Teads Holding Co. (TEAD) 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 audited annual consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K (this “Report”). In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations, and involve risks and uncertainties. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, particularly under Item 1A, “Risk Factors” and “Note About Forward-Looking Statements.”

The purpose of this Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) discussion is to provide the readers of our financial statements with narrative information from our management, which is necessary to understand our business, financial condition, and results of operations. The MD&A should be read in conjunction with our audited consolidated financial statements and notes thereto. In addition to the audited consolidated financial statements prepared in accordance with the generally accepted accounting principles in the United States ("GAAP"), we use certain non-GAAP financial measures throughout this discussion to provide investors with supplemental metrics used by our management for financial and operational decision making. These measures are supplemental and are not an alternative to our financial statements prepared in accordance with U.S. GAAP. See “Non-GAAP Reconciliations” in this Report for the definitions and limitations of these measures, and reconciliations to the most comparable GAAP financial measures.

Business Overview

Outbrain Inc. (together with our subsidiaries, “Outbrain,” the “Company,” “we,” “our” or “us”) was incorporated in August 2006 in Delaware. The Company is headquartered in New York, New York with various wholly-owned subsidiaries, including in Israel, Europe and Asia.

Outbrain is a leading recommendation platform for advertisers and digital media owners, reaching over a billion unique users around the world. Outbrain’s technology provides personalization, engagement and monetization solutions to thousands of digital media properties, including many of the world’s most prestigious publishers. For tens of thousands of advertisers around the world, Outbrain helps attract new customers and grow their businesses, driving measurable results and return on investment.

Over the past decade, consumers have become increasingly accustomed to seeing highly curated digital content and ads that align with their unique interests. Similar to the way in which social media and search have simplified discovery by synthesizing billions of consumer data points to offer personalized experiences, we provide digital media owners with a platform that encompasses data at scale as well as prediction and recommendation capabilities, helping them deliver both editorial content and paid advertising personalized to their users, based on context and each user’s interests and preferences. Our platform is built for user engagement and, as a mobile-first company, is designed to be highly effective on mobile devices. Outbrain’s technology is deployed on the mobile apps and websites of most of our media partners, generating 72% of our revenue in 2022.

Outbrain operates a two-sided marketplace, which means we usually have exclusive control over all aspects of the user experience, allowing us to quickly test and deploy new formats for our advertisers and media owners. Since inception, we have been guided by the same core principles pertaining to our three constituents: users, media partners, and advertisers.

Users. We believe that by focusing on improving the user experience and ad format innovation, we are able to cultivate user behavior patterns that compound engagement over time, delivering superior long-term monetization for ourselves and for our media partners, as well as better return on ad spend for our advertisers.

Media Partners. We are committed to the long-term success of our media partners. Consistent with this philosophy, we focus on establishing a true win-win partnership. We strive to develop trusted, transparent, multi-year contracts with media partners, which are typically exclusive with us. Our media partners include both traditional publishers and companies in new and rapidly evolving categories such as mobile device manufacturers and web browsers.

Advertisers. We offer a unique advertising solution across the entire purchase funnel, serving tens of thousands of brands - from small businesses to large, Fortune 500 enterprise brands and the agencies that support them. Outbrain’s value proposition to advertisers is to deliver measurable engagement that drives business outcomes - not limited to impressions, views, and reach.

Through our direct, usually exclusive code on page integrations with media partners, we have become one of the largest online advertising platforms on the open web. In 2022, we provided personalized ads to over a billion monthly unique users, delivering on average nearly 12 billion recommendations to content, services and products per day, with over 30,000 advertisers directly using our platform.

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The following is a summary of our performance for the periods presented:

•Our revenue was $992.1 million in 2022, compared to $1,015.6 million in 2021 and $767.1 million in 2020. Revenue for 2022 included net unfavorable foreign currency effects of approximately $42.7 million, and increased $19.2 million, or 1.9% on a constant currency basis.

•Our gross profit was $192.7 million and our gross margin was 19.4% in 2022, compared to gross profit of $240.3 million and gross margin of 23.7% in 2021, and gross profit of $165.1 million and gross margin of 21.5% in 2020.

•Our Ex-TAC Gross Profit(1) was $234.8 million in 2022, compared to $272.1 million in 2021 and $194.3 million in 2020.

•Our net loss was $24.6 million, or (12.8)% of gross profit in 2022, compared to net income of $11.0 million, or 4.6% of gross profit in 2021, and a net loss of $4.4 million, or 2.6% of gross profit, in 2020. Net income for 2021 included a one-time tax benefit of $31.8 million due to a release of the valuation allowance on certain U.S. deferred tax assets. Net income for 2021 also included one-time charges of $42.0 million (pre-tax) to recognize the unamortized discount and deferred financing costs on our senior subordinated secured notes that were exchanged for convertible notes upon our IPO, as well as $16.5 million of one-time incremental cumulative stock-based compensation expense (pre-tax) for awards with an IPO performance condition.

•Our Adjusted EBITDA(1) was $26.3 million in 2022, compared to $88.9 million in 2021 and $41.1 million in 2020. Adjusted EBITDA(1) was 11.2%, 32.7% and 21.2% of Ex-TAC Gross Profit(1) in 2022, 2021 and 2020, respectively.

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(1)Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See “Non-GAAP Reconciliations” in this Report for the definitions and limitations of these measures, and reconciliations to the most comparable GAAP financial measures.

Recent Developments

On March 10, 2023, we learned that SVB was closed by the California regulators and the FDIC was appointed as receiver. On March 12, 2023, the Department of the Treasury, Federal Reserve and FDIC approved actions enabling the FDIC to complete its resolution of SVB in a manner that fully protects all depositors, and we regained full access to the funds held by SVB.

As a result of the closure of SVB, our ability to collect payments from our customers through our operating accounts maintained at SVB has been impacted and may continue to be impacted. We are in the process of establishing an alternate operating account to which our customers can remit payments. If we are unable to establish an alternate account in the near-term, our cash flow may be negatively impacted, including with respect to the impact of timing of receipts on our first quarter 2023 results, as well as any difficulty we may encounter in collecting unremitted past payments or any impact of the delay on our customers’ ability to make such payments.

We also have a revolving credit facility with SVB, which has not been drawn and under which no amounts are outstanding. While we are currently unable to make borrowings under the credit facility, we do not foresee any near-term needs to draw upon this facility. See our risk factor Item 1A - “Our credit facility with SVB is currently not available for funding and may not be available for funding in the future. If our credit facility remains in effect, which remains uncertain, and we are able at any point to draw down on it, the terms of our facility subject us to operating restrictions and financial covenants that impose risk of default and may restrict our business and financing activities” and our Liquidity and Capital Resources discussion below in this MD&A.

SVB is also the counterparty to the Company’s forward foreign currency hedge contracts, and we do not anticipate that SVB will perform on these obligations. We expect minimal exposure as a result of non-performance and plan to seek a new hedging program with one or more financial institution in the near-term.

We currently do not anticipate a material impact on our financial condition or on our operations as a result of the SVB closure, although this event may impact the timing of our cash collections and disbursements in the first quarter of 2023, with limited to no impact expected for the full year.

