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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-25 · 243 added, 194 removed, 284 unchanged (61% of the section changed)

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Overview and Trends

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

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

Recent Developments

Telaria Merger, SpotX and SpringServe Acquisitions

On April 1, 2020, we completed the Telaria Merger, and on April 30, 2021, we completed the SpotX Acquisition.

These transactions were transformative and have resulted in what we believe to be the world’s largest independent sell-side advertising platform and ad server, with scale, capabilities, and solutions exceeding those offered by competitors.

We offer a single partner for transacting CTV, desktop display, video, audio and mobile inventory across all geographies and auction types.

As CTV viewership is growing rapidly and the pace of adoption is accelerating the shift of advertising budgets from linear television to CTV, these transactions have strategically positioned us to take advantage of this trend, and we believe that CTV will be our biggest growth driver in future periods.

The SpotX Acquisition resulted in a significant increase in our revenue and Revenue ex-TAC (as defined in section "Key Operating and Financial Performance Metrics"), in particular in CTV and online video.

Following the transaction, the percentage of our revenue attributable to CTV increased significantly, and because CTV is largely transacted through reserve auctions, these types of auctions have become a more significant portion of the transactions on our platform.

The acquisition also resulted in an increase in related operating expenses, primarily associated with costs for personnel, data center and hosting costs, facilities, 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 that began in the second quarter of 2021 and continue to be in process.

We are targeting in excess of $35 million in run-rate operating cost synergies over a two year period.

As of December 31, 2021, we have achieved more than half of our cost synergy target on a run-rate basis.

The SpringServe Acquisition, which we completed in July 2021, expanded our video and CTV offering to include ad server functionality in addition to our programmatic SSP capabilities.

The SpringServe ad server manages multiple aspects of video advertising for both programmatic transactions and inventory sold directly by the publisher, including forecasting, routing, customized ad experiences, and advanced podding logic.

Combined with our SSP, the SpringServe ad server provides publishers a holistic yield management solution that works across their entire video advertising business to drive value.

This is of particular importance for CTV publishers, who still sell a large percentage of their inventory through their direct sales team.

We believe the acquisition of SpringServe is highly strategic as it allows us to offer publishers an independent full-stack solution to the walled gardens, which can be leveraged across their entire video advertising business.

Impact of COVID-19 Pandemic and Other Recent Developments

The COVID-19 pandemic and resulting global disruptions have negatively affected our revenue, results of operations, cash flows, and financial condition.

Our business depends on the overall demand for advertising and on the economic health of our current and prospective sellers and buyers.

In response to the pandemic and associated economic challenges, a significant number of advertisers, in particular with respect to certain categories of advertising that were particularly impacted by the pandemic and resulting stay-at-home orders, reduced their advertising budgets, resulting in an overall decrease in advertising spend through our platform compared to our pre-COVID expectations.

This decrease was particularly pronounced through the first half of 2020, where we experienced a significant decline in our revenues compared to our expectations.

Our revenue trends improved significantly during the third and fourth quarters of 2020 as our revenue returned to positive growth.

During the first half of 2021, revenue from a number of advertising categories returned to pre-COVID spending levels, while certain categories including travel, auto, and entertainment remained below pre-COVID spending levels.

In the second half of 2021, we continued to see lower levels of spending in travel and auto, in part due to global supply chain disruptions, and also faced challenges due to government stay-at-home orders in certain markets such as Australia.

These factors were exacerbated by the

spread of the Omicron variant in December 2021, which resulted in renewed macro-economic challenges.

We expect such challenges to persist through the first quarter of 2022 and it is possible that they will increase in scope.

Due to the substantial uncertainties associated with the COVID-19 pandemic, the extent to which the pandemic (and actions taken in response to it by governments, businesses, and individuals) and other direct and indirect impacts of the pandemic will ultimately impact our business and is currently unknown, and depends on various factors, many of which are outside of our control.

Refer to Item 1A.

"Risk Factors" for additional information related to this risk.

2021 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 %

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

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.

MAGNA's October 2021 Programmatic Market forecast has estimated compound annual growth rates from 2021 to 2025 for mobile and desktop at 18% and 2%, respectively, and over the same period, eMarketer projected CTV to grow at a 24% compound annual growth rate.

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.

Initially our mobile business consisted primarily of mobile web, which is similar to our desktop business, but we expect our future 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;

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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.

