ADTHEORENT HOLDING COMPANY, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
The following discussion and analysis should be read in conjunction with other sections of this Annual Report, including "Item 1. Business," "Item 1A. Risk Factors," and the accompanying Consolidated Financial Statements and related Notes included elsewhere in this Report. Unless otherwise indicated, the terms "
AdTheorent," "we," "us," or "our" refer to AdTheorent Holdings, LLC, together with its consolidated subsidiaries.
Founded in 2012, we are a digital media platform that focuses on performance and privacy-driven methods to run programmatic digital advertising campaigns, serving ad agencies and client brands. Without relying on individualized profiles or sensitive personal data for targeting, we use machine learning and advanced data analytics to make programmatic digital advertising more effective and efficient at scale, delivering measurable real value to advertisers. Our differentiated advertising capabilities and superior campaign performance, measured by client-defined business metrics or KPIs, have helped fuel our client adoption and year-over-year growth.
We use machine learning and advanced data science to organize, analyze and operationalize non-sensitive data to deliver real-world value for customers. Central to our ad-targeting and campaign optimization methods, we build custom machine learning models for each campaign using historic and real-time data to predict future consumer conversion actions for every digital ad impression. We have integrations with Ad Exchanges/SSPs, from which we are sent ad impression opportunities to evaluate and purchase. We predictively score all of these ad impression opportunities for the purpose of deciding which ad impressions will likely drive valuable conversions or engagement activity for our customers. Our predictive platform scores over one million digital ad impressions per second and 75 billion to 90 billion digital ad impressions per day, assigning a "predictive score" to each. Each predictive score is determined by correlating non-personal data attributes associated with the particular impression with data corresponding to previously purchased impressions that yielded consumer conversion or engagement activity. Such non-individualized attributes include variables such as publisher, content and URL keywords, device make, device operating system and other device attributes, ad position, geographic data, weather, demographic signals, creative type and size, etc. The "predictive scores" generated by our platform allow us and our advertising clients to determine which ad impressions are more likely or less likely to result in client-desired KPIs. Our machine learning models are customized for every campaign and our platform "learns" over the course of each campaign as it processes more data related to data attributes and actual conversion experience. Based on these statistical probabilities or "predictive scores," our platform automatically determines bidding optimizations to drive conversions and advertiser ROI or ROAS, bidding on less than .001 of the evaluated impressions. Our use of machine learning and data science helps us to maximize efficiency and performance, enabling our customers to avoid wasted ad spend related to suboptimal impressions such as impressions that are predicted to be at a greater risk for fraud/invalid traffic or impressions with a higher likelihood of being unviewable, unmeasurable, and not brand safe, among other factors. Our capabilities extend across the digital ecosystem to identify and engage digital actors with the highest likelihood of completing customer-desired actions, including online sales, other online actions, and real-world actions such as physical location visitation, in-store sales or vertical specific KPI's such as prescription fills/lift or submitted credit card applications. Our custom and highly impactful campaign executions encompass popular digital screens - mobile, desktop, tablet, CTV - and all digital ad formats, including display, rich media, video, native and streaming audio. We actively manage our digital supply to provide advertisers with scale and reach, while minimizing redundant inventory, waste and other inefficiencies. Our CTV capability delivers scale and reach supplemented by innovative and industry recognized machine-learning optimizations towards real-world actions and value-added measurement services. Our platform and machine learning-based targeting provide privacy advantages that are lacking from alternatives which rely on individual user profiles or cookies employing a "one-to-one" approach to digital ad targeting. Our targeting approach is statistical, not individualized, and as a result we do not need to compile or maintain user profiles, and we do not rely on cookies or user profiles for targeting. Our solution-set is especially valuable to regulated customers, such as financial institutions and pharmaceutical companies, and other privacy-forward advertisers who desire efficient and effective digital ad-targeting without individualized or personal targeting data. We adhere to data usage protocols and model governance processes which help to ensure that each customer's data is safeguarded and used only for that customer's benefit, and the Company takes a consultative and collaborative approach to data use best practices with all of our customers. Supplementing our core machine learning-powered platform capabilities, we offer customized vertical solutions to address the needs of advertisers in specialized industries. These specialized solutions feature vertical-specific capabilities related to targeting, measurement and audience validation. Our Pharmaceutical and Healthcare offering ("AdTheorentRx") harnesses the power of machine learning to drive superior performance on campaigns targeting both HCP and patients, 42 -------------------------------------------------------------------------------- leveraging HIPAA-compliant methods and targeting practices that comply with NAI Code and other self-regulatory standards. Our BFSI solutions drive real-world performance within the context of regulatory requirements and data use best practices intended to prevent discrimination in the promotion of federally regulated credit-extension products. We have created additional industry-tailored offerings to address the unique challenges and opportunities in a growing range of verticals, including retail, automotive, dining, and entertainment. Recent Developments Business Combination On
December 22, 2021(the "Closing Date"), MCAP, now known as AdTheorent Holding Company, Inc., consummated the previously announced business combination pursuant to that certain Business Combination Agreement, dated as of July 27, 2021(as amended, restated, supplemented or otherwise modified, the "Business Combination Agreement"), by and among MCAP, GRNT Merger Sub 1 LLC, a Delawarelimited liability company ("Merger Sub 1"), GRNT Merger Sub 2 LLC, a Delawarelimited liability company ("Merger Sub 2"), GRNT Merger Sub 3 LLC, a Delawarelimited liability company ("Merger Sub 3"), GRNT Merger Sub 4 LLC, a Delawarelimited liability company ("Merger Sub 4" and, together with Merger Sub 1, Merger Sub 2 and Merger Sub 3, the "Merger Sub Entities"), H.I.G. Growth-AdTheorent Intermediate, LLC, a Delawarelimited liability company (the "Blocker"), H.I.G. Growth-AdTheorent, LLC, a Delawarelimited liability company, and AdTheorent Holding Company, LLC, a Delawarelimited liability company ("Legacy AdTheorent"). Pursuant to the terms of the Business Combination Agreement, Legacy AdTheorent, the Blocker and the Merger Sub Entities engaged in a series of four mergers, which resulted in Legacy AdTheorent becoming a wholly owned subsidiary of MCAP (the "Business Combination'). On the Closing Date, and in connection with the closing of the Business Combination, MCAP changed its name to AdTheorent Holding Company, Inc.Beginning December 23, 2021, our shares of Common Stock traded on the Nasdaq Capital Market under the ticker symbol "ADTH" and our warrants traded on Nasdaq under the ticker symbol "ADTHW".