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Acquisitions

On November 19, 2021, we entered into a definitive agreement, by and among our Company and the shareholders of video intelligence AG (“vi”), a Swiss-based contextual video technology company for digital media owners, for the acquisition of all of the outstanding shares of vi. The acquisition was completed on January 5, 2022. The purchase price of approximately $54.2 million was comprised of $49.4 million in cash and 355,786 shares of our common stock. This acquisition expanded the our video product offerings to include in-stream high-quality video content, delivering a better user experience and more value to our advertisers. This acquisition was accounted for as a business combination and the results of the acquired entity have been included in our results of operations beginning as of the acquisition date.

As part of our growth strategy, we plan to continue to evaluate strategic acquisition or investment opportunities to add incremental growth with compounding benefits to our business, to further expand our offerings, add key technology and/or reach new markets.

Macroeconomic Environment

General worldwide economic conditions have recently experienced significant instability as well as volatility and disruption in the financial markets, resulting from factors such as the effects of the Russia-Ukraine conflict, the COVID-19 pandemic, and general economic uncertainty. The current macroeconomic environment, with variables such as inflation, increased interest rates, recessionary concerns, currency exchange rate fluctuations, global supply chain disruptions, and labor market volatility, has negatively impacted our advertisers. Accordingly, these conditions have adversely impacted our business during the year ended December 31, 2022, and could, if they continue or worsen, adversely impact us in the future, including if our advertisers were to reduce or further reduce their advertising spending as a result of any of these factors. We continue to monitor our operations, and the operations of those in our ecosystem (including media partners, advertisers and agencies). These conditions make it difficult for us, our media partners, advertisers and agencies to accurately forecast and plan future business activities and could cause a further reduction or delay in overall advertising demand and spending, which would harm our business, financial condition and results of operations.

Factors Affecting Our Business

Retention and Growth of Relationships with Media Partners

We rely on relationships with our media partners for a significant portion of our advertising inventory and for our ability to increase revenue through expanding their use of our platform. To further strengthen these relationships, we continuously invest in our technology and product functionality to drive user engagement and monetization by (i) improving our algorithms; (ii) effectively managing our supply and demand; and (iii) expanding the adoption of our enhanced products by media partners.

Our relationships with media partners are typically long-term, exclusive and strategic in nature. Our top 20 media partners, based on our 2022 revenue, have been using our platform for an average of over seven years, despite their typical contract length being two to four years. Net revenue retention is an important indicator of media partner satisfaction, the value of our platform, as well as our ability to grow revenue from existing relationships.

We calculate media partner net revenue retention at the end of each quarter by starting with revenue generated on media partners’ properties during the same period in the prior year, “Prior Period Retention Revenue.” We then calculate the revenue generated on these same media partners’ properties in the current period, “Current Period Retention Revenue.” Current Period Retention Revenue reflects any expansions within the media partner relationships, such as any additional placements or properties on which we extend our recommendations, as well as contraction or attrition. Our media partner net revenue retention in a quarter equals the Current Period Retention Revenue divided by the Prior Period Retention Revenue. To calculate media partner net revenue retention for year-to-date and annual periods, we sum the quarterly Current Period Retention Revenue and divide it by the sum of the quarterly Prior Period Retention Revenue. These amounts exclude certain revenue adjustments and revenue recognized on a net basis. Our media partner net revenue retention was 86% for the year ended December 31, 2022, 126% for the year ended December 31, 2021 and 104% for the year ended December 31, 2020. For the year ended December 31, 2022 we have experienced lower yields mainly due to weaker demand on our platform, primarily as a result of the current macroeconomic conditions and the related impact on advertising spend, as well as due to unfavorable foreign currency effects.

Our growth also depends on our ability to secure partnerships with new media partners. New media partners are defined as those relationships in which revenue was not generated in the prior period, except for limited instances where residual revenue was generated on a media partner’s properties. In such instances, the residual revenue would be excluded from net revenue retention above. Revenue generated on new media partners’ properties contributed approximately 12% to revenue growth for the year ended December 31, 2022, 7% for the year ended December 31, 2021 and 7% for the year ended December 31, 2020.

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User Engagement with Relevant Media and Advertising Content

We believe that engagement is a key pillar of the overall value that our platform provides to users, media partners and advertisers. Our algorithms enable effective engagement of users by facilitating the discovery of content, products and services that they find most interesting, as well as connecting them to personalized ads that are relevant to them. We believe that the user experience has a profound impact on long-term user behavior patterns and thus “compounds” over time improving our long-term monetization prospects. This principle guides our behavior, and, as a result, we do not focus on the price of ads, nor on maximizing such prices, as may be the case with some of our competitors. Given this view, we do not focus on cost-per-click or cost-per-impression as key performance indicators for the business. Consequently, we have a differentiated approach to monetization as we optimize our algorithms for the overall user experience rather than just for the price of each individual user engagement.

Growth in user engagement is driven by several factors, including enhancements to our recommendation engine, growth in the breadth and depth of our data assets, the increase in size and quality of our content and advertising index, user engagement, expansion on existing media partner properties where our recommendations can be served and the adoption of our platform by new media partners. As we grow user engagement, we are able to collect more data, enabling us to further enhance our algorithms, which in turn helps us make smarter recommendations and further grow user engagement, providing our platform and our business with a powerful growth flywheel. We measure the impact of this growth flywheel on our business by reviewing the growth of Click Through Rate (“CTR”) for ads on our platform. CTR improvements increase the number of clicks on our platform. We believe that we have a significant opportunity to further grow user engagement, and thus our business, as today CTR for ads on our platform is less than 1% of recommendations served.

Advertiser Retention and Growth

We focus on serving ads that are most likely to deliver engagement, rather than on the price of the ads, which we believe leads to better ROAS for advertisers. Our growth is partially driven by retaining and expanding the amount of spend by advertisers on our platform, as well as acquiring new advertisers. Improving our platform with functionality and features that increase engagement and ROAS increases the attractiveness of our platform to existing and new advertisers while also growing our share of their advertising budgets. We continuously invest in enhancing our technological capabilities to deliver better ROAS and transparency on ad spend, and market these attributes to grow our advertiser base and share of wallet.

Prices paid by advertisers on our platform fluctuate period to period for a variety of reasons, including supply and demand, competition, macroeconomic conditions, and seasonality. While in 2021, average prices on an annual basis were up relative to prior year, we have experienced a downward trend resulting in lower average prices in 2022, compared to 2021 levels, reflecting the unfavorable macroeconomic conditions impacting our industry. Movements in average prices do not necessarily correlate to our revenue or Ex-TAC Gross Profit trends. In order to grow our revenue and Ex-TAC Gross Profit and maximize value for our advertisers and media partners, our focus as a business is on driving user engagement and ROAS for advertisers, not on optimizing for price.

For the year ended December 31, 2022, over 30,000 unique advertisers were active on our platform. In addition, we continue to grow our programmatic partnerships, enabling us to grow our advertiser base efficiently.

Expansion Into New Environments, New Content Experiences and New Ad Formats

The accelerating pace of technological innovation and adoption, combined with continuously evolving user behavior and content consumption habits, presents multiple opportunities for growth. The emergence of new devices, platforms and environments in which users spend time consuming content is one area of expansion for us. Similarly, the formats in which content can or will be consumed continue to evolve, as do user-friendly and impactful ad formats that can be delivered in or alongside that content. Fundamentally, we plan to continue making our platform available for media partners on all types of devices and platforms, and all formats of media, that carry their content.

