MAGNITE, INC. - FORM 10-Q - August 1, 2018

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EX-32 - EXHIBIT 32 - MAGNITE, INC.exhibit326-30x2018.htm
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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 June 30, 2018
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.   x Yes   ¨ 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).  x Yes   ¨ 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ¨
 
Accelerated filer x
 
 
 
Non-accelerated filer ¨ 
(Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
 
 
Emerging growth company x
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   o Yes x  No
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of July 26, 2018
Common Stock, $0.00001 par value
 
50,750,139


THE RUBICON PROJECT, INC.
QUARTERLY REPORT ON FORM 10-Q
 
TABLE OF CONTENTS
 
 
Page No.
Part I.
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 6.
 

2

PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE RUBICON PROJECT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
72,247

 
$
76,642

Marketable securities
32,072

 
52,504

Accounts receivable, net
153,163

 
165,890

Prepaid expenses and other current assets
9,041

 
9,620

TOTAL CURRENT ASSETS
266,523

 
304,656

Property and equipment, net
36,571

 
47,393

Internal use software development costs, net
14,340

 
12,734

Other assets, non-current
1,197

 
5,493

Intangible assets, net
11,767

 
13,359

TOTAL ASSETS
$
330,398

 
$
383,635

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
198,504

 
$
214,103

Other current liabilities
2,899

 
3,141

TOTAL CURRENT LIABILITIES
201,403

 
217,244

Other liabilities, non-current
1,331

 
1,780

TOTAL LIABILITIES
202,734

 
219,024

Commitments and contingencies (Note 10)


 


STOCKHOLDERS' EQUITY
 
 
 
Preferred stock, $0.00001 par value, 10,000 shares authorized at June 30, 2018 and December 31, 2017; 0 shares issued and outstanding at June 30, 2018 and December 31, 2017
—

 
—

Common stock, $0.00001 par value; 500,000 shares authorized at June 30, 2018 and December 31, 2017; 50,750 and 50,239 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
1

 
—

Additional paid-in capital
427,324

 
418,354

Accumulated other comprehensive income (loss)
(77)

 
41

Accumulated deficit
(299,584)

 
(253,784)

TOTAL STOCKHOLDERS' EQUITY
127,664

 
164,611

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
330,398

 
$
383,635


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


3

THE RUBICON PROJECT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Revenue
$
28,648

 
$
42,922

 
$
53,524

 
$
88,937

Expenses:
 
 
 
 
 
 
 
Cost of revenue
15,044

 
13,698

 
29,827

 
28,386

Sales and marketing
11,135

 
12,529

 
23,392

 
27,157

Technology and development
9,245

 
12,044

 
19,739

 
24,797

General and administrative
11,441

 
14,355

 
23,985

 
29,435

Restructuring and other exit costs
974

 
1,621

 
3,440

 
5,959

Total expenses
47,839

 
54,247

 
100,383

 
115,734

Loss from operations
(19,191
)
 
(11,325
)
 
(46,859
)
 
(26,797
)
Other (income) expense:
 
 
 
 
 
 
 
Interest income, net
(274
)
 
(228
)
 
(545
)
 
(395
)
Other income
(210
)
 
(167
)
 
(420
)
 
(379
)
Foreign exchange (gain) loss, net
(797
)
 
479

 
(243
)
 
851

Total other (income) expense, net
(1,281
)
 
84

 
(1,208
)
 
77

Loss before income taxes
(17,910
)
 
(11,409
)
 
(45,651
)
 
(26,874
)
Provision for income taxes
74

 
146

 
149

 
521

Net loss
$
(17,984
)
 
$
(11,555
)
 
$
(45,800
)
 
$
(27,395
)
Net loss per share:
 
 
 
 
 
 
 
Basic and Diluted
$
(0.36
)
 
$
(0.24
)
 
$
(0.92
)
 
$
(0.56
)
Weighted average shares used to compute net loss per share:
 
 
 
 
 
 
 
Basic and Diluted
50,071

 
48,783

 
49,883

 
48,559


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


 

4

THE RUBICON PROJECT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018

June 30, 2017
Net loss
$
(17,984
)
 
$
(11,555
)
 
$
(45,800
)
 
$
(27,395
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on investments
16

 
4

 
6

 
—

Foreign currency translation adjustments
(338
)
 
173

 
(124
)
 
270

Other comprehensive income (loss)
(322
)
 
177

 
(118
)
 
270

Comprehensive loss
$
(18,306
)
 
$
(11,378
)
 
$
(45,918
)
 
$
(27,125
)

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




5

 

THE RUBICON PROJECT, INC.
CONDENSED 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, 2017
50,239

 
$
—

 
$
418,354

 
$
41

 
$
(253,784
)
 
$
164,611

Exercise of common stock options
49

 
—

 
45

 
—

 
—

 
45

Restricted stock awards, net
(156
)
 
—

 
—

 
—

 
—

 
—

Issuance of common stock related to employee stock purchase plan
89

 
—

 
143

 
—

 
—

 
143

Issuance of common stock related to RSU vesting
830

 
1

 
—

 
—

 
—

 
1

Shares withheld related to net share settlement
(301
)
 
—

 
(658
)
 
—

 
—

 
(658
)
Stock-based compensation
—

 
—

 
9,440

 
—

 
—

 
9,440

Other comprehensive loss
—

 
—

 
—

 
(118
)
 
—

 
(118
)
Net loss
—

 
—

 
—

 
—

 
(45,800
)
 
(45,800
)
Balance at June 30, 2018
50,750


$
1


$
427,324


$
(77
)

$
(299,584
)

$
127,664


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

6


THE RUBICON PROJECT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(45,800
)
 
$
(27,395
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
17,588

 
18,976

Stock-based compensation
9,156

 
11,542

Loss on disposal of property and equipment
120

 
271

Provision for doubtful accounts
215

 
566

Accretion of available for sale securities
(318
)
 
(76
)
Unrealized foreign currency gains, net
(766
)
 
1,130

Deferred income taxes
—

 
274

Changes in operating assets and liabilities, net of effect of business acquisitions:
 
 
 
Accounts receivable
12,342

 
52,917

Prepaid expenses and other assets
2,351

 
(393
)
Accounts payable and accrued expenses
(15,287
)
 
(44,561
)
Other liabilities
(691
)
 
(446
)
Net cash provided by (used in) operating activities
(21,090
)
 
12,805

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(1,216
)
 
(4,839
)
Capitalized internal use software development costs
(4,817
)
 
(4,327
)
Investments in available-for-sale securities
(23,991
)
 
(31,789
)
Maturities of available-for-sale securities
41,150

 
45,050

Sales of available-for-sale securities
6,086

 
—

Net cash provided by investing activities
17,212

 
4,095

FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
45

 
384

Proceeds from issuance of common stock under employee stock purchase plan
143

 
444

Taxes paid related to net share settlement
(658
)
 
(2,048
)
Net cash used in financing activities
(470
)
 
(1,220
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(47
)
 
140

CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(4,395
)
 
15,820

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period
76,642

 
149,498

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — End of period
$
72,247

 
$
165,318

SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
 
 
 
Capitalized assets financed by accounts payable and accrued expenses
$
712

 
$
3,944

Capitalized stock-based compensation
$
284

 
$
251


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 (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 global advertising exchange that helps websites and applications thrive by giving them tools and expertise to sell ads easily and safely. In addition, the world’s leading agencies and brands rely on the Company's technology to execute tens of billions of advertising transactions each month. The Company provides a technology solution to automate the purchase and sale of digital advertising inventory for buyers and sellers. The Company's platform features applications and services for digital advertising sellers, including websites, mobile applications and other digital media properties, and their representatives, to sell their digital advertising inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, demand side platforms, or DSPs, to buy digital advertising inventory; and a marketplace over which such transactions are executed. Together, these features power and enhance a comprehensive, transparent, independent advertising marketplace that brings buyers and sellers together and facilitates intelligent decision making and automated transaction execution for the digital advertising inventory managed on the Company's platform. The Company's clients include many of the world's leading publishers of websites and mobile applications and buyers of digital advertising inventory.
Advertising inventory takes different forms, referred to as advertising units, is purchased and sold through different transactional methodologies, and allows advertising content to be presented to consumers through different channels. The Company's solution enables buyers and sellers to purchase and sell:
•
a comprehensive range of advertising units, including display, audio and video;
•
that are transacted through real-time bidding ("RTB"), which includes (i) direct sale of premium inventory, which the Company refers to as private marketplace ("PMP"), and (ii) open auction bidding, which the Company refers to as open marketplace ("OMP"); and
•
that are displayed across digital channels, including mobile web, mobile application, and desktop, as well as across various out-of-home channels, such as digital billboards.
Risks and Uncertainties
The Company has been negatively impacted by rapid changes in the ad tech industry including demand by ad tech buyers
for more efficiency and lower costs, changes in bidding technologies, and increased competition. In response to these challenges,
the Company made significant reductions in fees charged to buyers during 2017 and in November 2017 eliminated its buyer fees
altogether. The competitive pressures and reduced take rate resulted in lower revenue and cash flows in the first half of 2018 compared to the prior year. In an effort to bring its costs into better alignment with reduced take rates, the Company has undertaken restructuring activities to reduce headcount and related operating costs, and has also reduced its capital expenditures, which may make execution against its strategic business plans more difficult. Unless and until the Company is able to compensate for the fee reductions and reduced gross margins by continuing to increase advertising spending on its platform, or sufficiently reducing costs, it may not be able to grow its business and may continue to operate at a loss, depleting its cash resources and liquidity. If the Company continues to experience significant operating losses in the future, the Company may require additional liquidity to fund its operations. The Company’s current credit facility expires in September 2018. There can be no guarantee that additional financing will be available on commercially reasonable terms, if at all.
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 six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for any future interim period, the year ending December 31, 2018, or for any future year.
The condensed consolidated balance sheet at December 31, 2017 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, 2017 included in its 2017 Annual Report on Form 10-K.

