What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-27 · 272 added, 215 removed, 206 unchanged (70% of the section changed)

5 unchanged sentences

Risk Factors" and the "Special Note About Forward-Looking Statements."

Overview and Industry Trends

Business” for an overview of our business, of the industry we operate in, and of important industry trends.

Trends in Our Business

Ad Spend and Take Rate Trends

Overall, our revenue increased 25% from $124.7 million in 2018 to $156.4 million in 2019, which reflects both increased ad spend and higher overall take rates.

Our ad spend increased to $1,117 million in 2019, up from $992 million in 2018, driven by growth across both desktop and mobile channels, with video and audio inventory types being key contributors.

Our overall take rate in 2019 increased to 14.0%, compared to 12.6% in 2018.

Our 2019 take rate is higher due primarily to seller pricing improvements negotiated during the first half of 2018.

We believe this take rate puts us in a favorable competitive position in terms of pricing, but it is uncertain whether it represents a sustainable competitive advantage.

We do not expect significant increases in take rate, and could experience decreases in take rate due to the mix of PMP ad spend which typically carries a lower take rate, and from discounted seller fees related to our SPO initiatives.

Our results could be negatively impacted if take rate decreases from these factors are not offset by increased ad spend.

For an explanation of how ad spend and take rate are calculated and why they are useful to investors and managers, see the discussion below under the heading "Non-GAAP Financial Measures."

Industry dynamics are challenging due to market and competitive pressures and make it difficult to predict the near-term effect of our growth initiatives.

While we anticipate long-term benefits from these initiatives, unless we are able to continue to increase advertising spend on our platform, through higher transaction volumes or higher transaction values or both, our revenue growth may be limited.

Supply Path Optimization

Supply Path Optimization ("SPO"), refers to efforts by buyers to consolidate the number of vendors they work with to find the most effective and cost-efficient paths to procure media.

This practice emerged in 2018 and continues to gain momentum.

SPO is important to buyers because it can increase the proportion of their advertising ultimately spent on working media, with the goal of increasing return on their advertising spending, and can help them gain efficiencies by reducing the number of vendors they work with in a complex ecosystem.

Largely because of header bidding, buyers are able to choose the best partner (or a small number of partners) without limiting the available inventory to bid on.

There are a number of criteria that buyers use to evaluate supply partners, including transparency, cost, quality of inventory, privacy standards, brand safety standards, including compliance with ads.txt and similar industry standards, and fraudulent traffic prevention policies.

We believe we are well positioned to benefit from supply path optimization in the long run as a result of our broad inventory supply, buyer tools such as traffic shaping, our pricing tools, which reduce the overall cost of working with us, our transparency, and our brand safety measures.

We believe that benefits from successful outcomes in the SPO process could drive meaningful increases of ad spend across our platform.

In order to achieve increased ad spend, we may negotiate discounts to our seller fees with agencies and advertisers, and we have increasingly been receiving requests from buyers for discounts, rebates, or similar incentives in order to move more advertising spending to our platform.

We believe that because our business has many fixed costs, increases in ad spend volume create opportunity to disproportionately improve net income, even with increased seller fee discounts.

However, our results could be negatively impacted if our advertising spend increases and cost reductions are not adequate to compensate for the discounted fees.

Impact of Header Bidding

While the rise and rapid adoption of header bidding increased revenue for sellers, it also created new challenges.

Managing multiple exchanges on the page is technically complex, and in the early days of header bidding this complexity was exacerbated by the lack of independent technology standards.

In 2017, we began to address these issues through our support of Prebid, a free and open source suite of software products designed by advertising community developers to enable publishers to implement header bidding on their websites and from within their apps.

Despite Prebid’s adoption by a number of the world’s largest sellers, deploying and customizing it still requires dedicated technical resources.

In the second quarter of 2019, we announced the beta program for Demand Manager.

Demand Manager helps sellers effectively monetize their advertising inventory through configuration tools and analytics to make it easier to deploy, configure, and optimize Prebid-based header bidding solutions.

In October 2019, we acquired RTK.io, a provider of header bidding solutions that has much in common with our Demand Manager product, including a foundation in Prebid.

RTK’s technology and team enables Rubicon Project to extend the strategy we introduced with the launch of Demand Manager.

We plan to integrate the two solutions to extend our Demand Manager product portfolio and client base, and to add talented header bidding experts and Prebid developers to our team.

We believe that adoption of these tools will further strengthen our relationship with sellers and contribute to our future revenue growth.

We charge sellers a fee for Demand Manager that is based on all of the sellers’ advertising spending managed through Demand Manager, whether the actual inventory monetization runs through our exchange or otherwise.

Desktop, Mobile, Video and CTV Trends

MAGNA estimates that compound annual growth rates through 2023 for desktop, mobile, and video will be 1%, 22%, and 22%, respectively.

CTV is a nascent but rapidly growing segment, with the U.S.

market expected to grow at an annual compound rate of 19% through 2023 according to eMarketer.

Lower industry growth rates in desktop will make growth of desktop revenue more challenging unless we are able to grow market share through SPO or the expansion of additional inventory.

Our strategic focus is on growth areas—including mobile, video, PMPs, Demand Manager, and header bidding—that are expected to represent a majority of our revenue in future periods.

However, despite our progress in these growth areas, our traditional desktop display business is expected to continue to represent a significant part of our revenue in the near term.

Therefore, the mix of our desktop display business will continue to have a significant effect on our growth rate until our advertising spend mix has shifted more fully to growth areas.

Revenue from our mobile business was $88 million in 2019, representing 56% of our total business, and grew 34% in 2019 over 2018.

Video revenue was $29 million in 2019, and grew 43% in 2019 over 2018.

Because of the long-term growth potential in CTV, we undertook a comprehensive review in 2019 to determine our CTV strategic approach through build, buy or partner opportunities.

On December 19, 2019, we announced a stock-for-stock merger (“Merger”) with Telaria, Inc., (“Telaria”), which will create a combined company offering a single partner for transacting CTV, desktop display, video, audio, and mobile inventory across all geographies and auction types.

We believe the combination of Rubicon Project’s programmatic scale and expertise with Telaria’s leadership in CTV technology and premium partnerships, will create the world’s largest independent sell-side advertising platform with scale, capabilities, and solutions exceeding those offered by competitors.

Together, the combined company will enable thousands of publishers to connect with hundreds of buyers and brands, creating a global, independent alternative to closed players.

The combination will provide additional engineering and sales resources as well as deeper financial assets to seize the opportunity of CTV, the fastest-growing digital medium.

We believe the combined company will be an essential omni-channel partner for buyers to reach target audiences, optimizing the supply path with industry-leading transparency, robust support for identity solutions and brand-safe premium inventory.

In addition, Rubicon Project and Telaria have complimentary domestic and international footprints that will create a combined broader global reach.

Expense Reduction Initiatives

In addition to strategic decisions made to reduce costs paid by our clients on our platform while growing revenue through transaction volume, we have also focused on the cost structure of our business to enable us to compete more effectively.

We must operate efficiently to remain competitive in the current environment and to compensate for the ongoing investments in technology and data processing capabilities required to support the increased volume of transactions that our growth plans require.

As part of these efforts, during the first quarter of 2018, we undertook measures to reduce headcount by approximately 100 people, or 19% of our workforce, and to reduce other operating costs.

Our actions included reductions in administrative staff to bring our general and administrative operations into better alignment with the current size of the business, as well as in sales and technical personnel as a result of offshoring certain development functions, organizational delayering and restructuring, and reducing investment in unprofitable projects.

We are continuously evaluating our costs and pursuing additional cost-control and efficiency opportunities, including increased automation, across all aspects of the company.

However, we anticipate significant increases in ad request volume, and are developing internal tools to manage the volume increases and investing in software architectural improvements, filtering, and cloud services to accelerate innovation and further enable efficiencies.