Factors affecting our performance
Growth of the programmatic advertising market
Our operating results and prospects will be impacted by the overall continued adoption of programmatic advertising by inventory owners and content providers, as well as advertisers and the agencies that represent them. Programmatic advertising has grown rapidly in recent years, and any acceleration, or slowing, of this growth would affect our operating and financial performance. In addition, even if the programmatic advertising market continues to grow at its current rate, our ability to successfully position itself within the market will impact the future growth of the business.
Investment in platform and solutions to provide continuous differentiation in a changing market
We believe that the capabilities and differentiation of our platform and solutions has been critical to our historical growth. Continued innovation in an evolving programmatic marketplace will be an important driver of our future growth. We anticipate that operating expenses will increase in the foreseeable future as it invests in platform operations and technology, data science and machine learning capabilities and data infrastructure and tools to enhance our custom solutions and value-added offerings. We believe that these investments will contribute to our long-term growth, although they may have a negative impact on profitability in the near-term.
Customer Spend Growth and Retention
We plan to make incremental investments in sales and marketing to acquire new customers and increase existing customers' usage of our platform and solutions. We believe that there is significant room for growth within our existing customers, which include many large global brands and advertising agencies. Future revenue and profitability growth depends upon our ability to cost effectively on-board new customers and our on-going ability to retain and scale existing customers.
Ability to continue to access powerful media inventory in existing and emerging channels
Our ability to deliver upon clients' targeted key performance indicators is reliant upon our ability to access high quality media inventory across multiple advertising channels at scale. Our future growth will depend on our ability to maintain and grow spend on existing and emerging channels, including advertising on display, rich media, native, video and audio ad formats across mobile, desktop and CTV formats. 43 --------------------------------------------------------------------------------
Development of international markets
Although almost all of our historic revenue is attributable to campaigns and operations in
the United Statesand Canada, we plan to explore opportunities to serve new international markets, including serving the global needs of existing customers. We believe that the global opportunity for programmatic advertising is significant and should continue to expand as publishers and advertisers outside the United Statesand Canadaincreasingly seek to adopt the benefits that programmatic advertising provides. We believe that our privacy-forward approach to ad targeting and data usage will provide desired differentiation and value in highly and increasingly regulated markets such as the EU, which is subject to the GDPR. Our ability to efficiently expand into new markets will affect our operating results. Managing Seasonality The global advertising industry experiences seasonal trends that affect the vast majority of participants in the digital advertising ecosystem. Most notably, advertisers have historically spent relatively more in the fourth quarter of the calendar year to coincide with the holiday shopping season, and relatively less in the first quarter. In addition to the impact on revenue, increased fourth quarter demand for advertising inventory applies additional upward pressure on fourth quarter media costs, which adversely impacts profitability. We expect seasonality trends to continue, and our ability to manage resources in anticipation of these trends could affect operating results.
Key business metric
To analyze our business performance, make financial forecasts, and help shape long-term strategic plans, we review the following key business metrics:
We track active customers, which are defined as our customers who spent over
$5,000during the previous twelve months. We monitor active customers to help understand our revenue performance. Additionally, monitoring active customers helps us understand the nature and extent to which the active customer base is growing, which assists management in establishing operational goals. The number of active customers for the year ended December 31, 2021was 309 and for the year ended December 31, 2020was 270, increasing by 39 customers, or 14.4%.
Components of operating results
Media services revenue
We generate Managed Programmatic and Direct Access (collectively "Media Services") revenue by using our proprietary machine learning-powered technology platform to execute targeted digital advertising campaigns, offering advanced predictive targeting solutions across different customer industry verticals and consumer screens (desktop, mobile, and CTV), including customized targeting, measurement and analytical services to address unique advertiser challenges. Our customers consist of brands working directly with the Company and advertising agencies working on behalf of our customers.
