Integral Ad Science Holding 10Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-40557

INTEGRAL AD SCIENCE HOLDING CORP.

(Exact name of registrant as specified in its charter)


Delaware						83-0731995
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

Not Applicable1
(Address of principal executive offices)						(Zip Code)

(646) 278-4871

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
symbol

Name of each exchange
on which registered

Common Stock, $0.001 par value per share

IAS

The NASDAQ Stock Market LLC

(Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

On November 9, 2022, the Registrant had 153,828,376 shares of common stock, $0.001 par value, outstanding.

1Any stockholder or other communication required to be sent to our principal executive offices may be directed to our mailing address: 99 Wall Street, #1950, New York, NY 10005

Table of Contents

Page No.

PART I.

FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of Se ptember 30, 2022 (Unaudited) and December 31, 2021

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)

Condensed Consolidated Statements of Changes in Members’/ Stockholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (Unaudited)

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited)

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Item 4.

Controls and Procedures

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signatures

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRAL AD SCIENCE HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(IN THOUSANDS, EXCEPT SHARE DATA)	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	73,645	$	73,210
Restricted cash	141		70
Accounts receivable, net	57,849		53,028
Unbilled receivables	35,486		36,210
Prepaid expenses and other current assets	20,835		7,647
Total current assets	187,956		170,165
Property and equipment, net	1,591		1,413
Internal use software, net	21,556		18,100
Intangible assets, net	226,922		258,316
Goodwill	670,978		676,513
Operating lease right-of-use assets, net	19,031		—
Deferred tax asset, net	812		887
Other long-term assets	4,292		4,143
Total assets	$	1,133,138	$	1,129,537
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	44,011	$	56,257
Due to related party	104		74
Deferred revenue	287		160
Operating lease liabilities, current	6,856		—
Total current liabilities	51,258		56,491
Accrued rent	—		854
Net deferred tax liability	52,554		53,523
Long-term debt	233,146		242,798
Operating lease liabilities, non-current	19,358		—
Other long-term liabilities	1,639		8,681
Total liabilities	357,955		362,347
Commitments and Contingencies (Note 15)
Stockholders’ Equity
Preferred Stock, $0.001 par value, 50,000,000 shares authorized at September 30, 2022; 0 shares issued and outstanding at September 30, 2022 and December 31, 2021.	—		—
Common Stock, $0.001 par value, 500,000,000 shares authorized, 153,494,308 and 154,398,495 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively.	153		154
Additional paid-in-capital	797,274		781,951
Accumulated other comprehensive loss	(11,533)		(315)
Accumulated deficit	(10,711)		(14,600)
Total stockholders’ equity	775,183		767,190
Total liabilities and stockholders’ equity	$	1,133,138	$	1,129,537

See notes to the unaudited condensed consolidated financial statements.

INTEGRAL AD SCIENCE HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)	2022		2021		2022		2021
Revenue	$	101,343	$	79,014	$	290,913	$	221,041
Operating expenses:
Cost of revenue (excluding depreciation and amortization shown below)	19,171		13,845		53,864		38,191
Sales and marketing	28,190		19,578		77,961		62,990
Technology and development	19,459		14,609		54,071		47,554
General and administrative	20,150		16,081		56,081		57,670
Depreciation and amortization	12,617		16,100		37,585		45,098
Foreign exchange loss, net(1)	4,064		5		3,503		407
Total operating expenses	103,651		80,218		283,065		251,910
Operating income (loss)	(2,308)		(1,204)		7,848		(30,869)
Interest expense, net	(2,619)		(5,753)		(5,859)		(17,880)
Employee retention tax credit	6,981		—		6,981		—
Loss on extinguishment of debt	—		(3,721)		—		(3,721)
Net income (loss) before income taxes	2,054		(10,678)		8,970		(52,470)
(Provision) benefit from income taxes	(1,287)		898		(5,083)		4,855
Net income (loss)	$	767	$	(9,780)	$	3,887	$	(47,615)
Net income (loss) per share:
Basic	$	0.00	$	(0.06)	$	0.03	$	(0.34)
Diluted	$	0.00	$	(0.06)	$	0.02	$	(0.34)
Weighted average shares outstanding:
Basic	155,389,195		151,988,054		155,007,655		140,016,260
Diluted	156,696,754		151,988,054		157,581,569		140,016,260
Other comprehensive loss:
Foreign currency translation adjustments	(3,248)		(2,549)		(11,218)		(3,735)
Total comprehensive loss	$	(2,481)	$	(12,329)	$	(7,331)	$	(51,350)

(1) Prior period amounts have been reclassified to conform to current period presentation.

See notes to the unaudited condensed consolidated financial statements.

INTEGRAL AD SCIENCE HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’/ STOCKHOLDERS’ EQUITY

(UNAUDITED)

Three Months Ended September 30, 2022


	Common Stock
(IN THOUSANDS, EXCEPT SHARES)	Shares	Amount		Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total stockholders’ equity
Balance, July 1, 2022	155,498,704	$	155	$	804,175	$	(8,285)	$	(11,479)	$	784,566
RSUs vested	471,995	—		—		—		—		—
Option exercises	603,670	1		2,526		—		—		2,527
Stock-based compensation	—	—		14,225		—		—		14,225
Foreign currency translation adjustment	—	—		—		(3,248)		—		(3,248)
Repurchase of common stock	(3,080,061)	(3)		(23,652)		—		—		(23,655)
Net income	—	—		—		—		767		767
Balance, September 30, 2022	153,494,308	$	153	$	797,274	$	(11,533)	$	(10,711)	$	775,183

Nine Months Ended September 30, 2022


	Common Stock
(IN THOUSANDS, EXCEPT SHARES)	Shares	Amount		Additional paid-in capital		Accumulated other comprehensive loss		Accumulated deficit		Total stockholders’ equity
Balance, January 1, 2022	154,398,495	$	154	$	781,951	$	(315)	$	(14,600)	$	767,190
RSUs vested	761,208	1		—		—		—		1
Option exercises	1,414,666	1		5,907		—		—		5,908
Stock-based compensation	—	—		33,068		—		—		33,068
Foreign currency translation adjustment	—	—		—		(11,218)		—		(11,218)
Repurchase of common stock	(3,080,061)	(3)		(23,652)		—		—		(23,655)
Net income	—	—		—		—		3,887		3,887
Balance, September 30, 2022	153,494,308	$	153	$	797,274	$	(11,533)	$	(10,711)	$	775,183

See notes to the unaudited condensed consolidated financial statements.

INTEGRAL AD SCIENCE HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’/ STOCKHOLDERS’ EQUITY

(UNAUDITED)

Three Months Ended September 30, 2021


	Common Stock
(IN THOUSANDS, EXCEPT UNITS AND SHARES)	Shares	Amount		Additional paid-in capital		Accumulated other comprehensive income (loss)		Accumulated deficit		Total stockholders’ equity
Balance, July 1, 2021	134,203,403	$	134	$	430,368	$	3,337	$	—	$	433,839
RSUs vested	26,931	—		150		—		—		150
Stock-based compensation	—	—		7,984		—		—		7,984
Foreign currency translation adjustment	—	—		—		(2,549)		—		(2,549)
Net loss	—	—		—		—		(9,780)		(9,780)
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and offering costs	16,821,330	17		274,340		—		—		274,357
Issuance of common stock for the acquisition of Publica	2,888,889	3		49,628		—		—		49,631
Balance, September 30, 2021	153,940,553	$	154	$	762,470	$	788	$	(9,780)	$	753,632

Nine Months Ended September 30, 2021


	Member’s Interest			Common Stock
(IN THOUSANDS, EXCEPT UNITS AND SHARES)	Units(1)	Amount		Shares	Amount		Additional paid-in capital		Accumulated other comprehensive income (loss)		Accumulated deficit		Total members’/ stockholders’ equity
Balance, January 1, 2021	134,039,494	$	553,717	—	$	—	$	—	$	4,523	$	(126,761)	$	431,479
Repurchase of units	(99,946)	(413)		—	—		—		—		(791)		(1,204)
Units vested	17,486	—		—	—		—		—		—		—
Option exercises	246,369	1,075		—	—		3,360		—		—		4,435
Foreign currency translation adjustment	—	—		—	—		—		(3,735)		—		(3,735)
Net loss prior to corporate conversion	—	—		—	—		—		—		(37,832)		(37,832)
Conversion to Delaware corporation (Note 1)	(134,203,403)	(554,379)		134,203,403	134		388,860		—		165,385		—
Stock-based compensation	—	—		—	—		46,132		—		—		46,132
RSUs vested	—	—		26,931	—		150		—		—		150
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions and offering costs	—	—		16,821,330	17		274,340		—		—		274,357
Issuance of common stock for the acquisition of Publica	—	—		2,888,889	3		49,628		—		—		49,631
Net loss	—	—		—	—		—		—		(9,780)		(9,780)
Balance, September 30, 2021	—	$	—	153,940,553	$	154	$	762,470	$	788	$	(9,780)	$	753,632

(1) Amounts for periods prior to the Company’s conversion to a Delaware corporation have been retrospectively adjusted to give effect to the corporate conversion described in Note 1.

See notes to the unaudited condensed consolidated financial statements.

INTEGRAL AD SCIENCE HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,
(IN THOUSANDS)	2022		2021
Cash flows from operating activities:
Net income (loss)	$	3,887	$	(47,615)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization	37,585		45,098
Stock-based compensation	33,107		49,673
Foreign exchange loss, net	3,503		—
Deferred tax benefit	(657)		(9,966)
Extinguishment of debt	—		3,721
Amortization of debt issuance costs	348		1,020
Allowance for doubtful accounts	647		764
Employee retention tax credit	(6,981)		—
Non-cash interest expense	—		394
Impairment of assets	55		—
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	(8,031)		774
Decrease (increase) in unbilled receivables	(289)		703
Increase in prepaid expenses and other current assets	(6,757)		(6,151)
Increase in operating leases, net	(502)		—
Increase in other long-term assets	(330)		(574)
Increase (decrease) in accounts payable and accrued expenses	(8,226)		220
Increase in accrued rent	—		220
Increase (decrease) in deferred revenue	127		(563)
Increase (decrease) in due to/from related party	74		(62)
Net cash provided by operating activities	47,560		37,656
Cash flows from investing activities:
Payment for acquisitions, net of acquired cash	(1,603)		(166,204)
Purchase of property and equipment	(917)		(636)
Acquisition and development of internal use software and other	(9,952)		(10,011)
Net cash used in investing activities	(12,472)		(176,851)
Cash flows from financing activities:
Proceeds from initial public offering, net of underwriting discounts and commissions	—		281,589
Payments for offering costs	—		(4,728)
Repayment of long-term debt	(25,000)		(355,934)
Repayment of short-term debt	(1,836)		—
Proceeds from the New Revolver	15,000		235,000
Payments for debt issuance costs	—		(2,318)
Principal payments on capital lease obligations	—		(275)
Cash paid for unit repurchases	—		(1,202)
Proceeds from exercise of stock options	5,908		1,075
Payments for repurchase of common stock	(23,655)		—
Cash received from Employee Stock Purchase Program (ESPP)	388		—
Net cash (used in) provided by financing activities	(29,195)		153,207
Net increase in cash, cash equivalents and restricted cash	5,893		14,012
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(5,396)		(2,042)
Cash, cash equivalents and restricted cash at beginning of period	76,078		54,721
Cash, cash equivalents, and restricted cash, at end of period	$	76,575	$	66,691
Supplemental Disclosures:
Cash paid during the period for:
Interest	$	5,548	$	17,109
Taxes	$	11,817	$	1,438
Non-cash investing and financing activities:
Deferred offering costs accrued, not yet paid	$	—	$	2,506
Property and equipment acquired included in accounts payable	$	145	$	11
Internal use software acquired included in accounts payable	$	1,385	$	682
Conversion of members’ equity to additional paid-in capital	$	—	$	165,385
Lease liabilities arising from right of use assets	$	26,214	$	—

INTEGRAL AD SCIENCE HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

1. Description of business

Integral Ad Science Holding Corp. and its wholly-owned subsidiaries (together, the “Company”), formerly known as Kavacha Topco, LLC, is a leading global digital advertising verification company by revenue. The Company’s mission is to be the global benchmark for trust and transparency in digital media quality for the world’s leading brands, publishers, and platforms. The Company’s cloud-based technology platform provides actionable insights and delivers independent measurement and verification of digital advertising across all devices, channels, and formats, including desktop, mobile, connected TV (“CTV”), social, display, and video. The Company’s proprietary and Media Rating Council (the “MRC”) accredited Quality Impressions® metric is designed to verify that digital ads are served to a real person rather than a bot, viewable on-screen, and appear in a brand-safe and suitable environment in the correct geography. The Company is an independent, trusted partner for buyers and sellers of digital advertising to increase accountability, transparency, and effectiveness in the market. The Company helps advertisers optimize their ad spend and better measure consumer engagement with campaigns across platforms, while enabling publishers to improve their inventory yield and revenue.

