Trade Desk, Inc. - Quarter Report: 2016 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission File Number:  001-37879

 

 

THE TRADE DESK, INC.

(Exact name of registrant as specified in its charter)

 

 

 

42 N. Chestnut Street

Ventura, California  93001

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:

(805) 585-3434

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o   No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x No

 

As of November 4, 2016, the registrant had 5,366,767 shares of Class A common stock and 33,206,209 shares of Class B common stock outstanding.

 

 

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THE TRADE DESK, INC.

QUARTERLY REPORT ON FORM 10-Q

 

INDEX

 

		Page
Part I.	FINANCIAL INFORMATION	3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Condensed Consolidated Statement of Convertible Preferred Stock and Stockholders’ Equity for the Nine Months Ended September 30, 2016	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
Part II.	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	52
Signatures		53
Exhibit Index		54

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

THE TRADE DESK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)

 

		As of			As of
		September 30,			December 31,
		2016			2015
ASSETS
Current assets:
Cash		$	123,968		$	4,047
Accounts receivable, net		274,008			191,943
Prepaid expenses and other current assets		5,536			3,812
TOTAL CURRENT ASSETS		403,512			199,802
Property and equipment, net		10,545			6,625
Deferred taxes, net		1,171			1,171
Other assets, non-current		4,492			2,633
TOTAL ASSETS		$	419,720		$	210,231
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
LIABILITIES
Current liabilities:
Accounts payable		$	206,194		$	108,461
Accrued expenses and other current liabilities		14,007			9,937
Financing obligation, current portion		721			502
TOTAL CURRENT LIABILITIES		220,922			118,900
Debt, net		50,847			44,888
Convertible preferred stock warrant liabilities		—			6,927
Other liabilities, non-current		1,732			140
Financing obligation, non-current		485			1,030
TOTAL LIABILITIES		273,986			171,885
Commitments and contingencies (Note 10)
Convertible preferred stock, par value $0.000001; zero shares authorized, issued and outstanding as of September 30, 2016; 68,521 shares authorized, 66,330 shares issued and outstanding as of December 31, 2015; liquidation preference of $27,997 as of December 31, 2015		—			24,204
STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.000001; 100,000 shares authorized, zero shares issued and outstanding as of September 30, 2016; zero shares authorized, issued and outstanding as of December 31, 2015		—			—
Common stock, par value $0.000001; 1,000,000 and zero Class A shares authorized, 5,367 and zero shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively; 95,000 and 130,000 Class B shares authorized, 33,149 and 10,884 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively		—			—
Additional paid-in capital		170,832			1,039
Retained earnings (accumulated deficit)		(25,098		)	13,103
TOTAL STOCKHOLDERS’ EQUITY		145,734			14,142
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY		$	419,720		$	210,231

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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THE TRADE DESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2016			2015			2016			2015
Revenue		$	52,956		$	28,768		$	130,516		$	71,178
Operating expenses:
Platform operations		10,422			5,968			26,617			15,610
Sales and marketing		11,600			6,838			31,282			18,530
Technology and development		7,292			3,411			17,694			8,507
General and administrative		8,591			3,359			21,442			8,536
Total operating expenses		37,905			19,576			97,035			51,183
Income from operations		15,051			9,192			33,481			19,995
Interest expense		1,347			295			2,664			716
Change in fair value of preferred stock warrant liabilities		4,653			673			9,458			1,162
Foreign currency exchange loss, net		87			408			489			934
Total other expense, net		6,087			1,376			12,611			2,812
Income before income taxes		8,964			7,816			20,870			17,183
Provision for income taxes		5,320			3,211			10,668			6,904
Net income		$	3,644		$	4,605		$	10,202		$	10,279
Net income (loss) attributable to common stockholders		$	972		$	1,453		$	(37,007	)	$	6,922
Earnings (loss) per share:
Basic		$	0.08		$	0.14		$	(3.23	)	$	0.68
Diluted		$	0.06		$	0.10		$	(3.23	)	$	0.26
Weighted average shares outstanding:
Basic		12,629			10,228			11,461			10,193
Diluted		17,064			14,231			11,461			16,586

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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THE TRADE DESK, INC.

CONDENSED CONSOLIDATED STATEMENT OF CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

																Retained
		Convertible						Class A and Class B					Additional			Earnings			Total
		Preferred Stock						Common Stock(1)					Paid-In			(Accumulated			Stockholders’
		Shares		Amount				Shares		Amount			Capital			Deficit)			Equity
Balance at December 31, 2015		66,330		$	24,204			10,884		$	—		$	1,039		$	13,103		$	14,142
Exercise of common stock options		—		—				626		—			433			—			433
Stock-based compensation		—		—				—		—			1,057			—			1,057
Issuance of series C convertible preferred stock, net of issuance costs		11,501		59,871				—		—			—			—			—
Reclassification of preferred stock warrant liability upon net exercise of warrant		789		3,789				—		—			—			—			—
Repurchase of convertible preferred stock		(12,384	)	(4,623		)		—		—			(1,168		)	(46,041		)	(47,209		)
Repurchase and retirement of common stock		—		—				(189	)	—			—			(2,362		)	(2,362		)
Issuance of Class A common stock upon initial public offering, net of underwriters’ commissions and offering costs of $10,366		—		—				4,667		—			73,634			—			73,634
Conversion of convertible preferred stock to Class B common stock in connection with initial public offering		(66,236	)	(83,241		)		22,079		—			83,241			—			83,241
Conversion of warrant for convertible preferred stock to a warrant for Class B common stock in connection with initial public offering		—		—				—		—			12,596			—			12,596
Net exercise of warrant to purchase Class B common stock		—		—				449		—			—			—			—
Net income		—		—				—		—			—			10,202			10,202
Balance at September 30, 2016		—		$	—			38,516		$	—		$	170,832		$	(25,098	)	$	145,734

 

(1)     See Note7-Capitalization for discussion of the establishment of the Company’s two classes of common stock and the reclassification of its common stock into Class B common stock prior to the Company’s initial public offering in September 2016.