Managed programmatic revenue
For Managed Programmatic Revenue, we negotiate Insertion Orders ("IOs") with the advertising agency or brand, which specifies the material terms of the campaign. IOs are subject to cancellation by the client, usually with no penalty, for the unfilled portion of the IO. Our performance obligation is to deliver digital advertisements in accordance with the terms of the IO. We have concluded that this constitutes a single performance obligation for financial reporting purposes and that such obligation is recognized over the time, using the output method, for which we are transferring value to the customer through delivered advertising units. Our contracts with a customer may convey a right to discounted or free of charge impressions. We determine whether rights to discounted future impressions provide a material right to the customer and revenue related to such material right should be deferred to the period when such right to discount expires or is exercised by the customer. For periods presented, we did not identify material rights related to such discounts. 44 -------------------------------------------------------------------------------- Managed Programmatic Revenue is recorded on a gross basis. We are responsible for fulfilling advertising delivery, including optimization and reporting, establishes the selling price for the delivery, and we perform billing and collections, including ultimately retaining credit risk. We have therefore determined that we serve as a principal and that gross presentation of revenue is appropriate. Direct Access Revenue Direct Access customers access our platform directly and manage all aspects of their advertising campaigns. We provide advertiser and marketer customers direct access to the platform so that they can execute and manage advertising campaigns. Advertising Services Agreements with customers specify the pricing framework, which typically involves a percentage of customer spend and additional fees applicable to various data science model deployments and uses as applicable to a given campaign. Additional services can be procured on a per-service pricing basis. Platform fee revenue is recognized, on an over time basis, when the customer makes a purchase through the platform during the month. Our performance obligation is to provide the use of the platform to customers. We are not primarily responsible for the purchase of advertising inventory, third party data, and other related expenses. Revenue for customers working with us on this basis is recorded net of the amount incurred and payable to suppliers for the cost of advertising inventory, third party data and other add-on features, as we do not control the purchase nor have pricing discretion with regard to these items. We have therefore determined that we serve as an agent and that net presentation of revenue is appropriate. We bill clients for their purchases through our platform and the associated platform fees. A customer cannot take possession of the software platform, nor is it feasible or permissible for a customer to contract with a third party to host the software or for a customer to host the software. Fees are entirely variable, and revenue is recognized in the period we have the contractual right to the fee.
We classify our operating expenses into the following four categories. Each expense category includes overhead costs, including rent and related occupancy costs, which are allocated based on headcount.
Platform operations consists of the cost of revenue including advertising inventory, third party inventory validation and measurement, ad-serving, ad-verification, research and data (collectively referred to as "traffic acquisition costs" or "TAC") and other platform operations costs, which consist of amortization related to capitalized software, depreciation expense, allocated costs of personnel which set up and monitor campaign performance, and platform hosting, license and maintenance costs.
Sales and Marketing
Sales and marketing expenses include compensation and commission costs for sales and related support teams, as well as travel, trade show and other marketing-related expenses. Advertising costs are charged to operations when incurred.
Technology and development
Technology and development costs include costs to maintain and develop our technology platform. Costs incurred for research and product development are expensed as incurred and include salaries, taxes and benefits, contracting, and travel expenses related to research and development.
General and administrative costs
General and administrative expenses include remuneration of management and administrative personnel, fees for professional services, insurance, supplies and other fixed costs.
Rent expense is recognized on a straight-line basis over the term of the lease, with the difference between the cash rent expense and the straight-line expense being recognized as deferred rent.
Compensation expense related to employee equity-based awards is measured and recognized in the Consolidated Financial Statements based on the fair value of the awards granted. We granted awards to employees that vest based solely on continued service, or service conditions, and awards that vest based on the achievement of performance targets, or performance conditions. The fair value of each option award containing service and/or performance conditions is estimated on the grant date using the Black-Scholes option-pricing model. For service condition awards, equity-based compensation expense is recognized on a straight-line basis over the requisite service periods of the awards. For performance condition awards, equity-based compensation expense is recognized using a graded vesting model over the requisite service period of the awards. Forfeitures are recorded as they occur.
Debt issuance cost
Deferred issuance costs relate to our debt instruments, the short-term and long-term portions are reflected as a deduction from the carrying amount of the related debt. The debt issuance costs are amortized using the straight-line method over the term of the related debt instrument which approximates the effective interest method. Debt issuance costs incurred with line-of-credit arrangements are recorded as contra debt on our consolidated balance sheets and amortized over the term of the arrangement. Debt may be considered extinguished when it has been modified and the terms of the new debt instruments and old debt instruments are "substantially different" (as defined in the debt modification guidance in FASB Accounting Standards Codification ("ASC") Topic 470-50, Debt - Modifications and Extinguishments ("ASC 470-50")).
Income tax expense includes federal, state, and foreign taxes and is based on reported income before income taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the periods in which the deferred tax assets or liabilities are anticipated to be settled or realized. We regularly review deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. We recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from uncertain tax positions are measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet this threshold. Interest related to uncertain tax positions is recognized as part of the provision for income taxes and is accrued beginning in the period that such interest would be applicable under relevant tax law until such time that the related tax benefits are recognized. We are required to file tax returns in the
U.S.federal jurisdiction, various states, and in Canada. Our policy is to recognize interest and penalties related to uncertain tax benefits (if any) in the tax provision. 46 --------------------------------------------------------------------------------
The period-to-period comparisons of our results of operations have been prepared using the historical periods included in our audited consolidated financial statements. The following discussion should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this document.