However, we expect that it will continue to represent a significant part of our revenue in the near term and therefore have a negative effect on our overall growth rate.

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, 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.

Our consolidated operating results 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 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.

Generally, our revenue is based on a percentage of the ad spend that runs through our platform, although for certain clients or transaction types we may receive a fixed CPM for each impression sold, and for advertising campaigns that are transacted through insertion orders we earn revenue based on the full amount of ad spend that runs through our platform.

We also generate revenue from the fee we charge clients for use of our Demand Manager header-bidding product and SpringServe ad server product, which we acquired on July 1, 2021.

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.

For the majority of 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 for managed advertising campaigns that are transacted through insertion orders, 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.

Following the SpotX Acquisition, the percentage of our revenue reported on a gross basis increased significantly compared to pre-acquisition periods.

During the first quarter of 2021 (prior to the SpotX Acquisition), our revenue reported on a gross basis was less than 3% of total revenue.

For the three months ended December 31, 2021, our revenue reported on a gross basis increased to 19% of total revenue.

As revenue streams acquired in the SpotX Acquisition continue to increase, the percentage of revenue reported on a gross basis may continue to increase in future periods.

Any mix shift that causes an increase in the relative percentage of our revenue accounted for on a gross basis would result in a higher revenue contribution and an associated decrease in our gross margin percentage (with no underlying impact on gross profit or Revenue ex-TAC, as defined in section "Key Operating and Financial Performance Metrics").

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

We classify our expenses into the following categories:

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Our cost of revenue consists primarily of data center costs, bandwidth costs, ad protection costs, depreciation and maintenance expense of hardware supporting our revenue-producing platform, amortization of software costs for the development of our revenue-producing platform, amortization expense associated with acquired developed technologies, personnel costs, facilities-related costs, and cloud computing costs.

In addition, for revenue booked on a gross basis, cost of revenue includes traffic acquisition costs.

Personnel costs included in cost of revenue include salaries, bonuses, and stock-based compensation, and are primarily attributable to personnel in our network operations group who support our platform.

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Sales and Marketing .

Our sales and marketing expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, as well as marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with client relationships and backlog from our business acquisitions, and to a lesser extent, facilities-related costs and depreciation and amortization.

Our sales and marketing expenses consist primarily of personnel costs, including salaries, bonuses, and stock-based compensation, as well as marketing expenses such as brand marketing, travel expenses, trade shows and marketing materials, professional services, and amortization expense associated with client relationships, backlog, and non-compete agreements 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.

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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.

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.

Merger, Acquisition, and Restructuring Costs.

Our merger, acquisition, 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, and other restructuring activities, including facility closures, relocation costs, and contract termination costs.

Other (Income) Expense

Interest (Income) Expense, Net.

Interest income consists of interest earned on our cash equivalents and marketable securities.

Interest expense is mainly related to our credit facility.

Interest expense consists of interest expense associated with our Convertible Senior Notes and credit facility ("Term Loan B Facility"), and their related amortization of debt issuance costs and debt discount.

Interest income consists of interest earned on our cash equivalents.

Other Income.

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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, Australian Dollar, Canadian Dollar, and Euro.

Foreign currency exchange (gain) loss, net consists primarily of gains and losses on foreign currency transactions and remeasurement of monetary assets and liabilities on our balance sheet denominated in foreign currencies.

Foreign currency monetary assets and liabilities consist primarily of cash and cash equivalents, accounts receivable, accounts payable, and various intercompany balances held between our subsidiaries.

Our primary foreign currency exposures are currencies other than the U.S.

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

Provision (Benefit) for Income Taxes

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Tax laws, regulations, administrative practices, principles, and interpretations in various jurisdictions may be subject to significant change, with or without notice, due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes.

There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.

There are many transactions that occur during the ordinary course of business for which the

ultimate tax determination is uncertain.

Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize related tax benefits, the applicability of special tax regimes, changes in foreign currency exchange rates, changes in our stock price, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions.