The Company has its operations within the United States ("U.S.") in New York, California, and Illinois. Operations outside the U.S. include but are not limited to countries such as the United Kingdom ("U.K."), France, Germany, Italy, Singapore, Australia, France, Japan, and India.

Corporate conversion

On February 23, 2021, the Company amended the certificate of formation of Kavacha Topco, LLC to change the name of the Company to Integral Ad Science Holding LLC and on June 29, 2021, the Company converted to a Delaware corporation pursuant to a statutory conversion and changed its legal name to Integral Ad Science Holding Corp. in connection with its initial public offering ("IPO"). All of the outstanding member units were converted into 134,203,403 shares of common stock of the Company on a proportion of 1 member unit for 242 shares of common stock with the same voting rights. On June 29, 2021, the Company priced its IPO, which closed on July 2, 2021.

2. Basis of presentation and summary of significant accounting policies

This summary of significant accounting policies is presented to assist in understanding the Company’s condensed consolidated financial statements. These accounting policies have been consistently applied in the preparation of the condensed consolidated financial statements.

(a) Basis of presentation

The Company’s condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect the financial position, results of operations and cash flows for all periods presented. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

The accompanying interim Condensed Consolidated Balance Sheet as of September 30, 2022, the Condensed Consolidated Statements of Operations and Comprehensive Loss, of cash flows and of members’/stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the related footnote disclosures are unaudited. These unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in management’s opinion, include all adjustments necessary to state fairly the consolidated financial position of the Company. All adjustments made were of a normal recurring nature. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022, or for any future period.

The Company’s significant accounting policies are discussed in Note 2 to the consolidated financial statements for the years ended December 31, 2021, 2020 and 2019. There have been no significant changes to these policies, except for the adoption of ASC 842, Leases as disclosed in Note 2(h), that have had a material impact on the Company’s condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2022. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 3, 2022.

During the three and nine months ended September 30, 2022, the Company reclassified foreign exchange loss, net from "General and administrative" expenses within the Condensed Consolidated Statement of Operations as a separate line presented on the Condensed Consolidated Statement of Operations. Corresponding prior period amounts have also been reclassified to conform to current period presentation.

(b) Basis of consolidation

The condensed consolidated financial statements include the accounts of Integral Ad Science Holding Corp. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include fair value of assets acquired in business combinations, including assumptions with respect to future cash inflows and outflows, discount rates, assets useful lives, market multiples, the allocation of purchase price consideration in the business combination valuation of acquired assets and liabilities, the estimated useful lives of intangible assets and internal use software, the allowance for doubtful accounts, goodwill impairment testing, assumptions used to calculate equity-based compensation, and the realization of deferred tax assets. The Company bases its estimates on past experience, market conditions, and other assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis. Actual results may differ from these estimates due to risks and uncertainties, including uncertainty surrounding rapidly changing market and economic conditions due to heightened inflation, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain, disruptions in European economies as a result of the conflict in Ukraine and ongoing effects of the COVID-19 pandemic.

(d) Employee retention tax credit

The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") provided an employee retention credit which was a refundable tax credit against certain employment taxes. The Consolidated Appropriations Act (the "Appropriations Act") extended and expanded the availability of the employee retention credit through December 31, 2021. The Appropriations Act amended the employee retention credit to be equal to 70% of qualified wages paid to employees during the 2021 fiscal year.

The Company qualified for the employee retention credit beginning in March 2020 for qualified wages through June 2021 and filed a cash refund claim during the three months ended September 30, 2022. During the three and nine months ended September 30, 2022, the Company recorded an employee retention credit totaling $6,981, within Employee retention tax credit on the Company’s Condensed Consolidated Statements of Operations. As of September 30, 2022, the tax credit receivable has been included within Prepaid expenses and other current assets on the Company's Condensed Consolidated Balance Sheets.

(e) Cash, cash equivalents, and restricted cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows.


	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	73,645	$	73,210
Short term restricted cash	141		70
Long term restricted cash (held in other long-term assets)	2,789		2,798
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows	$	76,575	$	76,078

(f) Accounts receivable, net

Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts. The allowance is estimated based on management’s knowledge of its customers’ financial condition, credit history, and existing economic conditions. Invoices are typically issued with net 30-days to net 90-days terms. Account balances are considered delinquent if payment is not received by the due date, and the receivables are written off when deemed uncollectible. These costs are recorded in general and administrative expenses within the Consolidated Statements of Operations and Comprehensive Loss.

The activity in our allowance for doubtful accounts consists of the following as of:


	September 30, 2022		September 30, 2021
Balance, beginning of period	$	5,883	4,257
Additional provision	647		764
Receivables written off	(1,129)		(640)
Balance, end of period	$	5,401	4,381

(g) Stock-based compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The Company accounts for forfeitures as they occur. The Company used the following assumptions in valuing its time-based service options, which vest over a period of time subject to continued employment ("Time-Based Options"), return target options ("Return-Target Options"), which vest upon a realized cash return of the equity investment of Vista Equity Partners ("Vista"), the Company’s equity sponsor and funds controlled by Vista and registration of the shares held by Vista, market stock units ("MSUs"), and shares to be purchased under the Employee Stock Purchase Plan ("ESPP").

Expected term — For time-based awards, the estimated expected term of options granted is generally calculated as the vesting period plus the midpoint of the remaining contractual term, as the Company does not have sufficient historical information to develop reasonable expectations surrounding future exercise patterns and post-vesting employment termination behavior. For awards subject to market and performance conditions, the expected term represents the period of time that the options granted are expected to be outstanding.

Expected volatility — Since the Company does not have substantive trading history of its common stock, volatility is estimated based upon observed option-implied volatilities for a group of peer companies. The Company believes this is the best estimate of the expected volatility over the weighted-average expected term of its option grants.

Risk-free interest rate — The risk-free interest rate is based on the implied yield currently available on U.S. Treasury instruments with terms approximately equal to the expected term of the option.

Expected dividend — The expected dividend assumption was based on the Company’s history and expectation of dividend payouts. The Company currently has no history or expectation of paying cash dividends on its common stock/units.

Fair value —Prior to the IPO, because there was no public market for the Company’s common stock/units, the board of directors determined the best estimate of the fair value of the Company’s option grants, based on reasonable judgment and numerous objective and subjective factors, including independent third-party valuations of the Company’s common stock/units, operating and financial performance, and general and industry-specific economic outlook, amongst other factors. Following the pricing of the IPO, the Company’s shares are traded in the public market, and accordingly, the Company uses the applicable closing price of its common stock to determine fair value.

The Company used the following assumptions in valuing its stock-based compensation:


	September 30, 2022			September 30, 2021
Estimated fair value per share	$3.26	-	$14.43	$8.16	-	$14.04
Expected volatility (%)	65%	-	80%	65%	-	80%
Expected term (in years)	0.5	-	10.00	3.00	-	10.00
Risk-free interest rate (%)	0.46%	-	3.35%	0.46%	-	0.98%
Dividend yield	—			—

(h) Recently adopted accounting pronouncements

In January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU No. 2019-12”) effective January 1, 2021, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. Most amendments within ASU No. 2019-12 are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company early adopted ASU No. 2019-12, which did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU No. 2018-15”), which requires customers in a cloud computing arrangement that is a service contract to follow the internal use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. The guidance requires certain costs incurred during the application development stage to be capitalized and other costs incurred during the preliminary project and post-implementation stages to be expensed as they are incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrange is ready for its intended use. A customer’s accounting for the hosting component of the arrangement is not affected. The Company adopted this guidance on January 1, 2021 on a prospective basis. The adoption of ASU 2018-15 did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-2, “Leases (Topic 842)” (“ASU No. 2016-2”). Under ASU No. 2016-2, lessees are required to put most leases on their balance sheets but to recognize expenses in the income statement in a manner similar to current accounting. ASU No. 2016-2 also eliminated the current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs, and lease executory costs for all entities. The updated guidance is effective for the Company beginning January 1, 2022. Upon adoption, entities are required to use the modified retrospective approach for leases that exist, or are entered into, after the beginning of the earliest comparative period in the financial statements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which allows entities to not apply the new leases standard, including its disclosure requirements, in the comparative periods they present in their financial statements in the year of adoption.

The Company adopted ASU No. 2016-2 on January 1, 2022 using the modified retrospective transition approach, which resulted in the recognition of right-of-use assets ("ROU assets") of $21,666 and lease liabilities of $29,361. Differences between ROU assets and lease liabilities are attributed to deferred rent, lease incentive obligations and cease-use liability previously recognized under ASC 420 Exit or Disposal Cost Obligations. The Company elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. In addition, the Company elected the expedient permitting the combination of lease and non-lease components into a single lease component. The Company made a policy election to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

The adoption of ASU No. 2016-2 did not have a material impact on the Consolidated Statements of Operations and Comprehensive Loss or the Consolidated Statement of Cash Flows. Expanded disclosures around the Company's lease agreements under ASU No. 2016-2 are included in Note 14, Leases.

(i) Accounting pronouncements not yet adopted

In October 2021, the FASB issued ASU 2021-08, "Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which is intended to improve the accounting for acquired revenue contracts with customers in a business combination and create consistency in practice related to (i) the recognition of an acquired contract liability, and (ii) payment terms and their effect on subsequent revenue recognized by the acquirer. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2023. The Company will evaluate the impact of this guidance on future acquisitions as transactions occur.

In March 2020, the FASB issued ASU 2020-4, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” (“ASU No. 2020-4”) which is intended to address accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The amendments in ASU No. 2020-4 provide operational expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions to be affected by reference rate reform if certain criteria are met. The amendments in ASU No. 2020-4 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The optional amendments are effective for all entities as of March 12, 2020, through December 31, 2022. The Company intends to elect to apply certain of the optional expedients when evaluating the impact of reference rate reform on its debt instruments that reference LIBOR. The Company does not expect the adoption of ASU No. 2020-4 to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU No. 2016-13”) which is intended to provide more decision-useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU No. 2016-13 revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including, but not limited to accounts receivable. This guidance will be effective for the Company beginning January 1, 2023, including interim periods within that reporting period. Early adoption is permitted and the update allows for a modified retrospective method of adoption. The Company is currently evaluating the potential effect that adopting this guidance will have on its condensed consolidated financial statements.

3. Business combinations

Publica LLC

On August 9, 2021, a wholly-owned subsidiary of the Company acquired, directly or indirectly, all the membership units and membership interests of Publica LLC ("Publica"). The purchase price related to this acquisition was $171,366 in cash and 2,888,889 shares of common stock of the Company, valued at $49,631. The acquisition was financed with proceeds received from the Company's IPO.

The Publica acquisition was accounted for in accordance with ASC 805, using the acquisition method of accounting. The assets and liabilities of Publica, including identifiable intangible assets, have been measured at their fair value primarily using Level 3 inputs. Determining the fair value of the assets acquired and liabilities assumed requires judgement and involved the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, assets useful lives, market multiples, and other items. The use of different estimates and judgements could yield materially different results.

The fair values allocated to the assets acquired are based on management's estimates and assumptions and may be subject to change as additional information becomes available. The fair value of the customer relationship intangible asset acquired was determined using the excess earnings method. The fair value of the trademark and developed technology intangible assets acquired were determined using the relief from royalty method.

The excess of the purchase price, over the fair value of net assets acquired, including the amount assigned to the identifiable intangible assets, has been recorded to goodwill. The resulting goodwill has been allocated to the Company's single reporting unit. $57,972 of goodwill will be deductible for tax purposes.

The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows:


	Fair Value		Useful Life
Assets acquired:
Cash and cash equivalents	$	4,482
Accounts receivable	2,391
Property, plant and equipment	46
Prepaid expenses	188
Security deposits	12
Intangible assets:
Developed technology	15,200		5 years
Trademarks	2,200		5 years
Customer relationships	42,800		6 years
Total intangible assets	60,200
Total identifiable assets acquired	$	67,319
Liabilities assumed:
Accounts payable	$	560
Other current liabilities	2
Deferred tax liability	36,161
Total liabilities assumed	36,723
Goodwill	190,401		Indefinite
Total purchase consideration	$	220,997

Context

On December 31, 2021, a wholly-owned subsidiary of the Company acquired, directly or indirectly, all the common equity of Nobora SAS ("Context"). The Context acquisition builds on the Company's current, market-leading media classification and contextual targeting capabilities. The integration of Context's technology will enable marketing partners to identify brand suitable content beyond standard frameworks and contextually target with granularity. The purchase price related to the Context acquisition was $22,575 in cash, of which $967 is payable on December 31, 2023, and 457,959 shares of common stock of the Company, valued at $10,391.

