ADTHEORENT HOLDING COMPANY, INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, the impact of COVID-19 on our business, operations, and the markets and communities in which we, our clients, and partners operate, results of operations, revenues, operating expenses, and capital expenditures, sales and marketing initiatives and competition. In some cases, you can identify forward-looking statements because they contain words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "suggests," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements. We discuss many of these risks in our Annual Report on Form 10-K for the year endedDecember 31, 2021 in greater detail under the heading "Item 1A. Risk Factors" and in other filings we make from time to time with theSecurities and Exchange Commission ("SEC"). Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q, which are inherently subject to change and involve risks and uncertainties. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements. Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed with theSEC , including our Annual Report on Form 10-K for the year endedDecember 31, 2021 , completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
References to "Notes" are notes included in our unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Unless otherwise indicated, the terms "AdTheorent ," "Company," "we," "us," or "our" refer toAdTheorent Holding Company, Inc. , together with its consolidated subsidiaries. Business Overview
Founded in 2012, we are a digital media platform which focuses on performance-first, privacy-forward methods to execute programmatic digital advertising campaigns, serving both advertising agency and brand customers. Without relying on individualized profiles or sensitive personal data for targeting, we utilize machine learning and advanced data analytics to make programmatic digital advertising more effective and efficient at scale, delivering measurable real-world value for advertisers. Our differentiated advertising capabilities and superior campaign performance, measured by customer-defined business metrics, or KPIs, have helped fuel our customer adoption and year-after-year growth.
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We use machine learning and advanced data science to organize, analyze and
operationalize non-sensitive data to deliver real-world value for customers.
Central to our ad-targeting and campaign optimization methods, we build custom
machine learning models for each campaign using historic and real-time data to
predict future consumer conversion actions for every digital ad impression. We
have integrations with Ad Exchanges/Supply Side Platforms (SSPs), from which we
are sent ad impression opportunities to evaluate and purchase. We predictively
score all of these ad impression opportunities for the purpose of deciding which
ad impressions will likely drive valuable conversions or engagement activity for
our customers. Our predictive platform scores over one million digital ad
impressions per second and 75 billion to 90 billion digital ad impressions per
day, assigning a "predictive score" to each. Each predictive score is determined
by correlating non-individualized data attributes associated with the particular
impression with data corresponding to previously purchased impressions that
yielded consumer conversion or engagement activity. Such non-individualized
attributes include variables such as publisher, content and URL keywords, device
make, device operating system and other device attributes, ad position,
geographic data, weather, demographic signals, creative type, and size, etc. The
"predictive scores" generated by our platform allow us and our advertising
clients to determine which ad impressions are more likely or less likely to
result in client-desired KPIs. Our machine learning models are customized for
every campaign and our platform "learns" over the course of each campaign as it
processes more data related to post media view conversion experience. Based on
these statistical probabilities or "predictive scores," our platform
automatically determines bidding optimizations to drive conversions and
advertiser return on investment ("ROI") or return on advertising spend ("ROAS"),
bidding on less than .001 of the evaluated impressions. Our use of machine
learning and data science helps us to maximize efficiency and performance,
enabling our customers to avoid wasted ad spend related to suboptimal
impressions such as impressions that are predicted to be at a greater risk for
fraud/invalid traffic or impressions with a higher likelihood of being
unviewable, unmeasurable, or not brand safe, among other factors.
Our capabilities extend across the digital ecosystem to identify and engage
digital actors with the highest likelihood of completing customer-desired
actions, including online sales, other online actions, and real-world actions
such as physical location visitation, in-store sales or vertical specific KPI's
such as prescription fills/lift or submitted credit card applications. Our
custom and highly impactful campaign executions encompass popular digital
screens - mobile, desktop, tablet, connected TV ("CTV") - and all digital ad
formats, including display, rich media, video, native, and streaming audio. We
actively manage our digital supply to provide advertisers with scale and reach,
while minimizing redundant inventory, waste and other inefficiencies. Our CTV
capability delivers scale and reach supplemented by innovative and industry
recognized machine-learning optimizations towards real-world actions and
value-added measurement services.
Our platform and machine learning-based targeting provide privacy advantages
that are lacking from alternatives which rely on individual user profiles or
cookies employing a "one-to-one" approach to digital ad targeting. Our targeting
approach is statistical, not individualized, and as a result we do not need to
compile or maintain user profiles, and we do not rely on cookies or user
profiles for targeting. Our solution-set is especially valuable to regulated
customers, such as financial institutions and pharmaceutical companies, and
other privacy-forward advertisers who desire efficient and effective digital
ad-targeting without individualized or personal targeting data. We adhere to
data usage protocols and model governance processes which help to ensure that
each customer's data is safeguarded and used only for that customer's benefit,
and we take a consultative and collaborative approach to data use best practices
with all of our customers.
