# Zeta Global Holdings Corp. (ZETA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Zeta Global Holdings Corp.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1851003/000095017023004243/zeta-20221231.htm
Accession: 0000950170-23-004243
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ZETA/
All MD&A years: /company/ZETA/mda/
Previous year: /company/ZETA/mda/fy2021/ (FY 2021)
Next year: /company/ZETA/mda/fy2023/ (FY 2023)

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

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. Our management’s discussion and analysis of financial condition and results of operations included in this document generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 and 2019 items and year-to-year comparisons between 2021 and 2020, and 2020 and 2019 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Overview

Zeta is a leading omnichannel data-driven cloud platform that provides enterprises with consumer intelligence and marketing automation software. We empower our customers to target, connect and engage consumers through software that delivers personalized marketing across all addressable channels, including email, social media, web, chat, Connected TV (“CTV”) and video, among others. We believe our actionable insights derived from consumer intent enable our customers to acquire, grow and retain consumer relationships more efficiently and effectively than the alternative solutions available in the market.

Our Zeta Marketing Platform, or ZMP, is the largest omnichannel marketing platform with identity data at its core. The ZMP can analyze billions of structured and unstructured data points to predict consumer intent by leveraging sophisticated machine learning algorithms and the industry’s largest opted-in data set for omnichannel marketing. The ZMP acts on these insights by connecting with consumers through native integration of marketing channels and API integration with third parties. The ZMP’s data-driven algorithms and processes learn and optimize each customer’s marketing program in real time, producing a ‘flywheel effect’ that enables our customers to test, learn and improve their marketing programs in real time.

The ZMP empowers our customers to personalize consumer experiences at scale across multiple touchpoints. Marketing programs are created and orchestrated by our customers through automated workflows and sophisticated dashboards. Our Consumer Data Platform (“CDP+”) ingests, analyzes and distills disparate data points to generate a single view of a consumer, encompassing identity, profile characteristics, behaviors and purchase intent, which is then made accessible through a single console. Our Opportunity Explorer synthesizes Zeta’s proprietary data and data generated by our customers to uncover consumer insights that are translated into marketing programs designed for highly targeted audiences across digital channels, including email, SMS, websites, applications, social media, CTV and chat.

Factors Affecting Results of Operations

The following factors have been important to our business and we expect them to impact our results of operations and financial condition in future periods:

New Scaled Customer Acquisition

We are focused on increasing the number of scaled customers that adopt the ZMP in their enterprises. We define “scaled customers” as customers from which we generated at least $100,000 in revenues in the trailing twelve months. Our long-term growth and operating results will depend on our ability to attract more scaled customers as we address their most pressing marketing automation needs. We will continue to focus on enterprises across multiple geographies. Between January 1, 2022 and December 31, 2022, our sales team increased by approximately 23 sales employees, and we expect to continue to invest in our go-to-market efforts in 2023. We have significantly enhanced our sales techniques in order to build a collaborative environment that encourages cross-selling and implemented a new learning and development program for our sales team. Our sales team productivity increases with tenure and our current management system gives us confidence that we are well positioned for sustainable growth. Our Opportunity Explorer is a module that provides actionable insights to our customers and serves as an entry point into the ZMP. Opportunity Explorer has been a proven way to land scaled customers, with minimal cost of implementation and high value adoption.

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Drive Increase to Average Revenue Per User

During the year ended December 31, 2022, we experienced an increase in our scaled customer Average Revenue Per User (“ARPU”), which resulted in our revenue increasing for the year compared to the prior-year period. Our scaled customer ARPU growth resulted primarily from the initial effects of transitioning our sales team model to focus a dedicated team on new business development and a separate team on training and educating new and existing users on our platform capabilities. Our transition to this hunter/farmer sales model has included focusing more of our sales team on growth of existing scaled customers and aligning scaled customers with sellers that have specific industry expertise. In addition, scaled customer ARPU also benefitted from increased levels of business from customers in industries that experienced positive effects from the COVID-19 pandemic, such as insurance, automotive and telecom.

Expand Sales to Existing Customers

We adhere to a “land, expand, extend” sales model. After prospecting and landing new scaled customers, we focus on expanding sales to such scaled customers. This includes increasing their use of one product and/or embedding multiple products within an enterprise with our Opportunity Explorer serving as the connective tissue across multiple products. We have scaled customers both in the U.S. and internationally and we believe we can achieve growth by cross-selling our existing solutions and introducing new features and functionalities within the platform. We expect that our ability to increase adoption of our products within existing scaled customers increases our future opportunities through additional sales. As part of this strategy, we expect to drive expansion in the number of channels per scaled customer. During the year ended December 31, 2022 and 2021, our channels per scaled customer were 2.0 and 1.9, respectively.

We use an annual net revenue retention (“NRR”) rate as a measure of our ability to retain and expand business generated from our existing customers base. We believe that many companies frequently use annual NRR rate as an indicator for determining customer loyalty. We calculate our annual NRR rate by dividing current year revenue earned from customers from which we also earned revenue in the prior year, by the prior year revenues. Our annual NRR rate was 111.5% and 113.3% for the years ended December 31, 2022 and 2021, respectively. We exclude political and advocacy customers, which represented 6.3% and 1.5% of revenue for 2022 and 2021, respectively, from our calculation of annual NRR rate because of the biennial nature of these customers.

