DoubleVerify Holdings, Inc. (DV) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere within this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. You should read the “Special Note Regarding Forward- Looking Statements” and “Risk Factors” sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

The following generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of historical items and year-to-year comparisons between 2021 and 2020 that are not included in this discussion can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021. References to “Notes” are notes included in our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

Company Overview

We are a leading software platform for digital media measurement and analytics. Our mission is to create stronger, safer, more secure digital transactions that drive optimal outcomes for global advertisers. Through our software platform and the metrics it provides, we help preserve the fair value exchange between buyers and sellers of digital media.

Our customers include many of the largest global advertisers and digital ad platforms and publishers. We deliver our suite of solutions through a robust and scalable software platform that provides our customers with unified data analytics. We provide a consistent, cross-platform measurement standard across all major forms of digital media, making it easier for advertiser and supply-side customers to benchmark performance across all of their digital ads and to optimize business outcomes in real time. Our coverage spans nearly 100 countries where our customers activate our services and covers all key digital media channels, formats and devices.

Our company was founded in 2008 and introduced our first brand safety and suitability solution in 2010. We launched our first viewability and fraud solutions in 2013 and 2014, respectively. As the global digital advertising market has evolved, we have continued to expand our measurement capabilities and market coverage through new product innovation, increasing our international footprint and new platform partnerships. We announced our first social media platform partnership in 2017 and launched our CTV certification program in 2020.

We have experienced rapid growth and achieved significant profitability in recent years as evidenced by the following:

For the years ended December 31, 2022 and December 31, 2021, we generated 90% and 91% of our revenue, respectively, from advertiser customers. We derive revenue from our advertising customers based on the volume of Media Transactions Measured on our software platform. Advertisers utilize the DV Authentic Ad, our definitive metric of digital media quality, to evaluate the existence of fraud, brand suitability, viewability and geography for each digital ad. Advertisers pay us a Measured Transaction Fee per thousand impressions based on the volume of Media Transactions Measured on their behalf.

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We maintain an expansive set of direct integrations across the entire digital advertising ecosystem, including with leading programmatic and social platforms, which enables us to deliver our metrics across platforms where our customers buy ads. Further, our services are not reliant on any single source of impressions and we can service our customers as their digital advertising needs change. In 2022, we estimate that approximately 55% and 45% of Media Transactions Measured were for display and for video ad formats, respectively. In 2021, approximately 59% and 41% of Media Transactions Measured were for display and for video ad formats, respectively. In 2022, approximately 76%, 20% and 4% of Media Transactions Measured were for mobile devices, desktop devices, and emerging digital channels, respectively. In 2021, approximately 72%, 25% and 3% of Media Transactions Measured were for mobile devices, desktop devices, and emerging digital channels, respectively. For the years ended December 31, 2022 and December 31, 2021, 10% and 9% of our revenue, respectively, was generated from our supply-side customers to validate the quality of their ad inventory. We generate revenue from supply-side customers based on monthly or annual contracts with minimum guarantees and tiered pricing when guarantees are met.

We believe that there are meaningful long-term growth opportunities within the digital advertising market. We plan to continue to invest in the development of new and premium solutions that increase our value proposition to customers and to extend our solutions capabilities to cover new and growing digital media environments, channels and devices, including CTV, new mobile apps and other emerging areas of digital ad spend. We plan to continue to invest in sales and marketing to grow our existing customer relationships and acquire new customers. In addition, we have completed five acquisitions since 2018 and maintain an active pipeline of potential M&A targets and intend to continue evaluating add-on opportunities to bolster our current solutions suite and complement our organic growth initiatives.

Furthermore, we believe that there are significant long-term growth opportunities in markets outside of North America. We expect to continue to make investments in product development, sales and marketing, information technology, financial and administrative systems and controls to support our global growth.

Factors Affecting Our Performance

There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include:

Significant Growth in Digital Ad Spend. Magna Global estimated that global digital ad spend, excluding search, reached over $253 billion in 2022 and is expected to grow to $352 billion by 2027. Our revenues have grown substantially as a result of the growth in digital advertising as well as the continued adoption of digital measurement solutions and analytics. As the digital advertising market has grown, advertisers have increasingly shifted their digital media spend to both programmatic and social media channels in order to directly target advertisements to achieve desired business outcomes. We have been direct beneficiaries of this growth by virtue of our integrations with leading programmatic and social media platforms. In the year ended December 31, 2022, the revenue we generated by providing our activation solutions through programmatic and social integrations and our measurement solutions through social integrations grew 50% and 28%, respectively, over the prior year period. In the year ended December 31, 2021, the revenue we generated by providing our activation solutions through programmatic and social integrations and our measurement solutions through social integrations grew 45% and 47%, respectively, over the prior year period.