Supplementing our core machine learning-powered platform capabilities, we offer
customized vertical solutions to address the needs of advertisers in specialized
industries. These specialized solutions feature vertical-specific capabilities
related to targeting, measurement and audience validation. Our healthcare and
pharmaceutical offering ("AdTheorent Health ", formerly AdTheorentRx), harnesses
the power of machine learning to drive superior performance on campaigns
targeting both healthcare providers and patients, leveraging HIPAA-compliant
methods and targeting practices that comply with Network Advertising Initiative
Code and other self-regulatory standards. Our banking, financial services and
insurance ("BFSI") solutions drive real-world performance within the context of
regulatory requirements and data use best practices intended to prevent
discrimination and the use of "prohibited basis variables" in the promotion of
federally regulated credit-extension products. We have created additional
industry-tailored offerings to address the unique challenges and opportunities
in a growing range of other verticals including retail, automotive,
government/education/nonprofit, consumer packaged goods, dining, and
entertainment.
Factors Affecting Our Performance
Growth of the Programmatic Advertising Market
Our operating results and prospects will be impacted by the overall continued
adoption of programmatic advertising by inventory owners and content providers,
as well as advertisers and the agencies that represent them. Programmatic
advertising has grown rapidly in recent years; however, recent negative
macro-economic sentiment has impacted advertiser spending. Any acceleration, or
slowing, of programmatic advertising growth, due to macro-economic factors or
otherwise, would affect
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our operating and financial performance. In addition, even if the programmatic
advertising market continues to grow at its current rate, our ability to
successfully position ourself within the market will impact the future growth of
the business.
Investment in Platform and Solutions to Provide Continued Differentiation in Evolving Market
We believe that the capabilities and differentiation offered by our platform and solutions have been critical to our historical growth. Continued innovation in an evolving programmatic marketplace will be an important driver of our future growth. We anticipate that operating expenses will increase in the foreseeable future as the Company invests in platform operations and technology, data science and machine learning capabilities, and data infrastructure and tools to enhance our custom solutions and value-added offerings. We believe that these investments will contribute to our long-term growth, although they may have a negative impact on profitability in the near-term.
Growth in and Retention of Customer Spend
We are making incremental investments in sales and marketing to acquire new customers and increase existing customers' usage of our platform and solutions. We believe that there is significant room for growth within our existing customers, which include many large global brands and advertising agencies. Future revenue and profitability growth depends upon our ability to cost effectively on-board new customers and our on-going ability to retain and scale existing customers.
Our growth has and may continue to be impacted in the remainder of 2022 by macroeconomic factors beyond our control such as inflation, rising interest rates, pandemic related factors, global geopolitical uncertainties, among other things, as well as anticipated further year-over-year declines in our acquisition of new customers.
Ability to Continue to Access High Performing Media Inventory in Existing and Emerging Channels
Our ability to deliver upon clients' targeted key performance indicators is reliant upon our ability to access high quality media inventory across multiple advertising channels at scale. Our future growth will depend on our ability to maintain and grow spend on existing and emerging channels, including advertising on display, rich media, native, video and audio ad formats across mobile, desktop, and CTV formats.
Development of International Markets
Although almost all of our historic revenue is attributable to campaigns and operations inthe United States andCanada , we are exploring opportunities to serve new international markets, including serving the global needs of existing customers. We believe that the global opportunity for programmatic advertising is significant and should continue to expand as publishers and advertisers outsidethe United States andCanada increasingly seek to adopt the benefits that programmatic advertising provides. We believe that our privacy-forward approach to ad targeting and data usage will provide desired differentiation and value in highly and increasingly regulated markets such as the EU, which is subject to the General Data Protection Regulation ("GDPR"). Our ability to efficiently expand into new markets will affect our operating results.
Managing Seasonality
The global advertising industry experiences seasonal trends that affect the vast majority of participants in the digital advertising ecosystem. Most notably, advertisers have historically spent relatively more in the fourth quarter of the calendar year to coincide with the holiday shopping season, and relatively less in the first quarter. In addition to the impact on revenue, seasonal demand for advertising inventory also has a corresponding impact on media costs that increase or decrease with seasonal demand, which impacts profitability. We expect seasonality trends to continue, and our ability to manage resources in anticipation of these trends could affect operating results.
Key Business Metric
To analyze our business performance, determine financial forecasts and help develop long-term strategic plans, we review the following key business metric:
Active Customers
We track active customers, which are defined as our customers who spent over$5,000 during the previous twelve months. We monitor active customers to help understand our revenue performance. Additionally, monitoring active customers 25 --------------------------------------------------------------------------------
helps us understand the nature and extent to which the active customer base is growing, which assists management in establishing operational goals.