The following table summarizes our historical results of operation for the periods presented: Year Ended December 31, 2021 2020 Change % (amounts in US Dollars) (in thousands, except for percentages) Revenue
$ 165,365100.0 % $ 121,015100.0 % $ 44,35036.6 % Operating expenses: Platform operations 77,770 47.0 % 59,458 49.1 % 18,312 30.8 % Sales and marketing 38,799 23.5 % 31,608 26.1 % 7,191 22.8 % Technology and development 12,393 7.5 % 9,709 8.0 % 2,684 27.6 % General and administrative 35,424 21.4 % 8,126 6.7 % 27,298 335.9 % Total operating expenses 164,386 99.4 % 108,901 90.0 % 55,485 50.9 % Income from operations 979 0.6 % 12,114 10.0 % (11,135 ) -91.9 % Interest expense, net (2,404 ) -1.5 % (3,285 ) -2.7 % 881 -26.8 %
Gain on change in fair value of Seller's Earn-Out 23,399 14.1 % - 0.0 % 23,399 ** Gain on change in fair value of warrants 6,783 4.1 % - 0.0 % 6,783 ** Other income, net 22 0.0 % 646 0.5 % (624 ) -96.6 % Total other income (expense), net 27,800 16.8 % (2,639 ) -2.2 % 30,439 ** Income from operations before income taxes 28,779 17.4 % 9,475 7.8 % 19,304 203.7 % Provision for taxes (3,360 ) -2.0 % (2,780 ) -2.3 % (580 ) 20.9 % Net income
$ 25,41915.4 % $ 6,6955.5 % $ 18,724279.7 % ** Not meaningful Revenue Total revenue for years ended December 31, 2021and 2020 was $165.4 millionand $121.0 million, respectively, an increase of $44.4 million, or 36.6%. Growth was driven by a combination of continued increases in spend within COVID-resilient verticals, including: BFSI; government and non-profit, and healthcare/pharmaceutical, which increased approximately $22.3 million, or 33.1%, during the period, as well as growth and recovery within other verticals impacted by COVID-19 that suffered declines in the fiscal year ended December 31, 2020, including primarily: automotive; travel and hospitality; entertainment; and retail, which increased approximately $8.8 million, or 38.7%, during the period. As measured on a by-channel basis, Video (including CTV) revenue increased approximately $12.8 million, or 54.6%, during the period, while revenue from other channels increased approximately $31.1 million, or 31.6%, during the period.
Total Operating Expenses for the years ended
December 31, 2021and 2020 were $164.4 millionand $108.9 million, respectively, an increase of $55.5 million, or 50.9%. Platform operations Platform operations expenses for the years ended December 31, 2021and 2020 were $77.8 millionand $59.5 million, respectively. The increase of $18.3 million, or 30.8%, was mainly attributable to revenue driven TAC costs which increased approximately $14.0 million, or 33.4%. Volume driven increases in hosting expense increased approximately $1.6 millionand hiring driven increases in allocated costs of our personnel which set up and monitor campaign performance totaling approximately $1.8 millionalso contributed to the overall platform operations expense increase. 47
Sales and Marketing
Sales and marketing expenses for the years ended
December 31, 2021and 2020 were $38.8 millionand $31.6 million, respectively. The increase of $7.2 million, or 22.8%, was primarily due to an increase in sales commissions of $2.6 million. Equity-based compensation and hiring for the sales and customer support teams resulted in increases of $1.8 millionand $1.7 million, respectively, in employee expenses allocated to sales and marketing.
Technology and development
Technology and development expenses for the years ended
December 31, 2021and 2020 were $12.4 millionand $9.7 million, respectively. The increase of $2.7 million, or 27.6%, was mainly due to the increases in hiring and employee related costs to support research and product development.
general and administrative
General and administrative expenses for the years ended
December 31, 2021and 2020 were $35.4 millionand $8.1 million, respectively. The increase of $27.3 millionwas primarily attributable to $19.8 millionin costs incurred for the year ended December 31, 2021related to the Business Combination and public company readiness related legal and professional services. Additionally, we paid a one-time lease termination fee of approximately $4.2 millionfor terminating our primary New York Cityheadquarters office lease as we negotiated a more cost-effective lease in the same building to reduce future rent obligations. Also, an increase in equity-based compensation of $2.6 millioncontributed to employee expenses allocated to general and administrative. We anticipate that operating expenses will increase as we scale our operations and incur the incremental costs of operating as a public company. We expect increased expenses for general and director and officer insurance, investor relations, and other administrative and professional services. In addition, we expect to incur additional costs as we hire additional personnel and enhance our infrastructure to support the anticipated growth of the business.
Total Interest expense, net for the years ended
December 31, 2021and 2020 was $2.4 millionand $3.3 million, respectively, a decrease of $0.9 million, or 26.8%. The decrease in interest expense was primarily the result of a reduction in loan principal balance.
Gain on change in fair value of the selling price supplement
For the year ended
December 31, 2021, the Seller's Earn-Out had a decrease in fair value of $23.4 millionresulting in a gain for this amount. The Seller's Earn-Out was a result of the Business Combination.