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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THE TRADE DESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Nine Months
		Ended September 30,
		2016			2015
OPERATING ACTIVITIES:
Net income		$	10,202		$	10,279
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		2,612			1,123
Stock-based compensation		1,048			251
Change in fair value of preferred stock warrant liabilities		9,458			1,162
Other		810			532
Changes in operating assets and liabilities:
Accounts receivable		(82,322		)	(49,016		)
Prepaid expenses and other assets		(2,425		)	(2,908		)
Accounts payable		94,352			10,749
Accrued expenses and other liabilities		5,252			2,303
Net cash provided by (used in) operating activities		38,987			(25,525		)
INVESTING ACTIVITIES:
Purchase of property and equipment		(3,516		)	(1,463		)
Capitalized software development costs		(1,796		)	(1,236		)
Redemption of short-term investment		—			551
Net cash used in investing activities		(5,312		)	(2,148		)
FINANCING ACTIVITIES:
Proceeds from line of credit		75,847			20,000
Repayment on line of credit		(40,000		)	—
Repayment of term debt		(30,000		)	—
Payment of debt financing costs		(976		)	—
Payment of financing obligations		(326		)	(53		)
Proceeds from issuance of Series C convertible preferred stock		60,000			—
Repurchase of preferred stock and common stock		(54,000		)	—
Proceeds from exercise of stock options		433			71
Payment of stock repurchase costs		(155		)	—
Proceeds from the issuance of Class A common stock in initial public offering, net of
underwriting commissions		78,120			—
Payment of offering costs—initial public offering		(2,568		)	—
Payment of Series C convertible preferred stock offering costs		(129		)	—
Net cash provided by financing activities		86,246			20,018
Increase (decrease) in cash		119,921			(7,655		)
Cash—Beginning of period		4,047			17,315
Cash—End of period		$	123,968		$	9,660
SUPPLEMENTAL DISCLOSURES OF OTHER CASH FLOW INFORMATION:
Cash paid for income taxes		$	10,354		$	8,342
Cash paid for interest		$	1,379		$	559
Capitalized assets financed by accounts payable		$	1,803		$	118
Asset retirement obligation		$	354		$	—
Stock-based compensation included in capitalized development costs		$	9		$	10
Conversion of convertible preferred stock to Class B common stock		$	83,241		$	—
Conversion of warrant for convertible preferred stock to a warrant for Class B common stock and net exercise of warrant to purchase Class B common stock		$	12,596		$	—
Deferred initial public offering costs included in accounts payable		$	1,758		$	—
Net exercise of warrants to purchase Series Seed convertible preferred stock		$	3,789		$	—

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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THE TRADE DESK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Nature of Operations

 

The Trade Desk, Inc. (the “Company”) was formed in November 2009 as a Delaware corporation. The Company is headquartered in Ventura, California and has offices in various cities in the United States, Europe, Asia and Australia. The Company is a technology company that empowers advertising agencies and other buyers by providing a self-service platform that enables clients to purchase and manage data-driven digital advertising campaigns across various advertising formats.

 

Initial Public Offering

 

In September 2016, the Company completed an initial public offering (“IPO”). See Note 7—Capitalization.

 

Risks

 

The Company is subject to certain business risks, including dependence on key employees, competition, market acceptance of the Company’s platform, ability to source demand from buyers of advertising inventory and dependence on growth to achieve its business plan.

 

Note 2—Basis of Presentation and Summary of Significant Accounting Policies

 

The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and the related notes for the years ended December 31, 2014 and 2015 contained in the Company’s final prospectus related to its IPO (the “Prospectus”), which was filed with the Securities and Exchange Commission (“SEC”) on September 21, 2016 pursuant to Rule 424(b) under the Securities Act of 1933, as amended.

 

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with that used to prepare the Company’s audited annual consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring items, necessary for the fair statement of the condensed consolidated financial statements. The operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results expected for the full year ending December 31, 2016.

 

There have been no significant changes in the Company’s accounting policies from those disclosed in the Prospectus. Commencing September 2016, the Company provided its employees with an opportunity to purchase Class A shares pursuant to its 2016 Employee Stock Purchase Plan (the “ESPP”) (see Note 8).

 

Reverse Stock Split

 

On September 2, 2016, the Company effected a 1-for-3 reverse stock split of its outstanding common stock and a proportional adjustment to the then existing conversion ratios for each series of convertible preferred stock. Accordingly, all share and per share amounts for all periods presented in these condensed consolidated financial statements and notes thereto, have been adjusted retrospectively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratios.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates under different assumptions or circumstances.

 

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Fair Value of Financial Instruments

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value measurements are based on a fair value hierarchy, based on three levels of inputs, of which the first two are considered observable and the last unobservable, which are the following:

 

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

 

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted market prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

 

Level 3—Unobservable inputs.

 

Observable inputs are based on market data obtained from independent sources.

 

The carrying amounts of accounts receivable, accounts payable, accrued expenses and other current liabilities approximate fair value due to the short-term nature of these instruments. The carrying value of the line of credit and term loans approximates fair value based on borrowing rates currently available to the Company for financing with similar terms and were determined to be Level 2.