The number of active customers as ofSeptember 30, 2022 was 339 and as ofSeptember 30, 2021 was 306, increasing by 33 customers, or 11%, respectively, year over year. The number of active customers as ofDecember 31, 2021 was 309, for a year to date increase of 30 customers, or 10%.
Results of Operations
The period-to-period comparisons of our results of operations have been prepared using the historical periods included in our Condensed Consolidated Financial Statements. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this document as well as the Consolidated Financial Statements within our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSEC , for additional information regarding the components of our results of operations and our accounting policies.
Three and Nine Months Ended
The following table summarizes our historical results of operation for the
periods presented:
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
(in thousands) (% of Revenue) (in thousands) (% of Revenue) (in thousands) (% of Revenue)
(in thousands) (% of Revenue)
Revenue $ 37,584 100.0 % $ 39,534 100.0 % $ 114,301 100.0 % $ 110,368 100.0 %
Operating expenses:
Platform operations 19,581 52.1 % 19,217 48.6 % 58,207 50.9 % 52,368 47.4 %
Sales and marketing 11,127 29.6 % 9,209 23.3 % 32,540 28.5 % 25,689 23.3 %
Technology and
development 3,955 10.5 % 2,913 7.4 % 12,393 10.8 % 8,046 7.3 %
General and
administrative 4,729 12.6 % 3,073 7.8 % 15,433 13.5 % 13,187 11.9 %
Total operating expenses 39,392 104.8 % 34,412 87.0 % 118,573 103.7 % 99,290 90.0 %
(Loss) income from
operations (1,808 ) -4.8 % 5,122 13.0 % (4,272 ) -3.7 % 11,078 10.0 %
Interest income
(expense), net 97 0.3 % (598 ) -1.5 % (59 ) -0.1 % (1,808 ) -1.6 %
Gain on change in fair
value of Seller's
Earn-Out 2,901 7.7 % - 0.0 % 15,664 13.7 % - 0.0 %
Gain on change in fair
value of warrants 5,674 15.1 % - 0.0 % 8,261 7.2 % - 0.0 %
Gain on deconsolidation
of SymetryML - 0.0 % - 0.0 % 1,939 1.7 % - 0.0 %
Loss on change in fair
value of SAFE Notes - 0.0 % - 0.0 % (788 ) -0.7 % - 0.0 %
Loss on fair value of
investment in SymetryML
Holdings (39 ) -0.1 % - 0.0 % (49 ) 0.0 % - 0.0 %
Other (expense) income,
net (5 ) 0.0 % - 0.0 % (24 ) 0.0 % 20 0.0 %
Total other income
(expense), net 8,628 23.0 % (598 ) -1.5 % 24,944 21.8 % (1,788 ) -1.6 %
Income from operations
before income taxes 6,820 18.1 % 4,524 11.4 % 20,672 18.1 % 9,290 8.4 %
(Provision) benefit for
income taxes (1,095 ) -2.9 % (1,569 ) -4.0 % 540 0.5 % (3,141 ) -2.8 %
Net income $ 5,725 15.2 % $ 2,955 7.5 % $ 21,212 18.6 % $ 6,149 5.6 %
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Revenue
Change
2022 2021 $ %
Three Months Ended
Total revenue decreased$2.0 million , or 4.9%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The largest drivers of the decrease were in the BFSI (impacted by the automotive finance and insurance), government/education/nonprofit, consumer packaged goods and industry/agriculture verticals which collectively decreased by$5.6 million , or 31.0%. Offsetting these decreases were increases in theAdTheorent Health , real estate, and services verticals totaling approximately$3.5 million , or 39.6%. Included in the offsetting increase was the continued increase of CTV revenue which grew$1.0 million , or 36.3%. Total revenue increased$3.9 million , or 3.6%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30 , 2021.The largest drivers of the growth were in theAdTheorent Health , retail, real estate, and software/websites verticals, which collectively increased$10.6 million , or 27.9%, Offsetting these increases were decreases in the BFSI (impacted by the automotive finance and insurance), government/education/nonprofit, and industry/agriculture verticals totaling$7.0 million , or 16.5%. Overall, the revenue increase was driven by continued increased CTV revenue which grew$3.8 million , or 59.4%.
Operating expenses
Change
2022 2021 $ %
Three Months Ended
Operating expenses increased$5.0 million , or 14.5%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 , and operating expenses increased$19.3 million , or 19.4% for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Refer to the discussion below for further details of these variances.
