DIGITAL MEDIA SOLUTIONS, INC.
This MD&A should be read in conjunction with our consolidated financial
statements and the accompanying notes thereto contained in Item 8. Financial
Statements and Supplementary Data of this Annual Report, as well as Item 1.
Business of this Annual Report, for an overview of our operations and business
environment.
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Results of Operations
The following table presents our consolidated results of operations as a
percentage of net revenue:
Years Ended December 31,
2022 2021
Revenue by type:
Customer acquisition 96.1 % 95.7 %
Managed services 2.6 % 3.6 %
Software services 1.3 % 0.7 %
Total net revenue 100.0 % 100.0 %
Revenue by segment:
Brand Direct 52.2 % 59.3 %
Marketplace 55.3 % 52.4 %
Technology Solutions 2.5 % 2.2 %
Intercompany eliminations (10.0) % (13.9) %
Net revenue 100.0 % 100.0 %
Cost of revenue (exclusive of depreciation and amortization) 73.6 % 70.8 %
Gross profit 26.4 % 29.2 %
Salaries and related costs 12.8 % 11.2 %
General and administrative 10.7 % 9.4 %
Depreciation and amortization 7.2 % 5.9 %
Impairment of intangible assets 5.5 % - %
Acquisition costs 0.4 % 0.5 %
Change in fair value of contingent consideration 0.7 % 0.3 %
(Loss) income from operations (10.9) % 1.9 %
Interest expense 4.4 % 3.3 %
Change in fair value of warrant liabilities (0.9) % (4.2) %
Change in Tax Receivable Agreement liability * (3.6) %
Loss on debt extinguishment - % 0.5 %
Loss on disposal of assets * *
Net (loss) income before income taxes (14.4) % 5.9 %
Income tax (benefit) expense (1.0) % 4.5 %
Net (loss) income (13.4) % 1.4 %
Net (loss) income attributable to non-controlling interest (5.3) % 0.9 %
Net (loss) income attributable to Digital Media Solutions,
Inc. (8.1) % 0.5 %
____________________* Less than one tenth of a percent.
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Operating Results for years ended December 31, 2022 and 2021
The following table presents the consolidated results of operations for the
years ended December 31, 2022 and 2021 and the changes from the prior periods
(in thousands):
Years Ended December 31,
2022 2021 $ Change % Change
Net revenue $ 391,148 $ 427,935 $ (36,787) (9) %
Cost of revenue (exclusive of depreciation and
amortization) 287,820 303,025 (15,205) (5) %
Salaries and related costs 49,872 48,014 1,858 4 %
General and administrative 41,878 40,040 1,838 5 %
Depreciation and amortization 28,242 25,401 2,841 11 %
Impairment of intangible assets 21,570 - 21,570 100.0 %
Acquisition costs 1,650 1,967 (317) (16) %
Change in fair value of contingent consideration 2,583 1,106 1,477 134 %
(Loss) income from operations (42,467) 8,382 (50,849) (607) %
Interest expense 17,366 14,166 3,200 23 %
Change in fair value of warrant liabilities (3,360) (18,115) 14,755 (82) %
Change in Tax Receivable Agreement liability 125 (15,289) 15,414 (101) %
Loss on debt extinguishment - 2,108 (2,108) (100) %
Loss on disposal of assets 7 8 (1) (13) %
Net (loss) income before income taxes (56,605) 25,504 (82,109) (322) %
Income tax (benefit) expense (4,105) 19,311 (23,416) (121) %
Net (loss) income (52,500) 6,193 (58,693) (948) %
Net (loss) income attributable to non-controlling
interest (20,548) 3,991 (24,539) (615) %
Net (loss) income attributable to Digital Media
Solutions, Inc. $ (31,952) $ 2,202 $ (34,154) (1551) %
Net revenue. Our business generates revenue primarily through the delivery of a
variety of performance-based marketing services, including customer acquisition,
managed services and software services.