Examples of new environments in which content consumption is expected to grow include connected TVs (“CTV”), screens for autonomous vehicles and public transport, pre-installed applications on new smartphones, smartphone native content feeds, push notifications and email newsletters. We are developing solutions that allow media partners, service providers and manufacturers to provide better curated, personalized and more engaging content feeds and recommendations in these environments. Through our acquisition of vi in the first quarter of 2022, we expanded our video product offerings to new formats and environments, including pre-roll high-impact video formats.

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The development and deployment of new ad formats allow us to better serve users, media partners and, ultimately, advertisers who seek to target and engage users at scale; this continues to open and grow new types of advertiser demand, while ensuring relevance as the environments in which we operate diversify.

Investment in Our Technology and Infrastructure

Innovation is a core tenet of our Company and our industry. We plan to continue our investments in our people and our technology in order to retain and enhance our competitive position. For example, improvements to our algorithms help us deliver more relevant ads, driving higher user engagement, thereby improving ROAS for advertisers and increasing monetization for our media partners. Our Smartlogic product dynamically adjusts both the arrangement and the formats of content delivered to a user, depending on the user’s preferences and our media partner’s key performance indicators (“KPIs”), designed to provide a more personalized and engaging feed experience. We continue to invest in media partner and advertiser focused tools, technology and products as well as privacy-centric solutions, most recently announcing the launch of Keystone by Outbrain, which enables a more holistic management of overall revenue for media owners increasingly focused on revenue diversification.

We believe that our proprietary micro-services, API-based cloud infrastructure provides us with a strategic competitive advantage as we are able to deploy code an average of 300 times per day and grow in a scalable and highly cost-effective manner. As we develop and deploy solutions for enhanced integration of our technologies in new environments, with new content and ad formats, we anticipate activity through our platform to grow. We anticipate that the investment in our technology, infrastructure and solutions will contribute to our long-term growth.

Industry Dynamics

Our business depends on the overall demand for digital advertising, on the continuous success of our current and prospective media partners, and on general market conditions. Digital advertising is a rapidly evolving and growing industry, with growth that has outpaced the growth of the broader advertising industry. Content consumption continues to shift online, requiring media owners to adapt in order to successfully attract, engage and monetize their users. Given the large and growing volume of content being generated online, content curation tools are increasingly becoming a necessity for users and media owners alike. Advertisers increasingly rely on digital advertising platforms that deliver highly targeted ads and measurable performance. Regulators across most developed markets are increasingly focused on enacting and enforcing user privacy rules as well as tighter oversight of the major “walled garden” platforms. Industry participants have recently been, and likely will continue to be, impacted by changes implemented by platform leaders such as Apple’s change to its Identifier for Advertisers policy and Google’s evolving roadmap pertaining to the use of cookies within its Chrome web browser. See Item 1A, “Risk Factors” in this Report for additional information regarding changing industry dynamics with respect to industry participants and the regulatory environment. Given our focus on innovation, the depth and length of our media partner relationships and our scale, we believe that we are well positioned in the long-term to address and potentially benefit from many of these industry dynamics. Additionally, we believe that our strength in delivering engagement and clear outcomes for advertisers aligns well with the ongoing market shift towards increased accountability and expectations of ROAS from digital advertising spend generally.

Seasonality

The global advertising industry experiences seasonal trends that affect most participants in the digital advertising ecosystem. Our revenue generally fluctuates from quarter to quarter as a result of a variety of factors, including seasonality, as many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing, as well as the timing of advertising budget cycles. Historically, the fourth quarter of the year has reflected the highest levels of advertiser spending, and the first quarter generally has reflected the lowest level of advertiser spending. In addition, expenditures by advertisers tend to be cyclical and discretionary in nature, reflecting changes in brand advertising strategy, budgeting constraints and buying patterns and a variety of other factors, many of which are outside of our control. The quarterly rate of increase in our traffic acquisition costs is generally commensurate with the quarterly rate of increase in our revenue. However, traffic acquisition costs have, at times, grown at a faster or slower rate than revenue, primarily due to the mix of the revenue generated or contracted terms with media partners. We generally expect these seasonal trends to continue, though historical seasonality may not be predictive of future results given the potential for changes in advertising buying patterns and macroeconomic conditions. These trends will affect our operating results and we expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.

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Definitions of Financial and Performance Measures

Revenue

We generate revenue from advertisers through ads that we deliver across a variety of media partner properties. We charge advertisers for clicks on and, to a lesser extent, impressions of their ads, depending on how they choose to contract with us. We recognize revenue in the period in which the click or impression occurs.

The amount of revenue that we generate depends on the level of demand from advertisers to promote their content to users across our media partners’ properties. We generate higher revenue at times of high demand, which is also impacted by seasonal factors. For any given marketing campaign, the advertiser has the ability to adjust its price in real time and set a maximum daily spend. This allows advertisers to adjust the estimated ad spend attributable to the particular campaign. Due to the measurable performance that our advertisers achieve with us, a portion of our advertisers spend with us on an unlimited basis, as long as their ROAS objectives are met.

Our agreements with advertisers provide them with considerable flexibility to modify their overall budget, price (cost-per-click or cost-per-impression), and the ads they wish to deliver on our platform.

Traffic Acquisition Costs

We define traffic acquisition costs (“TAC”) as amounts owed to media partners for their share of the revenue we generated on their properties. We incur traffic acquisition costs in the period in which the revenue is recognized. Traffic acquisition costs are based on the media partners’ revenue share or, in some circumstances, based on a guaranteed minimum rate of payment from us in exchange for guaranteed placement of our ads on specified portions of the media partner’s digital properties. These guaranteed rates are typically provided per thousand qualified page views, whereas our minimum monthly payment to the media partner may fluctuate based on how many qualified page views the media partner generates, subject to a maximum guarantee. As such, traffic acquisition costs may not correlate with fluctuations in revenue, and our rates may remain fixed even with a decrease in revenue. Traffic acquisition costs also include amounts payable to programmatic supply partners.

Other Cost of Revenue

Other cost of revenue consists of costs related to the management of our data centers, hosting fees, data connectivity costs and depreciation and amortization. Other cost of revenue also includes the amortization of capitalized software that is developed or obtained for internal use associated with our revenue-generating technologies.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of wages, benefits, bonuses, stock-based compensation and, with respect to sales and marketing expenses, sales commissions.

Research and Development.  Research and development expenses are related to the development and enhancement of our platform and consist primarily of personnel and the related overhead costs, amortization of capitalized software for non-revenue generating infrastructure and facilities costs.

Sales and Marketing.  Sales and marketing expenses consist primarily of personnel and the related overhead costs for personnel engaged in marketing, advertising, client services, and promotional activities. These expenses also include advertising and promotional spend on media, conferences and other events to market our services, and facilities costs.

General and Administrative.  General and administrative expenses consist primarily of personnel and the related overhead costs, professional fees, facilities costs, insurance, and certain taxes other than income taxes. General and administrative personnel costs include, among others, our executive, finance, human resources, information technology and legal functions. Our professional service fees consist primarily of accounting, audit, tax, legal, information technology and other consulting costs, including our implementation of the Sarbanes-Oxley Act requirements.