Platform operations
Change
2022 2021 $ %
Three Months Ended
Platform operations expenses increased by$0.4 million , or 1.9%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The increase was mainly attributable to hiring-driven increases in our media operations, data science, and technology teams of$0.5 million and an increase in equity-based compensation of$0.5 million . There was also an increase in our data infrastructure expense, attributable to data used in our platform which is not related to any specific campaign of$0.4 million , and volume-driven increases in hosting expense of approximately$0.2 million . The increases were offset by revenue driven traffic acquisition costs which decreased approximately$1.1 million , or 8.2% Platform operations expenses increased$5.8 million , or 11.1%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The increase was mainly attributable to hiring-driven increases in our media operations, data science, and technology teams of$1.7 million and an increase in equity-based compensation of$1.4 million . Volume-driven increases in hosting expense of approximately$1.1 million , revenue driven traffic acquisition costs of$0.9 million , and data used in our platform which is not related to any specific campaign, of$0.7 million also contributed to the increase. 27 --------------------------------------------------------------------------------
Sales and marketing
Change
2022 2021 $ %
Three Months Ended
Sales and marketing expenses increased$1.9 million , or 20.8%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 primarily due to a$1.0 million increase in employee expenses related to hiring for the sales and customer support teams, a$0.9 million increase in equity-based compensation, and an increase of$0.4 million for travel-related expenses as sales personnel continue to resume more traditional business travel routines. Sales and marketing expenses increased$6.9 million , or 26.7%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 primarily due to a$3.2 million increase in employee expenses related to hiring for the sales and customer support teams, a$2.8 million increase in equity-based compensation, and an increase of$1.2 million for travel-related expenses as sales personnel continue to resume more traditional business travel routines. The increase is offset by a decrease in sales commissions of$0.5 million due to shortfalls relative to baseline revenue targets.
Technology and development
Change
2022 2021 $ %
Three Months Ended
Technology and development expenses increased$1.0 million , or 35.8%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . The increase was mainly due to$0.8 million of incremental software expense incurred, an increase of$0.6 million in employee related costs to support technology and product development, and an increase of$0.4 million in equity-based compensation. The increase was offset by a decrease of$0.5 million in technology and development expenses related to the deconsolidation ofSymetryML Holdings onMarch 31, 2022 . Technology and development expenses increased$4.3 million , or 54.0%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The increase was mainly due to$2.8 million of incremental software expense incurred, a$1.8 million increase in employee related costs to support technology and product development, and an increase of$1.4 million in equity-based compensation. The increase was offset by a decrease of$1.3 million in technology and development expenses related to the deconsolidation ofSymetryML Holdings onMarch 31, 2022 .
For further information on the deconsolidation of
General and administrative
Change
2022 2021 $ %
Three Months Ended
General and administrative expenses increased$1.7 million , or 53.9%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 primarily due to increases of$0.8 million in equity-based compensation,$0.8 million of insurance expense mainly driven by directors and officers insurance incurred, and$0.5 million of employee expenses related to hiring for the general and administrative teams. The increases were offset by a decrease in professional service expenses of$0.4 million due to prior year incurred costs related to public company readiness, including pre-public launch elevated legal and consulting costs. 28 -------------------------------------------------------------------------------- General and administrative expenses increased$2.2 million , or 17.0%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 primarily due increases of$2.7 million in equity-based compensation,$2.4 million of insurance expense mainly driven by directors and officers insurance incurred in the nine months endedSeptember 30, 2022 ,$1.1 million in employee expenses related to hiring for the general and administrative teams, and$0.2 million in public filing and registration related fees. These increases were offset by a one-time lease termination fee of approximately$4.2 million expensed in the nine months endedSeptember 30, 2021 for terminating our primaryNew York City headquarters office lease as we negotiated a more cost-effective lease in the same building to reduce future rent obligations. Interest income (expense) Change 2022 2021 $ %
Three Months Ended
Interest income (expense), net had a net change of$0.7 million , or 116.2%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 primarily due to a decrease in interest expense of$0.5 million directly related to the reduction in loan principal balance. Additionally, in the three months endedSeptember 30, 2022 , we earned$0.2 million related to a money market mutual fund account opened inJanuary 2022 . Interest income (expense), net changed$1.7 million , or 96.7%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 primarily due to a decrease in interest expense of$1.5 million directly related to the reduction in loan principal balance. Additionally, in the three months endedSeptember 30, 2022 , we earned$0.2 million related to a money market mutual fund account opened inJanuary 2022 .
