QUOTIENT TECHNOLOGY INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K filed onMarch 1, 2022 with theSEC , as amended by our Form 10-K/A, Amendment No. 1, filed onApril 29, 2022 with theSEC (collectively, "Annual Report on Form 10-K"). In addition to historical financial information, the following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934. The forward-looking statements reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties, including statements related to the potential impact of the COVID-19 pandemic on our business and operations. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences are described in "Risk Factors" set forth in our Annual Report on Form 10-K, and elsewhere in this Quarterly Report on Form 10-Q.
Overview
Quotient Technology Inc. is an industry leading digital media and promotions technology company that powers cohesive omnichannel brand-building and sales-driving marketing campaigns for advertisers and retailers to influence purchasing decisions throughout a shopper's path to purchase. These marketing campaigns are planned, delivered and measured using our technology platforms and data analytics tool. Our vision is to build the world's leading performance marketing platform that delivers a variety of targeted digital marketing solutions which advertisers and retailers can purchase to drive measurable improvements in sales and customer loyalty. Our customers consist primarily of consumer-packaged goods ("CPG") companies and their brand marketers (together referred to as "advertisers") who want to drive sales and positive brand engagement with shoppers. Our digital marketing platform is designed to produce returns on marketing investment for advertisers by utilizing consumer behavior and intent data to deliver the right marketing message to the right shopper at the right time, through multiple touchpoints while they are engaged online, out of home and in-store. We partner with retailers, who primarily sell through local, physical stores as well as through eCommerce properties. Traditionally, we have been primarily focused on theU.S. -based grocery retail market and the advertisers who sell products through that channel. However, we are aiming to expand outside the grocery retail space, such as with partners in certain vertically-integrated industries (also known as "verticals"). By partnering with Quotient, retailers can monetize their proprietary sales data and digital properties to build an alternative revenue stream and offer effective marketing opportunities for their brand partners to engage consumers, with the aim of achieving higher sales through their physical stores and eCommerce sites. Over the last five years, we have grown our platform capabilities and our network of marketing channels to reach shoppers through a combination of in-house innovation, partnerships, and acquisitions. Our network includes the digital properties of our retail partners, publisher partners, and advertiser customers (also known as CPG manufacturers or brands), social media platforms, our consumer brands Coupons.com and Shopmium, and DOOH properties. This network provides Quotient with proprietary and licensed data, including retailers' POS shopper data, consumer behavior and purchase intent data, and location intelligence. With such data powering our platforms, customers and partners use Quotient to leverage consumer data and insights, engage consumers via digital channels, and integrate marketing and merchandising programs to drive measurable sales results and consumer engagement.
We provide value to three constituencies: over 2,500 brands from approximately 900 CPGs; retail partners across multiple classes of trade such as grocery retailers, drug, automotive, mass merchant, dollar, club, and convenience merchandise channels; and consumers visiting our and our retailer and other network partners' websites, mobile properties and social channels.
We believe the breadth of our relationships has created a network effect, which
generates increased engagement with consumers and provides us a competitive
advantage over both offline and online competitors. As our network expands and
consumer audience increases, we generate more consumer data and insights, which
further improves our ability to deliver targeted and personalized media and
promotions, and also strengthens our measurement and data insight solutions. We
believe this will make our platforms more valuable to advertisers and
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retailers for their digital marketing campaigns. We expect that the breadth of
media and promotion content delivered through Quotient platforms from leading
brands will increase and enables us to attract and retain more retailers and
consumers.
Furthermore, we believe our strategy is adaptable to current trends in the
industry. For example, as retail media evolves with more retailers bringing
retail media in-house, a fragmented buying landscape is emerging for CPGs. We
see opportunity in these industry trends and dynamics through building a
regional retailer ad network and, as we continue to focus on bringing automation
and self-service to our media platform, we aim to make media buying across
multiple retailers and retail media networks easier.
We primarily generate revenue from advertisers and retailers using our
technology platforms to help achieve their digital marketing objectives in four
distinct ways: (i) plan and buy media and promotions campaigns to reach the
right shoppers; (ii) target advertising, promotions and messaging to shoppers
for maximum impact; (iii) sell advertising space and activate the shopper data
that retailers collect through loyalty programs and digital transactions; and
(iv) measure the impact of advertisements, promotions or messages that have been
planned, sold or placed with "closed loop" measurement, defined as the use of
consumer data to help understand and evaluate how certain digital campaigns
impact our advertiser customers' and retailer partners' sales.
Using shopper data from our retail partners and our proprietary data and
audience segments, we deliver targeted and/or personalized digital media and
promotions to shoppers through our network. As our customers and partners shift
more of their marketing spend to digital channels, our solutions help them
optimize the performance of such digital channels. Our platforms measure
performance by attribution of digital campaigns to retail purchases in near real
time, demonstrating return on spend for our customers and partners.
Our promotions products include digital paperless coupons, digital print
coupons, in-lane on receipt promotions, digital national promotions, shopper
promotions, digital rebates and loyalty offers. Our media solutions include
display, social, DOOH, Retailer.com display and sponsored search, shoppable
brand pages, and audiences. A growing number of campaigns that our customers
purchase are integrated campaigns, which combine a mix of digital media and/or
promotions solutions within a single campaign. While the revenue we earn from
these programs is generally determined on a cost-per-click, cost-per-impression,
or cost-per-acquisition basis, we are increasingly generating revenues based on
duration-based pricing with our duration-based National Promotions offering,
launched during 2021.