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Year Ended Favorable/(Unfavorable) %

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

December 31, 2021 December 31, 2020 December 31, 2019 2021 vs 2020

(in thousands)

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General and administrative 64,789 52,987 39,750 (22) % (33) %

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

Merger, acquisition, and restructuring costs 38,177 17,552 2,041 (118) % (760) %

Total expenses 549,483 275,862 183,997 (99) % (50) %

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Provision (benefit) for income taxes (95,053) 693 (1,512) 13,816 % (146) %

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

Net income (loss) $ 65 $ (53,432) $ (25,478) 100 % (110) %

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

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11,297 10,416 8,009

Merger and restructuring costs

Merger, acquisition, and restructuring costs

1,071 1,870 —

Total stock-based compensation expense

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General and administrative

Merger and restructuring costs

Merger, acquisition, and restructuring costs

Total expenses 117 124 118

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Provision (benefit) for income taxes

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

Net income (loss) — % (24) % (16) %

Comparison of the Years Ended December 31, 2021, 2020, and 2019

Revenue increased $246.8 million, or 111%, for the year ended December 31, 2021 compared to the prior year.

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.

Our revenue growth was driven primarily by organic growth as well as incremental revenue from the SpotX Acquisition, which was completed on April 30, 2021.

On a pro forma basis, including revenue for Telaria, SpotX and SpringServe during the relevant pre-acquisition period, revenue increased 30% for the year ended December 31, 2021 compared to the prior period, primarily due to growth in all channels, mainly driven by CTV and mobile, and a rebound from impacts of the COVID-19 pandemic, which were particularly pronounced in the first half of 2020.

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 the Telaria 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 Telaria 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 Telaria 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.

We expect our revenue will increase in 2022 compared to 2021, as a result of organic growth and contributions from recently acquired businesses, in particular with respect to our CTV revenue.

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.

We believe that contributions to revenue from reserve auctions, in particular with respect to CTV which is largely transacted on a reserved basis, will continue to grow as a percentage of our total revenue.

In general, we expect this shift will have a net positive impact on our revenue due to both an increase in the volume of transactions and average CPM, despite the fact that reserve auctions generally carry a lower take rate compared to open auction transactions.

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.

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Cost of Revenue

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 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 increased by $123.9 million , or 159%, for the year ended December 31, 2021 compared to the prior year primarily due to an increase in traffic acquisition cost of $49.9 million driven by the increase in revenue reported on a gross basis as a result of the SpotX Acquisition, an increase in depreciation and amortization expenses of $43.2 million also associated with the SpotX Acquisition, and an increase in data and bandwidth expenses of $21.4 million.

Cost of revenue increased $20.4 million, or 35%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to the Telaria 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 million in media costs.

Our cost of revenue will continue to increase in future periods primarily due to the impacts of recently completed acquisitions that have expanded the size of our revenue and expense base, increases in hosting costs and other expenses to support the growth of our business, increases in traffic acquisition costs associated with revenue reported on a gross basis, and an increase in amortization of intangible assets resulting from the Telaria Merger and the SpotX Acquisition.

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 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.

Sales and marketing expenses increased by $94.4 million, or 124%, for the year ended December 31, 2021 compared to the prior year primarily due to an increase of $54.1 million in amortization of acquired intangibles and other assets as a result of the SpotX Acquisition and the Telaria Merger as well as increases in headcount from the SpotX Acquisition, resulting in an additional $36.8 million of personnel related expenses.

Sales and marketing expenses increased by $31.5 million, or 71%, for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to the Telaria 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 Telaria 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.

We expect sales and marketing expenses to increase in 2022 compared to 2021 in absolute dollars primarily due to a full year of additional headcount costs and amortization of acquired intangible assets as a result of the SpotX Acquisition, new hiring to support our growth, and increases in travel and entertainment expenses.

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 $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.

Technology and development expenses increased by $22.9 million, or 44%, for the year ended December 31, 2021 compared to the prior year, primarily due to an increase of $21.2 million in personnel costs as a result of the increased headcount associated with the SpotX Acquisition and a full-year of results from the Telaria Merger.

Technology and development expenses increased by $11.3 million, or 28%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to an increase of $11.6 million in personnel costs as a result of the increased headcount associated with the Telaria Merger.

We expect technology and development expenses to increase in 2022 compared to 2021 in absolute dollars, primarily due to a full year of additional headcount costs related to the SpotX and SpringServe Acquisitions and new hiring to support our growth.

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

As a percentage of revenue, technology and development expense may fluctuate from quarter to quarter and period to period based on revenue levels, the timing and amounts of technology and development efforts, the timing and the rate of the amortization of capitalized projects and the timing and amounts of future capitalized internal use software development costs.

General and Administrative

General and administrative expenses 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.