Our customer loyalty is also reflected in the table below, which breaks down the tenure of our scaled customers for the year ended December 31, 2022.

Tenure for All Scaled Customers for Year Ended December 31, 2022

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Additionally, of our 103 super-scaled customers who generate at least $1.0 million in revenue in the trailing twelve months, 71 have a tenure of 3+ years.

Adoption of Marketing Automation Products

Our ability to drive adoption of the ZMP will depend on the overall demand for marketing automation solutions. We expect continued strong investment in marketing technology by enterprise companies. Additionally, as enterprise marketing spend shifts towards digital from offline channels, we expect marketing automation technology will benefit. As a result, we expect our enterprise customer base to grow and propel greater platform deployment and usage. While we do not believe our competitors offer a comparable all-in-one platform solution for marketing automation, certain competitors offer point solutions that compete with specific tools and products we offer as part of the ZMP. Potential customers may also elect to build in-house solutions for marketing automation. While it is difficult to predict adoption rates and future product demand, we are focused on continuing to innovate and create marketing automation products that address the business requirements of our customers better than alternative solutions.

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Investment in Innovation

We intend to invest in our business in order to drive long-term growth in an expanding market and capture economies of scale derived from a larger business base. For example, we plan to invest in our research and development activities to ensure we remain at the forefront of data management, AI development and marketing automation. We will also continue to invest in our sales and marketing capabilities. Lastly, we expect to invest in the expansion of markets including international and the B2B sector. We plan to incur additional general and administrative expenses to support our growth. Even as cost of revenue and other expenses fluctuate over time and may be negatively impacted by factors beyond our control, we plan to remain focused on making necessary investments to drive long-term growth.

Seasonality

In general, the marketing industry experiences seasonal trends that affect the vast majority of participants in the digital marketing ecosystem. Historically, marketing activity is higher in the fourth quarter of the calendar year to coincide with the holiday shopping season as compared to the first quarter. As a result, the subsequent first quarter tends to reflect lower activity levels and lower performance. We generally expect these seasonality trends to continue and our ability to effectively manage our resources in anticipation of these trends may affect our operating results.

Key Performance Metrics

We review several key performance metrics, discussed below, to evaluate our business, track performance, identify trends, formulate plans and make strategic decisions. We believe that the presentation of such metrics provides investors with effective ways to measure and model the performance of companies such as ours, with recurring revenue streams.

Scaled customers

We measure and track the number of scaled customers on an annual basis because our ability to attract new scaled customers, grow our scaled customer base and retain or expand our business with existing scaled customers is both an important contributor to our revenue growth and an indicator to investors of our measurable success. We define scaled customers as customers from which we generated at least $100,000 in revenues per year. As a subset of scaled customers, we define super-scaled customers as customers from which we generated at least $1.0 million in revenues per year. We calculate the number of scaled and super-scaled customers at the end of each quarter and on an annual basis as the number of customers billed during each applicable period. In 2022, we had 403 scaled customers that represented 98% of total revenue, compared to 355 scaled customers representing 96% of total revenue in 2021.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2022","","","2021"],["Scaled customers","","","403","","","","355"]]
[[/GREPCENT_TABLE]]

Scaled customers increased 14% for the year ended December 31, 2022, as compared to 2021, primarily due to growth in our customer base in the U.S. Of our scaled customers, 103 and 97 are super-scaled customers for the years ended December 31, 2022 and December 31, 2021, respectively.

Scaled customer ARPU

We believe that our ability to increase scaled customer ARPU is an indicator of our ability to grow the long-term value of existing customer relationships. We calculate the scaled customer ARPU as revenue for the corresponding period divided by the average number of scaled customers during that period. We believe that scaled customer ARPU is useful for investors because it is an indicator of our ability to increase revenue and scale our business.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2022","","","2021"],["Scaled customer ARPU","","$","1,431","","","$","1,242"]]
[[/GREPCENT_TABLE]]

Scaled customer ARPU increased 15% for the year ended December 31, 2022, as compared to 2021, primarily due to higher usage of our platform among scaled customers. ARPU for our super-scaled customers was $4.5 million (across 103 customers) and $3.6 million (across 97 customers) for the years ended December 31, 2022 and December 31, 2021, respectively due to the significant additions to the number of scaled customers in this category.

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Description of Certain Components of Financial Data

Revenues

Our revenue primarily arises from use of our technology platform via subscription fees, volume-based utilization fees and fees for professional services. Our platform revenue comprised of a mix of direct platform revenue and integrated platform revenue, which leverages application programming interface (“API”) integrations with third parties. For 2022 and 2021, we derived 77% and 76% of our revenues from direct platform revenue, respectively, and 23% and 24% of our revenues from integrated platform revenue, respectively. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Sales and other taxes collected by us are excluded from revenue. Our revenue recognition policies are discussed in more detail under “Critical Accounting Estimates.”

Cost of revenues (excluding depreciation and amortization)

Cost of revenue excludes depreciation and amortization and consists primarily of media and marketing costs and certain employee-related costs. Media and marketing costs consist primarily of fees paid to third-party publishers, media owners or managers, and strategic partners that are directly related to a revenue-generating events. We pay these third-party publishers, media owners or managers and strategic partners on a revenue-share, a cost-per-lead, cost-per-click, or cost-per-thousand-impressions basis. Expenses related to “internet traffic” associated with the viewing of available impressions or queries per second and costs of providing support to our customers are also included in the cost of revenues. Employee-related costs included in cost of revenues include salaries, bonuses, commissions, stock-based compensation and employee benefit costs primarily related to individuals directly associated with providing services to our customers. Our cost of revenues are dependent on the revenue mix and therefore can slightly increase or decrease in the future as a percentage of revenue over the long term.