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The following table presents revenue by type for each segment and the changes
from the prior periods:
Years Ended December 31,
2022 2021 $ Change % Change
Brand Direct
Customer acquisition $ 198,873 $ 244,942 $ (46,069) (19) %
Managed services 5,367 8,845 (3,478) (39) %
Total Brand Direct 204,240 253,787 (49,547) (20) %
Marketplace
Customer acquisition 216,385 224,158 (7,773) (4) %
Total Marketplace 216,385 224,158 (7,773) (4) %
Technology Solutions
Managed services 4,814 6,471 (1,657) (26) %
Software services 4,993 3,169 1,824 58 %
Total Technology Solutions 9,807 9,640 167 2 %
Corporate and Other
Customer acquisition
(39,284) (59,650) 20,366 (34) %
Total Corporate and Other
(39,284) (59,650) 20,366 (34) %
Total Customer acquisition 375,974 409,450 (33,476) (8) % Total Managed services 10,181 15,316 (5,135) (34) %Total Software services 4,993 3,169 1,824 58 % Total Net revenue$ 391,148 $ 427,935 $ (36,787) (9) % Customer Acquisition Revenue. Customer acquisition contracts deliver potential consumers or leads (i.e. number of clicks, emails, calls and applications) to the customer in real-time based on predefined qualifying characteristics specified by our customer. Our Brand Direct segment experienced a decrease in Customer acquisition revenue of$46.1 million or 19% during the year endedDecember 31, 2022 . Customer acquisition revenue for Marketplace decreased by$7.8 million or 4% for the year endedDecember 31, 2022 . The changes in both the Brand Direct and Marketplace segments were primarily due to macro challenges within the insurance industry which continue to apply downward pressure on cost per click ("CPC") and cost per lead ("CPL") pricing. Additionally, extraordinary inflation and supply chain challenges have contributed to the insurance market volatility as increased claims costs continue to suppress insurance carrier marketing spend further delaying the expected market recovery. We also observed aggressive competitive activities within our publisher portfolio, as well as an adjustment in the health insurance model shifting non-enrollment ad spend which impacted our performance since Q2. Managed Services Revenue. Managed services contracts provide continuous service of managing the customer's media spend for the purpose of generating leads through a third-party supplier of leads, as requested by our customer. Managed services revenue experienced a decrease of$5.1 million or 34% during the year endedDecember 31, 2022 . The changes were primarily driven by decreased media activity, resulting in lower agency fees. Software Services Revenue. Software services contracts provide the customer with continuous, daily access to the Company's proprietary software. Software services revenue is considered insignificant during the year endedDecember 31, 2022 . Cost of revenue and gross profit. Cost of revenue primarily includes media and other related costs, such as the cost to acquire user traffic through the purchase of impressions, clicks or actions from publishers or third-party intermediaries, including advertising exchanges, and technology costs that enable media acquisition. These media costs are used primarily to drive user traffic to the Company's and our customers' media properties. Cost of revenue also includes indirect costs such as data verification, hosting and fulfillment costs. Gross profit is exclusive of depreciation and amortization. 31
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The following table presents the gross profit percentage (gross profit as a
percentage of total net revenue) by segment and the changes from prior period:
Years Ended December 31,
2022 2021 PPTS Change
Brand Direct 21.0 % 23.0 % (2.0)
Marketplace 24.1 % 27.0 % (2.9)
Technology Solutions 85.4 % 63.2 % 22.2
Total gross profit percentage 26.4 % 29.2 % (2.8)
Gross profit for Brand Direct decreased for the year endedDecember 31, 2022 , primarily driven by inflationary uncertainty within the auto industry and aggressive competitive activities within our publisher portfolio leading to compressed pricing and decreased acquisition spending, timing of optimized media rebalancing, and monetization challenges within the DMS ecosystem. Gross profit for Marketplace decreased for the year endedDecember 31, 2022 , primarily driven by macro industry headwinds applying downward pricing pressure impacting revenue performance within our Insurance business as well as the shift in ad spend from non enrollment periods from some of our health insurance partners. The ad spend shift particularly affected the profitability of the Crisp business model due to the more stable nature of call center operations.
