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Table of Contents

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, 2016
OR

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of July 25, 2016
Common Stock, $0.00001 par value
 
48,920,591



Table of Contents

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

INDEX

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

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
  THE RUBICON PROJECT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
147,188

 
$
116,499

Accounts receivable, net
158,333

 
218,235

Marketable securities
39,700

 
23,349

Prepaid expenses and other current assets
7,303

 
7,624

TOTAL CURRENT ASSETS
352,524

 
365,707

Property and equipment, net
24,845

 
25,403

Internal use software development costs, net
15,789

 
13,929

Goodwill
65,705

 
65,705

Intangible assets, net
41,923

 
50,783

Marketable securities and other assets, non-current
1,900

 
15,209

TOTAL ASSETS
$
502,686

 
$
536,736

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
188,557

 
$
247,967

Other current liabilities
2,556

 
2,196

TOTAL CURRENT LIABILITIES
191,113

 
250,163

Deferred tax liability, net
6,774

 
6,225

Other liabilities, non-current
1,954

 
2,247

TOTAL LIABILITIES
199,841

 
258,635

Commitments and contingencies (Note 9)

 

STOCKHOLDERS' EQUITY
 
 
 
Preferred stock, $0.00001 par value, 10,000 shares authorized at June 30, 2016 and December 31, 2015; 0 shares issued and outstanding at June 30, 2016 and December 31, 2015

 

Common stock, $0.00001 par value; 500,000 shares authorized at June 30, 2016 and December 31, 2015; 48,850 and 46,600 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

 

Additional paid-in capital
383,570

 
358,406

Accumulated other comprehensive loss
(42)

 
(15)

Accumulated deficit
(80,683)

 
(80,290)

TOTAL STOCKHOLDERS' EQUITY
302,845

 
278,101

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
502,686

 
$
536,736


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

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THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Revenue
$
70,511

 
$
53,046

 
$
139,743

 
$
90,224

Expenses:
 
 
 
 
 
 
 
Cost of revenue
17,540

 
14,009

 
34,323

 
20,570

Sales and marketing
21,966

 
22,161

 
43,244

 
37,210

Technology and development
13,294

 
10,390

 
25,737

 
18,804

General and administrative
16,390

 
17,984

 
36,995

 
32,263

Total expenses
69,190

 
64,544

 
140,299

 
108,847

Income (loss) from operations
1,321

 
(11,498
)
 
(556
)
 
(18,623
)
Other (income) expense
 
 
 
 
 
 
 
Interest (income) expense, net
(131
)
 
11

 
(225
)
 
23

Other income
(197
)
 

 
(197
)
 

Foreign exchange (gain) loss, net
(578
)
 
847

 
(317
)
 
(1,343
)
Total other (income) expense, net
(906
)
 
858

 
(739
)
 
(1,320
)
Income (loss) before income taxes
2,227

 
(12,356
)
 
183

 
(17,303
)
Provision (benefit) for income taxes
4,904

 
(413
)
 
576

 
(329
)
Net loss
$
(2,677
)
 
$
(11,943
)
 
$
(393
)
 
$
(16,974
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
(0.30
)
 
$
(0.01
)
 
$
(0.45
)
Diluted
$
(0.06
)
 
$
(0.30
)
 
$
(0.01
)
 
$
(0.45
)
Weighted-average shares used to compute net loss per share:
 
 
 
 
 
 
 
Basic
46,341

 
39,414

 
45,502

 
37,596

Diluted
46,341

 
39,414

 
45,502

 
37,596


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

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THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Net loss
$
(2,677
)
 
$
(11,943
)
 
$
(393
)
 
$
(16,974
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on investments, net of tax
20

 
(3
)
 
84

 
(3
)
Foreign currency translation adjustments
(138
)
 
93

 
(111
)
 
30

Comprehensive loss
$
(2,795
)
 
$
(11,853
)
 
$
(420
)
 
$
(16,947
)

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


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THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
 
Common Stock 
 
Additional
Paid-In
Capital
 
Accumulated  Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders'
Equity 
 
Shares
 
Amount
 
Balance at December 31, 2015
46,600

 
$

 
$
358,406

 
$
(15
)
 
$
(80,290
)
 
$
278,101

Exercise of common stock options
1,771

 

 
12,859

 

 

 
12,859

Restricted stock awards, net
106

 

 

 

 

 

Shares withheld related to net share settlement
(341
)
 

 
(4,886
)
 

 

 
(4,886
)
Issuance of common stock related to RSU vesting
621

 

 

 

 

 

Issuance of common stock related to employee stock purchase plan
93

 

 
1,137

 

 

 
1,137

Stock-based compensation

 

 
16,054

 

 

 
16,054

Foreign exchange translation adjustment

 

 

 
(111
)
 

 
(111
)
Unrealized gain on investments, net of tax

 

 

 
84

 

 
84

Net loss

 

 

 

 
(393
)
 
(393
)
Balance at June 30, 2016
48,850

 
$

 
$
383,570

 
$
(42
)
 
$
(80,683
)
 
$
302,845


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


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THE RUBICON PROJECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(393
)
 
$
(16,974
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,408

 
13,849

Stock-based compensation
15,517

 
13,237

Loss on disposal of property and equipment, net
5

 
29

Change in fair value of contingent consideration

 
3

Unrealized foreign currency (gains) losses, net
(1,179
)
 
508

Deferred income taxes
557

 
(11
)
Changes in operating assets and liabilities, net of effect of business acquisitions:
 
 
 
Accounts receivable
59,638

 
(1,007
)
Prepaid expenses and other assets
(113
)
 
97

Accounts payable and accrued expenses
(59,252
)
 
19,845

Other liabilities
62

 
(950
)
Net cash provided by operating activities
33,250

 
28,626

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment, net
(3,933
)
 
(4,246
)
Capitalized internal use software development costs
(5,029
)
 
(4,061
)
Acquisitions, net of cash acquired

 
(8,647
)
Investments in available-for-sale securities
(15,687
)
 
(18,052
)
Maturities of available-for-sale securities
12,800

 

Change in restricted cash
256

 
1,100

Net cash used by investing activities
(11,593
)
 
(33,906
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from exercise of stock options
12,859

 
6,710

Proceeds from issuance of common stock under employee stock purchase plan
1,137

 
759

Taxes paid related to net share settlement
(4,886
)
 

Repayment of debt and capital lease obligations

 
(105
)
Net cash provided by financing activities
9,110

 
7,364

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(78
)
 
(46
)
CHANGE IN CASH AND CASH EQUIVALENTS
30,689

 
2,038

CASH AND CASH EQUIVALENTS--Beginning of period
116,499

 
97,196

CASH AND CASH EQUIVALENTS--End of period
$
147,188

 
$
99,234

SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
 
 
 
Capitalized assets financed by accounts payable and accrued expenses
$
1,698

 
$
1,910

Capitalized stock-based compensation
$
537

 
$
360

Common stock and options issued for business acquisitions
$

 
$
76,795


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

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THE RUBICON PROJECT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1—Organization and Summary of Significant Accounting Policies
Company Overview
The Rubicon Project, Inc., or Rubicon Project or the Company, was formed on April 20, 2007 in Delaware and began operations in April 2007. The Company is headquartered in Los Angeles, California.
The Company is a technology company with a mission to keep the Internet free and open and to fuel its growth by making it easy and safe to buy and sell advertising. The Company pioneered advertising automation technology to enable the world's leading brands, content creators, and application developers to trade and protect trillions of advertising requests each month and to improve the advertising experience of consumers. The Company offers a highly scalable platform that provides an automated advertising solution for buyers and sellers of digital advertising.

