INTEGRAL AD SCIENCE HOLDING CORP. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in the sections titled "Risk Factors" and "Forward-Looking Statements" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period. Unless the context otherwise requires, the terms "Company," "Integral Ad Science Holding Corp. ," "IAS," "we," "us," "our," or similar terms refer toIntegral Ad Science Holding LLC and its consolidated subsidiaries before the corporate conversion, andIntegral Ad Science Holding Corp. and, where appropriate, its subsidiaries after the Corporate Conversion. Overview We are a leading digital media quality company by revenue. With our cloud-based technology platform and the actionable insights it provides, we deliver independent measurement and verification of digital advertising across all devices, channels, and formats, including desktop, mobile, connected TV ("CTV"), social, display, and video. Our proprietary andMedia Rating Council (the "MRC") accredited Quality Impressions® metric is designed to verify that digital ads are served to a real person rather than a bot, viewable on-screen, and appear in a brand-safe and suitable environment in the correct geography. 29 -------------------------------------------------------------------------------- Without an independent evaluation of digital advertising quality, brands and their agencies previously relied on a wide range of publishers and ad platforms to self-report and measure the effectiveness of campaigns without a global benchmark to understand success. We are an independent, trusted partner for buyers and sellers of digital advertising to increase accountability, transparency, and effectiveness in the market. We help advertisers optimize their ad spend and better measure consumer engagement with campaigns across platforms, while enabling publishers to improve their inventory yield and revenue. As a leading media quality partner, we have deep integrations with all the major advertising and technology platforms including Amazon, Facebook, Google, Instagram, LinkedIn, Microsoft, Pinterest, Snap, Spotify,TikTok , The Trade Desk, Twitter,Xandr , Yahoo, and YouTube. Our platform uses advanced artificial intelligence ("AI") and machine learning ("ML") technologies to process over 100 billion daily web transactions on average. With this data, we deliver real-time insights and analytics to our global customers through our easy-to-use reporting platform, IAS Signal™, helping brands, agencies, publishers, and platform partners improve media quality and campaign performance. Our pre-bid and post-bid verification solutions enable advertisers to measure campaign performance and value across viewability, ad fraud prevention, brand safety and suitability, and contextual targeting for ads on desktop, mobile in-app, social, and CTV platforms. Our pre-bid programmatic solution is directly integrated with DSPs to help optimize return on ad spend ("ROAS") by directing budget to the best available inventory. With our Context Control solution, advertisers can leverage more than 300 contextual segments from the Company on a pre-bid basis to avoid undesirable content or target towards content that is more suitable for their campaigns. Additionally, our Total Visibility® offering provides marketers with actionable insights to optimize their campaign spend and drive higher yield by focusing on the most efficient and cost effective pathways. Our solutions help hundreds of publishers globally deliver high quality ad inventory that is fraud free, viewable, brand safe and suitable, and geographically targeted. COVID-19 Due to the pandemic, we temporarily closed our offices globally, including our corporate headquarters. As the pandemic has continued to evolve, we are continuing to operate with substantially all staff working remotely. Management reviews operations on a continuous basis and there have been minimal interruptions in our customer facing operations to date. In addition, to date, we have not experienced a material increase in customers' cancellations, or requests for more favorable contractual terms, or concessions, and we have not experienced a significant deterioration in the collectability of our receivables or a material negative impact from our vendors and third-party service providers. Further, we have not incurred impairment losses in the carrying values of our assets as result of the pandemic and are not aware of any specific events or circumstances that would require a revision to the estimates reflected in our consolidated financial statements.
We have had sufficient liquidity and capital resources to continue to meet our operating needs and service our debt.
However, the severity, magnitude and duration of the current COVID-19 pandemic
continues to be uncertain, rapidly changing, and hard to predict and depends on
events beyond our knowledge or control.