Uncertainty Resulting from Privacy Regulations

Our business is highly susceptible to emerging privacy regulations and oversight.

In Europe, data protection authorities have started to clarify certain requirements under the GDPR, but uncertainty remains.

Data protection authorities in a number of territories have expressed a desire to focus on the advertising technology ecosystem specifically.

In addition to the GDPR, a number of new privacy regulations will or have already come into effect in 2020.

The California legislature passed the California Consumer Privacy Act ("CCPA") in 2018, which became effective January 1, 2020.

This regulation imposes new obligations on businesses that handle the personal information of California residents.

The obligations imposed will require the Company to devote significant resources towards compliance.

Certain requirements remain unclear due to ambiguities in the drafting of or incomplete guidance.

These ambiguities and resulting impact on our business will need to be resolved over time.

In addition, other privacy bills have been introduced at both the state and federal level.

Certain international territories are also imposing new or expanded privacy obligations.

For example, Brazil's data protection regulation, the LGPD, will also come into effect in August 2020.

In the coming years, we expect further consumer privacy regulation worldwide.

Until prevailing compliance practices standardize, the impact of worldwide privacy regulations on our business and, consequently, our revenue could be negatively impacted.

Overview and Trends

Business" for an overview of our business, the industry in which we operate, and important industry and business trends.

2020 Channel Trends

Sellers use our technology to monetize their content across all digital channels, including CTV, mobile and desktop, and each of these channels will continue to represent a meaningful portion of our revenue in future periods.

We track the breakdown of revenue across channels to better understand how our clients are transacting on our platform, which informs decisions as to business strategy and the allocation of resources and capital.

The following table presents revenue by channel and as a percentage of total revenue for the years ended December 31, 2020, 2019, and 2018.

December 31, 2020 December 31, 2019 December 31, 2018

(in thousands, except percentages)

CTV $ 34,319 15 % $ — — % $ — — %

Desktop $ 78,956 36 $ 68,302 44 $ 59,039 47

Mobile $ 108,353 49 $ 88,112 56 $ 65,646 53

Total $ 221,628 100 % $ 156,414 100 % $ 124,685 100 %

Each of these digital channels has its own industry growth rate, with CTV and mobile projected to continue to grow steadily, while desktop growth flattens.

MAGNA's October 2020 Programmatic Market forecast has estimated compound annual growth rates from 2020 to 2024 for mobile and desktop at 18% and down 1%, respectively, and over the same period, eMarketer projected CTV to grow at a 23% compound annual growth rate.

We believe that CTV will be our biggest growth driver in future periods, and following the SpotX Acquisition we expect CTV revenue to represent a significantly higher percentage of our overall revenue.

We expect our mobile business to grow at a higher rate than desktop, consistent with industry trends and our historical results.

Our mobile business consists of two components, mobile web and mobile applications.

Initially our mobile business consisted primarily of mobile web, which is similar to our desktop business, but our mobile application business has been the growth driver behind our mobile business, and prior to the COVID-19 pandemic showed growth rates in excess of industry projections.

We therefore expect our growth within mobile to come largely from our mobile applications business and, in particular, mobile video.

Lower industry growth rates in desktop will make growing desktop revenue more challenging;

however, in future periods we believe we will be able to grow our desktop business in excess of industry projections by capturing market share through SPO and expansion of publisher relationships.

We expect our desktop business to decline as an overall percentage of our revenue in future periods.

However, we expect that it will continue to represent a significant part of our revenue in the near term.

Therefore, the mix of our desktop business will continue to have a negative effect on our overall growth rate.

Telaria Merger

On April 1, 2020, we completed the stock-for-stock merger with Telaria, Inc., a leading provider of CTV technology, which created a combined company offering a single partner for transacting CTV, desktop display, video, audio, and mobile inventory across all geographies and auction types.

The combination of Magnite's programmatic scale and expertise with Telaria’s leadership in CTV technology and premium partnerships created what we believe to be the world’s largest independent sell-side advertising platform, with scale, capabilities, and solutions exceeding those offered by competitors.

As CTV viewership is growing rapidly and the pace of adoption is accelerating the shift of advertising budgets from linear television to CTV, the Telaria merger

strategically positioned us to take advantage of this growth trend, and we believe that CTV will be our biggest growth driver in future periods.

Telaria Merger Costs Synergies and Other Expense Reduction Initiatives

In connection with the Merger, we restructured certain areas of our operations during 2020.

As part of those efforts, we achieved annual run rate cost synergies of over $20.0 million, mainly related to duplicative public company costs, vendor rationalization, overlapping general and administrative costs, and other operational streamlining.

Employees of the merged company were functionally aligned under a unified leadership team and we reduced our headcount by approximately 8% of our combined workforce during 2020.

Given the significant impact resulting from the COVID-19 pandemic, we instituted certain additional short-term actions during the second quarter, including compensation reductions, a hiring freeze, and deferment of certain capital expenditures.

When we experienced a recovery in revenue in the third quarter, we reinstated compensation and removed certain of these temporary cost-cutting initiatives during the fourth quarter.

SpotX Acquisition

On February 4, 2021, we entered into a Stock Purchase Agreement (the "SpotX Purchase Agreement") with RTL to acquire 100% of the issued and outstanding shares of capital stock of SpotX, Inc., a Delaware corporation ("SpotX"), for a purchase price equal to $560 million in cash plus 14 million shares of the Company’s common stock (the "SpotX Acquisition").

SpotX is one of the leading platforms shaping CTV and video advertising globally.

We believe the acquisition will create the largest independent CTV advertising platform in the programmatic marketplace, making it easier for buyers to reach CTV audiences at scale from industry-leading streaming content providers, broadcasters, platforms and device manufacturers.

Subject to receipt of regulatory approvals and satisfaction of customary closing conditions, the SpotX Acquisition is expected to close in the second quarter of 2021.

The SpotX Acquisition will result in a significant increase in our revenue, in particular in CTV and other video.

Following the transaction, we expect CTV to represent a higher percentage of our overall revenue, and because CTV is largely transacted through PMPs, we also expect to see an increase in the percentage of PMP transactions transacted on our platform.

If the SpotX Acquisition successfully closes, the acquisition would result in a substantial increase in related operating expenses, primarily associated with costs for personnel, payments to sellers for revenue reported on a gross basis, and other ancillary costs to support the business.

We expect some of those increases to be offset by cost saving activities we plan to undertake.

We are targeting in excess of $35 million in run-rate operating cost synergies, with more than half of the synergies to be realized within the first year of combined operations.

Components of Our Results of Operations

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Our consolidated operating results, together with non-GAAP financial measures, are regularly reviewed by our chief operating decision maker, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance.

We generate revenue from the purchase and sale of digital advertising inventory through our marketplace.

We generate revenue from the purchase and sale of digital advertising inventory through our platform.

We also generate revenue from the fee we charge clients for use of our Demand Manager product, which generally is a percentage of the client's advertising spending on any advertising marketplace.

We recognize revenue upon the fulfillment of our contractual obligations in connection with a completed transaction, subject to satisfying all other revenue recognition criteria.

For substantially all transactions executed through our platform, we act as an agent on behalf of the publisher that is monetizing its inventory, and revenue is recognized net of any advertising inventory costs that we remit to sellers.

With respect to certain revenue streams acquired in connection with the Merger with Telaria, we report revenue on a gross basis, based primarily on our determination that the Company acts as the primary obligor in the delivery of advertising campaigns for our buyer clients with respect to such transactions.

The revenue that we recognized on a gross basis was less than 2% of total revenue in 2020.

Our revenue recognition policies are discussed in more detail in Note 4 of the accompanying Notes to the Consolidated Financial Statements.

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Technology and Development .