The Context acquisition was accounted for in accordance with ASC 805, using the acquisition method of accounting. The assets and liabilities of Context, including identifiable intangible assets, have been measured at their fair value primarily using Level 3 inputs. Determining the fair value of the assets acquired and liabilities assumed requires judgement and involved the use of significant estimates and assumptions, including assumptions with respect to discount rates, opportunity costs, and assets useful lives. The use of different estimates and judgments could yield materially different results.

The excess of the purchase price, over the fair value of net assets acquired, including the amount assigned to the identifiable intangible assets, has been recorded to goodwill. The resulting goodwill has been allocated to the Company's single reporting unit, none of which will be deductible for tax purposes.

The allocation of purchase consideration to the assets acquired and liabilities assumed is as follows:


	Fair Value		Useful Life
Assets acquired:
Accounts receivable	$	122
Other assets	112
Developed technology	7,670		5 years
Total identifiable assets acquired	$	7,904
Liabilities assumed:
Accounts payable	$	318
Short-term debt	2,354
Deferred tax liability	142
Total liabilities assumed	2,814
Goodwill	27,876		Indefinite
Total purchase consideration	$	32,966

The Company recognized a deferred tax liability of $142 on its purchase of Context.

4. Property and equipment, net

Property and equipment consisted of the following:


	Estimated useful life (in years)			September 30, 2022		December 31, 2021
Computer and office equipment	1	-	3 years	$	3,888	$	3,100
Computer software	3	-	5 years	218		218
Leasehold improvements	Various			363		412
Furniture	5 years			81		66
Total property and equipment				4,550		3,796
Less: accumulated depreciation				(2,959)		(2,383)
Total property and equipment, net				$	1,591	$	1,413

Depreciation expense of property and equipment for the three months ended September 30, 2022 and 2021 was $234 and $418, respectively. Depreciation expense of property and equipment for the nine months ended September 30, 2022 and 2021 was $669 and $1,378, respectively.

5. Internal use software, net

Internal use software consisted of the following:


	Estimated useful life (in years)			September 30, 2022		December 31, 2021
Internal use software	3	-	5 years	$	43,007	$	32,591
Less: Accumulated amortization				(21,451)		(14,491)
Total internal use software, net				$	21,556	$	18,100

Amortization expense for the three months ended September 30, 2022 and 2021 was $2,453 and $2,086, respectively. Amortization expense for the nine months ended September 30, 2022 and 2021 was $7,000 and $5,793, respectively. For the nine months ended September 30, 2022, the Company impaired $49 of costs related to projects that were no longer being implemented, recorded in general and administrative expenses within the Condensed Consolidated Statements of Operations and Comprehensive Loss.

6. Intangible assets, net

The gross book value, accumulated amortization, net book value and amortization periods of the intangible assets were as follows:


	September 30, 2022
	Estimated useful life			Gross book value		Accumulated amortization		Net book value		Weighted average remaining useful life
Customer relationships	5	-	15 years	$	301,853	$	(104,902)	$	196,951	9.7 years
Developed technology	4	-	5 years	136,462		(116,888)		19,574		3.7 years
Trademarks	5	-	9 years	19,700		(9,362)		10,338		4.6 years
Favorable leases	6 years			198		(139)		59		1.8 years
Total				$	458,213	$	(231,291)	$	226,922

	December 31, 2021
	Estimated useful life			Gross book value		Accumulated amortization		Net book value		Weighted average remaining useful life
Customer relationships	5	-	15 years	$	302,026	$	(82,105)	$	219,921	10.4 years
Developed technology	4	-	5 years	138,342		(112,347)		25,995		4.5 years
Trademarks	5	-	9 years	19,700		(7,384)		12,316		5.4 years
Favorable leases	6 years			198		(114)		84		2.5 years
Total				$	460,266	$	(201,950)	$	258,316

Amortization expense related to intangibles for the three months ended September 30, 2022 and 2021 was $9,930 and $13,596, respectively. Amortization expense related to intangibles for the nine months ended September 30, 2022 and 2021 was $29,916 and $37,927, respectively.

7. Goodwill

The following table provides a roll forward of the changes in the goodwill balance:



Goodwill as of December 31, 2021	$	676,513
Measurement period adjustments	(231)
Impact of exchange rates	(5,304)
Goodwill as of September 30, 2022	$	670,978

8. Accounts payable and accrued expenses

Accounts payable and accrued expenses consisted of the following:


	September 30, 2022		December 31, 2021
Accounts payable	$	9,065	$	8,307
Accrued payroll	6,807		5,047
Accrued professional fees	2,701		2,334
Accrued bonuses and commissions	12,663		16,454
Accrued revenue sharing	3,883		8,497
Taxes payable	2,056		6,076
Short term debt	—		1,976
Accrued hosting fees	3,138		2,465
Cease use liability (short-term)	—		1,298
Other accrued expenses	3,698		3,803
Total accounts payable and accrued expenses	$	44,011	$	56,257

Other long-term liabilities consisted of the following:


	September 30, 2022		December 31, 2021
Purchase price payable for the acquisition of Context	$	967	$	2,320
Cease use liability (long-term)	—		5,689
Security deposit received	672		672
Total other long-term liabilities	$	1,639	$	8,681

9. Long-term debt

New Credit Agreement

On September 29, 2021, the Company entered into a new credit agreement with various lenders (the “New Credit Agreement” or the “New Revolver”), that provides for an initial $300,000 in commitments for revolving credit loans, which amount may be increased or decreased under specific circumstances, with a $30,000 letter of credit sublimit and a $100,000 alternative currency sublimit. In addition, the New Credit Agreement provides for the ability to request incremental term loan facilities, in a minimum amount of $5,000 for each facility. Borrowings pursuant to the New Credit Agreement may be used for working capital and other general corporate purposes, including for acquisitions permitted under the New Credit Agreement. The Company drew down $235,000 on the New Revolver on September 29, 2021 and an additional $10,000 on December 23, 2021. On June 27, 2022, the Company paid down $10,000. During the three months ended September 30, 2022, the Company drew and paid down $15,000 under the New Revolver.

Borrowings under the New Credit Agreement are scheduled to mature on September 29, 2026. The New Credit Agreement contains certain customary events of default including failure to make payments when due thereunder, and failure to observe or perform certain covenants.

The proceeds of the New Revolver, together with cash on hand, were used to repay the outstanding balance of the term loan and revolving loan under the Company's prior Credit Agreement. In connection with the New Revolver, the Company incurred costs of $2,318 that are included in Long-term debt, net, in the Condensed Consolidated Balance Sheets. In connection with the extinguishment of the term loan and revolving loan under the prior Credit Agreement, the Company wrote off deferred financing costs of $3,721 as a loss on extinguishment.

The interest rates for the New Revolver under the New Credit Agreement for U.S. dollar loans are equal to (i) the applicable rate for base rate loans range from 0.75% to 1.50% per annum, (ii) for LIBO Rate (as defined in the New Credit Agreement) loans range from 1.75% to 2.50% per annum, (iii) for RFR Loans (as defined in the New Credit Agreement) denominated in sterling range from 1.7826% to 2.5326%, and (iv) for RFR Loans denominated in euro range from 1.7965% to 2.5456%, in each case, based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement). Base rate borrowings may only be made in dollars. The Company is required to pay a commitment fee during the term of the New Credit Agreement ranging from 0.20% to 0.35% per annum of the average daily undrawn portion of the revolving commitments based on the Senior Secured Net Leverage Ratio. The interest rate on September 30, 2022 was 4.6%.

Any borrowings under the New Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty other than customary breakage costs, and any amounts repaid may be reborrowed. No mandatory prepayments will be required other than when borrowings and letter of credit usage exceed the aggregate commitment of all lenders.

The New Credit Agreement contains covenants requiring certain financial information to be submitted quarterly and annually. In addition, the Company is also required to comply with certain financial covenants such as maintaining a Net Leverage Ratio (as defined in the New Credit Agreement) of 3.50 to 1.00 or lower and maintaining a minimum Interest Coverage Ratio (as defined in the New Credit Agreement) of 2.50 to 1.00. As of September 30, 2022, the Company was in compliance with all covenants contained in the New Credit Agreement.


	September 30, 2022		December 31, 2021
New Revolver	$	235,000	$	245,000
Less: Unamortized debt issuance costs	(1,854)		(2,202)
Total carrying amount	$	233,146	$	242,798

Amortization of debt issuance costs for the three months ended September 30, 2022 and 2021 were $116 and $337, respectively. Amortization of debt issuance costs for the nine months ended September 30, 2022 and 2021 were $348 and $1,020, respectively. Amortization of debt issuance costs is recorded to interest expense, net on the Company's Condensed Consolidated Statements of Operations and Comprehensive Loss.

The Company recognized interest expense of $2,592 and $5,417 during the three months ended September 30, 2022 and 2021, respectively. The Company recognized interest expense of $5,615 and $16,464 during the nine months ended September 30, 2022 and 2021, respectively.

Future principal payments of long-term debt as of September 30, 2022 are as follows:


Year Ending
2022 (remaining three months)	$	—
2023	—
2024	—
2025	—
2026	235,000
	$	235,000

10. Income taxes

At the end of each interim period, the Company estimates the annual expected effective income tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax provision or benefit related to significant, unusual, or extraordinary items, if applicable, that will be separately reported or reported net of their related tax effects are individually computed and recognized in the interim period in which they occur. In addition, the effect of changes in enacted tax laws or rates, tax status, judgment on the realizability of a beginning-of-the-year deferred tax asset in future years or unrecognized tax benefits is recognized in the interim period in which the change occurs.

The computation of the annual expected effective income tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year, projections of the proportion of income (and/or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of the realization of deferred tax assets generated in the current year. The accounting estimates used to compute the provision or benefit for income taxes may change as new events occur, more experience is acquired, additional information is obtained or the Company’s tax environment changes. To the extent that the expected annual effective income tax rate changes during a quarter, the effect of the change on prior quarters is included in income tax provision in the quarter in which the change occurs.

For the three months ended September 30, 2022 and 2021, the Company recorded an income tax provision of $1,287 and an income tax benefit of $898, respectively. The Company’s effective tax rate for the three months ended September 30, 2022 and 2021 was 62.7% and (8.4%), respectively. The Company's effective tax rate for the three months ended September 30, 2022 differs from the statutory rate for the three months ended September 30, 2021 effective tax rate, primarily due to non-deductible executive compensation as the Company became subject to the provisions of Section 162(m) of the Internal Revenue Code as a result of becoming a public company, other permanent tax differences and discrete items.

For the nine months ended September 30, 2022 and 2021, the Company recorded an income tax provision of $5,083 and an income tax benefit of $4,855, respectively. The Company’s effective tax rate for the nine months ended September 30, 2022 and 2021 was 56.7% and (9.3%), respectively. The Company's effective tax rate for the nine months ended September 30, 2022 differs from the statutory rate for the nine months ended September 30, 2021 effective tax rate, primarily due to non-deductible executive compensation as the Company became subject to the provisions of Section 162(m) of the Internal Revenue Code as a result of becoming a public company, other permanent tax differences and discrete items.

The Company recognizes interest and, if applicable, penalties related to unrecognized tax benefits in the income tax provision. The Company is not currently under audit in any taxing jurisdiction.

11. Segment data

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), in deciding how to allocate resources and in assessing performance. The Company’s Chief Executive Officer is the CODM.

The Company manages its operations as a single segment for the purpose of assessing and making operating decisions. The Company’s CODM allocates resources and assesses performance based upon financial information at the consolidated level. Since the Company operates in one operating segment, all required financial segment information can be found in the condensed consolidated financial statements.

The following table summarizes revenue by geographic area:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
North and South America (“Americas”)	$	69,786	$	50,286	$	199,078	$	136,919
Europe, Middle East and Africa (“EMEA”)	23,110		20,222		68,368		61,185
Asia and Pacific Rim (“APAC”)	8,447		8,506		23,467		22,937
Total	$	101,343	$	79,014	$	290,913	$	221,041

For the three months ended September 30, 2022 and 2021, revenue in the U.S. was $65,725 and $46,156, respectively. For the nine months ended September 30, 2022 and 2021, revenue in the U.S. was $188,193 and $126,226, respectively.

The following table summarizes long lived assets (including property and equipment, net and operating right-of-use assets, net) by geographic area:


	September 30, 2022		December 31, 2021
Long lived assets
Americas	$	17,252	$	876
EMEA	327		181
APAC	3,043		356
Total	$	20,622	$	1,413

12. Stock-based compensation

Integral Ad Science Holding Corp. Amended and Restated 2018 Stock Option Plan

On August 1, 2018, the Company adopted the 2018 Non-Qualified Stock Option Plan (“2018 Plan”). Under the 2018 Plan, the Company had issued (i) Time-Based Options that vest over four years with 25% vesting after twelve months and an additional 6.25% vesting at the end of each successive quarter thereafter; and (ii) Return-Target Options that vest upon the first to occur of sale of the Company, or, sale or transfer to any third party of shares, as a result of which, any person or group other than Vista, obtains possession of voting power to elect a majority of the Company’s board of directors or any other governing body and the achievement of a total equity return multiple of 3.0 or greater.