Gross profit for Technology Solutions increased for the year ended
Total gross profit decreased for the year endedDecember 31, 2022 , primarily due to the unexpected impact of inflationary pressures within the insurance industry which led to a decline in click pricing and shifts in health insurance budgets culminating in monetization contraction within the DMS ecosystem. Salaries and related costs. Total compensation includes salaries, commissions, bonuses, payroll taxes and retirement benefits. Salaries and related costs increased$1.9 million or 3.9% for the year endedDecember 31, 2022 due to an increase in headcount from the addition of Crisp Results, DMS Voice licensing, and Traverse plus the subsequent resource expansion required of our workforce to support the Company. General and administrative. General and administrative consist of expenses incurred in our normal course of business relating to office supplies, computer and technology, rent and utilities, insurance, legal and professional fees, state and local taxes and licenses, penalties and settlements and bad debt expense, as well as sales and marketing expenses relating to advertising and promotion. We also include other expenses such as investment banking expenses, fundraising costs and costs related to the advancement of our corporate social responsibility program. General and administrative expenses increased$1.8 million or 4.6% for the year endedDecember 31, 2022 due to acquisition related expenses across multiple categories including software, technology, and professional expenses as well as an overall increase in compliance fees.
Depreciation and amortization. Property, plant and equipment consists of computers and office equipment, furniture and fixtures, leasehold improvements and internally developed software costs. Intangible assets subject to amortization include technology, customer relationships, brand, and non-competition agreements.
Depreciation and amortization expense increased$2.8 million or 11.2%, during the year endedDecember 31, 2022 due to intangible assets acquired with Crisp Results and AAP, as well as continued investments in internally developed software, which were placed in service during 2021. Impairment of intangible assets. The Company determined that the recent economic downturn and inflation, along with the Company's revenue reduction and decreased stock market price were indicators of impairment under ASC 360-10, Impairment and Disposal of Long-Lived Assets for certain asset groups during 2022. During the year endedDecember 31, 2022 , Impairment of intangible assets increased$21.6 million or 100.0%, due to the Intangible assets within Brand Direct and Marketplace exceeding its recoverability (see Note 6.Goodwill and Intangible Assets).
Acquisition costs. Acquisition related costs are not considered part of the consideration for acquisitions and are expensed as incurred. This includes acquisition incentive compensation and other transaction related costs.
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Acquisition costs decreased $0.3 million or 16.1% during the year ended December
31, 2022 . The changes were primarily due to prior year costs related to the AAP
and Crisp acquisitions, as well as the current year's Traverse acquisition. (see
Note 7. Acquisitions).
Interest expense. Interest expense for year ended December 31, 2022 was related
primarily to our debt, which carries a variable interest rate based on multiple
options at either LIBOR plus 5% or an alternate base rate, plus an agreed upon
margin with Truist Bank , the Company's financial institution since May 25, 2021
(see Note 8. Debt).
Interest expense increased by
Income tax (benefit) expense. The Company recorded income tax benefit of$4.1 million for the year endedDecember 31, 2022 . The blended effective tax rate for the year endedDecember 31, 2022 was 7.3%, which varies from our statutoryU.S. tax rate due to taxable income or loss that is allocated to the non-controlling interest and impact of the valuation allowance on DMS, Inc.