Our Business Model
We generate revenue based on the volume of purchased digital ads that our
solution measures. Advertisers use our digital marketing solutions for ad
viewability, brand safety, optimization, context control, and ad fraud
prevention. Advertisers pay us based on the total volume of impressions, which
is our primary contracting model. Certain contracts with advertisers have
pricing with a minimum commitment and/or fixed fee, plus overage, based on a
predetermined number of impressions. We maintain an expansive set of
integrations across the digital advertising ecosystem, including with leading
programmatic and social platforms, which enables us to cover all key channels,
formats and devices. We generate revenue from sell-side customers from contracts
that are generally for twelve-month terms (with auto renew), and a fixed fee
each month (tied to a total number of impressions), and an overage cost per
thousand impressions ("CPM") that is applied when impressions exceed the
impression threshold for a particular tier.
Key Factors Affecting Our Performance
Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:
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--------------------------------------------------------------------------------Innovate and Develop New Products for Key High-Growth Segments
•Programmatic. We aim to deliver transparency to programmatic ad buying via innovative solutions including contextual targeting and brand safety and suitability.
•Social. We plan to develop deeper integrations with social platforms, also known asWalled Gardens , including feed-based brand safety and suitability, to be able to deliver continued transparency to our customers.
•Connected TV. We plan to continue to expand CTV-specific verification solutions and contextual capabilities to address the fast-growing CTV segment.
•Adjacent product expansion. We aim to expand our platforms to address new areas of verification and measurement needs for our clients.
For example, with the introduction of our pre-bid contextual capability in 2020, we not only enhanced our core verification offering, but we were also able to expand into contextual targeting addressing new needs and providing new value to our customers. Similarly, in 2019, our CTV solution expanded our presence into this important and emerging digital channel. In 2021, we acquiredPublica LLC , a leading CTV ad platform and launched our brand safety solution for in-feed video ads onTikTok .
Increase Sales Within Our Existing Customer Base
We aim to increase the use of our products among existing customers across more campaigns and impressions. Given our comprehensive product portfolio, we believe we can cross-sell additional or new solutions to provide end-to-end coverage to more clients from pre-bid viewability to post-buy verification, fraud prevention, safety, suitability, and targeting.
Acquire New Customers and Increase Market Share
Our ability to acquire new customers and increase our market share is dependent upon a number of factors, including the effectiveness of our solutions, marketing and sales to drive new business prospects and execution, client digital marketing investment adoption, new products and feature offerings, global reach and the growth of the market for digital ad verification. There is a market opportunity to provide advertisers directly or through advertising agencies with verification services, specifically around ad viewability, ad fraud prevention and brand safety and suitability. Based on aMarch 2021 analysis byFrost & Sullivan , we estimate the global market opportunity for our ad verification solutions to be$9.5 billion and expect it to grow at a 16.2% CAGR from 2021 to 2025. We plan to work with the top 500 global advertisers by targeting high-spend verticals and brands with a natural sensitivity for brand safety, brand suitability, and ROAS needs. We believe we will increase our market share by strengthening our work with the leading social platforms, enhancing our programmatic solutions, deriving benefit from our broad global position, and leveraging our differentiated data science and market-leading contextual capabilities.
Expand Customer Base Internationally
Our ability to expand our customer base internationally is dependent upon a number of factors, including effectively implementing our business processes and go-to-market strategy, our ability to adapt to market or cultural differences, the general competitive landscape, our ability to invest in our sales and marketing channels, the maturity and growth trajectory of our services by region and our brand awareness and perception. Global marketers are becoming increasingly cognizant of the value of sophisticated verification strategies and, as such, we believe there is growing demand for our services internationally. Our investments in international markets resulted in a 29% growth in revenue year-over-year for the year endedDecember 31, 2021 . We believe thatLatin America and the APAC region may represent substantial growth opportunities, and we are investing in developing our business in those markets by way of expanded in-market customer service investment and by leveraging our global relationships. We aim to continue to grow outside theU.S. inEurope and other established markets such asAustralia andJapan , and view ourselves as best positioned to continue penetrating these markets given our market-leading global footprint. 31 --------------------------------------------------------------------------------
Seasonality
We experience fluctuations in revenue that coincide with seasonal fluctuations in the digital ad spending of our customers. 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 of each calendar year. We expect seasonality trends to continue, and our ability to manage our resources in anticipation of these trends will affect our operating results. Consequently, the fourth quarter usually reflects the highest level of measurement activity, and the first quarter reflects the lowest level of activity. Our revenue, cash flow, operating results and other key operating and performance metrics may vary from quarter to quarter due to the seasonal nature of our clients' spending on advertising campaigns. While our revenue is highly re-occurring, seasonal fluctuations in ad spend may impact quarter-over-quarter results. We believe that the year-over-year comparison of results more appropriately reflects the overall performance of the business.