We generally pay a distribution fee or revenue share to retailers and publishers
for activation or redemption of a digital promotion, for media campaigns, and
for use of data for targeting or measurement. We also pay a fee to third-party
publishers for traffic acquisition, which consists of delivering campaigns on
certain networks or properties. In cases where we control the digital promotion
and media advertising inventory before it is transferred to our customers, these
distribution, revenue share and third-party service fees are included in our
cost of revenues. In cases where we do not control the digital promotion and
media advertising inventory, we record revenues on a net basis, and the
distribution, revenue-share and third-party service fees are deducted from gross
revenues to arrive at net revenues.
Seasonality
Some of our products experience seasonal sales and buying patterns mirroring
those in the CPG, retail, advertising, and eCommerce markets, including
back-to-school and holiday campaigns, where demand increases during the second
half of our fiscal year. Seasonality may also be affected by CPG annual budget
cycles, as some large CPGs have fiscal years ending in June. We believe that
this seasonality pattern has affected, and will continue to affect, our business
and the associated revenues during the first half and second half of our fiscal
year. We recognized 54%, 59% and 54% of our annual revenue during the second
half of 2021, 2020 and 2019, respectively.
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--------------------------------------------------------------------------------Impact of COVID-19
We are cognizant of the ongoing COVID-19 pandemic and the resulting global implications. In an effort to protect the health and safety of our employees, our workforce has had, and continues in most instances, to spend a significant amount of time working remotely, and travel has been impacted. Many government measures initially imposed to contain COVID-19 or slow its spread, including orders to close all businesses not deemed "essential," isolate residents to their homes or places of residence, and practice social distancing, have been lifted in certain global locations and have been lifted widely in theU.S. , although as a result of new virus variants and subvariants arising, it is possible that such measures may be reinstated in the future. We anticipate that these actions and the global health crisis caused by the COVID-19 pandemic will continue to negatively impact business activity across the globe, even though vaccination efforts are continuing throughoutthe United States and, to varying extents, in other countries. Although as of the fall of 2022 the extent of restriction-lifting has been widespread, the residual effects of such restrictions and prolonged alternative working arrangements are unknown and the eventual effectiveness of the vaccination efforts likewise remains uncertain, including with respect to consumer activity across the globe, the productivity of our employee base and our sales and operations functions. We will continue to actively monitor the pandemic situation and may take further actions that alter our business operations as may be required by federal, state, local or foreign authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. If brands or retailers pause, delay, or cancel campaigns due to the continuing uncertainty, supply-chain disruption, and inflationary input-cost factors affecting advertiser and retailers, and also due to the consumer purchasing behavior changes caused by COVID-19, there may be an adverse impact on our promotion and media revenues and, accordingly, the growth of our business. The full extent of the impact of the ongoing COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict. See Part II, Item 1A, Risk Factors, for an additional discussion of risks related to COVID-19.
Third Quarter 2022 Overview
Quarterly revenues of$70.3 million in the third quarter of 2022 decreased by$65.5 million , or 48%, as compared to the same period in 2021. The year over year decrease in our quarterly revenues was largely due to the termination of our partnership with the Albertsons Companies, Inc. ("Albertsons"), the decline in media revenues as certain retail partners "in-house" media services, and the impact of ongoing macroeconomic challenges affecting CPG businesses. Revenues also decreased as a result of recognizing a higher portion of our revenue on a net basis due to our recent business model changes. Our net loss of$7.2 million in the third quarter of 2022 decreased by$0.6 million , as compared to the net loss of$7.8 million in the same period in 2021. The year over year decrease in our quarterly net loss was primarily due to a decrease in interest expense as a result of the adoption of ASU 2020-06 and the benefit of a non-recurring impairment charge recorded in the third quarter of 2021 related to certain intangible assets due to circumstances surrounding the termination of our partnership with Albertsons. Additionally, capitalized labor costs attributed to internally developed software increased due to a higher proportion of our engineering, product, and design efforts being focused on building new platforms, features and functionality. This was partially offset by a decrease in revenues as discussed previously, restructuring charge related to a workforce reduction plan, litigation settlements, and overall higher operating expenses, as a percentage of revenue, incurred to support our business objectives. While we continue to make important investments in our technology and infrastructure, we remain focused on operational efficiencies and expense management. We expect our operating expenses to decline in absolute dollars as we remove costs from the business, in connection with our ongoing business transformation efforts. However, we also expect operating expenses to increase as a percentage of revenue as more of our future revenue is recognized on a net basis compared to the prior periods due to the business model changes. When revenues begin to grow again, we expect to increase spending to support that growth.
Non-GAAP Financial Measure and Key Operating Metrics
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA"), a non-U.S. GAAP financial measure, is a key metric used by
our management and our Board of Directors to understand and evaluate our core
operating performance and trends, to prepare and approve our annual budget, to
develop short
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and long-term operational plans, and to determine bonus payouts. In particular,
we believe that the exclusion of certain income and expenses in calculating
Adjusted EBITDA can provide a useful measure for period-to-period comparisons of
our core business. Additionally, Adjusted EBITDA is a key financial metric used
by the compensation committee of our Board of Directors in connection with the
determination of compensation for our executive officers. Accordingly, we
believe that Adjusted EBITDA provides useful information to investors and others
in understanding and evaluating our operating results in the same manner as our
management and Board of Directors.