8

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, 2017 included in its Annual Report on Form 10-K.
Reclassifications
     Certain prior period amounts have been reclassified to conform to the current period presentation. Specifically, this includes amounts reclassified to conform to the current year presentation in the condensed consolidated statements of cash flows.
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.
Recently Adopted Accounting Pronouncements
On January 1, 2018, the Company adopted the following accounting pronouncements, using a prospective adoption method, which did not have an impact on the Company's condensed consolidated financial statements and did not result in any significant policy changes:
•
Accounting Standards Update ("ASU") 2017-01—Business Combinations (Topic 805): Clarifying the Definition of a Business; and
•
ASU 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.
The Company has also adopted ASU 2016-15—Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, although the retrospective adoption method did not have an impact on periods presented. The Company will apply this guidance to applicable future transactions.
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 February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02—Leases (Topic 842) ("ASU-2016-02"), which requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the effect this guidance will have on its condensed consolidated financial statements and related disclosures, and anticipates the guidance to result in increases in its assets and liabilities as most of its operating lease commitments will be subject to the new standard and recognized as right-of-use assets and lease liabilities.
In June 2018, the FASB issued ASU 2018-07—Stock Compensation (Topic 718) ("ASU 2018-07"), which expands the scope of Accounting Standards Codification Topic 718, Compensation—Stock Compensation to include share-based payments granted to non-employees in exchange for goods or services. Upon adoption, the fair value of awards granted to non-employees will be determined as of the grant date, which will be recognized over the service period. Previous guidance required the awards to be remeasured at fair value periodically when determining the related expense. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. Upon adoption, the entity is required to measure the non-employee awards at fair value as of the adoption date. The Company is currently evaluating the effect this guidance will have on its condensed consolidated financial statements and related disclosures.


9

Note 2—Net Income (Loss) Per Share
The following table presents the basic and diluted net loss per share:  
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands, except per share data)
Basic and Diluted EPS:
 
 
 
 
 
 
 
Net loss
$
(17,984
)
 
$
(11,555
)
 
$
(45,800
)
 
$
(27,395
)
Weighted-average common shares outstanding
50,443

 
49,666

 
50,346

 
49,557

Weighted-average unvested restricted shares
(372
)
 
(883
)
 
(463
)
 
(998
)
Weighted-average common shares outstanding used to compute net loss per share
50,071

 
48,783

 
49,883

 
48,559

Basic and diluted net loss per share
$
(0.36
)
 
$
(0.24
)
 
$
(0.92
)
 
$
(0.56
)
The following weighted-average 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:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Options to purchase common stock
18

 
88

 
27

 
137

Unvested restricted stock awards
301

 
367

 
244

 
295

Unvested restricted stock units
1,434

 
585

 
1,401

 
623

ESPP
36

 
44

 
49

 
52

Total shares excluded from net loss per share
1,789

 
1,084

 
1,721

 
1,107

Note 3—Revenues
On January 1, 2018, the Company adopted Accounting Standards Update 2014-09—Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") using a modified retrospective approach applied to all contracts that generated revenue in the preceding year. The adoption of this guidance did not have an impact on the amount or timing of revenue recognized by the Company.
The Company generates revenue from transactions where it provides a platform for the purchase and sale of digital advertising inventory. The Company’s advertising automation solution is a marketplace for sellers of digital advertising inventory (providers of websites, mobile applications and other digital media properties, and their representatives) and buyers of digital advertising inventory (including advertisers, agencies, agency trading desks, and demand-side platforms). 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 digital advertising inventory managed on the Company's platform. Digital advertising inventory is created when consumers access sellers’ content. Sellers provide digital advertising inventory to the Company’s platform in the form of advertising requests, or ad requests. When the Company receives ad requests from sellers, it sends bid requests to buyers, which enable buyers to bid on sellers’ digital advertising inventory. Winning bids can create advertising, or paid impressions, for the seller to present to the consumer.
The total volume of spending between buyers and sellers on the Company’s platform is referred to as advertising spend. The Company keeps a percentage of that advertising spend as a fee, and remits the remainder to the seller. The fee or “take rate” that the Company retains from the gross advertising spend on its platform is recognized as revenue. The fee earned on each transaction is based on the pre-existing agreement between the Company and the seller and the clearing price of the winning bid. The Company recognizes revenue upon fulfillment of its performance obligation to a customer, which occurs at the point in time an ad renders and is counted as a paid impression, subject to an underlying agreement existing with the customer and a fixed or determinable transaction price. Performance obligations for all transactions are satisfied, and the corresponding revenue is recognized, at a distinct point in time when an ad renders. The Company does not have arrangements with multiple performance obligations. The Company considers the following when determining if a contract exists under which the performance obligations have been satisfied: (i) contract approval by all parties, (ii) identification of each party’s rights regarding the goods or services to be transferred, (iii) specified payment terms, (iv) commercial substance of the contract, and (v) collectability of substantially all of the consideration is probable.

10

The Company has determined that it does not act as the principal in the purchase and sale of digital advertising inventory because it does not have control of the digital advertising inventory and does not set prices agreed upon within the auction marketplace, and therefore reports revenue on a net basis. In periods prior to the second quarter of 2017, the Company reported revenue on a gross basis for revenue associated with its intent marketing solution, as the Company determined that it acted as the principal in the purchase and sale of digital advertising inventory. The Company ceased offering its intent marketing solution after the first quarter of 2017, after which time, all of the Company’s revenues have been recorded on a net basis. Revenue generated by the Company’s intent marketing solution in 2017 prior to its cessation was $1.3 million, which is included in total revenue for the six months ended June 30, 2017.
Payment terms are specified in agreements between the Company and the buyers and sellers on its exchange platform. The Company generally bills buyers at the end of each month for the full purchase price of impressions filled in that month. The Company recognizes volume discounts as a reduction of revenue as they are incurred. Specific payment terms may vary by agreement, but are generally seventy-five days or less. The Company's accounts receivable are recorded at the amount of gross billings to buyers, net of allowances for the amounts the company is responsible to collect. The Company's accounts payable related to amounts due to sellers are recorded at the net amount payable to sellers (see Note 5). Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.
The following table presents our revenue by channel for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands, except percentages)
Channel:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Desktop
$
13,663

 
48
%
 
$
23,746

 
55
%
 
$
27,972

 
52
%
 
$
52,075

 
59
%
Mobile
14,985

 
52

 
19,176

 
45

 
25,552

 
48

 
36,862

 
41

Total
$
28,648


100
%

$
42,922


100
%

$
53,524


100
%

$
88,937


100
%
The following table presents our revenue disaggregated by geographic location, based on the location of the Company's sellers:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
United States
$
18,966

 
$
28,000

 
$
34,470

 
$
55,661

International
9,682

 
14,922

 
19,054

 
33,276

Total
$
28,648

 
$
42,922

 
$
53,524

 
$
88,937

Note 4—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.

11

The table below sets forth a summary of financial instruments that are measured at fair value on a recurring basis at June 30, 2018:
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs 
(Level 3)
 
(in thousands)
Cash equivalents
$
14,334

 
$
14,334

 
$
—

 
$
—

Corporate debt securities
$
12,112

 
$
—

 
$
12,112

 
$
—

U.S. Treasury, government and agency debt securities
$
19,960

 
$
19,960

 
$
—

 
$
—

The table below sets forth a summary of financial instruments that are measured at fair value on a recurring basis at December 31, 2017:
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs 
(Level 3)
 
(in thousands)
Cash equivalents
$
1,807

 
$
210

 
$
1,597

 
$
—

Corporate debt securities
$
25,098

 
$
—

 
$
25,098

 
$
—

U.S. Treasury, government and agency debt securities
$
29,901

 
$
29,901

 
$
—

 
$
—

At June 30, 2018 and December 31, 2017, cash equivalents of $14.3 million and $1.8 million, respectively, consisted of money market funds and commercial paper, with original maturities of three months or less. The carrying amounts of cash equivalents are classified as Level 1 or Level 2 depending on whether or not their fair values are based on quoted market prices for identical securities that are traded in an active market. The commercial paper included in cash equivalents at December 31, 2017 is classified as Level 2 since its fair value is not based on quoted market prices for identical securities that are traded in an active market, but rather is derived from similar securities. Corporate debt securities (which are included in marketable securities on the balance sheet) with fair values derived from similar securities rather than based on quoted market prices for identical securities, are classified as Level 2 as well. The fair values of the Company's U.S. treasury, government and agency debt securities are based on quoted market prices and classified as Level 1, and are included within marketable securities.
There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended June 30, 2018 and 2017.