Non-GAAP Financial Measures
In addition to providing financial measurements based on accounting principles generally accepted inthe United States of America ("GAAP"), this Annual Report includes additional financial measures that are not prepared in accordance with GAAP ("non-GAAP"), including adjusted EBITDA, unlevered free cash flow, adjusted net income and adjusted EPS. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures can be found below. As explained further below, we use these financial measures internally to review the performance of our business units without regard to certain accounting treatments, non-operational, extraordinary or non-recurring items. We believe that presentation of these non-GAAP financial measures provides useful information to investors regarding our results of operations. Because of these limitations, management relies primarily on its GAAP results and uses non-GAAP measures only as a supplement. Adjusted EBITDA, Unlevered Free Cash Flow and Unlevered Free Cash Flow Conversion We use the non-GAAP measures of Adjusted EBITDA,Unlevered Free Cash Flow and Unlevered Free Cash Flow Conversion to assess operating performance. Management believes that these measures provide useful information to investors regarding DMS's operating performance and its capacity to incur and service debt and fund capital expenditures. DMS believes that these measures are used by many investors, analysts and rating agencies as a measure of performance. By reporting these measures, DMS provides a basis for comparison of our business operations between current, past and future periods by excluding items that DMS does not believe are indicative of our core operating performance. Financial measures that are non-GAAP should not be considered as alternatives to operating income, cash flows from operating activities or any other performance measures derived in accordance with GAAP as measures of operating performance, or cash flows as measures of liquidity. These measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, DMS relies primarily on its GAAP results and uses Adjusted EBITDA and Unlevered Free Cash Flow only as a supplement. Adjusted EBITDA is defined as net (loss) income, excluding (a) interest expense, (b) income tax (benefit) expense, (c) depreciation and amortization, (d) impairment of intangible assets, (e) change in fair value of warrant liabilities, (f) debt extinguishment, (g) stock-based compensation, (h) change in Tax Receivable Agreement liability, (i) restructuring costs, (j) acquisition costs, and (k) other expense. In addition, we adjust to take into account estimated cost synergies related to our acquisitions. These adjustments are estimated based on cost-savings that are expected to be realized within our acquisitions over time as these acquisitions are fully integrated into DMS. These cost-savings result from the removal of cost and or service redundancies that already exist within DMS, technology synergies as systems are consolidated and centralized, headcount reductions based on redundancies, right-sized cost structure of media and service costs utilizing the most beneficial contracts within DMS and the acquired companies with external media and service providers. We believe that these non-synergized costs tend to overstate our expenses during the periods in which such synergies are still being realized. Furthermore, in order to review the performance of the combined business over periods that extend prior to our ownership of the acquired businesses, we include the pre-acquisition performance of the businesses acquired. Management believes that doing so helps to understand the combined operating performance and potential of the business as a whole and makes it easier to compare performance of the combined business over different periods. 33 -------------------------------------------------------------------------------- Table of Contents Unlevered Free Cash Flow is defined as Adjusted EBITDA, less capital expenditures, and Unlevered Free Cash Flow Conversion is defined as Unlevered Free Cash Flow divided by Adjusted EBITDA. The following table provides a reconciliation between Adjusted net income and Adjusted EBITDA, and Unlevered Free Cash Flow, from Net loss, the most directly comparable GAAP measure (in thousands): Years Ended December 31, 2022 2021 Net (loss) income$ (52,500) $ 6,193 Adjustments Interest expense 17,366 14,166 Income tax (benefit) expense (4,105) 19,311 Depreciation and amortization 28,242 25,401 Impairment of intangible assets 21,570 - Change in fair value of warrant liabilities (1) (3,360) (18,115) Change in Tax Receivable Agreement liability 125 (15,289) Loss on debt extinguishment - 2,108 Stock-based compensation expense 6,656 6,463 Restructuring costs 2,312 1,118 Acquisition costs (2) 1,650 1,967 Change in fair value of contingent consideration liabilities 2,583 1,106 Other expense (3) 5,117 6,520 Adjusted net income 25,656 50,949 Additional adjustments Pro forma cost savings - Reorganization (4) - 31 Pro forma cost savings - Acquisitions (5) - 3,330 Acquisitions EBITDA (6) - 2,711 Accounts reserved (7) - 944 Adjusted EBITDA 25,656 57,965 Less: Capital Expenditures 6,744 9,114 Unlevered free cash flow$ 18,912 $ 48,851 Unlevered free cash flow conversion 73.7 % 84.3 %