 

The Company’s convertible preferred stock warrants were measured using unobservable inputs that required a high level of judgment to determine fair value, and were thus classified as Level 3. Immediately prior to the closing of the Company’s IPO, all of the Company’s then-outstanding convertible preferred stock warrants were remeasured and automatically converted and reclassified into Class B common stock warrants and all remaining warrants were net exercised.

 

Certain long-lived assets, including property and equipment and capitalized software development costs, are also subject to measurement at fair value on a non-recurring basis if they are deemed to be impaired as a result of an impairment review. To date, no impairments have been recorded on those assets.

 

Recent Accounting Pronouncements

 

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

 

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers (Topic 606), which amends the existing accounting standards for revenue recognition. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year. During 2016, the FASB has continued to issue additional amendments to the new revenue guidance. The new revenue guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017. Early adoption is permitted for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. The guidance permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor determined the effect of this guidance on its consolidated financial statements.

 

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In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Under ASU 2015-05, if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 was effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. An entity can elect to adopt this guidance either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. Early adoption was permitted. The Company’s adoption of this guidance during the three months ended March 31, 2016 did not have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the income statement. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, and requires a modified retrospective adoption, with early adoption permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including forfeitures, accounting for income taxes, classification of excess tax benefits on the statement of cash flows, statutory tax withholding requirements and other stock based compensation classification matters. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period with the impact of the adoption recorded as a cumulative-effect adjustment as of the beginning of the year in which the guidance is adopted. Changes in the classification of excess tax benefits on the statement of cash flows as a result of the adoption of this guidance may be recorded on a retrospective or prospective basis. The Company elected to early adopt this guidance during the three months ended June 30, 2016 and changed its accounting policy to record forfeitures of stock-based awards when they occur. The Company’s adoption of this guidance did not have a material impact on its consolidated financial statements. The Company had no excess tax benefits as of December 31, 2015 and elected to record any future excess tax benefits in the statement of cash flows as an operating activity on a prospective basis. The cumulative-effect adjustment as a result of the adoption of this guidance for the change in accounting policy for forfeitures was approximately $5,000 and was recorded in the statement of operations during the three months ended June 30, 2016, rather than an adjustment to the retained earnings as the amount was not material. The change in accounting policy to record forfeitures when they occur and the requirement to record excess tax benefits when they occur in the statement of operations will result in increased volatility in earnings in the future.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If adopted in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes such interim period. The adoption of ASU 2016-15 should be applied using a retrospective transition method to each period presented, unless impracticable to do so. The Company does not expect the adoption of ASU 2016-15 will have a material impact on its consolidated statement of cash flows.

 

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Note 3—Earnings Per Share

 

In September 2016, and in preparation of the Company’s IPO and the establishment of two classes of common stock, each share of the then outstanding common stock was reclassified to Class B common stock. The Company sold Class A common stock in its IPO. As of September 30, 2016, the Company has two classes of common stock, Class A and Class B. Basic and diluted earnings (loss) per share attributable to common stockholders for Class A and Class B common stock were the same because they were entitled to the same liquidation and dividend rights.

 

The reconciliations of the numerators and denominators of the basic and diluted earnings (loss) per share computations are as follows (in thousands, except per share amounts):

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2016			2015			2016			2015
Earnings (loss) per share—basic:
Numerator:
Net income		$	3,644		$	4,605		$	10,202		$	10,279
Less: Income attributable to convertible preferred stock		(2,672		)	(3,152		)	—			(7,150		)
Add: Preferred stock modification		—			—			—			3,793
Less: Premium on repurchase of convertible preferred stock		—			—			(47,209		)	—
Net income (loss) attributable to common stockholders		$	972		$	1,453		$	(37,007	)	$	6,922
Denominator:
Weighted-average common shares outstanding		12,629			10,228			11,461			10,193
Earnings (loss) per share—basic		$	0.08		$	0.14		$	(3.23	)	$	0.68
Earnings (loss) per share—diluted:
Numerator:
Net income (loss) attributable to common stockholders—basic		$	972		$	1,453		$	(37,007	)	$	6,922
Add: Income attributable to dilutive convertible preferred stock		—			—			—			1,218
Less: Preferred stock modification		—			—			—			(3,793		)
Net income (loss) attributable to common stockholders—diluted		$	972		$	1,453		$	(37,007	)	$	4,347
Denominator:
Weighted-average shares outstanding		12,629			10,228			11,461			10,193
Dilutive convertible preferred stock		—			—			—			2,790
ESPP shares		5			—			—			—
Options to purchase common stock		4,430			4,003			—			3,603
Weighted-average shares outstanding—diluted		17,064			14,231			11,461			16,586
Earnings (loss) per share—diluted		$	0.06		$	0.10		$	(3.23	)	$	0.26

 

The following table presents the anti-dilutive shares excluded from the calculation of diluted earnings (loss) per share (in thousands):

 

		Three Months				Nine Months
		Ended September 30,				Ended September 30,
		2016		2015		2016		2015
Anti-dilutive options to purchase common stock		432		576		5,207		576
Common shares issuable upon conversion of convertible preferred stock		—		22,110		—		19,320
Anti-dilutive ESPP shares		—		—		2		—
Common shares issuable upon conversion of preferred stock warrants		—		730		—		730
Total shares excluded from earnings (loss) per share—diluted		432		23,416		5,209		20,626

 

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Note 4—Fair Value Measurements

 

The financial instruments that are measured at fair value on a recurring basis were (in thousands):

 

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Significant Other

Significant Other

As of

Active Markets for

Observable

Unobservable

December 31,

Identical Assets

Inputs

Inputs

2015

(Level 1)

(Level 2)

(Level 3)

Convertible preferred stock warrant liabilities

$

6,927

$

—

$

—

$

6,927

 

The changes in the fair value of preferred stock warrants are summarized below (in thousands):