General and administrative expenses

General and administrative expenses primarily consist of computer and telecom expenses, employee-related costs, including salaries, bonuses, stock-based compensation and employee benefits costs associated with our executives, finance, legal, human resources and other administrative personnel, as well as accounting and legal professional services fees and platform and related infrastructure costs. We expect general and administrative expenses to increase in absolute dollars in future periods. We expect that general and administrative expenses to decrease as a percentage of revenue over the long term.

Selling and marketing expenses

Selling and marketing expenses primarily consist of employee-related costs, including salaries, bonuses, employee benefits costs, stock-based compensation and commission costs for our sales and marketing personnel. Selling and marketing expenses also include costs for market development programs, advertising, promotional and other marketing activities. We intend to continue to invest in marketing initiatives and as a result we expect selling and marketing expenses to increase in absolute dollars in future periods. Selling and marketing expense as a percentage of revenue may fluctuate from period to period based on revenue levels and the timing of our investments in these functions over the long term.

Research and development expenses

Research and development expenses primarily consists of employee-related costs, including salaries, bonuses and employee benefit costs, stock-based compensation associated with engineering and IT services associated with the ongoing research and maintenance of internal use software. We expect to continue to invest in research and development in order to develop our technology platform to drive incremental value and growth and as a result we expect that research and development expenses will fluctuate from period to period as a percentage of revenue over the long term.

Depreciation and amortization

Depreciation and amortization relate to property and equipment, website and software development costs as well as acquisition-related and other acquired intangible assets. We record depreciation and amortization using straight-line method over the estimated useful life of the assets.

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Acquisition-related expenses

Acquisition-related expenses primarily consists of legal fees associated with certain business combinations. It also includes retention bonuses agreed to be paid to employees related to one-time events such as an acquisition or a significant transaction. We expect that acquisition-related expenses will be correlated with future acquisitions (if any), which could be greater than or less than our historic levels.

Restructuring expenses

Restructuring expenses consists primarily of employee termination costs due to internal restructuring. We expect that restructuring expenses will be correlated with future restructuring activities (if any), which could be greater than or less than our historic levels. We did not have any such restructuring activities during the year ended December 31, 2022.

Interest expense

Interest expense primarily consists of interest payable on our long-term borrowings, net of interest earned on our short term investments in money market accounts and other short term deposits. We anticipate interest expense to be impacted by changes in variable interest rates.

Other expenses / (income)

Other expenses / (income) primarily consist of changes in fair value of acquisition-related liabilities, gains and losses on sale of assets and foreign exchange gains and losses. We expect that the magnitude of other income and expenses will depend on external factors such as foreign exchange rate and the remeasurement impact of acquisition related liabilities, which depends on the performance of our acquisitions and could be greater than or less than our historic levels.

Change in fair value of warrants and derivative liabilities

Change in fair value of warrants and derivative liabilities primarily relates to warrants to purchase shares of our common stock that we issued in connection with previous financing rounds, these warrants were converted into our Class A Common Stock upon IPO and as such there is no revaluation impact of warrant liabilities during the year ended on December 31, 2022. Historically, our derivative liability represented the conversion feature on our redeemable convertible preferred stock, which also extinguished upon our IPO. When we enter into transactions that include certain features that qualify to be embedded derivatives in accordance with ASC Topic 815, that requires to bifurcate such features from their host instruments and account for them as free-standing derivative financial instruments if certain criteria are met. Future changes in the fair value of warrants and derivative liabilities depends on the Company entering into transactions that contain warrants or derivative features.

Income tax (benefit) / provision

We account for income taxes in accordance with ASC 740, Income Taxes, which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the consolidated statements of operations in the period that includes the enactment date. A valuation allowance is established when we determine that it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have concluded that the U.S. deferred tax assets are not realizable on a more-likely-than-not basis and that a full valuation allowance is required.

Stock-based compensation

The measurement of stock-based compensation for all stock-based payment awards, including restricted stock, employee’s stock purchase plan (“ESPP”), performance stock units (“PSUs”) and stock options granted to employees, consultants or advisors and non-employee directors, is based on the estimated fair value of the awards on the date of grant or date of modification of such grants. See Note 13 to our consolidated financial statements for further details.

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We estimate the recognition of unrecognized stock-based compensation as follows, subject to future forfeitures:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Results of Operations

We operate as a single reportable segment to reflect the way our Chief Operating Decision Maker (“CODM”) reviews and assesses the performance of the business. Our CODM is the Chief Executive Officer.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Comparison of the Years Ended December 31, 2022 and 2021

Revenues

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Revenues increased by $132.6 million, or 28.9%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase in revenues is attributable to incremental revenues of $76.1 million from existing customers and $56.5 million from new customers (including approximately $1.6 million from the acquisitions made during the year ended December 31, 2022).

Cost of revenues (excluding depreciation and amortization)

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Cost of revenues (excluding depreciation and amortization) increased by $40.7 million, or 23.3%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by $36.3 million in incremental media costs, higher stock-based compensation of $4.0 million, due to acceleration of certain grants during the year ended December 31, 2022 and increase in other employee related costs of $0.4 million.

