MAGNITE, INC. - FORM 10-Q - October 30, 2015

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EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - MAGNITE, INC.rubiex3119-30x2015.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER - MAGNITE, INC.rubiex3129-30x2015.htm
EX-32 - SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - MAGNITE, INC.rubiex329-30x2015.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
__________________
  (Mark One)

 x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
 
Commission File Number: 001-36384
__________________
THE RUBICON PROJECT, INC.
(Exact name of registrant as specified in its charter)
 __________________
Delaware
 
20-8881738
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
12181 Bluff Creek Drive, 4th Floor
Los Angeles, CA 90094
(Address of principal executive offices, including zip code)
 
 
 
Registrant’s telephone number, including area code:
 
(310) 207-0272
 
 __________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x    No ¨
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨
 
Accelerated filer  ¨
 
 
 
Non-accelerated filer  x 
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of October 22, 2015
Common Stock, $0.00001 par value
 
44,378,826



THE RUBICON PROJECT, INC.
QUARTERLY REPORT ON FORM 10-Q

INDEX

 
 
Page No.
Part I.
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 5.
 

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
  THE RUBICON PROJECT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
79,865

 
$
97,196

Accounts receivable, net
158,804

 
133,267

Prepaid expenses and other current assets
28,177

 
7,514

TOTAL CURRENT ASSETS
266,846

 
237,977

Property and equipment, net
16,067

 
15,196

Internal use software development costs, net
12,916

 
11,501

Goodwill
68,803

 
16,290

Intangible assets, net
55,428

 
14,090

Other assets, non-current
7,828

 
1,427

TOTAL ASSETS
$
427,888

 
$
296,481

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
167,075

 
$
151,021

Debt and capital lease obligations, current portion
—

 
105

Other current liabilities
1,365

 
3,276

TOTAL CURRENT LIABILITIES
168,440

 
154,402

Other liabilities, non-current
2,241

 
1,272

Deferred tax liability, net
10,253

 
607

Contingent consideration liabilities
27,483

 
11,448

TOTAL LIABILITIES
208,417

 
167,729

Commitments and contingencies (Note 9)

 

STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $0.00001 par value, 10,000 shares authorized at September 30, 2015 and December 31, 2014; 0 shares issued and outstanding at September 30, 2015 and December 31, 2014
—

 
—

Common stock, $0.00001 par value; 500,000 shares authorized at September 30, 2015 and December 31, 2014; 44,265 and 37,192 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
—

 
—

Additional paid-in capital
320,139

 
209,472

Accumulated other comprehensive income (loss)
27

 
(8)

Accumulated deficit
(100,695)

 
(80,712)

TOTAL STOCKHOLDERS’ EQUITY
219,471

 
128,752

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
427,888

 
$
296,481


The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

3

THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Revenue
$
64,253

 
$
32,165

 
$
154,477

 
$
83,463

Expenses:
 
 
 
 
 
 
 
Cost of revenue
16,556

 
5,144

 
37,126

 
14,456

Sales and marketing
22,817

 
11,540

 
60,027

 
30,863

Technology and development
11,822

 
5,766

 
30,626

 
15,041

General and administrative
18,225

 
15,157

 
50,488

 
42,130

Total expenses
69,420

 
37,607

 
178,267

 
102,490

Loss from operations
(5,167
)
 
(5,442
)
 
(23,790
)
 
(19,027
)
Other (income) expense:
 
 
 
 
 
 
 
Interest (income) expense, net
(37
)
 
23

 
(14
)
 
94

Change in fair value of preferred stock warrant liabilities
—

 
—

 
—

 
732

Foreign exchange (gain) loss, net
(38
)
 
(826
)
 
(1,381
)
 
104

Total other (income) expense, net
(75
)
 
(803
)
 
(1,395
)
 
930

Loss before income taxes
(5,092
)
 
(4,639
)
 
(22,395
)
 
(19,957
)
Provision (benefit) for income taxes
(2,083
)
 
(17
)
 
(2,412
)
 
145

Net loss
(3,009
)
 
(4,622
)
 
(19,983
)
 
(20,102
)
Cumulative preferred stock dividends
—

 
—

 
—

 
(1,116
)
Net loss attributable to common stockholders
$
(3,009
)
 
$
(4,622
)
 
$
(19,983
)
 
$
(21,218
)
Basic and diluted net loss per share attributable to common stockholders:
$
(0.07
)
 
$
(0.14
)
 
$
(0.51
)
 
$
(0.81
)
Basic and diluted weighted-average shares used to compute net loss per share attributable to common stockholders:
41,308

 
33,673

 
38,847

 
26,130


The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

 

4

THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015

September 30, 2014
Net loss
$
(3,009
)
 
$
(4,622
)
 
$
(19,983
)
 
$
(20,102
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on investments, net of tax
3

 
—

 
—

 
—

Foreign currency translation adjustments
5

 
(71
)
 
35

 
(34
)
Comprehensive loss
$
(3,001
)
 
$
(4,693
)
 
$
(19,948
)
 
$
(20,136
)

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.



5

 
THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
Common Stock 
 
Additional
Paid-In
Capital
 
Accumulated  Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity 
 
Shares
 
Amount
 
Balance at December 31, 2014
37,192

 
$
—

 
$
209,472

 
$
(8
)
 
$
(80,712
)
 
$
128,752

Exercise of common stock options
2,024

 
—

 
10,674

 
—

 
—

 
10,674

Restricted stock awards, net
481

 
—

 
—

 
—

 
—

 
—

Issuance of common stock related to RSU vesting
74

 
—

 
—

 
—

 
—

 
—

Issuance of common stock related to employee stock purchase plan
69

 
—

 
759

 
—

 
—

 
759

Issuance of common stock and exchange of stock options related to acquisition
4,425

 
—

 
76,611

 
—

 
—

 
76,611

Stock-based compensation
—

 
—

 
22,623

 
—

 
—

 
22,623

Foreign exchange translation adjustment
—

 
—

 
—

 
35

 
—

 
35

Net loss
—

 
—

 
—

 
—

 
(19,983
)
 
(19,983
)
Balance at September 30, 2015
44,265

 
$
—

 
$
320,139

 
$
27

 
$
(100,695
)
 
$
219,471


The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.
 

6

THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(19,983
)
 
$
(20,102
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
22,470

 
8,123

Stock-based compensation
22,037

 
16,727

Loss on disposal of property and equipment, net
29

 
199

Change in fair value of preferred stock warrant liabilities
—

 
732

Change in fair value of contingent consideration
(136
)
 
—

Unrealized foreign currency gain
(58
)
 
(1,356
)
Deferred income taxes
(2,143
)
 
(43
)
Changes in operating assets and liabilities, net of effect of business acquisition:
 
 
 
Accounts receivable
(12,300
)
 
(5,301
)
Prepaid expenses and other assets
996

 
(1,936
)
Accounts payable and accrued expenses
11,568

 
9,115

Other liabilities
(1,295
)
 
(906
)
Net cash provided by operating activities
21,185

 
5,252

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(7,757
)
 
(8,564
)
Capitalized internal use software development costs
(6,058
)
 
(6,619
)
Acquisition, net of cash acquired
(8,647
)
 
—

Investments in available-for-sale securities
(29,884
)
 
—

Maturities and sales of available-for-sale securities
1,600

 
—

Change in restricted cash
1,100

 
100

Net cash used in investing activities
(49,646
)
 
(15,083
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from the issuance of common stock in initial public offering, net of underwriting discounts and commissions
—

 
89,733

Payments of initial public offering costs
—

 
(3,037
)
Proceeds from exercise of stock options
10,674

 
1,194

Proceeds from issuance of common stock under employee stock purchase plan
759

 
—

Repayment of debt and capital lease obligations
(105
)
 
(4,025
)
Net cash provided by financing activities
11,328

 
83,865

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(198
)
 
99

CHANGE IN CASH AND CASH EQUIVALENTS
(17,331
)
 
74,133

CASH AND CASH EQUIVALENTS--Beginning of period
97,196

 
29,956

CASH AND CASH EQUIVALENTS--End of period
$
79,865

 
$
104,089

SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
 
 
 
Capitalized assets financed by accounts payable and accrued expenses
$
920

 
$
1,124

Leasehold improvements paid by landlord
$
—

 
$
803

Capitalized stock-based compensation
$
586

 
$
492

Conversion of preferred stock to common stock
$
—

 
$
52,571

Reclassification of preferred stock warrant liabilities to additional-paid-in-capital
$
—

 
$
6,183

Reclassification of deferred offering costs to additional-paid-in-capital
$
—

 
$
3,533

Common stock and options issued for business acquisition
$
76,795

 
$
—


The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

7

THE RUBICON PROJECT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1—Organization and Summary of Significant Accounting Policies
Company Overview
The Rubicon Project, Inc., or Rubicon Project or the Company, was formed on April 20, 2007 in Delaware and began operations in April 2007. The Company is headquartered in Los Angeles, California.
The Company is a technology company with a mission to automate the buying and selling of advertising. The Company offers a highly scalable platform that provides an automated advertising solution for buyers and sellers of digital advertising.

The Company delivers value to buyers and sellers of digital advertising through the Company’s proprietary advertising automation solution, which provides critical functionality to both buyers and sellers. The advertising automation solution consists of applications for sellers, including providers of websites, applications and other digital media properties, to sell their advertising inventory; applications for buyers, including advertisers, agencies, agency trading desks, demand side platforms, and ad networks, to buy advertising inventory; and a marketplace over which such transactions are executed. This solution incorporates proprietary machine-learning algorithms, sophisticated data processing, high-volume storage, detailed analytics capabilities, and a distributed infrastructure. Together, these features form the basis for the Company’s automated advertising solution that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the advertising inventory managed on the Company’s platform. On April 24, 2015, the Company completed the acquisition of Chango Inc., or Chango, a Toronto based intent marketing technology company. The acquisition expanded the Company's buyer capabilities and expertise, and expanded the Company's agency and brand advertiser transactions.
 
Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for the interim period presented have been included. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, for any future interim period, or for any future year.

The condensed consolidated balance sheet at December 31, 2014 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2014 included in its Annual Report on Form 10-K.

There have been no significant changes in the Company’s accounting policies from those disclosed in its audited consolidated financial statements and notes thereto for the year ended December 31, 2014 included in its Annual Report on Form 10-K, except for revenue recognition, which has been updated to include the impact of reporting revenue on a gross basis for certain arrangements of Chango. The operations of Chango were combined with the Company's historic buyer cloud operations, as discussed further below.
Reclassifications
Certain amounts in the consolidated balance sheet for December 31, 2014 have been reclassified to conform with current-period presentation.     
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed financial statements and accompanying footnotes. Actual results could differ materially from these estimates.
Revenue Recognition
The Company updated its revenue recognition policy to include transactions for which the Company manages campaigns on behalf of buyers and reports the related revenue on a gross basis.