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2016			2015			2016			2015
Beginning balance		$	7,943		$	1,455		$	6,927		$	966
Change in value of preferred stock warrants recorded in other expense, net		4,653			673			9,458			1,162
Reclassification to convertible preferred stock upon net exercise of Series Seed warrant		—			—			(3,789		)	—
Conversion of preferred stock warrants to common stock warrants upon the closing of the Company’s IPO on September 26, 2016		(12,596		)	—			(12,596		)	—
Ending balance		$	—		$	2,128		$	—		$	2,128

 

In connection with the Company’s IPO during September 2016, the outstanding warrants exercisable for 1,382,505 shares of convertible preferred stock were automatically converted into warrants exercisable for 460,834 shares of Class B common stock and net exercised resulting in the issuance of 448,545 shares of Class B common stock based on the IPO price of $18.00 per share and taking into account the 1-for-3 reverse stock split. The aggregate fair value of these warrants upon the closing of the IPO was $12.6 million, which was reclassified from liabilities to additional paid-in capital.

 

The Company determined the fair value of the preferred stock warrants utilizing the Black-Scholes model with the following assumptions:

 

		As of September 26, 2016				As of September 30, 2015
		Series Seed		Series A3		Series Seed		Series A3
Contractual term (years)		4.9		6.5		5.9		7.5
Expected volatility		59.1	%	59.1	%	59.2	%	62.5	%
Risk-free interest rate		1.12	%	1.34	%	1.56	%	1.80	%
Estimated dividend yield		—	%	—	%	—	%	—	%

 

Note 5—Accounts Payable

 

Accounts payable included the following (in thousands):

 

		As of			As of
		September 30,			December 31,
		2016			2015
Accounts payable–media and data		$	195,690		$	105,085
Accounts payable–other		10,504			3,376
Total		$	206,194		$	108,461

 

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Note 6—Debt

 

Revolving Credit Facility

 

On March 30, 2016, the Company entered into a credit agreement (the “Revolving Credit Agreement”) with a syndicate of banks, led by Citibank, N.A. The Revolving Credit Agreement provides for a senior secured asset-based revolving credit facility (the “Credit Facility”), which the Company may draw upon as needed. Available funding commitments to the Company under the Credit Facility, subject to certain conditions, total up to $125.0 million. Under certain circumstances the available revolver borrowings may be increased by an additional $50.0 million. The Revolving Credit Agreement is collateralized by a pledge of certain of the Company’s accounts receivable, deposit accounts, intellectual property, investment property, and equipment, and availability under the Credit Agreement is based on the value of accounts receivable, as reduced by certain reserves.

 

Borrowed funds bear interest, dependent on the Company’s time and method of borrowing, at an annual rate of either a Base Rate or a LIBOR rate, plus an applicable margin (“Base Rate Borrowings” and “LIBOR Rate Borrowings”). The Base Rate is defined as a fluctuating interest rate equal to the greatest of (1) the Federal Funds rate plus 0.5%, (2) the Prime Rate, and (3) one month LIBOR rate plus 2.0%. The applicable margin is defined as a rate between 0.5% to 1.0% for Base Rate advances and between 1.5% and 2.0% for LIBOR advances, depending on the amount of monthly average excess availability on the facility. The fee for undrawn amounts ranges from 0.25% to 0.30%. Interest is payable either (a) monthly for Base Rate Borrowings or (b) the last day of the Interest Period applicable for LIBOR Rate Borrowings. At September 30, 2016, all borrowings were designated LIBOR Rate Borrowings that bore interest at a weighted average rate of 2.27%.

 

The Credit Facility matures and all outstanding amounts become due and payable in March 2018. The Credit Facility contains customary conditions to borrowings, events of default and covenants, including covenants that restrict our ability to sell assets, make changes to the nature of our business, engage in mergers or acquisitions, incur, assume or permit to exist additional indebtedness and guarantees, create or permit to exist liens, pay dividends, issue equity instruments, make distributions or redeem or repurchase capital stock or make other investments, engage in transactions with affiliates and make payments in respect of subordinated debt. The Credit Facility also requires the Company to maintain compliance with a consolidated fixed charge coverage ratio covenant of at least 1.15 to 1.00. As of September 30, 2016, the Company was in compliance with all covenants.

 

On March 30, 2016, the Company borrowed $50.8 million under the Revolving Credit Agreement to repay all then outstanding borrowings under, and terminate, the Company’s prior debt facility, as well as pay fees and expenses associated with the Revolving Credit Agreement. Through September 2016, the Company borrowed an additional $20.0 million under the Revolving Credit Agreement and this amount was repaid. As of September 30, 2016, $50.8 million was outstanding under the Revolving Credit Agreement.

 

In connection with a prior debt facility, the Company was required to pay a fee of $0.8 million upon the occurrence of a liquidity event, including the Company’s IPO.  This liquidation fee was paid at the completion of the Company’s IPO and recorded as a component of interest expense in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016.

 

Note 7—Capitalization

 

In February 2016, the Company increased the authorized shares of common stock from 130,000,000 shares to 142,000,000 shares and the authorized shares of convertible preferred stock from 68,520,540 shares to 80,021,127 shares, of which 11,500,587 shares were designated as Series C preferred stock (“Series C preferred stock”).