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General and administrative expenses

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["General and administrative expenses","","$","213,615","","","$","189,606","","","$","24,009","","","","12.7","%"]]
[[/GREPCENT_TABLE]]

General and administrative expenses increased by $24.0 million, or 12.7%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by higher stock-based compensation of $13.2 million, computer and telecom-related expenses of $6.6 million and professional services fees of $4.2 million.

Selling and marketing expenses

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["Selling and marketing expenses","","$","299,238","","","$","229,343","","","$","69,895","","","","30.5","%"]]
[[/GREPCENT_TABLE]]

Selling and marketing expenses increased by $69.9 million, or 30.5%, for the year ended December 31, 2022, as compared to the year ended December 31, 2021. This increase was primarily driven by higher employee-related costs of $36.1 million, stock-based compensation of $22.8 million and other sales and marketing-related expenses of $11.0 million.

Research and development expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Research and development expenses increased by $5.0 million, or 7.7%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by higher consulting expenses of $3.0 million, employee related costs of $2.3 million which was partially offset by lower stock-based compensation of $0.3 million.

Depreciation and amortization

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Depreciation and amortization expense increased by $6.0 million, or 13.0%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was driven by an increase in amortization of intangible assets of $4.0 million and an increase in depreciation expense of $1.9 million primarily due to incremental website and software development-related capitalization over the recent periods.

Acquisition-related expenses

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Acquisition-related expenses decreased by $1.6 million, or 82.4%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily driven by lower professional fees.

Restructuring expenses

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["Restructuring expenses","","$","\u2014","","","$","727","","","$","(727",")","","","(100.0",")%"]]
[[/GREPCENT_TABLE]]

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Restructuring expenses decreased by $0.7 million, or 100%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021, due to the reorganization expenses incurred by the Company during the year ended December 31, 2021. There was no such reorganization done by the Company during the year ended December 31, 2022.

Interest expense

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Interest expense increased by $0.3 million, or 3.8%, for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by higher interest rates in 2022, partially offset by the income earned on our money market accounts and other short term deposits.

Other expenses / (income)

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Change"],["","","2022","","","2021","","","Amount","","","%"],["Other expenses / (income)","","$","13,983","","","$","(279",")","","$","14,262","","","NA"]]
[[/GREPCENT_TABLE]]

Other expenses increased by $14.3 million, or more than 100% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This increase was primarily driven by an incremental change of $14.8 million in the fair value of acquisition related liabilities, related to the Company's acquisitions, partially offset by foreign exchange gain of $0.3 million due to appreciation of US dollars against other currencies.

Change in fair value of warrants and derivative liabilities

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Change in fair value of warrants and derivative liabilities expense decreased by $4.6 million, or 91.8% for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This decrease was primarily driven by the extinguishment of warrants and derivative liabilities upon our initial public offering ("IPO") on June 14, 2021. We did not have any derivative liability as of December 31, 2022 and December 31, 2021.

Income tax benefit

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

Income tax benefit increased by $0.9 million, or 149.3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. For the year ended December 31, 2022, we recorded an income tax benefit of $1,491. For the year ended December 31, 2022 and 2021, income tax benefit relates primarily to the partial release of our U.S. valuation allowance as a business combination consummated during 2022 and 2021 created a source of future taxable income, partially offset by an income tax provision for foreign taxes.

The effective tax rates for the years ended December 31, 2022 and 2021 were 0.5% and 0.2%, respectively. The change in effective tax rate was primarily related to our partial release of our U.S. valuation allowance. During 2022, the net increase in our valuation allowance was $26.1 million primarily as a result of current year operating losses for which no tax benefit was recorded as we maintain a full valuation allowance against our U.S. net deferred tax assets based upon the weight of objective evidence.

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Non-GAAP Financial Measures

We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. Non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with generally accepted accounting principles, and may be different from similarly titled non-GAAP measures used by other companies. Whenever we use a non-GAAP financial measure, a reconciliation is provided to the most closely applicable financial measure stated in accordance with generally accepted accounting principles. We believe that these non-GAAP financial measures may be useful to investors in analyzing our financial and operational performance.

Adjusted EBITDA and adjusted EBITDA margin

Adjusted EBITDA is a non-GAAP financial measure defined as net loss adjusted for interest expense, depreciation and amortization, stock-based compensation, income tax (benefit) / provision, acquisition-related expenses, restructuring expenses, change in fair value of warrants and derivative liabilities, certain dispute settlement expenses, gain on extinguishment of debt, certain non-recurring IPO related expenses, including the payroll taxes related to vesting of restricted stock and restricted stock units upon the completion of our IPO, and other (income) / expenses. Acquisition-related expenses and restructuring expenses primarily consist of severance and other employee-related costs which we do not expect to incur in the future as acquisitions of businesses may distort the comparability of the results of operations. Change in fair value of warrants and derivative liabilities is a non-cash expense related to periodically recording “mark-to-market” changes in the valuation of derivatives and warrants. Other (income) / expenses consists of non-cash expenses such as changes in fair value of acquisition-related liabilities, gains and losses on sales of assets and foreign exchange gains and losses. In particular, we believe that the exclusion of stock-based compensation, certain dispute settlement expenses and non-recurring IPO related expenses that are not related to our core operations provides measures for period-to-period comparisons of our business and provides additional insight into our core controllable costs. Adjusted EBITDA margin is a non-GAAP metric defined as adjusted EBITDA divided by the total revenues for the same period. Adjusted EBITDA and adjusted EBITDA margin provide us with a useful measure for period-to-period comparisons of our business as well as comparison to our peers. Our use of adjusted EBITDA and adjusted EBITDA margin has limitations as an analytical tool, and you should not consider these measures in isolation or as a substitute for analysis of our financial results as reported under GAAP. Because of these and other limitations, you should consider our non-GAAP measures only as supplemental to other GAAP-based financial performance measures, including revenues and net loss.