General and administrative expenses increased by $11.8 million, or 22%, for the year ended December 31, 2021 compared to the prior year, primarily due to increases of $6.3 million in personnel expenses, $1.5 million in professional services, and $1.1 million in software license mainly attributed to the growth of the overall business as a result of the SpotX Acquisition.

General and administrative expenses increased by $13.2 million, or 33%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to increases of $7.1 million in personnel expenses and $4.0 million in facilities related expenses, both primarily associated with the Telaria Merger.

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

We expect general and administrative expenses to increase in 2022 compared to 2021 in absolute dollars primarily due to a full year of additional headcount costs related to the SpotX Acquisition and new hires to support our overall growth, as well as additional costs assuming a return to office work environment in 2022.

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.

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.

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

Merger, Acquisition, and Restructuring Costs

We incurred merger, acquisition, and restructuring costs of $38.2 million and $17.6 million during the years ended December 31, 2021 and 2020, respectively, primarily related to the SpotX and SpringServe Acquisitions, which were completed on April 30, 2021 and July 1, 2021, respectively, and the Telaria Merger, which was completed on April 1, 2020.

In 2021, these costs included professional fees related to investment banking advisory, legal, and other professional service fees of $28.4 million, one-time cash-based employee termination benefit costs of $6.2 million, facility closure costs of $2.5 million, and non-cash stock-based compensation expense associated with double-trigger accelerations and severance benefits of $1.1 million.

Costs incurred in 2020 included professional services of $9.9 million, one-time cash-based employee termination benefit costs of $5.7 million, and non-cash stock-based compensation expense and severance benefits of $1.9 million.

Merger, acquisition, and restructuring costs increased by $15.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 primarily due to increased professional services and cash and non-cash acceleration and termination benefits, as referenced above, associated with the Telaria Merger and resulting restructuring activities.

Other (Income) Expense, Net

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Total other (income) expense, net $ 13,918 $ (1,495) $ (593)

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, 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.

Interest expense, net increased by $19.9 million during the year ended December 31, 2021 compared to the prior year, mainly due to interest expense associated with the Convertible Senior Notes (defined below), which the Company entered into during March 2021, and interest expense associated with the Term Loan B Facility (defined below), which the Company entered into during April 2021, both in connection with the closing of the SpotX Acquisition.

Interest (income) expense, net was immaterial in the years ended December 31, 2020 and 2019.

Other income increased by $0.8 million and $3.4 million during the years ended December 31, 2021 and 2020, respectively, compared to the prior years due to a subleased property acquired from the Telaria Merger in April 2020 and additional subleases entered into in 2021 and 2020.

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

The foreign currency gain, net during the year ended December 31, 2021 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 year ended December 31, 2020 was primarily attributable to the currency movements between the same foreign currencies mentioned above relative to the U.S.

Dollar and 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.

Provision (Benefit) for Income Taxes

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."

We recorded an income tax benefit of $95.1 million for the year ended December 31, 2021 compared to an income tax expense of $0.7 million and income tax benefit of $1.5 million for the years ended December 31, 2020 and 2019, respectively.

The tax benefit for the year ended December 31, 2021 was primarily the result of the deferred tax liability associated with acquisitions that occurred during the year and the tax liability associated with foreign subsidiaries.

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

The tax benefit for the year ended December 31, 2019 was the result of a deferred tax liability associated with the RTK.io 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.

Key Operating and Financial Performance Metrics

In addition to our GAAP results, we review non-GAAP financial measures, including Revenue ex-TAC and Adjusted EBITDA, to help us evaluate our business on a consistent basis, 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.

Our non-GAAP financial measures are discussed below.

Revenue and net income (loss) are discussed above under the headings "Components of Our Results of Operations" and "Results of Operations."

December 31, 2021 December 31, 2020 December 31, 2019

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Revenue $ 468,413 $ 221,628 $ 156,414

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

Revenue ex-TAC 416,455 219,602 156,414

Gross profit 266,751 143,881 99,023

Net income (loss) 65 (53,432) (25,478)

Adjusted EBITDA 148,659 43,065 25,694

Revenue ex-TAC

Revenue ex-TAC is revenue excluding traffic acquisition cost ("TAC").

Traffic acquisition cost, a component of Cost of revenue, represents what we must pay sellers for the sale of advertising inventory through our platform for revenue reported on a gross basis.

In calculating Revenue ex-TAC, we add back the cost of revenue, excluding TAC, to gross profit, the most comparable GAAP measurement.

Revenue ex-TAC is a non-GAAP financial measure.

