforts and maximize revenue from ad placements across channels. Our platform is connected with leading third-party demand-side platforms, or DSPs, through server-to-server integrations, creating a robust programmatic marketplace where publishers can seamlessly transact with advertisers. These programmatic transactions fully automate the sales process and enable publishers to increase the value of their advertising inventory by using data to better segment and match their supply with demand. We provide a full suite of tools for publishers to control their video advertising business and protect the consumer viewing experience. These controls are particularly important for CTV publishers who need to ensure a TV-like viewing and advertising experience for consumers. For instance, our ad-pod feature provides long-form content publishers with a tool analogous to commercial breaks in traditional linear television so that they can request and manage several ads at once from different demand sources. Using this tool, publishers can establish business rules such as competitive separation of advertisers to ensure that competing brand ads do not appear during the same commercial break, audio normalization to control for the volume of an ad relative to content, and frequency capping to avoid exposing viewers to repetitive ad placements. Publishers on our platform receive up-to-the-second reporting and diagnostics so that they can effectively monitor buying patterns and make real-time changes to take advantage of market dynamics. Our inventory intelligence dashboard provides publishers with extensive analytics that leverage billions of historical data points to drive their monetization strategy, as well as access to first and third-party data that offers valuable insights into their video advertising such as performance, viewability and audience data, which can be used to segment inventory and create incremental value. We have built long-standing relationships with premium video publishers, in particular in the CTV space, and we believe the scale and quality of our client base makes us an important partner to video ad buyers. Buyers on our platform include some of the largest brand advertisers in the world and our platform is integrated with the leading video volume buyers in digital advertising. We provide our platform internationally inEurope ,Canada ,Latin America , and theAsia Pacific regions. We generate revenue when an advertising impression is sold on our platform based on a simple and transparent fee structure established with our publisher partners and do not collect any fees directly from DSPs integrated with our platform. OnDecember 19, 2019 , we announced a stock-for-stock merger with The Rubicon Project, Inc., or Rubicon Project which will create a combined company offering a single partner for transacting CTV, desktop display, video, audio, and mobile inventory across all geographies and auction types. We believe this combination will create the world's largest independent sell-side advertising platform with scale, capabilities, and solutions exceeding those offered by competitors. Together, the combined company will be an essential omni-channel partner for buyers to reach target audiences, optimizing the supply path with industry-leading transparency, robust support for identity solutions and brand-safe premium inventory. Upon completion of the merger, which is expected to close in earlyApril 2020 , each share of our common stock issued and outstanding as of the effective time of the merger will be converted into the right to receive 1.082 shares of Rubicon Project common stock. Based on the number of shares ofTelaria and Rubicon Project common stock outstanding and reserved for 42 -------------------------------------------------------------------------------- Table of Contents issuance as ofFebruary 11, 2020 , we estimate that former holders of our common stock will own approximately 47.6% and pre-merger holders of Rubicon Project common stock will own approximately 52.4% of the common stock of the combined company on a fully diluted basis. For the year endedDecember 31, 2019 , our revenue increased to$68.0 million , compared to$55.2 million for the year endedDecember 31, 2018 , an increase of 23.3%. Over the same period, our gross margin decreased from 87.6% to 80.0%. Our loss from continuing operations, net of income taxes improved from a loss of$9.2 million for the year endedDecember 31, 2018 to a loss of$9.0 million for the year endedDecember 31, 2019 , and our Adjusted EBITDA (refer to "Key Metrics-Adjusted EBITDA") improved from a loss of$0.4 million to a gain of$1.0 million for the same respective periods. Key Metrics We monitor the key metrics set forth in the table below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Revenue, gross margin and net loss from continuing operations, net of income taxes are discussed under the headings "Components of our Results of Operations." Adjusted EBITDA is discussed immediately following the table below. Years Ended December 31, 2019 2018 2017 (dollars in thousands) Revenue$ 68,038 $ 55,165 $ 43,799 Gross margin 80.0 % 87.6 % 92.1 % Net loss from continuing operations, net of income taxes (9,007) (9,230) (19,700) Adjusted EBITDA$ 1,003 $ (360) $ (6,517) Adjusted EBITDA Adjusted EBITDA represents our loss from continuing operations, net of income taxes, before depreciation and amortization expense, total interest and other income (expense), net and provision for income taxes, and as adjusted to eliminate the impact of non-cash stock-based compensation expense, expenses for prior corporate facilities required to be recorded as operating expenses as a result of the adoption of certain accounting standards, acquisition related costs, transaction costs, mark-to-market expense, executive severance, retention and recruiting costs, disposition costs, expenses for