 

In September 2016, and in preparation of the Company’s IPO and the establishment of two classes of common stock, each share of the then outstanding common stock was reclassified to Class B common stock. The Class A and Class B have the same rights and preferences including rights to dividends, except the Class B is entitled to ten votes per share and the Class A is entitled to one vote per share.  Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon any transfer, except for certain transfers described in the Company’s restated certificate of incorporation, including, without limitation, certain transfers for tax and estate planning purposes. In addition, upon the earlier of (1) the date on which the outstanding shares of Class B common stock represent less than 10% of the aggregate number of the then outstanding shares of Class A common stock and Class B common stock and (2) the affirmative vote or written consent of the holders of at least 662/3% of the outstanding shares of Class B common stock, all outstanding shares of Class B common stock will convert automatically into Class A common stock, and no additional shares of Class B common stock will be issued. Prior to the reclassification of existing common stock to Class B common stock, the existing common stock was entitled to one vote per share.

 

Immediately prior to the completion of the IPO on September 26, 2016, the Company amended its certificate of incorporation to amend the number of authorized shares of common stock to 1,095,000,000 shares, par value $0.000001 per share, and 100,000,000 shares of preferred stock, par value, $0.000001 per share.  The authorized common stock consists of 1,000,000,000 shares of Class A common stock and 95,000,000 shares of Class B common stock.

 

No shares of the newly authorized preferred stock are outstanding at September 30, 2016. The Company’s board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.

 

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Initial Public Offering

 

On September 26, 2016, the Company closed its IPO whereby 4,666,667 shares of Class A common stock were issued and sold by the Company and 700,000 shares of Class A common stock were sold by selling stockholders, pursuant to the underwriters’ exercise of their over-allotment option, at the IPO price of $18.00 per share. The Company received net proceeds from the offering of approximately $78.1 million after deducting underwriting discounts and commissions of $5.9 million, but before deducting offering costs of $4.5 million.  The Company did not receive any proceeds from the sales of shares by the selling stockholders. In connection with the Company’s IPO: (i) all shares of the Company’s outstanding Series Seed, A-1, A-2, A-3, B and C convertible preferred stock automatically converted into an aggregate 22,078,637 shares of Class B common stock on a one for one-third basis, including the 700,000 shares sold by selling shareholders which were converted from shares of Class B common stock to shares of Class A common stock prior to sale; and (ii) warrants exercisable for 1,382,505 shares of convertible preferred stock were automatically converted into warrants exercisable for 460,834 shares of Class B common stock and net exercised resulting in the issuance of 448,545 shares of Class B common stock based on the IPO price of $18.00 per share and taking into account the 1-for-3 reverse stock split.

 

In addition, upon completion of the IPO, costs associated with the IPO of $4.5 million were reclassified from other assets, non-current to additional paid-in capital.

 

Convertible Preferred Stock

 

In February 2016, the Company issued 11,500,587 shares of Series C convertible preferred stock for $60.0 million and used $54.0 million of the proceeds to repurchase 3,897,928 and 8,485,350 shares of Series Seed preferred stock (including shares issued upon exercise of warrant described below) and Series A preferred stock (comprising shares of Series A-1, A-2 and A-3), respectively, each at 80% of the Series C offering price per share of $5.22, and 188,786 shares of common stock at a price per share of $12.51. Warrants to purchase 808,135 shares of Seed preferred stock were net exercised, resulting in the issuance of 788,755 shares of Series Seed preferred stock of which 614,052 shares were then repurchased.

 

The repurchase price of the convertible preferred stock, including legal costs, of $51.8 million exceeded the carrying value of $4.6 million at the date of repurchase. The repurchase price in excess of the then carrying value of the preferred stock of $47.2 million was recorded as a reduction to additional paid-in capital of $1.2 million and a reduction to retained earnings of $46.0 million. For the computation of earnings per share for the nine months ended September 30, 2016, the repurchase price in excess of the then carrying value of the preferred stock of $47.2 million was recorded as an increase to net loss attributable to common stockholders.

 

Rights and Preferences of Convertible Preferred Stock

 

Prior to the Company’s IPO, the rights and preferences of convertible preferred stock were as follows:

 

Voting Rights:  Each holder of convertible preferred stock was entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted. The holders of convertible preferred stock and the holders of common stock would vote together as a single class on all matters.

 

Dividends Rights:  The holders of Series C preferred stock had a preferential dividend right whereby they were entitled to receive a dividend prior to any other class of stock. After payment of any dividend to the holders of Series C preferred stock, the holders of Series B preferred stock had a preferential dividend right whereby they were entitled to receive a dividend prior to any other class of stock. After payment of any dividend to the holders of Series C preferred stock and the holders of Series B preferred stock, the other holders of convertible preferred stock on a pari passu basis were entitled to receive dividends declared by the Board of Directors out of any assets of the Company legally available prior to the payment of dividends to the holders of common Stock. The dividend rate was $0.008 for holders of Series Seed preferred, $0.010087 for holders of Series A-1 preferred stock, $0.011758 for Series A-2 preferred stock, $0.014698 for Series A-3 preferred stock, $0.194 for Series B preferred stock and $0.417 for Series C preferred stock, per share per annum, when and if declared. If a common stock dividend was declared, such that the convertible preferred holders’ share, on an as-converted basis, would exceed the amount declared under the specified preferred stock dividend rate, the convertible preferred holders were entitled to receive the greater amount, as if the convertible preferred stock was converted to common stock.

 

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Liquidation Preferences:  In the event of any liquidation event, either voluntary or involuntary, the holders of Series B preferred stock and the holders of Series C preferred stock were entitled to receive, prior to the other holders of convertible preferred stock or common stock, on a pro rata and pari passau basis, an amount per share equal to the greater of their respective original issue price, plus any dividends declared but unpaid thereon or an amount as would have been payable had their shares of preferred stock immediately converted to common stock. After payment of the amounts to the Series B preferred stockholders and the Series C preferred stockholders, the other holders of convertible preferred stock were entitled to receive a liquidation preference of the greater of (1) the original issue price, plus any dividend declared but unpaid thereon and (2) such amount per share as would have been payable had all shares of the preferred stock been converted into common stock immediately prior to liquidation, dissolution or winding up. Thereafter, any remaining assets available for distribution were to be distributed among the holders of shares of common stock pro rata based on the number of shares held by each holder.