Our management believes Revenue ex-TAC is a useful measure in assessing the performance of Magnite as a combined company following the SpotX Acquisition and facilitates a consistent comparison against our core business without considering the impact of traffic acquisition costs related to revenue reported on a gross basis.

Our use of Revenue ex-TAC has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP.

A potential limitation of this non-GAAP financial measure is that other companies, including companies in our industry which have similar business arrangements, may define Revenue ex-TAC differently, which may make comparisons difficult.

Because of these and other limitations, you should consider our non-GAAP measures only as supplemental to GAAP-based financial performance measures, including revenue, net income (loss) and cash flows.

The following table presents the calculation of gross profit and reconciliation of gross profit to Revenue ex-TAC for the years ended December 31, 2021, 2020, and 2019, respectively:

December 31, 2021 December 31, 2020 December 31, 2019

(in thousands)

Revenue $ 468,413 $ 221,628 $ 156,414

Cost of revenue 201,662 77,747 57,391

Gross profit 266,751 143,881 99,023

Cost of revenue, excluding TAC 149,704 75,721 57,391

Revenue ex-TAC $ 416,455 $ 219,602 $ 156,414

We track the breakdown of Revenue ex-TAC 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 ex-TAC by channel:

Revenue ex-TAC

December 31, 2021 December 31, 2020 December 31, 2019

(in thousands)

CTV $ 143,407 $ 34,319 $ —

Desktop 112,981 76,930 68,302

Mobile 160,067 108,353 88,112

Total $ 416,455 $ 219,602 $ 156,414

Revenue ex-TAC increased $196.9 million, or 90%, for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase in Revenue ex-TAC was primarily due to contributions from the SpotX and SpringServe Acquisitions and the Telaria Merger, which were completed on April 30, 2021, July 1, 2021, and April 1, 2020, respectively, as well as organic growth across all channels as the business recovered from COVID-19 advertising lows in 2020.

Revenue ex-TAC increased $63.2 million, or 40%, for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase in Revenue ex-TAC was primarily attributable to contributions from the Telaria Merger, which was completed on April 1, 2020.

We expect Revenue ex-TAC to increase through the remainder of 2022 as compared to the same period in the prior year.

We believe that CTV will be our biggest growth driver in future periods and continue to represent a higher percentage of our overall Revenue ex-TAC.

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, impairment charges, interest income or expense, and other cash and non-cash based income or expenses that we do not consider indicative of our core operating performance, including, but not limited to foreign exchange gains and losses, acquisition and related items, and provision (benefit) for income taxes.

We believe Adjusted EBITDA is useful to investors in evaluating our performance for the following reasons:

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• Impairment charges are non-cash charges related to goodwill, intangible assets and/or long-lived assets.

• 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 non-cash charges related to acquisition and related items, such as amortization of acquired intangible assets, merger or acquisition related severance costs, 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 changes in our working capital needs, capital expenditures, non-operating real estate expenses or income, or contractual commitments.

• Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense.

• Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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

Our Adjusted EBITDA is influenced by fluctuations in our revenue, cost of revenue, and the timing and amounts of the cost of our operations.

Adjusted EBITDA should not be considered as an alternative to net income (loss), income (loss) from operations, or any other measure of financial performance calculated and presented in accordance with GAAP.

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.

The following table presents a reconciliation of net income (loss), the most comparable GAAP measure, to Adjusted EBITDA for the years ended December 31, 2021, 2020, and 2019:

December 31, 2021 December 31, 2020 December 31, 2019

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Stock-based compensation expense 40,735 28,491 18,825

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

Merger, acquisition, and restructuring costs, excluding stock-based compensation expense 37,106 15,682 2,041

Non-operational real estate expense (income), net 553 198 —

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Adjusted EBITDA $ 148,659 $ 43,065 $ 25,694

Adjusted EBITDA increased by $105.6 million during the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to increases in revenue from both organic growth and the SpotX and SpringServe Acquisitions, which are discussed in section "Comparison of the Years Ended December 31, 2021, 2020, and 2019" and improved operating leverage from our increased scale and related cost synergies.

Adjusted EBITDA increased by $17.4 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to the increase in revenue from the Telaria Merger and improved operating leverage from our increased scale and related merger cost synergies.

We expect Adjusted EBITDA to continue to increase as a result of continued growth in revenue, ongoing operating leverage, and the realization of additional cost synergies.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents, marketable securities, cash generated from operations, and our credit facility with Silicon Valley Bank ("SVB").

