The following discussion and analysis of our financial condition and results of
operations should be read together with our consolidated financial statements
and related notes thereto included elsewhere in this Annual Report. This
discussion and analysis contains forward-looking statements that are based upon
current expectations and involve risks, assumptions and uncertainties.
Overview
Kubient, a Delaware corporation, was incorporated in May 2017 to solve some of
the most significant problems facing the global digital advertising industry.
The Company's experienced team of marketing and technology veterans has
developed the Audience Marketplace, a modular, highly scalable, transparent,
cloud-based software platform for real-time trading of digital, Programmatic
Advertising. The Company's platform's open marketplace gives both advertisers
(ad space buyers) and Publishers (ad space sellers) the ability to use machine
learning in the most critical parts of any Programmatic Advertising inventory
auction, while simultaneously and significantly reducing those advertisers and
Publishers' exposure to fraud, specifically in the Pre-bid environment.
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The Company also provides unique capabilities with its proprietary pre-bid ad
fraud detection & prevention, Kubient Artificial Intelligence ("KAI"), which has
the ability to stop fraud in the critical 300 millisecond window before an
advertiser spends their budget on fraudulent ad space. The technology is powered
by deep learning algorithms, the latest advancement in machine learning, which
allows the Company to ingest vast amounts of data, find complex patterns in the
data and make accurate predictions. Most importantly, it's self-learning,
getting smarter and more accurate over time. This provides advertisers a
powerful tool capable of preventing the purchase of ad fraud.
The Company believes that its Audience Marketplace technology allows advertisers
to reach entire audiences rather than buying single impressions from disparate
sources. By becoming a one stop shop for advertisers and publishers, providing
them with the technology to deliver meaningful messages to their target
audience, all in one place, on a single platform that is computationally
efficient, transparent, and as safely fraud-free as possible, the Company
believes that its Audience Marketplace platform (and the application of the
platform's machine learning algorithms) leads to increased publisher revenue,
lower advertiser cost, reduced latency and increased economic transparency
during the advertising auction process.
Results of Operations
Year Ended December 31, 2022 Compared With Year Ended December 31, 2021
For the Years Ended
December 31,
2022 2021
Net Revenues $ 2,403,408 $ 2,737,767
Costs and Expenses:
Sales and marketing 3,779,509 3,032,133
Technology 3,177,497 3,079,752
General and administrative 6,558,052 6,117,601
Loss on legal settlement - 880,381
Impairment loss on intangible assets 2,626,974 -
Impairment loss on property and equipment 49,948 -
Impairment loss on goodwill 463,000 -
Total Costs and Expenses 16,654,980 13,109,867
Loss From Operations (14,251,572) (10,372,100)
Other (Expense) Income:
Interest expense (10,909) (8,383)
Interest income 18,597 88,537
Change in fair value of contingent consideration 613,000 -
Other income 11,000 233
Total Other Income 631,688 80,387
Net Loss $ (13,619,884) $ (10,291,713)
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Net Revenues
For the year ended December 31, 2022, net revenues decreased by $334,359, or
12%, to $2,403,408 from $2,737,767 for the year ended December 31, 2021. The
decrease in net revenues was primarily associated with a decrease of net
revenues associated with a major customer as compared to the 2021 period,
partially offset by revenues generated in the 2022 period related to customer
contracts acquired in connection with our acquisition of MediaCrossing in
November 2021.
Sales and Marketing
For the year ended December 31, 2022, sales and marketing expenses increased by
$747,376, or 25%, to $3,779,509 from $3,032,133 for the year ended December 31,
2021. The increase is primarily attributable to increases in headcount and
associated costs of approximately $1,100,000 including executives hired during
2021, software subscriptions of approximately $114,000, public relations of
approximately $24,000 in conjunction with decrease of consulting fees of
approximately $120,000 and selling expenses of approximately $371,000 associated
with a major customer as compared to the 2021 period.
Technology
For the year ended December 31, 2022, technology expenses increased by $97,745,
or 3%, to $3,177,497 from $3,079,752 for the year ended December 31, 2021. The
increase is primarily attributable to increases in headcount costs of $398,000,
stock-based compensation expense of approximately $176,000, cloud hosting
expenses of approximately $150,000, partially offset by decreases in technology
programming fees of approximately $467,000 related to the termination of our
Russian contractors, amortization expense of approximately $117,000, consulting
fees of approximately $30,000, software subscriptions of approximately $10,000
and travel and entertainment expenses of approximately $2,000.