The 2018 Plan contained a provision wherein, the Time-Based Options can be repurchased by the Company at cost upon resignation of the employee. Due to this repurchase feature, the Time-Based Options did not automatically provide the employee with the potential benefits associated with a stock award holder, and therefore, these awards were not accounted for as a stock-based award under ASC 718, Compensation - Stock Compensation but instead, compensation cost was recognized when the benefit to the employee was determined to be probable.

The Return-Target Options were considered to contain both market (total stockholder return threshold) and performance (exit event) conditions. As such, the award was measured on the date of grant. Since the conditions for vesting related to the Return-Target Options were not met prior to the IPO, no stock-based compensation was recognized in the pre-IPO financial statements of the Company.

In connection with the Company’s IPO, the 2018 Plan was amended and restated (“Amended and Restated 2018 Plan”) with the following modifications: (i) the provision to repurchase the Time-Based Options at cost upon resignation of the employee was removed and (ii) the Return-Target Options were modified to include vesting upon a sale of shares by Vista following the IPO resulting in Vista realizing a cash return on its investment in the Company equaling or exceeding $1.17 billion.

As a result of the modification to the Time-Based Options, the awards became subject to the guidance in ASC 718, Compensation - Stock Compensation. During the three and nine months ended September 30, 2022, the Company recognized stock compensation expense of $3,234 and $10,970, respectively, related to the Time-Based Options. During the three and nine months ended September 30, 2021, the Company recognized stock compensation expense of $4,595 and $42,742, respectively, related to the Time-Based Options.

As the return multiple and vesting conditions associated with the Return-Target Options were also modified, the Company fair valued the Return-Target Options using a Monte Carlo simulation model. The Return-Target Options become exercisable following both (i) a registration of shares of common stock held by Vista and (ii) Vista realizing a cash return on its investment in the Company equaling or exceeding $1.17 billion. As of September 30, 2022, the condition relating to Vista's cash return was not deemed probable and therefore, no stock-based compensation expense relating to the Return-Target Options was recognized during the three month period ended September 30, 2022.

Vesting of the Time-Based Options accelerate when the Return-Target Options vest and therefore, recognition of the remaining unamortized stock compensation expense related to the Time-Based Options will accelerate when it becomes probable that the Return-Target Options would vest.

The total number of Time-Based Options and Return Target Options outstanding under the Amended and Restated 2018 Plan as of September 30, 2022 were 3,464,146 and 1,759,104, respectively. The Company does not expect to issue any additional awards under the Amended and Restated 2018 Plan.

2021 Omnibus Incentive Plan (“2021 Plan”)

On June 29, 2021, the Company adopted the 2021 Plan to incentivize executive officers, management, employees, consultants and directors of the Company and to align the interests of the participants with those of the Company’s shareholders. As of September 30, 2022, there were 27,421,802 shares reserved for issuance under the 2021 Plan and the total number of shares reserved for issuance under the 2021 Plan will be increased on January 1 of each of the first 10 calendar years during the term of the 2021 Plan, by the lesser of (i) 5% of the total number of shares of common stock outstanding on each December 31 immediately prior to the date of increase or (ii) such number of shares of common stock determined by our Board or compensation committee.

During the three and nine months ended September 30, 2022, the Company recognized stock compensation expense of $672 and $2,417 respectively related to stock options. During the three and nine months ended September 30, 2021, the Company recognized stock compensation expense of $887 related to stock options. As of September 30, 2022, there are 1,525,398 total options outstanding under the 2021 Plan, consisting of 1,021,111 Time-Based Options and 504,287 Return-Target Options. The vesting conditions for the options issued under the 2021 Plan are identical to those described under the Amended and Restated 2018 Plan.

Stock option activity for the three months ended September 30, 2022 is as follows:

Time-Based Options


	Stock options	Weighted average exercise price		Weighted average remaining contractual life (years)	Aggregate intrinsic value
Outstanding at July 1, 2022	5,636,565	$	8.06	7.51	20,889
Granted	—	—		—	—
Canceled or forfeited	(547,638)	11.32		—	—
Exercised	(603,670)	4.19		—	—
Outstanding at September 30, 2022	4,485,257	$	8.18	6.85	$	8,119
Vested and expected to vest at September 30, 2022	4,485,257	$	8.18	6.85	$	8,119
Exercisable as of September 30, 2022	3,004,243	$	6.47	6.29	$	6,847

Return-Target Options


	Stock options	Weighted average exercise price		Weighted average remaining contractual life (years)	Aggregate intrinsic value
Outstanding at July 1, 2022	2,898,674	$	7.95	7.50	10,892
Granted	—	—		—	—
Canceled or forfeited	(745,410)	7.73		—	—
Exercised	—	—		—	—
Outstanding at September 30, 2022	2,153,264	$	8.03	7.22	$	4,047
Vested and expected to vest at September 30, 2022	2,153,264	$	8.03	7.22	$	4,047
Exercisable as of September 30, 2022	—	—		—	—

Stock option activity for the nine months ended September 30, 2022 is as follows:

Time-Based Options


	Stock options	Weighted average exercise price		Weighted average remaining contractual life (years)	Aggregate intrinsic value
Outstanding at January 1, 2022	6,648,975	$	7.46	7.76	98,055
Granted	—	—		—	—
Canceled or forfeited	(749,052)	9.38		—	—
Exercised	(1,414,666)	4.18		—	—
Outstanding at September 30, 2022	4,485,257	$	8.18	6.85	$	8,119
Vested and expected to vest at September 30, 2022	4,485,257	$	8.18	6.85	$	8,119
Exercisable as of September 30, 2022	3,004,243	$	6.47	6.29	$	6,847

Return-Target Options


	Stock options	Weighted average exercise price		Weighted average remaining contractual life (years)	Aggregate intrinsic value
Outstanding at January 1, 2022	3,265,126	$	7.53	7.27	47,947
Granted	—	—		—	—
Canceled or forfeited	(1,111,862)	6.54		—	—
Exercised	—	—		—	—
Outstanding at September 30, 2022	2,153,264	$	8.03	7.22	$	4,047
Vested and expected to vest at September 30, 2022	2,153,264	$	8.03	7.22	$	4,047
Exercisable as of September 30, 2022	—	—		—	—

As of September 30, 2022, unamortized stock-based compensation expense related to the Time-Based Options was $15,845, which will be recognized over the weighted average vesting term of 2.1 years. In addition, unamortized stock-based compensation expense related to the Return-Target Options of $26,108 will be recognized when events that trigger vesting are deemed probable.

Restricted Stock Units ("RSUs")

The majority of RSUs under the 2021 Plan vest 25% each year and become fully vested after four years of service. Beginning in May 2022, RSUs will begin to vest 6.25% at the end of each successive quarter and become fully vested after four years of service.

RSU activity for the three months ended September 30, 2022 is as follows:


	RSUs
	Number of Shares	Weighted Average Grant Date Fair Value
Outstanding as of July 1, 2022	7,365,070	$	13.85
Granted	1,369,772	8.44
Canceled or forfeited	(176,180)	13.63
Vested	(471,995)	15.54
Outstanding as of September 30, 2022	8,086,667	$	12.83
Expected to vest as of September 30, 2022	8,086,667

RSU activity for the nine months ended September 30, 2022 is as follows:


	RSUs
	Number of Shares	Weighted Average Grant Date Fair Value
Outstanding as of January 1, 2022	2,426,147	$	19.43
Granted	6,949,384	11.13
Canceled or forfeited	(527,656)	15.94
Vested	(761,208)	16.35
Outstanding as of September 30, 2022	8,086,667	$	12.83
Expected to vest as of September 30, 2022	8,086,667

During the three and nine months ended September 30, 2022, the Company recognized $7,552 and $16,524, respectively, of stock-based compensation expense related to these RSU awards. During the three and nine months ended September 30, 2021, the Company recognized $2,652 of stock-based compensation expense related to these RSU awards. Unamortized stock-based compensation expense related to RSUs as of September 30, 2022 was $93,458, which will be recognized over the weighted average vesting term of 3.4 years.

Performance Stock Units

The Company granted Performance Stock Units under the 2021 Plan, which are contingent upon achieving specified revenue performance goals by December 31, 2023. As of September 30, 2022, no stock-based compensation expense has been recognized as performance vesting conditions were not deemed probable to occur. The unrecognized compensation expense is $12,000 assuming performance at the highest tier.

Market Stock Units

The Company granted market stock units ("MSUs") under the 2021 Plan to certain executive officers. MSUs vest over four years, 25% on May 2, 2023 and 6.25% at the end of each quarter thereafter. The number of MSUs eligible to vest is based on the performance of the Company's common stock over each vesting period. The number of shares eligible to vest is calculated based on a payout factor. The payout factor is calculated by dividing the average closing price of the Company's stock during the ten trading days immediately preceding the applicable vesting date by the closing price of the Company's stock on April 29, 2022. The payout factor is zero if the quotient is less than 0.60 and is capped at 2.25. This quotient is then multiplied by the target number of MSUs granted to the relevant officer to determine the number of shares to be issued to the officer at vesting. The grant date fair value of the MSUs was determined using a Monte-Carlo simulation. The Company uses the accelerated attribution method to account for these awards.

MSU activity for the three and nine months ended September 30, 2022 is as follows:


	MSUs
	Number of Shares	Weighted Average Grant Date Fair Value
Outstanding as of January 1, 2022	—	$	—
Granted	1,261,413	14.43
Canceled or forfeited	(86,674)	14.43
Vested	—	—
Outstanding as of September 30, 2022	1,174,739	$	14.43
Expected to vest as of September 30, 2022	1,174,739

All outstanding MSU awards were granted in three months ended June 30, 2022. Forfeitures of MSU awards occurred during the three and nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, the Company recognized stock-based compensation expense of $2,657 and $3,065, respectively related to the MSU awards. Unamortized stock-based compensation expense related to MSUs was $13,882, which will be recognized over the weighted average vesting term of 3.7 years.

2021 Employee Stock Purchase Plan (“ESPP”)

The Company adopted the ESPP for the primary purpose of incentivizing employees in future periods. As of September 30, 2022, 3,033,556 shares of common stock are reserved for issuance under the ESPP. The number of shares available for issuance under the ESPP will be increased on January 1 of each calendar year, ending in and including 2031, by an amount equal to the lesser of (i) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by our Board, subject to a maximum of 16,000,000 shares of our common stock for the portion of the ESPP intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. All Company employees and employees of designated subsidiaries are eligible to participate in the ESPP and may purchase shares through payroll deductions of up to 15% of their eligible compensation, subject to a maximum of $25,000 in any annual period for the portion of the ESPP intended to qualify as an employee purchase plan under Section 423 of the Internal Revenue Code.

The ESPP provides eligible employees the opportunity to purchase shares of the Company's common stock through payroll deductions at a price equal to 85% of the fair market value of the shares on the first business day of the offering period or the last business day of the offering period, whichever is lower. The six month offering under the ESPP commenced on August 1, 2022. There are no shares issued under the ESPP plan as of September 30, 2022. Stock-based compensation expense recognized in the three and nine months ended September 30, 2022 was $131.

Total stock-based compensation expense for all equity arrangements for the three and nine months ended September 30, 2022 and 2021 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	101	$	48	$	258	$	48
Sales and marketing	4,457		2,419		10,650		13,227
Technology and development	3,168		1,820		6,979		8,829
General and administrative	6,521		3,854		15,220		27,569
Total	$	14,247	$	8,141	$	33,107	$	49,673

13. Members’/ Stockholders’ equity

As discussed in Note 1, the Company converted to a Delaware corporation, which created new elements of the capital structure upon its IPO.

Common stock

As of September 30, 2022, our authorized common stock consists of 500,000,000 shares of common stock, par value $0.001 per share and 50,000,000 preferred stock, par value $0.001 per share.

For the three months ended September 30, 2022, the Company issued 471,995 shares of common stock for vested RSUs and employees exercised stock options in exchange for 603,670 shares of common stock for $2,527. For the nine months ended September 30, 2022, the Company issued 761,208 shares of common stock for vested RSUs and employees exercised stock options in exchange for 1,414,666 shares of common stock for $5,908. During the three and nine months ended September 30, 2022, the Company repurchased 3,080,061 shares of common stock for $23,655.

For the three and nine months ended September 30, 2021, the Company issued and sold 15,000,000 shares of common stock in connection with the closing of its IPO on July 2, 2021 and 1,821,330 shares of common stock in connection with the exercise of the underwriters' option that closed on July 28, 2021. The Company issued 2,888,889 shares of common stock in connection with its acquisition of Publica on August 9, 2021. For the three months ended September 30, 2021, the Company also issued 26,931 shares of common stock for vested RSUs.