At December 31, 2020, we had cash and cash equivalents of $117.7 million, of which $23.5 million was held in foreign currency cash accounts.

Our cash and marketable securities balances are affected by our results of operations, the timing of capital expenditures, which are typically greater in the second half of the year, and by changes in our working capital, particularly changes in accounts receivable and accounts payable.

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, 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.

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, 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.

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:

At December 31, 2021, we had cash and cash equivalents of $230.4 million, of which $44.9 million was held in foreign currency denominated cash accounts, and an aggregate gross principal amount of $758.2 million of indebtedness outstanding under our Term Loan B Facility (as defined below) and our Convertible Senior Notes (as defined below).

In addition, we are party to a $65.0 million Revolving Credit Facility, of which approximately $5.1 million is assigned to outstanding but undrawn letters of credit.

See "Capital Resources" below for further information about our outstanding debt.

Our principal cash requirements for the 12 month period following this report primarily consist of personnel costs, contractual payment obligations, including office leases, data center costs and cloud hosting costs, capital expenditures, payment of interest and required principal payments on our Convertible Senior Notes and Term Loan B Facility, taxes, and cash requirements to fund working capital.

In the longer term, we would expect to have similar cash requirements, with increases in absolute dollars associated with the continued growth of our business and expansion of operations.

See "Contractual Obligations and Known Future Cash Requirements" for a further discussion of our known material contractual obligations.

Our working capital needs and cash conversion cycle, which is influenced by seasonality and may be negatively impacted as a result of COVID-19, can have large fluctuations due to the timing of receipts from buyers and timing of disbursements to sellers.

In addition, in the event a buyer defaults on payment, we may still be required to pay sellers for the inventory purchased.

Additionally, our capital expenditure investments tend to be higher in the second half of the year.

The impacts from changes in working capital and capital expenditures can significantly impact our cash flows and therefore, our liquidity during any period presented.

We have historically relied upon cash and cash equivalents, cash generated from operations, borrowings under credit facilities and issuance of debt for our liquidity needs.

Our ability to meet our cash requirements depends on, among other things, our operating performance, competitive developments, and financial market conditions, all of which are significantly affected by business, financial, economic, political, global health-related and other factors, many of which we may not be able to control or influence.

We believe our existing cash and cash equivalents, cash generated from operating activities, and available borrowings under our Revolving Credit Facility 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, including the factors described above with respect to working capital and cash conversion cycles, as well as the duration and severity of the COVID-19 pandemic and its impact on buyers and sellers and the factors set forth in Part I, Item 1A:

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

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.

Capital Resources

On April 30, 2021, we completed the SpotX Acquisition, which included cash consideration of $640.0 million, and on July 1, 2021, we completed the SpringServe Acquisition, which included cash consideration of $31.1 million, excluding indemnification holdback.

In March 2021, we sold convertible senior notes ("Convertible Senior Notes") for gross proceeds of $400.0 million.

The Convertible Senior Notes are senior, unsecured obligations with interest payable semi-annually in cash at a rate of 0.25% per annum in arrears on March 15 and September 15.

The Convertible Senior Notes will mature on March 15, 2026, unless earlier converted, redeemed, or repurchased.

The initial conversion rate is 15.6539 shares per $1,000 principal amount of notes, which represents an initial conversion price of approximately $63.88 per share of the Company’s common stock and is subject to adjustment as described in the Offering Memorandum.

At December 31, 2021, the balance of the Convertible Senior Notes was $390.4 million, net of unamortized debt issuance costs of $9.6 million.

Accrued interest for the Convertible Senior Notes at December 31, 2021 was $0.3 million.

In conjunction with the issuance of the Convertible Senior Notes, we entered into capped call transactions to reduce the Company's exposure to additional cash payments above principal balances in the event of a cash conversion of the Convertible Senior Notes.

The Company may owe additional cash or shares to the holders of the Convertible Senior Notes upon early conversion if our stock price exceeds $91.260 per share, which is subject to certain adjustments.

Although the Company’s incremental exposure to the additional cash payment above the principal amount of the Convertible Senior Notes is reduced by the capped calls, conversion of the Convertible Senior Notes by the holders may cause dilution to the ownership interests of existing stockholders.

See Note 18 in the "Notes to Consolidated Financial Statements" for more information regarding terms and conditions of the Convertible Senior Notes and the capped call transactions.