Key Business Metrics
In addition to ourU.S. GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. The key business metrics are presented based on our advertising customers, as revenue from these customers represents substantially all the revenue. The following table sets forth our key performance indicators for the periods set forth below:March 31 ,
2022 2021 Net revenue retention of advertising customers (%) (as of the end of the period)
126 % 110 %
Total advertising customers (as of the end of the period) 2,104 1,924
Total number of large advertising customers (as of the end of the
period) 184 172
Net revenue retention of advertising customers
We define net revenue retention of advertising customers as a metric to reflect the expansion or contraction of our advertising customers' revenue by measuring the period-over-period change in trailing-twelve-month revenues from customers who were also advertising customers in the prior trailing twelve-month period. As such, this metric includes the impact of any churned, or lost, advertising customers from the prior trailing-twelve-month period as well as any increases or decreases in their spend, including the positive revenue impacts of selling new services to an existing advertising customer. The numerator and denominator includes revenue from all advertising customers that we served and from which we recognized revenue in the earlier of the two trailing-twelve-month periods being compared. For purposes of discussing our key business metrics, we define an advertising customer as any advertiser account that spends at least$3,000 in the applicable trailing twelve-month periods. We calculate our net revenue retention of advertising customers as follows:
Numerator: The total revenue earned during the current trailing-twelve-month period from the cohort of advertising customers in the prior trailing-twelve-month period.
Denominator: The total revenue earned during the immediately preceding trailing-twelve-month period from such cohort of advertising customers in such trailing-twelve-month period.
The quotient obtained from this calculation is our net revenue retention rate of advertising customers.
Our calculation of net revenue retention of advertising customers may differ from similarly titled metrics presented by other companies.
Our net revenue retention of advertising customers increased from 110% as ofMarch 31, 2021 to 126% as ofMarch 31, 2022 . The increase in the net revenue retention of advertising customers as ofMarch 31, 2021 compared toMarch 31, 2022 was primarily due to the strong revenue growth during the trailing-twelve-month period of 33% in 2022 compared to 16% in 2021. 32 --------------------------------------------------------------------------------
Total advertising customers
We view the number of advertising customers as a key indicator of our scale and growth and the adoption of our platform. We determine our number of advertising customers by counting the total number of advertiser accounts who have spent at least$3,000 in the trailing twelve months. The total number of advertising customers has limitations as an operating metric as it does not reflect the product mix chosen by our advertising customers, the order frequency, or the purchasing behavior of our advertising customers. Because of these and other limitations, we consider, and you should consider, advertising customers in conjunction with our other metrics, including net revenue retention, net income (loss), adjusted EBITDA, and average revenue per advertising customer.
Total number of large advertising customers
Historically, our revenue has been driven primarily by a subset of large advertising customers who have leveraged our platform substantially from a usage standpoint. Increasing awareness of our solutions, further developing our sales and marketing expertise and partner ecosystem, and continuing to build solutions that address the unique identity needs of the top 500 global advertisers have increased our number of large advertising customers. We determine our number of large advertising customers by counting the total number of advertising accounts who have spent at least$200,000 per year. We believe the recruitment and cultivation of large advertising customers is critical to our long-term success. Our total number of large advertising customers increased from 172 as ofMarch 31, 2021 to 184 as ofMarch 31, 2022 , primarily due to economic recoveries and improved macroeconomic conditions since the prior year. As macroeconomic conditions fluctuate, including inflationary pressures due to the COVID-19 pandemic, there is no guarantee that we will continue to see an increase of large advertising customers.