Our technology and development expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, as well as professional services associated with the ongoing development and maintenance of our solution, and to a lesser extent, facilities-related costs and depreciation and amortization, including amortization expense associated with acquired intangible assets from our business acquisitions that are related to technology and development functions.

These expenses include costs incurred in the development, implementation, and maintenance of internal use software, including platform and related infrastructure.

Technology and development costs are expensed as incurred, except to

the extent that such costs are associated with internal use software development that qualifies for capitalization, which are then recorded as internal use software development costs, net, on our consolidated balance sheets.

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 sheets.

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.

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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.

Restructuring and Other Exit Costs.

Our restructuring and other exit costs consist primarily of employee termination costs, including stock-based compensation charges, facility closure and relocation costs, and contract termination costs.

Merger and Restructuring Costs.

Our merger and restructuring costs consist primarily of professional service fees associated with the merger and acquisition activities, including cash-based employee termination costs, stock-based compensation charges associated with the Merger, and other restructuring activities, including facility closures, relocation costs, and contract termination costs.

Other (Income) Expense

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We have foreign currency exposure related to our accounts receivable and accounts payable that are denominated in currencies other than the U.S.

Dollar, principally the British Pound and the Euro.

Dollar, principally the British Pound, Australian Dollar, Canadian Dollar, and Euro.

Provision (Benefit) for Income Taxes

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The following table sets forth our consolidated results of operations:

Favorable/(Unfavorable) %

December 31, 2019

December 31, 2018

Year Ended Favorable/(Unfavorable) %

December 31, 2020 December 31, 2019 December 31, 2018 2020 vs 2019 2019 vs 2018

(in thousands)

Revenue $ 221,628 $ 156,414 $ 124,685 42 % 25 %

Expenses (1)(2) :

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General and administrative 52,987 39,750 42,431 (33) % 6 %

Restructuring and other exit costs

Merger and restructuring costs 17,552 2,041 3,440 (760) % 41 %

Total expenses 275,862 183,997 188,293 (50) % 2 %

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Provision (benefit) for income taxes 693 (1,512) 357 (146) % 524 %

Net loss $ (53,432) $ (25,478) $ (61,822) (110) % 59 %

(1) Stock-based compensation expense included in our expenses was as follows:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019 December 31, 2018

(in thousands)

Cost of revenue

$ 525 $ 421 $ 321

Sales and marketing 8,229 5,638 4,557

Technology and development

7,451 4,757 2,867

General and administrative

Restructuring and other exit costs

10,416 8,009 8,139

Merger and restructuring costs

Total stock-based compensation expense

$ 28,491 $ 18,825 $ 16,282

(2) Depreciation and amortization expense included in our expenses was as follows:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019 December 31, 2018

(in thousands)

Cost of revenue

$ 34,879 $ 30,345 $ 33,306

Sales and marketing 13,313 537 586

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Total depreciation and amortization expense

$ 49,248 $ 32,126 $ 35,338

The following table sets forth our consolidated results of operations for the specified periods as a percentage of our revenue for those periods presented:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019 December 31, 2018

Revenue 100 % 100 % 100 %

Cost of revenue

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General and administrative

Restructuring and other exit costs

Merger and restructuring costs

Total expenses 124 118 151

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Provision (benefit) for income taxes

Net loss (24) % (16) % (50) %

Comparison of the Years Ended December 31, 2020, 2019, and 2018

Revenue increased $65.2 million, or 42%, for the year ended December 31, 2020 compared to the prior year.

Our revenue growth was driven primarily by ongoing increases in advertising spend transacted on our platform, particularly video and mobile ad spend, and to a lesser degree, by increases in take rate, or the fee we earn on advertising spend.

Revenue is impacted by shifts in the mix of advertising spend by transaction type and channel, changes in the fees we charge sellers for our services, and other factors such as changes in the market, our execution of the business, and competition.

In addition, an increase in PMP transactions as a percentage of the transactions on our platform could also result in reduced revenue, if not offset by increased volume, because PMP transactions can carry lower fees than OMP transactions.

Industry dynamics are challenging due to market and competitive pressures and make it difficult to predict the near-term effect of our growth initiatives.

Our revenue growth was driven primarily by the Merger, completed on April 1, 2020, which contributed $60.1 million in revenue during the year ended December 31, 2020.

On a per channel basis, CTV revenue increased $34.3 million, compared to the prior year (all as a result of the Merger), while mobile revenue increased $20.2 million, or a 23%, compared to the prior year, and desktop revenue increased $10.7 million, or 16%, compared to the prior year.

Excluding the impact of the Merger, our revenue increased 3% year-over-year.

Despite some recovery in our revenue trends, beginning in the third quarter of 2020, our overall annual revenue growth was significantly negatively affected by the impact of the COVID-19 pandemic.

Revenue increased $31.7 million, or 25%, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Our revenue growth was driven primarily by ongoing increases in advertising spend transacted on our platform, particularly video and mobile advertising spend.

We expect revenue to increase in 2021 compared to 2020, with CTV as our primary growth driver.

Our revenue is largely a function of the number of advertising transactions and the price, or CPM, at which the inventory is sold, which results in total advertising spend on our platform, and the take rate we charge for our services.

Because pricing and take rate vary across publisher, channel and transaction type, our revenue is impacted by shifts in the mix of advertising spend on our platform.

For instance, an increase in PMP transactions as a percentage of the transactions on our platform could also result in reduced revenue, if not offset by increased advertising spend, because PMP transactions can carry lower take rates than OMP transactions.

We believe that contributions to revenue from PMPs, in particular with respect to CTV which is largely transacted through PMPs, will continue to grow as a percentage of our total revenue.

In general, we expect this shift will result in an overall increase in advertising spend through our platform due to both an increase in volume and average CPM which will be partially offset by a decrease in our average take rate.

Our revenue growth has been tempered, and may be negatively impacted in the future, by reductions in revenue resulting from the economic impact of the COVID-19 pandemic.

Refer to Item 1A.

"Risk Factors" for additional information related to this risk factor and the impact it may have on our business.

Cost of Revenue

Cost of revenue decreased $2.6 million , or 4% , for the year ended December 31, 2019 compared to the prior year mainly due to our continued focus on infrastructure serving efficiency, which resulted in a decrease of $3.0 million in depreciation and amortization and a decrease of $1.0 million in data and bandwidth expenses due to our leverage in contract pricing as a result of our increased scale.

Cost of revenue increased by $20.4 million, or 35%, for the year ended December 31, 2020 compared to the prior year primarily due to the Merger.

Cost of revenue includes an increase of $11.8 million in data and bandwidth expenses, $4.5 million in depreciation and amortization, and $2.0 in media costs.

Cost of revenue decreased $2.6 million, or 4%, for the year ended December 31, 2019 compared to the year ended December 31, 2018 mainly due to our continued focus on infrastructure serving efficiency, which resulted in a decrease of $3.0 million in depreciation and amortization and a decrease of $1.0 million in data and bandwidth expenses.

These decreases were partially offset by an increase of $1.1 million in ad protection costs.

We expect cost of revenue to be higher in absolute dollars in 2020 compared to 2019 as we continue to expand select data center operations to cloud service providers to accelerate innovation and gain efficiencies, and to support the growth of our business.

We expect the cost of revenue to be higher in 2021 compared to 2020 in absolute dollars due primarily to the increased amortization of intangible assets resulting from the Merger and higher cloud service costs to support the growth of our business.

Cost of revenue may fluctuate from quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, depending on revenue levels and the volume of transactions we process supporting those revenues, and the timing and amounts of depreciation and amortization of equipment and software.

Sales and Marketing

Sales and marketing expenses stayed flat for the year ended December 31, 2019 compared to the prior year primarily due to the benefit of the prior year's cost control initiatives.