On April 30, 2021, and in conjunction with the SpotX Acquisition, we entered into a credit agreement (the "Credit Agreement") with Goldman Sachs Bank USA as administrative and collateral agent, and other lending parties thereto for a $360.0 million seven-year senior secured term loan facility ("Term Loan B Facility") and a $52.5 million senior secured revolving credit facility (the "Revolving Credit Facility"), which was subsequently increased to $65.0 million in June 2021.

As part of the Term Loan B Facility, the Company received $325 million in proceeds, net of discounts and fees, which were used to finance the SpotX Acquisition and related transactions and for general corporate purposes.

At December 31, 2021, amounts available under the Revolving Credit Facility were $59.9 million, net of letters of credit outstanding in the amount of $5.1 million.

Accrued interest for the Term Loan B Facility at December 31, 2021 was $1.8 million.

On December 13, 2021, the Board of Directors approved a share repurchase program, under which the company is authorized to purchase up to $50.0 million of its common stock over the twelve month period commencing December 10, 2021.

The repurchase program allows the company to repurchase its common stock using open market stock purchases, privately negotiated transactions, block trades or other means in accordance with U.S.

securities laws.

Under the share repurchase program, 349,245 shares were purchased in open market purchases through December 31, 2021 for a total of approximately $6.0 million at an average of $17.20 per share.

Approximately $44.0 million worth of shares remained available for purchase under the plan as of December 31, 2021.

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

If we raise additional funds by issuing equity or equity-linked securities, the ownership of our existing stockholders will be diluted.

If we raise additional financing by incurring indebtedness, we will be subject to increased fixed payment obligations and could also be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business.

other operating restrictions that could adversely impact our ability to conduct our business.

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.

In addition, if our operating performance during the next twelve months is below our expectations, our liquidity and ability to operate our business could be adversely affected.

Our cash and cash equivalents balance is affected by our results of operations, the timing of capital expenditures which are typically greater in the second half of the year, and by changes in our working capital, particularly changes in accounts receivable and accounts payable.

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, and may be negatively impacted as a result of COVID-19.

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

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

Cash flows from operating activities have been further affected by changes in our working capital, particularly changes in accounts receivable and accounts payable.

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, 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.

During the year ended December 31, 2021, net cash provided by operating activities was $126.6 million, compared to net cash used in operating activities of $12.1 million during the year ended December 31, 2020 and net cash provided by operating activities of $32.0 million during the year ended December 31, 2019.

Our operating activities included net income of $0.1 million, and net losses of $53.4 million, and $25.5 million for the years ended December 31, 2021 and 2020, and 2019, respectively, which were offset by non-cash adjustments of $94.6 million, $76.4 million, and $51.5 million, respectively.

Net changes in our working capital resulted in increases of $31.9 million and $5.9 million in cash provided by operating activities in 2021 and 2019, respectively.

In 2020, net changes in our working capital increased cash used from operating activities by $35.1 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.

We believe that cash flows from operations will continue to fluctuate, but in general will increase over time as our business continues to grow.

Investing Activities

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.

Our primary investing activities have consisted of acquisitions of businesses, purchases of property and equipment, capital expenditures 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 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.

We anticipate investment in internal use software development to slightly 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 increase compared to 2021.

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.

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

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.

For the years ended December 31, 2019 and 2018 we had net maturities of investments in available-for-sale securities of $7.5 million and $38.7 million, respectively.

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 the year ended December 31, 2021, net cash used by investing activities was $691.0 million compared to net cash provided by investing activities of $32.6 million during the year ended December 31, 2020 and net cash used by investing activities of $23.4 million during the year ended December 31, 2019.

During the year ended December 31, 2021, 2020, and 2019, we used

cash for purchases of property and equipment of $17.7 million, $14.3 million, and $11.4 million, respectively, and used cash for investments in our internally developed software of $11.4 million, $7.7 million, and $8.5 million, respectively.

During the year ended December 31, 2021, we used net cash of $661.9 million to acquire SpotX, SpringServe, and Nth Party.

During the year ended December 31, 2020, we acquired $54.6 million cash in the Telaria Merger.

For the year ended December 31, 2019, we used net cash of $11.0 million for the acquisition of RTK.io and had net maturities of investments in available-for-sale securities of $7.5 million.

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, 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.

Our financing activities consisted of our Convertible Senior Notes offering, amounts borrowed under our Term Loan B Facility, and transactions related to our equity plans.