Gain on change in fair value of warrants
For the year ended
December 31, 2021, the warrants had a decrease in fair value of $6.8 millionresulting in a gain for this amount. The warrants were assumed by the Company in connection with the Business Combination.
Other income (expenses)
Other income (expense) for the years ended
December 31, 2021and 2020 was $0and $0.6 million, respectively. The $0.6 millionin 2020 was primarily due to an escrow deposit recovery of $0.6 millionrelated to the 2018 sale of our Barometric department.
Provision for income taxes
Provision for Income Taxes for the years ended
December 31, 2021and 2020 was $3.4 millionand $2.8 million, respectively, an increase of $0.6 millionor 20.9%. The overall increase was the result of an increase in state and local taxes due to an increase in pre-tax book income, non-deductible Business Combination costs, and change in the valuation allowance. 48 --------------------------------------------------------------------------------
Non-GAAP Financial Information
We calculate and monitor certain non-GAAP financial measures to help set budgets, establish operational goals, analyze financial results and performance, and make strategic decisions. We also believe that the presentation of these non-GAAP financial measures in provides an additional tool for investors to use in comparing our results of operations over multiple periods. However, the non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies due to differences in the way that these measures are calculated. The non-GAAP financial measures presented should not be considered as the sole measure of our performance, and should not be considered insolation from, or a substitute for, comparable financial measures calculated in accordance with generally with accepted accounting principles in
the United States("GAAP"). The information in the table below sets forth the non-GAAP financial measures that we monitor. Because of the limitations associated with these non-GAAP financial measures, "Adjusted Gross Profit," "EBITDA," "Adjusted EBITDA," "Adjusted Gross Profit as a % of Revenue" and "Adjusted EBITDA as a percent of Adjusted Gross Profit" should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using non-GAAP measures on a supplemental basis. You should review the reconciliation of the non-GAAP financial measures below and not rely on any single financial measure to evaluate our business. Adjusted Gross Profit Adjusted Gross Profit is a non-GAAP profitability measure. Adjusted Gross Profit is a non-GAAP financial measure of campaign profitability, monitored by management and the Board, used to evaluate our operating performance and trends, develop short- and long-term operational plans, and make strategic decisions regarding the allocation of capital. We believe this measure provides a useful period to period comparison of campaign profitability and is useful information to investors and the market in understanding and evaluating our operating results in the same manner as our management and Board. Gross profit is the most comparable GAAP measurement, which is calculated as revenue less platform operations costs. In calculating Adjusted Gross Profit, we add back other platform operations costs, which consist of amortization expense related to capitalized software, depreciation expense, allocated costs of personnel which set up and monitor campaign performance, and platform hosting, license, and maintenance costs, to gross profit. The following table presents the calculation of gross profit and reconciliation of gross profit to Adjusted Gross Profit for the years ended December 31, 2021and 2020. Year Ended December 31, 2021 2020 (amounts in US Dollars) (in thousands) Revenue $ 165,365 $ 121,015Less: Platform operations 77,770 59,458 Gross Profit 87,595 61,557 Add back: Other platform operations 21,748 17,475 Adjusted Gross Profit (1) $ 109,343 $ 79,032EBITDA and Adjusted EBITDA EBITDA is a non-GAAP financial measure defined by us as net income (loss), before interest expense, net, depreciation, amortization and income tax expense. Adjusted EBITDA is defined as EBITDA before stock compensation expense, Business Combination transaction costs, management fees, non-core operations and other potential non-recurring items. 49 -------------------------------------------------------------------------------- Collectively these non-GAAP financial measures are key profitability measures used by our management and Board to understand and evaluate our operating performance and trends, develop short-and long-term operational plans and make strategic decisions regarding the allocation of capital. We believe that these measures can provide useful period-to-period comparisons of campaign profitability. Accordingly, we believe that these measures provide useful information to investors and the market in understanding and evaluating our operating results in the same manner as our management and the Board. Year Ended December 31, 2021 2020 (amounts in US Dollars) (in thousands) Net income $ 25,419 $ 6,695Interest expense, net 2,404 3,285 Tax provision 3,360 2,780 Depreciation and amortization 8,493 8,134 EBITDA (1) $ 39,676 $ 20,894Equity based compensation 5,823 657 Seller's Earn-Out equity-based compensation 55
Transaction costs (2) 15,603
Gain on change in fair value of earn-out price (3) (23,399)
Gain on change in fair value of warrants (4) (6,783 ) - Management fees (5) 5,607 872 Lease termination fee (6) 4,243 - Non-core operations (7) 2,155 1,047 Adjusted EBITDA (1)
$ 42,980 $ 24,882
Adjusted EBITDA as a percentage of adjusted gross margin and adjusted gross margin as a percentage of sales
Year Ended December 31, 2021 2020 (amounts in US Dollars) (in thousands, except for percentages) Gross Profit