Components of Results of Operations
Revenue
We derive revenue primarily from advertisers and programmatic services offered through a demand side platform to our customers across the digital advertising platform, which is our performance obligation. Fees associated with our contracts include impression-based fees driven by impression volume and a CPM. We deliver our products and solutions to serve two customer types (i) buy-side (advertisers and agencies) and (ii) sell-side (publishers, advertising/audience networks, and supply side platforms). We generally generate revenue by charging a CPM based on the volume of purchased digital ads that we measure and optimize on behalf of these customers. There are no separate fees to access our platform. Depending on our customer needs, our contracts have (i) usage-based pricing, or (ii) monthly, quarterly or annual minimum commitments, or (iii) fixed fees. Usage based pricing is our primary contracting model. For these minimum commitment contracts, if a customer uses fewer impressions than the minimum, there are no discounts or prorating to adjust the minimum fees, and if a customer uses more impressions than the minimum, then an overage fee is applied on such usage. We recognize revenue when control of the promised services is transferred to customers. Revenue from the cloud-based technology platform is primarily recognized based on impressions delivered to customers. An "impression" is delivered when an advertisement appears on pages viewed by users. A significant majority (i.e., over 90%) of the Company's contracts are usage-based contracts with no substantive minimum commitments. We have certain contracts for which pricing is variable through tiered pricing arrangements or include annual base fees that do not coincide with the calendar year, requiring an estimate of the transaction price attributable to each year. The majority of our contracts have a duration of one year or less.
Operating Expenses
Cost of revenue. Cost of revenue consists of data center costs, hosting fees,
revenue share with our DSP partners and personnel costs. Personnel costs include
salaries, bonuses, equity-based compensation, and employee benefit costs,
primarily attributable to our customer operations group. Our customer operations
group is responsible for onboarding, integration of new clients and providing
support for existing customers, including technical support for our technology
platform and product offering. We allocate overhead such as rent and occupancy
and information technology infrastructure charges based on headcount.
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Sales and marketing. Sales and marketing expense consists primarily of personnel
costs, including salaries, bonuses, equity-based compensation, employee benefits
costs and commission costs, for our sales and marketing personnel. Sales and
marketing expense also includes costs for advertising, promotional and other
marketing activities. We allocate overhead such as rent and occupancy and
information technology infrastructure charges based on headcount. Sales
commissions are expensed as incurred.
Technology and development. Technology and development expense consists
primarily of personnel costs of our engineering, product, and data sciences
activities, as well as software licenses. Personnel costs including salaries,
bonuses, equity-based compensation and employee benefits costs, third-party
consultant costs associated with the ongoing development and maintenance of our
technology platform and product offering. We allocate overhead such as rent and
occupancy and information technology infrastructure charges based on headcount.
Technology and development costs are expensed as incurred, except to the extent
that such costs are associated with software development that qualifies for
capitalization, which are then recorded as capitalized software development
costs included in internal use software, net on our consolidated balance sheet.
General and administrative. General and administrative expense consist of
personnel costs, including salaries, bonuses, equity-based compensation, and
employee benefits costs for our executive, finance, legal, human resources,
information technology, and other administrative employees. General and
administrative expenses also include outside consulting, legal and accounting
services, allocated facilities costs, and travel and entertainment primarily
related to intra-office travel and conferences.
Depreciation and amortization. Depreciation and amortization expense consists
primarily of depreciation and amortization expenses related to customer
relationships, developed technologies, trademarks, favorable leases, equipment,
leasehold improvements and other tangible and intangible assets. We depreciate
and amortize our assets in accordance with our accounting policies. Maintenance
and repairs, which do not extend the useful life of the respective assets, are
charged to expense as incurred. Intangible assets are amortized on a
straight-line basis over their estimated useful lives or using an accelerated
method. Useful lives of intangible assets range from four years to fifteen
years.
Interest expense, net
Interest expense, net. Interest expense consists primarily of interest payments on our outstanding borrowings under our Prior Credit Agreement (as defined below), New Credit Agreement (as defined below) and amortization of related debt issuance costs net of interest income.
Provision (benefit) from income taxes
Provision (benefit) from income taxes. The provision (benefit) from income taxes
resulted primarily from the current period book income (loss) multiplied by the
effective tax rate.