Gain on change in fair value of Seller's Earn-Out
Change
2022 2021 $ %
Three Months Ended
For the three months endedSeptember 30, 2022 , the fair value of the Seller's Earn-Out liability decreased$2.9 million resulting in a gain of this amount. The decrease in fair value was primarily a result of the decrease in our stock price fromJune 30, 2022 toSeptember 30, 2022 . For the nine months endedSeptember 30, 2022 , the fair value of the Seller's Earn-Out liability decreased$15.7 million resulting in a gain for this amount. The decrease in fair value was primarily a result of the decrease in our stock price fromDecember 31, 2021 toSeptember 30, 2022 . The Seller's Earn-Out was a result of the Business Combination onDecember 22, 2021 , as detailed in Note 3 - Business Combination included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 29 --------------------------------------------------------------------------------
Gain on change in fair value of warrants
Change
2022 2021 $ %
Three Months Ended
For the three months endedSeptember 30, 2022 , the fair value of the warrants liability decreased$5.7 million , resulting in a gain for this amount. The decrease in fair value was primarily a result of the decrease in our stock price fromJune 30, 2022 toSeptember 30, 2022 . For the nine months endedSeptember 30, 2022 , the fair value of the warrants liability decreased$8.3 million , resulting in a gain for this amount. The decrease in fair value was primarily a result of the decrease in our stock price fromDecember 31, 2021 toSeptember 30, 2022 .
The warrants were assumed by the Company in connection with the Business
Combination on
Benefit (provision) for income taxes
Change
2022 2021 $ %
Three Months Ended
Provision for income taxes changed
Benefit (provision) for income taxes changed$3.7 million for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . The AETR for the nine months endedSeptember 30, 2022 and 2021 was 9.4% and 33.8%, respectively. The AETR for the nine months endedSeptember 30, 2022 was less than the statutory rate of 21% primarily due to meals and entertainment and executive equity-based compensation not deductible for tax purposes. Additionally, we did not include any fair value adjustments not reasonably estimable for the full year in the calculation of our AETR, such as the Seller's Earn-out and warrant liabilities as we cannot project the full-year impact of these specific items.
Non-GAAP Financial Information
We calculate and monitor certain non-GAAP financial measures to help set budgets, establish operational goals, analyze financial results and performance, and make strategic decisions. We also believe that the presentation of these non-GAAP financial measures provides an additional tool for investors to use in comparing our results of operations over multiple periods. However, the non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. The non-GAAP financial measures presented should not be considered as the sole measure of our performance, and should not be considered in isolation from, or a substitute for, comparable financial measures calculated in accordance with generally with accepted accounting principles inthe United States ("GAAP"). The information in the table below sets forth the non-GAAP financial measures that we monitor. Because of the limitations associated with these non-GAAP financial measures, "Adjusted Gross Profit," "EBITDA," "Adjusted EBITDA," "Adjusted Gross Profit as a % of Revenue" and "Adjusted EBITDA as a percent of Adjusted Gross Profit" should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures on a supplemental basis. You should review the reconciliation of the non-GAAP financial measures below and not rely on any single financial measure to evaluate our business. Adjusted Gross Profit
Adjusted Gross Profit is a non-GAAP profitability measure. Adjusted Gross Profit is a non-GAAP financial measure of campaign profitability, monitored by management and the Board, used to evaluate our operating performance and trends,
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develop short- and long-term operational plans, and make strategic decisions
regarding the allocation of capital. We believe this measure provides a useful
period to period comparison of campaign profitability and is useful information
to investors and the market in understanding and evaluating our operating
results in the same manner as our management and Board. Gross profit is the most
comparable GAAP measurement, which is calculated as revenue less platform
operations costs. In calculating Adjusted Gross Profit, we add back other
platform operations costs, which consist of amortization expense related to
capitalized software, depreciation expense, allocated costs of personnel which
set up and monitor campaign performance, and platform hosting, license, and
maintenance costs, to gross profit.
The following table presents the calculation of gross profit and reconciliation
of gross profit to Adjusted Gross Profit for the three and nine months ended
September 30, 2022 and 2021.
Nine Months Ended September
Three Months Ended September 30, 30,
2022 2021 2022 2021
(in thousands)
Revenue $ 37,584 $ 39,534 $ 114,301 $ 110,368
Less: Platform operations 19,581 19,217 58,207 52,368
Gross Profit 18,003 20,317 56,094 58,000
Add back: Other platform operations 6,739 5,228 19,979 14,995
Adjusted Gross Profit (1) $ 24,742 $ 25,545 $ 76,073 $ 72,995
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP financial measure defined by us as net income (loss),
before interest expense, net, depreciation, amortization and income tax expense.
Adjusted EBITDA is defined as EBITDA before stock compensation expense, Business
Combination transaction costs, management fees, non-core operations and other
non-recurring items.
Collectively these non-GAAP financial measures are key profitability measures
used by our management and Board to understand and evaluate our operating
performance and trends, develop short-and long-term operational plans, measure
performance goals in employee equity incentive awards, and make strategic
decisions regarding the allocation of capital. We believe that these measures
can provide useful period-to-period comparisons of campaign profitability.