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Growth of Existing Customers. Our customers include many of the largest digital advertisers in the world and we have maintained exceptional customer retention with gross revenue retention rates of over 95% in each of the years ended December 31, 2022 and 2021. We define our gross revenue retention rate as the total prior year revenue earned from advertiser customers, less the portion of prior year revenue attributable to lost advertiser customers, divided by the total prior year revenue from advertiser customers, excluding a portion of our revenues that cannot be allocated to specific advertiser customers. Gross retention rates demonstrate strength in underlying business, recurring business profile, level of client satisfaction and lack of churn. We expect to continue to grow with our existing customers as they increase their spend on digital advertising and as we introduce new solutions across key channels, formats, devices and geographies. We have generated strong historical net revenue retention rates, with 127% for the year ended December 31, 2022 and 126% for the year ended December 31, 2021. We define our net revenue retention rate as the total current period revenue earned from advertiser customers, which were also customers during the entire most recent twelve-month period, divided by the total prior year period revenue earned from the same advertiser customers, excluding a portion of our revenues that cannot be allocated to specific advertiser customers. Net retention rates demonstrate strength in underlying business, recurring business profile, level of client satisfaction and lack of churn. Limitations for these metrics include limiting their usefulness as a comparative measure and the metrics not being the best indicator of our cash flows or future operating results. You should compensate for these limitations by relying primarily on the Company’s GAAP results and using the non-GAAP financial measures only supplementally.

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New Solutions and Channels. We have a strong track record of developing new solutions that have high adoption rates with our existing customers. We intend to extend our solutions capabilities to new adjacencies and cover new and growing digital channels and devices, including CTV, new mobile apps and other emerging areas of digital ad spend. At the end of 2018, we launched our Authentic Brand Suitability solution that allows advertisers to create a centralized set of brand suitability controls that can be automatically deployed across multiple programmatic buying platforms and campaigns. Authentic Brand Suitability, which significantly reduces wasted ad spend, generated $123.3 million and $84.6 million of revenue in 2022 and 2021, respectively. In 2022, we developed and launched several new solutions: (i) Fully On-Screen targeting, which empowers programmatic CTV advertisers to target inventory from sources that have received DV’s Fully On-Screen Certification, (ii) the DV Authentic Attention Snapshot, a comprehensive overview of high-level attention measurement made available to all DV advertisers, (iii) sustainability measurement, powered by Scope3, to provide advertisers with a comprehensive campaign-based carbon footprint via DV’s analytics platform, DV Pinnacle, and (iv) Post-campaign Brand Safety and Suitability measurement on TikTok, enabling advertisers to leverage a consistent measurement standard across all major platforms and publishers in order to inform future media planning and buying decisions.

New Geographies. Our customer base is predominately U.S.-based today. We intend to grow our presence in international markets in order to meet the needs of our existing customers and accelerate new customer acquisition in key geographies outside of North America. With offices or commercial operations in 21 locations across 17 countries, our expansion to new geographies has helped us to win the international business of our existing customers and to establish relationships with some of the world’s largest international advertisers. As of December 31, 2022, 348 of our 902 employees were based outside of the Americas.

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COVID-19. Although COVID-19 related restrictions have eased across the world, there remains uncertainty around the pandemic and its effect on macroeconomic factors, including supply-chains. Throughout the pandemic, we have continued to experience revenue growth over the prior year and the primary impact of the pandemic on our business has been a moderation of our revenue growth in 2020 as compared to 2019. The underlying demand for our products has remained relatively unchanged, with limited disruption on our new customer sales. To date, we have not experienced a material increase in customers’ cancellations, or requests for more favorable contractual terms, or concessions. We have also not experienced a significant deterioration in the collectability of our receivables or a material negative impact from our vendors and third-party service providers.

For the year ended December 31, 2022, we generated growth of 36% in total revenue as compared to the year ended December 31, 2021. Our ability to grow revenue within our existing customer accounts has remained strong, with a net revenue retention of 127% for the year ended December 31, 2022 and 126% for the year ended December 31, 2021. Our existing customer base has remained largely stable, and our gross revenue retention rate was over 95% for each of the years ended December 31, 2022 and 2021. Additionally, we generated net cash provided by operating activities of $94.9 million and $82.7 million in those same periods, respectively. We have had ample liquidity and capital resources to continue to meet our operating needs, and our ability to continue to service our debt or other financial obligations is not currently impaired.

While the impact of the pandemic on our business has been limited to date, our revenues are dependent on advertiser demand. The pandemic has resulted in market and supply chain disruptions and a global economic slowdown, which has materially impacted demand for a broad variety of goods and services, and is also disrupting sales channels and marketing activities. To the extent that demand for digital advertising declines, our results of operations and financial condition may be materially impacted. The duration of such disruptions is highly uncertain and cannot be predicted. See “Risk Factors — Risks Relating to Our Business — Economic downturns and unstable market conditions could adversely affect our business, financial condition and results of operations.”