8

The Company generates revenue from buyers and sellers in transactions in which they use the Company’s solution for the purchase and sale of advertising inventory, and also in transactions in which the Company manages ad campaigns on behalf of buyers. The Company recognizes revenue when four basic criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the fees are fixed or determinable, and (iv) collectibility is reasonably assured. The Company maintains separate arrangements with each buyer and seller either in the form of a master agreement, which specifies the terms of the relationship and access to the Company’s solution, or by insertion orders, which specify price and volume requests and other terms. The Company recognizes revenue upon the completion of a transaction, that is, when an impression has been delivered to the consumer viewing a website or application. The Company assesses whether fees are fixed or determinable based on impressions delivered and the contractual terms of the arrangements. Subsequent to the delivery of an impression, the fees are generally not subject to adjustment or refund. Historically, any refunds and adjustments have not been material. The Company assesses collectibility based on a number of factors, including the creditworthiness of a buyer and seller and payment and transaction history. The Company’s revenue arrangements generally do not include multiple deliverables.

Revenue is reported depending on whether the Company functions as principal or agent. The determination of whether the Company acts as the principal or the agent requires the Company to evaluate a number of indicators, none of which is presumptive or determinative. For transactions in which the Company is the principal, revenue is reported on a gross basis for the amount paid by buyers for the purchase of advertising inventory and related services and the Company records the amounts paid to sellers as cost of revenue. For transactions in which the Company is the agent, revenue is reported on a net basis for the amount of fees charged to the buyer (if any), and fees retained from or charged to the seller.

The Company enters into arrangements for which it manages advertising campaigns on behalf of buyers. The Company is the principal in these arrangements as it: (i) is the primary obligor in the advertising inventory purchase transaction; (ii) establishes the purchase prices paid by the buyer; (iii) performs all billing and collection activities including the retention of credit risk; (iv) has latitude in selecting suppliers; (v) negotiates the price it pays to suppliers of inventory; and (vi) makes all inventory purchasing decisions. Accordingly, for these arrangements the Company reports revenue on a gross basis.

For the Company's other arrangements, in which the Company’s solution matches buyers and sellers, enables them to purchase and sell advertising inventory, and establishes rules and parameters for advertising inventory transactions, the Company recognizes revenue on a net basis because the Company: (i) is not the primary obligor for the purchase of advertising inventory but rather provides a platform to facilitate the buying and selling of advertising; (ii) does not have pricing latitude as pricing is generally determined through the Company’s auction process and/or the Company’s fees are based on a percentage of advertising spend; and (iii) does not directly select suppliers.
Expenses
The Company classifies its expenses into four categories:
Cost of Revenue
The Company’s cost of revenue consists primarily of amounts the Company pays sellers for transactions for which the Company is the principal and reports revenues on a gross basis, data center costs, bandwidth costs, depreciation and maintenance expense of hardware supporting the Company’s revenue-producing platform, amortization of software costs for the development of the Company’s revenue-producing platform, amortization expense associated with acquired developed technologies, personnel costs, and facilities-related costs. Amounts the Company pays sellers includes the cost of advertising impressions the Company purchases from sellers through third-party exchanges in transactions for which the Company is the principal. Personnel costs included in cost of revenue include salaries, bonuses, stock-based compensation, and employee benefit costs, and are primarily attributable to personnel in our network operations group, who support the Company’s platform. The Company capitalizes costs associated with software that is developed or obtained for internal use and amortizes the costs associated with the Company’s revenue-producing platform in cost of revenue over their estimated useful lives. The Company amortizes acquired developed technologies over their estimated useful lives. Many of these expenses are generally fixed and do not increase or decrease in direct proportion to increases or decreases in our revenue.
Sales and Marketing
The Company’s sales and marketing expenses consist primarily of personnel costs, including stock-based compensation and the sales bonuses paid to the Company’s sales organization, marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with customer relationships and backlog from our business acquisitions, and to a lesser extent, facilities-related costs and depreciation and amortization. The Company's sales organization focuses on marketing the Company's solution to increase the adoption of the solution by existing and new buyers and sellers. The Company amortizes acquired intangibles associated with customer relationships and backlog from the Company's business acquisitions over their estimated useful lives.

9


Technology and Development
The Company’s technology and development expenses consist primarily of personnel costs, including stock-based compensation, and professional services associated with the ongoing development and maintenance of the Company’s solution, and to a lesser extent, facilities-related costs and depreciation and amortization, including amortization expense associated with acquired intangible assets from the Company's business acquisitions that are related to technology and development functions. These expenses include costs incurred in the development, implementation, and maintenance of internal use software, including platform and related infrastructure. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with internal use software development that qualifies for capitalization, which are then recorded as internal use software development costs on the Company’s consolidated balance sheet. The Company amortizes internal use software development costs that relate to its revenue-producing activities on its platform to cost of revenue and amortizes other internal use software development costs to technology and development costs or general and administrative expenses, depending on the nature of the related project. The Company amortizes acquired intangibles associated with technology and development functions from the Company's business acquisitions over their estimated useful lives.
General and Administrative
The Company’s general and administrative expenses consist primarily of personnel costs, including stock-based compensation, associated with the Company’s executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees, facilities-related costs and depreciation, and other corporate related expenses. General and administrative expenses also include internal use software development costs and acquired intangible assets from the Company's business acquisitions over their estimated useful lives that relate to general and administrative functions and changes in fair value associated with the liability-classified contingent consideration related to business acquisitions.
Cash, Cash Equivalents, and Marketable Securities
The Company invests excess cash primarily in money market funds, corporate debt securities, and highly liquid debt instruments of the U.S. government and its agencies. The Company classifies investments held in money market funds as cash equivalents included in cash and cash equivalents as they have weighted-average maturities at the date of purchase of less than 90 days, U.S. government and agency bonds and corporate debt securities with stated maturities of less than one year as short-term investments included in prepaid and other current assets, and U.S. government and agency bonds and corporate debt securities with stated maturities of over a year as long-term investments included in other assets, non-current on the Company’s consolidated balance sheets, as the Company does not expect to redeem or sell these securities within one year from the balance sheet date.
The Company determines the appropriate classification of investments in marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company classifies and accounts for the Company’s marketable securities as available-for-sale, and as a result carries the securities at fair value and reports the unrealized gains and losses as a component of stockholders’ equity. The Company determines any realized gains or losses on the sale of marketable securities on a specific identification method, and the Company records such gains and losses as a component of other income, net on the Company’s consolidated statements of operations.

Recent Accounting Pronouncements
Under the Jumpstart Our Business Startups Act, or the JOBS Act, the Company meets the definition of an emerging growth company. The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In May 2014, the Financial Accounting Standards Board, or FASB, issued new accounting guidance that requires an entity to recognize the amount of revenue it expects to earn from the transfer of promised goods or services to customers. The new accounting guidance will replace most existing GAAP revenue recognition guidance when it becomes effective. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. The guidance permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued an amendment deferring the effective date by one year making it effective for annual reporting periods beginning on or after December 15, 2017, while also providing for early adoption but not before the original effective date. The Company has not yet selected a transition method nor has it determined the effect of this guidance on its ongoing financial reporting.


10

In April 2015, the FASB issued new accounting guidance that simplified the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  In August 2015, the FASB issued an amendment to this guidance stating an entity may defer and present debt issuing costs associated with line of credit arrangements as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The new guidance is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In April 2015, the FASB issued new accounting guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In September 2015, the FASB issued new accounting guidance, which requires an acquirer in a business combination to recognize adjustments to the provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer is also required to either present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amounts recorded in the current-period earnings by line item that would have been recorded in previous periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The new guidance is effective for annual periods beginning after December 31, 2015, with early application permitted, and shall apply to adjustments to provisional amounts that occur after the effective date. The Company is currently assessing the impact this guidance will have on the Company's consolidated financial statements.
Note 2—Net Loss Per Share Attributable to Common Stockholders
The following table presents the basic and diluted net loss per share attributable to common stockholders:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(In thousands, except per share data)
Net loss attributable to common stockholders
$
(3,009
)
 
$
(4,622
)
 
$
(19,983
)
 
$
(21,218
)
Weighted-average common shares outstanding
44,028

 
35,865

 
41,190

 
27,746

Weighted-average unvested restricted shares
(1,723
)
 
(2,192
)
 
(1,707
)
 
(1,616
)
Weighted-average escrow shares
(997
)
 
—

 
(636
)
 
—

Weighted-average common shares outstanding used to compute net loss per share attributable to common stockholders
41,308

 
33,673

 
38,847

 
26,130

Basic and diluted net loss per share attributable to common stockholders
$
(0.07
)
 
$
(0.14
)
 
$
(0.51
)
 
$
(0.81
)
The following shares have been excluded from the calculation of diluted net loss per share attributable to common stockholders for each period presented because they are anti-dilutive:
 
 
September 30, 2015
 
September 30, 2014
 
(in thousands)
Options to purchase common stock
6,778

 
8,246

Unvested restricted stock awards
1,707

 
2,188

Unvested restricted stock units
2,739

 
298

Shares held in escrow
997

 
—

Total shares excluded from net loss per share attributable to common stockholders
12,221

 
10,732


11

In addition to the above anti-dilutive shares, shares contingently issuable if certain milestones are achieved on December 31, 2015 related to business combinations that occurred during the year ended December 31, 2014 and during the nine months ended September 30, 2015 have been excluded from the calculation of diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2015.
In connection with the acquisition of iSocket, Inc., or iSocket, which occurred during the year ended December 31, 2014, the Company may be required to issue up to $12.0 million of contingent consideration payable in shares of common stock if certain performance milestones have been achieved as of December 31, 2015. The number of shares to be issued is based on the average closing price of the Company's common stock for the ten consecutive trading days ending on (and including) the last trading day of 2015. If September 30, 2015 had been the end of the contingency period, 821,862 shares would have been issuable.
In connection with the acquisition of Chango, which occurred during the nine months ended September 30, 2015, the Company agreed to pay up to $18.2 million of contingent consideration in addition to 126,098 shares held in escrow, if certain milestones have been achieved as of December 31, 2015. The Company has the option to pay the contingent consideration in cash or common stock, or a combination thereof. As of September 30, 2015, the entire contingent consideration issuable in connection with the Chango acquisition was deemed earned (See Note 5). If the Company elects to pay the contingent consideration in shares, the number of shares to be issued in connection with the contingent consideration would be based on the greater of the volume-weighted-average closing prices of the Company's common stock for the 10 consecutive trading days ending on (and including) the trading day that is one day prior to December 31, 2015 and $18.77. If September 30, 2015 had been the end of the contingency period, 957,407 shares would have been issuable.
For the nine months ended September 30, 2014, the Company increased net loss by $1.1 million for cumulative preferred stock dividends in determining its net loss attributable to common stockholders. Upon the completion of the Company’s IPO in April 2014, all of the preferred stock converted to common stock and accordingly, after the IPO the Company was no longer required to increase its net loss for preferred stock dividends in determining its net loss attributable to common stockholders.
Note 3—Fair Value Measurements
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are based on market data obtained from independent sources. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last one is considered unobservable:

•
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.