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Results of Operations
The following table sets forth our consolidated statement of operations for the
periods indicated:
Three Months Ended March 31,
2022 2021
(in thousands except percentages)
Revenue $ 89,242 $ 66,952
Operating expenses:
Cost of revenue (excluding depreciation and
amortization shown below) 16,561 11,420
Sales and marketing 23,057 16,545
Technology and development 16,987 12,769
General and administrative 16,769 8,547
Depreciation and amortization 12,458 14,395
Total operating expenses 85,832 63,676
Operating income 3,410 3,276
Interest expense, net (1,426) (6,960)
Net income (loss) before income taxes 1,984 (3,684)
(Provision) benefit from income taxes (825) 912 Net income (loss)$ 1,159 $ (2,772) Net income (loss) margin 1 % (4) %
The following table sets forth our consolidated statement of operations data expressed as a percentage of total revenue for the periods indicated:
Three Months Ended March 31,
2022 2021
Revenue 100 % 100 %
Operating expenses:
Cost of revenue (excluding depreciation and amortization
shown below) 19 % 17 %
Sales and marketing 26 % 25 %
Technology and development 19 % 18 %
General and administrative 19 % 13 %
Depreciation and amortization 14 % 22 %
Total operating expenses 96 % 95 %
Operating income 4 % 5 %
Interest expense, net (2) % (10) %
Net income (loss) before income taxes 2 % (5) %
(Provision) benefit from income taxes (1) % 1 %
Net income (loss) 1 % (4) %
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Comparison of the Three Months Ended
Three Months Ended March 31,
$ %
2022 2021 change change
(in thousands except percentages)
Revenue $ 89,242 $ 66,952 $ 22,290 33 %
Operating expenses:
Cost of revenue (excluding depreciation and
amortization shown below) 16,561 11,420 5,141 45 %
Sales and marketing 23,057 16,545 6,512 39 %
Technology and development 16,987 12,769 4,218 33 %
General and administrative 16,769 8,547 8,222 96 %
Depreciation and amortization 12,458 14,395 (1,937) (13) %
Total operating expenses 85,832 63,676 22,156 35 %
Operating income 3,410 3,276 134 4 %
Interest expense, net (1,426) (6,960) 5,534 (80) %
Net income (loss) before income taxes 1,984 (3,684) 5,668 (154) %
(Provision) benefit from income taxes (825) 912 (1,737) (190) %
Net income (loss) $ 1,159 $ (2,772) $ 3,931 (142) %
Revenue
Total revenue increased by
Three Months Ended March 31,
$ %
2022 2021 change change
(in thousands)
Programmatic revenue $ 40,575 $ 26,574 $ 14,001 53 %
Advertiser direct revenue 34,615 32,598 2,017 6 %
Supply side revenue 14,052 7,780 6,272 81 %
Total revenue $ 89,242 $ 66,952 $ 22,290 33 %
Total revenue increased primarily due to a significant increase in our
programmatic revenue of $14.0 million , or 53%, attributable to growth in volume
of impressions of 34% and an increase of 16% in average CPMs. The increase in
average CPMs was attributable to significant growth of our Context Control
solution. Revenue from our advertiser direct customers increased $2.0 million ,
or 6%, reflecting volume growth in volume of impressions of 14% as well as the
acquisition of a number of new large customers. These increases were partially
offset by a decrease of 3% in average CPMs. Revenue from our supply side
customers increased $6.3 million , or 81%, primarily due to the impact of the
acquisition of Publica.
Operating expenses
Cost of Revenue. Cost of revenue increased by $5.1 million , or 45%, for the
three months ended March 31, 2022 as compared to the three months ended
March 31, 2021 . This increase was driven by a $2.3 million increase in data
center and hosting fees resulting from overall revenue growth and migration of
data centers to Amazon Web Services cloud and an increase of $2.8 million in
revenue share to our DSP partners on account of our growth in programmatic
revenue.