Members’ equity

Prior to the IPO, the Company was a single member LLC, and the Company’s Board of Directors, through the Kavacha Topco, LLC Amended and Restated Limited Liability Company Agreement (the “Operating Agreement”), had the authority to admit additional members. Under the terms of the Operating Agreement, the members of the Company were not obligated for debt, liabilities, contracts or other obligations of the Company. Profits and losses are allocated to members as defined in the Operating Agreement.

In conjunction with the pricing of the IPO, the Operating Agreement was terminated, and the Company converted from a Delaware domestic limited liability company to a Delaware domestic corporation. All outstanding member units were converted into 134,203,403 shares of common stock of the Company on a proportion of 1 member unit for 242 shares of common stock.

For the nine months ended September 30, 2021, the Company repurchased 99,946 units from members of the Company for $1,204. The repurchases in excess of par value for the nine months ended September 30, 2021 was $791. The repurchase of units has been accounted for as a reduction in members’/shareholders’ equity in these condensed consolidated financial statements. The Company also issued 17,486 units for vested unit awards. In addition, employees exercised 246,369 options for $4,435.

14. Leases

Determination of a leasing arrangement is performed at inception. Right-of-use assets represent the Company's right to use leased assets over the term of the lease, adjusted for lease incentives such as tenant improvements. Lease liabilities represent the Company's contractual obligation to make lease payments over the lease term. Right-of-use assets and lease liabilities are determined based on the present value of future lease payments using the interest rate implicit in the loan or, if that rate cannot be readily determined, the incremental borrowing rate. Incremental borrowing rates were determined for each lease based on the Company's borrowing rate adjusted for term differences and foreign currency risk.

Some real estate leases contain lease and non-lease components. Non-lease components generally represent use-based charges for common area maintenance, taxes and utilities. The Company has elected not to separate lease and non-lease components. Variable lease payments consist primarily of common area maintenance, utilities and taxes, which are not included in the recognition of ROU assets and related lease liabilities. Some contracts also contain lease incentives such as tenant improvement allowances and rent holidays, which are treated as a reduction of lease payments for the measurement of the lease liability.

The Company leases office spaces under non-cancelable lease terms, and have a remaining lease term of up to 4.4 years, with a number of month-to-month leases that are accounted for as short-term leases. The Company has not recognized renewal options as part of its right-of-use assets and lease liabilities, as the renewal options are not reasonably certain of exercise or occurrence as of September 30, 2022. Additionally, these lease arrangements do not contain residual value guarantees, and there are no other restrictions or covenants in the contracts.

The weighted-average remaining term of the Company's operating leases was 3.9 years as of September 30, 2022. The weighted-average discount rate used to measure the present value of the operating lease liabilities was 4.7% as of September 30, 2022.

The following table presents components of lease cost recorded in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022.


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Lease costs:
Operating lease costs	$	1,756	$	5,294
Short-term lease costs	838		2,524
Variable lease costs	62		241
Sublease income	(656)		(1,968)
Total lease costs	$	2,000	$	6,091

For the nine months ended September 30, 2022, operating cash flows included $5,665 of cash paid for operating lease liabilities and $672 received from the sublease. As of September 30, 2022, there are no material operating leases that have not yet commenced.

As of September 30, 2022, the maturities of remaining lease payments included in the measurement of operating leases are as follows:


Year Ended December 31,
2022 (remaining three months)	$	2,015
2023	7,761
2024	6,286
2025	6,377
2026	5,142
Thereafter	1,149
Total lease payments	28,730
Less: imputed interest	(2,516)
Total operating lease liability	$	26,214

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the following table summarizes operating leases as of December 31, 2021 under ASC 840.


Year Ended December 31,	Minimum lease payments		Sublease income
2022	$	6,957	$	1,569
2023	6,276		2,756
2024	6,345		2,825
2025	6,467		2,896
2026	5,157		2,968
2027 and thereafter	1,149		761
	$	32,351	$	13,775

15. Commitments and contingencies

Indemnifications

In its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. Those indemnities include intellectual property indemnities to the Company’s customers, indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware, and indemnifications related to the Company’s lease agreements. In addition, the Company’s advertiser and distribution partner agreements contain certain indemnification provisions which are generally consistent with those prevalent in the Company’s industry. The Company has not incurred any obligations under indemnification provisions historically and does not expect to incur significant obligations in the future. Accordingly, the Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying balance sheets.

Purchase commitments

In the ordinary course of business, the Company enters into various purchase commitments primarily related to third-party cloud hosting and data services, and information technology operations. Total non-cancelable purchase commitments as of September 30, 2022 were approximately $110,488 for periods through 2026.

16. Net income (loss) per share

For periods prior to the Company’s conversion to a Delaware corporation, including fiscal 2021 for which a portion of the period preceded the conversion, the Company has retrospectively presented net income (loss) per share as if the conversion had occurred at the beginning of the earliest period presented. The weighted average shares used in computing net income (loss) per share in these periods are based on the number of units held by members after giving effect to the conversion ratio.

Basic and diluted income (loss) per share is computed by dividing net income (loss) by the weighted-average shares outstanding:


	Three months ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net income (loss)	$	767	$	(9,780)	$	3,887	$	(47,615)
Denominator:
Basic Shares:
Weighted-average shares outstanding	155,389,195		151,988,054		155,007,655		140,016,260
Diluted Shares:
Basic weighted-average shares outstanding	155,389,195		151,988,054		155,007,655		140,016,260
Dilutive effect of stock based awards	1,307,559		—		2,573,914		—
Weighted-average diluted shares outstanding	156,696,754		151,988,054		157,581,569		140,016,260
Net income (loss) per share
Basic	$	0.00	$	(0.06)	$	0.03	$	(0.34)
Diluted	$	0.00	$	(0.06)	$	0.02	$	(0.34)

The following potentially dilutive securities were excluded from the computation of diluted net income (loss) per share attributable to common stock/unit-holders for the periods presented given that their inclusion would have been anti-dilutive. Since the conditions associated with the vesting of the Return-Target Options have not occurred as of the reporting date, such options are excluded from potentially anti-dilutive securities.


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Options to purchase common stock	5,169,703	6,676,630	4,493,135	6,676,630
RSUs	6,964,588	2,237,050	2,086,980	2,237,050
MSUs	793,212	—	284,942	—
Total	12,928,267	8,913,680	6,865,197	8,913,680

17. Fair value disclosures

Financial instruments

The carrying value of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximated fair value due to their short maturities. The carrying value of long-term debt approximates its fair value based on Level 2 inputs as the principal amounts outstanding are subject to variable interest rates that are based on market rates (see Note 9).

18. Related-party transactions

The Company incurs expenses for consulting services and other expenses related to services provided by Vista Consulting Group, LLC (“VCG”). For the three months ended September 30, 2022 and 2021, the Company incurred expenses of $18 and $20, respectively. For the nine months ended September 30, 2022 and 2021, the Company incurred expenses of $82 and $153, respectively. These costs were included in general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Amounts due to VCG as of September 30, 2022 and December 31, 2021 were $21 and $0, respectively. In addition, amounts due from VCG as of September 30, 2022 and December 31, 2021 were $25 and $0, respectively.

The Company incurs various travel and other expenses related to services provided by Vista Equity Partners Management, LLC (“VEP”). For the three months ended September 30, 2022 and 2021, the Company incurred expenses of $19 and $22, respectively. For the nine months ended September 30, 2022 and 2021, the Company incurred expenses of $56 and $23, respectively. These costs were included in general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Amounts due to VEP as of September 30, 2022 and December 31, 2021 were $18 and $0, respectively.

The Company had other related party transactions with companies owned by Vista Equity Partners that are immaterial individually and in aggregate to the Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Operations.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results or our plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

•geopolitical, economic and market conditions, including heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain and any disruptions in European economies as a result of the conflict in Ukraine;

•the adverse effect on our business, operating results, financial condition, and prospects from the ongoing COVID-19 pandemic;

•our dependence on the overall demand for advertising;

•a failure to innovate or make the right investment decisions;

•our failure to maintain or achieve industry accreditation standards;

•our ability to compete successfully with our current or future competitors in an intensely competitive market;

•our dependence on integrations with advertising platforms, digital service providers (“DSPs”), and proprietary platforms that we do not control;

•our international expansion;

•our ability to expand into new channels;

•our ability to sustain our profitability and revenue growth rate decline;

•risks that our customers do not pay or choose to dispute their invoices;

•risks of material changes to revenue share agreements with certain DSPs;

•our ability to effectively manage our growth;

•the impact that any acquisitions we have completed in the past and may consummate in the future, strategic investments, or alliances may have on our business, financial condition, and results of operations;

•our ability to successfully execute our international plans;

•the risks associated with the seasonality of our market;

•our ability to maintain high impression volumes;

•the difficulty in evaluating our future prospects given our short operating history;

•uncertainty in how the market for buying digital advertising verification solutions will evolve;

•our ability to provide digital or cross-platform analytics;

•our ability to maintain our corporate culture;

•risks posed by earthquakes, fires, floods, and other natural catastrophic events;

•interruption by man-made problems such as terrorism, computer viruses or social disruption;

•the risk of failures in the systems and infrastructure supporting our solutions and operations;

•our ability to avoid operational, technical, and performance issues with our platform;

•risks associated with any unauthorized access to user, customer, or inventory and third-party provider data;

•our inability to use software licensed from third parties;

•our ability to provide the non-proprietary technology, software, products, and services that we use;

•the risk of being sued by third parties for alleged infringement, misappropriation, or other violation of their proprietary rights;

•our ability to obtain, maintain, protect, or enforce intellectual property and proprietary rights that are important to our business;

•our involvement in lawsuits to protect or enforce our intellectual property;

•risks that our employees, consultants, or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers;

•risks that our trademarks and trade names are not adequately protected;

•the impact of unforeseen changes to privacy and data protection laws and regulation on digital advertising;

•the risk that a perceived failure to comply with laws and industry self-regulation may damage our reputation; and

•other factors disclosed in the section entitled “Risk Factors” and elsewhere in our Annual Report on Form 10-K and this Quarterly Report.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, as well as in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Quarterly Report in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in the section titled "Forward-Looking Statement" included in this Quarterly Report on Form 10-Q and the sections titled “Risk Factors” and "Forward-Looking Statements" included in our Annual Report on Form 10-K for the year ended December 31, 2021. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Our historical results are not necessarily indicative of the results that may be expected for any period in the future, and our interim results are not necessarily indicative of the results we expect for the full fiscal year or any other period. Unless the context otherwise requires, the terms “Company,” “Integral Ad Science Holding Corp.,” “IAS,” “we,” “us,” “our,” or similar terms refer to Integral Ad Science Holding LLC and its consolidated subsidiaries before the corporate conversion, and Integral Ad Science Holding Corp. and, where appropriate, its subsidiaries after the Corporate Conversion.

Overview

We are a leading digital media quality company by revenue. With our cloud-based technology platform and the actionable insights it provides, we deliver independent measurement and verification of digital advertising across all devices, channels, and formats, including desktop, mobile, connected TV (“CTV”), social, display, and video. Our proprietary and Media Rating Council (the “MRC”) accredited Quality Impressions® metric is designed to verify that digital ads are served to a real person rather than a bot, viewable on-screen, and appear in a brand-safe and suitable environment in the correct geography.

Without an independent evaluation of digital advertising quality, brands and their agencies previously relied on a wide range of publishers and ad platforms to self-report and measure the effectiveness of campaigns without a global benchmark to understand success. We are an independent, trusted partner for buyers and sellers of digital advertising to increase accountability, transparency, and effectiveness in the market. We help advertisers optimize their ad spend and better measure consumer engagement with campaigns across platforms, while enabling publishers to improve their inventory yield and revenue.

As a leading media quality partner, we have deep integrations with all the major advertising and technology platforms including Amazon, Facebook, Google, Instagram, LinkedIn, Microsoft, Pinterest, Snap, Spotify, TikTok, The Trade Desk, Twitter, Xandr, Yahoo, and YouTube. Our platform uses advanced artificial intelligence (“AI”) and machine learning (“ML”) technologies to process over 100 billion daily web transactions on average. With this data, we deliver real-time insights and analytics to our global customers through our easy-to-use reporting platform, IAS Signal™, helping brands, agencies, publishers, and platform partners improve media quality and campaign performance.

Our pre-bid and post-bid verification solutions enable advertisers to measure campaign performance and value across viewability, ad fraud prevention, brand safety and suitability, and contextual targeting for ads on desktop, mobile in-app, social, and CTV platforms. Our pre-bid programmatic solution is directly integrated with DSPs to help optimize return on ad spend (“ROAS”) by directing advertising budgets to the best available inventory. With our Context Control solution, advertisers can leverage more than 300 contextual segments from the Company on a pre-bid basis to avoid undesirable content or target towards content that is more suitable for their campaigns. Additionally, our Total Visibility® offering provides marketers with actionable insights to optimize their campaign spend and drive higher yield by focusing on the most efficient and cost effective pathways. Our solutions help hundreds of publishers globally deliver high quality ad inventory that is fraud free, viewable, brand safe and suitable, and geographically targeted.