We expect sales and marketing expenses to increase in 2020 compared to 2019 as a result of increased investment in headcount, particularly in international markets.

Sales and marketing expense may fluctuate quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, based on revenue levels, the timing of our investments and seasonality in our industry and business.

Sales and marketing expenses increased by $31.5 million, or 71%, for the year ended December 31, 2020 compared to the prior year primarily due to the Merger and associated increases in amortization related to acquired intangibles and other assets and increases in headcount.

Sales and marketing expenses increased by $20.4 million related to personnel expenses and $12.8 million related to depreciation and amortization associated with the Merger.

These increases were partially offset by a decrease in expenses of $2.4 million related to travel and industry events due to the impact of the COVID-19 pandemic.

Sales and marketing expenses stayed flat for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to the benefit of the prior year's cost control initiatives.

We expect sales and marketing expenses to increase in 2021 compared to 2020 in absolute dollars primarily due to a full year of additional headcount costs and amortization of acquired intangible assets as a result of the Merger and increased Travel and Entertainment expenses post COVID-19.

Sales and marketing expenses may fluctuate quarter to quarter and period to period, on an absolute dollar basis and as a percentage of revenue, based on revenue levels, the timing of our investments and seasonality in our industry and business.

Technology and Development

Technology and development expenses increased by $2.4 million , or 6% , for the year ended December 31, 2019 compared to the prior year, primarily due to an increase of $3.0 million in personnel costs as a result of strategic headcount additions to focus on the engineering aspect of our new developments, including Demand Manager and other initiatives.

We expect technology and development expense to increase in 2020 compared to 2019 as we make a limited number of strategic and targeted headcount additions to focus on the engineering aspect of building our new products and expanding features and functionalities of our current products.

Technology and development expenses increased by $11.3 million, or 28%, for the year ended December 31, 2020 compared to the prior year, primarily due to an increase of $11.6 million in personnel costs as a result of the increased headcount associated with the Merger.

Technology and development expenses increased by $2.4 million, or 6%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to an increase of $3.0 million in personnel costs as a result of strategic headcount additions to focus on the engineering aspect of our new developments, including Demand Manager and other initiatives.

We expect technology and development expenses to continue to increase in 2021 compared to 2020 in absolute dollars, primarily due to the additional headcount investment in our key growth opportunities.

The timing and amount of our capitalized development and enhancement projects may affect the amount of development costs expensed in any given period.

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General and Administrative

General and administrative expenses decreased by $0.7 million , or 2% , for the year ended December 31, 2019 compared to the prior year, primarily due to a decrease of $1.2 million in personnel related expenses due to the benefit of prior year's cost control initiatives.

We expect general and administrative expenses to increase slightly in 2020 compared to 2019.

General and administrative expenses increased by $13.2 million, or 33%, for the year ended December 31, 2020 compared to the prior year, primarily due to increases of $7.1 million in personnel expenses and $4.0 million in facilities related expenses, both primarily associated with the Merger.

In addition, professional services increased by $3.0 million in professional services mainly attributed to the growth of the overall business as a result of the Merger.

These increases were partially offset by a decrease in bad debt expense of $1.3 million.

General and administrative expenses decreased by $0.7 million, or 2%, for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to a decrease of $1.2 million in personnel related expenses due to the benefit of prior year's cost control initiatives.

We expect general and administrative expenses to increase in 2021 compared to 2020 in absolute dollars primarily due to the additional headcount and assuming a return to office work environment later in the year.

General and administrative expenses may fluctuate from quarter to quarter and period to period based on the timing and amounts of expenditures in our general and administrative functions as they vary in scope and scale over periods.

Such fluctuations may not be directly proportional to changes in revenue.

Restructuring and Other Exit Costs

As part of our on-going evaluation of efficiency and implementation of cost-control measures, during the first quarter of 2018, we undertook measures to reduce headcount by approximately 100 people, or 19% of our workforce, and to reduce other operating costs.

Merger and Restructuring Costs

We incurred merger and restructuring costs of $17.6 million and $2.0 million during the year ended December 31, 2020 and 2019, respectively, primarily related with the Merger.

In 2020, these costs included professional fees of $9.9 million related to investment banking advisory, legal, and other professional service fees, one-time cash-based employee termination benefit costs of $5.7 million, and non-cash stock-based compensation expense associated with double-trigger accelerations and severance benefits of $1.9 million.

In 2019, these costs consisted of professional services associated with the Merger, which were all incurred during the fourth quarter.

Merger and restructuring costs increased by $15.5 million during the year ended December 31, 2020 compared to the prior year primarily due cash and non-cash acceleration and termination benefits, as referenced above, and increased professional services associated with the Merger and resulting restructuring activities.

During the year ended December 31, 2018, we incurred restructuring costs of $3.4 million for severance and other one-time employee termination benefits related to headcount reductions that were made in 2018.

These costs included one-time cash-based employee termination benefit costs of $3.0 million and non-cash stock-based compensation expenses associated with severance benefits of $0.4 million.

These headcount reductions were as part of evaluation of efficiency and implementation of cost-control measures.

As part of these measures, we reduced headcount by approximately 100 people, or 19% of our workforce, and reduced other operating costs.

For the year ended December 31, 2018, we incurred restructuring and other exit costs of $3.4 million for severance and other one-time employee termination benefits related to headcount reductions that were made in the first quarter of 2018 (see Note 14 to the consolidated financial statements).

There were no restructuring and other exit costs incurred during the year ended December 31, 2019 .

All accrued costs as of December 31, 2018 associated with these events were paid in the first quarter of 2019.

We expect merger and restructuring costs to increase in 2021 compared to 2020 in absolute dollars if the SpotX Acquisition successfully closes.

Other (Income) Expense, Net

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019 December 31, 2018

(in thousands)

Interest income, net

Interest (income) expense, net $ (50) $ (789) $ (988)

Other income (3,665) (285) (766)

Foreign exchange (gain) loss, net 2,220 481 (389)

Total other (income) expense, net $ (1,495) $ (593) $ (2,143)

Other income increased by $3.4 million during the year ended December 31, 2020 compared to the prior year due to rental income for two real estate leases for which we sublease the property to a third parties.

We expect rental income for real estate leases subleased to third parties to be approximately $3.8 million in 2021, $3.2 million in 2022 and 2023, $3.0 million in 2024, and $0.3 million in 2025, based on the subleases in place as of December 31, 2020.

Foreign exchange (gain) loss, net is impacted by movements in exchange rates and the amount of foreign currency-denominated receivables and payables, which are impacted by our billings to buyers and payments to sellers.

The foreign currency loss, net during the year ended December 31, 2019 was primarily attributable to the currency movements between the British Pound and the Euro relative to the U.S.

The foreign currency loss, net during the year ended December 31, 2020 was primarily attributable to the currency movements between the British Pound, Australian Dollar, Canadian Dollar, and Euro relative to the U.S.

The foreign currency loss, net during the years ended December 31, 2019 and 2018 was primarily attributable to the currency movements between the British Pound and the Euro relative to the U.S.

Provision (Benefit) for Income Taxes

We recorded an income tax benefit of $1.5 million for the year ended December 31, 2019 compared to an income tax expense of $0.4 million for the year ended December 31, 2018 .

The net tax benefit for the year ended December 31, 2019 is the result of a deferred tax liability associated with the RTKio acquisition, the release of a foreign valuation allowance resulting from a change to a cost-plus arrangement for a foreign subsidiary, the domestic valuation allowance, and the tax liability associated with foreign subsidiaries.

Non-GAAP Financial Measures and Operational 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 measures include advertising spend and Adjusted EBITDA, which are discussed immediately following the table below, along with the operational performance measure take rate.

Revenue and other GAAP measures are discussed under the headings "Components of Our Results of Operations" and "Results of Operations."