Russia’s Invasion of Ukraine. In February 2022, the Russian Federation commenced a military action in Ukraine. In response to the military action, and in support of the people of Ukraine, we voluntarily discontinued our relationships with Russia-based customers. As the situation continues to evolve, we are closely monitoring the current and potential impact on our business, our people and our customers. The impact on our business is not material, but, as a result of the discontinuation of services with Russia-based advertisers and the ongoing conflict in Ukraine, the Company had a $1.0 million increase in bad debt reserves during the year ended December 31, 2022.

While the factors above may present significant opportunities for us, they also pose significant risks and challenges. See “Risk Factors” for more information on risks and uncertainties that may impact our business and financial results.

Components of Our Results of Operations

We manage our business operations and report our financial results in a single segment.

Revenue

Our customers use our solutions to measure their digital advertisements. We generate revenue from our advertising customers based on the volume of Media Transactions Measured on our software platform and from supply-side customers based on contracts with minimum guarantees or contracts that have tiered pricing after minimum guarantees are achieved.

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For the years ended December 31, 2022 and 2021, we generated 90% and 91% of our revenue, respectively, from advertiser customers. Advertisers can purchase our services to measure the quality and performance of ads purchased directly from digital properties, including publishers and social media platforms, which we track as Measurement (f/k/a Advertiser – direct) revenue. Advertisers can also purchase our services through programmatic platforms to evaluate the quality of ad inventories before they are purchased, which we track as Activation (f/k/a Advertiser – programmatic) revenue. We generate revenue from advertisers by charging a Measured Transaction Fee based on the volume of Media Transactions Measured on behalf of our customers. We recognize revenue from advertisers in the period in which we provide our measurement solutions. Advertisers typically leverage the full suite of our proprietary DV Authentic Ad metric to evaluate and measure the existence of fraud, brand suitability, viewability and geography for their digital ad investments. We have long-term relationships with many of our customers, with an average relationship of over seven years for our top 75 customers and over eight years for both our top 50 and 25 customers, and ongoing contractual agreements with a substantial portion of our customer base.

For the years ended December 31, 2022 and 2021, we generated 10% and 9% of our revenue, respectively, from supply-side customers who use our data analytics to validate the quality of their ad inventory and provide data to their customers to facilitate targeting and purchasing digital ads. We generate revenue for certain supply-side arrangements that include minimum guaranteed fees that reset monthly and are recognized on a straight-line basis over the access period, which is usually 12 months. For contracts that contain overages, once the minimum guaranteed amount is achieved, overages are recognized as earned over time based on a tiered pricing structure.

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See “Critical Accounting Policies and Estimates — Revenue Recognition” for a description of our revenue recognition policies.

Operating Expenses

Our operating expenses consist of the following categories:

Cost of revenue. Cost of revenue primarily consists of platform hosting fees, data center costs, software and other technology expenses, and other costs directly associated with data infrastructure; personnel costs, including salaries, bonuses, stock-based compensation and benefits, directly associated with the support and delivery of our software platform and data solutions; and costs from revenue-sharing arrangements with our partners.

Product development. Product development expenses primarily consist of personnel costs, including salaries, bonuses, stock-based compensation and benefits, third party vendors and outsourced engineering services, and allocated overhead. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Product development expenses are expensed as incurred, except to the extent that such costs are associated with software development that qualifies for capitalization, which are then recorded as capitalized software development costs included in Property, plant and equipment, net on our Consolidated Balance Sheets. We amortize capitalized software development costs to depreciation and amortization.

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Sales, marketing, and customer support. Sales, marketing, and customer support expenses primarily consist of personnel costs directly associated with our sales, marketing, and customer support departments, including salaries, bonuses, commissions, stock-based compensation and benefits, and allocated overhead. We allocate overhead such as information technology infrastructure, rent and occupancy charges based on headcount. Sales and marketing expense also includes costs for promotional marketing activities, advertising costs, and attendance at events and trade shows. Sales commissions are expensed as incurred.

General and administrative. General and administrative expenses primarily consist of personnel expenses associated with our executive, finance, legal, human resources and other administrative employees. Our general and administrative expenses also include professional fees for external accounting, legal, investor relations and other consulting services, and other overhead, as well as third-party costs related to acquisitions.

As part of our transition to becoming a public company in 2021, we incurred certain non-recurring professional fees and other expenses. Further, we have incurred, and will continue to incur, additional expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on a U.S. securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and other professional services.

Interest expense. Interest expense for the years ended December 31, 2022 and 2021, consists primarily of debt issuance costs, interest on outstanding balances under the New Revolving Credit Facility and interest on finance leases. On October 1, 2020, the Company entered into the New Revolving Credit Facility and repaid all amounts outstanding under the Prior Credit Facilities (as defined herein). The New Revolving Credit Facility bears interest at LIBOR plus an applicable margin per annum. On April 30, 2021, the Company used a portion of the net proceeds from the IPO and the concurrent private placement to pay the entire outstanding balance of $22.0 million under the New Revolving Credit Facility. See Note 9 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Other (income) expense. Other (income) expense consists primarily of interest earned on our cash equivalents and short-term investments, gains and losses on foreign currency transactions, and change in fair value associated with contingent consideration related to our acquisitions.