Accordingly, we believe that these measures provide useful information to
investors and the market in understanding and evaluating our operating results
in the same manner as our management and the Board.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Net income $ 5,725 $ 2,955 $ 21,212 $ 6,149
Interest (income) expense, net (97 ) 598 59 1,808
Tax provision (benefit) 1,095 1,569 (540 ) 3,141
Depreciation and amortization 1,973 2,130 6,015 6,354
EBITDA (1) $ 8,696 $ 7,252 $ 26,746 $ 17,452
Equity based compensation 2,783 110 8,627 382
Seller's Earn-Out equity-based
compensation 373 - 1,364 -
Transaction costs (2) - 907 (131 ) 3,345
Gain on change in fair value of Seller's
Earn-Out (3) (2,901 ) - (15,664 ) -
Gain on change in fair value of warrants
(4) (5,674 ) - (8,261 ) -
Gain on deconsolidation of SymetryML (5) - - (1,939 ) -
Loss on change in fair value of SAFE
Notes (6) - - 788 -
Loss on fair value of investment in
SymetryML Holdings 39 - 49 -
Separation expense related to headcount
reductions 270 - 270 -
Management fees (7) - 218 - 653
Lease termination fee - - - 4,243
Non-core operations (8) - 462 351 1,656
Adjusted EBITDA (1) $ 3,586 $ 8,949 $ 12,200 $ 27,731
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Adjusted EBITDA as a Percentage of Adjusted Gross Profit and Adjusted Gross Profit as a Percentage of Revenue
Three Months Ended September Nine Months Ended September
30, 30,
2022 2021 2022 2021
(in thousands, except for percentages)
Gross Profit $ 18,003 $ 20,317 $ 56,094 $ 58,000
Net income $ 5,725 $ 2,955 $ 21,212 $ 6,149
Net income as a % of Gross Profit 31.8 % 14.5 % 37.8 % 10.6 %
Adjusted Gross Profit (1) $ 24,742 $ 25,545 $ 76,073 $ 72,995
Adjusted EBITDA (1) $ 3,586 $ 8,949 $ 12,200 $ 27,731
Adjusted EBITDA as a % of Adjusted Gross
Profit (1) 14.5 % 35.0 % 16.0 % 38.0 %
Gross Profit $ 18,003 $ 20,317 $ 56,094 $ 58,000
Revenue $ 37,584 $ 39,534 $ 114,301 $ 110,368
Gross Profit as a % of Revenue 47.9 % 51.4 % 49.1 % 52.6 %
Revenue $ 37,584 $ 39,534 $ 114,301 $ 110,368
Adjusted Gross Profit (1) $ 24,742 $ 25,545 $ 76,073 $ 72,995
Adjusted Gross Profit as a % of Revenue
(1) 65.8 % 64.6 % 66.6 % 66.1 %
(1)
We use non-GAAP financial measures to help set budgets, establish operational
goals, analyze financial results and performance, and make strategic decisions.
(2)
Includes incurred transaction-related expenses and costs related to strategic
initiatives in the three and nine months ended September 30, 2021 which were
suspended due to the COVID-19 pandemic. In the three and nine months ended
September 30, 2022 , included professional fees directly related to the Business
Combination.
(3)
In connection with the Business Combination, a Seller's Earn-Out liability was
recorded. The gain represents the decrease in fair value of the Seller's
Earn-Out in the three and nine months ended September 30, 2022 .
(4)
In connection with the Business Combination, a liability for warrants was
recorded. The gain represents the decrease in fair value of the warrants in the
three and nine months ended September 30, 2022 .
(5)
On March 31, 2022 , we deconsolidated SymetryML which resulted in a gain. Refer
to Note 18 - SymetryML and SymetryML Holdings of our Condensed Consolidated
Financial Statements, included elsewhere in this Form 10-Q, for more
information.
(6)
On March 31, 2022 , in connection with the deconsolidation of SymetryML, the SAFE
Notes we performed a valuation of the SAFE notes on that date which resulted in
a loss. Refer to Note 18 - SymetryML and SymetryML Holdings of our Condensed
Consolidated Financial Statements, included elsewhere in this Form 10-Q, for
more information.
(7)
On December 22, 2016 , we closed a growth recapitalization transaction with
H.I.G. Capital . The agreements related to fees paid to H.I.G. Capital were
discontinued effective December 22, 2021 , the closing date of the Business
Combination.
(8)
Effective as of March 1, 2020 , we effectuated a contribution of our SymetryML
department into a new subsidiary, SymetryML, Inc. We periodically raised capital
to fund Symetry operations by entering into Simple Agreement for Future Equity
Notes ("SAFE Note") with several parties. We viewed SymetryML operations as
non-core, and did not fund future operational expenses incurred in excess of
SAFE Note funding secured. Effective March 31, 2022 , we no longer consolidate
SymetryML. Refer to Note 18 - SymetryML and SymetryML Holdings of our Condensed
Consolidated Financial Statements, included elsewhere in this Form 10-Q, for
more information.