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Other Expense, Net

Other expense, net is comprised of charges related to exchange of senior notes upon IPO, interest expense and other expense, net, and interest income.

Charges related to exchange of senior notes upon IPO. Charges for the year ended December 31, 2021 include a one-time charge of $42.0 million related to accelerated amortization of the unamortized discount and deferred issuance costs on the $200 million aggregate principal amount of senior subordinated secured notes issued on July 1, 2021 and exchanged to Convertible Notes upon our IPO.

Interest Expense.  Interest expense consists of interest expense on our 2.95% Convertible Senior Notes due 2026 (the “Convertible Notes”), our revolving credit facility and capital leases. Interest expense may increase if we incur borrowings periodically under our revolving credit facility or if we enter into new debt facilities or capital leasing arrangements.

Interest Income and Other (Expense) Income, net. Interest income and other (expense) income, net primarily consists of interest earned on our cash and cash equivalents and investments in marketable securities, discount amortization relating to our investments in marketable securities, and foreign currency exchange gains and losses. Foreign currency exchange gains and losses, both realized and unrealized, relate to transactions and monetary asset and liability balances denominated in currencies other than the functional currencies, including mark-to-market adjustments on undesignated foreign exchange forward contracts. Foreign currency gains and losses may continue to fluctuate in the future due to changes in foreign currency exchange rates.

Provision (Benefit) for Income Taxes

Provision (benefit) for income taxes consists of federal and state income taxes in the United States (“U.S.”) and income taxes in certain foreign jurisdictions, as well as deferred income taxes and changes in valuation allowance, reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Realization of our deferred tax assets depends on the generation of future taxable income. In considering the need for a valuation allowance, we consider our historical and future projected taxable income, as well as other objectively verifiable evidence, including our realization of tax attributes, assessment of tax credits and utilization of net operating loss carryforwards.

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Results of Operations

We have one operating segment, which is also our reportable segment. The following tables set forth our results of operations for the periods presented:

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(1)Ex-TAC Gross Profit and Adjusted EBITDA are non-GAAP financial measures. See “Non-GAAP Reconciliations” in this Report for the definitions and limitations of these measures, and reconciliations to the most comparable GAAP financial measures.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Revenue

Revenue decreased by $23.5 million, or 2.3%, to $992.1 million in 2022 from $1,015.6 million in 2021. Revenue for 2022 included net unfavorable foreign currency effects of approximately $42.7 million, and increased $19.2 million, or 1.9%, on a constant currency basis, compared to the prior year period. Our reported revenue decreased approximately $146.6 million due to net revenue retention of 86% on existing media partners, as we have experienced lower yields mainly due to weaker demand on our platform, primarily as a result of the current macroeconomic conditions and the related impact on advertising spend, as well as due to unfavorable foreign currency effects. This decrease was partially offset by growth of approximately 12%, or $125.0 million, from new media partners, including our recently acquired vi business.

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See "Non-GAAP Reconciliations" for information regarding the constant currency measures provided in this discussion and below to supplement our reported results.

Cost of Revenue and Gross Profit

Traffic acquisition costs increased $13.7 million, or 1.8%, to $757.3 million in 2022, compared to $743.6 million in the prior year period. Traffic acquisition costs included net favorable foreign currency effects of approximately $36.1 million, and increased $49.8 million, or 6.7%, on a constant currency basis, compared to the prior year period. Traffic acquisition costs grew despite lower revenue due to an unfavorable revenue mix and lower performance from certain deals. As a percentage of revenue, traffic acquisition costs increased to 76.3% in 2022, from 73.2% in 2021.

Other cost of revenue increased $10.3 million, or 32.5%, to $42.1 million in 2022, compared to $31.8 million in the prior year period, primarily due to increased depreciation expense on server equipment, higher hosting fees due to continued platform improvements, including increased data processing capacity, and higher network security related costs. This increase also includes costs from the newly acquired vi business, including the related amortization expense for intangible assets associated with developed technology. As a percentage of revenue, other cost of revenue increased 110 basis points to 4.2% in 2022 from 3.1% in 2021.

Gross profit decreased $47.6 million, or 19.8%, to $192.7 million in 2022, compared to $240.3 million in 2021, which was primarily attributable to the increase in cost of revenue and lower revenue, as previously described. Gross profit for 2022 included net unfavorable foreign currency effects of approximately $6.6 million, and decreased $41.0 million, or 17.0%, on a constant currency basis, compared to the prior year period.

Ex-TAC Gross Profit

Our Ex-TAC Gross Profit decreased $37.3 million, or 13.7%, to $234.8 million in 2022, from $272.1 million in 2021. Ex-TAC Gross Profit for 2022 included net unfavorable foreign currency effects of approximately $6.6 million, and decreased $30.7 million, or 11.3%, on a constant currency basis, compared to the prior year period. The decrease in Ex-TAC Gross Profit was primarily driven by lower revenue, as well as unfavorable revenue mix and lower performance from certain deals. See “Non-GAAP Reconciliations” for the related definition and reconciliations to our gross profit.

Operating Expenses

Operating expenses increased by $0.5 million, or 0.2%, to $206.2 million in 2022, from $205.7 million in 2021. Operating expenses for 2022 included net favorable foreign currency effects of approximately $10.7 million, and increased $11.2 million, or 5.4%, on a constant currency basis, compared to the prior year period. Reported operating expenses in 2021 reflected $16.5 million of one-time incremental cumulative stock-based compensation expense recorded for IPO-contingent awards, as well as a decrease of $8.2 million in regulatory costs, reflecting a partial insurance recovery in 2022. Such decreases were more than offset by a $25.2 million increase in other operating expenses in 2022, which was primarily comprised of higher other personnel-related costs of $11.6 million, increased public company costs of $4.2 million, expanded digital services taxes in Europe of $3.7 million, amortization of certain intangible assets related to our acquisition of vi, and increased costs of transitioning from a largely remote to a hybrid environment.

The components of operating expenses are discussed below:

•Research and development expenses — increased $1.2 million, primarily due to higher personnel-related costs to invest in our technology, offset in part by $1.2 million of one-time incremental cumulative stock-based compensation expense recorded 2021 for IPO-contingent awards.

•Sales and marketing expenses — increased $13.0 million, which was primarily due to higher personnel-related costs of $8.8 million, expanded digital services taxes of $3.7 million, amortization of certain intangible assets related to our acquisition of vi of $1.9 million, and increased costs related to the transition from a largely remote to a hybrid environment. These increases were partially offset by $4.2 million of one-time incremental cumulative stock-based compensation expense recorded in 2021 for IPO-contingent awards.

•General and administrative expenses — decreased $13.7 million, primarily due to $11.1 million of one-time incremental cumulative stock-based compensation expense recorded in 2021 for IPO-contingent awards, as well as a decrease in regulatory costs of $8.2 million, reflecting a partial insurance recovery in 2022. These decreases were partially offset by higher public company costs of $4.2 million, and increased costs of transitioning from a largely remote to a hybrid environment.