December 31, 2019

December 31, 2018

We recorded an income tax expense of $0.7 million for the year ended December 31, 2020 compared to an income benefit of $1.5 million and income tax expense of $0.4 million for the years ended December 31, 2019 and 2018, respectively.

The tax expense for the years ended December 31, 2020 and December 31, 2018 was primarily the result of the domestic valuation allowance and the tax liability associated with the foreign subsidiaries.

The net tax benefit for the year ended December 31, 2019 was the result of a deferred tax liability associated with the RTKio acquisition, the release of a foreign valuation allowance resulting from a change to a cost-plus arrangement for a foreign subsidiary, the domestic valuation allowance, and the tax liability associated with foreign subsidiaries.

Non-GAAP Financial Measures

In addition to our GAAP results, we review Adjusted EBITDA, a non-GAAP financial measure, 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.

Adjusted EBITDA is discussed immediately following the table below.

Revenue is discussed under the headings "Components of Our Results of Operations" and "Results of Operations."

December 31, 2020 December 31, 2019 December 31, 2018

(in thousands)

Financial Measures and non-GAAP Financial Measures:

Advertising spend

Revenue $ 221,628 $ 156,414 $ 124,685

Net loss $ ( 53,432 ) $ ( 25,478 ) $ ( 61,822 )

Adjusted EBITDA $ 43,065 $ 25,694 $ (11,222)

Operational Measure:

Advertising Spend

We define advertising spend as the total volume of spending between buyers and sellers transacted on our platform.

Advertising spend does not represent revenue reported on a GAAP basis.

We also use advertising spend for internal management purposes to assess market share of total advertising spending.

Our advertising spend may be influenced by demand for our services, the volume and characteristics of paid impressions, average CPM, our ability to fill ad requests, the nature and amount of fees we charge, and other factors such as changes in the market, our execution of the business, and competition.

Advertising spend may fluctuate due to seasonality.

In the past, we have experienced higher advertising spend during the fourth quarter of a given year because many buyers devote a disproportionate amount of their advertising budgets to this period of the year to coincide with increased holiday purchasing.

Buyers' focus on the fourth quarter generates more bidding activity on our platform, which may drive higher volumes of paid impressions, average CPM, or both.

Our advertising spend grew 13% for the year ended December 31, 2019 compared to 2018.

The increase in advertising spend was driven by higher ad request volumes and corresponding paid impressions.

CPMs generated from our auctions were flat driven by implementation of first price auctions and EMR for our header bidding inventory.

CPMs can be influenced heavily by the value of the inventory that we made available to buyers, including PMP, mobile, and video inventory that typically carries higher pricing.

The following table presents the reconciliation of revenue to advertising spend:

December 31, 2019

December 31, 2018

(in thousands)

Plus amounts paid to sellers

Advertising spend

Our solution enables buyers and sellers to transact through desktop and mobile channels.

The following tables present revenue by channel and as a percentage of total revenue for the years ended December 31, 2019 and 2018 .

December 31, 2019

December 31, 2018

(in thousands, except percentages)

Adjusted EBITDA

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The following table presents a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for the years ended December 31, 2020 and 2019.

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019 December 31, 2018

(in thousands)

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Stock-based compensation expense 28,491 18,825 16,282

Acquisition and related items

Interest income, net

Merger and acquisition related items 15,682 2,041 —

Non-operational real estate expense (income), net 198 — —

Interest (income) expense, net (50) (789) (988)

Foreign exchange (gain) loss, net 2,220 481 (389)

Other non-operating (income) expense, net 15 — —

Provision (benefit) for income taxes 693 (1,512) 357

Adjusted EBITDA $ 43,065 $ 25,694 $ (11,222)

Take rate is an operational performance measure calculated by dividing revenue by advertising spend.

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, credits for discrepancies and other items, and the overall development of the digital advertising ecosystem.

Take rate increased by 143 basis points for the year ended December 31, 2019 compared to the prior year.

Liquidity and Capital Resources

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The timing of cash receipts from buyers and payments to sellers can significantly impact our cash flows from operating activities and our liquidity for, and within, any period presented.

Our collection and payment cycle can vary from period to period depending upon various circumstances, including seasonality.

Our collection and payment cycle can vary from period to period depending upon various circumstances, including seasonality, and may be negatively impacted as a result of COVID-19.

On September 25, 2020, we amended and restated our loan and security agreement with SVB (the "Loan Agreement").

The Loan Agreement provides a senior secured revolving credit facility of up to $60.0 million with a maturity date of September 25, 2022.

Pursuant to the Loan Agreement, we are required to comply with certain financial covenants.

While we are in compliance with these covenants, this could change in the future depending on our operating results.

At December 31, 2019 , we had no amounts outstanding under our Loan Agreement.

The Loan Agreement includes a letter of credit, foreign exchange and cash management facility with a sublimit up to $10.0 million, of which $6.3 million was utilized for letters of credit related to leases as of December 31, 2020.

As of December 31, 2020, the amount available for borrowing was $53.7 million (net of letters of credit).

Pursuant to the Loan Agreement, we are required to comply with financial covenants, measured quarterly, with respect to a minimum liquidity ratio and maximum quarterly cash burn.

We are required to maintain a minimum liquidity ratio of at least 1.25 on the last day of each quarter and not exceed, on an absolute basis, a maximum quarterly cash burn for specific periods, as defined in the Loan Agreement.

The Liquidity Ratio is defined as Cash and Cash Equivalents, plus Accounts Receivable, less Accounts Payable - Seller, divided by all obligations due to SVB, including all debt balances, interest, service fees, and unused credit line fees, net of outstanding letters of credit as of the balance sheet date.

Cash Burn is defined as Adjusted EBITDA less Capital Expenditures during the trailing periods as outlined in the Loan Agreement.

The Loan Agreement defines Capital Expenditures as the current period unfinanced cash expenditures that are capitalized and amortized, including but not limited to property and equipment and capitalized labor costs as they relate to internal use software development costs.

December 31, 2020, the Company was in compliance with its financial covenants.

While we are currently in compliance with these covenants, this could change in the future depending on our operating results.

At December 31, 2020, we had no amounts outstanding under our Loan Agreement other than with respect to letters of credit).

Future availability under the credit facility is dependent on several factors, including the available borrowing base and compliance with future covenant requirements.

See Note 18 of "Notes to Consolidated Financial Statements" for additional information regarding the Loan Agreement.

We believe our existing cash and cash equivalents and investment balances will be sufficient to meet our working capital requirements for at least the next twelve months from the issuance of our financial statements.

We believe our existing cash and cash equivalents, investment balances, and available borrowings under our Loan Agreement will be sufficient to meet our working capital requirements for at least the next twelve months from the issuance of our financial statements.

However, there are multiple factors that could impact our cash balances in the future.

For example, we typically collect from buyers in advance of payments to sellers, and our collection and payment cycle can vary from period to period depending upon various circumstances, including seasonality.

Some buyers have begun demanding longer terms to pay us later and some sellers have begun demanding shorter terms to collect from us earlier.

We may not have the leverage to resist these demands given the competitive nature of our business.

If this continues, more of our cash will be required to fund our payment cycle and therefore not be available for other uses.

Some buyers have also began experiencing financial difficulty and have been forced into filing for bankruptcy protection, and we may be forced to pay sellers even if we are unable to collect from buyers.

Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in Part I, Item 1A:

In addition, in the event a buyer defaults on payment, we may still be required to pay sellers for the inventory purchased even if we are unable to collect from buyers.

These challenges have been exacerbated by the COVID-19 pandemic and resulting economic impact, as many of our buyers are experiencing financial

difficulties and liquidity constraints.

In certain cases, buyers have been unable to timely make payments and we have agreed to revised payment schedules.

To date, these actions have not had a material negative impact on our cash flow or liquidity.