Results of Operations

Comparison of the Years Ended December 31, 2022 and 2021

The following tables show our results of operations for the years ended December 31, 2022 and 2021:

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Revenue

Total revenue increased by $119.7 million, or 36%, from $332.7 million in the year ended December 31, 2021 to $452.4 million in the year ended December 31, 2022. We delivered a 22% increase in Media Transactions Measured and a 7% increase in Measured Transaction Fees. Advertiser net revenue retention rate was 127% for the year ended December 31, 2022, and 126% for the year ended December 31, 2021.

Activation (f/k/a Advertiser – programmatic) revenue increased $83.4 million, or 50%, driven by greater adoption of our Authentic Brand Suitability (ABS) solution as well as by new customers activating our core (non-ABS) programmatic solutions. Revenue from OpenSlate’s pre-campaign social activation tools and the implementation of pricing tiers based on enhanced programmatic integrations also contributed to year over year growth.

Measurement (f/k/a Advertiser – direct) revenue increased $22.4 million, or 17%, primarily driven by new customers and expansions by existing customers, both within and outside the United States. Revenue from social media platforms represented 37% and 33% of total Measurement revenue in 2022 and 2021, respectively.

Supply-side revenue increased $13.9 million, or 47%, primarily driven by an increase in revenue from existing and new platform customers, and by the integration of OpenSlate solutions into our product suite.

Cost of Revenue (exclusive of depreciation and amortization shown below)

Cost of revenue increased by $23.5 million, or 43%, from $54.4 million in the year ended December 31, 2021 to $77.9 million in the year ended December 31, 2022. The increase was primarily due to growth in Activation (f/k/a Advertiser – programmatic) revenue which drove increases in partner costs from revenue-sharing arrangements, as well as accelerated investments in cloud services to provide scale and flexibility necessary to support future growth.

Product Development Expenses

Product development expenses increased by $32.4 million, or 52%, from $62.7 million in the year ended December 31, 2021 to $95.1 million in the year ended December 31, 2022. The increase was primarily due to an increase in personnel costs, including stock-based compensation, of $23.9 million, an increase in third party software costs and outsourced engineering services of $4.4 million to support our product development efforts, and an increase in allocated rent expense of $2.5 million.

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Sales, Marketing and Customer Support Expenses

Sales, marketing and customer support expenses increased by $30.1 million, or 39%, from $77.3 million in the year ended December 31, 2021 to $107.4 million in the year ended December 31, 2022. The increase was primarily due to an increase in personnel costs, including stock-based compensation and sales commissions, of $23.5 million to support sales and account management efforts globally, and drive continued expansion with existing and new customers. Marketing activities, including advertising, promotions, events and other activities increased $1.1 million, personnel travel and entertainment expenses to support marketing and sales activities increased $2.2 million, and allocated rent expense increased $2.2 million.

General and Administrative Expenses

General and administrative expenses decreased by $2.7 million, or 3%, from $81.4 million in the year ended December 31, 2021 to $78.7 million in the year ended December 31, 2022. Personnel costs, including stock-based compensation, increased $6.2 million. Non-personnel cost increases included $5.7 million in bad debt reserves, $3.0 million in professional fees, $2.3 million in insurance costs for coverage as a public company, and $1.3 million in rent expense. Cost increases were more than offset by a $22.3 million decrease in costs related to the 2021 preparation and completion of the Company’s IPO.

Depreciation and Amortization

Depreciation and amortization increased by $4.0 million, or 13%, from $30.3 million in the year ended December 31, 2021 to $34.3 million in the year ended December 31, 2022. The increase was primarily due to an increase in intangibles related to the acquisition of OpenSlate and an increase in leasehold improvements at the Company’s new global headquarters, partially offset by write-offs and fully depreciated fixed assets.

Interest Expense

Interest expense is mainly related to costs for the New Revolving Credit Facility, which carries a variable interest rate, and to finance leases. Interest expense decreased by $0.3 million, from $1.2 million in the year ended December 31, 2021, to $0.9 million in the year ended December 31, 2022. The decrease was attributable to a reduction in outstanding debt and a reduction in interest costs related to finance leases. As of December 31, 2022 and 2021, the Company held no debt.

Other Income, Net

Other income increased by $0.9 million, from $0.3 million in the year ended December 31, 2021, to $1.2 million in the year ended December 31, 2022. The increase was primarily due to a $2.3 million increase in interest income earned on monetary assets, partially offset by losses related to changes in foreign currency exchange rates.

Income Tax Expense (Benefit)

Income tax expense increased by $19.6 million from a benefit of $3.5 million in the year ended December 31, 2021 to an expense of $16.1 million in the year ended December 31, 2022. The increase was primarily due to an increase in pre-tax book income and permanent book-to-tax income adjustments primarily related to non-cash compensation.

