Item 8. Financial Statements and Supplementary Data

THE TRADE DESK, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm			52
Consolidated Balance Sheets			55
Consolidated Statements of Operations			56
Consolidated Statements of Stockholders’ Equity			57
Consolidated Statements of Cash Flows			58
Notes to Consolidated Financial Statements			59

The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of Operations,” which is incorporated herein by reference.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of The Trade Desk, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of The Trade Desk, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Platform Fees

As described in Note 2 to the consolidated financial statements, the Company maintains agreements with each client and supplier in the form of master service agreements, which set out the terms of the relationship and access to the Company’s platform. The Company’s performance obligation is to provide the use of its platform to clients to develop ad campaigns and select the advertising inventory, data and other add-on features. The Company charges clients a platform fee, based on a percentage of a client’s purchases through the platform. The Company recognizes revenue for its platform fee at a point in time when the purchase by a client occurs through its platform. Management reports revenue on a net basis for the platform fees charged to clients. For the year ended December 31, 2019, the Company’s revenue was $661 million.

The principal considerations for our determination that performing procedures relating to revenue recognition – platform fees is a critical audit matter are the significant audit effort required in performing audit procedures and in evaluating audit evidence relating to client purchases through the Company’s platform to recognize revenue.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the completeness and accuracy of the revenue recognized for platform fees charged to clients, including both manual and automated controls operating over the information generated from the Company’s platform and controls over the accuracy in calculating revenue invoices based on client purchases. These procedures also included, among others, evaluating the completeness, accuracy, and relevance of underlying information generated from the Company’s platform by inspecting a sample of master service agreements and contracts for selected clients and evaluating the appropriateness of the revenue recognized by recalculating platform fees due and validating related cash receipts.

Intellectual Property Restructuring Transaction

As described in Note 11 to the consolidated financial statements, in April 2019, the Company initiated a transaction to transfer certain intellectual property rights among wholly owned subsidiaries, primarily to align its structure to its evolving operations. The transaction resulted in an increase in foreign deferred tax assets in an amount of $262.4 million. Management applied significant judgment in estimating the fair value of intangible assets, which involved the use of significant assumptions, including revenue growth rates, margins and discount rates.

The principal considerations for our determination that performing procedures relating to the intellectual property restructuring transaction is a critical audit matter are that there was a significant amount of judgment by management when developing the estimate of the fair value of intellectual property rights which in turn led to a high degree of auditor judgment and subjectivity in applying procedures to evaluate the fair value of intellectual property rights. Significant audit effort was required in evaluating the significant assumptions related to the fair value of the intellectual property rights, including the revenue growth rates, margins and discount rates, and the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls over management’s valuation of intellectual property rights, including controls over the development of the revenue growth rates, margins****, and discount rate assumptions. These procedures also included, among others, reading the intellectual property license agreement and cost sharing agreement; testing management’s process for estimating the fair value of intellectual property rights, which included evaluating the appropriateness of the methodology used and evaluating the reasonableness of management’s significant assumptions. Procedures were also performed to test the completeness, accuracy, and relevance of underlying data provided by management. Evaluating the reasonableness of the revenue growth rates and margin assumptions involved considering current and past performance of the business and evaluating the accuracy of management’s historical forecasting. Evaluating the reasonableness of the revenue growth rates also involved assessing consistency with external market and industry data. The discount rates were evaluated by considering the cost of capital of comparable businesses and other industry factors. Professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions, including the discount rates.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California

February 27, 2020

We have served as the Company’s auditor since 2015.

THE TRADE DESK, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

		As of December 31,
		2019				2018
ASSETS
Current assets:
Cash and cash equivalents		$	130,876			$	207,232
Short-term investments			124,112				—
Accounts receivable, net			1,166,376				834,764
Prepaid expenses and other current assets			27,857				14,527
TOTAL CURRENT ASSETS			1,449,221				1,056,523
Property and equipment, net			64,012				33,046
Operating lease assets			173,449				—
Deferred income taxes			18,950				8,460
Other assets, non-current			23,129				19,843
TOTAL ASSETS		$	1,728,761			$	1,117,872
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Current liabilities:
Accounts payable		$	868,618			$	669,147
Accrued expenses and other current liabilities			47,178				44,844
Operating lease liabilities			14,577				—
TOTAL CURRENT LIABILITIES			930,373				713,991
Operating lease liabilities, non-current			174,873				—
Other liabilities, non-current			10,998				9,314
TOTAL LIABILITIES			1,116,244				723,305
Commitments and contingencies (Note 13)
STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.000001; 100,000 shares authorized, zero shares issued and outstanding as of December 31, 2019 and 2018			—				—
Common stock, par value $0.000001 Class A, 1,000,000 shares authorized; 40,305 and 36,822 shares issued and outstanding as of December 31, 2019 and 2018, respectively Class B, 95,000 shares authorized; 5,171 and 7,042 shares issued and outstanding as of December 31, 2019 and 2018, respectively			—				—
Additional paid-in capital			380,079				270,447
Retained earnings			232,438				124,120
TOTAL STOCKHOLDERS’ EQUITY			612,517				394,567
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,728,761			$	1,117,872

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

THE TRADE DESK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

		Year Ended December 31,
		2019				2018				2017
Revenue		$	661,058			$	477,294			$	308,217
Operating expenses:
Platform operations			156,180				114,098				66,230
Sales and marketing			132,882				87,071				61,379
Technology and development			116,752				83,892				52,806
General and administrative			143,048				84,910				58,446
Total operating expenses			548,862				369,971				238,861
Income from operations			112,196				107,323				69,356
Other expense (income):
Interest expense (income), net			(4,719	)			(333	)			1,698
Foreign currency exchange loss, net			695				1,919				4,033
Total other expense (income), net			(4,024	)			1,586				5,731
Income before income taxes			116,220				105,737				63,625
Provision for income taxes			7,902				17,597				12,827
Net income		$	108,318			$	88,140			$	50,798
Earnings per share:
Basic		$	2.43			$	2.08			$	1.26
Diluted		$	2.27			$	1.92			$	1.15
Weighted average shares outstanding:
Basic			44,533				42,442				40,262
Diluted			47,806				45,793				44,056

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

THE TRADE DESK, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

														Retained
		Class A and B								Additional				Earnings				Total
		Common Stock (1)								Paid-In				(Accumulated				Stockholders’
		Shares				Amount				Capital				Deficit)				Equity
Balance as of December 31, 2016			39,131			$	—			$	179,198			$	(14,818	)		$	164,380
Exercise of common stock options			1,932				—				2,565				—				2,565
Stock-based compensation			—				—				21,860				—				21,860
Issuance of common stock under employee stock purchase plan			433				—				6,997				—				6,997
Restricted stock, net of forfeitures and shares withheld for taxes			145				—				(1,017	)			—				(1,017	)
Net income			—				—				—				50,798				50,798
Balance as of December 31, 2017			41,641				—				209,603				35,980				245,583
Exercise of common stock options			1,446				—				10,021				—				10,021
Stock-based compensation			—				—				43,695				—				43,695
Issuance of common stock under employee stock purchase plan			699				—				13,805				—				13,805
Restricted stock, net of forfeitures and shares withheld for taxes			78				—				(6,677	)			—				(6,677	)
Net income			—				—				—				88,140				88,140
Balance as of December 31, 2018			43,864				—				270,447				124,120				394,567
Exercise of common stock options			1,264				—				29,874				—				29,874
Stock-based compensation			—				—				82,346				—				82,346
Issuance of common stock under employee stock purchase plan			287				—				16,746				—				16,746
Restricted stock, net of forfeitures and shares withheld for taxes			61				—				(19,334	)			—				(19,334	)
Net income			—				—				—				108,318				108,318
Balance as of December 31, 2019			45,476			$	—			$	380,079			$	232,438			$	612,517

(1)	Refer to Note 9—Capitalization for discussion of the Company’s two classes of common stock.

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

THE TRADE DESK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		Year Ended December 31,
		2019				2018				2017
OPERATING ACTIVITIES:
Net income		$	108,318			$	88,140			$	50,798
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			21,662				11,822				7,209
Stock-based compensation			80,758				42,210				21,317
Deferred income taxes			(10,490	)			(5,101	)			(1,581	)
Bad debt expense			2,702				2,115				4,289
Noncash lease expense			21,894				—				—
Other			(1,939	)			2,905				(1,303	)
Changes in operating assets and liabilities:
Accounts receivable			(331,369	)			(239,901	)			(224,636	)
Prepaid expenses and other assets			(19,597	)			(10,551	)			(5,033	)
Accounts payable			191,763				177,675				171,793
Accrued expenses and other liabilities			6,845				17,289				8,371
Operating lease liabilities			(10,342	)			—				—
Net cash provided by operating activities			60,205				86,603				31,224
INVESTING ACTIVITIES:
Purchases of property and equipment			(35,693	)			(19,795	)			(10,110	)
Capitalized software development costs			(4,911	)			(5,396	)			(2,954	)
Business acquisition			—				—				(3,000	)
Purchases of investments			(212,776	)			—				—
Maturities of investments			89,539				—				—
Net cash used in investing activities			(163,841	)			(25,191	)			(16,064	)
FINANCING ACTIVITIES:
Repayment on line of credit			—				(27,000	)			—
Payment of debt financing costs			(6	)			(279	)			(154	)
Payment of financing obligations			—				—				(1,001	)
Proceeds from exercise of stock options			29,874				10,021				2,565
Proceeds from employee stock purchase plan			16,746				13,805				6,997
Taxes paid related to net settlement of restricted stock awards			(19,334	)			(6,677	)			(1,017	)
Net cash provided by (used in) financing activities			27,280				(10,130	)			7,390
(Decrease) increase in cash and cash equivalents			(76,356	)			51,282				22,550
Cash and cash equivalents—Beginning of year			207,232				155,950				133,400
Cash and cash equivalents—End of year		$	130,876			$	207,232			$	155,950
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for income taxes		$	19,727			$	17,287			$	19,163
Cash paid for interest		$	412			$	817			$	1,320
Capitalized assets financed by accounts payable		$	9,252			$	1,944			$	701
Tenant improvements paid by lessor		$	—			$	1,811			$	640
Stock-based compensation included in capitalized software development costs		$	1,588			$	1,485			$	543
Asset retirement obligation		$	3,543			$	907			$	-
Debt financing costs included in debt, net		$	—			$	—			$	1,153
Cash paid for amounts included in the measurement of lease liabilities included in operating cash flows		$	16,923			$	—			$	—
Operating lease assets obtained in exchange for operating lease liabilities		$	150,467			$	—			$	—

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

THE TRADE DESK, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 North America, Europe, Asia and Australia. The Company is a technology company that empowers buyers of advertising by providing a self-service cloud-based platform on which ad buyers can create, manage, and optimize more expressive data-driven digital advertising campaigns across ad formats, including display, video, audio, native and, social, on a multitude of devices, such as computers, mobile devices, and connected TV (CTV).

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

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the operations of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation. The Company has no material components of other comprehensive income (loss), and accordingly, the Company’s comprehensive income is the same as its net income for all periods presented.

Except for the accounting policy for leases that was updated as a result of adopting Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-02, Leases, as amended ("ASU 2016-02"), our significant accounting policies have been applied consistently to all years presented. Refer to “Operating Leases” below.

Use of Estimates

The preparation of 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.

On an on-going basis, management evaluates its estimates, primarily those related to: (1) revenue recognition criteria, including the determination of revenue reporting as net versus gross in the Company’s revenue arrangements, (2) allowances for doubtful accounts, (3) operating lease assets and liabilities, including our incremental borrowing rate and terms and provisions of each lease (4) the useful lives of property and equipment and capitalized software development costs, (5) income taxes, (6) assumptions used in the Black-Scholes option pricing model to determine the fair value of stock-based compensation, (7) the recognition and disclosure of contingent liabilities and (8) the assumptions used in valuing acquired assets and assumed liabilities in business combinations. These estimates are based on historical data and experience, as well as, various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Revenue Recognition

On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method. The adoption of ASU 2014-09 did not result in a change in the timing or amount of revenue recognized.

The Company determines revenue recognition through the following steps:

	•	Identification of a contract with a customer;

	•	Identification of the performance obligations in the contract;

	•	Determination of the transaction price;

	•	Allocation of the transaction price to the performance obligations in the contract; and

	•	Recognition of revenue when or as the performance obligations are satisfied.

The Company maintains agreements with each client and supplier in the form of master service agreements, which set out the terms of the relationship and access to the Company’s platform. The Company’s performance obligation is to provide the use of its platform to clients to develop ad campaigns and select the advertising inventory, data and other add-on features. The Company charges clients a platform fee, based on a percentage of a client’s purchases through the platform, and the transaction price is determined based on the consideration to which it expects to be entitled in exchange for the completion of a transaction, that is, when a bid is won. The platform fee percentage is based on the level of purchases by the client through the platform during the month. The Company recognizes revenue for its platform fee at a point in time when a purchase by the client occurs through its platform, which is when a bid is won. Subsequent to a bid being won through the Company’s platform, the associated fees are generally not subject to refund or adjustment. Historically, any refunds and adjustments have not been material.

The Company reports revenue net of amounts it pays suppliers for the cost of advertising inventory, third-party data and other add-on features (collectively, “Supplier Features”). The determination of whether the Company is the principal or agent, and hence whether to report revenue on a gross basis for the amount of the Supplier Features the clients purchase using the platform plus the Company’s platform fees or on a net basis for the amount of platform fees charged to the client, requires judgment. The Company determined that it is not primarily responsible for the purchase of Supplier Features, but rather, it is primarily responsible to provide a platform that enables clients to bid on advertising inventory, and use data and other add-on features in designing and executing their campaigns. The Company does not control the Supplier Features prior to the purchase by the client, and it does not have pricing latitude with respect to the cost of such features. The platform fee the Company charges clients is a percentage of their purchases through its platform, similar to a commission, and the platform fee is not contingent on the results of an advertising campaign. Based on these and other factors, the Company determined that it is not the principal in the purchase and sale of Supplier Features in all of its arrangements, and therefore, it reports revenue on a net basis for the platform fees charged to clients.

The Company generally bills clients for the gross amount of Supplier Features they purchase through its platform and the platform fees, net of allowances (“Gross Billings”). Some of the Company’s clients have payment relationships directly with advertising inventory suppliers in which case the Company only bills these clients for third-party data, other add-on features and its platform fees. The Company invoices its clients on a monthly basis for the purchases occurring during the month. Invoice payment terms, negotiated on a client-by-client basis, are typically between 30 to 90 days. However, for certain agency clients with sequential liability terms, payments are not due to the Company until such agency client has received payment from its clients who are advertisers. The Company’s accounts receivable are recorded at the amount of Gross Billings for the amounts it is responsible to collect, and accounts payable are recorded at the net amount payable to suppliers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.

Refer to Note 12 for geographic information related to Gross Billings.

Operating Expenses

The Company classifies its operating expenses into four categories:

Platform Operations. Platform operations expense consists of expenses related to hosting the Company’s platform, which includes “internet traffic” associated with the viewing of available impressions or queries per second (“QPS”) and providing support to clients. Platform operations expense includes hosting costs, personnel costs, and amortization of acquired technology and capitalized software costs for the development of the Company’s platform, including allocated overhead. Personnel costs included in platform operations include salaries, bonuses, stock-based compensation, and employee benefit costs, and are primarily attributable to personnel who provide the Company’s clients with support using the Company’s platform and the personnel who support the Company’s platform. The Company capitalizes certain costs associated with the development of the Company’s platform and amortizes these costs over their estimated useful lives in platform operations expense. The Company allocates overhead such as information technology infrastructure, rent and occupancy charges based on headcount.

Sales and Marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, employee benefits costs and commission costs, for the Company’s sales and marketing personnel. Sales and marketing expense also includes costs for market development programs, advertising, promotional and other marketing activities, and allocated overhead. The Company allocates overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Commissions costs are expensed as incurred.

Technology and Development. The Company’s technology and development expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation and employee benefits costs, third-party consultant costs associated with the ongoing development and maintenance of the Company’s platform and integrations with our advertising and data inventory suppliers, amortization of capitalized third-party software used in the development of the Company’s platform and allocated overhead. The Company allocates overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with software development that qualifies for capitalization, which are then recorded as capitalized software development costs included in other assets, non-current on the Company’s consolidated balance sheet. The Company amortizes capitalized software development costs relating to the Company’s platform to platform operations expense.

General and Administrative. The Company’s general and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation, and employee benefits costs associated with the Company’s executive, finance, legal, human resources, compliance, and other administrative personnel, as well as accounting and legal professional services fees, bad debt expense and allocated overhead. The Company allocates overhead such as information technology infrastructure, rent and occupancy charges based on headcount.

Stock-Based Compensation

Compensation expense related to stock options, restricted stock awards and units, which are referred to collectively as restricted stock, and awards granted under the Company’s employee stock purchase plan (“ESPP”), is measured and recognized in the consolidated financial statements based on the fair value of the awards granted. The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of restricted stock is calculated using the closing market price of the Company’s common stock on the date of grant, and for performance-based restricted stock, we also assess the probability of targets being achieved in determining the amount of expense to recognize. Stock-based compensation expense related to stock options and restricted stock is recognized on a straight-line basis over the requisite service periods of the awards, which is generally four years. For performance-based restricted stock, expense is recognized on a graded-vesting attribution basis over the requisite service period of the award and is adjusted in subsequent reporting periods if the assessed probability or estimated level of achievement of the performance goals changes. Stock-based compensation expense for ESPP awards is recognized on a graded-vesting attribution basis over the requisite service period of each award.

Determining the fair value of stock options and ESPP awards requires judgment. The Company’s use of the Black-Scholes option pricing model requires the input of subjective assumptions. The assumptions used in the Company’s option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment.

These assumptions and estimates are as follows:

Risk-Free Interest Rate. The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities approximating the expected term of the awards.

Expected Term. Given insufficient historical data relating to stock option exercises, to determine the expected term, the Company applies the simplified approach, in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award. For ESPP awards, the expected term is the time period from the grant date to the respective purchase dates included within each offering period.

Volatility. Because the Company has a short trading history for its common stock, the Company determines the price volatility based on a blend of the historical volatilities of a publicly traded peer group, implied volatilities from its traded options, and its historical volatility, based on daily price observations over a period equivalent to the expected term of the award.

Dividend Yield. The dividend yield assumption is based on the Company’s history and current expectations of dividend payouts. The Company has never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future, so the Company used an expected dividend yield of zero.

The Company will continue to use judgment in evaluating the assumptions related to the Company’s stock-based compensation.

Income Taxes

Deferred income tax assets and liabilities are determined based upon the net tax effects of the differences between the Company’s consolidated financial statements carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rate expected to apply to taxable income in the years in which the differences are expected to be reversed. A valuation allowance is used to reduce some or all of the deferred tax assets if, based upon the weight of available evidence, it is more likely than not that those deferred tax assets will not be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized. The Company recognizes interest and penalties accrued related to its uncertain tax positions in its income tax provision in the accompanying consolidated statements of operations.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Tax Cuts and Jobs Act (the "Act"). The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. The Company elected to treat any GILTI inclusions as a period cost.

Net Income Per Share Attributable to Common Stockholders

Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding.

Diluted net income per share attributable to common stockholders adjusts the basic net income per share attributable to common stockholders and the weighted-average number of shares of common stock outstanding for the potentially dilutive impact of stock options, restricted stock and ESPP using the treasury-stock method.

Cash, Cash Equivalents and Marketable Securities

The Company considers all short-term highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents, consisting of money market funds and time deposits, are carried at fair value. Refer to Note 6—Cash, Cash Equivalents and Short-Term Investments for additional information regarding the fair value of cash equivalents and marketable securities.

The Company classifies its marketable securities as available-for-sale investments in its current assets because they represent investments of cash available for current operations. Available-for-sale investments are carried at fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive income (loss) in stockholders' equity. Unrealized losses are charged against other expense when a decline in fair value is determined to be other-than-temporary. The Company determines realized gains or losses on sale of marketable securities on a specific identification method, and records such gains or losses as other expense (income).

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount, are unsecured and do not bear interest. The Company performs ongoing credit evaluations of its clients and certain advertisers when the Company’s agreements with its clients contain sequential liability terms that provide that the client payments are not due to the Company until the client has received payment from its clients who are advertisers. The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The allowance for doubtful accounts is determined based on historical collection experience and the review in each period of the status of the then-outstanding accounts receivable, while taking into consideration current client information, subsequent collection history and other relevant data. The Company reviews the allowance for doubtful accounts on a quarterly basis. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered.

The following table presents changes in the allowance for doubtful accounts (in thousands):

		Year Ended December 31,
		2019				2018				2017
Beginning balance		$	2,973			$	2,257			$	2,574
Add: bad debt expense			2,702				2,115				4,289
Less: write-offs, net of recoveries			(1,755	)			(1,399	)			(4,606	)
Ending balance		$	3,920			$	2,973			$	2,257

Property and Equipment, Net

Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method based upon the following estimated useful lives:

		Years
Computer equipment		2 – 3
Purchased software		3 – 5
Furniture, fixtures and office equipment		5
Leasehold improvements		*

	*	Leasehold improvements are amortized on a straight-line basis over the term of the lease, or the useful life of the assets, whichever is shorter.

Repair and maintenance costs are charged to expense as incurred, while renewals and improvements are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in the Company’s operating results.

Capitalized Software Development Costs

The Company capitalizes certain costs associated with creating and enhancing internally developed software related to the Company’s technology infrastructure. These costs include personnel and related employee benefits expenses for employees who are directly associated with and who devote time to software development projects, and external direct costs of materials and services consumed in developing or obtaining the software. Software development costs that do not qualify for capitalization, as further discussed below, are expensed as incurred and recorded in technology and development expenses in the consolidated statements of operations.

Software development activities typically consist of three stages: (1) the planning phase; (2) the application and infrastructure development stage; and (3) the post implementation stage. Costs incurred in the planning and post implementation phases, including costs associated with the post-configuration training and repairs and maintenance of the developed technologies, are expensed as incurred. The Company capitalizes costs associated with software developed when the preliminary project stage is completed, management implicitly or explicitly authorizes and commits to funding the project and it is probable that the project will be completed and perform as intended. Costs incurred in the application and infrastructure development phases, including significant enhancements and upgrades, are capitalized. Capitalization ends once a project is substantially complete and the software is ready for its intended purpose. Software development costs are amortized using a straight-line method over the estimated useful life of two years, 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.

The Company does not transfer ownership of its internally developed software, or lease its software, to third parties.

Cloud computing arrangements (“CCAs”), such as software as a service and other hosting arrangements, are evaluated for capitalized implementation costs in a similar manner as capitalized software development costs. If a CCA includes a software license, the software license element of the arrangement is accounted for in a manner consistent with the acquisition of other software licenses. If a CCA does not include a software license, the service element of the arrangement is accounted for as a service contract. The Company capitalized certain implementation costs for its CCAs that are service contracts, which are included in other assets, non-current. The Company amortizes capitalized implementation costs in a CCA over the life of the service contract. The Company capitalized $2.9 million and $0.9 million of CCA implementation costs in 2019 and 2018, respectively. Amortization expense was $0.6 million and $0.1 million for 2019 and 2018, respectively.

Business Combinations

The results of a business acquired in a business combination are included in the Company’s consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business generally being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

Transaction costs associated with business combinations are expensed as incurred and are included in general and administrative expenses in the consolidated statements of operations.

The Company performs valuations of assets acquired and liabilities assumed and allocates the purchase price to its respective assets and liabilities. Determining the fair value of assets acquired and liabilities assumed may require management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates, and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.

In October 2017, the Company paid $3.0 million in cash for certain assets of a data company accounted for as a business combination. These assets primarily consisted of acquired technology and goodwill which are included in other assets, non-current.

Operating Leases

On January 1, 2019, the Company adopted ASU No. 2016-02, codified as Accounting Standards Codification (“ASC”) 842, using the modified retrospective adoption approach. The Company elected the transition option provided by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, to not restate comparative periods, but rather to initially adopt the requirements of ASC 842 on January 1, 2019. The most significant impact of the adoption of ASC 842 resulted in the recognition of operating lease right-of-use assets (“operating lease assets’) of approximately $41 million, net of deferred rent and direct costs, and operating lease liabilities of approximately $47 million on its consolidated balance sheet. The impact on the Company’s consolidated statements of income and cash flows was not material.

ASC 842, provides various optional transition practical expedients. Upon transition to ASC 842, the Company elected the use of the package of practical expedients to not reassess: whether a contract is or contains a lease, lease classification and indirect costs. The Company did not elect the hindsight practical expedient in transition. The Company has elected to not separate lease and non-lease components.

Operating lease assets represent the Company’s right to control the use of an identified asset for a period of time, or term, in exchange for consideration, and operating lease liabilities represent its obligation to make lease payments arising from the aforementioned right.

The Company determines if an arrangement is, or contains, a lease at inception. Operating leases are included in operating lease assets, operating lease liabilities and operating lease liabilities, non-current on our consolidated balance sheets for all leases except for short-term leases with a term of 12 months or less. Operating lease assets and liabilities are initially recorded based on the present value of lease payments over the lease term, which includes the minimum unconditional term of the lease, and may include options to extend or terminate the lease when it is reasonably certain at the commencement date that such options will be exercised. As the rate implicit for each of the Company’s leases is not readily determinable, the Company uses its incremental borrowing rate, based on the information available at the lease commencement date in determining the present value of its expected lease payments. Operating lease assets also include any initial direct costs and any lease payments made prior to the lease commencement date and are reduced by any lease incentives received. Operating lease assets are amortized on a straight-line basis as the operating lease cost over the lease term on the consolidated statements of income. The related amortization, referred to as noncash lease expense, along with the change in the operating lease liabilities are separately presented within the cash flows from operating activities on the consolidated statements of cash flows.

Refer to Note 8—Leases for additional information.

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 approximates fair value based on borrowing rates currently available to the Company for financing with similar terms and were determined to be Level 2.

Certain long-lived assets including 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 material impairments have been recorded on those assets.

Concentration of Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. The Company maintains its cash and cash equivalents with financial institutions and its cash levels exceed the Federal Deposit Insurance Corporation (FDIC) federally insured limits. Marketable securities and short-term investments consist of investments in U.S. government securities, U.S. government agency securities, and high credit quality corporate debt securities.

For 2019, two clients accounted for 13% and 10%, respectively, of Gross Billings. For 2018, two clients accounted for 20% and 10%, respectively, of Gross Billings. For 2017, three clients accounted for 22%, 11% and 10%, respectively, of Gross Billings.

As of December 31, 2019, three clients accounted for 18%, 16% and 16%, respectively, of consolidated accounts receivable. As of December 31, 2018, two clients accounted for 24% and 14%, respectively, of consolidated accounts receivable.

As of December 31, 2019 and 2018, no suppliers accounted for more than 10% of consolidated accounts payable.

Foreign Currency Transactions and Translation

The Company has entities operating in various countries. Each of these entities’ functional currency is the U.S. Dollar. Transactions in foreign currencies are translated into U.S. Dollars at the rates of exchange in effect at the date of the transaction. Net transaction losses were approximately $0.7 million, $1.9 million, and $4.0 million for the years ended December 31, 2019, 2018 and 2017, respectively, and are included in foreign currency exchange loss, net in the accompanying consolidated statements of operations.

The Company enters into forward contracts to hedge foreign currency exposures related primarily to the Company’s foreign currency denominated accounts receivable. The Company does not designate the foreign exchange forward contracts as hedges for accounting purposes and changes in the fair value of the foreign exchange forward contracts are recorded in foreign currency exchange loss, net in the accompanying consolidated statements of operations. As of December 31, 2019 and 2018, the Company had open forward contracts with aggregate notional amounts of $92.9 million and $78.8 million, respectively. The fair value of the open forward contracts was not material. The Company’s forward contracts generally have terms of 30-60 days.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to, available for sale debt securities and accounts receivable. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, and in April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. These ASUs provide supplemental guidance and clarification to ASU 2016-13 and must be adopted concurrently with the adoption of ASU 2016-13, cumulatively referred to as “Topic 326.” Topic 326 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement-Disclosure Framework (Topic 820). The updated guidance modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on our consolidated financial statements.

Note 3—Net Income Per Share Attributable to Common Stockholders

The Company has two classes of common stock, Class A and Class B. Basic and diluted earnings per share (“EPS”) 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 computation of basic and diluted EPS is as follows (in thousands, except per share amounts):

		Year Ended December 31,
		2019				2018				2017
Numerator:
Net income		$	108,318			$	88,140			$	50,798
Denominator:
Weighted-average shares outstanding—basic			44,533				42,442				40,262
Effect of dilutive securities:
Options to purchase common stock			2,794				2,845				3,415
ESPP shares			131				251				268
Restricted stock			348				255				111
Weighted-average shares outstanding—diluted			47,806				45,793				44,056
Basic EPS		$	2.43			$	2.08			$	1.26
Diluted EPS		$	2.27			$	1.92			$	1.15
Anti-dilutive equity awards under stock-based award plans excluded from the determination of diluted EPS			691				472				1,246

Note 4—Property and Equipment, Net

Major classes of property and equipment were as follows (in thousands):

		As of December 31,
		2019				2018
Computer equipment		$	13,594			$	11,806
Purchased software			9,898				9,777
Furniture and fixtures			11,304				8,175
Construction in progress (1)			20,034				252
Leasehold improvements			36,523				18,693
			91,353				48,703
Less: Accumulated depreciation			(27,341	)			(15,657	)
		$	64,012			$	33,046

	(1)	Includes leasehold improvement projects which are not yet ready for intended use.

Depreciation expense for 2019, 2018 and 2017 was $14.9 million, $8.1 million and $5.3 million, respectively.

To date, there have been no impairment charges to property and equipment.

Note 5—Capitalized Software Development Costs

Capitalized software development costs, included in other assets, non-current, were as follows (in thousands):

		As of December 31,
		2019				2018
Capitalized software development costs, gross		$	15,203			$	11,487
Less: Accumulated amortization			(6,121	)			(3,386	)
Capitalized software development costs, net		$	9,082			$	8,101

The Company capitalized $6.5 million, $6.9 million and $3.5 million of software development costs in 2019, 2018 and 2017, respectively. Amortization expense was $5.5 million, $3.2 million and $1.9 million for 2019, 2018 and 2017, respectively. Based on the Company’s capitalized software development costs ready for intended use as of December 31, 2019, estimated amortization expense of $5.1 million and $1.7 million is expected to be recognized in 2020 and 2021, respectively. Amortization has not started on $2.3 million of capitalized software development costs that are not yet ready for intended use as of December 31, 2019.

Note 6—Cash, Cash Equivalents and Short-Term Investments

Cash, cash equivalents and short-term investments in marketable securities were as follows (in thousands):

		As of December 31, 2019
		Cash and
		Cash				Short-Term
		Equivalents				Investments				Total
Cash		$	32,123				—			$	32,123
Level 1:
Money market funds			45,588				—				45,588
Time deposits			35,000								35,000
Level 2:							—
Commercial paper			15,666				24,975				40,641
Corporate debt securities			—				78,998				78,998
U.S. government and agency securities			2,499				20,139				22,638
Total		$	130,876			$	124,112			$	254,988

		As of December 31, 2018
		Cash and
		Cash
		Equivalents
Cash		$	35,087
Level 1:
Money market funds			14,145
Time deposits			158,000
Total		$	207,232

The Company’s gross unrealized gains or losses from its short-term investments, recorded at fair value, for the periods presented within this Annual Report were immaterial.

The contractual maturities of the Company’s short-term investments are as follows (in thousands):

		December 31, 2019
Due in one year		$	108,257
Due in one to two years			15,855
Total		$	124,112

Note 7—Debt

Revolving Credit Facility

On October 26, 2018, the Company and a syndicate of banks, led by Citibank, N.A., as agent, entered into a second amended and restated loan and security agreement (the “Second A&R Credit Agreement”). The Second A&R Credit Agreement amends and restates the Company’s existing credit facility previously entered into on May 9, 2017, and consists of a $150.0 million revolving loan facility, with a $20.0 million sublimit for swingline borrowings and a $15.0 million sublimit for the issuance of letters of credit (the “Second A&R Credit Facility”). Under certain circumstances, the Company has the right to increase the Second A&R Credit Facility by an amount not to exceed $100.0 million. The Second A&R Credit Agreement is collateralized by substantially all of the Company’s assets, including a pledge of certain of its accounts receivable, deposit accounts, intellectual property, investment property, and equipment.

Loans under the Second A&R Credit Facility bear interest through maturity at a variable rate based upon, at the Company’s option, 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 0.50%, (2) Citibank, N.A.’s prime rate, and (3) one month LIBOR rate plus 2.00%. The applicable margin is between 0.25% to 1.25% for Base Rate Borrowings and between 1.25% and 2.25% for LIBOR Rate Borrowings based on the Company maintaining certain leverage ratios. The fee for undrawn amounts under the Second A&R Credit Facility ranges, based on the applicable leverage, from 0.225% to 0.400%. The Company will also be required to pay customary letter of credit fees, as necessary.

As of December 31, 2019, the Company did not have an outstanding debt balance under the Second A&R Credit Facility, and availability was $143.3 million. The Second A&R Credit Facility matures and all outstanding amounts become due and payable on May 9, 2022.

The Second A&R Credit Agreement 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 Second A&R Credit Agreement also requires the Company to maintain compliance with (a) a maximum ratio of consolidated funded debt to consolidated EBITDA of 3.50 to 1.00 and (b) a minimum ratio of consolidated EBITDA to interest expense of at least 3.00 to 1.00. As of December 31, 2019, the Company was in compliance with all covenants.

The Company entered into the Second A&R Credit Agreement primarily to lower its borrowing costs and to change from an asset-based structure to a cash-flow based structure.

Note 8—Leases

The Company has operating leases for its offices. Its leases have remaining lease terms of up to 11 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year with proper notification. Certain leases contain provisions for property-related costs that are variable in nature for which the Company is responsible, including common area maintenance and other property operating services. These costs are calculated based on a variety of factors including property values, tax and utility rates, property services fees, and other factors. The Company records rent expense for operating leases, some of which have escalating rent payments, on a straight-line basis over the lease term. The Company does not have any finance leases.

The components of lease expense for the years ended December 31, 2019 were as follows (in thousands):

		Amount
Operating lease cost		$	28,181
Short-term lease cost			1,582
Variable lease cost			2,469
Sublease income			(1,266	)
Total lease cost		$	30,966

Rent expense for non-cancelable operating leases was $10.9 million and $8.2 million for the years ended December 31, 2018 and 2017, respectively.

Supplemental information related to leases as of December 31, 2019 was as follows:

Weighted average remaining lease term		8.7 years
Weighted average discount rate		4.5%

Maturities of lease commitments as of December 31, 2019 were as follows (in thousands):

Year		Amount
2020		$	14,770
2021			45,522
2022			42,056
2023			38,310
2024			32,310
Thereafter			152,361
Total undiscounted lease commitments			325,329
Less: commitments for leases not yet commenced			(89,381	)
Less: interest			(46,498	)
Present value of lease liabilities			189,450
Less: operating lease liabilities, current			(14,577	)
Operating lease liabilities, non-current		$	174,873

As of December 31, 2018, the Company’s non-cancelable minimum lease commitments were as follows (in thousands):

Year		Amount (1)
2019		$	13,419
2020			18,746
2021			29,054
2022			23,786
2023			20,902
Thereafter			119,109
Total		$	225,016

	(1)	Includes non-cancelable minimum lease payments of $183.5 million for leases executed in 2018 that the Company planned to occupy in 2019.

Note 9—Capitalization

As of December 31, 2019, the Company is authorized to issue 1,095,000,000 shares of common stock, 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. 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.

No shares of preferred stock are outstanding as of December 31, 2019 and 2018. 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.

Note 10—Stock-Based Compensation

Stock-Based Compensation Expense

Stock-based compensation expense recorded in the consolidated statements of operations was as follows (in thousands):

		Year Ended December 31,
		2019				2018				2017
Platform operations		$	5,350			$	4,463			$	2,674
Sales and marketing			20,769				11,306				6,261
Technology and development			26,553				13,855				6,661
General and administrative			28,086				12,586				5,721
Total		$	80,758			$	42,210			$	21,317

Stock-Based Award Plans

The Company is authorized to issue stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based and cash-based awards under its 2016 Incentive Award Plan. As of December 31, 2019, 4.5 million shares remained available for grant under the Company’s 2016 Incentive Award Plan. The number of shares authorized for grant is subject to increase each year on January 1, equal to the lesser of (a) 4% of the common stock outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year and (b) such smaller number of shares as determined by the board of directors. On January 1, 2020, the number of shares authorized for grant under the Company’s 2016 Incentive Award Plan was increased by 1.8 million shares in accordance with plan provisions.

Stock options granted under the Company’s stock incentive plans generally vest over four years, subject to the holder’s continued service through the vesting date, and expire no later than 10 years from the date of grant. Restricted stock awards generally vest over four years, subject to the holder’s continued service through the vesting date.

Stock Options

The following summarizes stock option activity:

		Shares Under Option (in thousands)				Weighted- Average Exercise Price				Weighted- Average Contractual Life (years)				Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2018			4,630			$	37.03
Granted			869				182.23
Exercised			(1,264	)			23.59
Cancelled			(171	)			73.23
Outstanding as of December 31, 2019			4,064			$	70.74				7.5			$	769,018
Exercisable as of December 31, 2019			1,902			$	34.55				6.5			$	428,501

The fair value of options on the date of grant was estimated based on the Black-Scholes option pricing model. The weighted average assumptions used to value options granted to employees for the periods presented were as follows:

		Year Ended December 31,
		2019				2018				2017
Expected term (years)			6.0				6.0				6.0
Expected volatility			53.2	%			48.2	%			52.6	%
Risk-free interest rate			2.26	%			2.85	%			2.03	%
Estimated dividend yield			—	%			—	%			—	%

The weighted average grant date fair value per share of stock options granted for the years ended December 31, 2019, 2018 and 2017 and were $94.91, $35.08 and $22.48, respectively. The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 were $222.0 million, $119.0 million and $84.8 million, respectively.

Stock-based compensation expense related to stock options was $37.2 million, $17.7 million and $7.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, the Company had unrecognized employee stock-based compensation relating to stock options of approximately $107.5 million, which is expected to be recognized over a weighted-average period of 2.4 years.

Restricted Stock

The following summarizes restricted stock activity:

		Shares (in thousands)				Weighted- Average Grant Date Fair Value Per Share
Unvested as of December 31, 2018			518			$	65.14
Granted			188				201.21
Vested			(202	)			67.47
Forfeited			(47	)			60.89
Unvested as of December 31, 2019			457			$	120.65

Stock-based compensation expense related to restricted stock was $17.9 million, $7.4 million and $2.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, the Company had unrecognized employee stock-based compensation relating to restricted stock of approximately $47.9 million, which is expected to be recognized over a weighted-average period of 2.5 years.

On November 30, 2018, the Company entered into a transition agreement with its Chief Operating Officer (the “Transition Agreement”), which transition period is expected to end by June 30, 2019. Among other terms of the Transition Agreement, the Company granted a performance-based restricted stock award for 24,000 shares of the Company’s common stock subject to time-and performance-based vesting (the “PSUs”). The PSUs are included in the restricted stock activity for the year ended December 31, 2019 and 2018.

Employee Stock Purchase Plan

In September 2016, the Company established an ESPP with 800,000 shares of Class A common stock available for issuance. As of December 31, 2019, 0.3 million shares remained available for grant under this plan. The number of shares authorized for grant is subject to increase each year on January 1, equal to the lesser of (a) 800,000 shares, (b) 1% of the common stock outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year, and (c) such smaller number of shares as determined by the Company’s board of directors. On January 1, 2020, the number of shares available for issuance under the Company’s Employee Stock Purchase Plan was increased by 0.5 million shares in accordance with plan provisions.

Under the ESPP, all eligible employees are permitted to 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. ESPP purchases 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 (1) the closing market price per share of Class A common stock on the employee’s enrollment into the applicable offering period and (2) 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:

		Year ended December 31,
		2019				2018				2017
Expected term (years)			0.7				0.8				0.9
Expected volatility			53.2	%			46.2	%			45.9	%
Risk-free interest rate			2.08	%			2.32	%			1.22	%
Estimated dividend yield			—	%			—	%			—	%

The ESPP has a six-month holding 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 $25.7 million, $17.1 million and $10.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. At December 31, 2019, the Company had unrecognized employee stock-based compensation relating to ESPP awards of approximately $10.5 million, which is expected to be recognized over a weighted-average period of 0.5 years.

Note 11—Income Taxes

The following are the domestic and foreign components of the Company’s income before income taxes (in thousands):

		Year Ended December 31,
		2019				2018				2017
Domestic		$	162,252			$	115,706			$	66,148
Foreign			(46,032	)			(9,969	)			(2,523	)
Income before income taxes		$	116,220			$	105,737			$	63,625

The following are the components of the provision for income taxes (in thousands):

		Year Ended December 31,
		2019				2018				2017
Current:
Federal		$	9,180			$	11,683			$	9,944
State and local			7,800				9,295				3,906
Foreign			1,412				1,720				558
Total current provision			18,392				22,698				14,408
Deferred:
Federal			(6,316	)			(918	)			(172	)
State and local			(5,339	)			(2,615	)			(1,382	)
Foreign			1,165				(1,568	)			(27	)
Total deferred provision			(10,490	)			(5,101	)			(1,581	)
Total provision for income taxes		$	7,902			$	17,597			$	12,827

A reconciliation of the statutory tax rate to the effective tax rate for the periods presented is as follows:

		Year Ended December 31,
		2019				2018				2017
U.S. federal statutory income tax rate			21.0	%			21.0	%			35.0	%
State and local income taxes, net of federal benefit			1.7				5.0				2.6
Foreign income at other than U.S. rates (1)			10.5				2.1				2.2
Stock-based compensation			(20.5	)			(7.6	)			(19.0	)
Meals and entertainment			0.7				0.5				0.4
Nondeductible compensation			(1.3	)			—				—
Research and development credit			(5.0	)			(3.9	)			(2.8	)
Federal deferred tax asset revaluation			—				—				0.9
Other permanent items			(0.3	)			(0.4	)			0.9
Effective income tax rate			6.8	%			16.7	%			20.2	%

	(1)	For the year ended December 31, 2019, includes the impact of the valuation allowance associated with the United Kingdom (“U.K.”). For additional information, see discussion below.

Set forth below are the tax effects of temporary differences that give rise to a significant portion of the deferred tax assets and deferred tax liabilities (in thousands):

		As of December 31,
		2019				2018
Deferred tax assets (liabilities):
Reserves and allowances		$	3,275			$	2,465
Accrued expenses			5,452				4,193
Net operating losses			19,225				854
Research and development tax credit			2,739				1,367
Stock-based compensation			10,641				4,726
Deferred rent			(40	)			1,425
Prepaid expenses			(685	)			(559	)
Property and equipment			(2,606	)			(4,228	)
Intangibles (1)			179,096				87
Capitalized software development costs			(2,056	)			(1,874	)
Operating lease assets			(37,394	)			—
Operating lease liabilities			40,366				—
Other			151				4
Valuation allowance			(199,214	)			—
Total deferred tax assets, net		$	18,950			$	8,460

	(1)	As of December 31, 2019, includes intangibles associated with our international restructuring, net of amortization, offset by a reserve for uncertain tax position. See discussion below.

In April 2019, the Company completed a series of transactions resulting in changes to its international legal structure, including a transfer of certain intellectual property rights among wholly owned subsidiaries, primarily to align its structure to its evolving operations. The Company recorded a $262.4 million deferred tax asset associated with this restructuring offset by a reserve for uncertain tax position of $51.0 million. Based on available objective evidence, management believes it is not more-likely-than-not that these additional foreign deferred tax assets will be realizable as of December 31, 2019 and, therefore, are offset by a full valuation allowance to the extent not offset by reserves from uncertain tax positions. Management applied significant judgment in estimating the fair value of intangible assets, which involved the use of significant assumptions, including revenue growth rates, margins and discount rates.

As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred tax assets. During 2019, management recorded a valuation allowance of $199.2 million against its U.K. net deferred tax assets, based on the previous history of cumulative losses and the conclusion that future taxable profit may not be available for the utilization of the deferred tax assets for U.K. income tax purposes.

As of December 31, 2019, the Company had net operating loss carryforwards in the U.K. of approximately $129.1 million, which can be carried carryforward indefinitely. As of December 31, 2019, the Company had state and U.K. research and development tax credits of approximately $4.7 million and $0.3 million, respectively, which can be carried forward indefinitely.

As of December 31, 2019, unremitted earnings of the subsidiaries outside of the U.S. were approximately $1.2 million, on which no state taxes have been paid. The Company’s intention is to indefinitely reinvest these earnings outside the U.S. Upon distribution of those earnings in the form of a dividend or otherwise, the Company would be subject to both state income taxes and withholding taxes payable to various foreign countries. The amounts of such tax liabilities that might be payable upon repatriation of foreign earnings are not material.

As of December 31, 2019, the Company had gross unrecognized tax benefits of approximately $53.2 million, $47.1 million of which is a reduction to deferred tax assets and the remaining $6.1 million which would affect the Company’s effective tax rate if recognized. As of December 31, 2018, the Company had gross unrecognized tax benefits of approximately $4.3 million. The Company classifies liabilities for unrecognized tax benefits in other liabilities, non-current.

The following table presents changes in gross unrecognized tax benefits (in thousands):

		Year Ended December 31,
		2019				2018				2017
Beginning balance		$	4,330			$	3,101			$	1,007
Increases related to prior year tax positions			—				—				123
Decreases related to prior year tax positions			(20	)			(270	)			—
Increases related to current year tax positions (1)			49,100				1,499				1,971
Settlements			(197	)			—				—
Ending balance		$	53,213			$	4,330			$	3,101

	(1)	For the year ended December 31, 2019, includes the impact of a statutory rate change in the U.K.

Interest and penalties related to the Company’s unrecognized tax benefits accrued as of December 31, 2019 were not material.

The Company files U.S. federal, state, and foreign tax returns. The Company is currently under examination by the California Franchise Tax Board for the years ended December 31, 2016 and 2017. The Company expects to reduce its unrecognized tax benefits by $0.4 million during the next twelve months.

The 2016 through 2018 U.S. federal tax returns and 2010 through 2018 state tax returns remain open to examination. The majority of the Company’s foreign subsidiaries remain subject to examination by local taxing authorities for 2014 and subsequent years.

Note 12—Segment and Geographic Information

The Company reports revenue net of amounts it pays suppliers for the cost of advertising inventory, third-party data and other add-on features (collectively, “Supplier Features”). The Company generally bills clients for the gross amount of Supplier Features they purchase through its platform and the platform fees, net of allowances (“Gross Billings”). The Company’s accounts receivable are recorded at the amount of Gross Billings for the amounts it is responsible to collect, and accounts payable are recorded at the net amount payable to suppliers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue reported on a net basis.

Gross Billings, based on the billing address of the clients or client affiliates, were as follows (in thousands):

		Year Ended December 31,
		2019				2018				2017
US		$	2,639,497			$	1,937,074			$	1,270,116
International			456,190				347,939				221,626
Total		$	3,095,687			$	2,285,013			$	1,491,742

Property and equipment, net and operating lease assets presented by principal geographic area, were as follows (in thousands):

		December 31, 2019				December 31, 2018 (1)
US		$	157,245			$	25,887
International			80,216				7,159
Total		$	237,461			$	33,046

	(1)	As a result of the Company’s adoption of ASC 842 on January 1, 2019, the December 31, 2018 balance excludes operating lease assets. Refer to Note 2**—**Basis of Presentation and Summary of Significant Accounting Policies for additional information regarding the Company’s adoption of ASC 842.

Note 13—Commitments and Contingencies

As of December 31, 2019, the Company has various non-cancelable operating lease commitments for office space which as a result of the adoption of ASC 842, have been recorded as Lease Liabilities. Refer to Note 8**—**Leases for additional information regarding lease commitments.

As of December 31, 2019, the Company has non-cancelable commitments to its hosting services providers, marketing contracts and commitments to providers of software as a service. As of December 31, 2019, these purchase obligations were as follows (in thousands):

Year		Amount
2020		$	55,112
2021			32,298
2022			31,539
2023			30,000
2024			38,000
		$	186,949

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 as of December 31, 2019 and 2018.

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 on an at-will basis, subject to certain severance obligations in the event of certain involuntary terminations. 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.