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YoY shift: Bearish
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.70pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-
Not scored
Net-tone change vs last year's 10-K.
MD&A
-0.70pp
Lean -
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
No section text extracted for this filing. The 10-K may use a non-standard template that the parser doesn't recognize - the original doc is still linked in the Stats tab.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
impairment+10
loss+6
negative+1
termination+1
bad+1
Positive rising
No words rose this year.
MD&A (Item 7)
3,519 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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,
Net Revenues
Costs and Expenses:
Sales and marketing
Technology
General and administrative
Loss on legal settlement
Impairmentloss on intangible assets
Impairmentloss on property and equipment
Impairmentloss on goodwill
Total Costs and Expenses
Loss From Operations
Other (Expense) Income:
Interest expense
Interest income
Change in fair value of contingent consideration
Other income
Total Other Income
Net Loss
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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.
ImpairmentLoss on Intangible Assets, Property and Equipment and Goodwill
During the year ended December 31, 2022, we recognized an impairmentloss on intangible assets of $2,626,974, an impairmentloss on property and equipment of $49,948 and an impairmentloss 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,
Net Loss
Interest expense
Interest income
Change in fair value of contingent consideration
Depreciation and amortization
EBITDA
Adjustments:
Stock-based compensation expense
Adjusted EBITDA
Adjusted Loss Per Share
Weighted Average Common Shares Outstanding -
Basic and Diluted
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,
Cash and cash equivalents
Working capital
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.