Adjusted EBITDA excludes non-cash charges, such as depreciation, amortization
and stock-based compensation, because such non-cash expenses in any specific
period may not directly correlate to the underlying performance of our business
operations and can vary significantly between periods. Additionally, it excludes
the effects of interest expense, income taxes, other (income) expense net,
change in fair value of contingent consideration, impairment of certain
long-lived and right-of-use assets, impairment of certain intangible assets,
shareholder activism response costs, litigation settlements, certain acquisition
related costs, and restructuring charges. We exclude certain items because we
believe that these costs (benefits) do not reflect expected future operating
expenses. Additionally, certain items are inconsistent in amounts and frequency,
making it difficult to contribute to a meaningful evaluation of our current or
past operating performance.
Net loss and Adjusted EBITDA for each of the periods presented were as follows (in thousands):
Three Months Ended September
30, Nine Months Ended
2022 2021 2022 2021
Net loss $ (7,167) $ (7,843) $ (76,831) $ (38,458)
Adjusted EBITDA 10,028 17,327 1,660 28,492
Our use of Adjusted EBITDA has limitations as an analytical tool, and you
should not consider it in isolation or as a substitute for analysis of our
results as reported under
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA does not reflect interest and tax payments that may represent a reduction in cash available to us;
•Adjusted EBITDA also does not include the effects of stock-based compensation, depreciation, amortization of acquired intangible assets, change in fair value of contingent consideration, interest expense, other (income) expense, net, provision for (benefit from) income taxes, impairment of certain long-lived and right-of-use assets, impairment of certain intangible assets, shareholder activism response costs, litigation settlements, certain acquisition related costs, and restructuring charges; and
•other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
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A reconciliation of Adjusted EBITDA to net loss, the most directly comparable
U.S. GAAP financial measure, for each of the periods presented is as follows (in
thousands):
Three Months Ended September 30 ,
Nine Months Ended
2022 2021 2022 2021
Net loss $ (7,167) $ (7,843) $ (76,831) $ (38,458)
Adjustments:
Stock-based compensation 4,980 4,690 27,849 17,074
Depreciation and amortization 4,797 7,287 14,028 24,425
Other (1) 7,919 8,720 31,889 12,453
Change in fair value of contingent
consideration - 245 - 772
Interest expense 1,837 3,809 4,170 11,306
Other (income) expense, net (200) 96 181 130
Provision for (benefit from) income taxes (2,138) 323 374 790
Total adjustments $ 17,195 $ 25,170 $ 78,491 $ 66,950
Adjusted EBITDA $ 10,028 $ 17,327 $ 1,660 $ 28,492
(1)For the three and nine months ended September 30, 2022 , Other includes a
charge of zero and $11.4 million , respectively, related to the impairment of
certain long-lived and right-of-use assets; $5.0 million and $9.8 million ,
respectively, related to litigation settlements; $2.8 million and $5.5 million ,
respectively, related to restructuring charges; and $0.1 million and $5.2
million , respectively, related to shareholder activism response costs. For the
three and nine months ended September 30, 2021 , Other includes a charge of $6.5
million and $9.1 million , respectively, related to the impairment of certain
intangible assets due to the circumstances surrounding the termination of our
partnership with Albertsons; restructuring charges of $1.8 million and $2.0
million , respectively; and acquisition related costs of $0.4 million and $1.3
million , respectively. Acquisition related costs primarily include certain
bonuses contingent upon the acquired company meeting certain financial metrics
over the contingent consideration period, as well as diligence, accounting, and
legal expenses incurred related to certain acquisitions. Restructuring charges
relate to severance for impacted employees.
This non-GAAP financial measure is not intended to be considered in isolation
from, as substitute for, or as superior to, the corresponding financial measure
prepared in accordance with U.S. GAAP. Because of these and other limitations,
Adjusted EBITDA should be considered along with U.S. GAAP based financial
performance measures, including various cash flow metrics, net loss, and our
other U.S. GAAP financial results.
Factors Affecting Our Performance
Grow our network. The success and scale of our platforms and our ability to grow
revenue will depend on our ability to grow our publishing network, expand our
reach to engaged consumers, and drive volume of transactions on our platforms.
If we do not add network partners or expand our relationship with existing
network partners, or if network partners do not deliver active users to our
platforms, our business and revenue growth will be negatively impacted.
Obtaining high quality promotions, increasing the number of brand-authorized
activations, and capitalizing on new pricing/revenue models for promotions. Our
ability to grow revenue will depend upon our ability to shift more dollars to
our platforms from our brand customers, to continue to obtain high quality
promotions, to increase the number of brand-authorized activations available
through our platforms, and to capitalize on new pricing/revenue models for
promotions, such as duration-based pricing. If we are unable to do any of these,
growth in our revenue may be adversely affected.
Increasing revenue from advertisers on our platforms. Our ability to grow our
revenue in the future depends upon our ability to continue to increase revenues
from existing and new advertisers on our platforms through national brand
coupons, targeted media and measurement, and increasing the number of brands
that are using our platforms within each advertiser.
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Variability in promotional and media spend by advertisers or brands. Our
revenues may fluctuate due to changes in promotional or media spending budgets
of advertisers as well as the timing of their promotional and media spending.
Decisions by major advertisers, whether or not due to the ongoing impact of
COVID-19 and related supply chain and inflation input-cost issues, to delay or
reduce their promotional and media spending, move campaigns, or divert spending
away from digital promotions or media could slow our revenue growth or reduce
our revenues.
Ability to retain and expand our relationships with retailers, obtain commitment
and support for our platforms from retailers, and successfully renegotiate or
amend retailer agreements. The success and scale of our platforms depend on our
strategic relationships with retailers. The success and scale of our platforms
also depends on the level of commitment and support for our platforms from
retailers. Renewals or amendments of existing retailer relationships may become
more challenging for us in light of our business model and pricing changes.