12

Note 5—Other Balance Sheet Amounts
Investments in marketable securities as of June 30, 2018 consisted of the following:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
Available-for-sale—short-term:
 
U.S. Treasury, government and agency debt securities
$
19,983

 
$
—

 
$
(23
)
 
$
19,960

Corporate debt securities
12,112

 
—

 
—

 
12,112

Total
$
32,095

 
$
—

 
$
(23
)
 
$
32,072

Investments in marketable securities as of December 31, 2017 consisted of the following:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(in thousands)
Available-for-sale—short-term:
 
 
 
 
 
 
 
U.S. Treasury, government and agency debt securities
$
27,426

 
$
—

 
$
(20
)
 
$
27,406

Corporate debt securities
25,098

 
—

 
—

 
25,098

Total
$
52,524

 
$
—

 
$
(20
)
 
$
52,504

Available-for-sale—long-term:
 
 
 
 
 
 
 
U.S. Treasury, government and agency debt securities
$
2,504

 
$
—

 
$
(9
)
 
$
2,495

The Company's available-for-sale securities had a weighted remaining contractual maturity of 0.3 years as of June 30, 2018. For the three and six months ended June 30, 2018, the Company sold $6.1 million of available-for-sale investments, on which the realized gains were de minimis and there were no unrealized holding gains (losses) reclassified out of accumulated other comprehensive loss into the condensed consolidated statements of operations.
Accounts payable and accrued expenses included the following:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Accounts payable—seller
$
187,332

 
$
203,694

Accounts payable—trade
4,663

 
3,764

Accrued employee-related payables
6,509

 
6,645

Total
$
198,504

 
$
214,103

As of December 31, 2016, the Company had $0.1 million of restricted cash, which is included in the beginning balance of cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows for the six months ended June 30, 2017. There was no restricted cash as of June 30, 2018 and December 31, 2017.


13

Note 6—Intangible Assets
The Company’s intangible assets as of June 30, 2018 and December 31, 2017 included the following:
 
June 30, 2018
 
December 31, 2017
 
(in thousands)
Amortizable intangible assets:
 
 
 
Developed technology
$
16,878

 
$
16,878

Non-compete agreements
690

 
690

Trademarks
20

 
20

Total identifiable intangible assets, gross
17,588

 
17,588

Accumulated amortization—intangible assets:
 
 
 
Developed technology
(5,475
)
 
(4,062
)
Non-compete agreements
(333
)
 
(161
)
Trademarks
(13
)
 
(6
)
Total accumulated amortization—intangible assets
(5,821
)
 
(4,229
)
Total identifiable intangible assets, net
$
11,767

 
$
13,359

Amortization of intangible assets for the three months ended June 30, 2018 and 2017 were $0.8 million and $0.8 million, respectively, and $1.6 million and $2.4 million for the six months ended June 30, 2018 and 2017, respectively. The estimated remaining amortization expense associated with the Company's intangible assets was as follows as of June 30, 2018:
Fiscal Year
Amount
 
(in thousands)
Remaining 2018
$
1,593

2019
3,010

2020
2,826

2021
2,826

2022
1,512

Thereafter
—

Total
$
11,767

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. Outstanding options 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, typically approximately 25% vesting after approximately one year of service and the remainder vesting semi-annually thereafter. The restricted stock units granted in the first half of 2018 included 2,725,000 restricted stock units that vest 50% on each of the first and second anniversaries of the grant date. Options, restricted stock, and restricted stock units granted under the plans accelerate under certain circumstances for certain participants upon a change in control, as defined in the governing plan. An aggregate of 6,094,345 shares remained available for future grants at June 30, 2018 under the plans.

14

Stock Options
A summary of stock option activity for the six months ended June 30, 2018 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, 2017
4,363

 
$
8.75

 
 
 
 
Granted
658

 
$
1.97

 
 
 
 
Exercised
(49
)
 
$
0.91

 
 
 
 
Expired
(1,101
)
 
$
10.24

 
 
 
 
Forfeited
(49
)
 
$
4.54

 
 
 
 
Outstanding at June 30, 2018
3,822

 
$
7.30

 
7.14 years
 
$
1,470

Exercisable at June 30, 2018
2,188

 
$
9.80

 
5.81 years
 
$
309

The total intrinsic values of options exercised during the six months ended June 30, 2018 was $0.1 million. At June 30, 2018, the Company had unrecognized employee stock-based compensation expense relating to nonvested stock options of approximately $4.2 million, which is expected to be recognized over a weighted-average period of 2.8 years. The weighted-average grant date fair value per share of stock options granted during the six months ended June 30, 2018 was $1.03. Total fair value of options vested during the six months ended June 30, 2018 was $2.1 million.
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
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Expected term (in years)
N/A
 
5.7

 
6.1

 
6.0

Risk-free interest rate
N/A
 
1.87
%
 
2.66
%
 
2.10
%
Expected volatility
N/A
 
55
%
 
57
%
 
55
%
Dividend yield
N/A
 
—
%
 
—
%
 
—
%
There were no stock options granted during the three months ended June 30, 2018.
Restricted Stock
A summary of restricted stock activity for the six months ended June 30, 2018 is as follows:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
(in thousands)
 
 
Nonvested shares of restricted stock outstanding at December 31, 2017
558

 
$
12.60

Granted
—

 
$
—

Canceled
(156
)
 
$
13.82

Vested
(132
)
 
$
14.08

Nonvested shares of restricted stock outstanding at June 30, 2018
270

 
$
11.18

The aggregate fair value of restricted stock with service conditions that vested during the six months ended June 30, 2018 was $0.3 million. At June 30, 2018, the Company had unrecognized stock-based compensation expense for restricted stock with service conditions of $0.9 million, which is expected to be recognized over a weighted-average period of 1.4 years.

15

Restricted Stock Units
A summary of restricted stock unit activity for the six months ended June 30, 2018 is as follows:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
(in thousands)
 
 
Nonvested restricted stock units outstanding at December 31, 2017
3,609

 
$
7.55

Granted
4,707

 
$
2.20

Canceled
(788
)
 
$
5.60

Vested
(830
)
 
$
8.02

Nonvested restricted stock units outstanding at June 30, 2018
6,698

 
$
3.96

The weighted-average grant date fair value per share of restricted stock units granted during the six months ended June 30, 2018 was $2.20. The aggregate fair value of restricted stock units that vested during six months ended June 30, 2018 was $1.8 million. At June 30, 2018, the intrinsic value of nonvested restricted stock units was $19.1 million. At June 30, 2018, the Company had unrecognized stock-based compensation expense relating to nonvested restricted stock units of approximately $22.8 million, which is expected to be recognized over a weighted-average period of 2.60 years.
Employee Stock Purchase Plan
In November 2013, the Company adopted the Company's 2014 Employee Stock Purchase Plan ("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.
As of June 30, 2018, the Company has reserved 1,692,373 shares of its common stock for issuance under the ESPP.
Stock-Based Compensation Expense
Total stock-based compensation expense recorded in the condensed consolidated statements of operations was as follows:  
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018

June 30, 2017
 
(in thousands)
 
(in thousands)
Cost of revenue
$
77

 
$
96

 
$
184

 
$
180

Sales and marketing
1,158

 
974

 
2,343

 
2,409

Technology and development
623

 
981

 
1,472

 
2,056

General and administrative
2,402

 
2,628

 
4,759

 
5,337

Restructuring and other exit costs
352

 
624

 
398

 
1,560

Total stock-based compensation expense
$
4,612

 
$
5,303

 
$
9,156

 
$
11,542

Note 8—Restructuring and Other Exit Costs
As part of its on-going efforts to control costs and create efficiencies, the Company underwent restructuring events throughout 2017 and in the first quarter of 2018. The objective of these restructuring activities was to streamline operations, prioritize resources for growth initiatives and increase profitability.
In January 2017, the Company announced that it would cease providing intent marketing services and would close its Toronto, Canada office as a result. For the three and six months ended June 30, 2017, the Company recognized expenses of $1.6 million and $6.0 million, respectively, as restructuring and other exit costs related to the cessation of our intent marketing solution, including the closure of the Toronto office, as well as the realignment of the management team to a more cost efficient structure (collectively, the "2017 Restructuring Events"). A majority of the costs incurred in the three and six months ended June 30, 2017 were severance and one-time termination benefit costs, of which $0.7 million and $1.6 million, respectively, related to non-cash stock-based compensation, the remainder of which related to facility closure costs.
In the first quarter of 2018, the Company announced its restructuring plan to reduce headcount to bring the Company's general and administrative operations into better alignment with the current size of the business and de-layer certain functions, and