The Company delivers value to buyers and sellers of digital advertising through the Company's proprietary advertising automation solution, which provides critical functionality to both buyers and sellers. The advertising automation solution consists of applications for sellers, including providers of websites, mobile applications and other digital media properties, to sell their advertising inventory; applications for buyers, including advertisers, agencies, agency trading desks, demand side platforms, and ad networks, to buy advertising inventory; and a marketplace over which such transactions are executed. This solution incorporates proprietary machine-learning algorithms, sophisticated data processing, high-volume storage, detailed analytics capabilities, and a distributed infrastructure. Together, these features form the basis for the Company's automated advertising solution that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the advertising inventory managed on the Company's platform.
 
Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for the interim period presented have been included. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, for any future interim period, or for any future year.

The condensed consolidated balance sheet at December 31, 2015 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, 2015 included in its Annual Report on Form 10-K.

There have been no significant changes in the Company's accounting policies from those disclosed in its audited consolidated financial statements and notes thereto for the year ended December 31, 2015 included in its Annual Report on Form 10-K.
Revenue Recognition
The Company generates revenue from buyers and sellers in transactions in which they use the Company's solution for the purchase and sale of advertising inventory, and also in transactions in which the Company manages ad campaigns on behalf of buyers. The Company maintains separate arrangements with each buyer and seller either in the form of a master agreement, which specifies the terms of the relationship and access to the Company's solution, or by insertion orders, which specify price and volume requests and other terms. The Company recognizes revenue upon the fulfillment of its contractual obligations in connection with a completed transaction, subject to satisfying all other revenue recognition criteria, including (i) persuasive evidence of an arrangement existing, (ii) delivery having occurred or services having been rendered, (iii) the fees being fixed or determinable, and (iv) collectibility being reasonably assured. The Company assesses whether fees are fixed or determinable based on the contractual terms of the arrangements. Historically, any refunds and adjustments have not been material. The Company assesses collectibility based on a number of factors, including the creditworthiness of a buyer and seller and payment and transaction history. The Company's revenue arrangements generally do not include multiple deliverables.


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

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

For the Company's other arrangements, in which the Company's solution matches buyers and sellers, enables them to purchase and sell advertising inventory, and establishes rules and parameters for advertising inventory transactions, the Company reports revenue on a net basis because the Company: (i) is not the primary obligor for the purchase of advertising inventory but rather provides a platform to facilitate the buying and selling of advertising; (ii) does not have pricing latitude as pricing is generally determined through the Company's auction process and/or the Company's fees are based on a percentage of advertising spend; and (iii) does not directly select suppliers.
Reclassifications
Certain amounts in the consolidated balance sheet for December 31, 2015 have been reclassified to conform with current-period presentation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported and disclosed financial statements and accompanying footnotes. Actual results could differ materially from these estimates.
Recent Accounting Pronouncements
Under the Jumpstart Our Business Startups Act, or the JOBS Act, the Company meets the definition of an emerging growth company. The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
In May 2014, the FASB issued new accounting guidance that amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under the "Revenue from Contracts with Customers" topic with those of the International Financial Reporting Standards. The guidance implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. These amendments were effective for reporting periods beginning after December 15, 2016, with early adoption prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Subsequent to issuing the May 2014 guidance, in August 2015, the FASB issued amendments that deferred the effective date one year. As a result, the guidance is effective for reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016; in March 2016, the FASB issued further amendments that clarify the implementation guidance on principal versus agent considerations in the new revenue recognition standard. The amendments clarify how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The Company is currently assessing the impact this guidance will have on the Company's consolidated financial statements.

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In January 2016, the FASB issued new accounting guidance that changes certain recognition, measurement, presentation, and disclosure requirements for financial instruments. The new guidance requires all equity investments, except those accounted for under the equity method of accounting or resulting in consolidation, to be measured at fair value with changes in fair value recognized in net income. The guidance also simplifies the impairment assessment for equity investments without readily determinable fair values, amends the presentation requirements for changes in the fair value of financial liabilities, requires presentation of financial instruments by measurement category and form of financial asset, and eliminates the requirement to disclose the methods and significant assumptions used in estimating the fair value of financial instruments. The new guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is not permitted except for the amended presentation requirements for changes in the fair value of financial liabilities. The Company is currently assessing the impact this guidance will have on the Company's consolidated financial statements.
In February 2016, the FASB issued new accounting guidance that requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance 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. This guidance 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 assessing the impact this guidance will have on the Company's consolidated financial statements.
In March 2016, the FASB issued new accounting guidance that involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. In regards to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. This guidance is effective for fiscal years beginning after December 15, 2016 including interim periods within that reporting period; however early adoption is permitted. The Company is currently assessing the impact this guidance will have on the Company's consolidated financial statements.
In June 2016, the FASB issued new guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The new guidance will be effective for the Company starting in the first quarter of fiscal 2021. Early adoption is permitted starting in the first quarter of fiscal 2020. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.

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Note 2—Net Loss Per Share
The following table presents the basic and diluted net loss per share for each period presented:
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(In thousands, except per share data)
Net loss
$
(2,677
)
 
$
(11,943
)
 
$
(393
)
 
$
(16,974
)
Weighted-average common shares outstanding
48,740

 
41,873

 
47,939

 
39,747

Weighted-average unvested restricted shares
(1,763
)
 
(1,682
)
 
(1,732
)
 
(1,698
)
Weighted-average escrow shares
(636
)
 
(777
)
 
(705
)
 
(453
)
Weighted-average common shares outstanding used to compute net loss per share
46,341

 
39,414

 
45,502

 
37,596

Basic net loss per share
$
(0.06
)
 
$
(0.30
)
 
$
(0.01
)
 
$
(0.45
)
Diluted EPS:
 
 
 
 
 
 
 
Net loss
$
(2,677
)
 
$
(11,943
)
 
$
(393
)
 
$
(16,974
)
Weighted-average common shares used in basic EPS
46,341

 
39,414

 
45,502

 
37,596

Dilutive effect of weighted-average common stock options

 

 

 

Dilutive effect of weighted-average restricted stock awards

 

 

 

Dilutive effect of weighted-average restricted stock units

 

 

 

Dilutive effect of weighted-average ESPP

 

 

 

Dilutive effect of weighted-average escrow shares

 

 

 

Dilutive effect of weighted-average contingent shares

 

 

 

Weighted-average shares used to compute diluted net loss per share
46,341

 
39,414

 
45,502

 
37,596

Diluted net loss per share
$
(0.06
)
 
$
(0.30
)
 
$
(0.01
)
 
$
(0.45
)
The following weighted-average shares have been excluded from the calculation of diluted net loss per share for each period presented because they are anti-dilutive:
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Options to purchase common stock
1,317

 
2,894

 
1,519

 
2,951

Unvested restricted stock awards
756

 
674

 
685

 
660

Unvested restricted stock units
930

 
710

 
913

 
500

ESPP
26

 
28

 
22

 
28

Shares held in escrow
635

 
638

 
699

 
381

Contingent shares

 
1,552

 

 
1,110

Total shares excluded from net loss per share
3,664

 
6,496

 
3,838

 
5,630

In addition to the above anti-dilutive shares, shares contingently issuable if certain milestones were achieved on December 31, 2015 related to business combinations that occurred during the years ended December 31, 2014 and 2015 have been excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2015. If June 30, 2015 had been the end of the contingency period, 742,161 shares would have been issuable related to the iSocket, Inc., or iSocket, acquisition and 957,407 shares would have been issuable related to the Chango Inc., or Chango, acquisition. On December 31, 2015, the Company issued 585,170 shares in connection with the iSocket contingent consideration and 971,481 shares in connection with the Chango contingent consideration, which were included in the calculation of basic and diluted net loss per share for the three and six months ended June 30, 2016.