General and Administrative
For the year ended December 31, 2022, general and administrative expenses
increased by $440,451, or 7%, to $6,558,052 from $6,117,601 for the year ended
December 31, 2021. The increase is primarily attributable to increases in legal
and professional fees of approximately $601,000 primarily related to increased
legal costs, stock-based compensation expense of approximately $243,000, rent
expense of approximately $97,000, board fees of approximately $108,000, dues and
memberships fees of approximately $43,000, state franchise tax expense of
approximately $43,000, travel and entertainment expenses of approximately
$19,000, software subscriptions of approximately $12,000, partially offset by
decreases in recruiting fees of approximately $224,000, consulting fees of
approximately $252,000 primarily related to the hiring of an outside
compensation consultant, insurance expense of approximately $40,000, office
related expenses of approximately $25,000, bad debt expense of approximately
$16,000 and headcount costs of approximately $169,000.
Impairment Loss on Intangible Assets, Property and Equipment and Goodwill
During the year ended December 31, 2022, we recognized an impairment loss on
intangible assets of $2,626,974, an impairment loss on property and equipment of
$49,948 and an impairment loss on goodwill of $463,000.
During the year ended December 31, 2022, we identified triggering events that
indicated its finite-lived intangible assets and goodwill were at risk of
impairment and, as such, performed the required quantitative impairment
assessment to ultimately evaluate whether carrying value exceeded fair value.
The primary triggers for the impairment review were a loss of customers as well
as a reduction in the value of Kubient's market capitalization. As a result of
the quantitative assessments, we determined the intangible assets and goodwill
were fully impaired.
Loss on Legal Settlement
The Company recognized a loss on legal settlement of $880,381 for the year ended
December 31, 2021 related to a settlement agreement reached in March 2022
wherein we made a cash payment of $975,000 to Lo70s in consideration of the
dismissal of the ligation among the parties, as well as the releases and
covenants of the parties.
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Other Income
For the year ended December 31, 2022, the Company had other income of $631,688
as compared to other income of $80,387 during the year ended December 31, 2021.
The increase in other income is primarily due to the change in fair value
contingent consideration approximately $613,000, primarily due to the decline in
the Company's stock price as well as changes in the likelihood that forecasted
milestones would be met for the remainder of 2022.
Non-GAAP Measures
Adjusted EBITDA
The Company defines EBITDA as net income (loss) before interest, taxes and
depreciation and amortization. The Company defines Adjusted EBITDA as EBITDA,
further adjusted to eliminate the impact of certain non-recurring items and
other items that we do not consider in our evaluation of our ongoing operating
performance from period to period. These items will include stock-based
compensation, restructuring and severance costs, transaction costs, acquisition
costs, certain other non-recurring charges and gains that the Company does not
believe reflects the underlying business performance.
For the years ended December 31, 2022 and 2021, EBITDA and Adjusted EBITDA
consisted of the following:
For the Years Ended
December 31,
2022 2021
Net Loss $ (13,619,884) $ (10,291,713)
Interest expense 10,909 8,383
Interest income (18,597) (88,537)
Change in fair value of contingent consideration (613,000) -
Depreciation and amortization 330,993 452,136
EBITDA (13,909,579) (9,919,731)
Adjustments:
Stock-based compensation expense 991,487 724,042
Adjusted EBITDA $ (12,918,092) $ (9,195,689)
Adjusted Loss Per Share $ (0.90) $ (0.67)
Weighted Average Common Shares Outstanding -
Basic and Diluted 14,319,060 13,695,700
EBITDA and Adjusted EBITDA is a financial measure that is not calculated in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP"). Management believes that because Adjusted EBITDA excludes
(a) certain non-cash expenses (such as depreciation, amortization and
stock-based compensation) and (b) expenses that are not reflective of the
Company's core operating results over time (such as stock-based compensation
expense), this measure provides investors with additional useful information to
measure the Company's financial performance, particularly with respect to
changes in performance from period to period. The Company's management uses
EBITDA and Adjusted EBITDA (a) as a measure of operating performance, (b) for
planning and forecasting in future periods, and (c) in communications with the
Company's board of directors concerning the Company's financial performance. The
Company's presentation of EBITDA and Adjusted EBITDA are not necessarily
comparable to other similarly titled captions of other companies due to
different methods of calculation and should not be used by investors as a
substitute or alternative to net income or any measure of financial performance
calculated and presented in accordance with U.S. GAAP. Instead, management
believes EBITDA and Adjusted EBITDA should be used to supplement the Company's
financial measures derived in accordance with U.S. GAAP to provide a more
complete understanding of the trends affecting the business.
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Although Adjusted EBITDA is frequently used by investors and securities analysts
in their evaluations of companies, Adjusted EBITDA has limitations as an
analytical tool, and investors should not consider it in isolation or as a
substitute for, or more meaningful than, amounts determined in accordance with
U.S. GAAP. Some of the limitations to using non-GAAP measures as an analytical
tool are (a) they do not reflect the Company's interest income and expense, or
the requirements necessary to service interest or principal payments on the
Company's debt, (b) they do not reflect future requirements for capital
expenditures or contractual commitments, and (c) although depreciation and
amortization charges are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and non-GAAP measures do
not reflect any cash requirements for such replacements.
Liquidity and Capital Resources
We measure our liquidity in a number of ways, including the following:
For the Years Ended
December 31,
2022 2021
Cash and cash equivalents $ 14,739,484 $ 24,907,963
Working capital
$ 12,873,338 $ 22,676,301
Availability of Additional Funds
We believe our current cash on hand is sufficient to meet its operating and
capital requirements for at least the next twelve months from the date these
financial statements are issued. Our operating needs include the planned costs
to operate our business, including amounts required to fund working capital and
capital expenditures. Our future capital requirements and the adequacy of our
available funds will depend on many factors, including our ability to
successfully commercialize our products and services, competing technological
and market developments, and the need to enter into collaborations with other
companies or acquire other companies or technologies to enhance or complement
our product and service offerings.
Cash Flows
Year Ended December 31, 2022 Compared With Year Ended December 31, 2021
Our sources and uses of cash were as follows:
Cash Flows From Operating Activities
We experienced negative cash flows from operating activities for the years ended
December 31, 2022 and 2021 in the amounts of $9,599,932 and $7,674,792,
respectively. The net cash used in operating activities for the year ended
December 31, 2022 was primarily a result of cash used to fund a net loss of
$13,619,884, adjusted for net non-cash expenses of $3,856,402, partially offset
by $163,550 of net cash provided by changes in the levels of operating assets
and liabilities. The net cash used in operating activities for the year ended
December 31, 2021 was primarily a result of cash used to fund a net loss of
$10,291,713, adjusted for net non-cash expenses of $1,198,876, partially offset
by $1,418,045 of net cash provided by changes in the levels of operating assets
and liabilities.
Cash Flows From Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was
$16,549, which was attributable to purchases of property and equipment. Net cash
used in investing activities for the year ended December 31, 2021 was
$1,672,486, which was attributable to purchases of intangible assets, property
and equipment as well as the MediaCrossing purchase consideration.
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Cash Flows From Financing Activities
We experienced negative and positive cash flows from financing activities for
the years ended December 31, 2022 and 2021 in the amounts of $(551,998) and
$9,473,113, respectively. During the year ended December 31, 2022, $402,155 of
cash was used to repay financed director and officer insurance premiums and
$149,843 was used to repay our PPP loan. During the year ended December 31,
2021, $9,787,149 of proceeds were from exercises of options and warrants,
partially offset by $145,050 of cash used to repay financed director and officer
insurance premiums and $177,347 was used to partially repay our PPP loan.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any
relationships with any organizations or financial partnerships, such as
structured finance or special purpose entities, that would have been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Contractual Obligations
As a smaller reporting company, we are not required to provide the information
required by paragraph (a)(5) of this Item.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, or U.S. GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, contingent assets and liabilities, each as of the date
of the financial statements, and revenues and expenses during the periods
presented. On an ongoing basis, management evaluates their estimates and
assumptions, and the effects of any such revisions are reflected in the
financial statements in the period in which they are determined to be necessary.
Management bases their estimates on historical experience and on various other
factors that they believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual outcomes
could differ materially from those estimates in a manner that could have a
material effect on our consolidated financial statements. While our significant
accounting policies are more fully described in the notes to our consolidated
financial statements appearing elsewhere in this prospectus, we believe that the
following accounting policies and estimates are critical to the process of
making significant judgments and estimates in the preparation of our financial
statements and understanding and evaluating our reported financial results.