16

to reduce its investment in unprofitable projects (the "2018 Restructuring Events"). During the three and six months ended June 30, 2018, the Company incurred restructuring and other exit costs of $1.0 million and $3.4 million, respectively, for severance and one-time termination benefits.
The following table summarizes restructuring and other exit cost activity for the 2018 Restructuring Events (in thousands):
Accrued restructuring and other exit costs at December 31, 2017
$
—

Restructuring and other exit costs
3,440

Cash paid for restructuring and other exit costs
(2,561
)
Non-cash stock-based compensation for restructuring and other exit costs
(398
)
Accrued restructuring and other exit costs at June 30, 2018
$
481

Accrued restructuring costs related to the 2017 Restructuring Events were $0.1 million at December 31, 2017 and were paid in the first half of 2018. Accrued restructuring costs are included within other liabilities on the Company's condensed consolidated balance sheets.
Note 9—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 income tax expenses of $0.1 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively and $0.1 million and $0.5 million for the six months ended June 30, 2018 and 2017, respectively. The tax provision for the three and six months ended June 30, 2018 is primarily the result of the domestic valuation allowance and the tax liability associated with the foreign subsidiaries.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including the following: a federal corporate rate reduction from 34% to 21%; limitations on the deductibility of executive compensation and research and development (“R&D”) expenditures; immediate expensing of qualified property; the creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one time U.S. tax liability on those earning which have not previously been repatriated to the U.S. (the “Transition Tax”).
The Tax Act imposes a Transition Tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company determined, among other things, the amount of post-1986 E&P of the relevant subsidiaries. The Company recorded a provisional Transition Tax of $0.6 million, which reduced its U.S. net deferred tax assets for the year ended December 31, 2017. For the six months ended June 30, 2018, there was no change to the provisional Transaction Tax recorded in the prior period.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company has recognized the actual impact of the revaluation of deferred tax balances and the provisional impact related to the one-time Transition Tax. The Company included these amounts in its consolidated financial statements for the year ended December 31, 2017. The ultimate impact may materially differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions that have been made, additional regulatory guidance that may be issued, and actions that may be taken as a result of the Tax Act. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
In addition, it is unclear how many U.S. states will incorporate the federal law changes, or portions thereof, into their tax codes and foreign governments may enact tax laws in response to the Tax Act that could result in further changes to global taxation and materially affect the Company's financial position and results of operations.
Finally, the Tax Act imposes a new BEAT, essentially a 10% minimum tax (5% for tax years beginning after December 31, 2017, increasing to 10% for years beginning after December 31, 2018) calculated on a base equal to taxpayer’s income determined without tax benefits arising from base erosion payments. BEAT does not apply to corporations whose annual gross receipts for the three-taxable-year period ending with the preceding taxable year are less than $500 million. BEAT does not apply to the Company for the year ending December 31, 2018. Also, the Tax Act requires certain GILTI income earned by controlled foreign corporations (“CFCs”) to be included in the gross income of the CFCs’ U.S. shareholder (for tax years beginning after December 31, 2017). For

17

the six months ended June 30, 2018, the Company has included a provisional GILTI inclusion of $1.2 million for purposes of Accounting Standards Codification Topic 740. GAAP allows the Company to either (i) treat taxes due on future U.S. inclusions in taxable income related to BEAT and GILTI as current-period expense when incurred (the “period cost method”); or (ii) factor such amounts into the measurement of deferred taxes (the “deferred method”). The Company elected the period cost method.
Due to uncertainty as to the realization of benefits from the Company's domestic and certain international deferred tax assets, including net operating loss carryforwards and research and development tax credits, the Company has a full valuation allowance reserved against such assets. The Company intends to continue to maintain a full valuation allowance on the deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
There were no material changes to the Company's unrecognized tax benefits in the six months ended June 30, 2018, and 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. During the first quarter of 2017, the Internal Revenue Service commenced an examination of the 2015 tax year. During the second quarter of 2018, the Company received a Letter 590 from the IRS indicating that they had completed the examination and found no income tax related adjustments.
Note 10—Commitments and Contingencies
Operating Leases
The Company has commitments under non-cancelable operating leases for facilities, certain equipment, and its managed data center facilities. Total rental expenses were $3.3 million and $3.0 million for the three months ended June 30, 2018 and 2017, respectively, and $6.5 million and $6.3 million for the six months ended June 30, 2018 and 2017, respectively. Additionally, expenses for cloud-based services related to data centers were $1.5 million and $1.1 million for the three months ended June 30, 2018 and 2017, respectively, and $3.4 million and $2.8 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018 and December 31, 2017, the Company had $2.9 million of letters of credit associated with office leases available for borrowing, on which there were no outstanding borrowings as of either date.
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 material 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 condensed 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 June 30, 2018. However, based on management’s knowledge as of June 30, 2018, 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 condensed consolidated financial position, results of operations or cash flows.
On March 31, 2017, Guardian News & Media Limited ("Guardian") issued proceedings (the "Complaint") against the Company in the Chancery Division of the High Court of Justice in England & Wales. The Complaint alleges that the Company underpaid Guardian for digital advertising inventory sold by Guardian through the Company's platform as a result of the fact that

18

the Company charged fees to buyers of that inventory. Guardian claims the Company was precluded from charging buyer fees as a result of the contractual arrangements with Guardian and English agency law principles, as well as representations it allegedly made to Guardian. The Complaint claims damages including loss of revenue, interest, and costs. The Company disputes Guardian’s claims and is defending them vigorously, but the Complaint involves disputed facts and complex legal questions, and its outcome is therefore uncertain. Even if Guardian were to prevail in this action, the Company does not believe an unfavorable outcome would have a material adverse effect upon its condensed consolidated financial position, results of operations, or cash flows.
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.

19

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q and related statements by the Company contain 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 financial performance, including, without limitation, revenue, advertising spend, non-GAAP net revenue, non-GAAP loss per share, profitability, net income (loss), Adjusted EBITDA, earnings per share, and cash flow; strategic objectives, including focus on header bidding, mobile, video, and private marketplace opportunities; investments in our business; development of our technology; introduction of new offerings; the impact of our acquisition of nToggle and its traffic shaping technology on our business; the effects of our cost reduction initiatives; scope and duration of client relationships; the fees we may charge in the future; business mix and expansion of our mobile, video and private marketplace offerings; sales growth; client utilization of our offerings; our competitive differentiation; our market share and leadership position in the industry; market conditions, trends, and opportunities; consumer reach; certain statements regarding future operational performance measures including ad requests, fill rate, paid impressions, average CPM, take rate, and advertising spend; 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 and to manage any 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, buyers;
•
our reliance on large sources of advertising demand;
•
our ability to maintain and grow a supply of digital advertising inventory from sellers;
•
the effect on the advertising market and our business from difficult economic conditions;
•
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 for purchase and sale of higher value digital advertising inventory and to expand the use of our solution by buyers and sellers utilizing evolving digital media platforms;
•
our ability to introduce new offerings and bring them to market in a timely manner, and otherwise adapt in response to client demands and industry trends, including shifts in digital advertising growth from desktop to mobile channels and from display to video formats;
•
the increased prevalence of header bidding and its effect on our competitive position;
•
our header bidding solution not resulting in revenue growth and causing infrastructure strain and added cost;
•
uncertainty of our estimates and expectations associated with new offerings, including header bidding, private marketplace, mobile, video, guaranteed audience solutions, and traffic shaping;
•
declined fees and take rate and the need to grow through advertising spend increases rather than fee increases;
•
our ability to compensate for a reduced take rate by increasing the volume and/or value of transactions on our platform;
•
our vulnerability to the depletion of our cash resources as revenue declines with the reduction in our take rate and as we incur additional investments in technology required to support the increased volume of transactions on our exchange;
•
our ability to support our growth objectives with reduced resources from our cost reduction initiatives;
•
our ability to raise additional capital if needed and/or to renew our working capital line of credit;
•
our limited operating history and history of losses;
•
our ability to continue to expand into new geographic markets;
•
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);

20

•
the effects, including loss of market share, of increased competition in our market and increasing concentration of advertising spending, including mobile spending, in a small number of very large competitors;
•
the effects of consolidation in the ad tech industry, such as AT&T's acquisition of AppNexus;
•
acts of competitors and other third parties that can adversely affect our business;
•
our ability to differentiate our offerings and compete effectively in a market trending increasingly toward commodification, transparency, and disintermediation;
•
requests for discounts, fee concessions or revisions, rebates, refunds, favorable payment terms 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 identify future acquisitions of or investments in complementary companies or technologies and our ability to consummate the acquisitions and integrate such companies or technologies; and
•
our ability to comply with, and the effect on our business of, the European General Data Protection Regulation (GDPR), the California Consumer Privacy Act, and other evolving legal standards and regulations, particularly concerning data protection and consumer privacy and evolving labor standards.
We discuss many of these risks and additional factors that could cause actual results to differ materially from those anticipated by our forward-looking statements under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this report and in other filings we have made and will make from time to time with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2017 and subsequent Quarterly Reports on Form 10-Q. These forward-looking statements represent our estimates and assumptions only as of the date made. 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, any guidance we may provide will generally be given 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 or will file 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.
Overview
We provide a technology solution to automate the purchase and sale of digital advertising inventory for buyers and sellers. Our platform features applications and services for digital advertising inventory sellers, including websites, mobile applications, other digital media properties, and their representatives to sell their digital advertising inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, and demand side platforms, or DSPs, to buy digital advertising inventory; and a marketplace over which such transactions are executed. Together, these features power and enhance a comprehensive, transparent, independent advertising marketplace that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the digital advertising inventory we manage on our platform. Our clients include many of the world’s leading publishers of websites and mobile applications and buyers of digital advertising inventory.
Advertising inventory takes different forms, referred to as advertising units, is purchased and sold through different transactional methodologies, and allows advertising content to be presented to consumers through different channels. Our solution enables buyers and sellers to purchase and sell:
•
a comprehensive range of advertising units, including display, audio and video;
•
that are transacted through real-time bidding ("RTB"), which includes (i) direct sale of premium inventory, which we refer to as private marketplace ("PMP"), and (ii) open auction bidding, which we refer to as open marketplace ("OMP"); and