•
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•
Level 3 – Unobservable inputs.
The table below sets forth a summary of financial instruments that are measured at fair value on a recurring basis at September 30, 2015:

 
September 30, 2015
 
Fair Value Measurements at Reporting Date Using  
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)  
 
(in thousands)
Money market funds
$
27,739

 
$
27,739

 
$
—

 
$
—

Corporate debt securities
$
12,785

 
$
12,785

 
$
—

 
$
—

U.S. Treasury, government and agency debt securities
$
15,499

 
$
15,499

 
$
—

 
$
—

Contingent consideration liabilities
$
27,483

 
$
—

 
$
—

 
$
27,483


12


The table below sets forth a summary of financial instruments that are measured at fair value on a recurring basis at December 31, 2014:

 
December 31, 2014
 
Fair Value Measurements at Reporting Date Using  
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)  
 
(in thousands)
Money market funds
$
55,963

 
$
55,963

 
$
—

 
$
—

Contingent consideration liabilities
$
11,448

 
$
—

 
$
—

 
$
11,448


At September 30, 2015, cash equivalents of $27.7 million consisted of money market funds with original maturities of three months or less. The fair values of the Company's money market funds, U.S. treasury, government and agency debt securities, and corporate debt securities are based on quoted market prices as shown in the Company's investment brokerage statements.
The Company classified the contingent consideration liabilities, which were incurred in connection with the acquisitions of iSocket and Chango, within Level 3 as factors used to develop the estimated fair value include unobservable inputs that are not supported by market activity. The Company estimated the fair value of the contingent consideration liability related to the iSocket acquisition by discounting the present value of probability-weighted future payout related to the contingent earn-out criteria using an estimate of the Company's incremental borrowing rate. At December 31, 2014 and at September 30, 2015, the Company considered it highly likely that the iSocket earn-out criteria would be met. On Chango's acquisition date, the Company estimated the fair value of the contingent consideration liability related to the Chango acquisition by using a Monte-Carlo model as the fair value of the contingent consideration was dependent on both the performance milestones being achieved and the post-acquisition prices of the Company's common stock. Subsequent to Chango's acquisition date, the operations of Chango were fully integrated into the operations of the Company. Accordingly, pursuant to the acquisition agreement, because Chango would no longer be operated separate from the Company's other operations in accordance with the agreed-upon business plan, the entire contingent consideration was deemed earned. As a result, the changes in the fair value of the contingent consideration liability will primarily be dependent on prices of the Company's common stock for periods subsequent to Chango's acquisition date. Changes in these unobservable inputs could significantly impact the fair value of the contingent consideration liability recorded in the accompanying consolidated balance sheets and adjustments recorded in the consolidated statements of operations.
For each of the three months ended September 30, 2015 and nine months ended September 30, 2015, the Company recognized a gain of $0.1 million relating to the change in fair value of the contingent consideration liabilities, which was recorded in general and administrative expenses. The contingent consideration liability related to the iSocket acquisition is payable in shares and the number of shares to be issued is based on the average closing price of the Company's common stock for the 10 consecutive trading days ending on (and including) the last trading day of 2015. The contingent consideration liability related to the Chango acquisition is payable in cash or shares, or a combination thereof, and the number of shares issued, in addition to 126,098 shares held in escrow related to the contingent consideration, is based on the greater of the volume-weighted-average closing prices of the Company's common stock for the 10 consecutive trading days ending on (and including) the trading day that is one day prior to December 31, 2015 and $18.77.
The Company’s pre-IPO preferred stock warrants are recorded at fair value and were determined to be Level 3 fair value items. The changes in the fair value of preferred stock warrants are summarized below:
 
 
Three Month Roll Forward
 
Nine Month Roll Forward
 
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
 
(in thousands)
Beginning balance
 
$
—

 
$
—

 
$
—

 
$
5,451

Change in value of preferred stock warrants recorded in other expense, net
 
—

 
—

 
—

 
732

Net exercise of preferred stock warrant and conversion of preferred stock warrant to common stock warrant
 
—

 
—

 
—

 
(6,183
)
Ending balance
 
$
—

 
$
—

 
$
—

 
$
—


13

The Company’s contingent consideration liabilities are recorded at fair value and were determined to be Level 3 fair value items. The changes in the fair value of the contingent consideration liabilities are summarized below:
 
 
Three Month Roll Forward
 
Nine Month Roll Forward
 
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
 
(in thousands)
Beginning balance
 
$
27,622

 
$
—

 
$
11,448

 
$
—

Increase to contingent consideration liability related to the Chango acquisition
 
—

 
—

 
16,171

 
—

Change in fair value of contingent consideration liabilities recorded in general and administrative expense
 
(139
)
 
—

 
(136
)
 
—

Ending balance
 
$
27,483

 
$
—

 
$
27,483

 
$
—

Note 4—Other Balance Sheet Amounts
The Company holds restricted cash required to fulfill its payment obligations if the Company defaults under a software license agreement and certain building leases. At September 30, 2015 and December 31, 2014, restricted cash included in prepaid expenses and other current assets was $0.3 million and $0.4 million, respectively. At December 31, 2014, restricted cash included in other assets, non-current was $1.0 million.     
Investments in marketable securities as of September 30, 2015 consisted of the following:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-sale - short-term:
(in thousands)
U.S. Treasury, government and agency debt securities
$
8,676

 
$
—

 
$
—

 
$
8,676

Corporate debt securities
12,785

 
—

 
—

 
12,785

Total
$
21,461

 
$
—

 
$
—

 
$
21,461

Available-for-sale - long-term:
 
 
 
 
 
 
 
U.S. Treasury, government and agency debt securities
$
6,823

 
$
—

 
$
—

 
$
6,823

As of September 30, 2015, the Company's available-for-sale securities had a weighted remaining contractual maturity of 0.7 years. For the three and nine months ended September 30, 2015 the gross realized gains and gross realized losses were not significant and there were no unrealized holding gains (losses) reclassified out of accumulated other comprehensive loss into the consolidated statements of operations for the sale of available-for-sale investments.
The Company had no investments in marketable securities as of December 31, 2014.
The amortized cost and fair value of the Company's marketable securities at September 30, 2015, by contractual years-to-maturity are as follows:
 
Amortized Cost
 
Fair Value
 
(in thousands)
Due in less than 1 year
$
21,461

 
$
21,461

Due within 1-2 years
6,823

 
6,823

Total
$
28,284

 
$
28,284


14

Accounts payable and accrued expenses included the following:

September 30, 2015

December 31, 2014

(in thousands)
Accounts payable—seller
$
146,439


$
138,366

Accounts payable—trade
8,803


5,350

Accrued employee-related payables
11,833


7,305

Total
$
167,075


$
151,021

At September 30, 2015 and December 31, 2014, accounts payable—seller are recorded net of $0.7 million, respectively, due from sellers for services provided by the Company to sellers, where the Company has the right of offset.
 Note 5—Business Combinations
Chango Inc.
On April 24, 2015, or the Acquisition Date, the Company completed the acquisition of all the issued and outstanding shares of Chango, a Toronto, Canada based intent marketing technology company. The acquisition expanded the Company's premium advertising marketplace with intent marketing technology.
The purchase consideration for the acquisition included 4,191,878 shares of the Company's common stock, with a fair value of approximately $72.5 million, based on the Company's stock price as reported on the NYSE on the Acquisition Date. 639,318 of the 4,191,878 shares of the Company's common stock were placed in escrow to secure post-closing indemnification obligations of the sellers and any shares remaining in escrow after satisfaction of any resolved indemnity claims, less any shares withheld to satisfy pending or resolved claims, will be released from escrow on July 24, 2016. In addition, the Company issued 106,553 shares of the Company's common stock on the date of the acquisition, which were placed in escrow, related to employee future service requirements which were excluded from the purchase consideration and will be expensed in the Company's post acquisition statement of operations. The Company also used approximately $9.1 million of cash to repay Chango's outstanding debt, including accrued interest, and to pay Chango's outstanding transaction expenses.
The purchase consideration also included contingent consideration of up to approximately $18.2 million worth of the Company's common stock and 126,098 shares held in escrow based upon Chango's performance against certain agreed-upon operating objectives for the year ending December 31, 2015. The Company has the option to pay the contingent consideration in cash or common stock, or a combination thereof. A portion of the contingent consideration shares with a value of approximately $2.4 million, or 126,098 shares of the Company's stock based on the common stock issuance price pursuant to the purchase agreement, were issued and placed in escrow. The number of shares to be issued in connection with the contingent consideration, excluding the escrow shares, is based on the greater of the volume-weighted-average closing prices of the Company's common stock for the 10 consecutive trading days ending on (and including) the trading day that is one day prior to December 31, 2015 and $18.77. The fair value was estimated using a Monte-Carlo model as the fair value of the contingent consideration was dependent on both the performance milestones being achieved and the post-acquisition prices of the Company's common stock. The total contingent consideration was recorded at an estimated fair value of $16.2 million. The fair value of the contingent consideration provided herein assumed the probability of the performance milestones being achieved and the probability that the Company would settle the contingent consideration in common stock. The contingent consideration has been recorded as a non-current liability in the consolidated balance sheet as the contingent consideration is payable in a variable number of shares at the Acquisition Date. Changes in the fair value of the contingent consideration liability will be recorded in the Company's consolidated statement of operations. Subsequent to the Acquisition Date, the operations of Chango were fully integrated into the operations of the Company. Accordingly, pursuant to the acquisition agreement, because Chango would no longer be operated separate from the Company's other operations in accordance with the agreed-upon business plan, the entire contingent consideration was deemed earned. As a result, the changes in the fair value of the contingent consideration liability post-acquisition will primarily be dependent on prices of the Company's common stock for periods subsequent to Chango's Acquisition Date.
As part of the acquisition, existing stock options to purchase common stock of Chango were exchanged for 428,798 options to purchase the Company's common stock. The fair value of stock options exchanged on the Acquisition Date attributable to pre-acquisition services of approximately $4.3 million has been recorded as purchase consideration. The fair value of stock options exchanged on the Acquisition Date attributable to post-acquisition services of $2.4 million will be recorded as additional stock-based compensation expense in the Company's consolidated statement of operations over their remaining requisite service (vesting) periods.