______________
(1)Mark-to-market warrant liability adjustments. (2)Includes business combination transaction fees, acquisition incentive payments and pre-acquisition expenses. (3)Includes legal fees associated with acquisitions and other extraordinary matters, costs related to philanthropic initiatives, and private warrant transaction related costs. (4)Costs savings as a result of the Company reorganization initiated in Q2 2020. (5)Cost synergies expected as a result of the full integration of the acquisitions. (6)Pre-acquisition Adjusted EBITDA results from the AAP and Crisp Results acquisitions during the year endedDecember 31, 2021 . (7)For the year endedDecember 31, 2021 , represents bad debt expense associated with a specific strategic customer, which the Company believes will be settled over time. A reconciliation of Unlevered Free Cash Flow to net cash provided by operating activities, the most directly comparable GAAP measure, is presented below (in thousands): 34
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Years Ended December
31,
2022 2021
Unlevered free cash flow $ 18,912 $ 48,851
Capital expenditures 6,744 9,114
Adjusted EBITDA 25,656 57,965
Accounts reserved (1) - 944
Acquisitions EBITDA (2) - 2,711
Pro forma cost savings - Reorganization (3) - 31
Pro forma cost savings - Acquisitions (4) - 3,330
Adjusted net income 25,656 50,949
Impairment of intangible assets 21,570 -
Acquisition costs (5) 1,650 1,967
Change in fair value of contingent consideration liabilities 2,583 1,106
Other expenses (6) 5,117 6,520
Stock-based compensation 6,656 6,463
Restructuring costs 2,312 1,118
Change in fair value of warrant liabilities (7) (3,360) (18,115)
Loss on debt extinguishment - 2,108
Subtotal before additional adjustments (10,872) 49,782
Less: Interest expense 17,366 14,166
Less: Income tax (benefit) expense (4,105) 19,311
Less: Change in Tax Receivable Agreement liability - Consolidated statements of operations
125 (15,289)
Provision for bad debt 1,761 4,798
Amortization of right-of-use assets 937 -
Loss on disposal of assets 7 8
Impairment of intangible assets 21,570 -
Lease restructuring charges 438 542
Loss on debt extinguishment - 2,108
Stock-based compensation, net of amounts capitalized 6,656 6,393
Amortization of debt issuance costs 1,490 1,379
Deferred income tax (benefit) provision, net (4,108) 16,459
Change in fair value of contingent consideration 2,583 1,106
Change in fair value of warrant liability (3,360) (18,115) Change in Tax Receivable Agreement liability - Consolidated statements of cash flows
(1,146) (16,402)
Change in income tax receivable and payable 9 (727)
Change in accounts receivable 1,984 (8,369)
Change in prepaid expenses and other current assets 416 (419)
Change in accounts payable and accrued expenses (3,055) (612)
Change in operating lease liabilities (2,102) -
Change in other liabilities (137) (956)
Net cash (used in) provided by operating activities ______________
(1)For the year endedDecember 31, 2021 , represents bad debt expense associated with a specific strategic customer that we believe will be settled over time. (2)Pre-acquisition Adjusted EBITDA results from the AAP and Crisp Results acquisitions during the year endedDecember 31, 2021 . (3)Costs savings as a result of the Company reorganization initiated in Q2 2020. (4)Cost synergies expected as a result of the full integration of the acquisitions. (5)Includes business combination transaction fees, acquisition incentive payments and pre-acquisition expenses. (6)Includes legal fees associated with acquisitions and other extraordinary matters, costs related to philanthropic initiatives, and private warrant transaction related costs. (7)Mark-to-market warrant liability adjustments. 35
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Adjusted Net Income and Adjusted EPS