These changes require restructuring our agreements and the way we operate with
retailers and revenue arrangements for certain services. If we do not expand
these relationships, if we do not renew or amend these relationships on as
favorable terms as were in place immediately prior to renewal or amendment, if
we lose significant retailers, or if we do not add new retailers to our
platforms, our business will be negatively affected. In the near term, we expect
the termination of our relationship with Albertsons, as well as retailers
bringing retail media in-house, to continue to have a negative impact on our
financial performance.
Innovation in our media and promotions offerings, expansion of our consumer
reach and growth of our data analytics capabilities. Our ability to grow our
revenue in the future will depend on our ability to (i) innovate and invest in
promotion and media solutions, particularly with regard to automation and
self-service offerings; and (ii) invest in solutions around our data and
analytic capabilities, referred to as Quotient Analytics and Audiences, for
advertisers and retailers.
International Growth and Acquisitions. Our ability to grow our revenues will
also depend on our ability to grow our operations and offerings in existing
international markets and expand our business through selective acquisitions,
similar to our acquisitions of MLW Squared Inc. ("Ahalogy"), Crisp Media, Inc.
("Crisp"), Elevaate, SavingStar, Inc. ("SavingStar"), Shopmium SAS ("Shopmium"),
and Ubimo, and our ability to integrate such acquisitions with the core business
of the Company.
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--------------------------------------------------------------------------------Results of Operations
The following tables set forth our consolidated results of operations and our
consolidated results of operations as a percentage of revenues for the periods
presented:
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except percentages) 2022 2021 2022 2021
Revenues $ 70,336 100.0 % $ 135,884 100.0 % $ 218,043 100.0 % $ 375,080 100.0 %
Cost of revenues 36,765 52.3 % 86,535 63.7 % 123,110 56.5 % 240,680 64.2 %
Gross profit 33,571 47.7 % 49,349 36.3 % 94,933 43.5 % 134,400 35.8 %
Operating expenses:
Sales and marketing 19,939 28.3 % 29,401 21.6 % 63,334 29.0 % 85,233 22.7 %
Research and development 4,899 7.0 % 11,074 8.1 % 21,727 10.0 % 34,541 9.2 %
General and administrative 16,401 23.3 % 12,244 9.0 % 81,978 37.6 % 40,086 10.7 %
Change in fair value of contingent
consideration - - % 245 0.2 % - - % 772 0.2 %
Total operating expenses 41,239 58.6 % 52,964 38.9 % 167,039 76.6 % 160,632 42.8 %
Loss from operations (7,668) (10.9) % (3,615) (2.7) % (72,106) (33.1) % (26,232) (7.0) %
Interest expense (1,837) (2.6) % (3,809) (2.8) % (4,170) (1.9) % (11,306) (3.0) %
Other income (expense), net 200 0.3 % (96) (0.1) % (181) (0.1) % (130) - %
Loss before income taxes (9,305) (13.2) % (7,520) (5.6) % (76,457) (35.1) % (37,668) (10.0) %
Provision for (benefit from) income
taxes (2,138) (3.0) % 323 0.2 % 374 0.2 % 790 0.2 %
Net loss $ (7,167) (10.2) % $ (7,843) (5.8) % $ (76,831) (35.3) % $ (38,458) (10.2) %
Disaggregated Revenue
The following table presents our revenues disaggregated by type of services. The
majority of our revenue is generated from sales in
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Promotion $ 44,749 $ 65,538 $ (20,789) (32) % $ 137,516 $ 194,729 $ (57,213) (29) %
Media 25,587 70,346 (44,759) (64) % 80,527 180,351 (99,824) (55) %
Total Revenue $ 70,336 $ 135,884 $ (65,548) (48) % $ 218,043 $ 375,080 $ (157,037) (42) %
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Comparison of the Three and Nine months ended
Revenues
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenues $ 70,336 $ 135,884 $ (65,548) (48) % $ 218,043 $ 375,080 $ (157,037) (42) %
Revenues for the three months ended September 30, 2022 decreased by $65.5
million , or 48%, as compared to the same period in 2021. The decrease in digital
promotion revenues was primarily due to the termination of our partnership with
Albertsons, and as a result of recognizing more revenue on a net basis due to
business model changes. The decrease in media revenues was primarily due to the
termination of our partnership with Albertsons; as a result of recognizing more
revenue on a net basis due to business model changes; and due to certain retail
partners bringing media services in-house. Revenues from digital promotion and
media campaigns were 64% and 36%, respectively, of total revenues for the three
months ended September 30, 2022 , as compared to 48% and 52%, respectively, of
total revenues during the same period in 2021.
Revenues for the nine months ended September 30, 2022 decreased by $157.0
million , or 42%, as compared to the same period in 2021 and include the
recognition of $3.3 million of revenue previously deferred that should have been
recognized in prior periods as the underlying performance obligations were
satisfied in prior periods. The decrease in digital promotion revenues was
primarily due to the termination of our partnership with Albertsons, and as a
result of recognizing more revenue on a net basis due to business model changes.
The decrease in media revenues was primarily due to the termination of our
partnership with Albertsons; as a result of recognizing more revenue on a net
basis due to business model changes; and due to certain retail partners bringing
media services in-house. Revenues from digital promotion and media campaigns
were 63% and 37%, respectively, of total revenues for the nine months ended
September 30, 2022 , as compared to 52% and 48%, respectively, of total revenues
during the same period in 2021.