Liquidity and Capital Resources
Our business requires substantial amounts of cash for operating activities,
including salaries and wages paid to our employees, development expenses,
general and administrative expenses, and others. As of
As ofSeptember 30, 2022 , our working capital was$97.2 million . All amounts previously drawn on our Revolving Credit Facility, as defined below were re-paid inJanuary 2022 and we do not anticipate a need to borrow on this facility in the immediate future. We believe we have sufficient sources of liquidity, including cash generated from operations as well as the capacity on the Revolving Credit Facility, to support our operating needs, capital requirements, and debt service requirements for the next twelve months. 32 -------------------------------------------------------------------------------- The accompanying Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our purchase commitments per our standard terms and conditions with our suppliers and vendors are cancellable in whole or in part with or without cause prior to delivery. If we terminate an order, we will have no liability beyond payment of any balances owing for goods or services delivered previously.
Silicon Valley Bank Revolver
OnSeptember 21, 2017 , Legacy AdTheorent, as defined in Note 1 - Description of Business included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , entered into a Loan and Security agreement ("Loan and Security Agreement") withSilicon Valley Bank ("SVB"). The original Loan and Security Agreement consisted of a revolving line ("SVB Revolver") and letters of credit ("Letters of Credit"). The SVB Revolver is available on demand and accrues interest at Prime (as defined in the Loan and Security Agreement) plus 2.5% and interest shall be payable monthly. The borrowing base of the SVB Revolver is 80.0% of the Company's eligible accounts receivable. Upon expiration, all outstanding principal and interest are due. The collections of our accounts receivable are applied to the outstanding loan balance daily. Since the inception of the Loan and Security Agreement, Legacy AdTheorent has entered into several amendments, primarily to extend the term of the agreement. OnDecember 22, 2021 , we entered into a senior secured credit facilities credit agreement (the "Senior Secured Agreement") with SVB. The Senior Secured Agreement allows us to borrow up to$40.0 million in a revolving credit facility ("Revolving Credit Facility"), including a$10.0 million sub-limit for letters of credit and a swing line sub-limit of$10.0 million . The Revolving Credit Facility commitment termination date isDecember 22, 2026 . We accounted for the Senior Secured Agreement as a debt modification. In accordance with the Senior Secured Agreement there are two types of revolving loan, either a Secured Overnight Financing Rate Loan ("SOFR Loan") loan or an ABR Alternate Base Rate Loan ("ABR Loan"). The revolving loans may from time to time be SOFR Loans or ABR Loans, as determined by the Company. Interest shall be payable quarterly based on the type of loan.
a)
Each SOFR Loan bears interest for each day at a rate per annum equal to Adjusted Term SOFR, as defined in the Senior Secured Agreement, plus the Applicable Margin, as defined in the Senior Secured Agreement. The Applicable Margin can vary between 2.00% and 2.50% based on the leverage ratio of the Company.
b)
Each ABR Loan (including any swingline loan) bears interest at a rate per annum
equal to the highest of the Prime Rate in effect on such day, the Federal Funds
Effective Rate in effect on such day plus 0.50%, and the Adjusted Term SOFR, as
defined in the Senior Secured Agreement, for a one-month tenor in effect on such
day plus 1.00% ("ABR"); plus the Applicable Margin, as defined in the Senior
Secured Agreement. The Applicable Margin can vary between 1.00% and 1.50% based
on the leverage ratio of the Company.
In addition, the Senior Secured Agreement has a commitment fee in relation to
the non-use of available funds ranging from 0.25% to 0.35% per annum based on
the leverage ratio of the Company.
All obligations under the Senior Secured Agreement are secured by a first priority lien on substantially all assets of the Company.
We are subject to customary representations, warranties, and covenants. The Senior Secured Agreement requires that the Company meet certain financial and non-financial covenants which include, but are not limited to, (i) delivering audited consolidated financial statements to the lender within 90 days after year-end commencing with the fiscal year endingDecember 31, 2022 financial statements, (ii) delivering unaudited quarterly consolidated financial statements within 45 days after each fiscal quarter, commencing with the quarterly period ending onMarch 31, 2022 and (iii) maintaining certain leverage ratios and liquidity coverage ratios. As ofSeptember 30, 2022 , we were in full compliance with the terms of the Senior Secured Agreement.