At December 31, 2020, two buyers accounted for 33% and 12%, respectively, of consolidated accounts receivable.

The future capital requirements and the adequacy of available funds will depend on many factors, including the duration and severity of the COVID-19 pandemic and its impact on buyers and sellers and factors set forth in Part I, Item 1A:

"Risk Factors" of this Annual Report on Form 10-K.

Our ability to renew our existing credit facility, which matures on September 26, 2020 , or to enter into a new credit facility to replace or supplement the existing facility may be limited due to various factors, including the status of our business, global credit market conditions, and perceptions of our business or industry by sources of financing.

In particular, it may be difficult to renew or replace our existing credit facility if we are not able to produce, or demonstrate a path to produce, positive cash flow.

In addition, even if credit is available, lenders may seek more restrictive covenants and higher interest rates that may reduce our borrowing capacity, increase our costs, and reduce our operating flexibility.

We intend to finance the cash portion of the SpotX Acquisition consideration in part from cash on our balance sheet and in part through borrowings under certain proposed new credit facilities.

In connection with entering into the SpotX Purchase Agreement, we entered into the Commitment Letter, dated as of February 4, 2021, with Goldman Sachs Bank USA (the "Commitment Party"), pursuant to which, subject to the terms and conditions set forth therein, the Commitment Party has committed to provide the senior secured Term Loan Facility in an aggregate principal amount of up to $560 million.

If we fail to satisfy the closing conditions set forth in the Commitment Letter or the Commitment Party is unable to perform its obligations under the Commitment Letter for any reason, we will be required to find other sources of capital to fund the acquisition of SpotX.

In the future, we may attempt to raise additional capital through the sale of equity securities or through equity-linked or debt financing arrangements.

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Any future indebtedness we incur may result in terms that could be unfavorable to equity investors.

Due to the economic uncertainty caused by the COVID-19 pandemic, the debt and equity markets have become less predictable and obtaining financing on favorable terms and at favorable rates has become more difficult.

An inability to raise additional capital could adversely affect our ability to achieve our business objectives.

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The following table summarizes our cash flows for the periods presented:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019 December 31, 2018

(in thousands)

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Cash flows provided by (used in) investing activities 32,636 (23,388) 27,947

Cash flows used in financing activities

Cash flows provided by (used in) financing activities 7,354 (205) (1,279)

Effects of exchange rate changes on cash, cash equivalents and restricted cash 918 46 (172)

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Operating Activities

Our cash flows from operating activities are primarily driven by revenues generated from advertising activity, offset by the cash costs of operations, and significantly influenced by increases or decreases in receipts from buyers and related payments to sellers.

Our cash flows from operating activities are primarily driven by revenues generated from advertising activity, offset by the cash costs of operations, and are significantly influenced by the timing of and fluctuations in receipts from buyers and related payments to sellers.

Our future cash flows will be diminished if we cannot increase our revenue levels and manage costs appropriately.

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The timing of cash receipts from buyers and payments to sellers can significantly impact our cash flows from operating activities for any period presented.

During the year ended December 31, 2019 , net cash provided by operating activities was $32.0 million , compared to net cash used in operating activities of $22.7 million during the year ended December 31, 2018 .

Our operating activities included our net losses of $25.5 million and $61.8 million for the years ended December 31, 2019 and 2018 , respectively, which were offset by non-cash adjustments of $51.5 million and $51.3 million , respectively.

During the year ended December 31, 2020, net cash used in operating activities was $12.1 million, compared to net cash provided by operating activities of $32.0 million during the year ended December 31, 2019 and net cash used in operating activities of $22.7 million during the year ended December 31, 2018.

Our operating activities included our net losses of $53.4 million, $25.5 million, and $61.8 million for the years ended December 31, 2020 and 2019, and 2018, respectively, which were offset by non-cash adjustments of $76.4 million, $51.5 million, and $51.3 million, respectively.

In 2020, net changes in our working capital increased cash used in operating activities by $35.1 million, mainly driven by increased accounts receivable and accounts payable balances.

In 2019, net changes in our working capital increased cash provided by operating activities by $5.9 million.

In 2018 , net changes in our working capital increased cash used in operating

activities by $12.1 million .

The net changes in working capital for both periods are primarily due to the timing of cash receipts from buyers and the timing of payments to sellers.

We believe that cash flows from operations will continue to be negatively impacted by our working capital needs.

In 2018, net changes in our working capital increased cash used in operating activities by $12.1 million.

The net changes in working capital for all periods presented are primarily due to the timing of cash receipts from buyers and the timing of payments to sellers.

We believe that cash flows from operations will continue to be negatively impacted by our ongoing net losses and working capital needs.

Investing Activities

Our primary investing activities have consisted of investments in, and maturities of, available-for-sale securities, acquisitions of businesses, purchases of property and equipment, and capital expenditures to develop our internal use software in support of creating and enhancing our technology infrastructure.

Our primary investing activities have consisted of acquisitions of businesses, purchases of property and equipment, capital expenditures to develop our internal use software in support of creating and enhancing our technology infrastructure, and investments in, and maturities of, available-for-sale securities.

Purchases of property and equipment and investments in internal use software development may vary from period-to-period due to the timing of the expansion of our operations, changes to headcount, and the cycles of our internal use software development.

As we execute on our strategy to be a high volume, low cost advertising exchange, we are developing solutions to manage the growth of our digital advertising inventory volume more efficiently.

We anticipate investment in internal use software development to remain relatively consistent with past years' investment levels as we continue to innovate new solutions on our platform.

As the business continues to grow, we expect our investment in property and equipment to increase compared to 2019.

We anticipate investment in internal use software development to increase compared to past years' investment levels as we continue to innovate new solutions on our platform.

As the business continues to grow, we expect our investment in property and equipment to slightly increase compared to 2020.

Historically, a majority of our purchases in property and equipment have occurred in the latter half of the year in preparation for the peak volumes of the fourth quarter and early in the first quarter of the following year.

We expect those trends to continue, with higher levels of property and equipment spend in the latter half of this year compared to the first half of the year.

We expect those trends to continue, with higher levels of property and equipment spend in the latter half of next year compared to the first half of the year.

Investments in, and maturities of, available-for-sale securities and acquisitions of businesses vary from period-to-period.

During the year ended December 31, 2019 , net cash used by investing activities was $23.4 million compared to net cash provided by investing activities of $27.9 million during the year ended December 31, 2018 .

During the year ended December 31, 2020, net cash provided by investing activities was $32.6 million compared to net cash used by investing activities of $23.4 million during the year ended December 31, 2019 and net cash provided by investing activities of $27.9 million during the year ended December 31, 2018.

During the year ended December 31, 2020, 2019, and 2018, we used cash for purchases of property and equipment of $14.3 million, $11.4 million, and $11.4 million, respectively, and used cash for investments in our internally developed software of $7.7 million, $8.5 million, and $8.5 million, respectively, The cash provided by investing activity for the year ended December 31, 2020 included $54.6 million of cash and restricted cash acquired as part of the Merger.

Net cash used in our investing activities in 2019 included $11.0 million to acquire RTK.io.

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In addition, we had cash inflows of $9.2 million during the year ended December 31, 2018 related to sales of available-for-sale securities.

During each of the the years ended December 31, 2019 and 2018 , we had cash outflows for the purchase of property and equipment of $11.4 million .

We also made investments in our internally developed software of $8.5 million in each of the last two years.

On October 21, 2019, we acquired RTK.io, a leading provider of tools and services that bring simplicity and control to header bidding for publishers.

Refer to "Item 1.

Business" for additional information.

On December 19, 2019, we announced a stock-for-stock merger with Telaria, which will create a combined company offering a single platform for transacting CTV, desktop display, video, audio, and mobile inventory across all geographies and auction types.

Refer to "Item 1.