Macroeconomic and Geopolitical Conditions

Current adverse macroeconomic and geopolitical conditions, including the conflict in Ukraine, heightened inflation, slower growth or recession, changes to fiscal and monetary policy, higher interest rates, currency fluctuations, challenges in the supply chain and the ongoing effects of the COVID-19 pandemic may adversely affect our results. In response to heightened levels of inflation in 2022, central banks, including the U.S. Federal Reserve and the European Central Bank, have increased interest rates. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. The U.S. dollar may continue to strengthen against these foreign currencies if the Federal Reserve further raises the federal funds rate, which may result in downstream impacts to global exchange rates and further adverse impacts to our reported results.

Our business depends on the overall demand for advertising and on the economic health of advertisers that benefit from our platform. Economic downturns or unstable market conditions cause advertisers to decrease their advertising budgets, which in turn reduces spend though our platform.

Throughout the COVID-19 pandemic, we have had sufficient liquidity and capital resources to continue to meet our operating needs and service our debt. However, if macroeconomic conditions deteriorate or there are unforeseen developments with respect to the current COVID-19 pandemic our results of operations may be adversely affected.

Our Business Model

We generate revenue based on the volume of purchased digital ads that our solution measures. Advertisers use our digital marketing solutions for ad viewability, brand safety, optimization, context control, and ad fraud prevention. Advertisers pay us based on the total volume of impressions, which is our primary contracting model. Certain contracts with advertisers have pricing with a minimum commitment and/or fixed fee, plus overage, based on a predetermined number of impressions. We maintain an expansive set of integrations across the digital advertising ecosystem, including with leading programmatic and social platforms, which enables us to cover all key channels, formats and devices. We generate revenue from sell-side customers from contracts that are generally for twelve-month terms (with an auto renewal provision), and a fixed fee each month (tied to a total number of impressions), and an overage cost per thousand impressions ("CPM") that is applied when impressions exceed the impression threshold for a particular tier.

Key Factors Affecting Our Performance

Our historical financial performance has been, and we expect our financial performance in the future to be, driven by our ability to:

Innovate and Develop New Products for Key High-Growth Segments

•Programmatic. We aim to deliver transparency to programmatic ad buying via innovative solutions including contextual targeting and brand safety and suitability.

•Social. We plan to develop deeper integrations with social platforms, also known as Walled Gardens, including feed-based brand safety and suitability, to be able to deliver continued transparency to our customers.

•Connected TV. We plan to continue to expand CTV-specific verification solutions and contextual capabilities to address the fast-growing CTV segment.

•Adjacent product expansion. We aim to expand our platforms to address new areas of verification and measurement needs for our clients.

For example, with the introduction of our pre-bid contextual capability in 2020, we not only enhanced our core verification offering, but we were also able to expand into contextual targeting addressing new needs and providing new value to our customers. Similarly, in 2019, our CTV solution expanded our presence into this important and emerging digital channel. In 2021, we acquired Publica LLC, a leading CTV ad platform and launched our brand safety solution for in-feed video ads on TikTok.

Increase Sales Within Our Existing Customer Base

We aim to increase the use of our products among existing customers across more campaigns and impressions. Given our comprehensive product portfolio, we believe we can cross-sell additional or new solutions to provide end-to-end coverage to more clients from pre-bid viewability to post-buy verification, fraud prevention, safety, suitability, and targeting.

Acquire New Customers and Increase Market Share

Our ability to acquire new customers and increase our market share is dependent upon a number of factors, including the effectiveness of our solutions, marketing and sales to drive new business prospects and execution, client digital marketing investment adoption, new products and feature offerings, global reach and the growth of the market for digital ad verification. There is a market opportunity to provide advertisers directly or through advertising agencies with verification services, specifically around ad viewability, ad fraud prevention and brand safety and suitability. Based on a March 2021 analysis by Frost & Sullivan, we estimate the global market opportunity for our ad verification solutions to be $9.5 billion and expect it to grow at a 16.2% CAGR from 2021 to 2025. We plan to work with the top 500 global advertisers by targeting high-spend verticals and brands with a natural sensitivity for brand safety, brand suitability, and ROAS needs. We believe we will increase our market share by strengthening our work with the leading social platforms, enhancing our programmatic solutions, deriving benefit from our broad global position, and leveraging our differentiated data science and market-leading contextual capabilities.

Expand Customer Base Internationally

Our ability to expand our customer base internationally is dependent upon a number of factors, including effectively implementing our business processes and go-to-market strategy, our ability to adapt to market or cultural differences, the general competitive landscape, macroeconomic conditions, our ability to invest in our sales and marketing channels, the maturity and growth trajectory of our services by region and our brand awareness and perception. Global marketers are becoming increasingly cognizant of the value of sophisticated verification strategies and, as such, we believe there is growing demand for our services internationally. We believe that the Latin America and the APAC regions may represent substantial growth opportunities, and we are investing in developing our business in those markets by way of expanded in-market customer service investment and by leveraging our global relationships. We aim to continue to grow outside the U.S. in Europe and other established markets such as Australia and Japan, and view ourselves as best positioned to continue penetrating these markets given our market-leading global footprint.

Seasonality

We experience fluctuations in revenue that coincide with seasonal fluctuations in the digital ad spending of our customers. The global advertising industry experiences seasonal trends that affect the vast majority of participants in the digital advertising ecosystem. Most notably, advertisers have historically spent relatively more in the fourth quarter of the calendar year to coincide with the holiday shopping season, and relatively less in the first quarter of each calendar year. We expect these seasonality trends to continue, and our ability to manage our resources in anticipation of these trends will affect our operating results. Consequently, the fourth quarter of each calendar year usually reflects the highest level of measurement activity, and the first quarter of each calendar year reflects the lowest level of activity. Our revenue, cash flow, operating results and other key operating and performance metrics may vary from quarter to quarter due to the seasonal nature of our clients’ spending on advertising campaigns and macroeconomic conditions. While our revenue is highly re-occurring, seasonal fluctuations in ad spend may impact quarter-over-quarter results. We believe that the year-over-year comparison of results more appropriately reflects the overall performance of the business.

Key Business Metrics

In addition to our U.S. GAAP financial information, we review a number of operating and financial metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. The key business metrics are presented based on our advertising customers, as revenue from these customers represents substantially all the revenue.

The following table sets forth our key performance indicators for the periods set forth below:


(as of the end of the period)	September 30,
	2022		2021
Net revenue retention of advertising customers (%)	120	%	129	%
Total advertising customers	2,152		2,045
Total number of large advertising customers	184		183

Net revenue retention of advertising customers

We define net revenue retention of advertising customers as a metric to reflect the expansion or contraction of our advertising customers’ revenue by measuring the period-over-period change in trailing-twelve-month revenues from customers who were also advertising customers in the prior trailing-twelve-month period. As such, this metric includes the impact of any churned, or lost, advertising customers from the prior trailing-twelve-month period as well as any increases or decreases in their spend, including the positive revenue impacts of selling new services to an existing advertising customer. The numerator and denominator includes revenue from all advertising customers that we served and from which we recognized revenue in the earlier of the two trailing-twelve-month periods being compared. For purposes of discussing our key business metrics, we define an advertising customer as any advertiser account that spends at least $3,000 in the applicable trailing-twelve-month periods. We calculate our net revenue retention of advertising customers as follows:

Numerator: The total revenue earned during the current trailing-twelve-month period from the cohort of advertising customers in the prior trailing-twelve-month period.

Denominator: The total revenue earned during the immediately preceding trailing-twelve-month period from such cohort of advertising customers in such trailing-twelve-month period.

The quotient obtained from this calculation is our net revenue retention rate of advertising customers.

Our calculation of net revenue retention of advertising customers may differ from similarly titled metrics presented by other companies.

Our net revenue retention of advertising customers decreased from 129% as of September 30, 2021 to 120% as of September 30, 2022. The decrease in the net revenue retention of advertising customers as of September 30, 2021 compared to September 30, 2022 was primarily due lower revenue growth during the trailing-twelve-month period of 25% in 2022 compared to 34% in 2021.

Total advertising customers

We view the number of advertising customers as a key indicator of our scale and growth and the adoption of our platform. We determine our number of advertising customers by counting the total number of advertiser accounts who have spent at least $3,000 in the trailing-twelve-months. The total number of advertising customers has limitations as an operating metric as it does not reflect the product mix chosen by our advertising customers, the order frequency, or the purchasing behavior of our advertising customers. Because of these and other limitations, we consider, and you should consider, total advertising customers in conjunction with our other metrics, including net revenue retention, net income (loss), adjusted EBITDA, and average revenue per advertising customer.

Total number of large advertising customers

Historically, our revenue has been driven primarily by a subset of large advertising customers who have leveraged our platform substantially from a usage standpoint. We determine our total number of large advertising customers by counting the total number of advertising accounts who have spent at least $200,000 in the trailing-twelve-month period. We believe the recruitment and cultivation of large advertising customers contributes to our long-term success. Our total number of large advertising customers increased from 183 as of September 30, 2021 to 184 as of September 30, 2022.

Components of Results of Operations

Revenue

We derive revenue primarily from advertisers and programmatic services offered through a demand side platform to our customers across the digital advertising platform, which is our performance obligation. Fees associated with our contracts include impression-based fees driven by impression volume and a CPM.

We deliver our products and solutions to serve two customer types (i) buy-side (advertisers and agencies) and (ii) sell-side (publishers, advertising/audience networks, and supply side platforms). We generally generate revenue by charging a CPM based on the volume of purchased digital ads that we measure and optimize on behalf of these customers. There are no separate fees to access our platform. Depending on our customer needs, our contracts have (i) usage-based pricing, (ii) monthly, quarterly or annual minimum commitments, or (iii) fixed fees. Usage based pricing is our primary contracting model. For these minimum commitment contracts, if a customer uses fewer impressions than the minimum, there are no discounts or prorating to adjust the minimum fees, and if a customer uses more impressions than the minimum, an overage fee is applied on such usage.

We recognize revenue when control of the promised services is transferred to customers. Revenue from the cloud-based technology platform is primarily recognized based on impressions delivered to customers. An “impression” is delivered when an advertisement appears on pages viewed by users. A significant majority (i.e., over 90%) of the Company’s contracts are usage-based contracts with no substantive minimum commitments. We have certain contracts for which pricing is variable through tiered pricing arrangements or include annual base fees that do not coincide with the calendar year, requiring an estimate of the transaction price attributable to each year. The majority of our contracts have a duration of one year or less.

Operating Expenses

Cost of revenue. Cost of revenue consists of data center costs, hosting fees, revenue share with our DSP partners and personnel costs. Personnel costs include salaries, bonuses, equity-based compensation, and employee benefit costs, primarily attributable to our customer operations group. Our customer operations group is responsible for onboarding, integration of new clients and providing support for existing customers, including technical support for our technology platform and product offering. We allocate overhead such as rent and occupancy and information technology infrastructure charges based on headcount.

Sales and marketing. Sales and marketing expense consists primarily of personnel costs, including salaries, bonuses, equity-based compensation, employee benefits costs and commission costs, for our sales and marketing personnel. Sales and marketing expense also includes costs for advertising, promotional and other marketing activities. We allocate overhead such as rent and occupancy and information technology infrastructure charges based on headcount. Sales commissions are expensed as incurred.

Technology and development. Technology and development expense consists primarily of personnel costs of our engineering, product, and data sciences activities, as well as software licenses. Personnel costs including salaries, bonuses, equity-based compensation and employee benefits costs, third-party consultant costs associated with the ongoing development and maintenance of our technology platform and product offering. We allocate overhead such as rent and occupancy and information technology infrastructure charges based on headcount. Technology and development costs are expensed as incurred, except to the extent that such costs are associated with software development that qualifies for capitalization, which are then recorded as capitalized software development costs included in internal use software, net on our consolidated balance sheet.

General and administrative. General and administrative expense consists of personnel costs, including salaries, bonuses, equity-based compensation, and employee benefits costs for our executive, finance, legal, human resources, information technology, and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, allocated facilities costs, and travel and entertainment primarily related to intra-office travel and conferences.

Depreciation and amortization. Depreciation and amortization expense consists primarily of depreciation and amortization expenses related to customer relationships, developed technologies, trademarks, favorable leases, equipment, leasehold improvements and other tangible and intangible assets. We depreciate and amortize our assets in accordance with our accounting policies. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred. Intangible assets are amortized on a straight-line basis over their estimated useful lives or using an accelerated method. Useful lives of intangible assets range from four years to fifteen years.

Foreign exchange loss, net. Foreign exchange loss, net, is impacted by movements in exchange rates and the amount of foreign-currency denominated cash, receivables, intercompany balances, and payables, which are impacted by our billings to customers, payments to sellers and intercompany transactions.

Interest expense, net

Interest expense, net. Interest expense consists primarily of interest payments on our outstanding borrowings under our Prior Credit Agreement (as defined below), New Credit Agreement (as defined below) and amortization of related debt issuance costs net of interest income.