15

The total purchase consideration and the allocation of the total purchase consideration to assets acquired and liabilities assumed is summarized below (in thousands):
Shares of the Company's common stock
$
72,477

Estimated fair value of contingent consideration
16,171

Fair value of stock-based awards exchanged
4,318

Cash paid
9,097

Working capital adjustment
(184
)
Total purchase consideration
101,879

Cash
450

Accounts receivable
13,333

Prepaid and other assets
1,025

Fixed assets
265

Intangible assets, including in process research and development of $580
52,420

Goodwill
52,513

Total assets acquired
$
120,006

Accounts payable and accrued expenses
5,825

Other liabilities
443

Deferred tax liability, net
11,859

Total liabilities assumed
18,127

Total net assets acquired
$
101,879

The purchase price allocation is preliminary and subject to change pending finalization of the valuation.
As part of the acquisition, the Company recorded deferred tax liabilities related to acquired intangibles of $13.9 million net of deferred tax assets of $2.0 million, primarily related to net operating loss carry forwards.
The following table summarizes the components of the acquired intangible assets and estimated useful lives (in thousands, except for estimated useful life):
 
 
Estimated Useful Life
Technology
$
22,000

3 - 5 years
In-process research and development
580

3 years*
Customer relationships
22,000

5 years
Backlog
3,090

<1 year
Non-compete agreements
4,500

2 years
Trademarks
250

<1 year
Total intangible assets acquired
$
52,420

 
* Amortization begins once associated project is completed and it is determined it has alternative future use.
The intangible assets are generally amortized on a straight-line basis, which approximates the pattern in which the economic benefits are consumed, over their estimated useful lives. Amortization of developed technology is included in cost of revenues, the amortization of customer relationships and backlog is included in sales and marketing, the amortization of non-compete agreements is included in technology and development and general and administrative, and the amortization of trademarks is included in general and administrative in the consolidated statement of operations.
The Company believes the amount of goodwill resulting from the acquisition is primarily attributable to expected synergies from assembled workforce, an increase in development capabilities, increased offerings to customers, and enhanced opportunities for growth and innovation. The goodwill resulting from the Chango acquisition is not tax deductible.
During the nine months ended September 30, 2015, the Company recognized approximately $1.3 million in professional fees directly related to the acquisition of Chango, primarily composed of legal, accounting, and valuation costs, which are recorded within general and administrative expenses in the Company’s consolidated statements of operations. In addition, as part of the acquisition of Chango, the Company acquired Chango's NOLs of approximately $7.2 million.

16

Unaudited Pro Forma Information
On October 20, 2014, the Company completed the acquisition of all the issued and outstanding shares of Shiny, Inc., or Shiny, a Toronto, Canada based technology company focused on providing an end-to-end automated direct advertising platform for digital buyers of all sizes.
On November 17, 2014, the Company completed the acquisition of all the issued and outstanding shares of iSocket, a San Francisco, California based technology company focused on automating the direct buying and selling of premium, guaranteed ad inventory.    
The following table provides unaudited pro forma information as if Shiny, iSocket, and Chango had been acquired as of January 1, 2014. The unaudited pro forma information reflects adjustments for additional amortization resulting from the fair value adjustments to assets acquired and liabilities assumed. The pro forma results do not include any anticipated cost synergies or other effects of the integration of Shiny, iSocket, and Chango or recognition of compensation expense relating to the earn-out. Accordingly, pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor is it indicative of the future operating results of the combined company.
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands, except per share data)
Pro forma revenues
$
64,253

 
$
41,983

 
$
171,127

 
$
111,156

Pro forma net loss
$
(2,924
)
 
$
(11,779
)
 
$
(23,324
)
 
$
(50,832
)
Pro forma net loss per share
$
(0.07
)
 
$
(0.31
)
 
$
(0.56
)
 
$
(1.71
)
Subsequent to the Acquisition Date, the operations of Chango were fully integrated into the operations of the Company and as a result, the determination of Chango’s post-acquisition revenues and operating results on a standalone basis are impracticable given the integration of the Chango operations with the Company's operations.
Note 6—Goodwill and Intangible Assets
Details of the Company’s goodwill were as follows:
 
 
September 30, 2015
 
December 31, 2014
 
 
(in thousands)
Beginning balance
 
$
16,290

 
$
1,491

Additions from the acquisition of iSocket
 
—

 
11,778

Additions from the acquisition of Shiny
 
—

 
3,021

Additions from the acquisition of Chango
 
52,513

 
—

Ending balance
 
$
68,803

 
$
16,290


17

Details of the Company’s intangible assets were as follows:
 
 
September 30, 2015
 
December 31, 2014
 
 
(in thousands)
Amortizable intangible assets:
 
 
 
 
Developed technology
 
$
35,176

 
$
13,176

In-process research and development
 
580

 
—

Customer relationships
 
25,330

 
3,330

Backlog
 
3,090

 
—

Non-compete agreements
 
4,990

 
490

Trademarks
 
253

 
3

Total identifiable intangible assets, gross
 
69,419

 
16,999

Total accumulated amortization—intangible assets
 
(13,991
)
 
(2,909
)
Total identifiable intangible assets, net
 
$
55,428

 
$
14,090

Amortization expense of intangible assets for the three months ended September 30, 2015 and 2014 was $4.8 million and $0.1 million, respectively. Amortization expense of intangible assets for the nine months ended September 30, 2015 and 2014 was $11.1 million and $0.3 million, respectively.
As of September 30, 2015, the estimated remaining amortization expense associated with the Company’s intangible assets for each of the next five fiscal years was as follows:
Fiscal Year
Amount
 
(in thousands)
2015
$
4,646

2016
16,227

2017
13,725

2018
9,941

2019 and thereafter
10,889

Total
$
55,428

Note 7—Stock-Based Compensation
The Company's equity incentive plans provide for the grant of equity awards, including non-statutory or incentive stock options, restricted stock, and restricted stock units, to the Company’s employees, officers, directors and consultants. The Company’s board of directors administers the plans. Options outstanding vest based upon continued service at varying rates, but generally over four years from issuance with 25% vesting after one year of service and the remainder vesting monthly thereafter. Restricted stock and restricted stock units vest at varying rates. Options, restricted stock, and restricted stock units granted under the plans accelerate under certain circumstances on a change in control, as defined therein. The Company assumed Chango's 2009 Stock Option Plan as part of the acquisition. An aggregate of 1,422,562 shares remained available for issuance at September 30, 2015 under the plans.


18

Stock Options
A summary of stock option activity for the nine months ended September 30, 2015 is as follows:

Shares Under Option
 
Weighted- Average Exercise Price
 
Weighted- Average Contractual Life
 
Aggregate Intrinsic Value

(in thousands)
 
 
 
 
 
(in thousands)
Outstanding at December 31, 2014
8,113

 
$
8.05

 
 
 
 
Granted
1,213

 
$
12.42

 
 
 
 
Exercised
(2,034
)
 
$
5.33

 
 
 
 
Canceled
(514
)
 
$
11.64

 
 
 
 
Outstanding at September 30, 2015
6,778

 
$
9.38

 
7.41 years
 
$
37,232

Vested and expected to vest September 30, 2015
6,336

 
$
9.21

 
7.35 years
 
$
35,817

Exercisable at September 30, 2015
3,622

 
$
7.25

 
6.69 years
 
$
26,660

At September 30, 2015, the Company had unrecognized employee stock-based compensation expense relating to stock options of approximately $16.2 million, which is expected to be recognized over a weighted-average period of 1.7 years.
The weighted-average grant date per share fair value of stock options granted in the nine months ended September 30, 2015 was $9.47.
The Company estimates the fair value of stock options that contain service and/or performance conditions using the Black-Scholes option pricing model. The weighted-average input assumptions used by the Company were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Expected term (in years)
6.0

 
6.0

 
4.3

 
6.0

Risk-free interest rate
1.74
%
 
1.90
%
 
1.26
%
 
1.83
%
Expected volatility
43
%
 
51
%
 
48
%
 
53
%
Dividend yield
—
%
 
—
%
 
—
%
 
—
%
    
Restricted Stock
A summary of restricted stock activity for the nine months ended September 30, 2015 is as follows:
 
Number of Shares
 
(in thousands)
Nonvested shares of restricted stock outstanding at December 31, 2014
1,750

Granted
552

Canceled
(71
)
Vested
(524
)
Nonvested shares of restricted stock outstanding at September 30, 2015
1,707


At September 30, 2015, the Company had unrecognized employee stock-based compensation expense for restricted stock with service conditions of approximately $13.2 million, which is expected to be recognized over a weighted-average period of 2.2 years. At September 30, 2015, the Company had unrecognized employee stock-based compensation expense for restricted stock with market conditions granted in a prior year of approximately $1.3 million, which is expected to be recognized over a weighted-average period of 5.6 years.

The weighted-average grant date per share fair value of restricted stock with service conditions granted in the nine months ended September 30, 2015 was $16.75.


19

In May 2015, the Company granted certain executives shares of restricted stock that vest based on certain stock price performance metrics. The grant date fair value per share of restricted stock was $13.81, which was estimated using a Monte-Carlo lattice model. At September 30, 2015, the Company had unrecognized employee stock-based compensation expense of approximately $3.4 million, which is expected to be recognized over a weighted-average period of 2.5 years. The compensation expense will not be reversed if the performance metrics are not met.

Restricted Stock Units
A summary of restricted stock unit activity for the nine months ended September 30, 2015 is as follows:
 
Number of Shares
 
(in thousands)
Nonvested shares of restricted stock units outstanding at December 31, 2014
845

Granted
2,161

Canceled
(193
)
Vested
(74
)
Nonvested shares of restricted stock units outstanding at September 30, 2015
2,739


At September 30, 2015, the Company had unrecognized employee stock-based compensation expense relating to restricted stock units of approximately $29.8 million, which is expected to be recognized over a weighted-average period of 3.5 years.
The weighted-average grant date fair value per share of restricted stock units granted in the nine months ended September 30, 2015 was $16.59.