$ 87,595 $ 61,557Net income $ 25,419$ 6,695 Net income as a % of Gross Profit 29.0 % 10.9 % Adjusted Gross Profit (1) $ 109,343 $ 79,032Adjusted EBITDA (1) $ 42,980 $ 24,882Adjusted EBITDA as a % of Adjusted Gross Profit (1) 39.3 % 31.5 % Gross Profit $ 87,595 $ 61,557Revenue $ 165,365 $ 121,015Gross Profit as a % of Revenue 53.0 % 50.9 % Revenue $ 165,365 $ 121,015Adjusted Gross Profit (1) $ 109,343 $ 79,032Adjusted Gross Profit as a % of Revenue (1) 66.1 % 65.3 % (1) We use non-GAAP financial measures to help set budgets, establish operational goals, analyze financial results and performance, and make strategic decisions. (2) Includes incurred transaction-related expenses and costs related to strategic initiatives in the year ended December 31, 2020which were suspended due to the COVID-19 pandemic. In the year ended December 31, 2021, includes costs related to a different strategic process, which led to the Business Combination. (3) In connection with the Business Combination, a Seller's Earn-Out liability was recorded. The gain represents the change in fair value of the Seller's Earn-Out from the date of the close of the Business Combination ( December 22, 2021) to December 31, 2021. (4) In connection with the Business Combination, a liability for warrants was recorded. The gain represents the change in fair value of the warrants from the date of the close of the Business Combination ( December 22, 2021) to December 31, 2021. 50 --------------------------------------------------------------------------------
December 22, 2016, we closed a growth recapitalization transaction with H.I.G. Capital. As part of that transaction we agreed to pay monthly Management Fees to H.I.G. Capital. In the year ended December 31, 2021, additional fees were paid in connection with the completion of the Business Combination. The agreements related to fees paid to H.I.G. Capitalwere discontinued effective December 22, 2021, the closing date of the Business Combination. (6) In April 2021, we incurred a lease termination fee of approximately $4.2 millionin connection with moving our primary headquarters office in New York Cityto another space in the same building at a lower cost. (7) Effective as of March 1, 2020, we effectuated a contribution of our SymetryML department into a new subsidiary, SymetryML, Inc.We periodically raised capital to fund Symetry operations, by entering into Simple Agreement for Future Equity Notes ("SAFE Note") with several parties (Refer to Note 12 - SAFE Notes of our Consolidated Financial Statements, included elsewhere in this Form 10-K, for more information). We view SymetryML operations as non-core, and does not intend to fund future operational expenses incurred in excess of SAFE Note funding secured.
Cash and capital resources
Our business requires substantial cash for its operating activities, including salaries and wages paid to our employees, development costs, general and administrative expenses, and others. From
December 31, 2021, our working capital was $132.3 millionand we were fully drawn on our Revolving Credit Facility, as defined below. This amount was re-paid in January 2022and we do not anticipate a need to borrow on this facility in the immediate future. We believe we have sufficient sources of liquidity, including cash generated from operations as well as the capacity on the Revolving Credit Facility, to support our operating needs, capital requirements, and debt service requirements for the next twelve months. The accompanying audited financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Our purchase commitments per our standard terms and conditions with our suppliers and vendors are cancellable in whole or in part with or without cause prior to delivery. If we terminate an order, we will have no liability beyond payment of any balances owing for goods or services delivered previously.
Silicon Valley Bank Revolver
September 21, 2017, Legacy AdTheorent entered into a Loan and Security agreement ("Loan and Security Agreement") with Silicon Valley Bank("SVB"). The Loan and Security Agreement consisted of a revolving line of up to $8.0 million("SVB Revolver") and letters of credit up to $2.8 million("Letters of Credit") (Refer to Note 21 - Commitments and Contingencies of our Consolidated Financial Statements). Under the original terms, before subsequent amendments, the SVB Revolver matured on September 21, 2019. The SVB Revolver is available on demand and accrues interest at Prime (as defined in the Loan and Security Agreement) plus 2.5% and interest shall be payable monthly. The borrowing base of the SVB Revolver is 80.0% of the Company's eligible accounts receivable. Upon expiration, all outstanding principal and interest are due. The collections of our accounts receivable are applied to the outstanding loan balance daily. Since the inception of the Loan and Security Agreement, Legacy AdTheorent has entered into several amendments, primarily to extend the term of the agreement. On October 23, 2020, the Company entered into the sixth amendment to the Loan and Security Agreement. This amendment extended the previously amended maturity date of July 31, 2020to July 31, 2021. The interest rate definition was also amended to accrue at a floating per annum rate equal to the greater of (a) 2.50% above the Prime Rate and (b) 3.25%; provided, however, during a Streamline Period, the principal amount outstanding under the SVB Revolver shall accrue interest at a floating per annum rate equal to the greater of (x) 1.50% above the Prime Rate and (y) 3.25%. On July 27, 2021, the seventh amendment was executed which extended the previously amended maturity date of July 31, 2021to November 30, 2021. Additionally, an amendment fee in the amount of $4 thousandwas charged by SVB to Legacy AdTheorent in connection with the amendment. Legacy AdTheorentaccounted for the extension of the maturity date as a modification of the debt instrument. 51 -------------------------------------------------------------------------------- On December 22, 2021, we entered into a senior secured credit facilities credit agreement (the "Senior Secured Agreement") with SVB. The Senior Secured Agreement allows us to borrow up to $40.0 millionin a revolving credit facility ("Revolving Credit Facility"), including a $10.0 millionsub-limit for letters of credit and a swing line sub-limit of $10.0 million. The Revolving Credit Facility commitment termination date is December 22, 2026. We accounted for the Senior Secured Agreement as a debt modification. In accordance with the Senior Secured Agreement there are two types of revolving loan, either a Secured Overnight Financing Rate Loan ("SOFR Loan") loan or an ABR Alternate Base Rate Loan ("ABR Loan"). The revolving loans may from time to time be SOFR Loans or ABR Loans, as determined by the Company. Interest shall be payable quarterly based on the type of loan.