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Operating expenses as a percentage of revenue increased to 20.8% in 2022 from 20.3% in 2021, reflecting a higher rate of increase in operating expenses than revenues, partially offset by a 1.6% decrease in operating expenses as a result of the absence of the one-time incremental cumulative stock-based compensation expense of $16.5 million recognized during the year ended December 31, 2021.

Total Other Expense, Net

Total other expense, net, decreased $44.1 million to $5.0 million in 2022, compared to $49.1 million in 2021. This decrease in expenses was primarily attributable to the absence of the $42.0 million of one-time charges related to the exchange and cancellation of senior notes upon IPO recorded in 2021 to recognize the unamortized discount and deferred issuance costs on senior subordinated secured notes issued on July 1, 2021, upon our IPO and convertible senior notes issuance. In addition, we recorded $3.6 million of income in connection with our new investment program initiated in July 2022. These decreases in expenses were partially offset by higher interest expense of $4.0 million on our convertible notes issued in July 2021. See Notes 1 and 7 to the accompanying audited consolidated financial statements for additional information.

Provision (Benefit) for Income Taxes

Provision for income taxes was $6.0 million in 2022, compared to benefit from income taxes of $25.5 million in 2021, largely due to the $31.8 million release of the valuation allowance on certain deferred tax assets in the U.S in 2021. In addition, provision for income taxes increased due to the increase in uncertain tax positions compared to prior year. These increases were partially offset by the impact of lower global pre-tax profitability in the current year and the geographic mix of earnings, including lower tax expense from the inclusion of foreign subsidiaries’ income in the U.S. Our effective tax rate was (32.3)% in 2022, compared to 175.6% in 2021. Our 2021 effective tax rate was unfavorably impacted by the $31.8 million release of valuation allowance in the U.S. (See Note 8 to the accompanying audited consolidated financial statements for additional information.)

A provision enacted as part of the 2017 Tax Cuts & Jobs Act requires companies to capitalize certain research and experimental expenditures for tax purposes in tax years beginning after December 31, 2021. As a result, our utilization of net operating losses has increased in 2022, as compared to prior years.

In addition, on August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which among other things implements a 15% minimum tax on adjusted financial statement income of certain large corporations and a 1% excise tax on net share repurchases. Based on our current analysis of the provisions, this legislation is not expected to have a material impact on our consolidated financial statements, based on our current share repurchase program.

Our future effective tax rate may be affected by the geographic mix of earnings in countries with different statutory rates. Additionally, our future effective tax rate may be affected by our ongoing assessment of the need for a valuation allowance on our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

Net (Loss) Income

As a result of the foregoing, we recorded net loss of $24.6 million in 2022, as compared to net income of $11.0 million in 2021. As previously discussed, net income for 2021 included a one-time tax benefit of $31.8 million due to a release of the valuation allowance on certain deferred tax assets. Net income for 2021 also included $42.0 million of one-time charges related to exchange of senior notes upon IPO (pre-tax), as well as $16.5 million of one-time incremental cumulative stock-based compensation expense (pre-tax) for awards with an IPO performance condition.

Adjusted EBITDA

Our Adjusted EBITDA decreased $62.6 million to $26.3 million in 2022 from $88.9 million in 2021, due to lower Ex-TAC Gross Profit and increased operating expenses and other costs of revenue, as previously described. Our Adjusted EBITDA for 2022 included net favorable foreign currency effects of approximately $3.4 million. See “Non-GAAP Reconciliations” for the related definitions of Adjusted EBITDA and reconciliations to our net income.

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Revenue

Revenue increased by $248.5 million, or 32.4%, to $1,015.6 million in 2021 from $767.1 million in 2020. Revenue grew approximately 25.8%, or $198.5 million, from net revenue retention on existing media partners primarily due to increased monetization from higher demand on our platform and our growth in the click-through-rate, and approximately 7.0%, or $53.8 million, from new media partners. Revenue in 2021 also benefited from net favorable foreign currency effects of approximately $6.7 million.

Cost of Revenue and Gross Profit

Traffic acquisition costs increased $170.8 million, or 29.8%, to $743.6 million in 2021, compared to $572.8 million in the prior year period, including net unfavorable foreign currency effects of approximately $7.3 million. Traffic acquisition costs grew less than revenue due to favorable revenue mix from higher margin media partners and improved performance on media owners with guarantee arrangements. As a percentage of revenue, traffic acquisition costs decreased to 73.2% in 2021, from 74.7% in 2020.

Other cost of revenue increased $2.5 million, or 8.6%, to $31.8 million in 2021, compared to $29.3 million in the prior year period, primarily due to higher hosting fees due to increased revenue and increased depreciation expense on server equipment. As a percentage of revenue, other cost of revenue decreased 70 basis points to 3.1% in 2021 from 3.8% in 2020.

Gross profit increased $75.2 million, or 45.6%, to $240.3 million in 2021, compared to $165.1 million in 2020, which was primarily attributable to the increase in revenue, partially offset by the corresponding increase in cost of revenue, as previously described.

Ex-TAC Gross Profit

Our Ex-TAC Gross Profit increased $77.8 million, or 40.0%, to $272.1 million in 2021, from $194.3 million in 2020, including net unfavorable foreign currency effects of approximately $0.6 million. The increase in Ex-TAC Gross Profit was primarily driven by our revenue growth as well as favorable revenue mix from higher margin media partners and improved performance on media owners with guarantee arrangements. See “Non-GAAP Reconciliations” for the related definition and reconciliations to our gross profit.

Operating Expenses

Operating expenses increased by $50.8 million, or 32.8%, to $205.7 million in 2021, from $154.9 million in 2020. Operating expenses for 2021 included approximately $16.5 million of one-time incremental cumulative stock-based compensation expense for awards with a performance condition that was met upon our IPO, and regulatory matter costs of $6.4 million. Operating expenses for 2020 included terminated merger expenses of $11.2 million, offset in part by a $2.3 million reversal of a tax-contingency recorded in 2019. The remaining $36.8 million increase in operating expenses was primarily attributable to higher personnel-related costs of $25.0 million, primarily reflecting higher headcount and incentive-based compensation, as well as increased professional fees of $4.3 million and marketing costs of $3.8 million. Operating expenses included net unfavorable foreign currency effects of approximately $4.6 million.

The components of operating expenses are discussed below:

•Research and development expenses — increased $10.2 million, primarily attributable to increased personnel-related costs to invest in the growth of our platform, including $1.2 million of one-time incremental cumulative stock-based compensation expense related to awards with a performance condition that was satisfied upon our IPO.

•Sales and marketing expenses — increased $18.2 million, primarily due to higher personnel-related costs of $14.3 million, including $4.2 million of one-time incremental cumulative stock-based compensation expense for awards with a performance condition that was satisfied upon our IPO, as well as higher marketing costs of $3.6 million.

•General and administrative expenses — increased $22.4 million, largely due to higher personnel-related costs of $18.3 million, including $11.1 million of one-time incremental cumulative stock-based compensation expense for awards with a performance condition that was satisfied upon our IPO, and higher professional fees of $10.5 million, which included regulatory matter costs of $6.4 million in 2021. Operating expenses for 2020 included terminated merger expenses of $11.2 million, partially offset by a $2.3 million reversal of a tax-contingency recorded in 2019 with a corresponding charge to income tax expense in 2020.

Operating expenses as a percentage of revenue increased slightly to 20.3% in 2021 from 20.2% in 2020.

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Total Other Expense, Net

Total other expense, net, increased to $49.1 million in 2021, compared to $2.5 million in 2020, primarily due to $42.0 million of one-time charges recorded in 2021 to recognize the unamortized discount and deferred issuance costs on senior subordinated secured notes issued on July 1, 2021, upon our IPO and convertible senior notes issuance (see Note 7 to the accompanying audited consolidated financial statements for additional information). The increase in total other expense was also attributable to $3.1 million of interest expense on our convertible senior notes in 2021, as well as the absence of the $1.1 million gain on sale of an asset recorded in 2020.

(Benefit) Provision for Income Taxes

Benefit from income taxes was $25.5 million in 2021, compared to provision for income taxes of $3.3 million in 2020, primarily attributable to the release of the valuation allowance on certain deferred tax assets in the U.S. Our effective tax rate was 175.6% in 2021, compared to 43.0% in 2020. Our 2021 effective tax rate was unfavorably impacted by the $31.8 million release of valuation allowance in the U.S. (See Note 8 to the accompanying audited consolidated financial statements for additional information.) Our 2020 effective tax rate was unfavorably impacted by approximately 16.5 percentage points due to certain non-recurring prior year taxes in a foreign tax jurisdiction.

Our future effective tax rate may be affected by the geographic mix of earnings in countries with different statutory rates. Additionally, our future effective tax rate may be affected by our ongoing assessment of the need for valuation allowance on our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

Net Income

As a result of the foregoing, net income increased $6.6 million, to $11.0 million in 2021, from $4.4 million in 2020. As previously discussed, net income for 2021 included a one-time tax benefit of $31.8 million due to a release of the valuation allowance on certain deferred tax assets. Net income for 2021 also included charges of $42.0 million (pre-tax) to recognize the unamortized discount and deferred financing costs on our senior subordinated secured notes that were exchanged for convertible notes upon our IPO, as well as $16.5 million of one-time incremental cumulative stock-based compensation expense (pre-tax) for awards with an IPO performance condition.

Adjusted EBITDA

Our Adjusted EBITDA increased $47.7 million to $88.9 million in 2021 from $41.1 million in 2020, which was primarily attributable to the increase in Ex-TAC Gross Profit, partially offset by the corresponding increase in operating expenses as we continue to invest in our business. See “Non-GAAP Reconciliations” for the related definitions and reconciliations to our net income.

Non-GAAP Reconciliations

Because we are a global company, the comparability of our operating results is affected by foreign exchange fluctuations. We calculate certain constant currency measures and foreign currency impacts by translating the current year’s reported amounts into comparable amounts using prior year’s exchange rates. All constant currency financial information being presented is non-GAAP and should be used as a supplement to our reported operating results. We believe that this information is helpful to our management and investors to assess our operating performance on a comparable basis. However, these measures are not intended to replace amounts presented in accordance with U.S. GAAP and may be different from similar measures calculated by other companies.

We present Ex-TAC Gross Profit, Adjusted EBITDA, Adjusted EBITDA as a percentage of Ex-TAC Gross Profit, and Free Cash Flow because they are key profitability measures used by our management and the Board to understand and evaluate our operating performance and trends, develop short-term and long-term operational plans and make strategic decisions regarding the allocation of capital. Accordingly, we believe that these measures provide information to investors and the market in understanding and evaluating our operating results in the same manner as our management and the Board.

These non-GAAP financial measures are defined and reconciled to the corresponding U.S. GAAP measures below. These non-GAAP financial measures are subject to significant limitations, including those identified below. In addition, other companies in our industry may define these measures differently, which may reduce their usefulness as comparative measures. As a result, this information should be considered as supplemental in nature and is not meant as a substitute for revenue, gross profit, net (loss) income or net cash provided by operating activities presented in accordance with U.S. GAAP.

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Ex-TAC Gross Profit

Ex-TAC Gross Profit is a non-GAAP financial measure. Gross profit is the most comparable GAAP measure. In calculating Ex-TAC Gross Profit, we add back other cost of revenue to gross profit. Ex-TAC Gross Profit may fluctuate in the future due to various factors, including, but not limited to, seasonality and changes in the number of media partners and advertisers, advertiser demand or user engagements.

There are limitations on the use of Ex-TAC Gross Profit in that traffic acquisition cost is a significant component of our total cost of revenue but not the only component and, by definition, Ex-TAC Gross Profit presented for any period will be higher than gross profit for that period. A potential limitation of this non-GAAP financial measure is that other companies, including companies in our industry which have a similar business, may define Ex-TAC Gross Profit differently, which may make comparisons difficult. As a result, this information should be considered as supplemental in nature and is not meant as a substitute for revenue or gross profit presented in accordance with U.S. GAAP.

The following table presents the reconciliation of Ex-TAC Gross Profit to gross profit, the most directly comparable U.S. GAAP measure, for the periods presented:

Adjusted EBITDA

We define Adjusted EBITDA as net (loss) income before charges related to the exchange of senior notes upon IPO; interest expense; interest income and other (expense) income, net; provision (benefit) for income taxes; depreciation and amortization; stock-based compensation, and other income or expenses that we do not consider indicative of our core operating performance, including, but not limited to, IPO and public company implementation costs, merger and acquisition costs, regulatory matter costs, and severance costs related to our cost saving initiatives. We present Adjusted EBITDA as a supplemental performance measure because we believe it facilitates operating performance comparisons from period to period.

We believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and the Board. However, Adjusted EBITDA is a non-GAAP financial measure and how we calculate Adjusted EBITDA is not necessarily comparable to non-GAAP information of other companies. Adjusted EBITDA should be considered as a supplemental measure and should not be considered in isolation or as a substitute for any measures of our financial performance that are calculated and reported in accordance with U.S. GAAP.

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The following table presents the reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable U.S. GAAP measure, for the periods presented:

_________________________

(1)Primarily includes costs related to our initial public offering, public company implementation costs and costs related to our acquisition of vi in January 2022.

(2)Reflects a reversal of a tax contingency recorded within operating expenses in 2019 and a corresponding charge to income tax expense in 2020, net of foreign exchange impact.

Free Cash Flow

Free cash flow is defined as cash flow provided by operating activities, less capital expenditures and capitalized software development costs. Free cash flow is a supplementary measure used by our management and the Board to evaluate our ability to generate cash and we believe it allows for a more complete analysis of our available cash flows. Free cash flow should be considered as a supplemental measure and should not be considered in isolation or as a substitute for any measures of our financial performance that are calculated and reported in accordance with U.S. GAAP.

The following table presents the reconciliation of free cash flow to net cash provided by operating activities.

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LIQUIDITY AND CAPITAL RESOURCES

We regularly evaluate the cash requirements for our operations, commitments, development activities and capital expenditures and manage our liquidity risk in a manner consistent with our corporate priorities. During 2022, we initiated a new investment program, which is focused on achieving maximum returns within our investment policy parameters, while preserving capital and maintaining sufficient liquidity.

We believe that our cash and cash equivalents and investments will be sufficient to fund our anticipated operating expenses, capital expenditures, interest payments on our long-term debt, and planned share repurchases for at least the next 12 months and the foreseeable future. However, there are multiple factors that could impact our future liquidity, including our business performance, our ability to collect payments from our advertisers, having to pay our media partners even if our advertisers default on their payments, or other factors described under Item 1A “Risk Factors” included in this Report.

Sources of Liquidity

Our primary sources of liquidity are our cash and cash equivalents and investments in marketable securities and cash receipts from our advertisers. As discussed under “Recent Developments” in this MD&A, we have a revolving credit facility with SVB, which has been closed by the California regulators in March 2023. While we are currently unable to make borrowings under the credit facility, we do not foresee any near-term needs to draw upon this facility. We are currently evaluating our options with respect to potential alternate credit facilities, and we cannot guarantee that we will be able to obtain such alternate financing on favorable terms or in the desired timeframe.

We have historically experienced higher cash collections during our first quarter due to seasonally strong fourth quarter sales, and, as a result, our working capital needs typically decrease during the first quarter. We expect these trends to continue as we continue to grow our business.

As of December 31, 2022, in addition to cash flow from our operations, our available liquidity was follows:

__________________________

(1) As of December 31, 2022, approximately $42.6 million of our cash and cash equivalents was held outside of the United States by our non-U.S. subsidiaries. We currently do not have any plans to repatriate our earnings from our foreign subsidiaries. We intend to continue to reinvest our earnings from foreign operations for the foreseeable future, and do not anticipate that we will need funds generated from foreign operations to fund our domestic operations.

(2) See above under “Recent Developments” with respect to the impact of SVB’s closure on our credit facility with SVB (“2021 Revolving Credit Facility”). The 2021 Revolving Credit Facility provides, subject to borrowing availability and certain other conditions, for revolving loans in an aggregate principal amount of up to $75.0 million (the “Facility”), with a $15.0 million sub-facility for letters of credit. Our borrowing availability under the Facility is calculated by reference to a borrowing base which is determined by specified percentages of eligible accounts receivable, based on the defined borrowing formula. The facility will terminate on the earlier of (i) November 2, 2026 or (ii) 120 days prior to the maturity date of our 2.95% Convertible Senior Notes due 2026, unless the convertible notes have been converted to common equity securities of the Company.

The 2021 Revolving Credit Facility contains representations and warranties, including, without limitation, with respect to collateral; accounts receivable; financials; litigation, indictment and compliance with laws; disclosure and no material adverse effect, each of which is a condition to funding. Additionally, the 2021 Revolving Credit Facility includes events of default and customary affirmative and negative covenants applicable to us and our subsidiaries, including, without limitation, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, restricted payments and prepayment of the Convertible Notes and of junior indebtedness. The 2021 Revolving Credit Facility contains a financial covenant that requires, in the event that credit extensions under the Facility equal or exceed 85% of the lesser of the

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available commitments under the Facility or upon the occurrence of an event of defaults, our Company to maintain a minimum consolidated monthly fixed charge coverage ratio of 1.00. We were in compliance with all of the financial covenants under the 2021 Revolving Credit Facility as of December 31, 2022 and December 31, 2021. See Notes 7 and 14 to the accompanying audited financial statements for additional information relating to our 2021 Revolving Credit Facility.

Material Cash Requirements

Our primary uses of liquidity are payments to our publishers, our operating expenses, capital expenditures, our long-term debt and the related interest payments, and repurchases under our $30 million share repurchase program. We may also use our available cash to make acquisitions or investments in complementary companies or technologies.

We primarily use our operating cash for payments due to media partners and vendors, as well as for personnel costs and other employee-related expenditures. Our contracts with media partners are generally variable based on volume, or guarantee a minimum rate of payment if the media partner reaches certain performance targets. See “Definitions of Financial and Performance Measures —Traffic Acquisition Costs.”

Contractual Cash Obligations

The following table presents our material contractual obligations as of December 31, 2022:

___________________

(1)Our 2.95% Convertible Senior Notes are due July 27, 2026, with interest payable semi-annually in arrears on January 27 and July 27 of each year. See Note 7 to the accompanying financial statements for additional information, including conditions for early redemption.

(2)Operating lease agreements primarily relate to leases for certain office facilities and managed data center facilities, including one new operating lease agreement that has not yet commenced with future lease payments of approximately $2.4 million. See Note 5 to the accompanying financial statements for additional information relating to our leases.

(3)Capital lease and other obligations relate to prior leases for certain servers and related equipment. For the year ended December 31, 2022, we made regular payments totaling $3.2 million on our finance lease obligations. See Note 5 to the accompanying consolidated financial statements for additional information relating to our leases.

(4)Represents the remaining portion of the purchase price payable in connection with our 2022 acquisition of vi. See Note 2 to the accompanying consolidated financial statements for additional information.

(5)Other commitments include data service contracts and other hosting agreements, network services, and other costs to maintain our platform.

(6)We are unable to reliably estimate the timing of future payments related to uncertain tax positions; therefore, we have excluded $7.4 million from the preceding table related to uncertain tax positions, including accrued interest and penalties as of December 31, 2022.

Treasury Share Repurchases

In February 28, 2022, our Board of Directors (the “Board”) approved a share repurchase program under which we are authorized to purchase up to $30 million of our common stock, par value $0.001 per share, with no requirement to purchase any minimum number of shares. During 2022, we paid $30.2 million, including commissions, to repurchase 6,389,129 shares under our share repurchase program, and there was no remaining availability under this share repurchase program as of December 31, 2022.

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On December 14, 2022, our Board approved a new stock repurchase program, authorizing us to repurchase up to $30 million of its common stock, par value $0.001 per share, with no requirement to purchase any minimum number of shares. The manner, timing, and actual number of shares repurchased under the program will depend on a variety of factors, including price, general business and market conditions, and other investment opportunities. Shares may be repurchased through privately negotiated transactions or open market purchases, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. The repurchase program may be commenced, suspended or terminated at any time at our discretion without prior notice. Repurchases under our new $30 million share repurchase program commenced in January 2023.

In addition, we periodically withhold shares to satisfy employee tax withholding obligations arising in connection with the vesting of restricted stock units and exercise of options and warrants in accordance with the terms of our equity incentive plans and the underlying award agreements. During 2022, 2021 and 2020, we withheld 245,465 shares, 1,032,995 shares and 27,769 shares, respectively, with a fair value of $2.5 million, $14.2 million and $0.3 million, respectively, to satisfy the minimum employee tax withholding obligations.

Capital Expenditures

Our cash flow used in investing activities primarily consists of capital expenditures and capitalized software development costs. We spent $13.4 million in capital expenditures in 2022, primarily relating to expenditures for servers and related equipment, leasehold improvements, and office equipment. We currently anticipate that our capital expenditures will be between $11 million and $14 million in 2023, primarily relating to expenditures for servers and related equipment, leasehold improvements, and other equipment. However, actual amounts may vary from these estimates.

Cash Flows

The following table summarizes the major components of our net cash flows for the periods presented:

Operating Activities

Net cash from operating activities decreased $52.9 million, to cash provided by operating activities of $3.8 million in 2022, as compared to cash provided by operating activities of $56.8 million in 2021, primarily driven by a $56.0 million decrease in our net income after non-cash adjustments. Net cash related to our working capital declined by $3.2 million, primarily due to the unfavorable changes in accounts payable and other current liabilities and in prepaid expenses and other current assets, partially offset by the favorable change in accounts receivable. These changes in working capital were largely driven by lower profitability, higher prepayments to certain media owners in connection with long-term contracts, and the timing of payments and receipts.