Employee Stock Purchase Plan
In November 2013, the Company's board of directors adopted the Company's 2014 Employee Stock Purchase Plan, or ESPP. The ESPP is designed to enable eligible employees to periodically purchase shares of the Company's common stock at a discount through payroll deductions of up to 10% of their eligible compensation, subject to any plan limitations. At the end of each six month offering period, employees are able to purchase shares at a price per share equal to 85% of the lower of the fair market value of the Company's common stock on the first trading day of the offering period or on the last trading day of the offering period. Offering periods generally commence and end in May and November of each year.

The Company has reserved 896,927 shares of its common stock for issuance under the ESPP and shares reserved for issuance will increase on January 1st of each year by the lesser of (i) a number of shares equal to 1% of the total number of outstanding shares of common stock on the December 31st immediately prior to the date of increase or (ii) such number of shares as may be determined by the board of directors. In May 2015, a total of 68,516 shares of common stock were purchased for the first offering period. The Company estimated the total grant date fair value of the ESPP awards for the second offering period ending in November 2015 of $0.5 million using a Black-Scholes model with the following assumptions: term of 6 months corresponding with the offering period; volatility of 51% based on the Company's historical volatility for a six month period; no dividend yield; and risk-free interest rate of 0.09%. Compensation costs are recognized on a straight-line basis over the offering period.    

Stock-Based Compensation Expense     
Total stock-based compensation expense recorded in the consolidated statements of operations was as follows:  
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands)
Cost of revenue
$
65

 
$
39

 
$
177

 
$
127

Sales and marketing
2,197

 
793

 
5,180

 
2,070

Technology and development
1,525

 
530

 
3,431

 
1,257

General and administrative
5,013

 
5,788

 
13,249

 
13,273

Total stock-based compensation
$
8,800

 
$
7,150

 
$
22,037

 
$
16,727


20

Note 8—Income Taxes
In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date income. The Company’s annual estimated effective tax rate differs from the statutory rate primarily as a result of state taxes, foreign taxes, nondeductible stock option expenses, and changes in the Company’s valuation allowance.

The Company recorded an income tax benefit of $2.1 million and zero for the three months ended September 30, 2015 and 2014, respectively, and an income tax benefit of $2.4 million and an income tax provision of $0.1 million for the nine months ended September 30, 2015 and 2014, respectively. The tax benefit during the three and nine months ended September 30, 2015 is the result of net operating losses generated by the Canadian operations acquired as part of the Chango acquisition during the period.

The Company does not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year. Because of the Company’s history of tax losses, all years remain open to tax audit.
Note 9—Commitments and Contingencies
Operating Leases
The Company has commitments under non-cancelable operating leases for facilities and certain equipment, and its managed data center facilities. Total rent expense was $1.6 million for each of the three months ended September 30, 2015 and 2014, respectively, and $3.9 million and $4.6 million for the nine months ended September 30, 2015 and 2014, respectively.
During the nine months ended September 30, 2015, the Company entered into new operating leases. Future non-cancelable minimum commitments as of September 30, 2015 relating to these operating leases totaling $4.1 million are due through March 2020. During the nine months ended September 30, 2015, in connection with office leases, the Company entered into irrevocable letters of credit in the amount of $0.4 million. In addition, during the nine months ended September 30, 2015, the Company did not exercise the early termination option for the sublease for its headquarters in Los Angeles, California. As of September 30, 2015 future non-cancelable minimum commitments increased by $8.9 million for this sublease.
Guarantees and Indemnification
The Company’s agreements with sellers, buyers, and other third parties typically obligate it to provide indemnity and defense for losses resulting from claims of intellectual property infringement, damages to property or persons, business losses, or other liabilities. Generally these indemnity and defense obligations relate to the Company’s own business operations, obligations, and acts or omissions. However, under some circumstances, the Company agrees to indemnify and defend contract counterparties against losses resulting from their own business operations, obligations, and acts or omissions, or the business operations, obligations, and acts or omissions of third parties. For example, because the Company’s business interposes the Company between buyers and sellers in various ways, buyers often require the Company to indemnify them against acts and omissions of sellers, and sellers often require the Company to indemnify them against acts and omissions of buyers. In addition, the Company’s agreements with sellers, buyers, and other third parties typically include provisions limiting the Company’s liability to the counterparty, and the counterparty’s liability to the Company. These limits sometimes do not apply to certain liabilities, including indemnity obligations. These indemnity and limitation of liability provisions generally survive termination or expiration of the agreements in which they appear. The Company has also entered into indemnification agreements with its directors, executive officers and certain other officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements and there are no claims that the Company is aware of that could have a material effect on the Company’s consolidated financial statements.
Litigation
The Company and its subsidiaries may from time to time be parties to legal or regulatory proceedings, lawsuits and other claims incident to their business activities and to the Company’s status as a public company. Such matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of the Company’s business, regulatory investigations or enforcement proceedings, and claims by persons whose employment has been terminated. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to such matters as of September 30, 2015. However, based on management’s knowledge as of September 30, 2015, management believes that the final resolution of these matters known at such date, individually and in the aggregate, will not have a material adverse effect upon the Company’s consolidated financial position, results of operations or cash flows.

21

Employment Contracts
The Company has entered into severance agreements with certain employees and officers. The Company may be required to pay severance and accelerate the vesting of certain equity awards in the event of involuntary terminations.
Other Contracts
The Company is party to an engagement letter with an investment bank entered into in 2009 and amended in 2012. Pursuant to the engagement letter, the investment bank provided and may continue to provide strategic and consulting advice to the Company. The engagement letter also provides that, in case of a merger, tender offer, stock purchase, or other transaction resulting in the acquisition of the Company by another entity or the transfer of ownership or control of the Company or substantially all of its assets to another entity (a “Change in Control Transaction”) that is consummated before December 7, 2016 or pursuant to a definitive agreement entered into before that date, (i) the investment bank will provide investment banking services in connection with a Change in Control Transaction, if requested by the Company, and (ii) the Company will pay to the investment bank a fee equal to 2.5% of the total consideration paid or payable to the Company or its stockholders in the Change in Control Transaction, whether or not the Company requests such investment banking services. The investment bank was not entitled to participate in and did not receive any fee in connection with the Company's IPO.
Note 10—Subsequent Events
Subsequent to September 30, 2015, the Company entered into new operating leases for office facilities. Future non-cancelable minimum commitments relating to the operating leases totaling $5.8 million are due from October 2015 to August 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements, including statements based upon or relating to our expectations, assumptions, estimates, and projections. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “design,” “anticipate,” “estimate,” “predict,” “potential,” “plan” or the negative of these terms, and similar expressions. Forward-looking statements may include, but are not limited to, statements concerning our anticipated performance, including revenue, margin, cash flow, balance sheet, and profit expectations; development of our technology; introduction of new offerings; scope and duration of client relationships; business mix; sales growth; client utilization of our offerings; market conditions and opportunities; and operational and financial measures including managed revenue, non-GAAP net revenue, paid impressions, average CPM, Adjusted EBITDA, and take rate; and factors that could affect these and other aspects of our business. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and estimates and subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. These risks include, but are not limited to:

•
our ability to grow rapidly and to manage our growth effectively;
•
our ability to develop innovative new technologies and remain a market leader;
•
our ability to attract and retain buyers and sellers and increase our business with them;
•
our vulnerability to loss of, or reduction in spending by, large buyers;
•
the freedom of buyers and sellers to direct their spending and inventory to competing sources of inventory and demand;
•
our ability to use our solution to purchase and sell higher value advertising and to expand the use of our solution by buyers and sellers utilizing evolving digital media platforms;
•
our ability to introduce new solutions and bring them to market in a timely manner in response to client demands and industry trends, including shift in digital advertising growth from display to mobile channels;
•
uncertainty of our estimates and expectations associated with new offerings, including private marketplace, mobile, orders, automated guaranteed, and intent marketing solutions;
•
our ability to maintain a supply of advertising inventory from sellers;
•
uncertainty of our estimates and assumptions about the mix of gross and net reported transactions;
•
declining take rate associated with our buyer cloud transactions;
•
our belief that more transparent pricing in buyer cloud transactions will give us a competitive advantage, resulting in stronger relationships with our customers and driving higher spending with us in the future;
•
our limited operating history and history of losses;

22

•
our ability to continue to expand into new geographic markets;
•
our ability to adapt effectively to shifts in digital advertising to mobile and video channels;
•
increased prevalence of ad blocking technologies;
•
the slowing growth rate of online digital display advertising;
•
the growing percentage of online and mobile advertising spending captured by owned and operated sites (such as Facebook and Google) where we are unable to participate;
•
the effects of increased competition in our market and increasing concentration of advertising spending, including mobile spending, in a small number of very large competitors, and our ability to compete effectively and to maintain our pricing and take rate;
•
requests from buyers and sellers for discounts, fee concessions or revisions, rebates, and greater levels of pricing transparency and specificity;
•
potential adverse effects of malicious activity such as fraudulent inventory and malware;
•
the effects of seasonal trends on our results of operations;
•
costs associated with defending intellectual property infringement and other claims;
•
our ability to attract and retain qualified employees and key personnel;
•
our ability to consummate and integrate future acquisitions of or investments in complementary companies or technologies and our ability to identify such companies or technologies;
•
our ability to comply with, and the effect on our business of, evolving legal standards and regulations, particularly concerning data protection and consumer privacy and evolving labor standards; and
•
our ability to develop and maintain our corporate infrastructure, including our finance and information technology systems and controls.
We discuss many of these risks in Part II of this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors” and in other filings we make from time to time with the SEC. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Without limiting the foregoing, we generally give guidance only in connection with quarterly and annual earnings announcements, without interim updates, and we may appear at industry conferences or make other public statements without disclosing material nonpublic information in our possession. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.
Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
    
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.