Each SOFR Loan bears interest for each day at a rate per annum equal to Adjusted Term SOFR, as defined in the Senior Secured Agreement, plus the Applicable Margin, as defined in the Senior Secured Agreement. The Applicable Margin can vary between 2.00% and 2.50% based on the leverage ratio of the Company.
Each ABR Loan (including any swingline loan) bears interest at a rate per annum equal to the highest of the Prime Rate in effect on such day, the Federal Funds Effective Rate in effect on such day plus 0.50%, and the Adjusted Term SOFR, as defined in the Senior Secured Agreement, for a one-month tenor in effect on such day plus 1.00% ("ABR"); plus the Applicable Margin, as defined in the Senior Secured Agreement. The Applicable Margin can vary between 1.00% and 1.50% based on the leverage ratio of the Company. In addition, the Senior Secured Agreement has a commitment fee in relation to the non-use of available funds ranging from 0.25% to 0.35% per annum based on the leverage ratio of the Company.
Our borrowings under the revolving credit facility at
consist of ABR loans.
All obligations under the senior guarantee agreement are secured by a first lien on substantially all of the assets of the company.
We are subject to customary representations, warranties, and covenants. The Senior Secured Agreement requires that the Company meet certain financial and non-financial covenants which include, but are not limited to, (i) delivering audited consolidated financial statements to the lender within 90 days after year-end commencing with the fiscal year ending
December 31, 2022financial statements, (ii) delivering unaudited quarterly consolidated financial statements within 45 days after each fiscal quarter, commencing with the quarterly period ending on March 31, 2022and (iii) maintaining certain leverage ratios and liquidity coverage ratios. As of December 31, 2021, we were in full compliance with the terms of the Senior Secured Agreement. As of December 31, 2021, we had one letter of credit for approximately $1.0 millionand the remainder of $39.0 millionwas drawn on the revolving credit facility. The total amount drawn as of December 31, 2021was repaid in January 2022. Cash Flows
The following table summarizes our cash flows for the periods indicated:
December 31, 20212020 (amounts in US Dollars) (in thousands)
Net cash (used in) provided by operating activities
Net cash used in investing activities
$ (2,299 )$
(2,270 ) Net cash provided by (used in) financing activities
Net cash used in operating activities for the year ended
Increase in cash expenditures paid for business combinations and expenditures related to the preparation of public companies for
Increase in cash paid related to media inventory of
Increase in cash paid for personnel expenses mainly due to the increase in the workforce of
Increase in cash paid for income taxes by
Increase in cash paid for management fees of
Payment of lease termination fees
Timing differences of certain payments and collections. DPO decreased 12.5% to 49 days for the year ended
December 31, 2021from 56 days for the year ended December 31, 2020and DSO decreased 7.4% to 88 days for the year ended December 31, 2021from 95 days for the year ended December 31, 2020.
Offsetting increases in operating cash included the following:
Money collected for revenue increased
Typical Payment Terms
The Company's standard payment terms range from 30 to 60 days. For the periods presented, the Company's DSO has exceeded the standard payment terms of customers, because like many companies in our industry, we often experience slow payment by advertising agencies, such that advertising agencies typically collect payment from their customers before remitting payment to us. The Company evaluates the creditworthiness of customers on a regular basis. Accounts receivable are recorded at the invoiced amount, are unsecured, and do not bear interest. The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The Company individually reviews all balances that exceed 90 days from the invoice date and assesses for provisions for doubtful accounts based on an assessment of the balance that will not be collected. Factors considered include the aging of the receivable, historical write off experience, the creditworthiness of each agency customer, and general economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is remote.
We expect to continue to generate strong positive cash flow as we expand our operations.
Net cash used in investing activities during the year ended
December 31, 2021was $2.3 million, primarily consisting of capitalized software development costs of $2.1 millionNet cash used in investing activities during the year ended December 31, 2020was $2.3 million, primarily consisting of capitalized software development costs of $2.2 million.
We plan to continue to capitalize software and purchase property, plant and equipment as we expand our business.
Net cash provided by financing activities during the year ended
December 31, 2021was $91.9 million, consisting primarily of proceeds from the Reverse Recapitalization, net of costs of $77.7 million. We also drew $39.0 millionfrom our revolving credit facility and received proceeds from the SAFE notes of $1.7 million. Offsetting this financing cash inflow were re-payments of our term loan of $26.2 millionand the payment of $0.3 millionfor financing costs. Net cash used in financing activities during the year ended December 31, 2020was $5.4 million, consisting of payment of term loan and revolver debt of $6.8 million, proceeds from SAFE notes of $1.3 millionand cash received for exercised options of $0.1 million.
Significant Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with
53 -------------------------------------------------------------------------------- assumptions that impact the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our Consolidated Financial Statements. Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies, of the Consolidated Financial Statements included elsewhere in this Report. Our critical accounting policies are described below.