As of
33
--------------------------------------------------------------------------------Cash Flows
Days payable outstanding ("DPO") is calculated by dividing the average accounts
payable for the period presented by the expense activity classified as platform
operations less allocated costs of our personnel and allocated depreciation and
amortization for the periods presented multiplied by the number of days in the
period. We are generally contractually required to pay suppliers of advertising
inventory and data within a negotiated period of time, regardless of whether our
customers pay on time, or at all. While we attempt to negotiate long payment
periods with our suppliers and shorter periods from our customers, it is not
always successful. As a result, our accounts payable are often due on shorter
cycles than our accounts receivables, requiring us to remit payments from our
own funds, and accept the risk of bad debt. Our standard payment terms range
from 30 to 60 days.
Days sales outstanding ("DSO") is calculated by dividing average accounts
receivable for the period by revenue recorded for the period multiplied by the
number of days in the period. Our standard payment terms range from 30 to 60
days. For the periods presented, our DSO has exceeded the standard payment terms
of customers, because like many companies in our industry, we often experience
slow payment by advertising agencies, such that advertising agencies typically
collect payment from their customers before remitting payment to us. We evaluate
the creditworthiness of customers on a regular basis.
Accounts receivable are recorded at the invoiced amount, are unsecured, and do
not bear interest. The allowance for doubtful accounts is based on the best
estimate of the amount of probable credit losses in existing accounts
receivable. We individually review all balances that exceed 90 days from the
invoice date and assesses for provisions for doubtful accounts based on an
assessment of the balance that will not be collected. Factors considered include
the aging of the receivable, historical write off experience, the
creditworthiness of each agency customer, and general economic conditions.
Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is remote.
We expect to continue generating strong positive cash flows as we scale our operations.
The following table summarizes our cash flows for the periods indicated:
Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash provided by operating activities $ 8,439 $ 8,285
Net cash used in investing activities $ (2,388 ) $ (1,731 )
Net cash used in financing activities $ (38,302 ) $ (576 )
Operating Activities
Net cash provided by operating activities increased $0.2 million for the nine
months ended September 30, 2022 as compared to the nine months ended September
30, 2021 . The increase was primarily due to the following:
•
Cash collected for revenue increased
•
Decrease in cash paid for rent and lease termination fees
•
Decrease in cash paid for income taxes of
•
Decrease in cash paid for interest of
Offsetting decreases in operating cash included the following:
•
Increase in cash paid for employee expenses primarily due to the increase in
headcount of
•
Increase in cash paid for insurance premiums of
•
Increase in cash paid for software costs of
•
Increase in cash paid for professional services of
•
Increase in cash paid for sales and marketing costs of$1.4 million primarily due to a one-time marketing event in the 2022 period, as well as an increase in overall sales and marketing spend. 34 --------------------------------------------------------------------------------
•
Increase in cash paid for hosting costs of
•
Increase in cash paid related to campaign costs of
•
Timing differences of certain payments and collections. DPO decreased 5.7% to 50 days for the nine months endedSeptember 30, 2022 from 53 days for the nine months endedSeptember 30, 2021 and DSO increased 7.5% to 100 days for the nine months endedSeptember 30, 2022 from 93 days for the nine months endedSeptember 30, 2021 . Investing Activities Net cash used in investing activities during the nine months endedSeptember 30, 2022 was$2.4 million , primarily consisting of capitalized software development costs of$2.0 million . Net cash used in investing activities during the nine months endedSeptember 30, 2021 was$1.7 million , primarily consisting of capitalized software development costs of$1.6 million .
We expect to continue capitalizing software and purchasing property and equipment as we expand our operations.
Financing Activities
Net cash used in financing activities during the nine months endedSeptember 30, 2022 was$38.3 million , consisting primarily of the re-payment of revolver borrowings of$39.0 million . We also paid cash for restricted stock withheld for taxes of$0.2 million . Offsetting these payments were proceeds related to the SymetryML issuance of preferred stock of$0.4 million , cash received from stock option exercises of$0.3 million , and proceeds from the SAFE Notes of$0.2 million . Net cash used in financing activities during the nine months endedSeptember 30, 2021 was$0.6 million , consisting of a term loan payment of$1.8 million and offsetting proceeds from SAFE Notes of$1.2 million .
Critical Accounting Policies and Significant Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance with GAAP. Preparation of the financial statements requires our management to make judgments, estimates and assumptions that impact the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our Condensed Consolidated Financial Statements. We believe that our policies for revenue recognition, equity-based compensation, software development costs, goodwill, and long-lived asset recoverability have the greatest potential impact on our Condensed Consolidated Financial Statements and are therefore considered our critical accounting policies and estimates. During the nine months endedSeptember 30, 2022 , there were no changes in our critical accounting policies or estimates. See Note 2 - Summary of Significant Accounting Policies, of the Condensed Consolidated Financial Statements included elsewhere in this Report and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSEC , for additional information regarding our critical accounting policies.
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