23

Overview
We are a technology company on a mission to automate the buying and selling of advertising. We provide a complete advertising automation solution for both buyers and sellers. Our complete solution includes the ability to monetize sellers' inventory, including orders, on both a guaranteed and non-guaranteed basis, RTB, and static bidding, across different advertising units, such as display and video, across mobile and desktop channels. Our Advertising Automation Cloud is a highly scalable platform that provides leading user reach and a solution for buyers and sellers of digital advertising. Through the speed and big data analytics of our algorithm-based solution, we have transformed the cumbersome, complex process of direct buying and selling of digital advertising into a seamless automated process that optimizes results for both buyers and sellers. Buyers of digital advertising use our platform to reach over 650 million Internet users globally on some of the world’s leading websites and applications. Sellers of digital advertising use our platform to maximize revenue from advertising, decrease costs, and protect their brands and user experience, while accessing a global market of buyers representing top advertiser brands around the world. We believe the benefits we provide to both buyers and sellers, and the time and effort spent by both buyers and sellers to integrate with our platform and associated applications, give us a critical position in the digital advertising ecosystem.
Our Advertising Automation Cloud features applications for digital advertising sellers, including websites, applications and other digital media properties, to sell their advertising inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, or ATDs, demand side platforms, or DSPs, and ad networks, to buy advertising inventory; and a marketplace over which such transactions are executed. Together, these features power and optimize a comprehensive, transparent, independent advertising marketplace that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the advertising inventory we manage on our platform. Our Advertising Automation Cloud incorporates proprietary machine-learning algorithms, sophisticated data processing, high-volume storage, detailed analytics capabilities, and a distributed infrastructure. We analyze billions of data points in real time to enable our solution to make approximately 300 data-driven decisions per transaction in milliseconds, and to execute up to 5 million peak queries per second, and over 7 trillion bid requests per month. Since 2012, we have processed approximately 150 trillion bid requests. We believe we help increase the volume and effectiveness of advertising, increasing revenue for sellers and improving return on advertising investment for buyers.
We have direct relationships built on technical integration with our sellers. We believe that our direct relationships and integrations with sellers differentiate us from many other participants in the advertising ecosystem and make us a vital participant in the digital advertising industry. Our integration of sellers into our platform gives sellers the ability to monetize a full variety and volume of inventory. At the same time, buyers leverage our platform to manage their advertising spending, simplify order management and campaign tracking, obtain actionable insights into audiences for their advertising, and access impression-level purchasing from hundreds of sellers. We believe buyers need our platform because of our powerful solution and our direct relationships and integrations with some of the world’s largest sellers. Our solution is constantly self-optimizing based on our ability to analyze and learn from vast volumes of data. The additional data we obtain from the volume of transactions on our platform help make our machine-learning algorithms more intelligent, leading to higher quality matching between buyers and sellers, better return on investment for buyers, and higher revenue for sellers. As a result of that high quality matching, we attract even more sellers which in turn attracts more buyers and vice versa. We believe this self-reinforcing dynamic creates a strong platform for growth.
Since our incorporation in April 2007, we have invested in our solution to meet the complex needs of buyers and sellers of digital advertising. We have achieved significant growth as we have scaled our solution, including the functionality of our Advertising Automation Cloud and its applications for buyers and sellers. During our early stages, our solution helped sellers to automate their existing advertising network relationships to match the right buyer with each impression, as well as increase their revenue and decrease their costs. Between 2008 and 2009, we developed direct relationships with buyers and created applications to assist buyers to increase their return on investment. During 2010, we added RTB capabilities, allowing sellers’ inventory to be sold in an auction to buyers, creating a real time unified auction where buyers compete to purchase sellers’ advertising inventory. During 2012, we launched our private marketplace, which allows sellers to connect directly with pre-approved buyers to execute direct sales of previously unsold advertising inventory.
In 2014, we began offering Guaranteed Orders service, which enables buyers and sellers to transact in guaranteed advertising placements, and various services to assist buyers to purchase inventory through our marketplace and other exchanges.
In 2014, we expanded our orders automation technology and increased our capabilities in the automated guaranteed market with the acquisition of two companies, iSocket, Inc., or iSocket, and Shiny Inc., or Shiny. The addition of iSocket and Shiny provides additional solutions to automate the buying and selling of direct-sold and guaranteed deals. When combined with our existing orders technology, these acquisitions are expected to help us create a fully integrated solution for automating, streamlining, and managing the processes of direct buying and selling of guaranteed and non-guaranteed advertising.

24

On April 24, 2015, we completed the acquisition of Chango Inc., or Chango, a Toronto, Canada based intent marketing technology company. The acquisition expanded our buyer capabilities and expertise and our agency and brand advertiser transactions. Chango's technology includes access to keyword, contextual targeting and retargeting budgets. The acquisition also reinforces our direct order automation technology and expands our buyer cloud initiatives, specifically through the advancement of our Orders (Guaranteed Orders and Non-Guaranteed Orders) platform, and will expand direct integrations with premium brands and agencies that constitute a large base of Chango’s current customers. During the second quarter of 2015, we fully integrated and consolidated the transactions, sales teams, technologies, and engineering teams of our direct order automation technology, our buyer cloud initiatives, and Chango, creating combined operations that we refer to as buyer cloud operations or buyer cloud transactions. As a result, the determination of Chango’s post-acquisition revenues and operating results on a standalone basis are impracticable given the integration of the Chango operations with our operations. Transactions generated through the buyer cloud generally are through direct contractual relationships between us and a buyer. Revenue attributable to the vast majority of buyer cloud transactions is reported on a gross basis in accordance with GAAP. Revenue is reported gross for those arrangements for which we manage advertising campaigns on behalf of buyers by acting as the primary obligor in the purchase of ad inventory, exercising discretion in establishing prices, and selecting and purchasing inventory from the seller. Revenue continues to be reported net for transactions in which buyers and sellers of advertising use our solution to execute or facilitate their purchase and sale of advertising. For additional information refer to the revenue recognition policy described in “Critical Accounting Policies and Estimates.”
Large agencies, DSPs and ad networks, many of which are already established in size and scale, are responsible for the majority of automated digital advertising spending. Accordingly, we believe our growth will be less affected by an increase in buyers than by increases in the amount of spending per buyer as more advertising shifts from traditional to automated buying and selling.
Another industry trend is the expansion of automated buying and selling of advertising through new channels, including mobile, which has market growth rates exceeding those of the desktop channel and is a critical area of operational focus for us. The growth of automated buying and selling of advertising is also expanding into new markets, and in some markets the adoption of automated digital advertising is greater than in the United States. We intend to expand our business in existing territories served and enter new territories.
We generate revenue from buyers and sellers who use our solution for the purchase and sale of advertising inventory. Buyers use our solution to reach their intended audiences by purchasing advertising inventory that we make available or in some cases purchase from sellers through our solution. We recognize revenue upon the completion of a transaction, which is when an impression has been delivered to the consumer viewing a website or application, subject to satisfying all other revenue recognition criteria. We generally bill and collect the full purchase price of impressions from buyers in RTB transactions, together with other fees, if applicable. For arrangements in which pricing is determined through our auction process and we are not the primary obligor for the purchase of advertising inventory, or for those arrangements whereby we generate revenue directly from sellers who maintain the primary relationship with buyers and utilize our solution to transact and optimize their activities, we have determined we do not act as the principal and accordingly we report revenue on a net basis. For arrangements in which we manage advertising campaigns on behalf of the buyer by acting as the primary obligor in the purchase of advertising inventory, we exercise discretion in establishing prices, we have credit risk, and we independently select and purchase inventory from the seller, we have determined that we act as the principal and accordingly we report revenue on a gross basis.
For the three months ended September 30, 2015 and 2014, our revenue was $64.3 million and $32.2 million, respectively, representing a year-over-year increase of 100%, and our managed revenue was $244.4 million and $168.2 million, respectively, representing a year-over-year increase of 45%. For the three months ended September 30, 2015 and 2014, our net loss was $3.0 million and $4.6 million, respectively, and our Adjusted EBITDA was $12.6 million and $4.8 million, respectively. For the nine months ended September 30, 2015 and 2014, our revenue was $154.5 million and $83.5 million, respectively, representing a year-over-year increase of 85%, and our managed revenue was $668.7 million and $451.3 million, respectively, representing a year-over-year increase of 48%. For the nine months ended September 30, 2015 and 2014, our net loss was $20.0 million and $20.1 million, respectively, and our Adjusted EBITDA was $23.4 million and $5.8 million, respectively. Adjusted EBITDA is a non-GAAP measure. For information on how we compute Adjusted EBITDA, and a reconciliation of Adjusted EBITDA to net loss on a GAAP basis, please refer to “Certain Operational and Financial Measures.”
Our net loss and Adjusted EBITDA will be impacted by the rate at which our revenue increases, including the impact of acquisitions, seasonality, and the amount and timing of our investments in our operations.
Substantially all of our revenue is in North America, determined based on the location of our legal entity that is a party to the relevant transaction.

25

Certain Operational and Financial Measures
We regularly review certain non-GAAP operational and financial performance measures, in addition to our GAAP results, to help us evaluate our business, measure our performance, identify trends affecting our business, establish budgets, measure the effectiveness of investments in our technology and development and sales and marketing, and assess our operational efficiencies. These non-GAAP measures include managed revenue, take rate, non-GAAP net revenue, and Adjusted EBITDA, which are discussed immediately following the table below. Revenue and other GAAP measures are discussed under the headings “Components of Our Results of Operations” and “Results of Operations.” We report our financial results as one operating segment. Our consolidated operating results, together with the following operating and financial measures, are regularly reviewed by our chief operating decision maker, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance. You are encouraged to evaluate our definitions of these measures and the reasons we consider them appropriate.
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Operational measures:
 
 
 
 
 
 
 
Managed revenue (in thousands)
$
244,358

 
$
168,213

 
$
668,730

 
$
451,319

Take rate
23.7
%
 
19.1
%
 
21.5
%
 
18.5
%
Financial measures:
 
 
 
 
 
 
 
Non-GAAP net revenue (in thousands)
$
57,867

 
$
32,165

 
$
143,589

 
$
83,463

Adjusted EBITDA (in thousands)
$
12,575

 
$
4,778

 
$
23,434

 
$
5,823

Managed Revenue
Managed revenue is an operational measure that we define as the advertising spending transacted on our platform. Managed revenue does not represent revenue reported on a GAAP basis. We review managed revenue for internal management purposes to assess market share and scale. Tracking our managed revenue allows us to compare our results to the results of companies that report all spending transacted on their platforms as GAAP revenue. Our managed revenue is influenced by demand for our services, the volume and characteristics of paid impressions, and average CPM.
Our managed revenue has increased period over period as a result of increased use of our solutions by buyers and sellers, increases in average CPM, and our buyer cloud initiatives, including the now consolidated and integrated Chango operations. We expect managed revenue to continue to grow with increases in the pricing or volume of transactions on our platform, which can result from increases in the number of buyers or advertising spending, and from improvements in our auction algorithms. This increase may fluctuate due to seasonality and increases or decreases in average CPM and paid impressions. In addition, we generally experience higher managed revenue during the fourth quarter of a given year, resulting from higher advertising spending and more bidding activity, which may drive higher volumes of paid impressions or average CPM.
Our solution enables buyers and sellers to transact through our comprehensive automation offerings. Our managed revenue consisted of 77% in RTB transactions, 16% orders, and 7% static bidding during the three months ended September 30, 2015, and based on a channel perspective, our managed revenue consisted of 74% desktop and 26% mobile during the three months ended September 30, 2015.
Take Rate
Take rate is an operational measure that we define as non-GAAP net revenue divided by managed revenue. We review take rate for internal management purposes to assess the development of our marketplace with buyers and sellers. Our take rate can be affected by a variety of factors, including the terms of our arrangements with buyers and sellers active on our platform in a particular period, the scale of a buyer’s or seller’s activity on our platform, product mix, the implementation of new products, platforms and solution features, auction dynamics, and the overall development of the digital advertising ecosystem.