 

The liquidation preference provisions of the convertible preferred stock were considered contingent redemption provisions because there were certain elements that were not solely within the control of the Company, such as a change in control of the Company. Accordingly, prior to the conversion to common stock, the Company presented the convertible preferred stock within the mezzanine portion of the accompanying consolidated balance sheets.

 

Conversion Features:  Each share of convertible preferred stock was convertible at any time, at the option of the holder thereof, into such number of fully paid non-assessable shares of common stock as was determined by dividing the original issue price by the conversion price applicable to such share, in effect on the date of the conversion. The original issue price per share was $0.10 for Series Seed preferred stock, $0.126084 for Series A-1 preferred stock, $0.146976 for Series A-2 preferred stock, $0.183720 for Series A-3 preferred stock, $2.431 for Series B preferred stock and $5.217125 for Series C preferred stock. Prior to the IPO, the conversion price per share, as adjusted for the reverse stock split described in Note 2, was $0.30 for Series Seed preferred stock, $0.378252 for Series A-1 preferred stock, $0.440928 for Series A-2 preferred stock, $0.55116 for Series A-3 preferred stock, $7.293 for Series B preferred stock and $15.651375 for Series C preferred stock.

 

Each share of convertible preferred stock would automatically convert into shares of common stock at its then effective conversion rate immediately upon the earlier of (1) a Qualified IPO, and (2) the date specified by a vote of the holders of at least a majority of all then-outstanding shares of convertible preferred stock, voting together as a single class on an as-converted to common stock basis provided that each series of convertible preferred stock would not be converted as a result of such vote without the consent of the holders of a majority of the shares of such series of convertible preferred stock then outstanding.

 

Upon the conversion of the convertible preferred stock to common stock in connection with the Company’s IPO, the carrying value of the convertible preferred stock was reclassified to additional paid-in capital.

 

Preferred Stock Warrants

 

In 2011, the Company issued warrants to purchase 1.2 million shares of the Series Seed preferred stock, with an exercise price of $0.10 per share. The warrants expire upon the earlier of August 2021 or upon certain corporate events, as defined.

 

In 2013, the Company issued warrants to purchase 990,640 shares of the Company’s Series A-3 preferred stock, with an exercise price of $0.18372 per share. The warrants expire upon the earliest of (1) March 2023 (2) three years from the closing of the Company’s initial public offering and (3) upon a change in control, as defined.

 

In February 2016, warrants to purchase 808,135 shares of Series Seed preferred stock were net exercised resulting in the issuance of 788,755 shares of Series Seed preferred stock of which 614,052 shares were then repurchased in connection with the preferred stock repurchase discussed above.

 

In connection with the Company’s IPO during September 2016, the remaining outstanding warrants exercisable for 1,382,505 shares of convertible preferred stock were automatically converted into warrants exercisable for 460,834 shares of Class B common stock and net exercised resulting in the issuance of 448,545 shares of Class B common stock based on the IPO price of $18.00 per share and taking into account the 1-for-3 reverse stock split. See Note 4-Fair Value Measurements for discussion of the convertible preferred stock warrant valuation.

 

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Note 8—Stock-Based Compensation

 

Stock-Based Compensation Expense

 

Total stock-based compensation expense, by operating expense category, in the condensed consolidated statements of operations was as follows (in thousands):

 

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2016			2015			2016			2015
Platform operations		$	75		$	34		$	114		$	51
Sales and marketing		200			34			318			88
Technology and development		216			24			330			53
General and administrative		165			24			286			59
Total		$	656		$	116		$	1,048		$	251

 

Stock Options

 

A summary of stock option activity for the nine months ended September 30, 2016, is as follows:

 

		Shares		Weighted-			Weighted-Average
		Under Option		Average			Contractual
		(in thousands)		Exercise Price			Life
Outstanding at December 31, 2015		5,177		$	0.74		7.4 years
Granted		721		16.86
Exercised		(626	)	0.69
Cancelled		(65	)	2.51
Outstanding at September 30, 2016		5,207		2.96			7.0 years

 

The fair value of options on the date of grant is estimated based on the Black-Scholes option pricing model. The weighted average assumptions used to value options granted to employees during the three and nine months ended September 30, 2016 and 2015 were as follows:

 

		Three Months				Nine Months
		Ended September 30,				Ended September 30,
		2016		2015		2016		2015
Expected term (years)		6.1		5.9		6.0		6.0
Expected volatility		59.0	%	65.8	%	58.9	%	68.5	%
Risk-free interest rate		1.28	%	1.68	%	1.34	%	1.57	%
Estimated dividend yield		—	%	—	%	—	%	—	%

 

The weighted average grant date fair value per share of stock options granted for the three months ended September 30, 2016 and 2015 were $9.83 and $1.41, respectively. The weighted average grant date fair value per share of stock options granted for the nine months ended September 30, 2016 and 2015 were $9.27 and $0.89, respectively.

 

Stock-based compensation expense related to stock options totaled $0.4 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively. Stock-based compensation expense related to stock options totaled $0.8 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively. At September 30, 2016, the Company had unrecognized employee stock-based compensation relating to stock options of approximately $7.5 million, which is expected to be recognized over a weighted-average period of 3.6 years.

 

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Employee Stock Purchase Plan

 

In September 2016, the Company established an ESPP with 800,000 shares of Class A common stock available for issuance. In addition, on the first day of each calendar year beginning on January 1, 2017 and ending on (and including) January 1, 2026, the number of shares available for issuance under the ESPP will be increased by a number of shares equal to the least of (1) 800,000 shares, (2) 1% of the shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year, and (3) such smaller number of shares as determined by our board of directors.