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Adjusted EBITDA

In addition to results determined in accordance with GAAP, we believe that certain non-GAAP financial measures, including Adjusted EBITDA and Adjusted EBITDA Margin, are useful in evaluating our business. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenue. The following table presents a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to the most directly comparable financial measure prepared in accordance with GAAP.

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We use Adjusted EBITDA and Adjusted EBITDA Margin as measures of operational efficiency to understand and evaluate the core business operations of the Company. We believe that these non-GAAP financial measures are useful to investors for period to period comparisons of the core business and for understanding and evaluating trends in operating results on a consistent basis by excluding items that we do not believe are indicative of the core operating performance of the Company.

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These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of the Company’s results as reported under GAAP. Some of the limitations of these measures are:

In addition, other companies in the industry may calculate these non-GAAP financial measures differently, therefore limiting their usefulness as a comparative measure. You should compensate for these limitations by relying primarily on the Company’s GAAP results and using the non-GAAP financial measures only supplementally.

Selected Quarterly Results of Operations

The following tables set forth our unaudited consolidated quarterly results of operations for each of the 8 quarters within the period from January 1, 2021 to December 31, 2022. Our quarterly results of operations have been prepared on the same basis as our consolidated financial statements, and we believe they reflect all normal recurring adjustments necessary for the fair presentation of our results of operations for these periods. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. These quarterly results of operations are not necessarily indicative of our results of operations for a full year or any future period.

We experience fluctuations in revenue that coincide with seasonal fluctuations in the digital ad spending of our customers. Advertisers typically allocate the largest portion of their media budgets to the fourth quarter of the calendar year in order to coincide with increased holiday purchasing. As a result, the fourth quarter of the year typically reflects our highest level of measurement of digital ads while the first quarter reflects the lowest level of such activity. We expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole. While our revenue is highly recurring, seasonal fluctuations in ad spend may impact quarter-over-quarter results. We believe that the year-over- year comparison of results more appropriately reflects the overall performance of the business.

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The following table sets forth our unaudited consolidated results of operations for the specified periods as a percentage of revenue:

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The following table presents a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to the most directly comparable financial measure prepared in accordance with GAAP.

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Liquidity and Capital Resources

The Company’s operations are financed primarily through cash generated from operations. In October 2020, the Company entered into the New Revolving Credit Facility with available borrowings of $150 million. The Company had no outstanding debt under the New Revolving Credit Facility as of December 31, 2022. As of December 31, 2022, the Company had cash of $267.8 million and net working capital, consisting of current assets (excluding cash) less current liabilities, of $108.4 million. As of December 31, 2021, the Company had cash of $221.6 million and net working capital, consisting of current assets (excluding cash) less current liabilities, of $89.2 million.

In 2021, the Company received aggregate net proceeds of $253.2 million from the IPO, after deducting underwriting discount fees of $16.2 million. The Company also received aggregate net proceeds of $28.9 million from the concurrent private placement, after deducting fees of $1.0 million. We believe our existing cash and cash generated from operations, together with the undrawn balance under the New Revolving Credit Facility, will be sufficient to meet the Company’s working capital and capital expenditure requirements on a short-term and long-term basis.

We anticipate that our capital expenditures, including capitalized software, will be approximately $15 million to $25 million for 2023. We anticipate our lease payment obligations, including operating and finance leases, will be approximately $10 million for 2023. Our total future capital requirements and the adequacy of available funds will depend on many factors, including those discussed above as well as the risks and uncertainties set forth under “Risk Factors.”

Debt Obligations

In October 2020, DoubleVerify Inc., as borrower, and DoubleVerify MidCo, Inc., as guarantor, entered into the New Revolving Credit Facility and, in connection therewith, repaid all amounts outstanding under the Prior Credit Facilities.

On December 24, 2020, DoubleVerify Inc. prepaid $68.0 million of the outstanding principal amount under the New Revolving Credit Facility with a portion of the proceeds from the Private Placement (as defined herein). As of December 31, 2020, $22.0 million was outstanding under the New Revolving Credit Facility.

On April 30, 2021, we used a portion of the net proceeds from the IPO and the concurrent private placement to pay the entire outstanding balance of $22.0 million under the New Revolving Credit Facility.

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The New Revolving Credit Facility is secured by substantially all of the assets of the Credit Group (subject to customary exceptions) and contain customary affirmative and restrictive covenants, including with respect to our ability to enter into fundamental transactions, incur additional indebtedness, grant liens, pay dividends or make distributions to our stockholders and engage in transactions with our affiliates.

The New Revolving Credit Facility also requires us to remain in compliance with certain financial ratios and is in compliance as of December 31, 2022.