26

Non-GAAP Net Revenue
Non-GAAP net revenue is a financial measure that we define as GAAP revenue less amounts we pay sellers that are included within cost of revenue. Non-GAAP net revenue would represent our revenue if we were to record all of our revenue on a net basis. Non-GAAP net revenue does not represent revenue reported on a GAAP basis. We review non-GAAP net revenue for internal management purposes to assess performance. Non-GAAP net revenue is one useful measure in assessing the performance of our business because it shows the operating results of our business on a consistent basis without the effect of differing revenue reporting (gross vs. net) that we are required to apply under GAAP across different types of transactions. A potential limitation of non-GAAP net revenue is that other companies may define non-GAAP net revenue differently, which may make comparisons difficult. Our non-GAAP net revenue is influenced by demand for our services, the volume and characteristics of paid impressions, average CPM, our take rate, and the amounts we pay sellers.
The following table presents a reconciliation of revenue to non-GAAP net revenue for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
 
 
 
 
 
 
Revenue
 
$
64,253

 
$
32,165

 
$
154,477

 
$
83,463

Amounts paid to sellers
 
6,386

 
—

 
10,888

 
—

Non-GAAP net revenue
 
$
57,867

 
$
32,165

 
$
143,589

 
$
83,463

Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for stock-based compensation expense, depreciation and amortization, amortization of acquired intangible assets, interest income or expense, change in fair value of pre-IPO convertible preferred stock warrant liabilities, and other income or expense, which mainly consists of foreign exchange gains and losses, certain other non-recurring income or expenses such as acquisition and related costs, and provision for income taxes. Adjusted EBITDA should not be considered as an alternative to net loss, operating loss, or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted EBITDA excludes non-cash and other items that we do not consider indicative of our core operating performance. We believe Adjusted EBITDA is useful to investors in evaluating our performance for the following reasons:
•
Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s performance without regard to items such as stock-based compensation expense, depreciation and amortization, amortization of acquired intangible assets, interest income or expense, change in fair value of preferred stock warrant liabilities, foreign exchange gains and losses, certain other non-recurring income or expense items such as acquisition and related costs, and provision for income taxes that can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;
•
our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of performance and the effectiveness of our business strategies, and in communications with our board of directors concerning our performance;
•
Adjusted EBITDA may sometimes be considered by the compensation committee of our board of directors in connection with the determination of compensation for our executive officers; and
•
Adjusted EBITDA provides consistency and comparability with our past performance, facilitates period-to-period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:
•
stock-based compensation is a non-cash charge and is and will remain an element of our long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;
•
depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;
•
Adjusted EBITDA does not reflect non-cash charges related to acquisition and related items, such as amortization of acquired intangible assets and changes in the fair value of contingent consideration;

27

•
Adjusted EBITDA does not reflect changes in, or cash requirements for, acquisition and related items, such as transaction expenses and expenses associated with earn-out amounts;
•
Adjusted EBITDA does not reflect changes in our working capital needs, capital expenditures, or contractual commitments;
•
Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense; and
•
other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Our Adjusted EBITDA will be impacted by the rate at which our revenue increases and the timing of our investments in our operations. Please see below for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure calculated in accordance with GAAP.

The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014:

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands)
Net loss
$
(3,009
)
 
$
(4,622
)
 
$
(19,983
)
 
$
(20,102
)
Add back (deduct):
 
 
 
 
 
 
 
Depreciation and amortization expense, excluding amortization of acquired intangible assets
3,832

 
3,002

 
11,397

 
7,794

Amortization of acquired intangibles
4,789

 
68

 
11,073

 
329

Stock-based compensation expense
8,800

 
7,150

 
22,037

 
16,727

Acquisition and related items
321

 
—

 
2,717

 
—

Interest (income) expense, net
(37
)
 
23

 
(14
)
 
94

Change in fair value of preferred stock warrant liabilities
—

 
—

 
—

 
732

Foreign currency (gain) loss, net
(38
)
 
(826
)
 
(1,381
)
 
104

Provision (benefit) for income taxes
(2,083
)
 
(17
)
 
(2,412
)
 
145

Adjusted EBITDA
$
12,575

 
$
4,778

 
$
23,434

 
$
5,823


Components of Our Results of Operations
Revenue
We generate revenue from buyers and sellers who use our solution for the purchase and sale of advertising inventory. Buyers use our solution to reach their intended audiences by buying advertising inventory that we make available from sellers through our solution or advertising inventory we purchase from third-party exchanges. Our solution enables buyers and sellers to purchase and sell advertising inventory, matches buyers and sellers, and establishes rules and parameters for open and transparent auctions of advertising inventory. We generally recognize revenue upon the completion of a transaction, that is, when an impression has been made available to the consumer viewing a website or application, subject to satisfying all other revenue recognition criteria. We are responsible for the completion of the transaction. We generally bill and collect the full purchase price of impressions from buyers, together with other fees, if applicable. We report revenue on a net basis for arrangements for which pricing is determined through our auction process, we are not the primary obligor, and for which we have determined we do not act as the principal in the purchase and sale of advertising inventory. We report revenues on a gross basis for arrangements on which we act as the principal in the purchase and sale of advertising inventory--namely, arrangements for which we have direct contractual relationships with the buyer where we manage advertising campaigns on behalf of the buyer by acting as the primary obligor in the purchase of advertising inventory, we exercise discretion in establishing prices, we have credit risk, and we independently select and purchase inventory from the seller. In some cases, we generate revenue directly from sellers who maintain the primary relationship with buyers and utilize our solution to transact and optimize their activities. Our accounts receivable are recorded at the amount of gross billings to buyers, net of allowances, for the amounts we are responsible to collect, and our accounts payable are recorded at the net amount payable to sellers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.     

28

Our revenue, cash flow from operations, operating results and certain operational and financial performance may vary from quarter to quarter due to the seasonal nature of advertiser spending, as well as other circumstances that affect advertising activity. For example, many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. Moreover, advertising inventory in the fourth quarter may be more expensive due to increased demand. Historically, the fourth quarter of the year reflects our highest level of revenue, and the first quarter reflects the lowest level of our revenue.

Our revenue recognition policies are discussed in more detail below and in the notes to our condensed consolidated financial statements presented within this Form 10-Q.
Expenses
We classify our expenses into the following four categories:
Cost of Revenue. Our cost of revenue consists primarily of amounts we pay sellers for transactions for which we are the principal and report revenues on a gross basis, data center costs, bandwidth costs, depreciation and maintenance expense of hardware supporting our revenue-producing platform, amortization of software costs for the development of our revenue-producing platform, amortization expense associated with acquired developed technologies, personnel costs, and facilities-related costs. Amounts we pay sellers include the cost of advertising impressions we purchase from sellers through third-party exchanges in transactions for which we are the principal. Personnel costs included in cost of revenue include salaries, bonuses, stock-based compensation, and employee benefit costs, and are primarily attributable to personnel in our network operations group, who support our platform. We capitalize costs associated with software that is developed or obtained for internal use and amortize the costs associated with our revenue-producing platform in cost of revenue over their estimated useful lives. We amortize acquired developed technologies over their estimated useful lives. Many of these expenses are generally fixed and do not increase or decrease in direct proportion to increases or decreases in our revenue.
Sales and Marketing. Our sales and marketing expenses consist primarily of personnel costs, including stock-based compensation and the sales bonuses paid to our sales organization, marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with customer relationships and backlog from our business acquisitions, and to a lesser extent, facilities-related costs and depreciation and amortization. Our sales organization focuses on marketing our solution to increase the adoption of our solution by existing and new buyers and sellers. We amortize acquired intangibles associated with customer relationships and backlog from our business acquisitions over their estimated useful lives.
Technology and Development. Our technology and development expenses consist primarily of personnel costs, including stock-based compensation, and professional services associated with the ongoing development and maintenance of our solution, and to a lesser extent, facilities-related costs and depreciation and amortization, including amortization expense associated with acquired intangible assets from our business acquisitions that are related to technology and development functions. These expenses include costs incurred in the development, implementation, and maintenance of internal use software, including platform and related infrastructure. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with internal use software development that qualifies for capitalization, which are then recorded as internal use software development costs, net on our consolidated balance sheet. We amortize internal use software development costs that relate to our revenue-producing activities on our platform to cost of revenue and amortize other internal use software development costs to technology and development costs or general and administrative expenses, depending on the nature of the related project. We amortize acquired intangibles associated with technology and development functions from our business acquisitions over their estimated useful lives.
General and Administrative. Our general and administrative expenses consist primarily of personnel costs, including stock-based compensation, associated with our executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees, facilities-related costs and depreciation, and other corporate related expenses. General and administrative expenses also include amortization of internal use software development costs and acquired intangible assets from our business acquisitions over their estimated useful lives that relate to general and administrative functions and changes in fair value associated with the liability-classified contingent consideration related to acquisitions.
Other Expense, Net
Interest Expense, Net. Interest expense is mainly related to our credit facility and capital lease arrangements. Interest income consists of interest earned on our cash equivalents and was insignificant for the three and nine months ended September 30, 2015 and 2014.

29

Change in Fair Value of Convertible Preferred Stock Warrant Liability. Prior to our initial public offering, or IPO, the convertible preferred stock warrants were subject to re-measurement to fair value at each balance sheet date, and any change in fair value was recognized as a component of other expense, net. In connection with the closing of our IPO in April 2014, one warrant for 845,867 shares of convertible preferred stock was exercised on a net basis, resulting in the issuance of 286,055 shares of common stock, and the remaining warrant for 25,174 shares of convertible preferred stock was automatically converted into a warrant exercisable for 12,587 shares of common stock. Following the closing of our IPO, we are no longer required to re-measure the converted common stock warrants to fair value and record any changes in the fair value of these liabilities in our statement of operations. The common stock warrant was net exercised in June 2014. As of September 30, 2015, we had no outstanding warrants.
Foreign Currency Exchange (Gain) Loss, Net. Foreign currency exchange (gain) loss, net consists primarily of gains and losses on foreign currency transactions. We have foreign currency exposure related to our accounts receivable and accounts payable that are denominated in currencies other than the U.S. Dollar, principally the British Pound and Euro.
Provision for Income Taxes
Provision for income taxes consists primarily of federal, state, and foreign income taxes. Due to uncertainty as to the realization of benefits from our domestic deferred tax assets, including net operating loss carryforwards and research and development tax credits, we have a full valuation allowance reserved against such assets. We expect to maintain this full valuation allowance in the near term.