 

Under the ESPP, all eligible employees were auto-enrolled upon the IPO and each eligible employee may authorize payroll deductions of up to 100% of their compensation to purchase shares of Class A common stock, subject to applicable ESPP and statutory limits. The ESPP provides for offering periods generally up to two years, with purchases occurring and new offering periods commencing generally every six months. The first ESPP purchase occurs on December 29, 2016, and subsequent purchases will generally occur on May 15th and November 15th each year. At each purchase date, employees are able to purchase shares at 85% of the lower of (i) the closing market price per share of Class A common stock on the employee’s enrollment into the applicable offering period or (ii) the closing market price per share of Class A common stock on the purchase date. The ESPP has an automatic reset feature, whereby the offering period resets if the fair value of the Company’s common stock on a purchase date is less than that on the original offering date.

 

The fair value of ESPP shares was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

		As of
		September 30, 2016
Expected term (years)		1.3
Expected volatility		51.8%
Risk-free interest rate		0.61%
Estimated dividend yield		—%

 

The first offering period allows for cash contributions in addition to payroll deductions, and as a result, stock-based compensation expense for this offering period is marked-to-market at each reporting date. Stock-based compensation expense for ESPP is recognized on a graded-vesting attribution basis over the requisite service period of each award. The ESPP also has a six month holding period (twelve months for the first offering period) with respect to common stock purchases. Due to the holding period, the Company applies a discount to reflect the non-transferability of the shares. Stock-based compensation expense related to ESPP totaled $0.2 million for the three and nine months ended September 30, 2016.

 

Note 9—Income Taxes

 

In determining the interim income tax provision, the Company uses the annual estimated effective tax rate applied to the actual year-to-date income. The Company’s annual estimated effective tax rate differs from the U.S. federal statutory income rate of 35% primarily as a result of state taxes, foreign taxes, changes in the fair value of preferred stock warrant liabilities, and nondeductible stock-based compensation.

 

There were no material changes to the Company’s unrecognized tax benefits in the nine months ended September 30, 2016, and the Company does not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year.

 

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Note 10—Commitments and Contingencies

 

At September 30, 2016, the Company has various non-cancelable operating leases primarily for its corporate and international offices. These leases expire at various times through 2022. Total rent expense was $1.5 million and $0.6 million for the three months ended September 30, 2016 and 2015, respectively, and $3.1 million and $1.6 million for the nine months ended September 30, 2016 and 2015, respectively.

 

The Company’s non-cancelable minimum lease commitments were as follows (in thousands):

 

Year		Amount
2016 (for remaining three months)		$	628
2017		6,206
2018		7,683
2019		7,089
2020		6,750
Thereafter		6,186
		$	34,542

 

At September 30, 2016, the Company has non-cancelable commitments to its hosting services providers, marketing contracts and commitments to providers of software as a service. These commitments expire at various times through 2019.

 

At September 30, 2016, the Company’s purchase obligations were as follows (in thousands):

 

Year		Amount
2016 (for remaining three months)		$	1,096
2017		1,735
2018		1,216
2019		358
		$	4,405

 

Guarantees and Indemnification

 

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to clients, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon the Company to provide indemnification under such agreements, and thus there are no claims that the Company is aware of that could have a material effect on the Company’s balance sheet, statement of operations or statement of cash flows. Accordingly, no amounts for any obligation have been recorded at September 30, 2016.

 

Litigation

 

From time to time, the Company is subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of the various legal proceedings and claims cannot be predicted with certainty, management does not believe that any of these proceedings or other claims will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

Employment Contracts

 

The Company has entered into agreements with severance terms with certain employees and officers, all of whom are employed at-will. The Company may be required to accelerate the vesting of certain stock options in the event of changes in control, as defined and involuntary terminations.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains forward-looking statements, including statements based upon or relating to our expectations, estimates, and projections. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

 

We discuss many of these risks in Part II of this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors” and in other filings we make from time to time with the SEC. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.

 

Investors should read this Quarterly Report on Form 10-Q and the documents we reference in this report and have filed with the SEC, including our final prospectus related to our initial public offering (“IPO”) on September 21, 2016, or the Prospectus, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

References to “Notes” are notes included in our unaudited condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Overview

 

We are a technology company that empowers ad buyers, by providing a self-service platform that enables our clients to purchase and manage data-driven digital advertising campaigns using their own teams. Our platform allows clients to manage integrated advertising campaigns across various advertising formats, including display, video and social, and on a multitude of devices, including computers, mobile devices, connected TV and digital radio, an approach that we refer to as omnichannel.

 

Our company was founded in 2009 by two pioneers of programmatic advertising buying who were motivated to allow buyers of advertising to precisely target audiences with the most relevant and highest performing ads. We commercially launched our platform in May 2011. Since launch, we have also extended our platform to address additional advertising formats. In 2011, approximately 100% of gross spend on our platform was for display advertising compared to 57% in 2015, with the remainder derived from mobile, video and social.

 

Our clients are the advertising agencies and other service providers for advertisers. By aligning our business with buyers, we avoid inherent conflicts of interest that exist when serving both the buy and sell-side, which we believe helps us build trust with our clients. We provide our platform through a self-service, browser based user interface and also enable clients to customize and build their own features and reports on our platform through our application programming interfaces. After adding a client through our sales team or an in-bound request, we teach clients how to use our platform to design and execute advertising campaigns independently.