Employee retention tax credit

Employee retention tax credit. Employee retention tax credit was recognized in connection with our submission for employee retention credits under the CARES Act.

Loss on extinguishment of debt

Loss on extinguishment of debt. Loss on extinguishment of debt was incurred in connection with the repayment of outstanding debt under our Prior Credit Agreement.

Provision (benefit) from income taxes

Provision (benefit) from income taxes. The provision (benefit) from income taxes resulted primarily from the current period book income (loss) multiplied by the effective tax rate.

Results of Operations

The following table sets forth our consolidated statement of operations for the periods indicated:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
(in thousands except percentages)
Revenue	$	101,343		$	79,014		$	290,913		$	221,041
Operating expenses:
Cost of revenue (excluding depreciation and amortization shown below)	19,171			13,845			53,864			38,191
Sales and marketing	28,190			19,578			77,961			62,990
Technology and development	19,459			14,609			54,071			47,554
General and administrative	20,150			16,081			56,081			57,670
Depreciation and amortization	12,617			16,100			37,585			45,098
Foreign exchange loss, net	4,064			5			3,503			407
Total operating expenses	103,651			80,218			283,065			251,910
Operating income (loss)	(2,308)			(1,204)			7,848			(30,869)
Interest expense, net	(2,619)			(5,753)			(5,859)			(17,880)
Employee retention tax credit	6,981			—			6,981			—
Loss on extinguishment of debt	—			(3,721)			—			(3,721)
Net income (loss) before income taxes	2,054			(10,678)			8,970			(52,470)
(Provision) benefit from income taxes	(1,287)			898			(5,083)			4,855
Net income (loss)	$	767		$	(9,780)		$	3,887		$	(47,615)
Net income (loss) margin	1		%	(12)		%	1		%	(22)		%

The following table sets forth our consolidated statement of operations data expressed as a percentage of total revenue for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	100	%	100	%	100	%	100	%
Operating expenses:
Cost of revenue (excluding depreciation and amortization shown below)	19	%	18	%	19	%	17	%
Sales and marketing	28	%	25	%	27	%	28	%
Technology and development	19	%	18	%	19	%	22	%
General and administrative	20	%	20	%	19	%	26	%
Depreciation and amortization	12	%	20	%	13	%	20	%
Foreign exchange loss, net	4	%	—	%	1	%	—	%
Total operating expenses	102	%	102	%	97	%	114	%
Operating income (loss)	(2)	%	(2)	%	3	%	(14)	%
Interest expense, net	(3)	%	(7)	%	(2)	%	(8)	%
Employee retention tax credit	7	%	—	%	2	%	—	%
Loss on extinguishment of debt	—	%	(5)	%	—	%	(2)	%
Net income (loss) before income taxes	2	%	(14)	%	3	%	(24)	%
(Provision) benefit from income taxes	(1)	%	1	%	(2)	%	2	%
Net income (loss)	1	%	(12)	%	1	%	(22)	%

Comparison of the Three Months Ended September 30, 2022 and 2021


	Three Months Ended September 30,
	2022		2021		$ change		% change
(in thousands except percentages)
Revenue	$	101,343	$	79,014	$	22,329	28	%
Operating expenses:
Cost of revenue (excluding depreciation and amortization shown below)	19,171		13,845		5,326		38	%
Sales and marketing	28,190		19,578		8,612		44	%
Technology and development	19,459		14,609		4,850		33	%
General and administrative	20,150		16,081		4,069		25	%
Depreciation and amortization	12,617		16,100		(3,483)		(22)	%
Foreign exchange loss, net	4,064		5		4,059		81178	%
Total operating expenses	103,651		80,218		23,433		29	%
Operating income (loss)	(2,308)		(1,204)		(1,104)		92	%
Interest expense, net	(2,619)		(5,753)		3,134		(54)	%
Employee retention tax credit	6,981		—		6,981		100	%
Loss on extinguishment of debt	—		(3,721)		$	3,721	(100)	%
Net income (loss) before income taxes	2,054		(10,678)		12,732		(119)	%
(Provision) benefit from income taxes	(1,287)		898		(2,185)		(243)	%
Net income (loss)	$	767	$	(9,780)	$	10,547	(108)	%

Revenue

Total revenue increased by $22.3 million, or 28%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.


	Three Months Ended September 30,
	2022		2021		$ change		% change
(in thousands)
Programmatic revenue	$	47,067	$	33,723	$	13,344	40	%
Advertiser direct revenue	38,955		34,444		4,511		13	%
Supply side revenue	15,321		10,847		4,474		41	%
Total revenue	$	101,343	$	79,014	$	22,329	28	%

Total revenue increased primarily due to a significant increase in our programmatic revenue of $13.3 million, or 40%, attributable to growth in volume of impressions of 28% and an increase of 9% in average CPMs. The increase in average CPMs was attributable to significant growth of our Context Control solution. Revenue from our advertiser direct customers increased by $4.5 million, or 13%, reflecting growth in volume of impressions of 13%, as well as increased growth from our customer base. Revenue from our supply side customers increased by $4.5 million, or 41%, primarily due to the impact of the acquisition of Publica.

Operating expenses

Cost of Revenue. Cost of revenue increased by $5.3 million, or 38%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This increase was driven by a $2.5 million increase in data center and hosting fees resulting from overall revenue growth and migration of data centers to Amazon Web Services cloud, an increase of $2.3 million in revenue share to our DSP partners on account of our growth in programmatic revenue, an increase in compensation expenses of $0.3 million and $0.2 million of stock-based compensation expense, due to increased headcount.

Sales and marketing. Sales and marketing expenses increased by $8.6 million, or 44%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This increase was primarily due to an increase in compensation expenses of $3.0 million to support our growth and international expansion, $2.0 million in stock-based compensation expense, an increase in sales commissions of $1.3 million due to higher revenue growth, $0.2 million related to other staff related costs, an increase in restructuring severance costs of $0.3 million, an increase of $0.5 million in marketing and advertising expenses, an increase of $0.8 million in travel expenses and an increase of $0.3 million in software license fees.

Technology and development. Technology and development expenses increased by $4.9 million, or 33%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This increase was primarily due to a $1.3 million increase in stock-based compensation expense, an increase in compensation expenses of $2.7 million, an increase in hosting and license fees of $0.8 million to support our growth, $0.2 million due to higher allocation of overhead costs, and an increase in restructuring severance costs of $0.2 million. This was offset by decreases related to professional fees of $0.3 million.

General and administrative. General and administrative expenses increased by $4.1 million, or 25%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This increase was primarily due to $2.7 million stock-based compensation expense, an increase in compensation expenses of $2.2 million due to increased headcount, an increase of $1.7 million in professional fees incurred for audit, tax, legal and other services, an increase in travel and entertainment costs of $0.2 million, and an increase of $0.2 million for software licenses and computer maintenance. This was offset by a decrease of $1.3 million related to acquisition costs, a decrease in insurance costs of $0.4 million related to public company costs, $0.4 million due to decreased lease expense, $0.2 million due to lower allocation of overhead costs, and a decrease for bad debt reserves of $0.5 million.

Depreciation and amortization. Depreciation and amortization expenses decreased by $3.5 million, or 22%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This decrease results from decreased depreciation of our property and equipment of $0.2 million and decreased amortization of our intangible assets of $3.7 million, resulting from the use of the accelerated method to amortize the asset. This was partially offset by amortization expense related to our internal-use software, which increased $0.4 million in the three months September 30, 2022 as compared to the three months ended September 30, 2021.

Foreign exchange loss, net. Foreign exchange loss, net increased by $4.1 million, or 81,178%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. This increase results from fluctuations primarily attributable to the currency movements between the British Pound and Euro relative to the U.S. Dollar.

Interest expense, net

Interest expense, net. Interest expense decreased by $3.1 million, or 54%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The decrease in interest expense was primarily attributable to partial repayment of our long-term debt of $10.0 million, net and a reduction in the interest rates as a result of refinancing our debt.

Employee retention tax credit

Employee retention tax credit. Employee retention tax credit was $6,981 for the three months ended September 30, 2022 compared to no employee retention credit for the three months ended September 30, 2021. The employee retention tax credits were filed pursuant to the CARES Act.

Loss on extinguishment of debt

Loss on extinguishment of debt. There was no loss on extinguishment of debt for the three months ended September 30, 2022 compared to $3.7 million for the three months ended September 30, 2021. The loss was incurred in the prior year in connection with the repayment of outstanding debt under our Prior Credit Agreement.

(Provision) benefit from income taxes

(Provision) benefit from income taxes. Provision (benefit) from income taxes increased by $2.2 million, or 243%, for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The tax provision increased mainly due to higher book income for the three months ended September 30, 2022, and executive compensation as the Company became subject to the provisions of Section 162(m) of the Internal Revenue Code as a result of becoming a public company and discrete items, including stock-based compensation.

Comparison of the Nine Months Ended September 30, 2022 and 2021


	Nine Months Ended September 30, 2022
	2022		2021		$ change		% change
(in thousands except percentages)
Revenue	$	290,913	$	221,041	$	69,872	32	%
Operating expenses:
Cost of revenue (excluding depreciation and amortization shown below)	53,864		38,191		15,673		41	%
Sales and marketing	77,961		62,990		14,971		24	%
Technology and development	54,071		47,554		6,517		14	%
General and administrative	56,081		57,670		(1,589)		(3)	%
Depreciation and amortization	37,585		45,098		(7,513)		(17)	%
Foreign exchange loss, net	3,503		407		3,096		761	%
Total operating expenses	283,065		251,910		31,155		12	%
Operating income (loss)	7,848		(30,869)		38,717		(125)	%
Interest expense, net	(5,859)		(17,880)		12,021		(67)	%
Employee retention tax credit	6,981		—		6,981		100	%
Loss on extinguishment of debt	—		(3,721)		3,721		(100)	%
Net income (loss) before income taxes	8,970		(52,470)		61,440		(117)	%
(Provision) benefit from income taxes	(5,083)		4,855		(9,938)		(205)	%
Net income (loss)	$	3,887	$	(47,615)	$	51,502	(108)	%

Revenue

Total revenue increased by $69.9 million, or 32%, for the three months ended September 30, 2022 as compared to the nine months ended September 30, 2021.


	Nine Months Ended September 30,
	2022		2021		$ change		% change
(in thousands)
Programmatic revenue	$	135,537	$	92,090	$	43,447	47	%
Advertiser direct revenue	110,210		102,323		7,887		8	%
Supply side revenue	45,166		26,628		18,538		70	%
Total revenue	$	290,913	$	221,041	$	69,872	32	%

Total revenue increased primarily due to a significant increase in our programmatic revenue of $43.4 million, or 47%, attributable to growth in volume of impressions of 29% and an increase of 14% in average CPMs. The increase in average CPMs was attributable to significant growth of our Context Control solution. Revenue from our advertiser direct customers increased $7.9 million, or 8%, reflecting growth in volume of impressions of 8% as well as increased growth from our customer base. Revenue from our supply side customers increased $18.5 million, or 70%, primarily due to the impact of the acquisition of Publica.

Operating expenses

Cost of Revenue. Cost of revenue increased by $15.7 million, or 41%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase was driven by a $7.1 million increase in data center and hosting fees resulting from overall revenue growth and migration of data centers to Amazon Web Services cloud, an increase of $8.0 million in revenue share to our DSP partners on account of our growth in programmatic revenue, an increase in stock-based compensation expenses of $0.2 million and compensation expenses of $0.3 million to support our growth and international expansion.

Sales and marketing. Sales and marketing expenses increased by $15.0 million, or 24%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase was primarily due to an increase in sales commissions of $2.7 million due to higher revenue growth, an increase in compensation expenses of $8.3 million to support our growth and international expansion, an increase in recruiting expenses of $0.4 million, an increase in restructuring severance costs of $1.5 million, an increase of $2.1 million in marketing and advertising expenses, increase in software license fees of $0.5 million, subscriptions of $0.3 million, telecommunications expenses of $0.3 million and an increase of $1.4 million in travel expenses. These increases were partially offset by a decrease of $2.6 million in stock-based compensation expense, which was higher in the nine months ended September 30, 2021 due to the modification of the Company's stock awards at the time of the IPO and the charge recognized for all vested options.

Technology and development. Technology and development expenses increased by $6.5 million, or 14%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This increase was primarily due to an increase in compensation expenses of $7.2 million, an increase in hosting and license fees of $1.2 million to support our growth, an increase in professional fees of $0.8 million, and $0.4 million due to higher allocation of overhead costs. These increases were partially offset by $1.9 million in stock-based compensation expense, which was higher in the nine months ended September 30, 2021 due to the modification of the Company's stock awards at the time of the IPO and the charge recognized for all vested options, and a decrease of $1.1 million related to restructuring severance costs.