Sales and marketing. Sales and marketing expenses increased by $6.5 million , or
39%, for the three months ended March 31, 2022 as compared to the three months
ended March 31, 2021 . This increase was primarily due to a $2.5 million
stock-based compensation expense, which we did not incur in the three months
ended March 31, 2021 , an increase in sales commissions of $1.1 million due to
higher revenue growth, an increase in compensation expenses of $1.4 million to
support our growth and international expansion, an increase in restructuring
costs of $0.5 million , an increase of $0.5 million in marketing and advertising
expenses, increase in professional fees of $0.2 million and an increase of $0.2
million in travel expenses.
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Technology and development. Technology and development expenses increased by
$4.2 million , or 33%, for the three months ended March 31, 2022 as compared to
the three months ended March 31, 2021 . This increase was primarily due to a $1.5
million stock-based compensation expense, which we did not incur in the three
months ended March 31, 2021 , an increase in compensation expenses of $1.8
million , an increase in hosting and license fees of $1.3 million to support our
growth, and an increase in professional fees of $0.5 million . These increases
were partially offset by a decrease of $0.9 million in cloud migration related
fees.
General and administrative. General and administrative expenses increased by
$8.2 million , or 96%, for the three months ended March 31, 2022 as compared to
the three months ended March 31, 2021 . This increase was primarily due to a $4.0
million stock-based compensation expense, which we did not incur in the three
months ended March 31, 2021 , an increase in compensation expenses of $1.5
million due to increased headcount, an increase in insurance costs of $1.4
million related to public company costs, an increase of $1.8 million in
professional fees incurred for audit, tax, legal and other services, an increase
of $0.5 million for software licenses and computer maintenance, and an increase
in reserves for bad debts of $0.6 million . This was offset by a decrease in
facilities expense of $0.6 million due to the sublease of the facility
previously used as our New York corporate headquarters and decrease in IPO
related professional fees of $0.9 million incurred during the three months ended
March 31, 2021 .
Depreciation and amortization. Depreciation and amortization expenses decreased
by $1.9 million , or 13%, for the three months ended March 31, 2022 as compared
to the three months ended March 31, 2021 . This decrease results from decreased
depreciation of our property and equipment of $0.3 million and decreased
amortization of our intangible assets of $2.1 million , resulting from the use of
the accelerated method to amortize the asset. These decreases were offset by an
increase in amortization expense related to our internal-use software of $0.5
million .
Interest expense, net
Interest expense, net. Interest expense decreased by $5.5 million , or 80%, for
the three months ended March 31, 2022 as compared to the three months ended
March 31, 2021 . The decrease in interest expense was primarily attributable to
reduced Paid in Kind ("PIK") interest expense of $0.4 million and a decrease in
interest expense by $5.1 million due to partial repayment of our long-term debt
of $100.0 million and a reduction in the interest rates as a result of
refinancing our debt.
(Provision) benefit from income taxes
(Provision) benefit from income taxes. Provision (benefit) from income taxes increased by$1.7 million , or 190%, for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 . The tax provision increased due to higher book income for the three months endedMarch 31, 2022 .
Non-GAAP Financial Measures
We use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance withU.S. GAAP. Adjusted EBITDA is the primary financial performance measure used by management to evaluate our business and monitor ongoing results of operations. Adjusted EBITDA is defined as income (loss) before depreciation and amortization, stock-based compensation, interest expense, income taxes, acquisition, restructuring and integration costs, IPO readiness costs and other one-time, non-recurring costs. Adjusted EBITDA margin represents the Adjusted EBITDA for the applicable period divided by the revenue for that period presented in accordance withU.S. GAAP. We use non-GAAP financial measures to supplement financial information presented on aU.S. GAAP basis. We believe that excluding certain items from ourU.S. GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepareU.S. GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our shareholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period-to-period comparisons. Although we believe these measures are useful to investors and analysts for the same reasons they are useful to management, as discussed below, these measures are not a substitute for, or superior to,U.S. GAAP financial measures or disclosures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. 37 -------------------------------------------------------------------------------- The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net income (loss) prepared in accordance withU.S. GAAP and should be read only in conjunction with financial information presented on aU.S. GAAP basis. Reconciliation of Adjusted EBITDA to its most directly comparableU.S. GAAP financial measure, net income (loss), is presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Adjusted EBITDA Three Months Ended March 31, (in thousands) 2022 2021 Net income (loss)$ 1,159 $ (2,772) Depreciation and amortization 12,458 14,395 Stock-based compensation 8,139 - Interest expense, net 1,426 6,960 (Provision) benefit from income taxes 825