We expect promotion revenue to decline as we continue to recognize a higher
proportion of revenue on a net basis. We recognize revenue on a net basis for
arrangements when we act as an agent and do not control the service provided by
the retailer or the price charged by the partner. CPGs and retailers are
responsible for the determination of where a campaign is delivered, and
retailers are responsible for providing the underlying services. We expect media
revenue to continue to be negatively impacted due to retail partners bringing
media services in-house.
Cost of Revenues and Gross Profit
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except
percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Cost of revenues $ 36,765 $ 86,535 $ (49,770) (58) % $ 123,110 $ 240,680 $ (117,570) (49) %
Gross profit $ 33,571 $ 49,349 $ (15,778) (32) % $ 94,933 $ 134,400 $ (39,467) (29) %
Gross margin 48 % 36 % 44 % 36 %
Cost of revenues for the three months ended September 30, 2022 decreased by
$49.8 million , or 58%, as compared to the same period in 2021. The decrease was
primarily due to (i) a net decrease of $37.8 million in distribution fees paid
to our partners for media and promotion revenues delivered through their
platforms, associated with the decrease in revenues as discussed previously, and
data and traffic acquisition costs for offsite media on non-owned-and-operated
properties, a portion of which is now reported net with revenues; (ii) the
benefit of a non-recurring charge during the third quarter of 2021 of $6.5
million related to the impairment of certain intangible assets due to
circumstances surrounding the termination of our partnership with Albertsons;
(iii) a decrease in amortization expense of $2.4 million related to acquired
intangible assets; (iv) a decrease in compensation costs of $2.0 million ; and
(v) a
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decrease in overhead expenses of
Cost of revenues for the nine months endedSeptember 30, 2022 decreased by$117.6 million , or 49%, as compared to the same period in 2021. The decrease was primarily due to (i) a net decrease of$94.7 million in distribution fees paid to our partners for media and promotion revenues delivered through their platforms, associated with the decrease in revenues as discussed previously, as well as data and traffic acquisition costs for offsite media on non-owned-and-operated properties, a portion of which is now reported net with revenues; (ii) a decrease in amortization expense of$9.8 million related to acquired intangible assets; (iii) the benefit a non-recurring charges during the second and third quarters of 2021 of$9.1 million related to the impairment of certain intangible assets due to circumstances surrounding the termination of our partnership with Albertsons; (iv) a decrease in overhead expenses of$3.5 million related to facilities and infrastructure support; and (v) a decrease in compensation costs of$2.4 million , partially offset by a charge of$1.4 million related to the impairment of certain capitalized software assets and an increase in restructuring charges of$0.5 million . Gross margin for the three and nine months endedSeptember 30, 2022 increased to 48% and 44%, respectively, as compared to 36% for each respective period in 2021. The increase was primarily due to lower amortization expense related to acquired intangible assets and a higher proportion of revenue recognized net of certain costs, partially offset by operating leverage on the reduction of net revenues and sales mix of 32% and 29%, respectively. We expect the cost of revenues during the remainder of 2022 to continue to decline, in absolute dollars, as we expect a higher proportion of our revenue to be recognized on a net basis. We recognize revenue on a net basis for arrangements when we act as an agent and do not control the service provided by the retailer or the price charged by the partner. CPGs and retailers are responsible for the determination of where a campaign is delivered, and retailers are responsible for providing the underlying services. Sales and Marketing Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Sales and marketing$ 19,939 $ 29,401 $ (9,462) (32) %$ 63,334 $ 85,233 $ (21,899) (26) % Percent of revenues 28 % 22 % 29 % 23 %
Sales and marketing expenses consist primarily of compensation, including salaries and benefits, sales commissions and stock-based compensation provided to our sales and marketing personnel, as well as facility costs and other related overhead costs; marketing programs; amortization of acquired intangibles; and travel costs.
Sales and marketing expenses for the three months endedSeptember 30, 2022 decreased by$9.5 million , or 32%, as compared to the same period in 2021. The decrease was primarily the result of a decrease in compensation costs of$6.4 million related to lower personnel costs in connection with our expense management efforts; a decrease of$2.9 million in promotional, advertising and other costs; and a decrease of$0.2 million in restructuring charges. Sales and marketing expenses for the nine months endedSeptember 30, 2022 decreased by$21.9 million , or 26%, as compared to the same period in 2021. The decrease was primarily the result of a decrease in compensation costs of$13.5 million related to lower personnel costs in connection with our expense management efforts; a decrease of$8.2 million in promotional, advertising and other costs; and a decrease of$0.4 million in restructuring charges, partially offset by an increase in amortization of acquired intangibles of$0.2 million . 41 -------------------------------------------------------------------------------- We expect sales and marketing expenses to remain relatively flat, in absolute dollars, as we continue to invest in sales and marketing in order to support our growth and business objectives. Research and Development Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Research and development$ 4,899 $ 11,074 $ (6,175) (56) %$ 21,727 $ 34,541 $ (12,814) (37) % Percent of revenues 7 % 8 % 10 % 9 % Research and development expenses consist primarily of compensation, including salaries, bonuses and benefits, and stock-based compensation provided to our engineering personnel, as well as facility costs and other related overhead costs; costs related to development of new products and the enhancement of existing products; and fees for design, testing, consulting, and other related services.