Revenue Recognition
The Company maintains a contract with each customer and supplier, which specify
the terms of the relationship. The Company provides a service to its customers
(the buy-side ad networks who work for advertisers) by connecting advertisers
and publishers. For this service, the Company earns a percentage of the amount
that is paid by the advertiser, who wants to run a digital advertising campaign,
which, in some cases, is reduced by the amount paid to the publisher, who wants
to sell its ad space to the advertiser.
The transaction price is determined based on the consideration to which it
expects to be entitled, including the impact of any implicit price concessions
over the course of the contract. The Company's performance obligation is to
facilitate the publication of advertisements. The performance obligation is
satisfied at the point in time that the ad is placed. Subsequent to a bid being
won, the associated fees are generally not subject to refund or adjustment.
Historically, any refunds and adjustments have not been material. The revenue
recognized is the amount the Company is responsible to collect from the customer
related to the placement of an ad (the "Gross Billing"), less the amount the
Company remits to the supplier for the ad space (the "Supplier Cost"), if any.
The determination of whether the Company is the principal or agent, and hence
whether to report revenue on a gross basis equal to the Gross Billing or on a
net basis for the difference between the Gross Billing and Supplier Cost,
requires judgment. The Company acts as an agent in arranging via its platform
for the specified good (the ad space) to be purchased by the advertiser, as it
does not control the goods or services being transferred to the end customer, it
does not take responsibility for the quality or acceptability of the ad space,
it does not bear inventory risk, nor does it have discretion in establishing
price of the ad space. As a result, the Company recognizes revenue on a net
basis for the difference between the Gross Billing and the Supplier Cost.
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The Company invoices customers on a monthly basis for the amount of Gross
Billings in the relevant period. Invoice payment terms, negotiated on a
customer-by- customer basis, are typically between 45 to 90 days. However, for
certain agency customers with sequential liability terms as specified by the
Interactive Advertising Bureau, (i) payments are not due to the Company until
such agency customers has received payment from its customers (ii) the Company
is not required to make a payment to its supplier until payment is received from
the Company's customer and (iii) the supplier is responsible to pursue
collection directly with the advertiser. As a result, once the Company has met
the requirements of each of the five steps under ASC 606, the Company's accounts
receivable are recorded at the amount of Gross Billings which represent amounts
it is responsible to collect and accounts payable, if applicable, are recorded
at the amount payable to suppliers. In the event step 1 under ASC 606 is not
met, the Company does not record either the accounts receivable or accounts
payable. Accordingly, both accounts receivable and accounts payable appear large
in relation to revenue reported on a net basis.
Business Combinations
Business combinations are accounted for using the acquisition method and,
accordingly, the assets acquired (including identified intangible assets), the
liabilities assumed and any contingent consideration are recorded at their
acquisition date fair values. The Company's fair value measurement of the
contingent consideration is based on significant inputs not observed in the
market and thus represents a Level 3 measurement. Level 3 instruments are valued
based on unobservable inputs that are supported by little or no market activity
and reflect the Company's own assumptions in measuring fair value.
Intangible Assets
Intangible assets are comprised of costs to acquire and develop computer
software, including the costs to acquire third-party data which is used to
improve the Company's artificial intelligence platform for client use, as well
as costs to acquire customer lists, customer contracts and related customer
relationship and restrictive covenant agreements. The intangible assets have
estimated useful lives of two years for the computer software, five years for
the capitalized data, seven years for the customer lists and three years for the
restrictive covenant agreements. Once placed into service, the Company amortizes
the cost of the intangible assets over their estimated useful lives on a
straight-line basis.
Impairment of Long-lived Assets
The Company reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable. An impairment would be recognized when estimated future cash
flows expected to result from the use of the asset and its eventual disposition
are less than its carrying amount.
Stock-Based Compensation
The Company measures the cost of services received in exchange for an award of
equity instruments based on the fair value of the award. The fair value of the
award is measured on the grant date. The fair value amount is then recognized
over the period during which services are required to be provided in exchange
for the award, usually the vesting period. Upon the exercise of an award, the
Company issues new shares of common stock out of its authorized shares. The
Company accrues for any equity awards at fair value that have been contractually
earned but not yet issued.
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