The following table reconciles adjusted EBITDA and adjusted EBITDA margin to net loss and net loss margin, the most directly comparable financial measure calculated and presented in accordance with GAAP.

[[GREPCENT_TABLE]]
[["","","Year ended December 31,"],["","","2022","","","2021","","","2020"],["Net loss","","$","(279,239",")","","$","(249,563",")","","$","(53,225",")"],["Net loss margin","","","(47.3",")%","","","(54.4",")%","","","(14.5",")%"],["Add back:"],["Depreciation and amortization","","","51,878","","","","45,922","","","","40,064"],["Restructuring expenses","","","\u2014","","","","727","","","","2,090"],["Acquisition-related expenses","","","344","","","","1,953","","","","5,402"],["Stock-based compensation","","","298,992","","","","259,159","","","","105"],["IPO related expenses","","","\u2014","","","","2,705","","","","\u2014"],["Gain on extinguishment of debt","","","\u2014","","","","(10,000",")","","","\u2014"],["Dispute settlement expense","","","\u2014","","","","1,196","","","","\u2014"],["Other expenses / (income)","","","13,983","","","","(279",")","","","(126",")"],["Change in fair value of warrants and derivative liabilities","","","410","","","","5,000","","","","28,100"],["Interest expense","","","7,303","","","","7,033","","","","16,257"],["Income tax (benefit) / provision","","","(1,491",")","","","(598",")","","","919"],["Adjusted EBITDA","","$","92,180","","","$","63,255","","","$","39,586"],["Adjusted EBITDA margin%","","","15.6","%","","","13.8","%","","","10.8","%"]]
[[/GREPCENT_TABLE]]

40

Liquidity and Capital Resources

We have financed our operations and capital expenditures primarily through utilization of cash generated from operations, as well as borrowings under our credit facilities. As of December 31, 2022, we had cash and cash equivalents of $121.1 million and net working capital, consisting of current assets less current liabilities, of $107.7 million. As of December 31, 2022, we had an accumulated deficit of $771.1 million.

We believe our existing cash and anticipated net cash provided by operating activities, together with available borrowings under our credit facility, will be sufficient to meet our working capital requirements for at least the next 12 months and thereafter for the foreseeable future. However, if our operating performance during the next 12 months is below our expectations, our liquidity and ability to operate our business could be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors.” In the future, we may attempt to raise additional capital through sales of equity securities or through equity linked or debt financing arrangements. Any future indebtedness we incur may result in terms that could be unfavorable to our equity investors. We cannot guarantee that we will be able to raise additional capital in the future on favorable terms, or at all. Any inability to raise capital could adversely affect our ability to achieve our business objectives.

Cash flows

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

[[GREPCENT_TABLE]]
[["","","For year ended December 31,"],["","","2022","","","2021","","","2020"],["Net cash provided by / (used for):"],["Cash provided by operating activities","","$","78,486","","","$","44,292","","","$","35,539"],["Cash used for investing activities","","","(48,445",")","","","(46,849",")","","","(25,207",")"],["Cash (used for) / provided by financing activities","","","(12,625",")","","","55,732","","","","2,783"],["Effect of exchange rate changes on cash and cash equivalents","","","(165",")","","","(41",")","","","(208",")"],["Net increase in cash and cash equivalents, including restricted cash","","$","17,251","","","$","53,134","","","$","12,907"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities

During the year ended December 31, 2022, net cash provided by operating activities of $78.5 million resulted primarily from adjusted non-cash items of $361.0 million, more than offsetting our net loss of $279.2 million. Non-cash items include stock-based compensation of $299.0 million, depreciation and amortization of $51.9 million, and a change in fair value of acquisition related liabilities of $13.0 million. Changes in working capital were primarily driven by an increase in accounts receivable of $19.8 million and a decrease in deferred revenue of $4.6 million, partially offset by an increase in accounts payable of $13.5 million and accrued expenses and other current liabilities of $8.0 million.

During the year ended December 31, 2021, net cash provided by operating activities of $44.3 million resulted primarily from adjusted non-cash items of $297.7 million, more than offsetting our net loss of $249.6 million. Non-cash items include stock-based compensation of $259.2 million, depreciation and amortization of $45.9 million, gain on extinguishment of debt of $10.0 million and a change in fair value of warrants and derivative liabilities of $5.0 million. Changes in working capital were primarily driven by a decrease in accounts payable of $22.2 million and an increase in prepaid expenses of $3.1 million, partially offset by an increase in accrued expenses and other current liabilities of $14.6 million, an increase in deferred revenue of $2.8 million and a decrease in other current assets of $5.7 million.

Net cash used in investing activities

During the year ended December 31, 2022, we used $48.4 million of cash in investing activities, primarily consisting of capital expenditures of $22.2 million (including a $18.6 million investment in data and partnership agreements), website and software development costs of $17.0 million and business and asset acquisitions of $9.2 million (net of cash acquired).

During the year ended December 31, 2021, we used $46.8 million of cash in investing activities, primarily consisting of $20.1 million (net of cash acquired) of business and asset acquisitions, investments in website and software development costs of $17.3 million and other capital expenditures of $9.5 million.

41

Net cash provided by financing activities

During the year ended December 31, 2022, we used $12.6 million of cash in financing activities, primarily due to the repurchase of $9.6 million of common stock repurchased under our repurchase and RSA withholdings program and payment of acquisition related liabilities of $6.0 million, partially offset by $2.7 million paid by certain employees under the Company's employee stock purchase plan.

During the year ended December 31, 2021, net cash provided by financing activities of $55.7 million was primarily due to IPO proceeds (net of issuance cost) of $126.5 million, new credit facility of $183.3 million (net of financing cost) and proceeds from our employee stock purchase plan of $0.8 million, partially offset by repayments against credit facilities of $180.7 million and payments made against acquisition-related liabilities for $9.9 million. Further, in connection with our IPO, we repurchased and canceled certain stock, including restricted stock and restricted stock units with a total repurchase amount of $64.5 million.

Debt

As of December 31, 2022, we have $184.0 million (net of $1.0 million of unamortized debt acquisition costs) of outstanding long-term borrowings.

On February 3, 2021, we entered into a $222.5 million Senior Secured Credit Facility which was used to fully repay and terminate our previous credit agreement. Borrowings under the debt are $185 million and bear interest payable quarterly ranging from LIBOR plus 2.125% to LIBOR plus 2.625% based on our consolidated net leverage ratio stated in the credit agreement. We are required to repay the principal balance and any unpaid accrued interest on the Senior Secured Credit Facility on February 3, 2026.

We are currently in compliance with our financial maintenance covenants under the Senior Secured Credit Facility and, based upon our current expectations, believe that we will continue to comply with our financial maintenance covenants for the next 12 months. The Senior Secured Credit Facility contains restrictive covenants that place restrictions on us and may limit our ability to, among other things, incur additional debt and liens, purchase our securities, undertake transactions with affiliates, make other investments, pay dividends or distribute excess cash flow.

On April 23, 2020, we entered into a promissory note evidencing an unsecured $10 million loan under the Paycheck Protection Program (“PPP Loan”) of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). We accounted for the loan as a financial liability in accordance with ASC Topic 470, Debt. Accordingly, the loan was recognized within long-term debt. We used the proceeds from the loan for payroll, rent and utilities and certain other approved expenses during the eight-week period commencing on the loan effective date. On June 10, 2021, we received a notice from SBA stating full forgiveness of the principal amount of $10 million and the related interest therein.

During the year ended December 31, 2022, we borrowed $5.6 million against the revolver facility and repaid the same amount against the term loan under the credit facility.

We do not engage in off-balance sheet financing arrangements.

Contractual obligations

As of December 31, 2022, our material contractual obligations were as follows:

[[GREPCENT_TABLE]]
[["","","Total","","","1 Year","","","1-3 Years","","","3-5 Years","",""," 5 Years"],["Long-term borrowings","","$","225,666","","","$","23,850","","","$","53,182","","","$","148,634","","","$","\u2014"],["Operating leases","","","11,873","","","","2,723","","","","3,991","","","","3,294","","","","1,865"],["Purchase obligations","","","77,174","","","","37,953","","","","37,796","","","","1,425","","","","\u2014"],["Total contractual obligations","","$","314,713","","","$","64,526","","","$","94,969","","","$","153,353","","","$","1,865"]]
[[/GREPCENT_TABLE]]

Acquisition-related contingent consideration payables and holdback payables are contractual obligations for which the timing of cash out flow cannot be estimated. Contingent consideration estimates may change based on actual results and may differ from management’s current expectations. For more information refer to Note 7 and Note 8 to our consolidated financial statements and notes thereto included in the “Financial Statements and Supplementary Data” section of this Annual Report on Form 10-K.

Share Repurchase Program

42

In August 2022, the Company's Board of Directors authorized a share repurchase program to repurchase up to $50 million of our outstanding Class A common stock through December 31, 2024 (the “2022 SRP”). The actual timing, number and value of shares repurchased will be determined by the Company at its discretion and will depend on a number of factors, including market conditions, applicable legal requirements, our capital needs, and whether there is a better alternative use of capital. Repurchases during any given fiscal period under the 2022 SRP and withholding under the RSA withholding program (as described below) will reduce the number of weighted-average common shares outstanding for the period. See Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Purchases of Equity Securities by the Issuer or Affiliated Purchaser” for more information on the 2022 SRP.

RSA Withholding Program

In August 2022, the Company’s Board of Directors authorized withholding as an alternative to market sales by executives to satisfy tax withholding requirements upon vesting of restricted stock awards ( “RSAs”). As such, we may use corporate cash to make required tax payments associated with the vesting of certain executive RSAs and withhold a corresponding number of shares from such executives.

Quarterly Financial Information (Unaudited)

The following table set forth the Company’s quarterly consolidated statement of operations data for each of the eight quarters in the two-year period ended December 31, 2022. The Company has prepared the quarterly unaudited consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. In the opinion of management, the financial information in these tables reflects all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair statement of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results for any future period.