For the years ended December 31, 2021, 2020, and 2019 we provided net cash of $678.1 million and $7.4 million, and used net cash of $0.2 million, respectively, for financing activities.

Cash inflows from financing activities for the year ended December 31, 2021 included $400.0 million in proceeds from our Convertible Senior Notes offering, $349.2 million in net proceeds from our Term Loan B Facility, cash proceeds from stock options exercised of $9.4 million and $3.7 million cash proceeds from issuance of common stock under our employee stock purchase plan.

These inflows for the year ended December 31, 2021 were partially offset by a $39.0 million payment for capped call transactions entered into in connection with the Convertible Senior Notes offering, debt issuance cost payments of $30.4 million, repurchases of $6.0 million of treasury stock in conjunction with our stock repurchase plan, $6.5 million 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, $1.8 million repayment of Term Loan B, and repayment of $0.6 million financing lease obligations.

Cash inflows from financing activities for the year ended December 31, 2020 included cash proceeds from stock option exercised of $13.5 million and cash proceeds from issuance of common stock under our employee stock purchase plan of $1.7 million, partially offset by payments of $7.9 million 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.

Cash outflows from financing activities for the year ended December 31, 2019 included payments of $1.8 million 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, which were partially offset by cash proceeds from issuance of common stock under our employee stock purchase plan of $1.1 million and cash proceeds from stock option exercised of $0.6 million.

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, 2020 other than the short-term operating leases and the indemnification agreements described below.

We did not have any other off-balance sheet arrangements at December 31, 2021 other than the short-term operating leases and the indemnification agreements described below, and commitments mentioned in Note 17 - Commitments and Contingencies.

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, including data centers and cloud managed services that expire at various times through 2030.

Our principal commitments consist of obligations under our Convertible Senior Notes, Term Loan B Facility, Revolving Credit Facility, leases for our various office facilities, including our corporate headquarters in New York, New York and offices in Los Angeles, California, operating lease agreements, including data centers and cloud hosting services that expire at various times through 2031, and indemnification holdback associated with the SpringServe Acquisition.

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

We received rental income from subleases totaling $4.4 million for the year ended December 31, 2021.

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

The following table summarizes our future lease obligations, payments of principal and interest under our debt agreements, sublease income, and other future payments due under non-cancelable agreements at December 31, 2021.

2022 2023 2024 2025 2026 Thereafter Total

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Obligations for leases not included in Lease liabilities as of December 31, 2021

92 138 143 145 148 50 716

Convertible Senior Notes — — — — 400,000 — 400,000

Interest, Convertible Senior Notes 1,000 1,000 1,000 1,000 208 — 4,208

Term Loan B (1)

3,600 3,600 3,600 3,600 3,600 340,200 358,200

Interest, Term Loan B (2)

20,803 20,593 20,440 20,174 19,964 26,255 128,229

Operating sublease income (4,605) (4,481) (4,322) (1,306) — — (14,714)

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Total $ 54,216 $ 46,069 $ 40,612 $ 32,409 $ 430,654 $ 393,600 $ 997,560

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.

(1) Includes only scheduled amortization of payments and excludes currently unknown prepayment amounts that will be required, per terms of the Credit Agreement, after the end of each fiscal year.

(2) Interest payments are based on an assumed rate of 5.75%, which was the rate used as of December 31, 2021 for the associated Credit Agreement.

Payments associated with our Convertible Senior Notes are based on contractual terms and intended timing of repayments of long-term debt and associated interest and do not assume conversion prior to the maturity date.

Other non-cancelable obligations include other agreements in the normal course of business and purchase consideration that extend beyond a year.

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) 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.

(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, awards with market and performance conditions 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, 2021, 2020 and 2019.

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We generate revenue from transactions where we provide a platform for the purchase and sale of digital advertising inventory.

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 also generate revenue from the fee we charge clients for use of our Demand Manager header-bidding product, and from our SpringServe ad server product, which we acquired on July 1, 2021.

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

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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.

For the majority of 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 Telaria Merger and the SpotX Acquisition, 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

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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.

We amortize internal use software development costs using a straight-line method over a three year 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.

We determined the life of internal use software based on historical software upgrades and replacement.

The Company evaluates internal use software in use for abandonment and use that as a significant indicator for impairment on a quarterly basis.

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.

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.

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Stock-Based Compensation

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

Compensation expense related to employee and non-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.

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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.

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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