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Note 3—Fair Value Measurements
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are based on market data obtained from independent sources. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last one is considered unobservable:

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


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

Level 3 – Unobservable inputs.
The table below sets forth a summary of financial instruments that are measured at fair value on a recurring basis at June 30, 2016:

 
Total
 
Fair Value Measurements at Reporting Date Using  
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)  
 
 
 
 
 
 
 
 
 
(in thousands)
Money market funds
$
16,495

 
$
16,495

 
$

 
$

Corporate debt securities
$
15,710

 
$
15,710

 
$

 
$

U.S. Treasury, government and agency debt securities
$
23,990

 
$
23,990

 
$

 
$


The table below sets forth a summary of financial instruments that are measured at fair value on a recurring basis at December 31, 2015:

 
Total
 
Fair Value Measurements at Reporting Date Using  
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)  
 
 
 
 
 
 
 
 
 
(in thousands)
Money market funds
$
19,257

 
$
19,257

 
$

 
$

Corporate debt securities
$
12,786

 
$
12,786

 
$

 
$

U.S. Treasury, government and agency debt securities
$
23,946

 
$
23,946

 
$

 
$


At June 30, 2016 and December 31, 2015, cash equivalents of $16.5 million and $19.3 million, respectively, consisted of money market funds with original maturities of three months or less. The fair values of the Company's money market funds, U.S. treasury, government and agency debt securities, and corporate debt securities are based on quoted market prices.

12

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At June 30, 2015, the Company had contingent consideration liabilities in connection with the acquisitions of iSocket and Chango that the Company classified within Level 3 as factors used to develop the estimated fair value included unobservable inputs that were not supported by market activity. The Company estimated the fair value of the contingent consideration liability for iSocket by discounting the present value of the probability-weighted future payout related to the contingent earn-out criteria using an estimate of the Company's incremental borrowing rate. At June 30, 2015, the Company considered it highly likely that the iSocket earn-out criteria would be met. On December 31, 2015, the Company issued 585,170 shares of common stock in satisfaction of the contingent consideration. The Company estimated the fair value of the contingent consideration liability related to the Chango acquisition by using a Monte-Carlo model as the fair value of the contingent consideration was dependent on both the performance milestones being achieved and the post-acquisition prices of the Company's common stock. Subsequent to Chango's acquisition date, the operations of Chango were fully integrated into the operations of the Company. Accordingly, pursuant to the acquisition agreement, because Chango was no longer operated separately from the Company's other operations in accordance with the agreed-upon business plan, the entire contingent consideration was deemed earned. As a result, the changes in the fair value of the contingent consideration liability post-acquisition were primarily dependent on prices of the Company's common stock for periods subsequent to Chango's acquisition date. On December 31, 2015, the Company issued 971,481 shares of common stock in satisfaction of the contingent consideration.
For the three and six months ended June 30, 2015, the change in fair value of the contingent consideration liabilities, which was recorded in general and administrative expenses, was insignificant.
The Company's contingent consideration liability was recorded at fair value and was determined to be a Level 3 fair value item. The change in the fair value of the contingent consideration liability is summarized below:
 
Three Month Roll Forward
 
Six Month Roll Forward
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Beginning balance
$

 
$
11,586

 
$

 
$
11,448

Increase to contingent consideration liability related to the Chango acquisition

 
16,171

 

 
16,171

Change in fair value of contingent consideration liability recorded in general and administrative expense

 
(135
)
 

 
3

Ending balance
$

 
$
27,622

 
$

 
$
27,622

Note 4—Other Balance Sheet Amounts
The Company holds restricted cash as collateral for credit cards. At June 30, 2016 and December 31, 2015, restricted cash included in prepaid expenses and other current assets were $0.1 million and $0.3 million, respectively.
Investments in marketable securities as of June 30, 2016 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
$
23,973

 
$
17

 
$

 
$
23,990

Corporate debt securities
15,710

 

 

 
15,710

Total
$
39,683

 
$
17

 
$

 
$
39,700

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

 
$

 
$

 
$

As of June 30, 2016, the Company's available-for-sale securities had a weighted remaining contractual maturity of 0.5 years. For the three and six months ended June 30, 2016 the gross realized gains and gross realized losses were not significant and there were no unrealized holding gains (losses) reclassified out of accumulated other comprehensive loss into the consolidated statements of operations for the sale of available-for-sale investments.

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Investments in marketable securities as of December 31, 2015 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
$
10,485

 
$

 
$
(22
)
 
$
10,463

Corporate debt securities
12,786

 

 

 
12,786

Total
$
23,271

 
$

 
$
(22
)
 
$
23,249

Available-for-sale — long-term:
 
 
 
 
 
 
 
U.S. Treasury, government and agency debt securities
$
13,529

 
$

 
$
(46
)
 
$
13,483

The amortized cost and fair value of the Company's marketable securities at June 30, 2016, by contractual years-to-maturity are as follows:
 
Amortized Cost
 
Fair Value
 
 
 
 
 
(in thousands)
Due in less than 1 year
$
39,683

 
$
39,700

Total
$
39,683

 
$
39,700

There were no non-current marketable securities at June 30, 2016.
Accounts payable and accrued expenses included the following:

June 30, 2016
 
December 31, 2015
 
 
 
 

(in thousands)
Accounts payable—seller
$
171,137

 
$
228,850

Accounts payable—trade
7,300

 
6,962

Accrued employee-related payables
10,120

 
12,155

Total
$
188,557

 
$
247,967

At June 30, 2016 and December 31, 2015, accounts payable—seller are recorded net of $0.5 million and $0.7 million, respectively, due from sellers for services provided by the Company to sellers, where the Company has the right of offset.
 Note 5—Business Combinations
On April 24, 2015, or the Acquisition Date, the Company completed the acquisition of all the issued and outstanding shares of Chango, a Toronto, Canada based intent marketing technology company.
The following table provides unaudited pro forma information as if Chango had been acquired as of January 1, 2014. The unaudited pro forma information reflects adjustments for additional amortization resulting from the fair value adjustments to assets acquired and liabilities assumed. The pro forma results do not include any anticipated cost synergies or other effects of the integration of Chango or recognition of compensation expense relating to the earn-out. Accordingly, pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisition been completed on the dates indicated, nor is it indicative of the actual or future operating results of the combined company.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2015
 
 
 
 
 
(in thousands, except per share data)
Pro forma revenues
$
56,489

 
$
106,874

Pro forma net loss
$
(10,575
)
 
$
(18,608
)
Pro forma net loss per share, basic and diluted
$
(0.25
)
 
$
(0.45
)

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Subsequent to the Acquisition Date, the operations of Chango were fully integrated into the operations of the Company and as a result, the determination of Chango's post-acquisition revenues and operating results on a standalone basis are impracticable given the integration of the Chango operations with the Company's operations.

Note 6—Intangible Assets
Intangible assets primarily consist of acquired developed technology, customer relationships and non-compete agreements resulting from business combinations, which are recorded at acquisition-date fair value, less accumulated amortization. The Company determines the appropriate useful life of its intangible assets by performing an analysis of expected cash flows of the acquired assets. Intangible assets are amortized over their estimated useful lives using a straight-line method, which approximates the pattern in which the economic benefits are consumed.
During the three months June 30, 2016, the Company reassessed the remaining estimated useful lives of the developed technology and customer relationships related to the Chango acquisition. The change in estimated useful lives for the developed technology and customer relationships was based on the remaining expected benefit from those assets. As a result, the remaining estimated useful life for developed technology was changed from a range between 1.8 and 3.8 years to a range between 1.3 and 2.8 years and the remaining estimated useful life for customer relationships was changed from 3.8 years to 1.8 years as of June 30, 2016.
    
Details of the Company's intangible assets were as follows:
 
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
 
 
(in thousands)
Amortizable intangible assets:
 
 
 
 
Developed technology
 
$
35,486

 
$
35,756

Customer relationships
 
25,330

 
25,330

Non-compete agreements
 
4,990

 
4,990

Total identifiable intangible assets, gross
 
65,806

 
66,076

Total accumulated amortization—intangible assets
 
(23,883
)
 
(15,293
)
Total identifiable intangible assets, net
 
$
41,923

 
$
50,783

Amortization expense of intangible assets for the three and six months ended June 30, 2016 were $4.6 million and $8.6 million, respectively. The change in the remaining estimated useful lives for acquired technology and customer relationships resulted in increased amortization expense of $0.5 million for the three and six months ended June 30, 2016. The increased amortization expense decreased the basic and diluted earnings per share by $0.01 for the three and six months ended June 30, 2016.
Given the change in remaining estimated useful lives, the Company revised the estimated remaining amortization expense associated with the Company's intangible assets for each of the next five fiscal years as follows as of June 30, 2016:
Fiscal Year
Amount
 
(in thousands)
2016
$
11,283

2017
19,410

2018
8,415

2019
2,815

2020 and thereafter

Total
$
41,923


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Note 7—Stock-Based Compensation
The Company's equity incentive plans provide for the grant of equity awards, including non-statutory or incentive stock options, restricted stock, and restricted stock units, to the Company's employees, officers, directors, and consultants. The Company's board of directors administers the plans. Options outstanding vest based upon continued service at varying rates, but generally over four years from issuance with 25% vesting after one year of service and the remainder vesting monthly thereafter. Restricted stock and restricted stock units vest at varying rates, usually 25% vesting after one year of service and the remainder vesting semi-annually thereafter. Options, restricted stock, and restricted stock units granted under the plans accelerate under certain circumstances on a change in control, as defined therein. An aggregate of 2,768,110 shares remained available for issuance at June 30, 2016 under the plans.

Stock Options
A summary of stock option activity for the six months ended June 30, 2016 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, 2015
6,203

 
$
9.76

 
 
 
 
Granted
419

 
$
14.09

 
 
 
 
Exercised
(1,771
)
 
$
7.26

 
 
 
 
Canceled
(457
)
 
$
11.78

 
 
 
 
Outstanding at June 30, 2016
4,394

 
$
10.97

 
7.20 years
 
$
15,278

Vested and expected to vest
4,337

 
$
10.93

 
7.18 years
 
$
15,216

Exercisable at June 30, 2016
2,592

 
$
9.47

 
6.45 years
 
$
12,359

At June 30, 2016, the Company had unrecognized employee stock-based compensation expense relating to stock options of approximately $10.7 million, which is expected to be recognized over a weighted-average period of 2.1 years.
The weighted-average grant date per share fair value of stock options granted in the six months ended June 30, 2016 was $6.52.
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, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Expected term (in years)
5.8

 
4.0

 
5.9

 
4.2

Risk-free interest rate
1.39
%
 
1.16
%
 
1.43
%
 
1.23
%
Expected volatility
55
%
 
48
%
 
48
%
 
48
%
Dividend yield
%
 
%
 
%
 
%
    

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Restricted Stock
A summary of restricted stock activity for the six months ended June 30, 2016 is as follows:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
(in thousands)
 
 
Nonvested shares of restricted stock outstanding at December 31, 2015
1,479

 
$
15.58

Granted
525

 
$
12.15

Canceled
(419
)
 
$
14.25

Vested
(337
)
 
$
16.35

Nonvested shares subject to restricted stock outstanding at June 30, 2016
1,248

 
$
14.37


At June 30, 2016, the Company had unrecognized employee stock-based compensation expense relating to restricted stock with service conditions of approximately $9.4 million, which is expected to be recognized over a weighted-average period of 2.7 years. At June 30, 2016, the Company had unrecognized employee stock-based compensation expense relating to restricted stock with market conditions granted in 2014 of approximately $0.6 million, which is expected to be recognized over a weighted-average period of 4.9 years.

In February 2016, the Company granted certain executives shares of restricted stock that vest based on certain stock price performance metrics. The grant date fair value per share of restricted stock was $11.07, which was estimated using a Monte-Carlo lattice model. In May 2015, the Company granted certain executives shares of restricted stock that vest based on certain stock price performance metrics. The grant date fair value per share of restricted stock was $13.81, which was estimated using a Monte-Carlo lattice model. At June 30, 2016, the Company had unrecognized employee stock-based compensation expense relating to these shares of restricted stock with market conditions of approximately $3.6 million, which is expected to be recognized over a weighted-average period of 2.2 years. The compensation expense will not be reversed if the performance metrics are not met.

Restricted Stock Units
A summary of restricted stock unit activity for the six months ended June 30, 2016 is as follows:
 
Number of Shares
 
Weighted-Average Grant Date Fair Value
 
(in thousands)
 
 
Nonvested shares of restricted stock units outstanding at December 31, 2015
2,647

 
$
15.76

Granted
1,756

 
$
13.89

Canceled
(512
)
 
$
15.15

Vested
(622
)
 
$
16.18

Nonvested shares subject to restricted stock units outstanding at June 30, 2016
3,269

 
$
14.78


At June 30, 2016, the Company had unrecognized employee stock-based compensation expense relating to restricted stock units of approximately $41.0 million, which is expected to be recognized over a weighted-average period of 3.3 years.

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


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Table of Contents

As of June 30, 2016, the Company has reserved 1,100,149 shares of its common stock for issuance under the ESPP. Shares reserved for issuance will increase on January 1 of each year by the lesser of (i) a number of shares equal to 1% of the total number of outstanding shares of common stock on the December 31 immediately prior to the date of increase or (ii) such number of shares as may be determined by the board of directors. In May 2016, 93,416 shares of common stock were purchased under the ESPP. The Company estimated the total grant date fair value of the ESPP awards for the offering period ending in November 2016 of $0.5 million using a Black-Scholes model with the following assumptions: term of 6 months corresponding with the offering period; volatility of 58% based on the Company's historical volatility for a six month period; no dividend yield; and risk-free interest rate of 0.38%. Compensation costs are recognized on a straight-line basis over the offering period.    

Stock-Based Compensation Expense     
Total stock-based compensation expense recorded in the consolidated statements of operations was as follows:  
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Cost of revenue
$
108

 
$
70

 
$
170

 
$
112

Sales and marketing
2,543

 
1,858

 
4,657

 
2,983

Technology and development
1,800

 
1,116

 
3,174

 
1,906

General and administrative
2,675

 
4,695

 
7,516

 
8,236

Total stock-based compensation expense
$
7,126

 
$
7,739

 
$
15,517

 
$
13,237

Note 8—Income Taxes
In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date income. The Company's annual estimated effective tax rate differs from the statutory rate primarily as a result of state taxes, foreign taxes, nondeductible stock option expenses, and changes in the Company's valuation allowance.
The Company recorded an income tax provision of $4.9 million and an income tax benefit of $0.4 million for the three months ended June 30, 2016 and 2015, respectively, and an income tax provision of $0.6 million and an income tax benefit of $0.3 million for the six months ended June 30, 2016 and 2015, respectively. The tax provision for the three and six months ended June 30, 2016 is primarily the result of the domestic valuation allowance and the geographical mix of income and losses.
Due to uncertainty as to the realization of benefits from the Company's domestic and certain international net deferred tax assets, including net operating loss carryforwards and research and development tax credits, the Company has a full valuation allowance reserved against such net deferred tax assets. The Company intends to continue to maintain a full valuation allowance on the net 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 three and six months ended June 30, 2016, 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.
Note 9—Commitments and Contingencies
Operating Leases
The Company has commitments under non-cancelable operating leases for facilities and certain equipment and its managed data center facilities. Total rental expenses were $4.3 million and $3.1 million for the three months ended June 30, 2016 and 2015, respectively, and $8.3 million and $5.4 million for the six months ended June 30, 2016 and 2015, respectively.
During the six months ended June 30, 2016, the Company entered into new operating leases. Future non-cancelable minimum commitments as of June 30, 2016 relating to these new operating leases totaling $0.2 million are due through March 2020.
The Company has rental income from commercial office space the Company holds under lease and has subleased to other tenants that is included in other income. Rental income was insignificant for the three and six months ended June 30, 2016.


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Table of Contents

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 or omissions of sellers, and sellers often require the Company to indemnify them against acts or 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.
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 of employment of such persons.
Other Contracts
The Company is party to an engagement letter with an investment bank entered into in 2009 and amended in 2012. Pursuant to the engagement letter, the investment bank provided and may continue to provide strategic and consulting advice to the Company. The engagement letter also provides that, in case of a merger, tender offer, stock purchase, or other transaction resulting in the acquisition of the Company by another entity or the transfer of ownership or control of the Company or substantially all of its assets to another entity (a "Change in Control Transaction") that is consummated before December 7, 2016 or pursuant to a definitive agreement entered into before that date, (i) the investment bank will provide investment banking services in connection with a Change in Control Transaction, if requested by the Company, and (ii) the Company will pay to the investment bank a fee equal to 2.5% of the total consideration paid or payable to the Company or its stockholders in the Change in Control Transaction, whether or not the Company requests such investment banking services.
Claims and 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, 2016. However, based on management's knowledge as of June 30, 2016, management believes that the final resolution of these matters known at such date, individually and in the aggregate, will not have a material effect upon the Company's consolidated financial position, results of operations or cash flows.
Note 10—Subsequent Events
Subsequent to June 30, 2016, the Company entered into new operating leases for office facilities. Future non-cancelable minimum commitments relating to the operating leases totaling $3.5 million are due from September 2016 to April 2019.
On July 24, 2016, the Company released 635,396 shares from escrow related to the acquisition of Chango.

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Table of Contents

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, managed revenue (advertising spending), non-GAAP net revenue, profitability, net income (loss), Adjusted EBITDA, earnings per share, and cash flow; strategic objectives, including focus on mobile, video, and Orders opportunities, expanded header bidding solutions, and implementation of solutions to improve the advertising experience of consumers; investments in our business; development of our technology; introduction of new offerings; scope and duration of client relationships; the fees we may charge in the future; business mix and expansion of our mobile, video, and Orders offerings; sales growth; client utilization of our offerings; our competitive differentiation; our leadership position in the industry; market conditions, trends, and opportunities; user reach; certain statements regarding future operational performance measures including take rate, paid impressions, and average CPM; and factors that could affect these and other aspects of our business. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and estimates and subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. These risks include, but are not limited to:
our ability to grow rapidly and to manage our growth effectively;
our ability to develop innovative new technologies and remain a market leader;
our ability to attract and retain buyers and sellers and increase our business with them;
our vulnerability to loss of, or reduction in spending by, buyers;
our ability to maintain a supply of 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 to purchase and sell higher value advertising and to expand the use of our solution by buyers and sellers utilizing evolving digital media platforms;
our ability to introduce new offerings and bring them to market in a timely manner in response to client demands and industry trends, including shifts in digital advertising growth from display to mobile channels;
our ability to implement solutions to improve the advertising experience of consumers;
the increased prevalence of header bidding and its effect on our competitive position;
uncertainty of our estimates and expectations associated with new offerings, including private marketplace, mobile, Orders, automated guaranteed, video, and guaranteed audience solutions;
uncertainty of our estimates and assumptions about the mix of gross and net reported transactions;
declining fees and take rate and the need to grow through managed revenue (advertising spending) increases rather than fee increases;
our limited operating history and history of losses;
our ability to continue to expand into new geographic markets;
our ability to adapt effectively to shifts in digital advertising to mobile and video channels;
increased prevalence of ad blocking technologies;
the slowing growth rate of online digital display advertising;
the growing percentage of online and mobile advertising spending captured by owned and operated sites (such as Facebook and Google) where we are unable to participate;
the effects of increased competition in our market and increasing concentration of advertising spending, including mobile spending, in a small number of very large competitors;
our ability to differentiate our offerings, compete effectively and to maintain our pricing and take rate in a market trending increasingly toward commodification, transparency, and disintermediation;
requests from buyers and sellers for discounts, fee concessions or revisions, rebates, and greater levels of pricing transparency and specificity;

20

Table of Contents

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;
our ability to comply with, and the effect on our business of, evolving legal standards and regulations, particularly concerning data protection and consumer privacy and evolving labor standards; and
our ability to develop and maintain our corporate infrastructure, including our finance, information technology, and data security systems and controls.
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," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this report and in other filings we make from time to time with the Securities and Exchange Commission, or SEC. These forward-looking statements represent our estimates and assumptions only as of the date of this report. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Without limiting the foregoing, we generally give guidance only in connection with quarterly and annual earnings announcements, without interim updates, and we may appear at industry conferences or make other public statements without disclosing material nonpublic information in our possession. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.
Investors should read this report 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 complete technology solution to automate the purchase and sale of advertising for both buyers and sellers. Our highly scalable platform reaches approximately one billion Internet users globally on some of the world's leading websites and mobile applications. We help increase the volume and effectiveness of advertising, improving revenue for sellers and return on advertising investment for buyers.
Advertising takes different forms, referred to as advertising units, and is purchased and sold through different transactional methodologies, referred to as inventory types. Finally, it is presented to users through different channels. Our solution enables buyers and sellers to purchase and sell:
a comprehensive range of advertising units, including display and video;
utilizing various inventory types, including (i) direct sale of premium inventory, which we refer to as Orders, on a guaranteed, or fully reserved, basis, as well as on a non-guaranteed basis and (ii) real-time bidding, or RTB;
across digital channels, including mobile web, mobile application and desktop, as well as across various out-of-home channels, such as digital billboards, that are in the early stages of leveraging our advertising automation platform.
Our platform features applications for digital advertising sellers, including websites, mobile applications and other digital media properties, to sell their advertising inventory; applications and services for buyers, including advertisers, agencies, agency trading desks, or ATDs, demand side platforms, or DSPs, and ad networks, to buy advertising inventory; and a marketplace over which such transactions are executed. Together, these features power and optimize a comprehensive, transparent, independent advertising marketplace that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the advertising inventory we manage on our platform.
Sellers of digital advertising use our platform to maximize revenue by accessing a global market of buyers representing top advertiser brands around the world to monetize their advertising inventory across inventory types, advertising units, and channels. We also help sellers decrease costs and protect their brands and user experience.