[[GREPCENT_TABLE]]
[["","","Quarter ended"],["","","March 31, 2022","","","June 30, 2022","","","September 30, 2022","","","December 31, 2022"],["Revenues","","$","126,268","","","$","137,301","","","$","152,252","","","$","175,140"],["Operating expenses:"],["Cost of revenues (excluding depreciation and amortization)","","","41,725","","","","50,233","","","","57,529","","","","65,979"],["General and administrative expenses","","","53,349","","","","55,665","","","","53,584","","","","51,017"],["Selling and marketing expenses","","","68,918","","","","77,139","","","","76,987","","","","76,194"],["Research and development expenses","","","17,231","","","","18,038","","","","16,954","","","","17,231"],["Depreciation and amortization","","","12,766","","","","13,315","","","","13,367","","","","12,430"],["Acquisition-related expenses","","","344","","","","\u2014","","","","\u2014","","","","\u2014"],["Total operating expenses","","$","194,333","","","$","214,390","","","$","218,421","","","$","222,851"],["Loss from operations","","","(68,065",")","","","(77,089",")","","","(66,169",")","","","(47,711",")"],["Interest expense","","","1,298","","","","1,666","","","","2,038","","","","2,301"],["Other expenses / (income)","","","5,273","","","","5,696","","","","1,142","","","","1,872"],["Change in fair value of warrants and derivative liabilities","","","\u2014","","","","1,215","","","","(805",")","","","\u2014"],["Total other expenses","","$","6,571","","","$","8,577","","","$","2,375","","","$","4,173"],["Loss before income taxes","","","(74,636",")","","","(85,666",")","","","(68,544",")","","","(51,884",")"],["Income tax (benefit) / provision","","","(2,599",")","","","343","","","","896","","","","(131",")"],["Net loss","","$","(72,037",")","","$","(86,009",")","","$","(69,440",")","","$","(51,753",")"],["Other comprehensive (income) / loss:"],["Foreign currency translation adjustment","","","244","","","","403","","","","774","","","","(1,477",")"],["Total comprehensive loss","","$","(72,281",")","","$","(86,412",")","","$","(70,214",")","","$","(50,276",")"],["Basic loss per share","","$","(0.54",")","","$","(0.63",")","","$","(0.49",")","","$","(0.36",")"],["Diluted loss per share","","$","(0.54",")","","$","(0.63",")","","$","(0.49",")","","$","(0.36",")"],["Weighted average number of shares used to compute net loss per share"],["Basic","","","134,084,703","","","","135,903,592","","","","140,594,128","","","","145,489,764"],["Diluted","","","134,084,703","","","","135,903,592","","","","140,594,128","","","","145,489,764"]]
[[/GREPCENT_TABLE]]

The Company recorded total stock-based compensation as follows:

[[GREPCENT_TABLE]]
[["","","Quarter ended"],["","","March 31, 2022","","","June 30, 2022","","","September 30, 2022","","","December 31, 2022"],["Cost of revenues (excluding depreciation and amortization)","","$","1,162","","","$","1,738","","","$","1,536","","","$","2,198"],["General and administrative expenses","","","29,775","","","","30,905","","","","28,193","","","","24,528"],["Selling and marketing expenses","","","36,807","","","","42,090","","","","38,868","","","","34,612"],["Research and development expenses","","","5,992","","","","7,602","","","","6,621","","","","6,365"],["Total","","$","73,736","","","$","82,335","","","$","75,218","","","$","67,703"]]
[[/GREPCENT_TABLE]]

43

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates are based on management judgment and the best available information, and as such actual results could differ from those estimates.

While our significant accounting policies are described in more detail in Note 2 in our consolidated financial statements included in the “Financial Statements and Supplementary Data” section of this this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue recognition

Revenue arises primarily from our technology platform via subscription fees, volume-based utilization fees and fees for professional services designed to increase our customers’ usage of our technology platform. Sales and other taxes collected by us concurrent with revenue-producing activities are excluded from revenues.

We may incur third-party costs on behalf of customers, including direct costs and incidental costs. Third-party direct costs incurred in connection with the delivery of advertising or marketing services include, among others: purchased media, data, cost of physical mailers, and procurement cost of Internet Protocol Addresses (“IPs”) used in the emailing services. The inclusion of billings related to third-party direct costs in revenues depends on whether we act as a principal or as an agent in the customer arrangement. In certain contracts, we contract with customers to provide access to our software platform available through different pricing options to tailor to multiple customer types and customer needs. These options include fixed or minimum monthly subscription fees, fixed cost per mile and percentage of spend on third-party costs. We generate revenue when the software platform is used on a self-service basis by charging a platform fee that is either a percentage of spend or a flat monthly subscription fee as well as fees for additional features such as data and advanced reporting. As we do not obtain control of the ad spots prior to transfer to the customer in these arrangements, revenue is recognized on a net basis. We may also act as principal when contracting for third-party services on behalf of our customers, because we control the specified goods or services before they are transferred to the customer and we are responsible for providing the specified goods or services, or we are responsible for directing and integrating third-party vendors to fulfill our performance obligation at the agreed upon contractual price. In such arrangements, we also take pricing risk under the terms of the customer contract. In certain media buying businesses, we act as principal when we control the buying process for the purchase of the media and contract directly with the media vendor. In these arrangements, we assume the pricing risk under the terms of the customer contract. In such cases, we include billable amounts related to third-party costs in the transaction price and record revenues at the gross amount billed, consistent with the manner that revenues are recognized for the underlying services contract.