During 2022, we have been primarily focused on the development of new features
and functionality of our technology which has increased our overall
capitalization of internal use software development costs. The development
includes focus on our technology for
Research and development expenses for the three months endedSeptember 30, 2022 decreased by$6.2 million , or 56%, as compared to the same period in 2021. The decrease was primarily due to a decrease in compensation of$3.2 million related to lower personnel costs in connection with our expense management efforts; an increase in capitalization of internal use software development costs of$3.1 million ; and a decrease of$0.1 million in restructuring charges; offset by an increase in overhead expenses related to facilities and infrastructure support of$0.2 million . Research and development expenses for the nine months endedSeptember 30, 2022 decreased by$12.8 million , or 37%, as compared to the same period in 2021. The decrease was primarily due to an increase in capitalization of internal use software development costs of$7.6 million ; a decrease in compensation of$5.2 million related to lower personnel costs in connection with our expense management efforts; and a decrease of$0.2 million in restructuring charges; offset by an increase in overhead expenses related to facilities and infrastructure support of$0.2 million . We believe that continued investment in technology is critical to attaining our strategic objectives, and we intend to balance our investment in research and development with our continued operational and cost optimization efforts. However, we expect research and development expenses, in absolute dollars, to decline in future periods as we consolidate our engineering function to drive efficiencies. Over the long term, we plan to continue to expand our tools and products that will enable our business to scale and provide more offerings to our customers. General and Administrative Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change General and administrative$ 16,401 $ 12,244 $ 4,157 34 %$ 81,978 $ 40,086 $ 41,892 105 % Percent of revenues 23 % 9 % 38 % 11 % 42
-------------------------------------------------------------------------------- General and administrative expenses consist primarily of compensation, including salaries, bonuses and benefits, and stock-based compensation provided to our executives, finance, legal, human resource and administrative personnel, as well as facility costs and other related overhead costs; and fees paid for professional services, including legal, tax, accounting services, and other related services. General and administrative expenses for the three months endedSeptember 30, 2022 increased by$4.2 million , or 34%, as compared to the same period in 2021. The increase was primarily due to an increase of$5.0 million related to litigation settlements; an increase in restructuring charges of$0.9 million ; an increase in professional service fees of$0.7 million ; an increase in compensation costs of$0.4 million ; and shareholder activism response costs of$0.1 million ; partially offset by a decrease in other administrative expenses of$2.6 million and a decrease in acquisition related costs of$0.3 million . General and administrative expenses for the nine months endedSeptember 30, 2022 increased by$41.9 million , or 105%, as compared to the same period in 2021. The increase was primarily due to an increase in stock-based compensation costs of$12.0 million related to the stock option, RSU award and PSU award modifications for our former CEO in connection with his separation agreement; an impairment charge related to certain long-lived and right-of-use assets of$10.0 million due to the exit of occupancy of office space; an increase of$9.7 million related to litigation settlements; shareholder activism response costs of$5.1 million ; an increase in restructuring charges of$3.4 million related to severance for impacted employees; an increase in professional service fees of$2.0 million including higher legal fees due to litigation matters; and an increase in compensation costs of$1.8 million ; partially offset by a decrease in acquisition related costs of$1.3 million and an decrease in other administrative expenses of$0.8 million . We expect general and administrative expenses, in absolute dollars, to decrease in future periods as we balance our investment in corporate infrastructure with our continued operational and cost optimization efforts.
Change in Fair Value of Contingent Consideration
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Change in fair value of contingent
consideration $ - $ 245 $ (245) (100) % $ - $ 772 $ (772) (100) %
Percent of revenues - % - % - % - %
During the three and nine months ended September 30, 2022 , we did not record
any charge related to the change in fair value of contingent consideration. As
of December 31, 2021 , Ubimo's contingent consideration period ended upon
achieving certain financial metrics. During the first quarter of 2022, we paid
$24.7 million and, as such, no liability existed as of September 30, 2022 .
During the three months ended September 30, 2021 , we recorded a net charge of
$0.2 million related to the re-measurement of contingent consideration
associated with Ubimo, due to the increase in expected achievement of certain
financial metrics over the contingent consideration period. During the nine
months ended September 30, 2021 , we recorded a net charge of $0.8 million
related to the re-measurement of contingent consideration associated with both
Ubimo and Elevaate, due to the increase in expected achievement of certain
financial metrics over the contingent consideration period.
43
--------------------------------------------------------------------------------Interest Expense and Other Income (Expense), Net
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Interest expense $ (1,837) $ (3,809) 1,972 (52) % $ (4,170) $ (11,306) $ 7,136 (63) %
Other income (expense), net 200 (96) 296 (308) % (181) (130) (51) 39 %
$ (1,637) $ (3,905) $ 2,268 (58) % $ (4,351) $ (11,436) $ 7,085 (62) %
Interest expense is primarily related to the convertible senior notes,
promissory note and finance lease obligations. Interest expense for the three
and nine months ended September 30, 2022 decreased by $2.0 million and $7.1
million , respectively, primarily due to the adoption of ASU 2020-06, under which
guidance the Company no longer incurs interest expense related to the accretion
of the debt discount associated with the convertible note. Refer to Note 2 for
further details related to the adoption of the new standard.
Other income (expense), net consists primarily of interest income on
Provision for (benefit from) Income Taxes
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except percentages) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Provision for (benefit from)
income taxes $ (2,138) $ 323 $ (2,461) (762) % $ 374 $ 790 $ (416) (53) %
The benefit from income taxes of $2.1 million and provision for income taxes of
$0.4 million for the three and nine months ended September 30, 2022 ,
respectively, and the provision for income taxes of $0.3 million and $0.8
million for the three and nine months ended September 30, 2021 , respectively,
was primarily attributable to our foreign operations, state taxes, and an
adjustment resulting in a $1.9 million benefit during the third quarter related
to prior periods that management determined is not material to the previously
issued annual and interim financial statements.