 

We generate revenue by charging our clients a platform fee based on a percentage of a client’s total spend on advertising, data and other features through our platform, the total of which we refer to as gross spend. We enter into ongoing master service agreements with our clients as opposed to episodic insertion orders. To further align our interests with those of our clients, we do not buy advertising inventory in order to resell it to our clients for a profit.

 

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Executive Summary

 

Highlights

 

For the three months ended September 30, 2016 and 2015:

 

·                  our revenue was $53.0 million and $28.8 million, respectively, representing a period over period increase of 84%;

 

·                  our net income was $3.6 million and $4.6 million, respectively; and

 

·                  our Adjusted EBITDA was $16.6 million and $9.3 million, respectively.

 

For the nine months ended September 30, 2016 and 2015:

 

·                  our revenue was $130.5 million and $71.2 million, respectively, representing a period over period increase of 83%;

 

·                  our net income was $10.2 million and $10.3 million, respectively; and

 

·                  our Adjusted EBITDA was $36.7 million and $20.4 million, respectively.

 

Adjusted EBITDA is a financial measure that is not in accordance with generally accepted accounting principles (“GAAP”). For information on how we compute Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA, see the section captioned “Non-GAAP Financial Data” below.

 

Trends, Opportunities and Challenges

 

The growing digitization of media and fragmentation of audiences has increased the complexity of advertising, and thereby increased the need for automation in ad buying, which we provide on our platform. In order to grow, we will need to continue to develop our platform’s programmatic capabilities and advertising inventory. We believe that key opportunities include our ongoing expansion into video and television ad inventory and continuing development of our data usage and advertising targeting capabilities.

 

We believe that our revenue as a percentage of gross spend, which is sometimes referred to as take rate, may fluctuate from period to period due to a number of factors, such as changes in the proportion of spend represented by our larger customers with the lowest platform fees, our clients’ use of platform features and volume discounts. Revenue as a percentage of gross spend may also decrease in the future, especially as we introduce and as our clients select new platform features, expand our omnichannel capabilities and add additional clients whose businesses may have different underlying business models. Further, we believe that our ability to integrate and offer television and digital radio advertising inventory for purchase through our platform, and in particular our ability to manage the increased costs that will accompany these purchases, will impact the future growth of our business.

 

We believe that growth of the programmatic advertising market is important for our ability to grow our business. Adoption of programmatic advertising by advertisers allows us to acquire new clients and grow revenue from existing clients. Although our clients include some of the largest advertising agencies in the world, we believe there is significant room for us to expand further within these clients and gain a larger amount of their advertising spend through our platform. We also believe that the industry trends noted above will lead to advertisers adopting programmatic advertising through platforms such as ours. However, even if the programmatic advertising market continues to grow at its current rate, our ability to position ourselves within the market will impact the future growth of our business.

 

Similarly, the adoption of programmatic advertising by inventory owners and content providers allows us to expand the volume and type of advertising inventory that we present to our clients. For example, we have expanded our native and digital audio advertising offerings through our recent integrations with supply-side partners.

 

We plan to invest for long-term growth. We anticipate that our operating expenses will increase significantly in the foreseeable future as we invest in platform operations and technology and development to enhance our product features, including programmatic buying of television ad inventory, and in sales and marketing to acquire new clients and reinforce our relationships with existing clients. In addition, we expect to continue making investments in our infrastructure, including our information technology, financial and administrative systems and controls, to support our operations.

 

In addition, we believe the markets outside of the United States offer an opportunity for growth, and we intend to make additional investments in sales and marketing and product development to expand in these markets, including China and Indonesia, where we are making significant investments in launching our platform and growing our team.

 

We believe that these investments will contribute to our long-term growth, although they may negatively impact profitability in the near term.

 

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Table of Contents

 

Results of Operations

 

The following tables set forth our consolidated results of operations and our consolidated results of operations as a percentage of revenue for the periods presented:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2016			2015			2016			2015
		(in thousands)
Revenue		$	52,956		$	28,768		$	130,516		$	71,178
Operating expenses:
Platform operations		10,422			5,968			26,617			15,610
Sales and marketing		11,600			6,838			31,282			18,530
Technology and development		7,292			3,411			17,694			8,507
General and administrative		8,591			3,359			21,442			8,536
Total operating expenses		37,905			19,576			97,035			51,183
Income from operations		15,051			9,192			33,481			19,995
Total other expense, net		6,087			1,376			12,611			2,812
Income before income taxes		8,964			7,816			20,870			17,183
Provision for income taxes		5,320			3,211			10,668			6,904
Net income		$	3,644		$	4,605		$	10,202		$	10,279

 

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015
		(as a percentage of revenue*)
Revenue		100	%	100	%	100	%	100	%
Operating expenses:
Platform operations		20		21		20		22
Sales and marketing		22		24		24		26
Technology and development		14		12		14		12
General and administrative		16		12		16		12
Total operating expenses		72		68		74		72
Income from operations		28		32		26		28
Total other expense, net		11		5		10		4
Income before income taxes		17		27		16		24
Provision for income taxes		10		11		8		10
Net income		7	%	16	%	8	%	14	%

 

*     Percentages may not sum due to rounding.

 

Revenue

 

								Change
		2016			2015			$			%
		($ in thousands)
Three months ended September 30,		$	52,956		$	28,768		$	24,188		84	%
Nine months ended September 30,		$	130,516		$	71,178		$	59,338		83	%

 

The increases in revenue were primarily driven by increases in gross spend on our platform by existing clients added on or before September 30, 2015. During the three and nine months ended September 30, 2016, gross spend by existing clients increased by 70% and 81%, respectively, compared to the same prior year periods. Gross spend by existing clients represented approximately 87% and 90% of the total gross spend during the three and nine months ended September 30, 2016, respectively.

 

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