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At the same time, buyers leverage our platform to manage their advertising spending across inventory types, advertising units, and channels, simplify order management and campaign tracking, obtain actionable insights into audiences for their advertising, and access impression-level purchasing from hundreds of sellers. We believe buyers use our platform because of our powerful solution and our direct relationships and integrations with some of the world's largest sellers.
Our platform incorporates proprietary machine-learning algorithms, sophisticated data processing, high-volume storage, detailed analytics capabilities, and a distributed infrastructure. We analyze billions of data points in real time to enable our solution to make approximately 300 data-driven decisions per transaction in milliseconds and over 12 trillion bid requests per month. Since 2012, we have processed over 200 trillion bid requests. Our solution is constantly self-optimizing based on our systems' ability to analyze and learn from vast volumes of data. The additional data we obtain from the volume of transactions on our platform help make our machine-learning algorithms more intelligent, leading to higher quality matching between buyers and sellers, better return on investment for buyers, and higher revenue for sellers. High quality matching helps us attract more sellers which in turn attracts more buyers and vice versa. We believe this self-reinforcing dynamic creates a strong platform for growth.
In addition to the United States, we have personnel and operations in Canada, England, France, Australia, Germany, Italy, Japan, Singapore, and Brazil. As of June 30, 2016, 172 of our 652 employees were based outside the United States.
We operate our business on a worldwide basis, with an established operating presence in North America and Europe and a developing presence in Asia and Latin America. With the exception of approximately $33.9 million in intangible assets in Canada, substantially all of our assets are U.S. assets. Excluding Canada, our non-U.S. subsidiaries and operations perform primarily sales, marketing, and service functions.
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 measure, 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 buyers and sellers who use our solution for the purchase and sale of advertising inventory. Our solution enables buyers and sellers to purchase and sell advertising inventory, by matching buyers and sellers, and establishing rules and parameters for open and transparent auctions of advertising inventory. Buyers use our solution to reach their intended audiences by buying advertising inventory that we make available from sellers through our solution or advertising inventory we purchase from third-party exchanges. Sellers use our solution to monetize their inventory. We recognize revenue upon fulfillment of our contractual obligations in connection with a completed transaction, subject to satisfying all other revenue recognition criteria, including (i) persuasive evidence of an arrangement existing, (ii) delivery having occurred or services having been rendered, (iii) the fees being fixed or determinable, and (iv) collectibility being reasonably assured. We generally bill and collect the full purchase price of impressions from buyers, together with other fees, if applicable. We report revenue on a net basis for arrangements in which we have determined that we do not act as the principal in the purchase and sale of advertising inventory because pricing is determined through our auction process and we are not the primary obligor. We report revenue on a gross basis for arrangements in which we have determined that we act as the principal in the purchase and sale of advertising inventory because we have direct contractual relationships with and manage advertising campaigns on behalf of the buyer by acting as the primary obligor in the purchase of advertising inventory, we exercise discretion in establishing prices, we have credit risk, and we independently select and purchase inventory from the seller. In some cases, we generate revenue directly from sellers who maintain the primary relationship with buyers and utilize our solution to transact and optimize their activities. Our accounts receivable are recorded at the amount of gross billings to buyers, net of allowances, for the amounts we are responsible to collect, and our accounts payable are recorded at the net amount payable to sellers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.     
Our revenue, cash flow from operations, operating results, and non-GAAP financial and operational performance measures may vary from quarter to quarter due to the seasonal nature of overall advertiser spending in the market, as well as other circumstances that affect advertising activity. For example, many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. Moreover, advertising inventory in the fourth quarter may be more expensive due to increased demand. Historically, the fourth quarter of the year has reflected our highest level of revenue, and the first quarter has reflected the lowest level of our revenue.
Our revenue may also be impacted by a shift in the mix of managed revenue (advertising spending) by inventory type and channel, changes in the fees we are able to charge or choose to charge buyers and sellers for our services (which drives take rate), whether we are the principal in the transactions and therefore report revenue on a gross basis, and other factors such as changes in the market, our execution of the business, and competition.

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Our revenue recognition policies are discussed in more detail below and in the notes to our condensed consolidated financial statements presented within this Form 10-Q.
Expenses
We classify our expenses into the following four categories:
Cost of Revenue. Our cost of revenue consists primarily of amounts we pay sellers for transactions for which we are the principal and report revenues on a gross basis, data center costs, bandwidth costs, depreciation and maintenance expense of hardware supporting our revenue-producing platform, amortization of software costs for the development of our revenue-producing platform, amortization expense associated with acquired developed technologies, personnel costs, and facilities-related costs. 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, marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with customer relationships and backlog from our business acquisitions, and to a lesser extent, facilities-related costs and depreciation and amortization. Our sales organization focuses on increasing the adoption of our solution by existing and new buyers and sellers. We amortize acquired intangibles associated with customer relationships and backlog from our business acquisitions over their estimated useful lives.
Technology and Development. Our technology and development expenses consist primarily of personnel costs, including stock-based compensation and bonuses, and professional services associated with the ongoing development and maintenance of our solution, and to a lesser extent, facilities-related costs and depreciation and amortization, including amortization expense associated with acquired intangible assets from our business acquisitions that are related to technology and development functions. These expenses include costs incurred in the development, implementation, and maintenance of internal use software, including platform and related infrastructure. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with internal use software development that qualifies for capitalization, which are then recorded as internal use software development costs, net on our consolidated balance sheet. We amortize internal use software development costs that relate to our revenue-producing activities on our platform to cost of revenue and amortize other internal use software development costs to technology and development costs or general and administrative expenses, depending on the nature of the related project. We amortize acquired intangibles associated with technology and development functions from our business acquisitions over their estimated useful lives.
General and Administrative. Our general and administrative expenses consist primarily of personnel costs, including stock-based compensation 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 other corporate-related expenses. General and administrative expenses also include amortization of internal use software development costs and acquired intangible assets from our business acquisitions over their estimated useful lives that relate to general and administrative functions and changes in fair value associated with the liability-classified contingent consideration related to acquisitions.
Other Expense, Net
Interest Expense, Net. Interest expense is mainly related to our credit facility. Interest income consists of interest earned on our cash equivalents and marketable securities.
Other Income. Other income consists primarily of rental income from commercial office space the Company holds under lease and has subleased 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, Euro, Canadian Dollar, and Australian Dollar.

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Provision (benefit) for Income Taxes
Provision (benefit) for income taxes consists primarily of federal, state, and foreign income taxes. Due to uncertainty as to the realization of benefits from our domestic and certain 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. However, given our anticipated future taxable earnings, we believe that there is a reasonable possibility that, within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the domestic valuation allowance will no longer be needed. 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 actually achieve.
Pursuant to Section 382 of the Internal Revenue Code, we underwent an ownership change for tax purposes (i.e., a more than 50% change in stock ownership in aggregated 5% shareholders) on December 31, 2015. As a result, the use of our domestic NOL carryforwards and tax credits generated prior to the ownership change will be subject to the annual 382 use limitations of approximately $53.1 million. We have concluded that the ownership change will not impact our ability to utilize substantially all of our NOLs and carryforward credits to the extent we generate taxable income that can be offset by such losses.
Non-GAAP Financial Measures
In addition to our GAAP results, we review certain non-GAAP financial 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 financial measures include managed revenue (advertising spending), non-GAAP net revenue, and Adjusted EBITDA, which are discussed immediately following the table below. Revenue and other GAAP measures are discussed under the headings "Components of Our Results of Operations" and "Results of Operations."
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Financial and non-GAAP Financial Measures:
 
 
 
 
 
 
 
Revenue (in thousands)
$
70,511

 
$
53,046

 
$
139,743

 
$
90,224

Managed revenue (advertising spending) (in thousands)
$
257,413

 
$
227,152

 
$
505,910

 
$
424,372

Non-GAAP net revenue (in thousands)
$
65,108

 
$
48,544

 
$
128,668

 
$
85,722

Net loss (in thousands)
$
(2,677
)
 
$
(11,943
)
 
$
(393
)
 
$
(16,974
)
Adjusted EBITDA (in thousands)
$
18,439

 
$
6,667

 
$
33,897

 
$
10,859

Operational Measure:
 
 
 
 
 
 
 
Take Rate
25.3
%
 
21.4
%
 
25.4
%
 
20.2
%

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Managed Revenue (Advertising Spending)
We define managed revenue (advertising spending) as the advertising spending transacted on our platform. Managed revenue (advertising spending) does not represent revenue reported on a GAAP basis. Tracking our managed revenue (advertising spending) allows us to compare our results to the results of companies that report all or substantially all spending transacted on their platforms as GAAP revenue on a gross basis. We also use managed revenue (advertising spending) for internal management purposes to assess market share of total advertising spending and scale of our offerings.
Our managed revenue (advertising spending) may be influenced by demand for our services, the volume and characteristics of paid impressions, average CPM, and other factors such as changes in the market, our execution of the business, and competition.
The following table presents the reconciliation of revenue to managed revenue (advertising spending):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenue
 
$
70,511

 
$
53,046

 
$
139,743

 
$
90,224

Plus amounts paid to sellers(1)
 
186,902

 
174,106

 
366,167

 
334,148

Managed revenue (advertising spending)
 
$
257,413

 
$
227,152

 
$
505,910

 
$
424,372

(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 our comprehensive inventory types and channels. The following tables present managed revenue (advertising spending) in dollar terms and by inventory type and channel and managed revenue (advertising spending) by inventory type and channel as a percentage of total managed revenue (advertising spending) for the three and six months ended June 30, 2016 and 2015:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Managed revenue (advertising spending) by inventory type:
 
 
 
 
 
 
 
 
RTB
 
$
194,528

 
$
170,307

 
$
387,631

 
$
320,004

Orders
 
53,880

 
38,948

 
95,994

 
68,360

Static bidding(1)
 
9,005

 
17,897

 
22,285

 
36,008

Total managed revenue (advertising spending)
 
$
257,413

 
$
227,152

 
$
505,910

 
$
424,372

 
 
 
 
 
 
 
 
 
Managed revenue (advertising spending) by channel:
 
 
 
 
 
 
 
 
Desktop
 
$
172,453

 
$
176,574

 
$
347,119

 
$
334,732

Mobile
 
84,960

 
50,578

 
158,791

 
89,640

Total managed revenue (advertising spending)
 
$
257,413

 
$
227,152

 
$
505,910

 
$
424,372



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Three Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Managed revenue (advertising spending) by inventory type:
 
 
 
 
 
 
 
 
RTB
 
76
%
 
75
%
 
77
%
 
75
%
Orders
 
21
%
 
17
%
 
19
%
 
16
%
Static bidding(1)
 
3
%
 
8
%
 
4
%
 
9
%
Total managed revenue (advertising spending)
 
100
%
 
100
%
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Managed revenue (advertising spending) by channel:
 
 
 
 
 
 
 
 
Desktop
 
67
%
 
78
%
 
69
%
 
79
%
Mobile
 
33
%
 
22
%
 
31
%
 
21
%
Total managed revenue (advertising spending)
 
100
%
 
100
%
 
100
%
 
100
%
(1)
Subsequent to June 30, 2016, the Company decided to terminate its offering related to static bidding as it represented an immaterial amount of our managed revenue (advertising spending) on our platform as advertising spending in the market has shifted from static bidding to RTB. The decision to end the static bidding offering enables the Company to reallocate resources to focus on mobile, video, and Orders growth initiatives. No material impact is expected on the Company's future results of operations as static bidding was expected to further decrease as compared to RTB and Orders.
Non-GAAP Net Revenue
We define non-GAAP net revenue as GAAP revenue less amounts we pay sellers that are included within cost of revenue for the portion of our revenue reported on a gross basis. Non-GAAP net revenue would represent our revenue if we were to record all of our revenue on a net basis. Non-GAAP net revenue does not represent revenue reported on a GAAP basis. Non-GAAP net revenue is one useful measure in assessing the performance of our business because it shows the operating results of our business on a consistent basis without the effect of differing revenue reporting (gross vs. net) that we apply under GAAP across different types of transactions, and facilitates comparison of our results to the results of companies that report all of their revenue on a net basis. A potential limitation of non-GAAP net revenue is that other companies may define non-GAAP net revenue differently, which may make comparisons difficult.
Our non-GAAP net revenue may be influenced by demand for our services, the volume and characteristics of managed revenue (advertising spending), and our take rate.
The following table presents a reconciliation of revenue to non-GAAP net revenue for the three and six months ended June 30, 2016 and 2015. Before our acquisition of Chango in April 2015, we reported all revenue on a net basis and therefore payments to sellers were not included in the cost of revenue before that date.
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Revenue
 
$
70,511

 
$
53,046

 
$
139,743

 
$
90,224

Less amounts paid to sellers
 
5,403

 
4,502

 
11,075

 
4,502

Non-GAAP net revenue
 
$
65,108

 
$
48,544

 
$
128,668

 
$
85,722

    

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Table of Contents

Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) adjusted to exclude stock-based compensation expense, depreciation and amortization, amortization of acquired intangible assets, interest income or expense, and other cash and non-cash based income or expenses, which mainly consist of foreign exchange gains and losses, acquisition and related items, and provision (benefit) for income taxes. Adjusted EBITDA should not be considered as an alternative to net income (loss), operating loss, or any other measure of financial performance calculated and presented in accordance with GAAP. Adjusted EBITDA excludes non-cash and other cash items that we do not consider indicative of our core operating performance. We believe Adjusted EBITDA is useful to investors in evaluating our performance for the following reasons:
Adjusted EBITDA is widely used by investors and securities analysts to measure a company's performance without regard to items such as those we exclude in calculating this measure, which can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired;
our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of performance and the effectiveness of our business strategies, and in communications with our board of directors concerning our performance, and Adjusted EBITDA is also used as a metric for determining payment of cash incentive compensation; and
Adjusted EBITDA provides a measure of consistency and comparability with our past performance that many investors find useful, facilitates period-to-period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:
stock-based compensation is a non-cash charge and is and will remain an element of our long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period;
depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future, but Adjusted EBITDA does not reflect any cash requirements for these replacements;
Adjusted EBITDA does not reflect non-cash charges related to acquisition and related items, such as amortization of acquired intangible assets and changes in the fair value of contingent consideration;
Adjusted EBITDA does not reflect cash and non-cash charges and changes in, or cash requirements for, acquisition and related items, such as certain transaction expenses and expenses associated with earn-out amounts;
Adjusted EBITDA does not reflect changes in our working capital needs, capital expenditures, or contractual commitments;
Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense; and
other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Our Adjusted EBITDA is influenced by fluctuation in our revenue and the timing and amounts of our investments in our operations.

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The following table presents a reconciliation of net income (loss), the most comparable GAAP measure, to Adjusted EBITDA for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Net loss
$
(2,677
)
 
$
(11,943
)
 
$
(393
)
 
$
(16,974
)
Add back (deduct):
 
 
 
 
 
 
 
Depreciation and amortization expense, excluding amortization of acquired intangible assets
5,190

 
4,191

 
9,759

 
7,565

Amortization of acquired intangibles
4,592

 
5,268

 
8,649

 
6,284

Stock-based compensation expense
7,126

 
7,739

 
15,517

 
13,237

Acquisition and related items
13

 
967

 
331

 
2,396

Interest (income) expense, net
(131
)
 
11

 
(225
)
 
23

Foreign currency (gain) loss, net
(578
)
 
847

 
(317
)
 
(1,343
)
Provision (benefit) for income taxes
4,904

 
(413
)
 