21

•
that are displayed across digital channels, including mobile web, mobile application, and desktop, as well as across various out-of-home channels, such as digital billboards.
We generate revenue from transactions where we provide a platform for the purchase and sale of digital advertising inventory. Digital advertising inventory is created when consumers access sellers’ content. Sellers provide digital advertising inventory to our platform in the form of advertising requests, or ad requests. When we receive ad requests from sellers, we send bid requests to buyers, which enable buyers to bid on sellers’ digital advertising inventory. Winning bids can create advertising, or paid impressions, for the seller to present to the consumer. The volume of paid impressions measured as a percentage of ad requests is referred to as fill rate. The price that buyers pay for each thousand paid impressions purchased is measured in units referred to as CPM.
The total volume of spending between buyers and sellers on our platform is referred to as advertising spend. We keep a percentage of that advertising spend as a fee, and remit the remainder to the seller. The fee or “take rate” that we retain from the gross advertising spend on our platform is recognized as revenue. The fee earned on each transaction is based on the pre-existing agreement between the Company and the seller and the clearing price of the winning bid. We discuss advertising spend and take rate more fully in the “Non-GAAP Financial Measures and Operational Performance Measures” section below.
Industry Trends and Trends in Our Business
Market Opportunities
The programmatic digital advertising market continues to experience growth. In September 2017, MAGNA estimated that the global programmatic market (excluding search and social) will grow from $25 billion in 2017 to $51 billion by 2021, which represents a 19% compound annual growth rate over that period. Another important trend in the digital advertising industry is the continued expansion of automated buying and selling of advertising inventory through new and developing channels, including mobile, which has market growth rates exceeding those of the desktop channel and is a critical area of operational focus for us. According to MAGNA estimates, mobile advertising was an $11 billion global market in 2017 that is expected to increase to $32 billion by 2021, producing a compound annual growth rate of 31%.
Consistent with industry trends, our mobile business is growing faster than desktop. Our mobile advertising spend increased $57.8 million, or 38%, for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, while our desktop business declined 2% during the same period. Our mobile business consists of two components, mobile web and mobile applications. Initially our mobile business was built upon mobile web, which is more similar to our desktop business and subject to many of the same market pressures as discussed below, and as a result has experienced low or negative growth in recent periods. While our mobile web business is trending more in line with desktop, our mobile application business, which is where we see the greatest potential for growth, has shown growth rates in excess of industry projections. Advertising spend from mobile applications is approaching half of our mobile business.
The growth of automated buying and selling of advertising is also expanding into geographic markets outside of the United States, and in some markets, the adoption rate of programmatic digital advertising is greater than in the United States. We
attribute advertising spend to the geographic location of the seller on whose inventory the advertising spend was directed. Our
markets outside of the United States are more heavily built upon desktop display advertising than they are on mobile, and as such
are subject to the same factors impacting our desktop business as described below. In addition, as programmatic advertising has
grown in markets outside of the United States, we have seen more competitors enter those markets aggressively and gain market
share. As a result of these factors, the portion of our advertising spend attributed to markets outside the United States declined to 36% during the six months ended June 30, 2018 from 39% during the first half of 2017. Another factor impacting our business is that a large share of the growth in digital advertising spending worldwide is being captured by owned and operated sites, such as Facebook and Google.
Macro Trends Impacting Desktop
These market factors present long-term growth opportunities; however, in the near term the industry-wide shift from desktop to mobile advertising has had an adverse impact on our business. In recent years, we have seen an industry-wide slowdown in the growth rate for traditional desktop advertising, and the growth rate for this portion of the market is expected to flatten in future years. According to MAGNA, programmatic desktop advertising is expected to grow at a 6% compound annual growth rate over the 2017-2021 period. This results from the market shift to mobile channels noted above. These trends are having a significant effect on our overall growth rate, because desktop advertising continues to be a significant part of our core business, representing 53% of advertising spend in the first half of 2018. As noted above, our advertising spend in desktop decreased 2% during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. In addition to the ongoing industry shift away from desktop to mobile, year-over-year growth in our desktop business is hampered further by the continued migration to header bidding, which to date has been focused primarily on desktop display advertising inventory. Header bidding has resulted in adverse revenue effects for us when comparing the six months ended June 30, 2018 to the same period in

22

2017 due to loss to competitors of some inventory that we would otherwise have been able to sell through our platform. While header bidding has increased competition for inventory, it also has made available to us significant amounts of inventory that previously we were unable to access, and while our traditional desktop display business has declined, our header bidding solution gained significant traction in 2017 and through the first half of 2018.
Header bidding is going through an additional technical evolution from the client side, which involves the browser running the auction, to a server-side solution, in which a server runs the auction and offers the potential for improved performance and speed. We believe that our investments in our client-side header bidding solution as well as server-side header bidding have the potential to improve our competitiveness in all markets in 2018 and beyond. However, we must continue to address certain technical and operational challenges, as described under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017, in order to realize our header bidding solution's full potential.
Because of these rapid developments in the industry, advertising spend from our traditional desktop display business has declined and no longer can be relied upon to be the primary growth driver of our business. Our strategic focus is on growth areas—including mobile, video, and PMPs—that are expected to represent a majority of our advertising spend in 2018. However, despite our solid progress in mobile, our traditional desktop display business is expected to continue to represent a significant part of our business in the near term. Therefore, the weight of our desktop display business and its decreasing advertising spend trend will continue to have a significant adverse effect on our growth until our advertising spend mix has shifted more fully to growth areas.
Take Rate Decline
Ad tech exchange intermediaries like us have used different revenue models in OMP transactions, including charging fees only to sellers or arbitraging the purchase and sale of ad impressions. Our approach was historically to charge fees to both buyers and sellers in OMP transactions conducted on our exchange, consistent with the fact that we provide services to each. Traditionally, for OMP waterfall transactions, we ran a modified second price auction in which the clearing price was the greater of the second highest bid in the auction plus one cent or the applicable price floor. Our buyer fees were determined algorithmically and added to the clearing price to determine the price charged to the winning bidder. Our take rate was made up of the total fees we charge buyers and sellers. In the second quarter of 2017, our take rate was 21.0%.
In late 2017, we reduced and then eliminated our buyer fees as a result of three strategic moves we made in response to market conditions. First, in response to market demands for more efficiency and lower cost from intermediaries like us, and in an effort to be more competitive in attracting demand and capturing supply, we made a strategic decision to reduce the fees we charged buyers in OMP waterfall transactions.
Second, the mix of OMP transactions on our exchange had shifted from approximately three quarters conducted through the traditional ad server waterfall at the end of December 2016 to approximately half through the ad server waterfall as of September 30, 2017. In traditional OMP waterfall transactions, available impressions are passed to different demand sources in a sequence determined by the seller’s ad server, and when an impression is passed to a particular demand source, that demand source is generally able to auction the impression with little or no competition. As the percentage of OMP waterfall transactions has declined, the percentage of header bidding transactions has increased. Header bidding increases competition for ad inventory by exposing impressions simultaneously to multiple sources of demand in a competitive auction that, if successful, replaces the ad server waterfall. Each demand source in a header bidding auction conducts its own auction for the impression and then passes its winning bid to a “downstream” meta-auction in which the seller evaluates bids from all its demand sources, and generally the highest bid wins. This competition pushes auction clearing prices much closer to the winning first-price bid than OMP waterfall transactions. In order to be more competitive and give our buyers a better chance of winning the header bidding impressions on which they bid, we began charging lower buyer fees for header bidding transactions so that we could pass higher priced bids into the downstream auction. Based upon experience with this approach and client feedback, in October 2017 we began offering a modified first price auction dynamic in our header bidding solution without buyer fees. Subsequently, in an effort to capture more inventory for our buyers and deliver better monetization to our sellers, and to provide better transparency and predictability to all our clients, effective as of January 22, 2018, we made first price our default auction dynamic for header bidding transactions. This means that the first price or highest bid in our auction wins and that first price is passed to the downstream auction. Because buyers needed time to adapt their systems and bidding strategies to first-price auction dynamics and maximize advertising campaign returns and performance, or may prefer not to develop their own first price pricing algorithms, we built and implemented an optional feature at no additional cost, which we call Estimated Market Rate ("EMR"). This feature uses algorithms that monitor existing market conditions against our dataset of auction outcomes to look for opportunities to reduce the amount of the bid that we pass through to the downstream auction on behalf of our winning bidder, while maintaining high fill rates. This is intended to help buyers bid on digital advertising inventory consistent with market values while preserving demand and budget for sellers on our platform. In addition to increasing the rate at which buyers win in our auctions, and the monetization that that winning provides to sellers, our first price auction dynamic and EMR solution have contributed to higher CPMs for our header bidding inventory.