For more information about the Prior Credit Facilities and the New Revolving Credit Facility, see Note 9 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

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Operating Activities

For the year ended December 31, 2022, cash provided by operating activities was $94.9 million, attributable to net income of $43.3 million, adjusted for non-cash charges of $72.8 million and net cash outflows of $21.2 million used in changes in operating assets and liabilities. Non-cash charges primarily consisted of $34.3 million in depreciation and amortization, $42.3 million in stock-based compensation, and $7.3 million in non-cash lease expenses, offset by $19.6 million in deferred taxes. The main drivers of the changes in operating assets and liabilities were an increase in trade receivables and prepaid expenses and other assets of $40.7 million due to an increase in sales and the timing of cash receipts, and an increase of $19.5 million in trade payables and accrued expenses and other liabilities. Accrued expenses and other liabilities include the benefit of $8.7 million tenant improvement allowance received from the landlord of the Company’s new global headquarters and income taxes of $10.6 million.

For the year ended December 31, 2021, cash provided by operating activities was $82.7 million, attributable to net income of $29.3 million, adjusted for non-cash charges of $66.9 million and net cash outflows of $13.4 million used in changes in operating assets and liabilities. Non-cash charges primarily consisted of $30.3 million in depreciation and amortization, $22.1 million of offering costs related to the preparation and completion of the Company’s IPO and $21.9 million in stock-based compensation, partially offset by a $7.9 million credit for deferred taxes. The main drivers of the changes in operating assets and liabilities were an increase in trade receivables and prepaid assets of $29.1 million due to an increase in sales and the timing of cash receipts, and an increase of $16.2 million in trade payable and accrued expenses and other liabilities.

Our cash flows from operating activities are primarily influenced by growth in our operations and by changes in our working capital. In particular, accounts receivable increases in conjunction with our rapid growth in sales and decreases based on timing of cash receipts from our customers. The timing of payments on our liabilities also impacts our cash flows from operating activities. We typically pay suppliers in advance of collections from our clients. Our collection and payment cycles can vary from period to period.

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We compute our average days sales outstanding, or DSO, as of a given date based on our total trade receivables balance, including unbilled accounts receivable, at the end of the period, divided by the average daily total revenue of the trailing three-month period. This metric is used by us to determine the effectiveness of our credit and collection efforts in allowing credit to customers, as well as our ability to collect. We compute our average days payable outstanding, or DPO, as of a given date based on our trade payables balance at the end of the period, divided by the average daily cost of operating expenses over such period, excluding depreciation, amortization, and certain other costs that are excluded from Adjusted EBITDA. This metric is used by the Company to determine the amount of days it takes to pay its invoices to our trade creditors. Limitations for these metrics include limiting their usefulness as a comparative measure and the metrics not being the best indicator of our cash flows. You should compensate for these limitations by relying primarily on the Company’s GAAP results and using the non-GAAP financial measures only supplementally.

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The following table summarizes the DSO and DPO for the periods presented.

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Investing Activities

For the year ended December 31, 2022, cash used in investing activities of $40.0 million was attributable to purchases of property, plant and equipment, including leasehold improvements and furniture and fixtures for the Company’s new global headquarters of approximately $32.4 million, and capitalized software development costs.

For the year ended December 31, 2021, cash used in investing activities of $158.6 million was attributable to the acquisitions of Meetrics and of OpenSlate, purchases of property, plant and equipment, and capitalized software development costs.

Financing Activities

For the year ended December 31, 2022, cash used in financing activities of $7.9 million was primarily due to $10.2 million of shares repurchased for settlement of employee tax withholdings, $3.2 million of contingent consideration related to the acquisition of Zentrick, partially offset by $5.8 million of proceeds from common stock issued upon exercise of stock options.

For the year ended December 31, 2021, cash provided by financing activities of $264.4 million was primarily due to $299.4 million of proceeds from the IPO and concurrent private placement, $12.4 million of proceeds from stock option exercises, partially offset by $22.0 million of debt repayment and $22.1 million of offering costs related to the preparation and completion of the Company’s IPO.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets and liabilities and related disclosures at the dates of the financial statements, and revenue and expenses during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.

While our significant accounting policies are more fully described in Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following discussion addresses our most critical accounting policies, which are those that are most important to our financial condition and results of operations and require our most difficult, subjective and complex judgments.

Revenue Recognition

In accordance with ASC 606, Revenue from Contracts with Customers, the Company recognizes revenue under the core principle to depict the transfer of control to its customers in an amount reflecting the consideration to which it expected to be entitled. In order to achieve that core principle, the Company applies the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

For Measurement (f/k/a Advertiser – direct) revenue, our contracts with our customers typically consist of the various ad measurement services that we offer. Included in these services is access to our software platform that allows customers to access and manage their data related to our services. We deliver our services together when media transactions are measured and primarily charge a contractually fixed Measured Transaction Fee per 1,000 impressions on the number of Media Transactions Measured. We recognize revenue over time when we satisfy a performance obligation by transferring promised services to a customer.