We use the non-GAAP measures Adjusted Net Income and Adjusted EPS to assess operating performance. Management believes that these measures provide investors with useful information on period-to-period performance as evaluated by management and comparison with our past financial and operating performance. Management also believes these non-GAAP financial measures are useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. We define Adjusted Net Income (Loss) as net loss attributable toDigital Media Solutions, Inc. adjusted for (x) costs associated with the change in fair value of warrant liabilities, debt extinguishment, Business Combination, acquisition-related costs, equity based compensation and lease restructuring charges and (y) the reallocation of net income (loss) attributable to non-controlling interests from the assumed acquisition byDigital Media Solutions, Inc. of all units ofDigital Media Solutions Holdings, LLC ("DMSH LLC ") (other than units held by subsidiaries ofDigital Media Solutions, Inc. ) for newly-issued shares of Class A Common Stock ofDigital Media Solutions, Inc. on a one-to-one basis. We define adjusted pro forma net loss per share as adjusted pro forma net loss divided by the weighted-average shares of Class A Common Stock outstanding, assuming the acquisition byDigital Media Solutions, Inc. of all outstandingDMSH LLC units (other than units held by subsidiaries ofDigital Media Solutions, Inc. ) for newly-issued shares of Class A Common Stock on a one-to-one-basis. The following table presents a reconciliation between GAAP Earnings Per Share and Non-GAAP Adjusted Net Income and Adjusted EPS (In thousands, except per share data): Years Ended December 31, 2022 2021 Numerator: Net (loss) income$ (52,500) $ 6,193 Net (loss) income attributable to non-controlling interest (20,548) 3,991
Net (loss) income attributable to
Denominator:
Weighted average shares - basic 38,252 35,249
Add: dilutive effects of equity awards under the 2020 Omnibus Incentive Plan
27 389
Add: dilutive effects of public warrants - 126
Weighted average shares - diluted 38,279 35,764
Net (loss) earnings per common share:
Basic and diluted$ (0.84) $ 0.06 36
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Years Ended December
31,
2022 2021
Numerator:
Net (loss) income attributable to
Add adjustments:
Change in fair value of warrant liabilities (3,360) (18,115)
Loss on debt extinguishment - 2,108
Acquisition costs 1,650 1,967
Change in fair value of contingent consideration liabilities 2,583 1,106
Restructuring costs 2,312 1,118
Business combination expenses - 3,330
Stock-based compensation expense 6,656 6,463
Accounts reserved - 944
9,841 (1,079)
Adjusted net (loss) income attributable to
(22,111) 1,123
Denominator:
Weighted-average shares outstanding - basic and diluted 38,252 35,249 Weighted-average LLC Units ofDMSH, LLC that are convertible into Class A common stock 24,510 25,853 62,762 61,102 Adjusted EPS - basic and diluted
Liquidity and Capital Resources
The following table summarizes certain key measures of our liquidity and capital
resources (in thousands):
December 31, December 31,
2022 2021 $ Change % Change
Cash $ 48,839 $ 26,394 $ 22,445 85 %
Availability under revolving credit facility $ 10,000 $ 50,000 $ (40,000) (80) %
Total Debt $ 261,625 $ 223,875 $ 37,750 17 %
Our capital sources are focused on investments in our technology solutions,
corporate infrastructure and strategic acquisitions to further expand into new
business sectors and/or expand sales in existing sectors. We generate sufficient
cash flows for working capital and expect to do so for the foreseeable future.
Our principal sources of liquidity on a short-term basis are Cash and cash
equivalents, and cash flows provided by operations. Our primary use of cash is
compensation to our employees and payments for general operating expenses and
Interest expense.
The Term Loan, which was issued at an original issue discount of 1.80% or
$4.2 million , is subject to payment of 1.0% of the original aggregate principal
amount per annum paid quarterly, with a bullet payment at maturity. The Term
Loan will mature, and the revolving credit commitments under the Revolving
Facility will terminate, on May 25, 2026 , when any outstanding balances will
become due. The Term Loan bears interest at our option, at either (i) adjusted
LIBOR plus 5.00% or (ii) the Base Rate plus 4.00%. Since May 25, 2021 our
interest rate is based on LIBOR plus 5.00%. For the year ended December 31,
2022 , the effective interest rate was 9.28%.
Borrowings under the Revolving Facility bear interest, at our option, at either
(i) adjusted LIBOR plus 4.25% or (ii) a base rate (which is equal to the highest
of (a) the administrative agent's prime rate, (b) the federal funds rate, as in
effect from time to time, plus 0.50%, (c) one-month LIBOR plus 1.00%, and (d)
1.75% (the "Base Rate")), plus 3.25%. Under the Revolving Facility, DMS LLC pays
a 0.50% per annum commitment fee in arrears on the undrawn portion of the
revolving commitments. Since May 25, 2021 our interest rate is based on LIBOR
plus 5.00%. The Company drew $5.0 million and $35.0 million on October 4, 2022
and December 29, 2022 , respectively. For the year ended December 31, 2022 , the
effective interest rate was 0.30%.