23

Third, as the ad tech industry has matured and evolved, competition has increased and pricing has become more
transparent. The primary buyers in our OMP transactions are DSPs buying on behalf of agency and brand clients that are demanding reduced costs and fee transparency throughout the value chain. DSPs and their clients are consequently demanding that exchanges disclose and limit or eliminate buyer fees, and DSPs and their clients may reduce or eliminate spending on exchanges that charge buyer fees. In addition, some sellers believe that buyer fees ultimately reduce seller revenue, and therefore are seeking to cap or eliminate buyer fees on sale of their inventory. In response to these market trends, and consistent with our strategy to be a high volume, low cost and transparent exchange, we stopped charging our additive buyer fees altogether effective November 1, 2017. We still charge some buyers an access fee to connect to our system when their spending is too small to support the maintenance of their accounts, but these access fees in the aggregate are insignificant. As such, our future revenue will consist almost entirely of a unitary marketplace fee. Most of our marketplace fees are negotiated with sellers as a percentage of the auction clearing price for sale of their inventory. In some cases, we reduce the buyer’s bid amount by the amount of our fee and pass the remainder as the bid to the seller. If the bid wins we retain the amount of the bid reduction as our fee. We do this at the discretion of sellers that allocate digital advertising inventory through a decisioning process that follows after our auction and incorporates other demand sources as well as our bids, and that prefer or require that we submit our bids to them net of our fees, so that our bid matches the amount we will owe them if we win. This is referred to as net bidding. Net bidding amounts can vary across transactions depending upon various factors including inventory and auction characteristics and seller policies.
These strategic price reductions contributed to the decrease in our take rate from 21.0% for the three months ended June 30, 2017 to 12.1% for the three months ended June 30, 2018.
Our strategic pricing reductions are intended to address the market's demand for lower costs and to attract more inventory and spending to our platform. Lower pricing has caused our revenue and margins to decline significantly during the first half of 2018 compared to the corresponding period in 2017. In order to adjust to our lower take rates and return to growth, we must increase advertising spend on our platform. Increases in PMP and header bidding transactions as a percentage of the activity on our exchange could yield higher advertising spend despite lower take rates due to higher CPMs typically associated with PMP transactions, and from modified first-price auctions in header bidding transactions. However, in an increasingly competitive market in which buyers and sellers have many choices, it is not clear whether pricing reductions will result in increases in spending on our platform, or whether any spending increases will compensate fully for the reduction in pricing. We have seen significant increases in the volume of ad requests we receive, but the rate at which we win header bidding auctions is much lower than the rate at which we win waterfall transactions. As our business continues to shift away from waterfall transactions to header bidding—header bidding now represents more than 77% of our revenue—we need to participate in more header bidding auctions and increase the fill rate in header bidding auctions to compensate for the decline in the number of waterfall transactions. Driving revenue growth in this situation is difficult to accomplish in a competitive market and requires accessing significantly greater inventory levels from our sellers and in turn processing more auctions. This growth in business volume requires adequate processing capacity as well as ongoing innovation to address evolving client needs, capture business, and improve our fill rate.
Prior to the elimination of buyer fees, such fees represented approximately half of our revenue for the first ten months of
2017, and we do not expect to be able to grow advertising spending or reduce costs quickly enough in the near term to make up for the elimination of these fees. This will result in significant cash consumption to support operations during 2018. Unless and until we are able to compensate for elimination of our buyer fees by increasing advertising spend on our platform, through higher transaction volumes or higher transaction values or both, or by increasing seller fees, we will not be able to grow our business and our cash resources will diminish until such time growth offsets our reduced level of operating expenses.
Therefore, while we work to increase the volume of transactions on our exchange and compete more effectively, we must operate more efficiently to relieve the pressure on our margins and cash resources that has resulted from our price reductions and to compensate for the ongoing investments in technology and data processing capabilities required to support the increased volume of transactions that our growth plans require. Consequently, we are continuously evaluating our costs and pursuing additional cost-control and efficiency opportunities, including increased automation, across all aspects of the Company. As part of these efforts, during the first quarter of 2018 we undertook measures to reduce headcount by approximately 100 people, or 19% of our workforce, and to reduce other operating costs. Our actions included reductions in administrative staff to bring our general and administrative operations into better alignment with the current size of the business as well as in sales and technical personnel as a result of offshoring certain development functions, organizational delayering and restructuring, and reducing investment in unprofitable projects.
Uncertainty Resulting from GDPR
The GDPR adds significant new regulatory requirements that are applicable to us as well as our clients and competitors. Some critical elements of the GDPR are still unclear, and there has not yet been time for consistent regulatory guidance to be developed, or for established industry compliance practices to emerge. In particular, uncertainty about the requirements regarding end-user consent, and diverging interpretations among sellers and buyers as to the adequacy of any consent that is obtained, could

24

result in the removal of personal data from bid requests, which will lower the value of the impressions, resulting in reduced revenue and advertising spend for us. Until prevailing industry standards emerge, our revenue from European sellers could fluctuate from quarter to quarter.
Components of Our Results of Operations
We report our financial results as one operating segment. Our consolidated operating results, together with non-GAAP financial measures and the operational performance 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.
Revenue
We generate revenue from the purchase and sale of digital advertising inventory through our marketplace. We recognize revenue upon the fulfillment of our contractual obligations in connection with a completed transaction, subject to satisfying all other revenue recognition criteria. Our revenue recognition policies are discussed in more detail within Note 3 of the accompanying Notes to the Condensed Consolidated Financial Statements.
Expenses
We classify our expenses into the following categories:
Cost of Revenue. Our cost of revenue consists primarily of 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, facilities-related costs, and for transactions we have previously reported on a gross basis, the amounts we paid sellers. 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.
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, as well as marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with client relationships and backlog from our business acquisitions, and to a lesser extent, facilities-related costs and depreciation and amortization. Our sales organization focuses on increasing the adoption of our solution by existing and new buyers and sellers. We amortize acquired intangibles associated with client 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 bonuses, as well as 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 condensed 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 and bonuses, 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 amortization, 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.
Restructuring and Other Exit Costs. Our restructuring and other exit costs consist primarily of employee termination costs, including stock-based compensation charges, and facility closure costs.

25

Other (Income), Expense
Interest (Income) Expense, Net. Interest income consists of interest earned on our cash equivalents and marketable securities. Interest expense is mainly related to our credit facility and was insignificant for the six months ended June 30, 2018 and 2017.
Other Income. Other income consists primarily of rental income from commercial office space we hold under lease and have sublet to other tenants.
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.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes consists of federal, state, and foreign income taxes and is primarily the result of the domestic valuation allowance and the tax liability associated with foreign subsidiaries. Due to uncertainty as to the realization of benefits from the predominant portion of our domestic and international net deferred tax assets, including net operating loss carryforwards and research and development tax credits, we have a full valuation allowance reserved against such net deferred tax assets. We intend to continue to maintain a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain net deferred tax assets and a decrease to income tax expense or recognition of a benefit for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to achieve.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including the following: a federal corporate rate reduction from 34% to 21%; limitations on the deductibility of executive compensation and research and development (“R&D”) expenditures; immediate expensing of qualified property; the creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, which will result in a one time U.S. tax liability on those earning which have not previously been repatriated to the U.S. (the “Transition Tax”).
The Tax Act imposes a Transition Tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we determined, among other things, the amount of post-1986 E&P of the relevant subsidiaries. We recorded a provisional Transition Tax of $0.6 million, which reduced our U.S. net deferred tax assets for the year ended December 31, 2017. For the six months ended June 30, 2018, there was no change to the provisional Transaction Tax recorded in the prior period.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have recognized the actual impact of the revaluation of deferred tax balances and the provisional impact related to the one-time Transition Tax. We included these amounts in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may materially differ from these provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions that have been made, additional regulatory guidance that may be issued, and actions that may be taken as a result of the Tax Act. We expect to complete our analysis within the measurement period in accordance with SAB 118.
In addition, it is unclear how many U.S. states will incorporate the federal law changes, or portions thereof, into their tax codes and foreign governments may enact tax laws in response to the Tax Act that could result in further changes to global taxation and materially affect our financial position and results of operations.
Finally, the Tax Act imposes a new BEAT, essentially a 10% minimum tax (5% for tax years beginning after December 31, 2017, increasing to 10% for years beginning after December 31, 2018) calculated on a base equal to taxpayer’s income determined without tax benefits arising from base erosion payments. BEAT does not apply to corporations whose annual gross receipts for the three-taxable-year period ending with the preceding taxable year are less than $500 million. BEAT does not apply to the Company for the year ending December 31, 2018. Also, the Tax Act requires certain GILTI income earned by controlled foreign corporations (“CFCs”) to be included in the gross income of the CFCs’ U.S. shareholder (for tax years beginning after December 31, 2017). For the six months ended June 30, 2018, we have included a provisional GILTI inclusion of $1.2 million for purposes of Accounting Standards Codification Topic 740. GAAP allows us to either (i) treat taxes due on future U.S. inclusions

26

in taxable income related to BEAT and GILTI as current-period expense when incurred (the “period cost method”); or (ii) factor such amounts into the measurement of deferred taxes (the “deferred method”). We elected the period cost method.
Results of Operations
The following table sets forth our condensed consolidated results of operations:
 
Three Months Ended
 
Favorable/(Unfavorable) %
 
Six Months Ended
 
Favorable/(Unfavorable) %
 
June 30, 2018
 
June 30, 2017
 
 
June 30, 2018
 
June 30, 2017
 
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenue
$
28,648

 
$
42,922

 
(33
)%
 
$
53,524

 
$
88,937

 
(40
)%
Expenses (1)(2):
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
15,044

 
13,698

 
(10
)%
 
29,827

 
28,386

 
(5
)%
Sales and marketing
11,135

 
12,529

 
11
 %
 
23,392

 
27,157

 
14
 %
Technology and development
9,245

 
12,044

 
23
 %
 
19,739

 
24,797

 
20
 %
General and administrative
11,441

 
14,355

 
20
 %
 
23,985

 
29,435

 
19
 %
Restructuring and other exit costs
974

 
1,621

 
40
 %
 
3,440

 
5,959

 
42
 %
Total expenses
47,839

 
54,247

 
12
 %
 
100,383

 
115,734

 
13
 %
Loss from operations
(19,191
)
 
(11,325
)
 
(69
)%
 
(46,859
)
 
(26,797
)
 
(75
)%
Other (income) expense, net
(1,281
)
 
84

 
NM

 
(1,208
)
 
77

 
NM

Loss before income taxes
(17,910
)
 
(11,409
)
 
(57
)%
 
(45,651
)
 
(26,874
)
 
(70
)%
Provision for income taxes
74

 
146

 
49
 %
 
149

 
521

 
71
 %
Net loss
$
(17,984
)
 
$
(11,555
)
 
(56
)%
 
$
(45,800
)
 
$
(27,395
)
 
(67
)%
NM - Not Meaningful
(1) Stock-based compensation expense included in our expenses was as follows:
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Cost of revenue
$
77

 
$
96

 
$
184

 
$
180

Sales and marketing
1,158

 
974

 
2,343

 
2,409

Technology and development
623

 
981

 
1,472

 
2,056

General and administrative
2,402

 
2,628

 
4,759

 
5,337

Restructuring and other exit costs
352

 
624

 
398

 
1,560

Total stock-based compensation expense
$
4,612

 
$
5,303

 
$
9,156

 
$
11,542

(2) Depreciation and amortization expense included in our expenses was as follows:
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Cost of revenue
$
8,353

 
$
8,045

 
$
16,514

 
$
16,424

Sales and marketing
151

 
286

 
314

 
753

Technology and development
227

 
331

 
468

 
997

General and administrative
147

 
193

 
292

 
802

Total depreciation and amortization expense
$
8,878

 
$
8,855

 
$
17,588

 
$
18,976


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The following table sets forth our condensed consolidated results of operations for the specified periods as a percentage of our revenue for those periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Revenue
100
 %
 
100
 %
 
100
 %
 
100
 %
Cost of revenue
53

 
32

 
56

 
32

Sales and marketing
39

 
29

 
44

 
30

Technology and development
32

 
28

 
37

 
28

General and administrative
40

 
34

 
45

 
33

Restructuring and other exit costs
3

 
4

 
6

 
7

Total expenses
167

 
127

 
188

 
130

Loss from operations
(67
)
 
(27
)
 
(88
)
 
(30
)
Other (income) expense, net
(4
)
 
—

 
(2
)
 
—

Loss before income taxes
(63
)
 
(27
)
 
(86
)
 
(30
)
Provision for income taxes
—

 
—

 
—

 
1

Net loss
(63
)%
 
(27
)%
 
(86
)%
 
(31)
 %
Comparison of the Three and Six Months Ended June 30, 2018 and 2017
Revenue
Revenue decreased $14.3 million, or 33%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease was primarily due to the elimination of our buyer fees beginning in November 2017, market and competitive pressures, deceleration in traditional desktop display spending, and header bidding dynamics as described above in "Industry Trends and Trends in Our Business".
For the six months ended June 30, 2018, revenue decreased $35.4 million, or 40%, compared to the prior year period, primarily for the same reasons described above for the three month period. The decrease for the six month period was also impacted by the cessation of our intent marketing solution in March 2017.
Revenue is impacted by shifts in the mix of advertising spend by transaction type and channel, changes in the fees we charge buyers and sellers for our services (which drive take rate), and other factors such as changes in the market, our execution of the business, and competition. In addition to the elimination of buyer transaction fees resulting in lower take rate, an increase in PMP transactions as a percentage of the transactions on our platform could contribute to lower take rates because PMP transactions can carry lower fees than OMP transactions. Industry dynamics are challenging due to market and competitive pressures and make it difficult to predict the near-term effect of our growth initiatives. Consequently, while we anticipate long-term benefits from these initiatives, unless and until we are able to compensate for the reduction in our fees by continuing to increase advertising spend on our platform, through higher transaction volumes or higher transaction values or both, or by increasing seller fees, our revenue will continue to decline, we will not be able to grow our business, and our cash resources will diminish until such time growth offsets our reduced level of operating expenses.
Cost of Revenue
Cost of revenue increased by $1.3 million, or 10%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily due to an increase of $1.1 million in data center and bandwidth expenses to support the increase in our transaction volume.
For the six months ended June 30, 2018, cost of revenue increased $1.4 million, or 5%, compared to the prior year period. The increase was primarily due an increase of $2.3 million in data center and bandwidth expenses to support the increase in our transaction volume, which was partially offset by a $0.8 million reduction in media costs related to the cessation of our intent marketing solution during the first quarter of 2017.
We expect cost of revenue to be higher in absolute dollars in 2018 compared to 2017 as a result of increased spending on data centers, serving costs, and technology to process the greater volumes of data and transactions we will need to grow revenue. Cost of revenue may fluctuate from quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, depending on revenue levels and the volume of transactions we process supporting those revenues, and the timing and amounts of depreciation and amortization of equipment and software.

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Sales and Marketing
Sales and marketing expenses decreased $1.4 million or 11% for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily due to a decrease of $0.6 million in sales and marketing personnel costs as a result of our 2018 cost control initiatives. Sales and marketing depreciation and amortization costs also decreased compared to the prior year period.
For the six months ended June 30, 2018, sales and marketing expenses decreased $3.8 million, or 14%, compared to the prior year period. The decrease is attributable to our 2017 and 2018 cost reduction measures, including the realignment of our management team, primarily consisting of a $2.1 million decrease in personnel costs as well as decreases across other expenses necessary to support our reduced headcount.
We expect sales and marketing expenses to continue to decline in 2018 compared to 2017 as a result of headcount reductions and other cost control measures we implemented in the first quarter of 2018, as described below. Sales and marketing expense may fluctuate quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, based on revenue levels, the timing of our investments and seasonality in our industry and business.
Technology and Development
Technology and development expenses decreased by $2.8 million, or 23%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily due to a decrease of $2.5 million in personnel costs as a result of our 2018 cost control initiatives.
For the six months ended June 30, 2018, technology and development expenses decreased by $5.1 million, or 20%, compared to the prior year period. Technology and development personnel costs decreased $3.7 million for the six months ended June 30, 2018 compared to the prior year period, primarily as a result of our 2017 and 2018 cost control initiatives. In addition, facilities related expenses and depreciation and amortization expenses decreased compared to the prior year period primarily due to the cessation of our intent marketing services offering and closure of our Toronto office in the first quarter of 2017.     
We expect technology and development expense to continue to decline in 2018 compared to 2017 as a result of headcount reductions we implemented in the first quarter 2018, as described below, and we expect additional savings in 2018 as we improve our efficiencies in technology development while continuing to invest in our engineering and technology teams. The timing and amount of our capitalized development and enhancement projects may affect the amount of development costs expensed in any given period. As a percentage of revenue, technology and development expense may fluctuate from quarter to quarter and period to period based on revenue levels, the timing and amounts of these investments, the timing and the rate of the amortization of capitalized projects and the timing and amounts of future capitalized internal use software development costs.
General and Administrative  
General and administrative expenses decreased by $2.9 million, or 20%, for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The decrease is primarily due to a decrease of $1.8 million in personnel costs as a result of our 2018 cost control initiatives. In addition, professional services expenses decreased by $0.4 million.
For the six months ended June 30, 2018, general and administrative expenses decreased by $5.5 million, or 19%, compared to the prior year period. Personnel related expenses decreased $2.2 million primarily as a result of our 2017 and 2018 cost control initiatives. Professional service expenses also decreased $1.9 million, including reductions in legal fees and consultant services. General and administrative depreciation and amortization costs also decreased $0.5 million due to accelerated amortization of certain capitalized software assets in 2017.
We expect quarterly general and administrative expense to continue to decline in 2018 compared to 2017 as a result of headcount reductions and other cost control measures we implemented in the first quarter 2018, as described below. General and administrative expenses may fluctuate from quarter to quarter and period to period based on the timing and amounts of our investments and related expenditures in our general and administrative functions as they vary in scope and scale over periods which may not be directly proportional to changes in revenue.
Restructuring and Other Exit Costs
We incurred restructuring and other exit costs of $1.0 million and $3.4 million for severance and other one-time employee termination benefits during the three and six months ended June 30, 2018, respectively, related to headcount reductions that were made in the first quarter of 2018, as described below. For the three and six months ended June 30, 2017, we incurred $1.6 million and $6.0 million, respectively, primarily in severance and one-time employee termination benefits and facility closure costs, as a result of the management restructuring and the costs associated with the shut-down of our intent marketing services (see Note 8).