The Company has adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method, the
Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. The Company measures revenue based on the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service or product to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreements, the Company performs the following steps (i) identification of contracts with customers; (ii) identification of performance obligations; (iii) determination of the transaction price; (iv) allocation of the transaction price to performance obligations; and (v) recognition of revenue when or as the Company satisfies each performance obligation.
Typical payment terms are between net 30 and net 60 days.
Equity-based compensation expense related to employee equity-based awards is measured based on the grant-date fair value of the stock-based awards and is recognized over the requisite service period of the awards. Following the Business Combination, the fair value of our Common Stock is now determined based on the quoted market price. Prior to completion of the Business Combination, as Legacy AdTheorent's units were not listed on a public marketplace, the calculation of the fair value of its units was subject to a greater degree of estimation in determining the basis for unit-based awards that were issued. Given the absence of a public market, Legacy AdTheorent was required to estimate the fair value of the units at the time of each grant. Legacy
AdTheorentconsidered objective and subjective factors in determining the estimated fair value and utilized third party valuation experts to determine the grant date unit price using the Black-Scholes option-pricing model. Under the Black-Scholes model, Legacy AdTheorent determined the value of its units based on interpolating from the valuations in its most recent external equity financing rounds and, when applicable, an expected valuation for an initial public offering of its shares, subject to discounts for the probability and timing of an exit event and lack of marketability, among other factors. Determining the fair value of stock-based awards at the grant date requires judgment. Our use of the Black-Scholes option-pricing model and Monte-Carlolattice model requires the input of subjective assumptions such as the expected term of the option, the expected volatility of the price of our Common Stock, risk-free interest rates, the expected dividend yield of our Common Stock, and the fair value of our Common Stock. The assumptions used in our valuation models represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
Software development costs
We capitalize certain costs associated with creating and enhancing internally developed software. The development costs associated with certain solutions offered exclusively through software as a service model are accounted for in accordance with ASC Topic 350-40,
Internal-Use Software("ASC 350-40"). Under ASC 350-40 qualifying software costs developed for internal use are capitalized when application development begins, it is probable that the project will be completed, and the software will be used as intended. Capitalized costs include (1) payroll and payroll-related costs for 54 -------------------------------------------------------------------------------- employees who are directly associated with, and devote time to, a qualifying project and (2) certain external direct costs for third-parties who are directly associated with, and devote time to, a qualifying project. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred. The Company capitalizes direct costs related to application development activities that are probable to result in additional functionality. Capitalized costs are amortized on a straight-line basis over 2 years, which best represents the pattern of the software's useful life. The Company tests for impairment whenever events or changes in circumstances that could impact recoverability occur.
We account for business acquisitions in accordance with ASC Topic 805, Business Combinations. We measure the cost of an acquisition as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. We record goodwill for the excess of (i) the total costs of acquisition, fair value of any non-controlling interests and acquisition date fair value of any previously held equity interest in the acquired business over (ii) the fair value of the identifiable net assets of the acquired business. The acquisition method of accounting requires us to exercise judgment and make estimates and assumptions based on available information regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions and contingencies. We must also refine these estimates over a one-year measurement period, to reflect any new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair value of assets and liabilities in connection with an acquisition, these adjustments could materially impact our results of operations and financial position. Estimates and assumptions that we must make in estimating the fair value of future acquired technology, user lists and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expenses. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed, which could materially impact our results of operations.
GoodwillThe Company tests goodwill for impairment on an annual basis as of October 31and at other times if a significant event or change in circumstances indicates that it is more likely than not that the fair value of these assets has been reduced below their carrying value. We use judgment in assessing whether assets may have become impaired between annual impairment assessments. Indicators such as unexpected adverse economic factors, unanticipated technological changes or competitive activities, loss of key personnel and acts by governments and courts, may signal that an asset has become impaired. In testing goodwill for impairment, we have the option to begin with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, including changes in our management, strategy and primary user base. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then perform a quantitative goodwill impairment test. The estimated fair value of the reporting unit is established using an income approach based on a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of the reporting unit, including judgments about appropriate discount rates, long-term growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows, and also applies a market approach which compares the reporting unit to comparable companies in our industry. Depending upon the results of that measurement, the recorded goodwill may be written down, and impairment expense is recorded in the Consolidated Statements of Operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit. Based on a qualitative assessment performed as of October 31, 2021and a quantitative test performed as of December 31, 2020, we determined it was more likely than not that the fair value of the reporting unit exceeded its carrying value, 55 -------------------------------------------------------------------------------- resulting in no impairment in either year. As of December 31, 2021, the goodwill recorded was not at-risk for future impairment. We will continue to monitor our goodwill for possible future impairment.
We assess the recoverability of our long-lived assets when events or changes in circumstances indicate their carrying value may not be recoverable. Such events or changes in circumstances may include: a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrate continuing losses associated with the use of a long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. We perform impairment testing at the asset group level that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. We assess recoverability of a long-lived asset by determining whether the carrying value of the asset group can be recovered through projected undiscounted cash flows over their remaining lives. If the carrying value of the asset group exceeds the forecasted undiscounted cash flows, an impairment loss is recognized, measured as the amount by which the carrying amount exceeds estimated fair value. An impairment loss is charged to operations in the period in which management determines such impairment. There were no impairments recorded for the years ended
December 31, 2021and 2020.
© Edgar Online, source