Net cash provided by operating activities increased $3.8 million, to $56.8 million in 2021, as compared to $53.0 million in 2020, primarily driven by a $48.7 million increase in our net income after non-cash adjustments, largely offset by net use of cash related to working capital of $33.1 million, primarily due to the timing of payments, and an increase in other assets of $9.2 million, due to higher prepayments to certain media owners in connection with long-term contracts.

Our free cash flow for 2022 was use of cash of $22.1 million, as compared to free cash flow of $36.7 million in 2021 and $42.5 million in 2020, reflecting lower operating cash flow and higher capital expenditures in 2022. Free cash flow is a supplemental non-GAAP financial measure. See “Non-GAAP Reconciliations” for the related definition and a reconciliation to net cash provided by operating activities.

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Investing Activities

Cash used in investing activities increased $297.8 million, to $317.9 million in 2022 from $20.1 million in 2021, primarily due to $246.7 million of purchases of marketable securities under our new investment program initiated in July 2022, net of maturities, and $45.2 million of consideration paid, net of cash acquired for our acquisition of vi.

Cash used in investing activities increased $10.7 million, to $20.1 million in 2021 from $9.4 million in 2020, largely due to higher capital expenditures of $8.2 million, primarily attributable to our purchasing as opposed to leasing of servers and related equipment.

Financing Activities

Cash from financing activities decreased $357.6 million to cash used in financing activities of $31.7 million in 2022, from cash provided by financing activities of $325.9 million in 2021. This decrease was primarily due to the absence of the prior year’s net proceeds from common stock issuances upon our IPO of $145.1 million and net proceeds from issuances of our long-term debt of $193.3 million. In addition, treasury share repurchases increased by $18.5 million in 2022, including $30.2 million of repurchases under our $30 million share repurchase program initiated in February 2022, offset in part by lower shares withheld to satisfy employee tax withholding obligations on vested stock-based compensation awards.

Cash from financing activities increased $330.1 million to $325.9 million in 2021, largely due to net proceeds from common stock issuance upon our IPO of $145.1 million and net proceeds related to issuances of long-term debt of $193.3 million. These increases in cash from financing activities were partially offset by a $13.9 million increase in payments in connection with shares withheld to cover employee tax withholding obligations on vested stock-based compensation awards, primarily in connection with our IPO.

Critical Accounting Policies and Estimates

Our audited consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these audited consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the following policies may involve a higher degree of judgment and complexity in their application than most of our accounting policies and represent the critical accounting policies used in the preparation of our audited consolidated financial statements. Readers are encouraged to consider this summary together with our audited consolidated financial statements and the related notes, including Note 1, for a more complete understanding of the critical accounting policies discussed below.

Revenue Recognition

The determination of whether our revenue should be reported on a gross or net basis involves judgment. In general, we act as a principal on behalf of our advertisers and revenue is recognized gross of any costs that we remit to the media partners. In these cases, we determined that we control the advertising inventory before it is transferred to our advertisers. Our control is evidenced by our ability to monetize the advertising inventory before it is transferred to our advertisers. For those revenue arrangements where we do not control the advertising inventory before it is transferred to our advertisers, we are the agent and recognize revenue on a net basis.

Stock-based Compensation

We recognize stock-based compensation for stock-based awards, including stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) based on the grant date fair value of the awards. We account for forfeitures as they occur. Determining the appropriate fair value of stock-based awards requires numerous assumptions, some of which are complex and subjective.

Certain of our stock option awards, RSUs and SARs had a service condition and a performance condition, satisfied upon our IPO, which was a qualifying liquidity event. Accordingly, we recognized stock-based compensation expense upon our IPO to the extent the related service condition was met.

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The fair value of our RSUs is based on the fair value of our common stock on the date of grant, which is based on the closing price of our common stock subsequent to our IPO. Prior to our IPO, because there was no public market for our common stock, our Board determined the fair value of the common stock by considering a number of objective and subjective factors, including valuations of our common stock performed by an unrelated valuation specialist, valuations of comparable peer companies, sales of our convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of our capital stock, and general and industry-specific economic outlook.

There were no stock options granted in 2022. The estimated grant-date fair value of our stock options granted in 2021 and 2020 was calculated using the Black-Scholes option pricing model, based on the following assumptions and inputs, each of which requires the use of subjective assumptions, as further described below.

Expected term - represents the period over which our option awards are expected to be outstanding, determined using the simplified method, based on the average of the time to the vest date and the contractual term.

Risk-free interest rate - based on the U.S. Treasury yield curve on the date of grant for zero-coupon U.S. Treasury notes with maturities corresponding to the awards’ expected term.

Expected volatility - due to our short trading history, estimated using average historical stock volatilities of comparable actively traded public companies within our industry over a period equivalent to the awards’ expected term.

Expected dividend rate - assumed to be zero as we have not paid and do not anticipate paying any dividends.

Fair value of our common stock - subsequent to our IPO, the fair value of common stock is based on the closing price of our common stock on the date of grant. Prior to our IPO, our Board determined the fair value of the common stock by considering a number of objective and subjective factors, including valuations of our common stock performed by an unrelated valuation specialist, valuations of comparable peer companies, sales of our convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of our capital stock, and general and industry-specific economic outlook.

If any of the assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation for any future awards may differ materially compared with the previously granted awards.

Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using an asset and liability approach, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled.

We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. In evaluating our ability to recover our deferred tax assets within the jurisdictions in which they arise, we consider all available positive and negative evidence, including our history of pre-tax income, projected future taxable income, the scheduled reversals of deferred tax liabilities, taxable income available to carryback to prior years and our tax planning strategies. As a result of our analysis, during the fourth quarter of 2021, we concluded that it is more likely than not that the majority of the U.S. deferred tax assets will be realized, and released $31.8 million of our U.S. valuation allowance. During 2022, after weighing all of the evidence, we determined that the positive evidence, particularly the evidence that was objectively verifiable, continued to outweigh the negative evidence. However, upon evaluating our forecasted state taxable income, we increased our valuation allowance against state net operating loss carryforwards by $2.8 million at December 31, 2022.

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We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related interest and penalties.

We have not made any material changes in the accounting methodology used to account for income taxes during the past three fiscal years. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. Other than those potential impacts, we do not believe there is a reasonable likelihood that there will be a material change in tax related balances.

Recently Issued Accounting Pronouncements

See Note 1 to the accompanying audited consolidated financial statements for recently issued accounting standards, which may have an impact on our financial statements upon adoption.

Off-Balance Sheet Arrangements

We do not currently engage in off-balance sheet financing arrangements. In addition, we do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.

JOBS Act Transition Period

We are an emerging growth company as defined in the JOBS Act. The JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards, delaying the adoption of some accounting standards until they would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act for the adoption of certain accounting standards until the earlier of the date 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 audited consolidated financial statements may not be comparable to companies that have adopted new or revised accounting pronouncements as of public company effective dates.

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