For Activation (f/k/a/ Advertiser – programmatic) revenue, our customers can elect to use our services for evaluating the quality of advertising they are considering purchasing. Customers purchase our social activation solutions directly from us, and our programmatic activation solutions through Demand-Side Platforms that manage ad campaign auctions and inventories on their behalf. We enter into product integration agreements with our Demand-Side Platform partners. In these arrangements, the customer pays a Measured Transaction Fee to the Company (collected by the Demand-Side Platform) for the successful execution of the purchase of advertising inventory on an exchange. We recognize revenue over time when we satisfy a performance obligation by transferring promised services to a customer.

For Supply-side revenue, we offer to our supply-side platform partners arrangements to measure all ads on their platform. These arrangements are typically subscription-based with minimum guarantees, and are recognized on a straight-line basis over the term of the contract, usually twelve months. For contracts that contain overages, once the minimum guaranteed amount is achieved, overages are recognized as earned over time based on a tiered pricing structure. Overages give rise to variable consideration that is allocated to the distinct periods to which the overage relates.

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For transactions that involve third parties, the Company evaluates which party in the arrangement obtains control of the Company’s services (and is therefore the Company’s customer), which impacts whether the Company reports revenue as the gross amounts paid by the advertiser through the Demand-Side Platform or the net amount paid by the Company’s Demand-Side Platform partners. For certain arrangements, customers may purchase the Company’s service offering through a Demand-Side Platform that manages various ad campaign auctions and inventory on behalf of the advertisers. Customers elect to use the Company’s service of evaluating the quality of advertising inventory up for bid on an advertising exchange. The ability to provide these services to customers requires that the Company enter into product integration agreements with Demand-Side Platforms who in turn make the Company’s services available to advertisers. In these arrangements, the customer pays a Measured Transaction Fee to the Company (collected by the Demand-Side Platform) for the successful execution of the purchase of advertising inventory on an exchange. In these transactions, the Company transfers control of the Company’s services directly to the advertiser (who is the Company’s customer) and therefore revenue is recognized for the gross amount paid by the advertiser for the Company’s services. Specifically, the Company transfers control of the data that is influencing the purchasing decisions directly to the customer and the Company is primarily responsible for providing these services to the customer. That is, control of these services (or a right to these services) does not transfer to the Demand-Side Platform before they are transferred to the Company’s customers. Further, the Company has latitude in establishing the sales price with those customers as there is a fixed retail rate card that is included in the product integration agreements with the Demand-Side Platforms or are governed by contracts in place with the customers. Accordingly, the Company records revenue for the gross amounts of the Measured Transaction Fees paid by advertisers for these services and records the amounts retained by the Demand-Side Platforms as a cost of revenue.

Goodwill and Intangibles

Goodwill represents the excess of purchase price over the fair value of tangible net assets and identifiable intangible assets of the businesses acquired. Goodwill deemed to have an indefinite life is not amortized. Intangible assets determined to have finite lives are amortized over their useful lives. Goodwill with indefinite lives are subject to impairment testing annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable, using the guidance and criteria described in the accounting standard for Goodwill and Other Intangible Assets. This testing compares carrying values to fair values and, when appropriate, the carrying value of these assets is reduced to fair value.

The Company has a single reporting unit. There are many assumptions and estimates used that directly impact the results of impairment testing, including an estimate of future expected revenues, net income, earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA margins and cash flows, useful lives, discount rates and an estimate of value using multiples derived from the stock prices of publicly traded guideline companies applied to such expected cash flows and market approaches in order to estimate fair value. The determination of whether or not goodwill or indefinite-lived acquired intangible assets have become impaired involves a significant level of judgment in the assumptions and estimates underlying the approach used to determine the value of our reporting unit. Changes in our strategy or market conditions could significantly impact these judgments and require an impairment to be recorded to intangible assets and goodwill. There have been no goodwill impairment indicators subsequent to the impairment test performed as of October 1, 2022. For each of the years ended December 31, 2022 and December 31, 2021, there were no impairments related to our intangible assets.

We allocate the fair value of the purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. The estimates used in valuing the intangible assets are determined with the assistance of third-party specialists, a discounted cash flow analysis and estimates made by management. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset primarily made to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

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Stock-Based Compensation

Our stock-based compensation awards relate to restricted stock units and stock options. For purposes of calculating stock-based compensation, we estimate the fair value of the restricted stock units using the grant date stock price or a Monte Carlo Simulation model in instances where a market condition exists. We estimate the fair value of stock options issued using a Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for stock-based compensation awards is the date of grant and the expense is recognized using the accelerated attribution method over the vesting period net of an estimated forfeiture rate. For share-based awards that vest subject to the satisfaction of a market condition, the fair value measurement date for stock-based compensation is the date of grant and the expense is recognized on a straight-line basis over the derived service period or upon achievement of the market condition.