transitional services, litigation costs and other adjustments. Adjusted EBITDA is a key measure used by management to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses we do not consider to be indicative of our core operating performance in calculating adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis. EBITDA is not a measure calculated in accordance withU.S. GAAP. See footnote 4 to the table in Part II, Item 6. "Selected Consolidated Financial Data" in this Annual Report for a discussion of the limitations of adjusted EBITDA and a reconciliation of adjusted EBITDA to loss from continuing operations, net of income taxes, the most comparableU.S. GAAP measurement, for the years endedDecember 31, 2019 , 2018 and 2017. Components of Operating Results We operate in one segment, online video advertising services. The key elements of our operating results include: Revenue We primarily generate revenue on a transactional basis where we are paid by a publisher each time an advertising impression is monetized on our platform based on a simple and transparent fee structure that we establish with our publisher partners. Typically, this fee is structured as a percentage of the price that the publisher receives for its advertising inventory. Our revenue is therefore influenced by the number of ad impressions we sell through our platform, the average CPM (price per 1,000 impressions) for inventory sold, and the percentage fee that we retain, or take rate. We believe that contributions to revenue from CTV will continue to grow as a percentage of our total revenue. In general, we expect this shift to result in an increase in the average CPM for inventory monetized through our platform and a decrease in our average take rate. As our business continues to mature, we may adjust our pricing model and add additional revenue streams to account for new products or service offerings or changes in client preferences and demands. For instance, we may charge data licensing or professional service fees or strategically pursue a license or subscription-based pricing model with certain publishers in order to create a potentially deeper and stickier relationship. 43 -------------------------------------------------------------------------------- Table of Contents For substantially all transactions executed through our platform, we act as an agent on behalf of the publisher that is monetizing its inventory, and revenue is recognized net of any inventory costs that we remit to publishers. However, for certain transactions, we report revenue on a gross basis, based primarily on its determination that the Company acts as the primary obligor in the delivery of advertising campaigns for its buyer clients with respect to such transactions. Our revenue recognition policies are discussed in more detail in the section below titled "-Critical Accounting Policies and Estimates." Cost of Revenue, Gross Profit and Gross Margin Our cost of revenue primarily consists of third party hosting fees, licensing fees, data costs, and, for revenue recognized on a gross basis, cost of advertising inventory. Gross margin is our gross profit expressed as a percentage of our total revenue. Our gross margin is impacted by the relative contribution to our revenue from transactions that we record on a gross basis, which are typically recognized at a lower gross margin due to the fact that the cost of revenue for such transactions includes the cost of advertising inventory. InJune 2018 , we acquired the business of SlimCut, which included certain revenue streams that are recorded on a gross basis. Prior to the acquisition, we recorded all of our revenue on a net basis. Accordingly, following the acquisition, the relative contribution to revenue from transactions booked on a gross basis increased compared to prior periods resulting in a negative impact on our gross margin.
Operating Expenses
Operating expenses consist of technology and development, sales and marketing, general and administrative, depreciation and amortization and mark-to-market expenses. Salaries, incentive compensation, stock-based compensation and other personnel-related costs are the most significant components of each of technology and development, sales and marketing and general and administrative expenses. We include stock-based compensation expense in connection with the grant of stock option awards or restricted stock unit awards in the applicable operating expense category based on the respective equity award recipient's function. Our employee head count increased from 167 employees atDecember 31, 2018 , to 179 employees atDecember 31, 2019 . In the event the pending merger with Rubicon Project were not completed, we expect our operating expenses as a stand-alone entity to continue to increase in future periods to support our continued growth, in particular with respect to technology and development expense and sales and market expense. Technology and Development Expense. Technology and development expense primarily consists of salaries, incentive compensation, stock-based compensation and other personnel-related costs for product development and engineering personnel. Additional expenses in this category include other related overhead. Due to the rapid development and changes in our business, we have expensed all technology and development expenses in the same period that the costs were incurred. The number of employees in technology and development functions increased from 34 employees atDecember 31, 2018 to 35 employees atDecember 31, 2019 . Sales and Marketing Expense. Sales and marketing expense primarily consists of salaries, incentive compensation, stock-based compensation and other personnel-related costs for our marketing and sales and sales support employees. Additional expenses in this category include marketing programs, travel and other related overhead. The number of