Business" for additional information.

Financing Activities

Our financing activities consisted of transactions related to the issuance of our common stock under our equity plans.

For the years ended December 31, 2019 and 2018 , we used net cash of $0.2 million and $1.3 million , respectively, for financing activities.

Cash outflows from financing activities for the years ended December 31, 2019 and 2018 included payments of $1.8 million and $1.6 million , respectively, for income tax deposits paid in respect of vesting of stock-based compensation awards that were reimbursed by the award recipients through surrender of shares.

Offsetting these outflows were cash inflows of $1.6 million and $0.4 million from the issuance of common stock under the employee stock purchase plan and exercise of stock options for the years ended December 31, 2019 and 2018 , respectively.

For the years ended December 31, 2020, 2019, and 2018 we provided net cash of $7.4 million, and used net cash of $0.2 million, and $1.3 million, respectively, for financing activities.

Cash outflows from financing activities for the years ended December 31, 2020, 2019, and 2018 included payments of $7.9 million, $1.8 million, and $1.6 million, respectively, for income tax deposits paid in respect of vesting of stock-based compensation awards that were reimbursed by the award recipients through surrender of shares.

Offsetting these outflows were cash inflows of $15.2 million, $1.6 million, and $0.4 million, from the issuance of common stock under the employee stock purchase plan and exercise of stock options for the years ended December 31, 2020, 2019, and 2018, respectively.

Off-Balance Sheet Arrangements

We do not have any relationships with other entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We did not have any other off-balance sheet arrangements at December 31, 2019 than the indemnification agreements described below.

We did not have any other off-balance sheet arrangements at December 31, 2020 other than the short-term operating leases and the indemnification agreements described below.

Contractual Obligations and Known Future Cash Requirements

Our principal commitments consist of leases for our various office facilities, including our corporate headquarters in Los Angeles, California and offices in New York, New York, and operating lease agreements with data centers that expire at various times through 2030 .

At December 31, 2019 , expected future commitments relating to operating leases were $25.8 million .

16 of "Notes to Consolidated Financial Statements" for our annual lease commitment for each of the next five years and thereafter.

Our principal commitments consist of leases for our various office facilities, including our corporate headquarters in Los Angeles, California and offices in New York, New York, and operating lease agreements, including data centers and cloud managed services that expire at various times through 2030.

In certain cases, the terms of the lease agreements provide for rental payments on a graduated basis.

We received rental income from subleases totaling $3.7 million for the year ended December 31, 2020.

There were no significant changes to our unrecognized tax benefits in the year ended December 31, 2019 .

Upon completion of the Merger with Telaria, which is expected to close in early April 2020, our unrecognized tax benefits may be materially impacted, and as a result, we cannot reasonably estimate if there will be significant changes to unrecognized tax benefits through December 31, 2020 .

The following table summarizes our future lease obligations, related sublease income, and other future payments due under non-cancelable agreements at December 31, 2020.

2021 2022 2023 2024 2025 Thereafter Total

(in thousands)

Lease liabilities associated with leases included Right of Use Assets as of December 31, 2020

$ 11,653 $ 8,392 $ 7,428 $ 6,740 $ 3,551 $ 11,403 $ 49,167

Obligations for leases not included in Lease liabilities as of December 31, 2020 1,549 3,593 3,713 3,835 2,827 13,323 28,840

Operating sublease income (3,814) (3,245) (3,194) (3,042) (253) — (13,548)

Other non-cancelable obligations 9,010 8,073 5,158 4,031 2,000 — 28,272

Total $ 18,398 $ 16,813 $ 13,105 $ 11,564 $ 8,125 $ 24,726 $ 92,731

Obligations for leases not included in the lease liabilities as of December 31, 2020 include commitments under agreements for an office lease for our new corporate headquarters in Los Angeles and a data center in Singapore which have not commenced as of December 31, 2020.

Other non-cancelable obligations include other agreements in the normal course of business, including an agreement for third-party cloud-managed services.

As part of the agreement, we have a minimum commitment to pay $20.0 million over the course of five years, with no annual minimum commitment.

As of December 31, 2020, the Company's commitment is $18.0 million.

In addition, on February 4, 2021, we entered into a Stock Purchase Agreement with RTL US Holding, Inc., to purchase all of the issued and outstanding shares of capital stock of SpotX, a Delaware corporation and wholly owned subsidiary of RTL, for a purchase price equal to $560 million in cash ("Cash Consideration") and 14 million shares of the Company's common stock.

The Cash Consideration is subject to customary working capital and other adjustments.

We intend to finance the Cash Consideration in part from cash on our balance sheet and in part through borrowings under the Term Loan Facility.

The funding of the Term Loan Facility provided for in the Commitment Letter is contingent on the satisfaction of customary conditions, including the execution and delivery of definitive documentation with respect to credit facilities in accordance with the terms set forth in the Commitment Letter and the consummation of the SpotX acquisition in accordance with the Purchase Agreement.

Our unrecognized tax benefits changes for the year ended December 31, 2020 resulted from a closed IRS audit and the Company's reasonable expectation that federal research and development credits will expire unutilized pursuant to Section 383 of the Code, which allowed us to decrease our unrecognized tax benefit.

The Merger with Telaria resulted in an increase to our unrecognized tax benefit for prior year taxes in foreign jurisdictions.

The increase to unrecognized tax benefit for the period is not material.

In the ordinary course of business, we enter into agreements with sellers, buyers, and other third parties pursuant to which we agree to indemnify buyers, sellers, vendors, lessors, business partners, lenders, stockholders, and other parties with respect to certain matters, including, but not limited to, losses resulting from claims of intellectual property infringement, damages to property or persons, business losses, or other liabilities.

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We believe that the following assumptions and estimates have the greatest potential impact on our consolidated financial statements:

(i) the determination of revenue recognition as net versus gross in our revenue arrangements, (ii) internal-use software development costs, (iii) intangible asset impairment analysis, (iv) assumptions used in the valuation models to determine the fair value of stock options and stock-based compensation expense, (v) the assumptions used in the valuation of acquired assets and liabilities in business combinations, and (vi) income taxes, including the realization of tax assets and estimates of tax liabilities.

There have been no significant changes in our accounting policies from those disclosed in our audited consolidated financial statements and notes thereto for the year ended December 31, 2019 .

(i) the determination of revenue recognition as net versus gross in our revenue arrangements, (ii) the determination of the estimated useful lives of internal-use software development costs, (iii) the recoverability of intangible asset and goodwill, (iv) assumptions used in the valuation models to determine the fair value of stock options and stock-based compensation expense, (v) the assumptions used in the valuation of acquired assets and liabilities in business combinations, and (vi) income taxes, including

the realization of tax assets and estimates of tax liabilities.

There have been no significant changes in our accounting policies or estimates from those disclosed in our audited consolidated financial statements and notes thereto for the years ended December 31, 2020 and 2019.

We believe that the accounting policies disclosed below include estimates and assumptions critical to our business and their application could have a material impact on our consolidated financial statements.

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We also generate revenue from the fee we charge clients for use of our Demand Manager product, which generally is a percentage of the client's advertising spending on any advertising marketplace.

Our advertising automation solution is a marketplace that includes sellers of inventory (providers of websites, mobile applications and other digital media properties, and their representatives) and buyers of inventory (including advertisers, agencies, agency trading desks, and demand-side platforms).

This solution incorporates proprietary machine-learning algorithms, sophisticated data processing, high-volume storage, detailed analytics capabilities, and a distributed infrastructure.

Together, these features form the basis for our automated advertising solution that brings buyers and sellers together and facilitates intelligent decision-making and automated transaction execution for the digital advertising inventory managed on our platform.

Our platform dynamically connects sellers and buyers of advertising inventory in a digital marketplace.