576

 
(329
)
Adjusted EBITDA
$
18,439

 
$
6,667

 
$
33,897

 
$
10,859


Operational Performance Measure
Take Rate
Take rate is an operational performance measure calculated as non-GAAP net revenue divided by managed revenue (advertising spending). Reconciliations for revenue to both non-GAAP net revenue and managed revenue (advertising spending) are included within "Non-GAAP Financial Measures." We review take rate for internal management purposes to assess the development of our marketplace with buyers and sellers.
Our take rate (and our fees, which drive take rate) can be affected by a variety of factors, including the terms of our arrangements with buyers and sellers active on our platform in a particular period, the scale of a buyer's or seller's activity on our platform, mix of inventory types, the implementation of new products, platforms and solution features, auction dynamics, competitive factors, our strategic pricing decisions, and the overall development of the digital advertising ecosystem.    
Industry Trends and Trends in Our Business
The digital advertising market generally, and RTB specifically, continue to experience rapid growth. In December 2015, International Data Corporation, or IDC, estimated RTB was a $10.3 billion global market in 2015 that will increase to $20.5 billion by 2019, and Orders was a $3.7 billion global market in 2015 that will grow to $34.1 billion by 2019. The compound annual growth rate for these market opportunities is 41% on a combined basis.
Another important trend in the digital advertising industry is the expansion of automated buying and selling of advertising through new channels, including mobile, which has market growth rates exceeding those of the desktop channel and is a critical area of operational focus for us. According to IDC estimates, mobile advertising (excluding search advertising) was a $28.1 billion global market in 2015 that is expected to increase to $85.1 billion by 2019, a compound annual growth rate of 32%. We have significantly advanced our mobile capabilities through a combination of internal product development, strategic customer wins, increased mobile activity driven from existing buyer and seller customers, and international expansion, resulting in an increase in our mobile managed revenue (advertising spending) of 126% during the year ended December 31, 2015 compared to the year ended December 31, 2014, and 77% during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
The growth of automated buying and selling of advertising is also expanding into new geographic markets, and in some markets the rate of adoption of automated digital advertising is greater than in the United States. Our managed revenue (advertising spending) in international markets, based upon seller location, grew to approximately 35% during the year ended December 31, 2015 compared to the year ended December 31, 2014, and 40% and 36% during the six months ended June 30, 2016 and 2015, respectively. We intend to continue to expand our business in existing territories served and enter new territories.

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In the midst of these macro growth trends, other changes in the industry are having an adverse impact on our business. In recent years, we have seen an industry-wide slowdown in the rate of growth for traditional desktop display advertising, which has historically been our core business, as advertising spending on mobile continues to grow. Our managed revenue (advertising spending) for desktop increased 35% during the year ended December 31, 2015 compared to the year ended December 31, 2014; while it only increased by 4% during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
The impact of the slowdown in the rate of growth for traditional desktop display advertising has been compounded for our business by the faster-than-expected industry migration to header bidding in North America in the first half of 2016. Header bidding increases competition for some inventory that we would otherwise be able to sell through our platform, with commensurate adverse revenue effects for us. This may continue to have an adverse impact on us, primarily in North America, in the second half of 2016. We do believe that, in the second half of the year and into 2017, our own header bidding solution—FastLane—will improve our competitiveness in the traditional desktop display market and will support our growth in mobile and video.
As a result of these rapid developments in the industry, growth in our traditional RTB desktop display business has decelerated significantly and can no longer be relied upon to drive the growth of our business. Our strategic focus is on high-growth areas—mobile, video, and Orders—that are expected to represent a majority of our managed revenue (advertising spending) in 2017. Our mobile managed revenue (advertising spending) increased by 126% during the year ended December 31, 2015 compared to the year ended December 31, 2014 and 77% during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. However, despite our solid progress in mobile, our traditional RTB desktop display accounted for approximately 74% and 69% of our managed revenue (advertising spending) during the year ended December 31, 2015 and six months ended June 30, 2016, respectively, and is expected to continue to represent a significant part of our business in the near term. Therefore, the weight of RTB and its slower growth trends will continue to have a significant effect on our growth until our managed revenue (advertising spending) mix has shifted more fully to higher-growth areas.
Another factor impacting our business is that most growth in digital advertising spending worldwide is being captured by owned and operated sites, such as Facebook and Google, where we have been unable to participate. As a result, we are increasingly competing with other independent ad exchanges for the shrinking share of the overall market for digital advertising spending that is addressable by independent advertising exchanges and other intermediaries such as ourselves.

We also believe that customer demands for greater pricing transparency and lower fees will result in a reduction of our take rate. Buyers on our platform have come under growing pressure from their clients to reduce their fees and/or to provide fee transparency, and buyers will apply this pressure to us. Although we believe our pricing is competitive, we experience requests from buyers and sellers for discounts, fee concessions or revisions, rebates, and greater levels of pricing transparency and specificity. In light of increasing market trends toward transparency, commodification of intermediary services, and disintermediation, we may voluntarily reduce our fees in an effort to be more competitive in attracting demand and capturing inventory. While fee reductions could make us more competitive, it is not clear whether they would result in increases in spending on our platform or whether any spending increases will compensate fully for the reduction in fees.

Another factor that we expect to contribute to declining take rate is an increase in Orders as a percentage of overall managed revenue (advertising spending) because Orders carries lower fees. An increase in Orders as a percentage of our managed revenue (advertising spending) could yield higher absolute non-GAAP net revenue despite lower fees due to the higher CPMs typically associated with Orders transactions, but it is not certain that this effect will be realized.
Our revenue, managed revenue, non-GAAP net revenue, cash flow from operations, Adjusted EBITDA, operating results, and certain operational and financial performance measures may also vary from quarter to quarter due to the seasonal nature of advertiser spending, as well as other circumstances that affect advertising activity. For example, many advertisers devote a disproportionate amount of their advertising budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. Moreover, advertising inventory in the fourth quarter may be more expensive due to increased demand. Historically, the fourth quarter of the year reflects our highest level of revenue and managed revenue, and the first quarter reflects the lowest level of our revenue and managed revenue.

Although, our managed revenue (advertising spending) has increased period over period as a result of an increase in overall advertising spending in the market, increased use of our solutions by buyers and sellers, and increases in average CPM, we expect managed revenue (advertising spending) growth rates to decelerate year-over-year due to market and competitive pressures and deceleration in traditional desktop display. We also expect growth in revenue and non-GAAP net revenue to decelerate year-over-year through the remainder of 2016 due to deceleration in managed revenue (advertising spending) growth and decreases in our fees. Consequently, we expect lower year-over-year Adjusted EBITDA growth through the remainder of 2016. However, the effect on Adjusted EBITDA of the decrease in revenue growth may be partially offset by operating efficiencies. Finally, we expect take rate to decline over time due to changes in the inventory mix on our platform and reductions in fees we charge.


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Table of Contents

Results of Operations
The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented:
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Revenue
$
70,511

 
$
53,046

 
$
139,743

 
$
90,224

Expenses:
 
 
 
 
 
 
 
    Costs of revenue (1) (2)
17,540

 
14,009

 
34,323

 
20,570

    Sales and marketing (1) (2)
21,966

 
22,161

 
43,244

 
37,210

    Technology and development (1) (2)
13,294

 
10,390

 
25,737

 
18,804

    General and administrative (1) (2)
16,390

 
17,984

 
36,995

 
32,263

Total expenses
69,190

 
64,544

 
140,299

 
108,847

Income (loss) from operations
1,321

 
(11,498)

 
(556
)
 
(18,623)

    Other (income) expense
(906
)
 
858

 
(739
)
 
(1,320
)
Income (loss) before income taxes
2,227

 
(12,356)

 
183

 
(17,303)

    Provision (benefit) for income taxes
4,904

 
(413
)
 
576

 
(329
)
Net loss
$
(2,677
)
 
(11,943)

 
$
(393
)
 
(16,974)

(1) 
Stock-based compensation expense included in our expenses was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Costs of revenue
$
108

 
$
70

 
$
170

 
$
112

Sales and marketing
2,543

 
1,858

 
4,657

 
2,983

Technology and development
1,800

 
1,116

 
3,174

 
1,906

General and administrative
2,675

 
4,695

 
7,516

 
8,236

Total stock-based compensation expense
$
7,126

 
$
7,739

 
$
15,517

 
$
13,237

(2) 
Depreciation and amortization expense included in our expenses was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
 
 
 
 
 
 
 
 
(in thousands)
Cost of revenue
$
6,720

 
$
5,258

 
$
12,668

 
$
8,729

Sales and marketing
1,970

 
3,240

 
3,562

 
3,745

Technology and development
606

 
479

 
1,204

 
733

General and administrative
486

 
482

 
974

 
642

Total depreciation and amortization expense
$
9,782

 
$