employees in sales and marketing functions increased from 103 employees atDecember 31, 2018 to 107 employees atDecember 31, 2019 . General and Administrative Expense. General and administrative expense primarily consists of salaries, incentive compensation, stock-based compensation and other personnel-related costs for business operations, administration, finance and accounting, legal, information systems and human resources employees. Included in general and administrative expenses are consulting and professional fees, including legal, accounting and investor relations fees, insurance, and costs associated with Sarbanes-Oxley Act compliance and other public company corporate expenses, costs associated with the pending merger with Rubicon Project, travel and other related overhead. The number of employees in general and administrative functions increased from 30 employees atDecember 31, 2018 to 37 employees atDecember 31, 2019 . Restructuring Costs. Restructuring costs primarily consists of costs associated with the relocation of office space as a result of the sale of our buyer platform inAugust 2017 (refer to notes 17 and 3 in notes to consolidated financial statements. Depreciation and Amortization Expense. Depreciation and amortization expense primarily consists of depreciation expense related to investments in property, equipment and software as well as the amortization of certain intangible assets. 44 -------------------------------------------------------------------------------- Table of Contents Mark-to-market. Mark-to-market expense consists primarily of the remeasurement of the estimated fair value of contingent consideration incurred in connection with our acquisition of SlimCut inJune 2018 . Interest Expense and Other Income (Expense), Net Interest and other income (expense), net consist primarily of interest income, interest expense, patent expense, sublease income and foreign exchange transaction gains and losses. Sublease expense is included in the comparative period only. In the current year sublease expense is included in operating expense in accordance with ASC Topic 842 (Leases). Interest income is derived from interest received on our cash and cash equivalents. Interest expense is primarily attributable to interest paid on taxes and fees to local jurisdictions. Sublease income and expense is attributable to subleases on our former corporate headquarters. As ofDecember 31, 2019 , we did not have any outstanding borrowings under our credit facility. Provision for Income Taxes Provision for income taxes consists of minimumU.S. federal, state and local taxes, income taxes in foreign jurisdictions in which we conduct business and deferred income taxes. Results of Operations The following table is a summary of our consolidated statement of operations data for each of the periods indicated. The period-to-period comparisons of the results are not necessarily indicative of our results for future periods. Years EndedDecember 31, 2019 2018 2017 Percentage Percentage Percentage Amount of Revenue Amount of Revenue Amount of Revenue (dollars in thousands) Revenue $ 68,038 100.0 % $ 55,165 100.0 % $ 43,799 100.0 % Cost of revenue 13,625 20.0 % 6,844 12.4 % 3,448 7.9 % Gross profit 54,413 80.0 % 48,321 87.6 % 40,351 92.1 % Operating expenses: Technology and development 11,140 16.4 % 9,925 18.0 % 8,586 19.6 % Sales and marketing 25,503 37.5 % 25,424 46.1 % 28,073 64.1 % General and administrative 29,200 42.9 % 20,187 36.6 % 20,197 46.1 % Restructing Costs - - % 149 0.3 % - - % Depreciation and amortization 1,486 2.2 % 3,705 6.7 % 4,586 10.5 % Mark-to-market - - % 57 0.1 % 148 0.3 % Total operating expenses 67,329 99.0 % 59,447 107.8 % 61,590 140.6 % Loss from continuing operations (12,916) (19.0) % (11,126) (20.2) % (21,239) (48.5) % Total interest and other income (expense), net 4,385 6.4 % 1,886 3.4 % 1,192 2.7 % Loss from continuing operations before income taxes (8,531) (12.5) % (9,240) (16.7) % (20,047) (45.8) % Provision (benefit) for income taxes 476 0.7 % (10) - % (347) (0.8) % Loss from continuing operations, net of income taxes $ (9,007) (13.2) % $ (9,230) (16.7) % $ (19,700) (45.0) %
Total income (loss) from discontinued operations, net of income taxes
- - % (136) (0.2) % 21,927 50.1 %
Net income (loss) $ (9,007) (13.2) % $ (9,366) (17.0) % $ 2,227 5.1 %
45-------------------------------------------------------------------------------- Table of Contents Comparison of Years EndedDecember 31, 2019 and 2018 Years Ended Change December 31, Increase / (Decrease) 2019 2018 Amount Percentage (dollars in thousands) Revenue$ 68,038 $ 55,165 $ 12,873 23.3 % Revenue. Our revenue during the year endedDecember 31, 2019 increased to$68.0 million from$55.2 million in the prior year period, representing a 23.3% increase year-over-year. The year-over-year increase in our revenue was primarily driven by an increase revenue attributable to CTV, which increased by nearly 100% from$14.9 million in 2018 to$29.7 million in 2019. This increase was partially offset by a decrease in desktop and mobile revenue where we saw a significant decline in revenue from our supply-side platform, partially offset by revenue attributable to our outstream solution. Years Ended Change December 31, Increase / (Decrease) 2019 2018 Amount Percentage (dollars in thousands) Cost of revenue$ 13,625 $ 6,844 $ 6,781 99.1 % Gross profit 54,413 48,320 6,093 12.6 % Gross margin 80.0 % 87.6 % Cost of Revenue, Gross Profit and Gross Margin. Our cost of revenue during the year endedDecember 31, 2019 increased to$13.6 million from$6.8 million in the prior year period. The increase in cost of revenue primarily reflects an increase in hosting fees corresponding with additional spend being transacted through our platform, as well as an increase in cost of inventory relating to transactions that we report on a gross basis from the our outstream business that was acquired inJune 2018 . Our gross profit during the year endedDecember 31, 2019 increased to$54.4 million from$48.3 million in the prior year period, reflecting an increase in our revenue of$12.9 million year-over-year, which was partially offset by a$6.8 million increase in our cost of revenue year-over-year. Our gross margin decreased to 80.0% for the year endedDecember 31, 2019 compared to 87.6% for the year endedDecember 31, 2018 . The decrease in our gross margin was driven primarily by a change in the relative contribution to revenue from transactions reported on a gross basis, as well as an increase in web hosting fees that increases the cost of revenue. Years Ended Change December 31, Increase / (Decrease) 2019 2018 Amount Percentage (dollars in thousands) Technology and development expense$ 11,140 $ 9,925 $ 1,215 12.2 % % of total revenue 16.4 % 18.0 % Technology and Development. The increase in technology and development expense in 2019 compared to 2018 was primarily attributable to a$1.4 million increase in salaries, incentive compensation, stock-based compensation and other personnel-related costs, partially offset by other miscellaneous expenses. Years Ended Change December 31, Increase / (Decrease) 2019 2018 Amount Percentage (dollars in thousands) Sales and marketing expense$ 25,503 $ 25,424 $ 79 0.3 % % of total revenue 37.5 % 46.1 % Sales and Marketing. Sales and marketing expense remained relatively flat in 2019 compared to 2018. Sales and marketing expense for 2019 reflects a$3.0 million increase in salaries, incentive compensation, stock compensation and other personnel-related costs due to an increase in headcount. This was partially offset by a$1.7 million decrease in rent expense reclassified to general and administrative expense as a result of the implementation of ASC Topic 842 (Leases) and a$1.2 million decrease in professional, marketing and research fees. 46
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Years Ended Change
December 31, Increase / (Decrease)
2019 2018 Amount Percentage
(dollars in thousands)
General and administrative expense $ 29,200 $ 20,187 $ 9,013 44.6 %
% of total revenue 42.9 % 36.6 %
General and Administrative. The increase in general and administrative expense
in 2019 compared to 2018, was primarily attributable to the adoption of ASC
Topic 842 (Leases), which resulted in $6.0 million in additional lease expense
being recorded in general and administrative expenses, an increase of $1.7
million in transaction fees due to the pending merger with the Rubicon Project,
and an increase of $1.8 million in salaries, incentive compensation, stock
compensation and other personnel-related costs due to an increase in headcount,
which were partially offset by a $0.7 million decrease in rent expenses.
Years Ended Change
December 31, Increase / (Decrease)
2019 2018 Amount Percentage
(dollars in thousands)
Depreciation and amortization expense $ 1,486 $ 3,705 $ (2,219) (59.9) %
% of total revenue 2.2 % 6.7 %
Depreciation and Amortization. The decrease in depreciation and amortization expense in 2019 compared to 2018 was primarily attributable to accelerated depreciation on leasehold improvements and furniture and fixtures that were disposed of in connection with our relocation of office space in 2018.
Years Ended Change
December 31, Increase / (Decrease)
2019 2018 Amount Percentage
(dollars in thousands)
Mark-to-market expense $ - $ 57 $ (57) (100.0) %
% of total revenue - % 0.1 %
Mark-to-market expense. Mark-to-market expense in 2018 is related to contingent
considerations associated with the acquisition of SlimCut. Refer to Note 7 -
acquisitions for additional information.
Years Ended Change
December 31, Increase / (Decrease)
2019 2018 Amount Percentage
(dollars in thousands)
Total interest and other income (expense),
net $ 4,385 $ 1,886 $ 2,499 132.5 %
% of total revenue 6.4 % 3.4 %
Total Interest and Other income (expense), Net. The increase in total interest and other income (expense), net in 2019 compared to 2018 was primarily attributable to the fact that, as a result of the adoption of ASC Topic 842 Leases, effective for 2019, certain sublease expenses which were previously recorded as total interest and other income (expense) are required to be recorded in operating leases expenses.
Years Ended Change
December 31, Increase / (Decrease)
2019 2018 Amount Percentage
(dollars in thousands)
Provision (benefit) for income taxes
4,860.0 % % of total revenue 0.7 % - %
Provision (benefit) for Income Taxes. Provision for income taxes increased compared to 2018 due to an increase in income in foreign jurisdictions with higher effective tax rates.
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Comparison of Years Ended December 31, 2018 and 2017
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
Revenue $ 55,165 43,799 $ 11,366 26.0 %
Revenue. Our revenue during the year ended December 31, 2018 increased to $55.2
million from $43.8 million in the prior year period, representing a 26.0%
increase year-over-year. The year-over-year increase in our revenue was
primarily driven by an increase in revenue attributable to CTV, which increased
by 322%, from $3.5 million in 2017 to $14.8 million in 2018. This increase was
partially offset by a decrease in desktop revenue.
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
Cost of revenue $ 6,844 $ 3,448 $ 3,396 98.5 %
Gross profit 48,320 40,351 7,969 19.7 %
Gross margin 87.6 % 92.1 %
Cost of Revenue, Gross Profit and Gross Margin. Our cost of revenue during the
year ended December 31, 2018 increased to $6.8 million from $3.4 million for the
same period in 2017. The increase in cost of revenue is attributable to an
increase in hosting fees corresponding with additional spend being transacted
through our platform, as well as an increase in cost of inventory relating to
transactions that we report on a gross basis.
Our gross profit during the year ended December 31, 2018 increased to $48.3
million from $40.4 million in the prior year period, reflecting an increase in
our revenue of $11.4 million which was partially offset by a $3.4 million
increase in our cost of revenue year-over-year.
Our gross margin decreased to 87.6% for the year ended December 31, 2018
compared to 92.1% for the year ended December 31, 2017 . The decrease in our
gross margin was largely driven by an increase in the relative contribution to
revenue from transactions reported on a gross basis.
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
Technology and development expense $ 9,925 $ 8,586 $ 1,339 15.6 %
% of total revenue 18.0 % 19.6 %
Technology and Development. The increase in technology and development expense
in 2018 compared to 2017 was primarily attributable to a $1.5 million increase
in salaries, incentive compensation, stock-based compensation and other
personnel-related costs, partially offset by a decrease of a $0.2 million in
rent expense.
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
Sales and marketing expense $ 25,424 $ 28,073 $ (2,649) (9.4) %
% of total revenue 46.1 % 64.1 %
Sales and Marketing. The decrease in sales and marketing expense in 2018
compared to 2017 was primarily attributable to a $2.4 million decrease in
salaries, incentive compensation, stock compensation and other personnel-related
costs and $0.4 million in bad debt expense, which were partially offset by a
$0.2 million increase in rent expense.
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
General and administrative expense $ 20,187 $ 20,197 $ (10) - %
% of total revenue 36.6 % 46.1 %
General and Administrative. General and administrative expense in 2018 compared to 2017 was relatively flat.
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Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
Depreciation and amortization expense $ 3,705 $ 4,586 $ (881) (19.2) %
% of total revenue 6.7 % 10.5 %
Depreciation and Amortization. The decrease in depreciation and amortization
expense in 2018 compared to 2017 was primarily attributable to accelerated
depreciation that began in 2017 on leasehold improvements and furniture and
fixtures that were disposed of in connection with our relocation of office
space.
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
Mark-to-market expense $ 57 $ 148 $ (91) (61.5) %
% of total revenue 0.1 % 4.3 %
Mark-to-Market Expense. Mark-to-market expense for 2018 is related to contingent considerations associated with the acquisition of SlimCut. Mark-to-market expense for 2017 is related to contingent consideration associated with the acquisition of TVN. Refer to Note 7.
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
Total interest and other income (expense),
net $ 1,886 $ 1,192 $ 694 (58.2) %
% of total revenue 3.4 % 3.0 %
Total Interest and Other Income (Expense), Net. The increase in total interest
and other income (expense), net in 2018 compared to 2017 was primarily
attributable to an increase of $1.0 million of interest income and $0.5 million
of income related to the license of intellectual property, partially offset by
increases of $0.4 million in net sublease expense, $0.3 million of expense
related to transitional services provided following the sale of our buyer
platform and $0.1 million in other expense.
Years Ended Change
December 31, Increase / (Decrease)
2018 2017 Amount Percentage
(dollars in thousands)
(Benefit) provision for income taxes
(97.1) % % of total revenue - % (0.8) %
(Benefit) Provision for Income Taxes. Benefit for income taxes decreased compared to 2017 due to the use of a deferred tax benefit in 2017 as a result of the sale of our buyer platform.
Income (Loss) from Discontinued Operations, Net of Income Taxes
In
For the year endedDecember 31, 2018 , loss from discontinued operations consisted of working capital adjustments reflected in loss on sale of discontinued operations net of income taxes, in the amount of$0.1 million . For the year endedDecember 31, 2017 , total income from discontinued operations consisted of operating income net of income taxes, attributable to our buyer platform of$7.3 million and gain on sale of discontinued operations, net of taxes of$14.6 million (refer to Note 3 in the consolidated financial statements). Seasonality Our revenue tends to be seasonal in nature and varies from quarter to quarter. During the first quarter, advertisers generally devote less of their budgets to ad spending and as a result we tend to generate less revenue during the first quarter of each calendar year. The fourth quarter of each calendar year tends to be our strongest revenue quarter, as advertising spend generally increases during the holiday season. In addition, we tend to see an increase in the amount of advertising through our platform in 49
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Table of Contents years in which there are impending elections for various state and national offices when political advertising revenue tends to increase, in particular during presidential election years.
Liquidity and Capital Resources
Working Capital
The following table summarizes our cash and cash equivalents, accounts
receivable and working capital for the periods indicated:
As of December 31,
2019 2018
(dollars in thousands)
Cash and cash equivalents $ 54,164 $ 47,659
Accounts receivable, net of allowance for doubtful accounts 157,317 104,387
Working capital $ 41,432 $ 42,253
Our cash and cash equivalents at December 31, 2019 were held for working capital
purposes. We do not enter into investments for trading or speculative purposes.
Our policy is to invest any cash in excess of our immediate requirements in
investments designed to preserve the principal balance and provide liquidity.
Accordingly, our cash and cash equivalents are invested primarily in demand
deposit accounts and money market funds that are currently providing only a
minimal return.
Sources of Liquidity
Our principal sources of liquidity are our cash and cash equivalents. Cash and
cash equivalents consist primarily of cash on deposit with banks and investments
in money market funds. Cash and cash equivalents were $54.2 million , and $47.7
million as of December 31, 2019 and 2018.
We are party to a loan and security agreement, or "Credit Facility", with
Silicon Valley Bank , "lender". Pursuant to the credit facility, we can incur
revolver borrowings up to the lesser of $25.0 million and a borrowing base equal
to 80.0% of eligible accounts receivable. Any outstanding principal amounts
borrowed under the credit facility must be paid at maturity. Interest accrues at
a floating rate equal to the lender's prime rate and is payable monthly. We are
charged a fee of 0.35% of any unused borrowing capacity, which is payable
quarterly. The credit facility also includes a letter of credit, foreign
exchange and cash management facility up to the full amount of available credit.
The credit facility matures in March 26, 2020 . In light of the merger with
Rubicon Project, which is expected to close in early April 2020 , we do not
expect to renew the credit facility. While we do not have any outstanding
borrowings under the credit facility as of December 31, 2019 and December 31,
2018 , the lender has issued standby letters of credit in favor of the landlords
of our current and former headquarters and other office space totaling $3.1
million , which can be drawn down from amounts available under the credit
facility. Upon the expiration of the credit facility we intend to collateralize
these letters of credit with cash, in an equal amount.
The credit facility contains customary conditions to borrowings, events of
default and negative covenants, including covenants that restrict our ability to
dispose of assets, merge with or acquire other entities, incur indebtedness,
incur encumbrances, make distributions to holders of its capital stock, make
investments or engage in transactions with our affiliates. The credit facility
also includes a financial covenant with respect to a minimum cash balance, a
minimum quick ratio, tested monthly, and Adjusted EBITDA for trailing periods
which vary from three to twelve months, tested quarterly. The minimum quick
ratio and Adjusted EBITDA covenants will only be tested if our net cash balance
falls below a specified amount . Our obligations under the credit facility are
secured by substantially all of our assets other than intellectual property,
although we have agreed not to encumber any of our intellectual property without
the lender's prior written consent. Subject to certain exceptions, we are also
required to maintain all of our cash and cash equivalents at accounts with the
lender. We were in compliance with all covenants as of December 31, 2019 and
through the date of this filing.
Operating and Capital Expenditure Requirements
We believe our existing cash balances will be sufficient to meet our anticipated cash requirements from issuance date of this Annual Report through at least the next 12 months. Share Repurchase OnOctober 2, 2018 , our board of directors approved a share repurchase program under which we were authorized to purchase up to$20.0 million of common stock over the 18-month period commencing on the date of approval. As ofDecember 31, 2018 , we had purchased shares up to the maximum amount authorized under the share repurchase program, including 50 -------------------------------------------------------------------------------- Table of Contents 1,666,858 shares that were purchased in open market purchases (for a total of approximately$4.7 million ), 2,000,000 shares that were purchased fromCanaan Partners in a negotiated transaction (for a total of$6.1 million ) and 3,651,314 shares that were purchased fromW Capital Partners in a negotiated transaction (for a total of approximately$9.2 million ). In addition, during the three months endedDecember 31, 2018 , we purchased an additional 1,400,572 shares fromW Capital Partners (for a total of approximately$3.5 million ) outside of our share repurchase program.
All share repurchases were funded from cash on hand.
Historical Cash Flows The following table summarizes our historical cash flows for the periods indicated:
December 31,
2019 2018 2017
(dollars in thousands)
Net cash provided by (used in):
Operating activities $ 2,282 $ 1,760 $ (10,631)
Investing activities (202) (7,511) 45,933
Financing activities $ 4,369 $ (22,481) $ (3,317)
Operating Activities
Net cash used in or provided by operating activities is primarily influenced by
the revenue our business generates, our costs of revenue, and amounts of cash we
invest in personnel and infrastructure to support our business. Net cash
provided by (used in) operating activities has been used to fund operations
through changes in working capital, particularly in the areas of accounts
receivable, accounts payable and accrued expenses, adjusted for non-cash expense
items such as depreciation, amortization and stock-based compensation expenses.
In 2019, our net cash provided by operating activities was $2.3 million and
consisted of adjustments for non-cash items of $11.6 million , which were
partially offset by a loss from continuing operations of $9.0 million and cash
used by working capital of $0.3 million . Adjustments for non-cash items
primarily consisted of depreciation and amortization expense of $1.7 million ,
non-cash stock-based compensation expense of $5.8 million , lease expense of $4.0
million . The cash used by working capital of $0.3 million primarily consisted of
an increase in accounts payable and accrued expenses of $59.4 million and an
increase in deferred rent, security deposits payable and other current
liabilities of $0.7 million , which were partially offset by an increase in
accounts receivable of $53.6 million , an increase in prepaid expenses of $2.1
million and an decrease in operating lease liabilities of $4.7 million .
In 2018, our net cash provided by operating activities was $1.8 million and
consisted of adjustments for non-cash items of $7.7 million and cash provided by
working capital of $3.4 million , which was partially offset by a loss from
continuing operations of $9.4 million . Adjustments for non-cash items primarily
consisted of depreciation and amortization expense of $3.7 million , non-cash
stock-based compensation expense of $3.8 million , and bad debt recovery and loss
on disposal of fixed assets of $0.2 million . The cash provided by working
capital of $3.4 million primarily consisted of an increase in accounts payable
and accrued expenses of $48.8 million and an increase in deferred rent, security
deposits payable and other current liabilities of $0.8 million , which was
partially offset by an increase in accounts receivable of $43.3 million , an
increase in prepaid expenses of $1.8 million and an increase in deferred income
and other liabilities of $1.1 million .
In 2017, our net cash used in operating activities was $10.6 million and
consisted of a loss from continuing operations of $19.7 million , cash used in
working capital of $13.4 million and $15.0 million gain on sale of discontinued
operations, partially offset by net income from discontinued operations of $21.9
million and adjustments for non-cash items of $15.5 million . Adjustments for
non-cash items primarily consisted of depreciation and amortization expense of
$7.8 million , non-cash stock-based compensation expense of $5.4 million ,
compensation expense related to acquisition contingent consideration of $1.8
million , loss on disposal of property $0.4 million and mark to market expense of
$0.1 million . The cash used in working capital of $13.4 million , primarily
consisted of an increase in accounts receivable of $19.9 million and a decrease
in contingent consideration of $4.8 million , which was partially offset by an
increase in accounts payable of $13.8 million , an decrease in prepaid expenses
and other current assets and an increase in deferred rent and security deposits
payable of $3.8 million .
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Investing Activities
In 2019, our net cash used in investing activities consisted of the purchase of
property and equipment and the purchase of patents not subject to amortization
of $0.2 million .
In 2018, our net cash used in investing activities of $7.5 million consisted of
the acquisition of SlimCut for initial cash consideration of $4.8 million and
the purchase of property and equipment of $2.7 million .
In 2017, our net cash provided by investing activities was $45.9 million and
consisted of the sale of our buyer platform for net cash proceeds of $49.0
million , offset by $2.0 million of expenses paid with respect to the sale of the
buyer platform, and $1.1 million used to purchase property and equipment.
On December 19, 2019 , the Company announced a stock-for-stock merger with
Rubicon, which will create a combined company offering a single platform for
transacting CTV, desktop display, video, audio, and mobile inventory across all
geographies and auction types. Refer to "Item 1. Business" for additional
information.
Financing Activities
In 2019, our net cash provided by financing activities was $4.4 million and
consisted of $6.7 million in proceeds received from the exercise of stock option
awards, and $0.5 million of proceeds in connection with shares purchased under
our ESPP, which was partially offset by $1.4 million in tax payments on behalf
of employees related to net share settlements of restricted stock unit awards
and $1.5 million in cash payments for contingent consideration relating to our
acquisition of SlimCut.
In 2018, our net cash used in financing activities was $22.5 million and
consisted of $23.5 million of purchases of common stock and $1.3 million used to
pay tax withholdings on behalf of employees related to net share settlements of
restricted stock unit awards, partially offset by $2.4 million in proceeds
received from the issuance of common stock in connection with shares purchased
under our ESPP and the exercise of stock option awards.
In 2017, our net cash used in financing activities was $3.3 million and
consisted of $2.4 million of purchases of common stock pursuant to our share
repurchase program, $1.8 million used to pay tax withholdings on behalf of
employees related to net share settlements of restricted stock unit awards and
$0.2 million of principal payments related to capital leases, partially offset
by $1.1 million in proceeds received from the issuance of common stock in
connection with shares purchased under our ESPP and the exercise of stock option
awards.
Off-Balance Sheet Arrangements
As of December 31, 2019 , we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of
unconsolidated subsidiaries, structured finance, special purpose entities or
variable interest entities.
Critical Accounting Policies and Estimates
We prepare our audited consolidated financial statements in accordance with U.S.
GAAP. The preparation of audited consolidated financial statements also requires
us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses and related disclosures. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ
significantly from the estimates made by our management. To the extent that
there are differences between our estimates and actual results, our future
financial statement presentation, financial condition, results of operations and
cash flows will be affected.
Critical accounting policies and estimates are those we consider to be the most
important to the portrayal of our financial condition and results of operations
because they require the most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Our critical accounting policies and estimates include
those related to the following:
Revenue Recognition
We primarily generates revenue on a transactional basis where it is paid by a
publisher each time an advertising impression is monetized on its platform based
on a simple and transparent fee structure that the Company establishes with its
publisher partners. The determination of whether revenue should be reported on a
gross or net basis is based on an assessment of whether the Company is acting as
the principal or an agent in the transaction. In determining whether the Company
is acting as the principal or an agent, the Company followed the accounting
guidance for principal-agent considerations. The determination of whether the
Company is acting as a principal or an agent in a transaction involves judgment
and is based on an evaluation of the terms of each arrangement, none of which
are considered presumptive or determinative. For substantially all publisher
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transactions on the Company's platform, the Company reports revenue on a net
basis as the Company determined that it acts as an agent for publishers and is
not the primary obligor in such transactions, given that: (1) another party is
primarily responsible for fulfilling the contract and the Company does not have
discretion in establishing prices and (2) the Company does not generally take on
inventory risk. However, for certain transactions, the Company reports revenue
on a gross basis, based primarily on its determination that the Company acts as
the primary obligor in the delivery of advertising campaigns for buyers with
respect to such transactions. Refer to Note 2 - Summary of Significant
Accounting Policies for additional information.
Accounts Receivable, Net of Allowances for Doubtful Accounts
We carry our accounts receivable at net realizable value. On a periodic basis,
our management evaluates our accounts receivable and determines whether to
provide an allowance or if any accounts should be written down and charged to
expense as a bad debt. The evaluation is based on a past history of collections,
current credit conditions, the length of time the account is past due and a past
history of write-downs. A receivable is considered past due if we have not
received payments based on agreed-upon terms. We extend credit to customers and
generally do not require any security or collateral to support our receivables
Goodwill and Intangible Assets
Goodwill represents the excess of the aggregate purchase price paid over the
fair value of the net tangible and intangible assets acquired. Intangible
assets that are not considered to have an indefinite useful life are amortized
over their useful lives. We evaluate the estimated remaining useful lives of
purchased intangible assets and whether events or changes in circumstances
warrant a revision to the remaining period of amortization. Goodwill is not
amortized, but rather is subject to an impairment test.
We evaluate goodwill and other intangible assets with indefinite lives for
impairment annually, or more frequently if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit
below its carrying value. We adopted FASB Accounting Standards Update ("ASU")
2011-08, "Testing Goodwill for Impairment," which gives companies the option to
qualitatively assess whether it is more likely than not that the fair value of a
reporting unit is less than its carrying value.
We operate as one operating and reporting segment and, therefore, we assess
goodwill for impairment annually as one singular reporting unit, using a
two-step approach. Our policy is to first perform a qualitative assessment to
determine if that it was more likely or not if the reporting unit's carrying
value is less than the fair value, indicating the potential for goodwill
impairment. If the reporting unit fails the qualitative test then we proceed
with the quantitative two step goodwill impairment calculation.
We also review identifiable intangible assets for impairment whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Recoverability of intangible assets are measured by a comparison of
the carrying amount of the asset or asset group, using an income approach, to
future undiscounted net cash flows expected to be generated by the asset or
asset group. If such assets are not recoverable, the impairment to be
recognized, if any, is measured by the amount which the carrying amount of the
assets exceeds the estimated fair value of the assets or asset group. As we
operate as one business unit and our long-lived assets do not have identifiable
cash flows that are independent of the other assets and liabilities of this
business unit, the impairment testing on intangible assets is performed at the
entity-level.
We did not identify any impairment of our goodwill at December 31, 2019 , 2018,
and 2017 and therefore, for the years ended December 31, 2019 , 2018, and 2017 no
impairment losses related to goodwill were recorded.
Stock-Based Compensation
We include stock-based compensation expense as part of operating expenses in
connection with the grant or modification of stock option awards, restricted
stock unit awards, employee stock purchase plan awards, and other equity awards
to our directors, employees and consultants. We account for stock-based
compensation in accordance with the authoritative accounting guidance on
stock-based payment awards. Pursuant to the fair value recognition provisions of
such guidance, stock-based payment awards are measured at the grant date based
on the fair value of the award and is recognized as compensation expense, net of
estimated forfeitures, over the requisite service period, which is generally the
vesting period of the respective award. During the years ended December 31,
2019 , 2018 and 2017, we recorded stock-based compensation expense of $5.8
million , $3.8 million and $4.7 million in continuing operations, respectively.
Information about the assumptions used in the calculation of stock-based
compensation expense is set forth in "Note 16 - Stock-Based Compensation" in the
notes to the consolidated financial statements included in Part II, Item 8 of
this Annual Report.
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Table of Contents Income Taxes Our income tax expense represents amounts paid or payable (or received or receivable) for the current year and includes any changes in deferred taxes during the year. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, as well as for operating loss and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. Our deferred income tax expense represents the change during the period in deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are non-current under ASU 2015-17. We reduce the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that we will not realize some or all of the deferred tax asset. As a result of our historical operating performance and the cumulative net losses incurred to date, we do not have sufficient objective evidence to support the recovery of the deferred tax assets. Accordingly, we have established a valuation allowance against substantially all deferred tax assets for financial reporting purposes because we believe it is more likely than not that these deferred tax assets will not be realized. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. Potential interest and penalties associated with unrecognized tax positions are recognized in our provision for income taxes. Recent Issued and Adopted Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, refer to "Note 2 - Summary of Significant Accounting Policies" in the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report.
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