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The Company's ability to borrow amounts under the Credit Facility is conditioned upon its compliance with specified covenants, including certain reporting covenants and financial covenants that, in addition to other items, require the Company to maintain a maximum net leverage ratio (ratio of total debt borrowed by the Company to EBITDA for the four consecutive fiscal quarters most recently ended, subject to certain adjustments set forth in the Credit Facility) not to exceed 4.5:1.0 on the last day of the quarter endedDecember 31, 2022 , which net leverage ratio is adjusted for subsequent quarters as set forth in the Credit Facility. In the event the Company breaches the net leverage ratio, the Company may cure such breach by raising capital through the sale of equity, which capital will be added on a dollar-for-dollar basis to the calculation of EBITDA for purposes of such test period to determine compliance with the financial covenant. There are no limitations on the use of the capital raised in connection with such equity cure. As ofDecember 31, 2022 , the Company was in breach of the net leverage ratio, which it cured onMarch 29, 2023 through the funds received in connection with the issuance of Series A and Series B convertible Preferred stock and Warrants (see Note 17. Subsequent Events). As ofDecember 31, 2022 , the Company was in material compliance with all financial covenants after consideration of the equity cure. Cash flows from operating activities Net cash (used in) provided by operating activities was$(0.3) million for the yearDecember 31, 2022 as compared to$18.8 million provided by operating activities in the yearDecember 31, 2021 . The decrease is primarily attributable to an increase in accounts receivable collections, a decrease in accounts payable and current accrued expenses due to timing of vendor payments, and a decrease in the income tax provision. Cash flows from investing activities Net cash used in investing activities for the yearDecember 31, 2022 decreased by$25.0 million or 73% to$9.2 million from$34.2 million for the yearDecember 31, 2021 , primarily due to the 2021 AAP and Crisp Results acquisitions when compared to the 2022 Traverse acquisition. Cash flows from financing activities Net cash provided by financing activities for the yearDecember 31, 2022 was$32.0 million , reflecting an increase of$21.6 million or 206%, as compared to$10.5 million for the yearDecember 31, 2021 . This increase was due to higher required repayments of borrowings of long-term debt and notes payable in the prior year under the Monroe Credit Facility and Insurance Premium Financial Service arrangements. Furthermore, the Company drew down from the revolver.
For the year
Off-Balance Sheet Arrangements
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. In addition, we do not engage in trading activities involving non-exchange traded contracts. In our ongoing business, we do not enter into transactions involving, or otherwise form relationships with, unconsolidated entities or financial partnerships that are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements in accordance with GAAP. In doing so, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenue and expenses during the reporting period. Actual results could differ significantly from these estimates. A number of the estimates and assumptions relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. We believe that the accounting policies listed below involve our more significant judgments, estimates and assumptions and, therefore, could have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion of these policies is necessary to understand and evaluate the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report.
Acquisitions
Under the acquisition method of accounting, the Company recognizes, separately
from goodwill, the identifiable assets acquired and liabilities assumed at their
estimated acquisition date fair values. The excess of the fair value of purchase
consideration over the fair values of these identifiable assets and liabilities
are recorded as goodwill.
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The Company performs valuations of assets acquired and liabilities assumed and
allocates the purchase price to its respective assets and liabilities.
Determining the fair value of assets acquired and liabilities assumed requires
management to use significant judgment and estimates, including the selection of
valuation methodologies, estimates of future revenue, costs and cash flows,
discount rates, and selection of comparable companies. Management's estimates of
fair value are based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable. As a result, actual results may differ
from these estimates. During the measurement period, the Company may record
adjustments to acquired assets and assumed liabilities, with corresponding
offsets to goodwill. Upon the conclusion of a measurement period, any subsequent
adjustments are recorded to earnings.
At the acquisition date, the Company measures the fair values of all assets
acquired and liabilities assumed that arise from contractual contingencies. The
Company also measures the fair values of all non-contractual contingencies if,
as of the acquisitions date, it is more likely than not that the contingencies
will give rise to assets or liabilities.
Acquisition related costs not considered part of the considerations are expensed
as incurred and recorded in Acquisition costs within the consolidated statement
of operations.