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As part of our on-going evaluation of efficiency and implementation of cost-control measures, during the first quarter of 2018 we undertook measures to reduce headcount by approximately 100 people, or 19% of our workforce, and to reduce other operating costs. Our actions included reductions in administrative staff to bring our general and administrative operations into better alignment with the current size of the business as well as in sales and technical personnel as a result of offshoring certain development functions, organizational delayering and restructuring, and reducing investment in unprofitable projects. We estimate the 2018 restructuring activities will result in annualized cash basis cost savings of approximately $24.0 million, which we began to realize in the second quarter of 2018.
Other (Income) Expense, Net
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Interest income, net
$
(274
)
 
$
(228
)
 
$
(545
)
 
$
(395
)
Other income
(210
)
 
(167
)
 
(420
)
 
(379
)
Foreign exchange (gain) loss, net
(797
)
 
479

 
(243
)
 
851

Total other (income) expense, net
$
(1,281
)
 
$
84

 
$
(1,208
)
 
$
77

Foreign exchange (gain) loss, net is impacted by movements in exchange rates, primarily the British Pound and the Euro relative to the U.S. Dollar, and the amount of foreign currency-denominated receivables and payables, which are impacted by our billings to buyers and payments to sellers. The foreign currency gain, net during the three and six months ended June 30, 2018 was primarily attributable to the strengthening of the U.S. Dollar in relation to the Euro and the British Pound for foreign currency denominated transactions.
Provision for Income Taxes     
We recorded income tax expenses of $0.1 million and $0.1 million for the three months ended June 30, 2018 and 2017, respectively, and $0.1 million and $0.5 million for the six months ended June 30, 2018 and 2017, respectively. The tax provision for the three and six months ended June 30, 2018 is primarily the result of the domestic valuation allowance and the tax liability associated with foreign subsidiaries.
Non-GAAP Financial Measures and Operational Performance Measures
In addition to our GAAP results, we review certain non-GAAP financial measures and operational measures 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 advertising spend, non-GAAP net revenue, Adjusted EBITDA, and take rate, 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".
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Financial Measures and non-GAAP Financial Measures:
 
 
 
 
 
 
 
Revenue
$
28,648

 
$
42,922

 
$
53,524

 
$
88,937

Advertising spend
$
237,658

 
$
204,391

 
$
448,685

 
$
395,931

Non-GAAP net revenue
$
28,648

 
$
42,922

 
$
53,524

 
$
88,304

Net loss
$
(17,984
)
 
$
(11,555
)
 
$
(45,800
)
 
$
(27,395
)
Adjusted EBITDA
$
(5,491
)
 
$
3,000

 
$
(19,695
)
 
$
4,100

Operational Measure:
 
 
 
 
 
 
 
Take Rate %
12.1
%
 
21.0
%
 
11.9
%
 
22.3
%
Advertising Spend
We define advertising spend as the total volume of spending between buyers and sellers transacted on our platform. Advertising spend does not represent revenue reported on a GAAP basis. Tracking our advertising spend facilitates comparison of

30

our results to the results of companies in our industry that report GAAP revenue on a gross basis. We also use advertising spend for internal management purposes to assess market share of total advertising spending.
Our advertising spend may be influenced by demand for our services, the volume and characteristics of paid impressions, average CPM, our ability to fill ad requests, the nature and amount of fees we charge, and other factors such as changes in the market, our execution of the business, and competition.
Advertising spend may fluctuate due to seasonality. In the past, we have experienced higher advertising spend during the fourth quarter of a given year because many buyers devote a disproportionate amount of their advertising budgets to this period of the year to coincide with increased holiday purchasing. Buyers' focus on the fourth quarter generates more bidding activity on our platform, which may drive higher volumes of paid impressions, average CPM, or both. Our advertising spend grew 16% and 13% for the three and six months ended June 30, 2018, respectively, compared to the same periods in 2017. The increase in advertising spend was driven by higher ad request volumes and an increase in the CPMs generated from our auctions. The increase in CPMs was driven by increased bidding activity on our platform, the value of the inventory that we made available to buyers, including PMP, mobile and video inventory that typically carries higher pricing, and auction dynamics, including the implementation of first price auctions and EMR for our header bidding inventory.
The following table presents the reconciliation of revenue to advertising spend:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Revenue
$
28,648

 
$
42,922

 
$
53,524

 
$
88,937

Plus amounts paid to sellers(1)
209,010

 
161,469

 
395,161

 
306,994

Advertising spend
$
237,658

 
$
204,391

 
$
448,685

 
$
395,931

(1) Amounts paid to sellers for the portion of our revenue reported on a net basis for GAAP purposes. 
Our solution enables buyers and sellers to transact through desktop and mobile channels. The following tables present revenue and advertising spend in dollar terms by channel and as a percentage of total revenue or advertising spend for the three and six months ended June 30, 2018 and 2017.
 
Revenue
 
Advertising Spend
 
Three Months Ended
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands, except percentages)
Channel:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Desktop
$
13,663

 
48
%
 
$
23,746

 
55
%
 
$
117,029

 
49
%
 
$
118,517

 
58
%
Mobile
14,985

 
52

 
19,176

 
45

 
120,629

 
51

 
85,874

 
42

Total
$
28,648

 
100
%
 
$
42,922

 
100
%
 
$
237,658

 
100
%
 
$
204,391

 
100
%
 
Revenue
 
Advertising Spend
 
Six Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands, except percentages)
Channel:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Desktop
$
27,972

 
52
%
 
$
52,075

 
59
%
 
$
237,087

 
53
%
 
$
242,156

 
61
%
Mobile
25,552

 
48

 
36,862

 
41

 
211,598

 
47

 
153,775

 
39

Total
$
53,524

 
100
%
 
$
88,937

 
100
%
 
$
448,685

 
100
%
 
$
395,931

 
100
%
Non-GAAP Net Revenue
We define non-GAAP net revenue as GAAP revenue less amounts we pay sellers, where the amounts paid are included within cost of revenue for the portion of our revenue reported on a gross basis. The portion of our revenue reported on a gross basis was attributable to intent marketing services, which no longer generated revenue after the first quarter of 2017. Historically, non-GAAP net revenue was a useful measure in assessing the performance of our business in periods for which our revenue included revenue reported on a gross basis, because it showed the operating results of our business on a consistent basis without the effect of differing revenue reporting (gross vs. net) that we applied under GAAP across different types of transactions, and facilitated

31

comparison of our results to the results of companies that report all of their revenue on a net basis. Revenue from intent marketing services in the first quarter of 2017 created the difference between our non-GAAP net revenue and our GAAP revenue for that period. We ceased offering our intent marketing solution in the first quarter of 2017, so for subsequent periods non-GAAP net revenue is the same as GAAP revenue, as there is no longer a reconciling item between GAAP and non-GAAP net revenue. Non-GAAP net revenue is presented for comparative purposes as the first quarter of 2017 still included the intent marketing solution reconciling item.
A potential limitation of non-GAAP net revenue is that other companies may define non-GAAP net revenue differently, which may make comparisons difficult.
Non-GAAP net revenue is influenced by the volume and characteristics of advertising spend and our take rate. The revenue we have reported on a gross basis was associated with our intent marketing business. Because we exited that business in the first quarter of 2017, we do not expect to report any revenue on a gross basis after the first quarter of 2017 unless and until we change our business practices, develop new products, or make an acquisition, in each case with characteristics that require gross reporting.
The following table presents a reconciliation of revenue to non-GAAP net revenue for the three and six months ended June 30, 2018 and 2017.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(in thousands)
 
(in thousands)
Revenue
$
28,648

 
$
42,922

 
$
53,524

 
$
88,937

Less amounts paid to sellers(1)

—

 
—

 
—