The determination of the fair value of restricted stock units utilizing the Monte Carlo Simulation model is affected by a number of assumptions including expected volatility, risk free rate and the fair market value of the Company’s common stock.

The determination of the fair value of stock option awards utilizing the Black-Scholes model is affected by a number of assumptions, including expected volatility, expected life, risk-free interest rate, expected dividends, and the fair market value of the Company’s common stock. These inputs are subjective and generally requires significant judgment and estimation by management.

Prior to our common stock becoming publicly traded, we estimated the fair value of our common stock as discussed in the section “Fair Value of Common Stock” below.

Fair Value of Common Stock

Historical Valuation Approach

Given the absence of a public trading market for our common stock prior to our IPO, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including, with input from management, our financial and operating history, equity market conditions affecting comparable public companies, and the lack of marketability of our common stock.

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In addition, our board of directors considered valuations of our common stock prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. These valuations considered recent arm’s length market transactions, where applicable, estimates of future expected revenues, EBITDA, EBITDA margins and cash flows, discount rates, and an estimate of value using multiples derived from the stock prices of comparable publicly traded companies applied to such expected cash flows and market approaches in order to estimate fair value. These assumptions were incorporated in a hybrid approach used to evaluate recent arm’s length market transactions and scenarios in which the Company remained privately held or the Company completed an initial public offering. The hybrid approach included using the Option Pricing Method (OPM) and Probability-Weighted Expected Return Method (PWERM) models.

In November 2020, the Private Placement Investors invested in the Company in the Private Placement at a total enterprise value (the “Total Enterprise Value”) based on arm’s length negotiations, which resulted in a per share valuation of $17.22 (adjusted for the reverse stock split). The Total Enterprise Value represented an equity value of our common stock of approximately 14 times historical revenue for the last twelve months (“LTM Revenue”), less a discount for the lack of marketability of our common stock (“Liquidity Discount”). Based on the Total Enterprise Value from the Private Placement and our board of directors’ belief that it is customary and standard practice for high growth companies in the Company’s industry to use a revenue multiplier to value a company, our board of directors determined that the most appropriate representation of the value of the Company was to attribute value based on LTM Revenue multiplied by 14, less a Liquidity Discount. The LTM Revenue utilized in the per share valuation for the Private Placement was the twelve months ended September 30, 2020, which was the most recent month ended prior to the Company entering into a definitive agreement for the Private Placement and the most recent historical financial information provided to the Private Placement Investors.

For grants of stock options and restricted stock units subsequent to closing of the Private Placement (summarized above), our board of directors continued to utilize this formula of (LTM Revenue × 14) x Liquidity Discount. The Liquidity Discount was determined by our board of directors to be 15% for the valuation following the Private Placement, resulting in the following formula: Valuation = (LTM Revenue × 14) x 0.85. The liquidity discount decreased over time leading up to the IPO. In addition to looking at historical revenue, our board of directors also considered projected 2021 revenue in setting the valuation for grants of stock options and restricted stock units subsequent to closing of the Private Placement, primarily as a guidepost to ensure that the historical LTM revenue formula was reasonable.

Current Valuation Approach

Following the completion of our IPO, our board of directors no longer determines the fair value of our common stock in accordance with the valuation formula described above under “— Historical Valuation Approach.” Instead, our board of directors determines the fair value of our common stock based on the closing price of our common stock as reported on the date of the grant. The closing price (and therefore, the fair value) of our common stock may fluctuate significantly based on a number of factors that are outside of our control. See “Risk Factors — Risks Related to Our Common Stock — The market price of our common stock may be volatile and could decline regardless of our operating performance.”

Taxes

We account for income taxes using the asset and liability method, in accordance with ASC 740, Accounting for Income Taxes. Deferred income taxes are provided for temporary differences in recognizing certain income, expense and credit items for financial reporting purposes and tax reporting purposes. Excess tax benefits and tax deficiencies are recognized in the income tax provision in the period in which they occur.

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We record a valuation allowance when it is determined that it is more-likely-than-not that some portion or all of its deferred tax assets will not be realized. As of each reporting date, management considers new evidence, both positive and negative, that could impact management’s view with regard to the future realization of deferred tax assets. For certain tax positions, we use a more-likely-than-not threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefits determined on a cumulative probability basis, which are more-likely-than-not to be realized upon ultimate settlement in the financial statements. We recognize interest and penalties related to income tax matters in income tax expense.

Emerging Growth Company Status

The Company was an emerging growth company, as defined in the JOBS Act for the year ended December 31, 2021. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company elected to use this extended transition period for complying with certain new or revised accounting standards during the year ended December 31, 2021.

As a result, the Company’s financial statements for periods prior to and during which it was an emerging growth company may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

The Company no longer meets the requirement of being an emerging growth company and has filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as a large accelerated filer.

Recent Accounting Pronouncements

See Note 2, Basis of Presentation and Summary of Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information on the adoption of recent accounting pronouncements.

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