Contingent consideration
The Company recognizes the fair value of any contingent consideration that is
transferred to the seller in a business combination on the date at which control
of the acquiree is obtained. Contingent consideration is classified as a
liability or as equity on the basis of the definitions of an equity instrument
and a financial liability. Since the Company's contingent consideration can be
paid in cash or DMS Class A Common Stock, at the election of the Company, the
Company classifies its contingent consideration as a liability. Contingent
consideration payments related to acquisitions are measured at fair value at
each reporting period using Level 3 unobservable inputs. The Company's estimates
of fair value are based upon projected cash flows, estimated volatility and
other inputs which are uncertain and involve significant judgments by
management. Any changes in the fair value of these contingent consideration
payments are included in income from operations in the consolidated statements
of operations.
Valuation allowance for deferred tax assets
We establish an income tax valuation allowance when available evidence indicates
that it is more likely than not that all or a portion of a deferred tax asset
("DTA") will not be realized. In assessing the need for a valuation allowance,
we consider the amounts and timing of expected future deductions or
carryforwards and sources of taxable income that may enable utilization. We
maintain an existing valuation allowance until enough positive evidence exists
to support its reversal. Changes in the amount or timing of expected future
deductions or taxable income may have a material impact on the level of income
tax valuation allowances. Our assessment of the realizability of the DTA
requires judgment about its future results. Inherent in this estimation is the
requirement for us to estimate future book and taxable income and possible tax
planning strategies. These estimates require us to exercise judgment about our
future results, the prudence and feasibility of possible tax planning
strategies, and the economic environment in which the Company does business. It
is possible that the actual results will differ from the assumptions and require
adjustments to the allowance. Adjustments to the allowance would affect future
net income.
Goodwill and other intangible assets
We account for our business combinations using the acquisition accounting
method, which requires us to determine the fair value of net assets acquired and
the related Goodwill and Intangible assets. Determining the fair value of assets
acquired and liabilities assumed requires management's judgment and involves the
use of significant estimates, including projections of future cash flows,
discount rates, asset lives and market multiples.
We review Goodwill as of December 31 each year and whenever events or
significant changes in circumstances indicate that the carrying value may not be
recoverable. We evaluate the recoverability of Goodwill at the reporting unit
level. For the year ended December 31, 2022 , the result of our annual impairment
test indicated that there were no Goodwill impairment indicators, as the
carrying value of the reporting units exceeded their fair value. The fair value
of each reporting unit for 2022 was estimated using a combination of the income
approach, which incorporates the use of the discounted cash flow method, and the
market approach, which incorporates the use of earnings and revenue multiples
based on market data. The Company's estimates of fair value are based upon
projected cash flows, weighted average cost of capital and other inputs which
are uncertain and involve significant judgments by management.
We review Intangible assets with finite lives subject to amortization whenever
events or circumstances indicate that a carrying amount of an asset may not be
recoverable. We evaluate the recoverability of Intangible assets at the asset
group level. Recoverability of these assets is determined by comparing the
carrying value of these assets to the estimated undiscounted future cash flows
expected to be generated by these asset groups. These asset groups are impaired
when their carrying value exceeds their fair value. Impaired Intangible assets
with finite lives subject to amortization are written down to their fair value
with a charge to expense in the period the impairment is identified. Intangible
assets with finite lives are amortized on a straight-line basis with estimated
useful lives generally between one and nine years. Events or circumstances that
might require impairment testing include the loss of a significant client, the
identification of other impaired assets within a reporting unit, loss
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of key personnel, the disposition of a significant portion of a reporting unit,
significant decline in stock price or a significant adverse change in business
climate or regulations. The Company determined that the recent economic downturn
and inflation, along with the Company's revenue reduction and decreased stock
market price were indicators of impairment under ASC 360-10, Impairment and
Disposal of Long-Lived Assets for certain asset groups during 2022.
Refer to Note 1. Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements, included in Item 8. Financial Statements and
Supplementary Data of this Annual Report, for information on our critical and
significant accounting policies.
Recently Issued Accounting Standards
Refer to Note 1. Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this Annual Report, for a more detailed discussion on recent accounting pronouncements and the related impact on our consolidated financial statements.
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