Our solution incorporates proprietary machine-learning algorithms, sophisticated data processing, high-volume storage, detailed analytics capabilities, and a distributed infrastructure.

Digital advertising inventory is created when consumers access sellers’ content.

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The fee that we retain from the gross advertising spend on our platform is recognized as revenue.

The fee earned on each transaction is based on the pre-existing agreement we have

with the seller and the clearing price of the winning bid.

The fee earned on each transaction is based on the pre-existing agreement we have with the seller and the clearing price of the winning bid.

We recognize revenue upon fulfillment of our performance obligation to a client, which occurs at the point in time an ad renders and is counted as a paid impression, subject to a contract existing with the client and a fixed or determinable transaction price.

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We consider the following when determining if a contract exists (i) contract approval by all parties, (ii) identification of each party’s rights regarding the goods or services to be transferred, (iii) specified payment terms, (iv) commercial substance of the contract, and (v) collectability of substantially all of the consideration is probable.

We have determined that we do not act as the principal in the purchase and sale of digital advertising inventory because we are not the primary obligor and do not set prices agreed upon within the auction marketplace, and therefore we report revenue on a net basis.

The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether we are acting as the principal or an agent in the transaction.

In determining whether we are acting as the principal or an agent, we followed the accounting guidance for principal-agent considerations.

Making such determinations involves judgment and is based on an evaluation of the terms of each arrangement, none of which are considered presumptive or determinative.

For substantially all transactions on our platform, we have determined that we do not act as the principal in the purchase and sale of digital advertising inventory because we are not the primary obligor as we do not have control of the digital advertising inventory and do not set prices agreed upon within the auction marketplace, and therefore we report revenue on a net basis.

However, for certain transactions related to revenue streams acquired in connection with the Merger with Telaria, we report revenue on a gross basis, based primarily on our determination that we act as the primary obligor in the delivery of advertising campaigns for buyers with respect to such transactions.

Internal Use Software Development Costs

We capitalize certain internal use software development costs associated with creating and enhancing internally developed software related to our technology infrastructure.

These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software projects, and external direct costs of materials and services consumed in developing or obtaining the software.

Software development costs that do not meet the qualification for capitalization, as further discussed below, are expensed as incurred and recorded in technology and development expenses in the results of operations.

Software development activities generally consist of three stages, (i) the planning stage, (ii) the application and infrastructure development stage, and (iii) the post implementation stage.

Costs incurred in the planning and post implementation stages of software development, including costs associated with the post-configuration training and repairs and maintenance of the developed technologies, are expensed as incurred.

We capitalize costs associated with software developed for internal use when the planning stage is completed, management has authorized further funding for the completion of the project, and it is probable that the project will be completed and perform as intended.

Costs incurred in the application and infrastructure development stages, including significant enhancements and upgrades, are capitalized.

Capitalization ends once a project is substantially complete and the software and technologies are ready for their intended purpose.

We amortize internal use software development costs using a straight-line method over the estimated useful life, commencing when the software is ready for its intended use.

The straight-line recognition method approximates the manner in which the expected benefit will be derived.

Valuation of Goodwill and Intangibles

The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates and assumptions.

The acquisition method of accounting for business combinations requires us to estimate the fair value of assets acquired, liabilities assumed, and any noncontrolling interest in an acquired business to properly allocate purchase price consideration between assets that are depreciated or amortized and goodwill.

Long-lived assets, including property and equipment, long-term prepayments, and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

The evaluation is performed at the lowest level of identifiable cash flows independent of other assets.

An impairment loss would be recognized when estimated undiscounted future cash flows generated from the assets are less than their carrying amount.

Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value.

We evaluate goodwill annually or more frequently if events or changes in circumstances indicate that goodwill may be impaired.

In accordance with guidance related to impairment testing, we have the option to first assess qualitative factors to determine whether or not it is necessary to perform the quantitative goodwill impairment test.

If the qualitative assessment option is not elected, or if the qualitative assessment indicates that it is more likely than not that the fair value is less than its carrying amount, a quantitative analysis is then performed.

The quantitative analysis, if performed, compares the estimated fair value of the Company with its respective carrying amount, including goodwill.

If the estimated fair value of the Company exceeds its carrying amount, including goodwill, goodwill is considered not to be impaired and no additional steps are necessary.

If the fair value is less than the carrying amount, including goodwill, then an impairment adjustment must be recorded up to the carrying amount of goodwill.

Stock-Based Compensation

Compensation expense related to employee stock-based awards is measured and recognized on the fair value of the awards granted.

We have granted awards to employees that vest based solely on continued service, or service conditions, awards that vest based on the achievement of performance targets, or performance conditions, and awards that vest based on our stock price exceeding a peer index, or market conditions.

The fair value of each option award containing service and/or performance conditions is estimated on the grant date using the Black-Scholes option-pricing model.

The fair value of awards containing market conditions is estimated using a Monte-Carlo lattice model.

For service condition awards, stock-based compensation expense is recognized on a straight-line basis over the requisite service periods of the awards, which is generally four years.

For performance condition and market condition awards, stock-based compensation expense is recognized using a graded vesting model over the requisite service period of the awards.

For market condition awards, expense recognized is not subsequently reversed if the market conditions are not achieved.

Stock-based awards issued to non-employees are accounted for at fair value determined by using the Black-Scholes option-pricing model.

We believe that the fair value of the stock options is more reliably measured than the fair value of the services received.

The fair value of each non-employee stock-based compensation award is re-measured each period until a commitment date is reached, which is generally the vesting date.

Determining the fair value of stock-based awards at the grant date requires judgment.

Our use of the Black-Scholes option-pricing model and Monte-Carlo lattice model requires the input of subjective assumptions such as the expected term of the option, the expected volatility of the price of our common stock, risk-free interest rates, the expected dividend yield of our common stock, and the fair value of our common stock.

The assumptions used in our valuation models represent management’s best estimates.

These estimates involve inherent uncertainties and the application of management’s judgment.

If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

Business Combinations

The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of acquisition.

We allocate the purchase price of a business combination, which is the sum of the consideration provided, which may consist of cash, equity or a combination of the two, to the identifiable assets and liabilities of the acquired business at their acquisition date fair values.

The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill.

Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenues and cash flows, discount rates and selection of comparable companies.

When we issue stock-based or cash awards to an acquired company’s stockholders, we evaluate whether the awards are contingent consideration or compensation for post-business combination services.

The evaluation includes, among other things, whether the vesting of the awards is contingent on the continued employment of the selling stockholder beyond the acquisition date.

If continued employment is required for vesting, the awards are treated as compensation for post-acquisition services and recognized as expense over the requisite service period.

We estimate the fair value of intangible assets acquired generally using a discounted cash flow approach, which includes an analysis of the future cash flows expected to be generated by the asset and the risk associated with achieving these cash flows.

The key assumptions used in the discounted cash flow model include the discount rate that is applied to the forecasted future cash flows to calculate the present value of those cash flows and the estimate of future cash flows attributable to the acquired intangible asset, which include revenue, expenses and taxes.

The carrying value of acquired working capital assets and liabilities approximates its fair value, given the short-term nature of these assets and liabilities.

We are subject to income taxes in the U.S.

and foreign jurisdictions.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different.

We adjust these reserves as facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate.

To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which such determination is made.

The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate as well as the related net interest and penalties.

In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Services ("IRS") and other tax authorities which may assert assessments against us.

We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our provision for income taxes.

Recently Issued Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 2 of our "Notes to Consolidated Financial Statements" within this Annual Report on Form 10-K.

Quantitative and Qualitative Disclosure About Market Risk

This section is not required for smaller reporting companies.

The information set forth under Note 2 to our "Notes to Consolidated Financial Statements" under the caption "Organization and Summary of Significant Accounting Policies" is incorporated herein by reference.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis