Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549 

FORM 10-Q

 (Mark One)

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

For the quarterly period ended September 30, 2019

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 001-35982

TELARIA, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-5480343
(State or another jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

222 Broadway, 16th Floor, New York, NY	10038
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (646) 723-5300

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	TLRA	New York Stock Exchange

Indicate by check mark whether the registrant (1) 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 ý    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý   No o

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

Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company x
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

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

As of October 31, 2019, there were 46,571,809 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

TELARIA, INC

FORM 10-Q

	TABLE OF CONTENTS
		PAGE
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 (unaudited)	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION	35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
SIGNATURES
CERTIFICATIONS

2

Part I — FINANCIAL INFORMATION 

Item 1. — Financial Statements

Telaria, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

	September 30,		December 31,
	2019		2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	65,749	$	47,659
Accounts receivable net of allowance for doubtful accounts of $1,069 and $982 as of September 30, 2019 and December 31, 2018 respectively.	114,382		104,387
Prepaid expenses and other current assets	3,903		3,381
Total current assets	184,034		155,427
Long-term assets:
Operating lease right-of-use asset, net of amortization	24,132		—
Property and equipment net of accumulated depreciation of $3,353 and $2,696 as of September 30, 2019 and December 31, 2018, respectively	2,167		2,789
Intangible assets, net	3,601		4,379
Goodwill	9,277		9,478
Deferred tax assets	126		193
Other assets	1,998		2,440
Total long-term assets	41,301		19,279
Total assets	$	225,335	$	174,706
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	137,646	$	109,991
Operating lease liability	5,078		—
Deferred rent	—		797
Contingent consideration on acquisition	—		1,500
Other current liabilities	171		886
Total current liabilities	142,895		113,174
Long-term liabilities:
Operating lease liability, net of current portion	24,987		—
Deferred rent, net of current portion	—		5,759
Deferred tax liabilities	1,099		1,153
Other non-current liabilities	218		225
Total liabilities	169,199		120,311
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.0001 par value: 250,000,000 shares authorized as of September 30, 2019 and December 31, 2018, 59,111,023 and 56,956,935 shares issued and 46,546,783 and 44,392,695 outstanding as of September 30, 2019 and December 31, 2018, respectively	4		4
Treasury stock, at cost: 12,564,240 shares as of September 30, 2019 and December 31, 2018	(31,980)		(31,980)
Additional paid-in capital	303,393		293,154
Accumulated other comprehensive loss	(829)		(949)
Accumulated deficit	(214,452)		(205,834)
Total stockholders’ equity	56,136		54,395
Total liabilities and stockholders’ equity	$	225,335	$	174,706

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

3

Telaria, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	16,564		13,478		48,402		35,509
Cost of revenue	3,419		1,868		9,338		4,032
Gross profit	13,145		11,610		39,064		31,477
Operating expenses:
Technology and development	2,936		2,432		8,531		7,044
Sales and marketing	6,682		5,840		19,784		18,778
General and administrative	6,839		4,306		21,204		14,670
Restructuring costs	—		32		—		149
Depreciation and amortization	345		523		1,153		3,198
Total operating expenses	16,802		13,133		50,672		43,839
Loss from continuing operations	(3,657)		(1,523)		(11,608)		(12,362)
Interest expense and other income, net:
Interest expense	(1)		(27)		(2)		(74)
Other income, net	910		72		3,097		1,917
Total interest expense and other income, net	909		45		3,095		1,843
Loss from continuing operations before income taxes	(2,748)		(1,478)		(8,513)		(10,519)
Provision for income taxes	53		103		104		146
Loss from continuing operations, net of income taxes	(2,801)		(1,581)		(8,617)		(10,665)
Loss on sale of discontinued operations, net of income taxes	—		—		—		(136)
Net loss	$	(2,801)	$	(1,581)	$	(8,617)	$	(10,801)
Net loss per share — basic and diluted:
Loss from continuing operations, net of income taxes	$	(0.06)	$	(0.03)	$	(0.19)	$	(0.21)
Loss from discontinued operations, net of income taxes	—		—		—		—
Net loss	$	(0.06)	$	(0.03)	$	(0.19)	$	(0.21)
Weighted-average number of shares of common stock outstanding:
Basic and diluted	46,158,465		52,716,626		45,579,435		52,265,228

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

4

Telaria, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net loss	$	(2,801)	$	(1,581)	$	(8,617)	$	(10,801)
Other comprehensive loss:
Foreign currency translation adjustments	$	140	$	(145)	$	120	$	(417)
Comprehensive loss	$	(2,661)	$	(1,726)	$	(8,497)	$	(11,218)

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

5

Telaria, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

(in thousands, except share data)

(unaudited)

`									Accumulated
	Common Stock			Treasury Stock			Additional		Other				Total
	Share	Capital		Share	Capital		Paid-In Capital		Comprehensive Loss		Accumulated Deficit		Stockholders' Equity
Balance as of December 31, 2018	56,956,935	$	4	(12,564,240)	$	(31,980)	$	293,154	$	(949)	$	(205,834)	$	54,395
Exercise of stock options awards	825,349	—		—	—		3,181		—		—		3,181
Stock-based compensation expense	—	—		—	—		1,083		—		—		1,083
Common stock issued for settlement of restricted stock units net of 164,580 shares withheld to satisfy income tax withholding obligations	280,808	—		—	—		(536)		—		—		(536)
Common stock issuance in connection with employee stock purchase plan	87,671	—		—	—		270		—		—		270
Net loss	—	—		—	—		—		—		(4,333)		(4,333)
Foreign currency translation adjustment	—	—		—	—		—		(232)		—		(232)
Balance as of March 31, 2019	58,150,763	$	4	(12,564,240)	$	(31,980)	$	297,152	$	(1,181)	$	(210,167)	$	53,828
Exercise of stock options awards	149,478	—		—	—		611		—		—		611
Stock-based compensation expense	—	—		—	—		2,020		—		—		2,020
Common stock issued for settlement of restricted stock units net of 26,801 shares withheld to satisfy income tax withholding obligations	74,768	—		—	—		(197)		—		—		(197)
Net loss	—	—		—	—		—		—		(1,484)		(1,484)
Foreign currency translation adjustment	—	—		—	—		—		212		—		212
Balance as of June 30, 2019	58,375,009	$	4	(12,564,240)	$	(31,980)	$	299,586	$	(969)	$	(211,651)	$	54,990
Exercise of stock options awards	508,570	$	—	—	$	—	$	2,077	$	—	$	—	$	2,077
Stock-based compensation expense	—	—		—	—		1,868		—		—		1,868
Common stock issued for settlement of restricted stock units net of 52,137 shares withheld to satisfy income tax withholding obligations	176,940	—		—	—		(377)		—		—		(377)
Common stock issuance in connection with employee stock purchase plan	50,504	—		—	—		239		—		—		239
Net loss	—	—		—	—		—		—		(2,801)		(2,801)
Foreign currency translation adjustment	—	—		—	—		—		140		—		140
Balance as of September 30, 2019	59,111,023	4		(12,564,240)	(31,980)		303,393		(829)		(214,452)		56,136

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

6

									Accumulated
	Common Stock			Treasury Stock			Additional		Other				Total
	Share	Capital		Share	Capital		Paid-In Capital		Comprehensive Loss		Accumulated Deficit		Stockholders' Equity
Balance as of December 31, 2017	55,136,038	$	5	(3,845,496)	$	(8,443)	$	288,277	$	(232)	$	(196,468)	$	83,139
Exercise of stock options awards	314,711			—	—		1,018		—		—		1,018
Stock-based compensation expense	—	—		—	—		856		—		—		856
Common stock issued for settlement of restricted stock units net of 222,202 shares withheld to satisfy income tax withholding obligations	433,317	—		—	—		(912)		—		—		(912)
Common stock issuance in connection with employee stock purchase plan	84,415	—		—	—		240		—		—		240
Net loss	—	—		—	—		—		—		(6,101)		(6,101)
Foreign currency translation adjustment	—	—		—	—		—		(70)		—		(70)
Balance as of March 31, 2018	55,968,481	$	5	(3,845,496)	$	(8,443)	$	289,479	$	(302)	$	(202,569)	$	78,170
Exercise of stock options awards	84,535	—		—	—		160		—		—		160
Stock-based compensation expense	—	—		—	—		980		—		—		980
Common stock issued for settlement of restricted stock units net of 24,255 shares withheld to satisfy income tax withholding obligations	206,248	—		—	—		(103)		—		—		(103)
Net loss	—	—		—	—		—		—		(3,119)		(3,119)
Foreign currency translation adjustment	—	—		—	—		—		(202)		—		(202)
Balance as of June 30, 2018	56,259,264	$	5	(3,845,496)	$	(8,443)	$	290,516	$	(504)	$	(205,688)	$	75,885
Exercise of stock options awards	392,488	—		—	—		598		—		—		598
Stock-based compensation expense	—	—		—	—		933		—		—		933
Common stock issued for settlement of restricted stock units net of 18,326 shares withheld to satisfy income tax withholding obligations	68,004	—		—	—		(164)		—		—		(164)
Common stock issuance in connection with employee stock purchase plan	93,348	—		—	—		283		—		—		283
Net loss	—	—		—	—		—		—		(1,581)		(1,581)
Foreign currency translation adjustment	—	—		—	—		—		(145)		—		(145)
Balance as of September 30, 2018	56,813,104	$	5	(3,845,496)	$	(8,443)	$	292,166	$	(649)	$	(207,269)	$	75,809

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

7

Telaria, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2019		2018
Cash flows from operating activities:
Net loss from continuing operations	$	(8,617)	$	(10,665)
Total loss from discontinued operations	—		(136)
Adjustments required to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense	1,153		3,198
Bad debt expense	110		190
Amortization of acquired technology	143		—
Amortization of operating lease right-of-use asset	2,965		—
Loss on disposal of property and equipment	128		41
Stock-based compensation expense	4,971		2,769
Deferred tax benefit	67		—
Net changes in operating assets and liabilities:
Increase in accounts receivable	(10,197)		(7,260)
Increase in prepaid expenses, other current assets	(765)		(1,828)
Increase in accounts payable and accrued expenses	27,827		14,842
Decrease in other current liabilities	(60)		(408)
Decrease in operating lease liability	(3,463)		—
Increase in deferred rent and security deposits payable	7		656
Decrease in other liabilities	(10)		(605)
Net cash provided by operating activities	14,259		794
Cash flows from investing activities:
Purchase of property and equipment	(230)		(2,622)
Acquisition, net of cash received	—		(4,856)
Net cash used in investing activities	(230)		(7,478)
Cash flows from financing activities:
Contingent consideration on acquisition	(1,500)		—
Proceeds from the exercise of stock options awards	5,869		1,776
Proceeds from issuance of common stock under employee stock purchase plan	509		523
Tax withholdings related to net share settlements of restricted stock unit awards (RSUs)	(1,110)		(1,179)
Net cash provided by financing activities	3,768		1,120
Net increase (decrease) in cash and cash equivalents	17,797		(5,564)
Effect of exchange rate changes in cash and cash equivalents	293		(189)
Cash, cash equivalents at beginning of period	47,659		76,320
Cash, cash equivalents at end of period	$	65,749	$	70,567
Supplemental disclosure of cash flow activities:
Cash paid for income taxes	$	49	$	58
Cash paid for operating leases subject to ASU 842	$	5,107	$	—
Supplemental disclosure of non-cash investing and financing activities:
Contingent consideration related to acquisition	$	—	$	1,443
Deferred tax liability related to acquisition	$	—	$	1,092
Cash holdback related to acquisition	$	—	$	472

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

8

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

1. Organization and Description of Business 

Telaria, Inc. (the "Company") provides a fully programmatic software platform for premium publishers to manage and monetize their video advertising. The Company's platform is built specifically for digital video and to support the unique requirements of connected TV, mobile and over-the-top content. The Company provides publishers with real-time analytics and decisioning tools to control their video advertising business and offers a holistic monetization solution to optimize yield across a publisher’s entire supply of digital video inventory.

On June 8, 2018, the Company acquired all of the outstanding shares of SlimCut Media SAS ("SlimCut"), a video technology solutions company operating primarily in Canada and France, pursuant to a stock purchase agreement.

The Company is headquartered in the State of New York.

2.  Summary of Significant Accounting Policies 

Basis of Presentation 

The accompanying unaudited interim condensed consolidated financial statements and condensed footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the U.S. Securities and Exchange Commissions (the “SEC”) regarding unaudited interim financial information. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments necessary for a fair presentation of the Company’s condensed consolidated balance sheets, statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows for the interim periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. Accordingly, these unaudited interim condensed consolidated financial statements and condensed footnotes should be read in conjunction with the consolidated financial statements and accompanying notes thereto included in the Company’s Form 10-K for the year ended December 31, 2018 filed with the SEC on March 19, 2019.

Principles of Consolidation 

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All significant inter-company balances and transactions have been eliminated in the accompanying unaudited interim condensed consolidated financial statements. 

Use of Estimates 

The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the Condensed Consolidated Financial Statements and accompanying disclosures. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers cash deposits and all highly liquid investments with an original maturity of three months or less to be cash equivalents. The fair value of the Company’s cash and cash equivalents approximates their cost plus accrued interest because of the short-term nature of the instruments.

Accounts Receivable 

The Company extends credit to customers and generally does not require any security or collateral.  Accounts receivable are recorded at the invoiced amount.  The Company carries its accounts receivable balances at net realizable value. Management evaluates the collectability of its accounts receivable balances on a periodic basis and determines whether to provide an allowance or if any accounts should be written down and charged to expense as bad debt. The evaluation is based on a past history of collections, current credit conditions, the length of time the account is past due and a past history of write-downs. An accounts receivable balance is considered past due if the Company has not received payments based on agreed-upon terms.

9

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

2.  Summary of Significant Accounting Policies (Continued)

Revenue Recognition

The Company primarily generates revenue on a transactional basis where it is paid by a publisher each time an advertising impression is monetized on its platform based on a simple and transparent fee structure that the Company establishes with its publisher partners. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company is acting as the principal or an agent in the transaction. In determining whether the Company is acting as the principal or an agent, the Company followed the accounting guidance for principal-agent considerations. The determination of whether the Company is acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of each arrangement, none of which are considered presumptive or determinative. For substantially all publisher transactions on the Company's platform, the Company reports revenue on a net basis as the Company determined that it acts as an agent for publishers and is not the primary obligor in such transactions, given that: (1) another party is primarily responsible for fulfilling the contract and the Company does not have discretion in establishing prices and (2) the Company does not generally take on inventory risk. However, for certain transactions, the Company reports revenue on a gross basis, based primarily on its determination that the Company acts as the primary obligor in the delivery of advertising campaigns for buyers with respect to such transactions.

Credit Facility

The Company is party to a loan and security agreement, or credit facility, with Silicon Valley Bank, as lender. Pursuant to the credit facility, the Company can incur revolver borrowings up to the lesser of $25.0 million and a borrowing base equal to 80% of eligible accounts receivable. Any outstanding principal amounts borrowed under the credit facility must be paid at maturity. Interest accrues at a floating rate equal to the lender’s prime rate and is payable monthly. The Company is charged a fee of 0.35% of any unused borrowing capacity, which is payable quarterly. The credit facility also includes a letter of credit, foreign exchange and cash management facility up to the full amount of available credit. The credit facility matures in January 2020. While the Company had no outstanding borrowings under the credit facility as of September 30, 2019 and December 31, 2018, the lender has issued standby letters of credit in favor of the landlords of our current and former headquarters and other office space totaling $3.2 million, which can be drawn down from amounts available under the credit facility.

The credit facility contains customary conditions to borrowings, events of default and negative covenants, including covenants that restrict the Company's ability to dispose of assets, merge with or acquire other entities, incur indebtedness, incur encumbrances, make distributions to holders of its capital stock, make investments or engage in transactions with our affiliates. The Company is also subject to a financial covenant with respect to a minimum quick ratio, tested monthly, and Adjusted EBITDA for trailing periods which vary from three to twelve months, tested quarterly. Pursuant to an amendment to the credit facility, executed in November 2018, the Adjusted EBITDA covenant will only be tested if (i) the quick ratio falls below a certain threshold and (ii) unrestricted and unencumbered cash falls below $25.0 million. On November 6, 2019, the Company entered into an amendment to the credit facility to adjust the quick ratio. The Company's obligations under the credit facility are secured by substantially all of its assets other than its intellectual property, although the Company has agreed not to encumber any of its intellectual property without the lender’s prior written consent. Subject to certain exceptions, the Company is also required to maintain all of its cash and cash equivalents at accounts with the lender. The Company was in compliance with all covenants as of September 30, 2019 and through the date of this filing.

Concentrations of Credit Risk 

Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. 

All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality.  The Company’s cash and cash equivalents may exceed federally insured limits at times.  The Company has not experienced any losses on cash and cash equivalents to date. 

The Company determines collectability by performing ongoing credit evaluations and monitoring its customers’ accounts receivable balances. For new customers and their agents, which may be advertising agencies or other third parties, the Company performs a credit check with an independent credit agency and may check credit references to determine creditworthiness. The Company only recognizes revenue when collection is reasonably assured. 

10

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

2.  Summary of Significant Accounting Policies (Continued)

During the three and nine months ended September 30, 2019, there were no publishers that accounted for more than 10% of revenue. At September 30, 2019, the top three Demand Side Platforms (DSPs), accounted for approximately 52% of accounts receivable in the aggregate. During the three and nine months ended September 30, 2018, there were two publishers and one publisher, respectively, that each accounted for more than 10% of revenue. At September 30, 2018 and December 31, 2018 there were one demand-side platform, or DSPs, that accounted for more than 10% of outstanding accounts receivable.

Legal Contingencies

The Company is occasionally involved with various claims and litigation during the normal course of business. Reserves are established in connection with such matters when a loss is probable and the amount of such loss can be reasonably estimated. As of September 30, 2019 and December 31, 2018, no reserves were recorded. The determination of probability and the estimation of the actual amount of any such loss are inherently unpredictable, and it is therefore possible that the eventual outcome of such claims and litigation could exceed the estimated reserves, if any. Based upon the Company’s experience, current information and applicable law, it generally does not believe it is reasonably probable that any proceedings or possible related claims will have a material effect on its financial statements. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Stock-Based Compensation

The Company accounts for stock-based compensation expense under FASB ASC 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of stock-based compensation expense based on estimated fair values, for all stock-based payment awards made to employees, and FASB ASC 505-50, “Equity-Based Payments to Non-Employees,” which requires the measurement and recognition of stock-based compensation expense based on the estimated fair value of services or goods being received, for all stock-based payment awards made to other service providers and non-employees.

The Company measures its stock-based payment awards based on its estimate of the fair value of such awards using an option-pricing model, for stock option awards, and the fair value of the Company’s common stock on the date of grant, for restricted stock unit awards.  The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations.

The Company recognizes compensation expenses for the value of its stock-based payment awards, using the straight-line method, over the requisite service period of each of the awards, net of actual forfeitures. In the event of modification of the conditions on which stock-based payment awards were granted, an additional expense is recognized for any modification that increases the total fair value of the stock-based payment arrangement or is otherwise beneficial to the employee, other service provider or non-employee at the modification date. During the nine months ended September 30, 2019, the Company modified certain stock awards, resulting in the recognition of stock-based compensation of $383 during the period.

Recently Issued Accounting Pronouncements 

FASB Accounting Standards Update No. 2018-15 - Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40)

In August 2018, Financial Accounting Standards Board, ("FASB") issued an Accounting Standards Update, ("ASU") No. 2018-15 Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The requirement is for public business entities to apply the guidance to annual reporting periods beginning after December 15, 2019 with early adoption permitted, including interim periods. The Company does not believe adoption of this amendment will have a material impact on the Company's condensed consolidated financial statements and related disclosures.

FASB Accounting Standards Update No. 2018-13 - Fair Value Measurement (Topic 820)

In August 2018, FASB issued ASU No. 2018-13 Fair Value Measurements (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in the update modify the disclosure

11

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

2.  Summary of Significant Accounting Policies (Continued)

requirements on fair value measurements in Topic 820, including the removal, modification and additions of certain disclosure requirements for Level 3 fair value measurements and for transfers between Level 1 and Level 2 of the fair value hierarchy. The requirement is for all entities that are required to make disclosures about recurring or nonrecurring fair value measurements to apply the guidance to annual reporting periods beginning after December 15, 2019 with early adoption permitted for any modified or removed disclosures only. The Company does not believe adoption of this amendment will have a material impact on the Company's condensed consolidated financial statements and related disclosures.

FASB Accounting Standards Update No. 2018-07 - Improvements to Nonemployee Share-Based Payment Accounting (Topic 718)

In June 2018, FASB issued an ASU No. 2018-07 Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendment simplifies the accounting for equity based payments to nonemployees by expanding the scope of Topic 718 to include nonemployees. Public business entities are required to apply the guidance to annual reporting periods beginning after December 15, 2018 with early adoption permitted, including interim periods. The Company has adopted this update with no material impact to the Company's condensed consolidated financial statements and related disclosures.

FASB Accounting Standards Update No. 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220)

In February 2018, FASB issued an ASU No. 2018-02 Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Public business entities are required to apply the guidance to annual reporting periods beginning after December 15, 2018 with early adoption permitted, including the interim periods. The Company adopted this update with no material impact to the Company's condensed consolidated financial statements and related disclosures.

FASB Accounting Standards Update No. 2016-02 — Leases (Topic 842) 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which clarifies and improves existing authoritative guidance related to leasing transactions.  This ASU will require the recognition of lease assets and liabilities for operating leases with terms of more than 12 months. This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company implemented this guidance in the first quarter of 2019 using the modified retrospective transition method and will not restate comparative periods. Refer to note 9 - ASC 842 (Leases) for more information.

12

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

3.  Acquisitions

On June 8, 2018, the Company acquired all of the outstanding shares of SlimCut, a video technology solutions company serving premium publishers in Canada and France, pursuant to a stock purchase agreement between the Company and the sellers identified therein. As consideration for the acquisition, the Company made an initial payment to the sellers of $5,458, subject to certain adjustments set forth in the purchase agreement, and was required to make a second payment of $500, subject to adjustment or holdback, on March 31, 2019 (the “Holdback Amount”). In addition, the sellers were eligible to receive future cash payments up to $1,500 based on achieving certain financial milestones of SlimCut during fiscal year 2018.

The fair value of the contingent consideration as of June 8, 2018 was $1,443 and was included in the purchase price of SlimCut. The Company re-measured the estimated fair value of the contingent consideration at June 30, 2018 and September 30, 2018 with no material changes noted. As of December 31, 2018, the financial milestones were achieved and the fair value of the contingent consideration was adjusted to $1,500, which resulted in $57 in mark-to-market expense at year-end. During the first quarter ended March 31, 2019, the contingent consideration on the acquisition was paid in full. In addition, during the first quarter ended March 31, 2019, the Company released the Holdback Amount in the amount of $472.

4. Fair Value Measurements 

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. The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation. The three-tiers are defined as follows: 

•Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities; 

•Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and 

•Level 3. Unobservable inputs for which there is little or no market data requiring the Company to develop its own assumptions. 

Assets and Liabilities Measured at Fair Value on a Recurring Basis 

	September 30, 2019								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds(1)	$	27,125	$	—	$	—	$	27,125	$	28,672	$	—	$	—	$	28,672
Total assets	$	27,125	$	—	$	—	$	27,125	$	28,672	$	—	$	—	$	28,672
Liabilities:
Contingent consideration on acquisition liability(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	1,500	$	1,500
Total liabilities	$	—	$	—	$	—	$	—	$	—	$	—	$	1,500	$	1,500

(1) Money market funds are included within cash and cash equivalents in the Company’s consolidated balance sheets.  As short-term, highly liquid investments readily convertible to known amounts of cash, the Company’s money market funds have carrying values that approximates their fair value. Amounts above do not include $38,624 and $18,987 of operating cash balances as of September 30, 2019 and December 31, 2018, respectively.

(2) On June 8, 2018, the Company acquired all of the outstanding shares of SlimCut. In connection with the acquisition, the former stockholders of SlimCut were eligible to receive future cash payments contingent on the operating performance of SlimCut in reaching certain financial milestones. In estimating the fair value of the contingent consideration on the date of acquisition, the Company used a Monte-Carlo valuation model based on future expectations of reaching financial milestones, other management assumptions (including operating results, business plans, anticipated future cash flows, and marketplace data), and the weighted-probabilities of possible payments. These assumptions were based on significant

13

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

4. Fair Value Measurements (Continued)

inputs not observed in the market and, therefore, represent a Level 3 measurement. The Company re-measured the estimated fair value of the contingent consideration at June 30, 2018 and September 30, 2018 with no material changes noted. As of December 31, 2018, the financial milestones were achieved and the fair value of the contingent consideration was adjusted to $1,500, which resulted in $57 in mark-to-market expense at year-end. During the quarter ended March 31, 2019, contingent consideration on the acquisition was fully paid.

Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)

	2019
Beginning Balance at January 1, 2019	$	1,500
Contingent consideration paid (SlimCut Acquisition)	(1,500)
Balance as of September 30, 2019	$	—

5. Goodwill and Intangibles Assets, Net

Goodwill includes the cost of the acquired business in excess of the fair value of the tangible net assets recorded in connection with the acquisition of SlimCut (see Note 3 – Acquisitions) as well as the acquisition of The Video Network Pty Ltd, an Australian proprietary limited company, that occurred in 2015. Accounting Standards Codification 350, “Intangibles – Goodwill and Other” (“ASC 350”), requires the Company to assess goodwill for impairment annually or more frequently if a triggering event occurs. The Company operates as one operating and reporting segment and, therefore, the Company assesses goodwill for impairment annually as one singular reporting unit. The Company has the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not more-likely-than not that the fair value of a reporting unit exceeds its carrying amount, then the two-step goodwill impairment test is not required to be performed.

During the fourth quarter of 2018, the Company performed a qualitative assessment of the reporting unit's fair value which included assessing the impact of certain factors such as general economic conditions, limitations on accessing capital, changes in forecasted operating results, and fluctuations in foreign exchange rates. Based on the qualitative assessment, the Company concluded that it was more-likely-than-not that the estimated fair value of the Company's reporting unit exceeded its carrying value and thus, the Company did not proceed to the two-step goodwill impairment test.

The Company did not identify any impairment of its goodwill as of September 30, 2019 and December 31, 2018, and therefore, for the three and nine months ended September 30, 2019 and for the year ended December 31, 2018, no impairment losses related to goodwill were recorded.

The change in the carrying amount of goodwill as of September 30, 2019 is as follows:

	2019
Beginning balance as of January 1, 2019	$	9,478
Foreign exchange impact	(201)
Ending Balance as of September 30, 2019	$	9,277

The Company also reviews certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of intangible assets are measured by a comparison of the carrying amount of the asset or asset group, using an income approach, to future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets are not recoverable, the impairment to be recognized, if any, is measured by the amount which the carrying amount of the assets exceeds the estimated fair value of the assets or asset group.  As the Company operates as one business unit and its long-lived assets do not have identifiable cash flows that are

14

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

5. Goodwill and Intangible Assets, Net (Continued)

independent of the other assets and liabilities of this business unit, the impairment testing on intangible assets is performed at the entity-level.

The Company did not identify any impairment of intangible assets as of September 30, 2019 and December 31, 2018, and therefore, for the three and nine months ended September 30, 2019 and for the year ended December 31, 2018, no impairment losses related to intangible assets were recorded.

Information regarding the Company’s acquisition-related intangible assets, net is as follows:

	September 30, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer relationships	$	4,581	$	(1,665)	$	2,916
Technology	928		(243)		685
Total acquisition-related intangible assets, net	$	5,509	$	(1,908)	$	3,601

	December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer relationships	$	4,797	$	(1,283)	$	3,514
Technology	973		(108)		865
Total acquisition-related intangible assets, net	$	5,770	$	(1,391)	$	4,379

Amortization expense for the three and nine months ended September 30, 2019 was $195 and $596, respectively. For the three and nine months ended September 30, 2018 amortization expense was $206 and $417 respectively. Amortization of customer relationships is recorded in operating expense on the consolidated statements of operations. Amortization expense of technology is recorded as amortization expense in cost of revenue.

The estimated future amortization expense for intangibles subject to amortization for the next five years and thereafter is as follows:

2019 (three months remaining)	191
2020	770
2021	639
2022	455
2023	351
2024 and thereafter	1,195

15

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

6. Accounts Payable and Accrued Expenses

The Company records accounts payable and accrued expenses at cost when the service is provided or when the related product is delivered. The Company’s accounts payable and accrued expenses consist of the following:

	September 30, 2019		December 31, 2018
Trade accounts payable	$	121,695	$	95,028
Accrued compensation, benefits and payroll taxes	5,630		5,468
Accrued cost of revenue	7,573		7,127
Other payables and accrued expenses	2,748		2,368
Total accounts payable and accrued expenses	$	137,646	$	109,991

7.  Changes in Accumulated Other Comprehensive Loss 

The following tables provide the components of accumulated other comprehensive loss: 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019	2018
	Foreign Currency Translation Adjustment		Foreign Currency Translation Adjustment		Foreign Currency Translation Adjustment	Foreign Currency Translation Adjustment
Balance at beginning of the period	$	(969)	$	(504)	(949)	(232)
Other comprehensive income (loss)(1)	140		(145)		120	(417)
Balance as of September 30, 2019	$	(829)	$	(649)	(829)	$	(649)

(1)   For the three and nine months ended September 30, 2019 and September 30, 2018, there were no foreign currency translation adjustments reclassified from accumulated other comprehensive income (loss) to the Company's Consolidated Statement of Operations. 

16

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

8.  Net Loss Per Share of Common Stock 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Numerator:
Loss from continuing operations, net of income taxes	$	(2,801)	$	(1,581)	$	(8,617)	$	(10,665)
Total loss from discontinued operations, net of income taxes	—		—		—		(136)
Net loss	$	(2,801)	$	(1,581)	$	(8,617)	$	(10,801)
Denominator:
Weighted-average number of shares of common stock outstanding for basic and diluted net loss per share	46,158,465		52,716,626		45,579,435		52,265,228
Basic and diluted loss per share:
Net loss from continuing operations	(0.06)		(0.03)		(0.19)		(0.21)
Net loss	$	(0.06)	$	(0.03)	$	(0.19)	$	(0.21)

The following securities were outstanding during the periods presented below and have been excluded from the calculation of diluted net loss from continuing operations per share because the effect is anti-dilutive.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Stock option awards	5,513,932	2,347,045	5,513,932	2,347,045
Restricted stock unit awards	2,655,788	6,554,864	2,655,788	6,554,864
Total anti-dilutive securities	8,169,720	8,901,909	8,169,720	8,901,909

17

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

9. ASU 842 - Leases

Adoption of ASC Topic 842, Leases

On January 1, 2019, the Company adopted ASC Topic 842 using the modified retrospective transition method. Topic 842 requires the recognition of lease assets and liabilities for operating leases. Beginning on January 1, 2019, the Company's condensed consolidated financial statements are presented in accordance with the revised policies, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical policies. The modified retrospective transition method required the cumulative effect, if any, of initially applying the guidance to be recognized as an adjustment to the Company's accumulated deficit as of our adoption date. There was no cumulative effect adjustment to the Company's accumulated deficit as a result of initially applying the guidance. As a result of adopting Topic 842, the Company recognized additional operating lease assets of $26,449 and operating lease liabilities of $32,932 as of January 1, 2019. The discount rate used to calculate the adjustments was the Company's incremental borrowing rate applied as of the adoption date of January 1, 2019.

Management elected the package of practical expedients permitted under the transition guidance within Topic 842, which allowed the Company to carry forward prior conclusions about lease identification, classification and initial direct costs for leases entered into prior to adoption of Topic 842. Additionally, management elected not to separate lease and non-lease components for all of the Company's leases. For leases with a term of 12 months or less, management elected the short-term lease exemption, which allowed the Company to not recognize right-of-use assets or lease liabilities for qualifying leases existing at transition and new leases the Company may enter into in the future.

General Description of Leases

The Company has entered into various non-cancelable operating lease agreements for its facilities. The Company classifies leases at their commencement as either operating or finance leases and may receive renewal or expansion options, rent holidays and leasehold improvement or other incentives on certain lease agreements. The Company’s operating leases primarily consist of leases for real estate throughout the world with lease expirations between 2019 and 2029. These arrangements typically do not transfer ownership of the underlying asset as the Company does not assume, nor does it intend to assume, the risks and rewards of ownership.

The Company recognizes a right-of-use asset and lease liability for all of its leases at the commencement of the lease. Lease liabilities are measured based on the present value of the minimum lease payments discounted by a rate determined as of the date of commencement. Right-of-use assets are measured based on the lease liability adjusted for any initial direct costs, prepaid rent, and lease incentives. The following summarizes right-of-use assets as of September 30, 2019.

	September 30, 2019
Total operating lease right-of-use asset, gross	$	27,097
Less: accumulated amortization	(2,965)
Operating lease right-of-use asset, net	$	24,132

Significant Assumptions and Judgments

Significant judgment is required when determining whether a contract is or contains a lease. The Company reviews contracts to determine whether the language conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

As discussed above, the present value of minimum lease payments is used in determining the value of the Company's operating and finance leases. The discount rate used to calculate the present value for lease payments is the Company's incremental borrowing rate, which is determined based on information available at lease commencement and is equal to the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The incremental borrowing rate used for our lease obligations as of September 30, 2019 and January 1, 2019 ranged from 4.08% to 7.36%. As of September 30, 2019, the weighted-average remaining lease term for our operating leases was 6.62 years. As of September 30, 2019, the weighted-average discount rate for our operating leases was 6.83%.

18

Telaria, Inc.

Notes to Condensed Consolidated Financial Statements

(in thousands, except share and per share data)

(unaudited)

9. ASU 842 - Leases (Continued)

The following table summarizes the Company's lease cost and sublease income for the three and nine months ended September 30, 2019:

	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost	$	1,518	$	4,547
Variable lease cost	176		515
Short-term lease cost	92		272
Sublease income, gross	(1,111)		(3,219)
Total lease cost	$	675	$	2,115

As of September 30, 2019, the future payments under the Company's operating leases for each of the next five years and thereafter are as follows:   

	Total
Remaining in 2019	$	1,712
2020	6,927
2021	5,776
2022	5,076
2023	5,092
2024 and thereafter	13,197
Total minimum lease payments	$	37,780
Less: imputed interest	(7,715)
Present value of minimum lease payments	$	30,065
Less: current portion of operating lease obligations	(5,078)
Total long-term lease obligations	$	24,987

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

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited interim consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2018 included in the Annual Report on Form 10-K filed with the SEC on March 19, 2019.  This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.  These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations.  Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K filed with the SEC on March 19, 2019.  You should not rely upon forward-looking statements as predictions of future events.  Furthermore, such forward-looking statements speak only as of the date of this report.  Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.  We will disclose material non-public information through one or more of the following channels: our investor relations website (http://investor.telaria.com), the social media channels identified on our investor relations website, press releases, SEC filings, public conference calls and webcasts. 

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Overview 

Telaria, Inc. provides a fully programmatic software platform for publishers to manage and monetize their video advertising. Our platform is built specifically for digital video and to support the unique requirements of connected TV, mobile and over-the-top content. We provide publishers with real-time analytics, data and decisioning tools to control their video advertising business and offer a holistic monetization solution to optimize yield across a publisher’s entire supply of digital video inventory.

Our technology enables publishers to manage and deliver their directly sold and programmatic video inventory through a single platform, allowing them to get a complete picture of their sales efforts and maximize revenue from ad placements across channels. Our platform is connected with leading third-party demand-side platforms, or DSPs, through server-to-server integrations, creating a robust programmatic marketplace where publishers can seamlessly transact with buyers. These programmatic transactions fully automate the sales process and enable publishers to increase the value of their advertising inventory by using data to better segment and match their supply with demand.

In addition, publishers manage video inventory sold by their direct sales team through our Advanced TV ad server, which was built specifically to meet the unique requirements of connected TV, or CTV, and over-the-top, or OTT, content. Publishers use our integrated ad-server and programmatic supply side platform to optimize yield by having their directly sold campaigns compete against our marketplace of programmatic demand to obtain the highest value for their inventory.

We provide a full suite of tools for publishers to control their video advertising business and protect the consumer viewing experience. These controls are particularly important for our clients in CTV and OTT who need to ensure a TV-like viewing and advertising experience for consumers.

For instance, our ad-pod feature provides long-form content publishers with a tool analogous to commercial breaks in traditional linear television so that they can request and manage several ads at once from different demand sources. Using this tool, publishers can establish business rules such as competitive separation of advertisers to ensure that competing brand ads do not appear during the same commercial break, audio normalization to control for the volume of an ad relative to content, and frequency capping to avoid exposing viewers to repetitive ad placements.

Publishers on our platform receive up-to-the-second reporting and diagnostics so that they can effectively monitor buying patterns and make real-time changes to take advantage of market dynamics. Our inventory intelligence dashboard provides publishers with extensive analytics that leverage billions of historical data points to drive their monetization strategy, as well as access to first and third-party data that offers valuable insights into their video advertising such as performance, viewability and audience data, which can be used to segment inventory and create incremental value.

We have built long-standing relationships with premium video publishers, in particular in the CTV and OTT space,and we believe the scale and quality of our client base makes us an important partner to video ad buyers. Buyers on our platform include some of the largest brand advertisers in the world and our platform is integrated with the leading video volume buyers in digital advertising. We generate revenue when an advertising impression is sold on our platform based on a simple and transparent fee structure established with our publisher partners and do not collect any fees directly from DSPs integrated with our platform.

We provide our platform internationally in Europe, Canada, Latin America, and the Asia Pacific region. During the second quarter of 2018, we further expanded our international presence through the acquisition of SlimCut Media SAS ("SlimCut"), a global video technology solutions company operating primarily in Canada and France. Refer to Note 3 - Acquisition, in the notes to the condensed consolidated financial statements.

For the quarter ended September 30, 2019, our revenue from continuing operations increased to $16.6 million, compared to $13.5 million for the quarter ended September 30, 2018, an increase of 23.0%. Our loss from continuing operations, net of income taxes increased from a loss of $1.6 million for the quarter ended September 30, 2018 to a loss of $2.8 million for the quarter ended September 30, 2019, and our Adjusted EBITDA (refer to “Key Metrics-Adjusted EBITDA”) decreased from a gain of $39 thousand to a loss of $0.3 million for the same respective periods.

For the nine months ended September 30, 2019, our revenue from continuing operations increased to $48.4 million, compared to $35.5 million for the nine months ended September 30, 2018, an increase of 36.3%  Our loss from continuing operations, net of income taxes improved from a loss of $10.7 million for the nine months ended September 30, 2018 to a loss of $8.6 million for the nine months ended September 30, 2019, and our Adjusted EBITDA (refer to “Key Metrics-Adjusted EBITDA”) improved from a loss of $4.4 million to a loss of $1.7 million for the same respective periods.

21

Key Metrics 

We monitor the key metrics set forth in the table below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess our operational efficiencies. Revenue and net loss from continuing operations, net of income taxes are discussed under the headings “Components of our Results of Operations.”  Adjusted EBITDA is discussed immediately following the table below. 

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(dollars in thousands) (unaudited)
Revenue	$	16,564	$	13,478	$	48,402	$	35,509
Loss from continuing operations, net of income taxes	$	(2,801)	$	(1,581)	$	(8,617)	$	(10,665)
Adjusted EBITDA	$	(332)	$	39	$	(1,738)	$	(4,361)

Adjusted EBITDA 

Adjusted EBITDA represents our loss from continuing operations, net of income taxes, before depreciation and amortization expense, total interest and other income (expense), net and provision for income taxes, and as adjusted to eliminate the impact of non-cash stock-based compensation expense, expenses for prior corporate facilities required to be recorded as operating expenses as a result of the adoption of certain accounting standards, acquisition related costs, restructuring costs, executive severance, retention and recruiting costs, expenses for transitional services and other adjustments. Adjusted EBITDA is a key measure used by management to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses we do not consider to be indicative of our core operating performance in calculating adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis.

Adjusted EBITDA is a non-GAAP financial measure. Our use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) although depreciation and amortization expense are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash and capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; (d) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (e) Adjusted EBITDA does not reflect costs related to prior corporate facilities, acquisition related costs, restructuring costs, executive severance, retention and recruiting costs, expenses for transitional services and other adjustments that may represent a reduction in cash available to us; and (f) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.  Because of these and other limitations, you should consider Adjusted EBITDA alongside our other U.S. GAAP-based financial performance measures, net loss and our other U.S. GAAP financial results.

22

The following table presents a reconciliation of adjusted EBITDA to loss from continuing operations, net of income taxes, the most directly comparable U.S. GAAP measure, for each of the periods indicated.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(dollars in thousands) (unaudited)
Loss from continuing operations, net of income taxes	$	(2,801)	$	(1,581)	$	(8,617)	(10,665)
Adjustments:
Depreciation and amortization expense	392		523		1,296		3,198
Total interest expense and other income, net(1)	(909)		(45)		(3,095)		(1,843)
Provision for income taxes	53		103		104		146
Stock-based compensation expense	1,868		934		4,971		2,769
Expenses for prior corporate facilities (2)	1,065		—		3,130		—
Acquisition-related costs	—		73		—		402
Restructuring costs	—		32		—		149
Executive severance, retention and recruiting costs	—		—		473		223
Expenses for transitional services(3)	—		—		—		697
Other adjustments(4)	—		—		—		563
Total net adjustments	2,469		1,620		6,879		6,304
Adjusted EBITDA	$	(332)	$	39	$	(1,738)	$	(4,361)

(1) Reflects sublease income for our former office facilities. In addition, includes income received from the transfer of rights in the name "Tremor Video" for the three and nine months ended September 30, 2018.

(2) For the three and nine months ended September 30, 2019, reflects lease costs for prior corporate facilities, previously recorded in interest and other income (expenses), which are now required to be recorded in operating expenses as a result of the adoption of ASC 842. Refer to note 9 - ASC 842 (Leases) for more information.

(3)  For the nine months ended September 30, 2018, reflects costs incurred providing transitional services following the sale of our buyer platform.

(4) For the nine months ended September 30, 2018, reflects rent expense for our current corporate headquarters, which was then unoccupied.

Components of Operating Results 

We operate in one segment, online video advertising services.  The key elements of our operating results include: 

Revenue 

We primarily generate revenue on a transactional basis where we are paid by a publisher each time an advertising impression is monetized on our platform based on a simple and transparent fee structure that we establish with our publisher partners. Typically, this fee is structured as a percentage of the price that the publisher receives for its advertising inventory. Our revenue is therefore influenced by the number of ad impressions we sell through our platform, the average CPM (price per 1,000 impressions) for inventory sold, and the percentage fee that we retain, or take rate. We believe that contributions to revenue from CTV and OTT will continue to grow as a percentage of our total revenue. In general, we expect this shift to result in an increase in the average CPM for inventory monetized through our platform and a decrease in our average take rate.

As our business continues to mature, we may adjust our pricing model and add additional revenue streams to account for new products or service offerings or changes in client preferences and demands. For instance, we may charge data licensing or professional service fees or strategically pursue a license or subscription-based pricing model with certain publishers in order to create a potentially deeper and stickier relationship.

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For substantially all transactions executed through our platform, we act as an agent on behalf of the publisher that is monetizing its inventory, and revenue is recognized net of any inventory costs that we remit to publishers. However, for certain transactions, the Company reports revenue on a gross basis, based primarily on its determination that the Company acts as the primary obligor in the delivery of advertising campaigns for its buyer clients with respect to such transactions.

Cost of Revenue, Gross Profit and Gross Margin 

The Company's cost of revenue primarily consists of third party hosting fees, licensing fees, data costs, and, for revenue recognized on a gross basis, cost of advertising inventory.

Gross margin is our gross profit expressed as a percentage of our total revenue. Our gross margin is impacted by the relative contribution to our revenue from transactions that we record on a gross basis, which are typically recognized at a lower gross margin due to the fact that the cost of revenue for such transactions includes the cost of advertising inventory. In June 2018, we acquired the business of SlimCut, which included certain revenue streams that are recorded on a gross basis. Prior to the acquisition, we recorded 100% of our revenue on a net basis. Accordingly, following the acquisition, the relative contribution to revenue from transactions booked on a gross basis increased compared to prior periods resulting in a negative impact on our gross margin.

Operating Expenses 

Operating expenses consist of technology and development, sales and marketing, general and administrative, and depreciation and amortization.  Salaries, cash incentive compensation, stock-based compensation and other personnel-related costs are the most significant components of each of technology and development, sales and marketing and general and administrative expenses. We include stock-based compensation expense in connection with the grant of stock option awards or restricted stock unit awards in the applicable operating expense category based on the respective equity award recipient’s function. We expect our operating expenses to continue to increase in future periods, to support our continued growth.

Technology and Development Expense. Technology and development expense primarily consists of salaries, cash incentive compensation, stock-based compensation and other personnel-related costs for product development and engineering personnel. Additional expenses in this category include other related overhead. Due to the rapid development and changes in our business, we have expensed all technology and development expenses in the same period that the costs were incurred. We intend to continue to invest in our technology and development efforts. We believe continuing to invest in technology and development efforts is essential to maintaining our competitive position.

Sales and Marketing Expense. Sales and marketing expense primarily consists of salaries, cash incentive compensation, stock-based compensation and other personnel-related costs for our marketing and sales and sales support employees.  Additional expenses in this category include marketing programs, travel and other related overhead. We expect our sales and marketing expense to increase in the foreseeable future to support our continued revenue growth.

General and Administrative Expense. General and administrative expense primarily consists of salaries, incentive compensation, stock-based compensation and other personnel-related costs for business operations, administration, finance and accounting, legal, information systems and human resources employees. Additional expenses in this category include legal, accounting, investor relations and other professional fees, insurance, public company expenses, including costs associated with Sarbanes-Oxley Act compliance, travel and other related overhead. We expect our general and administrative expenses to increase in absolute dollars in future periods as a result of operating in accordance with the Sarbanes-Oxley Act.

Depreciation and Amortization Expense. Depreciation and amortization expense primarily consists of our depreciation expense related to investments in property, equipment and software as well as the amortization of certain intangible assets. 

Interest Expense and Other Income, Net 

Interest and other income (expense), net consist primarily of interest income, interest expense, patent expense, sublease income and foreign exchange transaction gains and losses. Sublease expense is included in the comparative period only. In the current year sublease expense is included in operating expense in accordance with ASC 842 (Leases). Interest income is derived from interest received on our cash and cash equivalents.  Interest expense is primarily attributable to interest paid on taxes and fees to local jurisdictions   Sublease income and expense is attributable to subleases on our former corporate headquarters. As of September 30, 2019 and December 31, 2018, we did not have any outstanding borrowings under our credit facility.

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Provision for Income Taxes 

Provision for income taxes consists of minimum U.S. state and local taxes, as well as income taxes in foreign jurisdictions in which we conduct business.

Income from Discontinued Operation

For the year ended December 31, 2018, loss from discontinued operations consisted of working capital adjustments related to the sale of the Company’s divested buyer platform.

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The following table is a summary of our consolidated statements of operations data for each of the periods indicated.  

	Three Months Ended September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage of Revenue		Amount		Percentage of Revenue
	(dollars in thousands)
Consolidated Statements of Operations Data:
Revenue	$	16,564	100.0	%	$	13,478	100.0	%	$	48,402	100.0	%	$	35,509	100.0	%
Cost of revenue	3,419		20.6		1,868		13.9		9,338		19.3		4,032		11.4
Gross profit	13,145		79.4		11,610		86.1		39,064		80.7		31,477		88.6
Operating expenses:
Technology and development	2,936		17.7		2,432		18.0		8,531		17.6		7,044		19.8
Sales and marketing	6,682		40.3		5,840		43.3		19,784		40.9		18,778		52.9
General and administrative	6,839		41.3		4,306		32.0		21,204		43.8		14,670		41.3
Restructuring costs	—		—		32		0.2		—		—		149		0.4
Depreciation and amortization	345		2.1		523		3.9		1,153		2.4		3,198		9.0
Total operating expenses	16,802		101.4		13,133		97.4		50,672		104.7		43,839		123.5	%
Loss from continuing operations	(3,657)		(22.1)		(1,523)		(11.3)		(11,608)		(24.0)		(12,362)		(34.8)
Total interest expense and other income, net	909		5.5		45		0.3		3,095		6.4		1,843		5.2
Loss from continuing operations before provision for income taxes	(2,748)		(16.6)		(1,478)		(11.0)		(8,513)		(17.6)		(10,519)		(29.6)
Provision for income taxes	53		0.3		103		0.8		104		0.2		146		0.4
Loss from continuing operations, net of income taxes	(2,801)		(16.9)		(1,581)		(11.7)	%	(8,617)		(17.8)	%	(10,665)		(30.0)	%
Total income from discontinued operations, net of income taxes	—		—		—		—		—		—		(136)		(0.4)
Net loss	$	(2,801)	(16.9)	%	$	(1,581)	(11.7)	%	$	(8,617)	(17.8)	%	$	(10,801)	(30.4)	%

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Comparison for the Three and Nine Months Ended September 30, 2019 and 2018

	Three Months Ended September 30,				Change Increase/ (Decrease)				Nine Months Ended September 30,				Change Increase/ (Decrease)
	2019		2018		Amount		Percentage		2019		2018		Amount		Percentage
	(dollars in thousands)
Revenue	$	16,564	$	13,478	$	3,086	23.0	%	$	48,402	$	35,509	$	12,893	36.3	%

Revenue

Our revenue during the three months ended September 30, 2019 increased to $16.6 million from $13.5 million for the same period in 2018, an increase of 23.0%. The year-over-year increase in our revenue was primarily driven by growth in revenue from CTV, which increased 115% year-over-year to $7.3 million.

Our revenue during the nine months ended September 30, 2019, increased to $48.4 million from $35.5 million for the same period in 2018, an increase of 36.3%. The year-over-year increase in our revenue was primarily driven by growth in revenue from CTV, which increased 134% year-over-year to $19.6 million, as well as from incremental contributions from our SlimCut business which we acquired in June 2018.

Cost of Revenue, Gross Profit and Gross Margin 

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
Cost of revenue	$	3,419		$	1,868		$	1,551	83.0	%	$	9,338		$	4,032		$	5,306	131.6	%
Gross profit	13,145			11,610			1,535		13.2	%	39,064			31,477			7,587		24.1	%
Gross margin	79.4		%	86.1		%					80.7		%	88.7		%

Our cost of revenue during the three months ended September 30, 2019, increased to $3.4 million from $1.9 million for the three months ended September 30, 2018. The increase in our cost of revenue primarily reflects an increase in hosting fees corresponding with additional spend being transacted through our platform, as well as an increase in cost of inventory relating to transactions that we report on a gross basis.

Our gross profit during the three months ended September 30, 2019, increased by $1.5 million or 13.2%, compared to the three month period ended September 30, 2018. This reflects an increase in our revenue of $3.1 million, year-over-year, which was partially offset by a $1.6 million increase in our cost of revenue year-over-year.

Our gross margin decreased to 79.4% for the three months ended September 30, 2019, compared to 86.1% for the three months ended September 30, 2018. The decrease in our gross margin was driven primarily by a change in the relative contribution to revenue from transactions reported on a gross basis, as well as an increase in web hosting fees.

Our cost of revenue during the nine months ended September 30, 2019, increased to $9.3 million from $4.0 million for the nine months ended September 30, 2018. The increase in our cost of revenue primarily reflects an increase in hosting fees corresponding with additional spend being transacted through our platform, as well as an increase in cost of inventory relating to transactions that we report on a gross basis.

Our gross profit during the nine months ended September 30, 2019, increased by $7.6 million or 24.1%, compared to the prior year period. This reflects an increase in revenue of $12.9 million, year-over-year, which was partially offset by a $5.3 million increase in our cost of revenue year-over-year.

Gross margin decreased to 80.7% for the nine months ended September 30, 2019, compared to 88.7%, for the nine months ended September 30, 2018. The decrease in our gross margin was driven primarily by a change in the relative contribution to revenue from transactions reported on a gross basis, specifically revenue from certain business lines that we acquired in connection with our acquisition of SlimCut in June 2018, as well as an increase in web hosting costs.

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Technology and Development Expense 

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
Technology and development expense	$	2,936		$	2,432		$	504	20.7	%	$	8,531		$	7,044		$	1,487	21.1	%
% of total revenue	17.7		%	18.0		%					17.6		%	19.8		%

Technology and development expense during the three months ended September 30, 2019, compared to the three months ended September 30, 2018, was primarily attributable to an increase of $0.5 million in compensation expense due to an increase in headcount during the quarter.

Technology and development expense during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, was primarily attributable to an increase of $1.4 million in compensation expense due to an increase in headcount during the year.

Sales and Marketing Expense 

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
Sales and marketing expense	$	6,682		$	5,840		$	842	14.4	%	$	19,784		$	18,778		$	1,006	5.4	%
% of total revenue	40.3		%	43.3		%					40.9		%	52.9		%

Sales and marketing expense increased during the three months ended September 30, 2019, compared to the three months ended September 30, 2018, reflecting an increase of $1 million in compensation expense, partially offset by rent expense reclassified to general and administrative expense as a result of the implementation of ASC 842 (Leases).

Sales and marketing expense increased during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, reflecting an increase of $2.3 million in compensation expense, partially offset by a $1.3 million in rent expense reclassified to general and administrative expense as a result of the implementation of ASC 842 (Leases).

General and Administrative Expense 

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
General and administrative expense	$	6,839		$	4,306		$	2,533	58.8	%	$	21,204		$	14,670		$	6,534	44.5	%
% of total revenue	41.3		%	31.9		%					43.8		%	41.3		%

The increase in general and administrative expense during the three months ended September 30, 2019 compared to the three months ended September 30, 2018, was primarily attributable to the adoption of ASC 842 (Leases), which resulted in $1.5 million in additional lease expense recorded in general and administrative expenses and an increase of $1.0 million in compensation expense.

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The increase in general and administrative expense during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, was primarily attributable to the adoption of ASC 842 (Leases), which resulted in $5.0 million in additional lease expense being recorded in general and administrative expenses, an increase of $1.1 million in compensation expense and an increase of $0.3 million in accounting fees.

Restructuring Costs

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
Restructuring costs	$	—		$	32		$	(32)	(100.0)	%	$	—		$	149		$	(149)	(100.0)	%
% of total revenue	—		%	0.2		%					—		%	0.4		%

During the three and nine months ended September 30, 2018, we incurred certain restructuring costs due to the relocation of our office space. We did not incur any restructuring costs during the three and nine months ended September 30, 2019.

Depreciation and Amortization Expense 

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,					Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019		2018			Amount		Percentage
	(dollars in thousands)
Depreciation and amortization expense	$	345		$	523		$	(178)	(34.0)	%	1,153		$	3,198		$	(2,045)	(63.9)	%
% of total revenue	2.1		%	3.9		%					2.4	%	9.0		%

Depreciation and amortization for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, decreased slightly which was primarily attributable to accelerated depreciation to certain leasehold improvements from the relocation of our corporate headquarters in 2018.

The decrease in depreciation and amortization expense for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018 was primarily attributable to the accelerated depreciation taken on certain leasehold improvements and furniture and fixtures at our former corporate headquarters in 2018.

Interest Expense and Other Income, Net 

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
Total interest expense and other income, net	$	909		$	45		$	864	1,920.0	%	$	3,095		$	1,843		$	1,252	67.9	%
% of total revenue	5.5		%	0.3		%					6.4		%	5.2		%

Interest expense and other income, net during the three months ended September 30, 2019, compared to the three months ended September 30, 2018 increased by $0.9 million. The increase was primarily attributable to adoption of ASC 842 Leases, which requires sublease expense to be recorded in operating expenses.

Interest expense and other income, net during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018 increased by $1.3 million. The increase was primarily attributable to adoption of ASC 842 Leases, which requires sublease expense to be recorded in operating expenses.

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Provision for income taxes 

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
Provision for income taxes	$	53		$	103		$	(50)	(48.5)	%	$	104		$	146		$	(42)	(28.8)	%
% of total revenue	0.3		%	0.8		%					0.2		%	0.4		%

The provision for income taxes for the three and nine months ended September 30, 2019, remained relatively flat compared to the three and nine months ended September 30, 2018.

Loss from Discontinued Operations

	Three Months Ended September 30,						Change Increase / (Decrease)				Nine Months Ended September 30,						Change Increase / (Decrease)
	2019			2018			Amount		Percentage		2019			2018			Amount		Percentage
	(dollars in thousands)
Loss from discontinued operations	$	—		$	—		$	—	—	%	$	—		$	(136)		$	136	(100.0)	%
% of total revenue	—		%	—		%					—		%	(0.4)		%

For the nine months ended September 30, 2018, total loss from discontinued operations consisted of working capital adjustments relating to our sale of the buyer platform in 2017.

Liquidity and Capital Resources 

Working Capital 

The following table summarizes our cash and cash equivalents, accounts receivable, net of allowance for doubtful accounts, and working capital for the periods indicated:

	September 30,
	2019		2018
	(dollars in thousands)
Cash and cash equivalents	$	65,749	$	70,567
Accounts receivable, net of allowance for doubtful accounts	114,382		67,963
Working capital	$	41,139	$	63,639

Our cash and cash equivalents at September 30, 2019 were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return. 

Sources of Liquidity 

Cash and Cash Equivalents 

Our principal sources of liquidity are our cash and cash equivalents.  Cash and cash equivalents consist primarily of cash on deposit with banks and investments in money market funds.  Cash and cash equivalents were $65.7 million and $47.7 million as of September 30, 2019 and December 31, 2018, respectively.

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Credit Facility 

We are party to a loan and security agreement, which we refer to as our credit facility, with Silicon Valley Bank, which we refer to as our lender. Pursuant to the credit facility, we can incur revolver borrowings up to the lesser of $25.0 million and a borrowing base equal to 80.0% of eligible accounts receivable. Any outstanding principal amounts borrowed under the credit facility must be paid at maturity. Interest accrues at a floating rate equal to the lender’s prime rate and is payable monthly. We are charged a fee of 0.35% of any unused borrowing capacity, which is payable quarterly. The credit facility also includes a letter of credit, foreign exchange and cash management facility up to the full amount of available credit. The credit facility matures in January 2020. While we had no outstanding borrowings under the credit facility as of September 30, 2019 and December 31, 2018, our lender has issued standby letters of credit in favor of the landlords of our current and former headquarters and other office space totaling $3.2 million, which can be drawn down from amounts available under the credit facility.

The credit facility contains customary conditions to borrowings and events of default and negative covenants, including covenants that restrict our ability to dispose of assets, merge with or acquire other entities, incur indebtedness, incur encumbrances, make distributions to holders of our capital stock and make investments or engage in transactions with our affiliates. We are also subject to a financial covenant with respect to a minimum quick ratio, tested monthly, and Adjusted EBITDA for trailing periods which vary from three to twelve months, tested quarterly. Pursuant to an amendment to the credit facility, executed in November 2018 the Adjusted EBITDA covenant will only be tested if (i) the quick ratio falls below a certain threshold and (ii) unrestricted and unencumbered cash falls below $25.0 million. On November 6, 2019, the Company entered into an amendment to the credit facility to adjust the quick ratio. Our obligations under the credit facility are secured by substantially all of our assets other than our intellectual property, although we have agreed not to encumber any of our intellectual property without the lender’s prior written consent. Subject to certain exceptions, we are also required to maintain all of our cash and cash equivalents at accounts with the lender. We were in compliance with all covenants as of September 30, 2019 and through the date of this filing.