44
--------------------------------------------------------------------------------Liquidity and Capital Resources
We have financed our operations and capital expenditures through cash flows from operations as well as from the proceeds from the issuance of convertible senior notes in 2017. As ofSeptember 30, 2022 , our principal source of liquidity was cash and cash equivalents of$208.4 million , which was held for working capital purposes. Our cash equivalents are comprised primarily of money market funds. We have incurred and expect to continue to incur legal, accounting, regulatory compliance and other costs in future periods as we continue to invest in corporate infrastructure and in connection with litigation matters. As a result of legal matters settled previously, we expect to pay approximately$9.8 million , of which approximately$7.3 million is expected to be paid during the fourth quarter of 2022. We intend to continue to manage our operating expenses in line with our existing cash and available financial resources. InJuly 2022 , we initiated a workforce reduction plan in connection with our ongoing business transformation efforts. Under this plan, we eliminated approximately 7% of our regular, full-time, global workforce, which we anticipate will generate annual cost savings of approximately$19.0 million . Some of our agreements with retailers include an upfront payment for exclusive rights for the term of the agreement. These payments are generally recognized as an expense or as a contra-revenue item over the term of the exclusive right benefit. In addition, some of our agreements with retailers include certain guaranteed distribution fees which, in some cases, may apply to multiple annual periods. If the adoption and usage of our platforms do not meet projections or minimums, these guaranteed distribution fees may not be recoverable and any shortfall may be payable by us at the end of the applicable period. We considered various factors in our assessment including our historical experience with the transaction volumes through the retailer and comparative retailers, ongoing communications with the retailer related to the retailer's marketing efforts to promote the digital platform, and revenues and associated revenue share payments for the particular retailer relationship that were projected. For example, in 2020 the Company's efforts to implement, with Albertsons, one of our solutions resulted in multiple disputes being raised by each of the parties against the other, one of which disputes resulted in the Company not being able to meet the contractual minimum at the end of the applicable period under the agreement. In order to resolve certain of the disputes regarding the parties' respective obligations, we recognized a loss of$8.8 million during the year endedDecember 31, 2020 . This loss was included in cost of revenues on our consolidated statements of operations. During the second quarter of 2021, the Company notified Albertsons that, due to Albertsons' failure to meet certain obligations under the agreement, the Company is not obligated to meet the contractual minimums for the period that ended inOctober 2021 . In connection with renewal discussions between the parties, we received a letter inOctober 2021 from Albertsons notifying us of their intent to early terminate our agreement related to the delivery of promotions and media campaigns, effectiveDecember 31, 2021 . We informed Albertsons that we disputed their right to terminate the agreement prior toMarch 31, 2022 . OnNovember 16, 2021 , the Company notified Albertsons it was terminating the Agreement effectiveNovember 18, 2021 , due to Albertsons' failure to cure its material breach of the Agreement. Consistent with its offer, the Company continued to provide certain services past the termination date for the benefit of its CPG customers; and ceased providing the last of such services onFebruary 26, 2022 . The parties are currently in litigation. If the contractual minimum applicable to the period that ended inOctober 2021 is enforceable, the Company may recognize a loss that, depending on a variety of factors, is estimated to be as high as$8.5 million . InNovember 2017 , we issued$200.0 million aggregate principal amount of 1.75% convertible senior notes due 2022 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, (the "Notes"). The Notes are unsecured obligations of the company and bear interest at a fixed rate of 1.75% per annum, payable semi-annually in arrears onJune 1 andDecember 1 of each year, commencing onJune 1, 2018 . The Notes will mature onDecember 1, 2022 ("Maturity Date"), unless earlier repurchased, redeemed, or converted in accordance with their terms. Our intent is to meet the repayment obligation pursuant to the Notes and as ofNovember 2, 2022 we have executed commitment letters with each of two lenders regarding the obtaining of debt financing in the amount of$105.0 million . If the Notes are neither repaid nor refinanced on or prior to the Maturity date, we may not have the ability to meet our obligations as they become due. InNovember 2021 , we entered into a Loan, Guaranty, and Security Agreement (the "ABL Credit Agreement", which prior to the First Amendment (as defined in the next paragraph) provided for an asset-backed revolving credit facility in the aggregate amount of$100.0 million and a sublimit for letters of credit of$10.0 million (the ABL Credit 45 -------------------------------------------------------------------------------- Agreement, as amended, the "ABL Facility"). Prior to the First Amendment, the ABL Facility was to have matured onNovember 17, 2026 with a springing maturity under certain circumstances as set forth in the First Amendment. OnAugust 5, 2022 , we entered into a First Amendment and Limited Waiver to the ABL Credit Agreement (the "First Amendment"). The First Amendment, among other things, waived an event of default that occurred as a result of the Company's non-compliance, as ofJune 30, 2022 , with a covenant requiring us to maintain a minimum fixed charge coverage ratio ("FCCR") of 1.0 over a lookback period of twelve months measured fromJune 30, 2022 . The First Amendment also amended such FCCR covenant for the next three quarters and required the original FCCR requirement to resume beginning the quarter-endedJune 30, 2023 , and to maintain such covenant requirement with respect to all succeeding quarters. In addition, the First Amendment (i) redefined the term "Termination Date" to extend the springing maturity date, toNovember 1, 2022 , that would have been triggered in the absence of a refinancing of our 1.75% Convertible Senior Notes due 2022 ("Notes") and to remove, as an option to avoid the triggering of the revised springing maturing date, a cash payoff occurring later thanSeptember 1, 2022 ; (ii) reduced the aggregate principal amount available for borrowing to up to$50.0 million ; and (iii) included a temporary$5.0 million reduction in funding available, otherwise known as an availability block, based on our FCCR.