Results of Operations
The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands)
Revenue
$
64,253

 
$
32,165

 
$
154,477

 
$
83,463

Expenses:
 
 
 
 
 
 
 
    Costs of revenue (1) (2)
16,556

 
5,144

 
37,126

 
14,456

    Sales and marketing (1) (2)
22,817

 
11,540

 
60,027

 
30,863

    Technology and development (1) (2)
11,822

 
5,766

 
30,626

 
15,041

    General and administrative (1) (2)
18,225

 
15,157

 
50,488

 
42,130

Total expenses
69,420

 
37,607

 
178,267

 
102,490

Loss from operations
(5,167)

 
(5,442)

 
(23,790)

 
(19,027)

    Other (income) expense, net
(75
)
 
(803
)
 
(1,395
)
 
930

Loss before income taxes
(5,092)

 
(4,639)

 
(22,395)

 
(19,957)

    Provision (benefit) for income taxes
(2,083
)
 
(17
)
 
(2,412
)
 
145

Net loss
$
(3,009
)
 
$
(4,622
)
 
$
(19,983
)
 
$
(20,102
)
(1) 
Includes stock-based compensation expense as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands)
Costs of revenue
$
65

 
$
39

 
$
177

 
$
127

Sales and marketing
2,197

 
793

 
5,180

 
2,070

Technology and development
1,525

 
530

 
3,431

 
1,257

General and administrative
5,013

 
5,788

 
13,249

 
13,273

Total
$
8,800

 
$
7,150

 
$
22,037

 
$
16,727



30

(2) 
Includes depreciation and amortization expense as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands)
Cost of revenue
$
5,270

 
$
2,607

 
$
13,999

 
$
6,833

Sales and marketing
2,286

 
143

 
6,031

 
332

Technology and development
526

 
171

 
1,259

 
561

General and administrative
539

 
149

 
1,181

 
397

Total depreciation and amortization
$
8,621

 
$
3,070

 
$
22,470

 
$
8,123



 
Three Months Ended*

 
Nine Months Ended*
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
    Cost of revenue
26
 %
 
16
 %
 
24
 %
 
17
 %
    Sales and marketing
36
 %
 
36
 %
 
39
 %
 
37
 %
    Technology and development
18
 %
 
18
 %
 
20
 %
 
18
 %
    General and administrative
28
 %
 
47
 %
 
33
 %
 
50
 %
Total expenses
108
 %
 
117
 %
 
115
 %
 
123
 %
Loss from operations
(8
)%
 
(17
)%
 
(15
)%
 
(23
)%
    Other (income) expense, net
—
 %
 
(2
)%
 
(1
)%
 
1
 %
Loss before income taxes
(8
)%
 
(14
)%
 
(14
)%
 
(24
)%
    Provision (benefit) for income taxes
(3
)%
 
—
 %
 
(2
)%
 
—
 %
Net loss
(5
)%
 
(14
)%
 
(13
)%
 
(24
)%

*    Certain figures may not sum due to rounding.

Comparison of the Three Months Ended and Nine Months Ended September 30, 2015 and 2014
Revenue
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands)
Revenue
$
64,253

 
$
32,165

 
$
154,477

 
$
83,463

    
Revenue increased $32.1 million, or 100%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The increase in revenue was primarily due to an increase in the amount of advertising spending on our platform during the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The increase in revenue was also attributable to an increase in average CPM during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to increased matching efficiency and a shift in mix of managed revenue, or advertising spend on our platform, from lower-priced higher-volume inventory mainly associated with static bidding to higher-priced lower-volume inventory mainly associated with RTB and Orders. The increase in average CPM was partially offset by a decrease in paid impressions resulting from the same shift in mix of advertising spend on our platform from static bidding to RTB and Orders. Paid impressions associated with RTB and Orders increased during the three months ended September 30, 2015 compared to the three months ended September 30, 2014, while paid impressions associated with static bidding decreased. Static bidding now makes up a small portion of our paid impressions, so we expect the influence of shift in mix from static bidding to RTB and orders to moderate in future quarters. Secondarily, the increase was due to the impact of the gross revenue reporting for buyer cloud initiatives, following the acquisition of Chango as discussed earlier, for which the vast majority of the revenue is reported on a gross basis given the nature of the arrangements and our role as the principal in those arrangements. Lastly, the increase was also due to the additional revenue generated by buyer cloud transactions, which included Chango.

31

Revenue increased $71.0 million, or 85%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 primarily for the same reasons described above.
We expect revenue to continue to grow on an annual basis. Revenue may be impacted by seasonality, changes in the amounts we are able to charge buyers and sellers for our services, and other factors such as changes in the market, our execution of the business, and competition.
Cost of Revenue
 
Three Months Ended
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands, except percentages)
Costs of revenue
$
16,556

 
$
5,144

 
$
37,126

 
$
14,456

Percent of revenue
26
%
 
16
%
 
24
%
 
17
%

Cost of revenue increased by $11.4 million, or 222%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase was primarily due to the addition to cost of revenue of $6.4 million in amounts we pay sellers for transactions we report on a gross revenue basis because we are the primary obligor, an increase of $2.7 million in depreciation and amortization expense, and an increase in data center, hosting, and bandwidth costs of $1.9 million. The increase in amounts we pay sellers was primarily attributable to buyer cloud initiatives (which includes the consolidated and integrated operations from Chango). The increase in depreciation and amortization was primarily attributable to an increase in amortization of developed technology acquired in our business combinations, depreciation of computer equipment and network hardware, and amortization of capitalized internal use software primarily due to additional personnel and their development of new features and functionality to our solution. The amortization of developed technology acquired in our business combinations was $2.0 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively. The amortization of capitalized internal use software reflected in cost of revenue was $1.4 million and $1.1 million for the three months ended September 30, 2015 and 2014, respectively. The increases in data center, hosting, and bandwidth costs were primarily to support the increase in the use of our platform and international expansion efforts requiring additional data centers, hardware, software, and maintenance expenses.
Cost of revenue increased by $22.7 million, or 157%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. This increase was primarily due to the addition to cost of revenue of $10.9 million in amounts we pay sellers for transactions we report on a gross revenue basis because we are the primary obligor, an increase of $7.2 million in depreciation and amortization expense, and an increase in data center, hosting, and bandwidth costs of $3.7 million. The amortization of developed technology acquired in our business combinations was $4.3 million and $0.2 million for the nine months ended September 30, 2015 and 2014, respectively. The amortization of capitalized internal use software reflected in cost of revenue was $4.2 million and $3.0 million for the nine months ended September 30, 2015 and 2014, respectively. The increases for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 were primarily due to the same reasons described above.
We expect cost of revenue to increase in absolute dollars in future periods as we continue to invest additional capital into our data centers, increase amounts we pay sellers as a result of an increase in transactions we report on a gross revenue basis, hire additional personnel to continue to build and maintain our systems, and invest in our technology. As a percentage of revenue, cost of revenue may fluctuate on a quarterly basis depending on revenue levels, the amounts we pay sellers for transactions in which we are the primary obligor, the timing of investments, and due to increased amortization of acquired technology from business combinations.
Sales and Marketing
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands, except percentages)
Sales and marketing
$
22,817

 
$
11,540

 
$
60,027

 
$
30,863

Percent of revenue
36
%
 
36
%
 
39
%
 
37
%


32

Sales and marketing expense increased by $11.3 million, or 98%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase was primarily due to an increase in personnel costs of $6.8 million, and to a lesser extent, an increase in depreciation and amortization of $2.1 million. The increase in personnel costs was primarily due to an increase in sales and marketing headcount resulting from continued hiring and our recent acquisitions. The increase in depreciation and amortization was mainly related to amortization of customer relationships and backlog acquired in our business combinations.
Sales and marketing expense increased by $29.2 million, or 94%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. This increase was primarily due to an increase in personnel costs of $17.8 million, and to a lesser extent, an increase in depreciation and amortization of $5.7 million. These increases were primarily for the same reasons described above.
We expect sales and marketing expenses to increase in absolute dollars in future periods as we continue to invest in our business, including expanding our domestic and international business. Sales and marketing expense as a percentage of revenue may fluctuate from period to period based on revenue levels, the timing of our investments, the seasonality in our industry and business, and increased amortization as a result of customer relationship intangibles acquired in our business combinations.
Technology and Development
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands, except percentages)
Technology and development
$
11,822

 
$
5,766

 
$
30,626

 
$
15,041

Percent of revenue
18
%
 
18
%
 
20
%
 
18
%

Technology and development expense increased by $6.1 million, or 105%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase was primarily due to an increase in personnel costs of $4.3 million. The increase in personnel costs was primarily due to an increase in headcount as a result of our recent acquisitions and continued hiring of engineers to maintain and support our technology and development efforts.

Technology and development expense increased by $15.6 million, or 104%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. This increase was primarily due to an increase in personnel costs of $11.6 million. The increase in personnel costs was primarily for the same reasons described above.
We expect technology and development expense to increase in absolute dollars in future periods as we continue to invest in our engineering and technology teams to support our technology and development efforts; however, the timing and amount of our capitalized development and enhancement projects may affect the amount of development costs expensed in any given period. Technology and development expense as a percentage of revenue may fluctuate from period to period based on revenue levels, the timing of these investments, the timing and the rate of the amortization of capitalized projects, and increased amortization as a result of non-compete intangibles acquired in our business combinations.
General and Administrative
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(in thousands, except percentages)
General and administrative
$
18,225

 
$
15,157

 
$
50,488

 
$
42,130

Percent of revenue
28
%
 
47
%
 
33
%
 
50
%

General and administrative expense increased by $3.1 million, or 20%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase was primarily due to an increase in personnel costs of $1.3 million and professional services costs of $1.1 million. The increase in personnel costs was primarily due to increased headcount.
General and administrative expense increased by $8.4 million, or 20%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. This increase was primarily due to an increase in personnel costs of $4.2 million and professional services costs of $2.2 million. These increases were primarily for the same reasons described above.

33

We expect general and administrative expense to increase in absolute dollars as we continue to invest in corporate infrastructure to support our growth and our operation as a public company, including professional services fees, insurance premiums and compliance costs. In addition, general and administrative expense is expected to be impacted as a result of changes to the fair value of contingent consideration liabilities associated with our acquisitions.
    
Other (Income) Expense, Net

 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014