Operating and Capital Expenditure Requirements 

We believe our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months.  If our available cash balances and available borrowings under our credit facility are insufficient to satisfy our liquidity requirements, we will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. We may seek to raise additional funds through equity, equity-linked or debt financings. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders. 

Historical Cash Flows 

The following table summarizes our historical cash flows for the periods indicated:

	Nine Months Ended September 30,
	2019		2018
	(dollars in thousands)
Net cash provided by (used in):
Operating activities	$	14,259	$	794
Investing activities	(230)		(7,478)
Financing activities	3,768		1,120

Operating Activities 

Net cash provided by operating activities is primarily influenced by the revenue our business generates, our costs of revenue, and amounts of cash we invest in personnel, infrastructure and other operating expenses to support our business. Net cash provided by operating activities has been used to fund operations through changes in working capital, particularly in the areas of accounts receivable, accounts payable and accrued expenses, adjusted for non-cash expense items such as depreciation, amortization and stock-based compensation expenses. 

During the nine months ended September 30, 2019, our net cash provided by operating activities was $14.3 million and primarily consisted of a $13.3 million increase in net cash resulting from changes in working capital, and $9.5 million in

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adjustments for non-cash items, partially offset by a $8.6 million loss from continuing operations, net of income taxes. The components of our net loss from continuing operations are described in greater detail above under "Results of Operations." Adjustments for non-cash items consisted of $1.2 million in depreciation and amortization expense, $5.0 million in non-cash stock-based compensation expense, $3.0 million of amortization of operating lease right-of-use asset expense, $0.1 million in bad debt expense, $0.1 million of expense for loss on disposal of property, plant, and equipment and $0.1 million of amortization of acquired technology. The increase in cash resulting from changes in working capital during the nine months ended September 30, 2019 consisted of a $27.8 million increase in accounts payable and accrued expense, which was partially offset by a $3.5 million decrease in operating leases, a $0.8 million increase in other prepaid expenses and other current assets, and a $10.2 million increase in accounts receivable.

During the nine months ended September 30, 2018, our net cash provided by operating activities was $0.8 million and primarily consisted of a $5.3 million increase in net cash resulting from changes in operating assets and liabilities and an increase of $6.2 million in adjustments for non-cash items, partially offset by loss from continuing operations, net of income taxes of $10.7 million. Adjustments for non-cash items consisted of $3.2 million in depreciation and amortization expense, $2.8 million in non-cash stock-based compensation expense and bad debt expense of $0.2 million. The increase in cash resulting from changes in our working capital during the nine months ended September 30, 2018 consisted of a $14.8 million increase in accounts payable and accrued expense, a $0.6 million increase in deferred rent and security deposits payable and a $0.3 million increase in other current liabilities, partially offset by a $7.3 million increase in accounts receivable, $1.8 million increase in prepaid expenses and other current assets, $0.7 million decrease in deferred income and a $0.6 million decrease in other liabilities. The components of our net loss from continuing operations are described in greater detail above under “Results of Operations.”

Investing Activities 

For the nine months ended September 30, 2019 our net cash used in investing activities of $0.2 million consisted of the purchase of property and equipment. For the nine months ended September 30, 2018, our net cash used in investing activities of $7.5 million, consisted of the acquisition of SlimCut for initial cash payment of $4.9 million and the purchase of property and equipment of $2.6 million.

Financing Activities 

For the nine months ended September 30, 2019, our net cash provided by financing activities was $3.8 million, which consisted of $5.9 million in proceeds received from the exercise of stock option awards, and $0.5 million of proceeds in connection with shares purchased under our ESPP, which was partially offset by $1.1 million in tax payments on behalf of employees related to net share settlements of restricted stock unit awards and $1.5 million in cash payments for contingent consideration relating to our acquisition of SlimCut.

For the nine months ended September 30, 2018, our net cash provided by financing activities was $1.1 million, which consisted of $1.8 million in proceeds received from the exercise of stock option, and $0.5 million of proceeds in connection with shares purchased under our ESPP, which was partially offset by $1.2 million in tax payments on behalf of employees related to net share settlements of restricted stock unit awards.

Off-Balance Sheet Arrangements 

During the periods presented, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities. 

Critical Accounting Policies and Significant Judgments and Estimates

We prepare our unaudited interim consolidated financial statements in accordance with U.S. GAAP.  The preparation of unaudited interim consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.  We believe the estimates, assumptions and judgments involved in revenue recognition and deferred revenue, stock-based compensation expense, and accounting for income taxes have the greatest potential impact on our unaudited interim consolidated financial statements, and consider these to be our critical accounting policies and estimates. 

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There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission on March 19, 2019.

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

We are exposed to market risk primarily related to changes in interest rates and foreign currency exchange rates.  We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into hedging arrangements to manage the risks described below. 

Interest Rate Risk 

We maintain cash and a short-term investment portfolio consisting mainly of highly liquid, short-term money market funds, which we consider to be cash and cash equivalents, respectively.  The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Because our cash and cash equivalents have a relatively short maturity, our portfolio’s fair value is relatively insensitive to interest rate changes.  These investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income.  A 10% increase or decrease in interest rates occurring January 1, 2019 and sustained through the period ended September 30, 2019, would not have been material. We do not enter into investments for trading or speculative purposes. In future periods, we will continue to evaluate our investment policy relative to our overall objectives. 

We are exposed to market risks related to fluctuations in interest rates related to our $25.0 million credit facility where an increase in interest rates may result in higher borrowing costs.  Since we currently do not have any outstanding borrowings under our credit facility, the effect of a hypothetical 10% change in interest rates would not have any impact on our interest expense. 

Foreign Currency Exchange Risk 

Due to our international operations, we are exposed to foreign exchange risk related to foreign denominated revenues and costs, which must be translated into U.S. dollars. Our primary exposures are related to non-U.S. dollar denominated sales and operating expenses primarily in Australia, Brazil, France, Canada, Malaysia, Singapore, New Zealand, and the United Kingdom. The effect of a 10% increase or decrease in exchange rates on foreign denominated cash, receivables and payables would not have been material for the periods presented. Substantially all of our advertiser contracts are currently denominated in U.S. dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue. These exposures may change over time as our business practices evolve and if our exposure increases, adverse movements in foreign currency exchanges rates could have a material adverse impact on our financial results.

Inflation Risk 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Item 4. Controls and Procedures 

Evaluation of Disclosure Controls and Procedures 

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. Based on the evaluation of our disclosure

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controls and procedures as of September 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective at a reasonable assurance level. 

Changes in Internal Control over Financial Reporting 

We acquired SlimCut Media SAS, or SlimCut in June 2018. In the second quarter of 2019, we completed our review of the internal control structure of SlimCut and made appropriate changes to incorporate our controls and procedures into the acquired operations. SlimCut will be included in our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019.

Except as described in the preceding paragraph, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls 

While our management, including our Chief Executive Officer and Chief Financial Officer, design our disclosure controls and procedures and internal control over financial reporting to provide reasonable assurance of achieving their objectives, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.  These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 

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Part II  — OTHER INFORMATION 

Item 1. Legal Proceedings. 

The Company is from time to time involved with various claims and litigation arising during the normal course of business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.  Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors. 

There have been no material changes to our risk factors as compared to the risk factors described in our Annual Report on Form 10-K for the year end December 31, 2018, filed with the SEC on March 19, 2019. 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 

(a)         Recent Sales of Unregistered Equity Securities 

None 

(b)         Use of Proceeds 

None. 

(c)  Issuer Purchases of Equity Securities 

None

Item 3.  Defaults upon Senior Securities. 

Not applicable.

Item 4.  Mine Safety Disclosures. 

Not applicable. 

Item 5. Other Information. 

Not applicable.

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Item 6. Exhibits. 

(a)                  List of Exhibits 

Exhibit Number	Exhibit Description
31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1+	Certification Pursuant of Principal Executive Officer to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+	Certification Pursuant of Principal Financial Officer to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase.
101.DEF	XBRL Taxonomy Extension Definition Linkbase.
101.LAB	XBRL Taxonomy Extension Label Linkbase.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

+                     In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

TELARIA, INC.
By:	/s/ Mark Zagorski
	Mark Zagorski
	Chief Executive Officer
Date:	November 6, 2019
TELARIA, INC.
By:	/s/ John S. Rego
	John S. Rego
	Senior Vice President and Chief Financial Officer
Date:	November 6, 2019

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