The ABL Credit Agreement, as modified by the First Amendment, terminated
pursuant to its own terms on
We believe our existing cash, cash equivalents and cash flow from operations,
and access to financing sources, including the debt financing transactions
contemplated by the commitment letters executed with two lenders, will be
sufficient to meet our existing and expected future scheduled debt repayment
obligations, working capital and capital expenditure needs for the next 12
months and beyond. To the extent that current and anticipated future sources of
liquidity are insufficient to fund our future business activities and
requirements, we may be required to seek additional equity or debt financing. In
the event future additional financing is required from outside sources beyond
those levels currently contemplated, we may not be able to raise it on terms
acceptable to us or at all. During the period of uncertainty and volatility
related to the ongoing COVID-19 pandemic, we will continue to monitor our
liquidity. See Part II, Item 1A, Risk Factors, for an additional discussion of
risks related to COVID-19.
Cash Flows
The following table summarizes our cash flows for the periods presented (in
thousands):
Nine Months Ended September 30,
2022 2021
Net cash (used in) provided by operating activities $ (6,488) $ 29,711
Net cash used in investing activities (14,216) (10,773)
Net cash (used in) provided by financing activities (8,760) 3,218
Effect of exchange rates on cash and cash equivalents 441 37
Net (decrease) increase in cash and cash equivalents $ (29,023) $ 22,193
Operating Activities
Cash from operating activities relates to our net income or loss for the period,
adjusted for net non-cash income or expenses and changes in our operating assets
and liabilities.
During the nine months ended September 30, 2022 , net cash used in operating
activities of $6.5 million reflected our net loss of $76.8 million , adjusted for
net non-cash expenses of $57.8 million , and cash used as a result of changes in
working capital of $12.5 million . Non-cash expenses included depreciation and
amortization, stock-based compensation, amortization of debt discount and
issuance costs, allowance (recovery) for credit losses, deferred income taxes,
change in fair value of contingent consideration, impairment of long-lived and
right-of-use assets, and other non-cash expenses, including amortization of
right-of-use asset, amortization of deferred cost, and loss on disposal of
property and equipment. The primary uses of cash from working capital items
included a decrease in accounts payable and other liabilities of $30.5 million
due to timing of services and payments
46
--------------------------------------------------------------------------------
including payment for a deferred cost related to a retailer agreement, a Ubimo
contingent consideration payment of $19.0 million related to the changes in fair
value over the contingent consideration period, a decrease in deferred revenues
of $9.2 million due to reduced billings for campaigns, a decrease in accrued
compensation and benefits of $9.3 million due to annual bonus payouts, and an
increase in prepaid expenses and other assets of $2.0 million , partially offset
by a decrease in accounts receivable of $82.5 million due to timing of invoicing
and collections.
Investing Activities
Purchases of property and equipment may vary from period-to-period due to the
timing of the expansion of our operations, the addition of headcount and the
development activities related to our future offerings. We expect to continue to
invest in property and equipment and in the further development and enhancement
of our software platform for the foreseeable future. In addition, from time to
time, we may consider potential acquisitions that would complement our existing
service offerings, enhance our technical capabilities or expand our marketing
and sales presence. Any future transaction of this nature could require
potentially significant amounts of capital or could require us to issue our
stock and dilute existing stockholders.
During the nine months ended
Financing Activities
Our financing activities consisted primarily of payments made for shares withheld to cover payroll withholding taxes relating to the vesting of RSUs and the issuance of shares of common stock upon the exercise of stock options.
During the nine months endedSeptember 30, 2022 , net cash used in financing activities of$8.8 million reflected$5.7 million in payments for Ubimo contingent consideration (initially measured and included as part of purchase consideration on the date of acquisition), payments made for shares withheld to cover the required payroll withholding taxes of$3.7 million in connection with vesting of equity grant awards, payments on promissory note and finance lease obligations of$0.1 million , and payments for debt issuance costs of$0.1 million , partially offset by proceeds received from issuance of common stock of$0.8 million .
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Contractual Obligations and Commitments
Refer to Note 8 and Note 13 of our notes to condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q for further information. There have been no significant changes outside the ordinary course of business during the three and nine months endedSeptember 30, 2022 to our commitments and contingencies disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K, except as noted in Note 13 "Commitments and Contingencies".
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There were no significant changes in our critical accounting policies and estimates during the three and nine months endedSeptember 30, 2022 , as compared to the critical accounting policies and estimates disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K. 47 --------------------------------------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Such management estimates include, but are not limited to, revenue recognition, collectability of accounts receivable, useful lives of intangible assets, estimates related to recoverability of long-lived assets and goodwill, stock-based compensation, legal contingencies, deferred income taxes and associated valuation allowances and distribution fee commitments. These estimates generally require judgments, may involve the analysis of historical and prediction of future trends, and are subject to change from period to period. Actual results may differ from the Company's estimates, and such differences may be material to the accompanying condensed consolidated financial statements. The ongoing COVID-19 pandemic has created and may continue to create uncertainty in macroeconomic conditions, which may cause further business slowdowns or shutdowns, depress demand for our advertising business and adversely impact our results of operations, even in light of ongoing vaccination efforts. We expect uncertainties around our key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the COVID-19 pandemic. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements.
Recently Issued and Adopted Accounting Pronouncements
Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements contained in this Form 10-Q for further information.
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