Revenues from certain contracts with customers are subject to variability due to cash incentives and credit notes, therefore, revenues are recognized but subject to the constraint on the variable consideration, i.e. only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Contracts with customers may include multiple services. We determine whether those services are distinct from each other, and therefore performance obligations are to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation.

We determine the standalone selling price for various performance obligations in the customer contracts that require significant judgement.

We have certain revenue contracts with our vendors that involve both the purchase and sale of services with a single counterparty. We assess each contract to determine if the revenue and expense should be presented gross or net.

Website and software development costs

We capitalize the cost of internally developed software that has a useful life in excess of one year. These costs consist of the salaries and benefits of employees working on such software development to customize it to our needs. Capitalization begins during the application development stage, once the preliminary project stage has been completed. We assess whether an enhancement creates additional functionality to the software, and qualifies the costs incurred for capitalization. Once a project is available for general release, capitalization ceases and we estimate the useful life of the asset and begin amortization using the straight-line method.

44

We annually assess whether triggering events are present to review internal-use software for impairment. The estimated useful life of our website and software development costs is three years.

We determine the amount of internal software costs to be capitalized based on the amount of time spent by our developers on projects in the application stage of development. There is judgment involved in estimating the time allocated to a particular project in the application stage. A significant change in the time spent on each project could have a material impact on the amount capitalized and the related amortization expense in subsequent periods.

Intangible assets, net

We record intangible assets at cost less accumulated amortization. Cost of intangible assets acquired through business combinations represents their fair market value at the date of acquisition. Amortization is calculated using the straight-line method which is consistent with the realization of cash flows over the weighted average useful lives of the intangible assets.

We also purchase and license data content from multiple data providers to develop the proprietary databases of information for client use. This data content sometime consists of consumer information like name, address, phone numbers, zip codes, gender, age group, etc. and it may also consist of business information industry, sales volume, physical address, financial information, credit score, etc. We capitalize the intangible assets as the data contents are received from the third parties as we expect those assets to provide future economic benefit via the generation of our revenue and margins. The intangible assets are amortized on a straight-line basis over the estimated useful life of the data asset. We review the carrying value of our definite-lived intangible assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If these future undiscounted cash flows are less than the carrying value of the asset, then the carrying amount of the asset is written down to its fair value, based on the related estimated discounted future cash flows. Factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the intangible assets are used, and the effects of obsolescence, demand, competition and other economic factors.

Fair value

We account for all stock options using a fair value-based method. The fair value of each stock option granted to employees is estimated on the date of the grant using the Black-Scholes-Merton option pricing model, and the related stock-based compensation is recognized over the expected life of the option. We account for our Employee Stock Purchase Plan (“ESPP”) and Performance Stock Units (“PSU”) using a fair value-based method. The fair value of ESPP was determined using the Black-Sholes-Merton model and PSU was determined using the Monte-Carlo Simulation Method, and the related stock-based compensation is recognized over the expected vesting term.

Key assumptions used to determine the fair value of stock options, ESPPs and PSUs were as follows:

•
Risk-free interest rate: The risk-free interest rate is based on the U.S. Treasury rates at the time of grant that approximate the expected term of the option.

•
Expected dividend yield: We have never declared or paid any dividends and do not expect to pay any dividends in the foreseeable future.

•
Expected term: We estimate the expected term using the “simplified method” as we do not have sufficient historical exercise data.

•
Current value of the underlying asset: This is based on the VWAP (volume weighted average price) of our stock as of the date of issuance of PSUs.

•
Expected volatility: Expected volatility is estimated by considering the historical volatility of similar publicly-traded companies for which share price information is available.

Business combination and goodwill

We utilize the purchase method of accounting in accordance with ASC 805, Business Combinations. This standard requires that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based on the fair value of the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Our estimates and assumptions used in assessing fair value are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of these tangible and intangible assets

45

acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the acquisition date. The fair value of contingent consideration is recalculated each reporting period with any resulting gains or losses recorded on the Consolidated Statements of Operations and Comprehensive Loss.

We perform an annual goodwill impairment test on October 1 every year based on financial statements as of September 30. Goodwill impairment is assessed based on a comparison of the fair value of our reporting units to the underlying carrying value of the reporting unit’s net assets, including goodwill. As of December 31, 2022, we have four reporting units. If the carrying value of the reporting unit exceeds its fair value, an impairment loss shall be recognized, in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. For the years ended December 31, 2022 and 2021, annual goodwill impairment test, we elected to bypass the qualitative assessment for the four reporting units and proceeded directly to the quantitative impairment test using a discounted cash flow method to estimate the fair value of the reporting units. As a result of this assessment, it was concluded that there was no impairment loss because the fair value of the reporting units significantly exceeded the respective carrying value of each reporting unit.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial condition and results of operations is disclosed in Note 2 to our consolidated financial statements and notes thereto included in the “Financial Statements and Supplementary Data” section of this Annual Report on Form 10-K.

Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act. 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 those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. The JOBS Act does not preclude an emerging growth company from early adopting new or revised accounting standards. We expect to use the extended transition period for any new or revised accounting standards during the period we remain an emerging growth company.