(912)
Acquisition, restructuring and integration costs 749 171 IPO readiness costs - 945 Loss on disposal of assets 49 - Adjusted EBITDA$ 24,805 $ 18,787 Revenue$ 89,242 $ 66,952 Net income (loss) margin 1 % (4) % Adjusted EBITDA margin 28 % 28 %
Liquidity and Capital Resources
General
As ofMarch 31, 2022 , our principal sources of liquidity were cash and cash equivalents totaling$82.3 million , which was held for working capital purposes, as well as the available balance under our New Revolver, described further below. We expect that our cash and cash equivalents on hand atMarch 31, 2022 will enable us to continue to make investments in the future. We expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale. We believe our existing cash and cash equivalents, availability under our New Revolver and cash provided by operations will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months and beyond. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, the continuing market acceptance of our products. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, it could reduce our ability to compete successfully and harm our results of operations. Some of our customers pay in advance for subscriptions, a portion of which is recorded as deferred revenue. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is later recognized as revenue in accordance with our revenue recognition policy. As ofMarch 31, 2022 andDecember 31, 2021 , we had deferred revenue of$0.4 million and$0.2 million , respectively, all of which was recorded as a current liability and is expected to be recorded as revenue in the next twelve months, provided all other revenue recognition criteria have been met. 38 --------------------------------------------------------------------------------
Credit Facilities
OnJuly 19, 2018 , we entered into the Prior Credit Agreement with a syndicate of lenders, comprised of the$325.0 million (the "Term Loan") and the$25.0 million (the "Revolving Loan"), with maturity dates ofJuly 19, 2024 andJuly 19, 2023 , respectively (the "Prior Credit Agreement"). Pursuant to the Incremental Facility Assumption Agreement No. 1, dated as ofNovember 19, 2019 (the " Prior Credit Agreement Amendment"), the Term Loan was increased to$345.0 million . As explained below, onSeptember 29, 2021 , the Company repaid the outstanding balances and terminated the Prior Credit Agreement. In addition to the cash pay interest, the Prior Credit Agreement included PIK interest at a rate of 1.25% per annum. All PIK interest due was paid by capitalizing such interest and adding such applicable PIK interest to the principal amount of the outstanding Term Loan. EffectiveFebruary 1, 2021 , and subject to maintaining a total leverage ratio less than 6.50 to 1.00, additional PIK interest was not accrued pursuant to the Prior Credit Agreement. The interest rate during the period prior to the repayment was 6.0%. OnSeptember 29, 2021 , we entered into a new credit agreement with various lenders (the "New Credit Agreement" or the "New Revolver"), which provides for an initial$300.0 million in commitments for revolving credit loans, which amount may be increased or decreased under specific circumstances, with a$30.0 million letter of credit sublimit and a$100.0 million alternative currency sublimit. In addition, the New Credit Agreement provides for the ability to request incremental term loan facilities, in a minimum amount of$5.0 million for each facility. Borrowings under to the New Credit Agreement may be used for working capital and other general corporate purposes, including for acquisitions permitted under the New Credit Agreement. The interest rates applicable to revolving borrowings under the New Credit Agreement are, at our option, either (i) in the case ofU.S. dollar loans, (x) a base rate, which is equal to the greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, and (c) the Adjusted LIBOR (subject to a floor of 0.0%) for a one month Interest Period (each term as defined in the New Credit Agreement) plus 1%, or (y) the Adjusted LIBOR (subject to a floor of 0.0%) equal to the LIBOR (as defined in the New Credit Agreement) for the applicable Interest Period multiplied by the Statutory Reserve Rate (each term as defined in the New Credit Agreement) or (ii) in the case of RFR Loans (as defined in the New Credit Agreement) denominated in sterling or euro, (x) the applicable RFR (as defined in the New Credit Agreement) or (y) the applicable Term RFR (as defined in the New Credit Agreement), plus in the case of each of clauses (i) and (ii), the Applicable Rate (as defined in the New Credit Agreement). The Applicable Rate (i) for base rate loans range from 0.75% to 1.50% per annum, (ii) for LIBOR loans range from 1.75% to 2.50% per annum, (iii) for RFR Loans denominated in sterling range from 1.7826% to 2.5326%, and (iv) for RFR Loans denominated in euro range from 1.7965% to 2.5456%, in each case, based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement). Base rate borrowings may only be made in dollars. A commitment fee during the term of the New Credit Agreement ranging from 0.20% to 0.35% per annum of the average daily undrawn portion of the revolving commitments based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement). The interest rate atMarch 31, 2022 was 2.5%. The New Credit Agreement contains covenants requiring certain financial information to be submitted quarterly and annually. In addition, we are also required to comply with certain financial covenants such as maintaining a Net Leverage Ratio (as defined in the New Credit Agreement) of 3.50 to 1.00 or lower and maintaining a minimum Interest Coverage Ratio (as defined in the New Credit Agreement) of 2.50 to 1.00. As ofMarch 31, 2022 , the Company was in compliance with all covenants contained in the New Credit Agreement. Based upon current facts and circumstances, we believe existing cash coupled with the cash flows generated from operations will be sufficient to meet our cash needs and comply with covenants. 39 --------------------------------------------------------------------------------
Cash Flows
The table below presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.
Three Months
Ended
2022 2021
Net cash provided by operating activities $ 11,187 $ 7,697
Net cash used in investing activities (3,005) (6,377)
Net cash provided by (used in) financing activities 598
(1,338)
Net increase (decrease) in cash and cash equivalents, and restricted cash
$ 8,780 $ (18)
Effect of exchange rate changes on cash and cash
equivalents, and restricted cash 278 (846)
Cash, cash equivalents, and restricted cash, at
beginning of period 76,078 54,721
Cash, cash equivalents and restricted cash, at end of period$ 85,137 $ 53,857 Operating Activities For the three months endedMarch 31, 2022 , net cash provided by operating activities was$11.2 million , resulting from a net income of$1.2 million adjusted for non-cash expenses of depreciation and amortization of$12.5 million , stock-based compensation of$8.1 million , bad debt expense of$0.3 million , partially offset by a decrease in working capital of$10.4 million , a decrease in net operating leases of$0.2 million and a deferred tax benefit of$0.7 million . For the three months endedMarch 31, 2021 , net cash provided by operating activities was$7.7 million , resulting from a net loss of$2.8 million adjusted for non-cash expenses of depreciation and amortization of$14.7 million , non-cash interest expense of$0.4 million , offset by a decrease in the allowance for doubtful accounts of$0.3 million and a decrease in working capital of$4.4 million .
Investing Activities
Cash used in investing activities was
Cash used in investing activities was$6.4 million for the three months endedMarch 31, 2021 , reflecting our asset purchase of internal use software for$4.5 million inJanuary 2021 , and$1.7 million of capitalized costs relating to internal use software.
Financing Activities
Cash provided by financing activities was
Cash used in financing activities was
Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating leases for office space, our purchase commitments related to hosting and data services and repayments of long-term debt. We lease office space under operating leases, which expire on various dates throughMarch 2027 and the total non-cancelable payments under these leases were$30.6 million as ofMarch 31, 2022 . Total non-cancelable purchase commitments related to hosting services as ofMarch 31, 2022 were$114.3 million for periods through 2026. The New Revolver matures in 2026. 40 --------------------------------------------------------------------------------
Indemnification Agreements
In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, in connection with the completion of this offering we intend to enter into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.
JOBS Act
We qualify as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). For as long as we are an "emerging growth company," we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory "say-on-pay" votes on executive compensation and shareholder advisory votes on golden parachute compensation. The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to "opt-in" to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting estimates described in "Note 2-Basis of presentation and summary of significant accounting policies" to our consolidated financial statements appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2 to our condensed consolidated financial statements: "Basis of presentation and summary of significant accounting policies-Accounting pronouncements not yet adopted" included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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