General and administrative. General and administrative expenses decreased by $1.6 million, or 3%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This decrease was primarily due to higher stock-based compensation expense of $12.3 million in the nine months ended September 30, 2021 due to the modification of the Company's stock awards at the time of the IPO and the charge recognized for all vested options, a decrease in facilities expenses of $1.0 million due to the sublease of the facility previously used as our New York corporate headquarters, a decrease in acquisition costs of $1.9 million, a decrease in reserves for bad debts of $0.1 million, higher allocation of overhead costs of $0.3 million, and a decrease in IPO related professional fees of $1.3 million incurred during the nine months ended September 30, 2021. This decrease was offset by increases in compensation expenses of $4.9 million due to increased headcount, an increase in recruiting expenses of $0.7 million, an increase in insurance costs of $2.3 million related to public company costs, an increase of $4.9 million in professional fees incurred for audit, tax, legal and other services, an increase of $1.1 million for software licenses and computer maintenance, an increase of $0.5 million in travel expenses, and an increase of $1.0 million for restructuring severance costs.

Depreciation and amortization. Depreciation and amortization expenses decreased by $7.5 million, or 17%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. This decrease results from decreased depreciation of our property and equipment of $0.7 million and decreased amortization of our intangible assets of $8.0 million, resulting from the use of the accelerated method to amortize the asset. These decreases were partially offset by an increase in amortization expense related to our internal-use software of $1.2 million.

Foreign exchange loss, net. Foreign exchange loss, net increased $3.1 million, or 761% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The loss results from fluctuations primarily attributable to the currency movements between the British Pound and Euro relative to the U.S. Dollar.

Interest expense, net

Interest expense, net. Interest expense decreased by $12.0 million, or 67%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The decrease in interest expense was primarily attributable to reduced Paid in Kind ("PIK") interest expense of $0.4 million and a decrease in interest expense by $11.5 million due to partial repayment of our long-term debt of $110.0 million, net and a reduction in the interest rates as a result of refinancing our debt.

Employee retention tax credit

Employee retention tax credit. Employee retention tax credit was $7.0 million for the nine months ended September 30, 2022 compared to no employee retention tax credit for the nine months ended September 30, 2021. The employee retention tax credits were filed pursuant to the CARES Act.

Loss on extinguishment of debt

Loss on extinguishment of debt. There was no loss on extinguishment of debt for the nine months ended September 30, 2022 compared to $3.7 million for the nine months ended September 30, 2021. The loss was incurred in the prior year in connection with the repayment of outstanding debt under our Prior Credit Agreement.

(Provision) benefit from income taxes

(Provision) benefit from income taxes. (Provision) benefit from income taxes increased by $9.9 million, or 205%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The tax provision increased mainly due to higher book income for the nine months ended September 30, 2022, non-deductible executive compensation as the Company became subject to the provisions of Section 162(m) of the Internal Revenue Code as a result of becoming a public company, and discrete items, including executive compensation.

Non-GAAP Financial Measures

We use supplemental measures of our performance, which are derived from our consolidated financial information, but which are not presented in our consolidated financial statements prepared in accordance with U.S. GAAP. Adjusted EBITDA is the primary financial performance measure used by management to evaluate our business and monitor ongoing results of operations. Adjusted EBITDA is defined as income (loss) before depreciation and amortization, stock-based compensation, interest expense, income taxes, acquisition, restructuring and integration costs, IPO readiness costs, foreign exchange gains and losses, and other one-time, non-recurring costs. Adjusted EBITDA margin represents the Adjusted EBITDA for the applicable period divided by the revenue for that period presented in accordance with U.S. GAAP.

We use non-GAAP financial measures to supplement financial information presented on a U.S. GAAP basis. We believe that excluding certain items from our U.S. GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare U.S. GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our shareholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period-to-period comparisons. Although we believe these measures are useful to investors and analysts for the same reasons they are useful to management, as discussed below, these measures are not a substitute for, or superior to, U.S. GAAP financial measures or disclosures. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net income (loss) prepared in accordance with U.S. GAAP and should be read only in conjunction with financial information presented on a U.S. GAAP basis. Reconciliations of Adjusted EBITDA and Adjusted EBITDA margin to their most directly comparable U.S. GAAP financial measures, net income (loss) and corresponding margin, are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items.

Adjusted EBITDA


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2022			2021			2022			2021
Net income (loss)	$	767		$	(9,780)		$	3,887		$	(47,615)
Depreciation and amortization	12,617			16,100			37,585			45,098
Stock-based compensation	14,247			8,141			33,107			49,673
Interest expense, net	2,619			5,753			5,859			17,880
Provision (benefit) from income taxes	1,287			(898)			5,083			(4,855)
Acquisition, restructuring and integration costs	1,518			2,314			4,396			4,893
IPO readiness costs	—			56			—			1,094
Loss on extinguishment of debt	—			3,721			—			3,721
Foreign currency transaction gains	4,064			—			3,551			—
Employee retention tax credit	(6,981)			—			(6,981)			—
Impairment of assets	6			—			55			—
Adjusted EBITDA	$	30,144		$	25,407		$	86,542		$	69,889
Revenue	$	101,343		$	79,014		$	290,913		$	221,041
Net income (loss) margin	1		%	(12)		%	1		%	(22)		%
Adjusted EBITDA margin	30		%	32		%	30		%	32		%

Liquidity and Capital Resources

General

As of September 30, 2022, our principal sources of liquidity were cash and cash equivalents totaling $73.6 million, which was held for working capital purposes, as well as the $65.0 million available balance under our New Revolver, described further below. We expect that our cash and cash equivalents on hand at September 30, 2022 will enable us to continue to make investments in the future. We expect our operating cash flows to further improve as we increase our operational efficiency and experience economies of scale.

We believe our existing cash and cash equivalents, availability under our New Revolver and cash provided by operations will be sufficient to meet our working capital and capital expenditure needs for at least the next twelve months and beyond. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings and, continued market acceptance of our products. In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, including intellectual property rights.

We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies, it could reduce our ability to compete successfully and harm our results of operations.

Some of our customers pay in advance for subscriptions, a portion of which is recorded as deferred revenue. Deferred revenue consists of the unearned portion of billed fees for our subscriptions, which is later recognized as revenue in accordance with our revenue recognition policy. As of September 30, 2022 and December 31, 2021, we had deferred revenue of $0.3 million and $0.2 million, respectively, all of which was recorded as a current liability and is expected to be recorded as revenue in the next twelve months, provided all other revenue recognition criteria have been met.

Credit Facilities

On July 19, 2018, we entered into a Credit Agreement (the "Prior Credit Agreement") with a syndicate of lenders, comprised of the $325.0 million (the “Term Loan”) and the $25.0 million (the "Revolving Loan"), with maturity dates of July 19, 2024 and July 19, 2023, respectively. Pursuant to the Incremental Facility Assumption Agreement No. 1, dated as of November 19, 2019, the Term Loan was increased to $345.0 million. As explained below, on September 29, 2021, the Company repaid the outstanding balances and terminated the Prior Credit Agreement.

In addition to the cash pay interest, the Prior Credit Agreement included PIK interest at a rate of 1.25% per annum. All PIK interest due was paid by capitalizing such interest and adding such applicable PIK interest to the principal amount of the outstanding Term Loan. Effective February 1, 2021, and subject to maintaining a total leverage ratio less than 6.50 to 1.00, additional PIK interest was not accrued pursuant to the Prior Credit Agreement. The interest rate during the period prior to the repayment was 6.0%.

On September 29, 2021, we entered into a new credit agreement with various lenders (the “New Credit Agreement” or the “New Revolver”), which provides for an initial $300.0 million in commitments for revolving credit loans, which amount may be increased or decreased under specific circumstances, with a $30.0 million letter of credit sublimit and a $100.0 million alternative currency sublimit. In addition, the New Credit Agreement provides for the ability to request incremental term loan facilities, in a minimum amount of $5.0 million for each facility. Borrowings under the New Credit Agreement may be used for working capital and other general corporate purposes, including for acquisitions permitted under the New Credit Agreement.

The interest rates applicable to revolving borrowings under the New Credit Agreement are, at our option, either (i) in the case of U.S. dollar loans, (x) a base rate, which is equal to the greater of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 0.5%, and (c) the Adjusted LIBOR (subject to a floor of 0.0%) for a one month Interest Period (each term as defined in the New Credit Agreement) plus 1%, or (y) the Adjusted LIBOR (subject to a floor of 0.0%) equal to the LIBOR (as defined in the New Credit Agreement) for the applicable Interest Period multiplied by the Statutory Reserve Rate (each term as defined in the New Credit Agreement) or (ii) in the case of RFR Loans (as defined in the New Credit Agreement) denominated in sterling or euro, (x) the applicable RFR (as defined in the New Credit Agreement) or (y) the applicable Term RFR (as defined in the New Credit Agreement), plus in the case of each of clauses (i) and (ii), the Applicable Rate (as defined in the New Credit Agreement). The Applicable Rate (i) for base rate loans range from 0.75% to 1.50% per annum, (ii) for LIBOR loans range from 1.75% to 2.50% per annum, (iii) for RFR Loans denominated in sterling range from 1.7826% to 2.5326%, and (iv) for RFR Loans denominated in euro range from 1.7965% to 2.5456%, in each case, based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement). Base rate borrowings may only be made in dollars. The Company is required to pay a commitment fee during the term of the New Credit Agreement ranging from 0.20% to 0.35% per annum of the average daily undrawn portion of the revolving commitments based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement). The interest rate at September 30, 2022 was 4.6%.

The New Credit Agreement contains covenants requiring certain financial information to be submitted quarterly and annually. In addition, we are also required to comply with certain financial covenants such as maintaining a Net Leverage Ratio (as defined in the New Credit Agreement) of 3.50 to 1.00 or lower and maintaining a minimum Interest Coverage Ratio (as defined in the New Credit Agreement) of 2.50 to 1.00. As of September 30, 2022, the Company was in compliance with all covenants contained in the New Credit Agreement. Based upon current facts and circumstances, we believe existing cash coupled with the cash flows generated from operations will be sufficient to meet our cash needs and comply with covenants.

Cash Flows

The table below presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated.


	Nine Months Ended September 30,
	2022		2021
Net cash provided by operating activities	$	47,560	$	37,656
Net cash used in investing activities	(12,472)		(176,851)
Net cash (used in) provided by financing activities	(29,195)		153,207
Net increase in cash and cash equivalents, and restricted cash	$	5,893	$	14,012
Effect of exchange rate changes on cash and cash equivalents, and restricted cash	(5,396)		(2,042)
Cash, cash equivalents, and restricted cash, at beginning of period	76,078		54,721
Cash, cash equivalents and restricted cash, at end of period	$	76,575	$	66,691

Operating Activities

For the nine months ended September 30, 2022, net cash provided by operating activities was $47.6 million, resulting from a net income of $3.9 million adjusted for non-cash expenses of depreciation and amortization of $37.6 million, stock-based compensation of $33.1 million, foreign exchange losses of $3.5 million, bad debt expense of $0.6 million, amortization of debt issuance costs of $0.3 million partially offset by Employee retention tax credit of $7.0 million, a decrease in working capital of $24.0 million, and a deferred tax benefit of $0.7 million.

For the nine months ended September 30, 2021, net cash provided by operating activities was $37.7 million, resulting from a net loss of $47.6 million adjusted for non-cash expenses of depreciation and amortization of $45.1 million, stock-based compensation of $49.7 million, a loss on the extinguishment of debt of $3.7 million, amortization of debt issuance costs of $1.0 million, bad debt expense of $0.8 million, and non-cash interest expense of $0.4 million, partially offset by a decrease in working capital of $5.4 million, and a deferred tax provision of $10.0 million.

Investing Activities

Cash used in investing activities was $12.5 million for the nine months ended September 30, 2022, reflecting capitalized costs related to our internal use software of $10.0 million, payment of $1.6 million for Context and Amino Payments acquisitions, and the purchase of property and equipment of $0.9 million.

Cash used in investing activities was $176.9 million for the nine months ended September 30, 2021, reflecting payment for the acquisition of Publica, net of acquired cash of $166.2 million, capitalized costs related to our internal use software of $10.0 million and the purchase of property and equipment of $0.6 million.

Financing Activities

Cash used in financing activities was $29.2 million for the nine months ended September 30, 2022, reflecting cash paid for share repurchases of $23.7 million, a repayment of outstanding short-term debt of $1.8 million, repayment of outstanding long-term debt of $25.0 million, offset by proceeds from issuance of debt of $15.0 million, proceeds of $5.9 million in stock options exercised and cash received from the ESPP of $0.4 million.

Cash provided by financing activities was $153.2 million for the nine months ended September 30, 2021, reflecting proceeds from the IPO, net of underwriting discounts and commissions of $281.6 million, issuance of new debt of $235.0 million, and $1.1 million in stock options exercised. This was offset by a repayment of outstanding debt of $355.9 million, $1.2 million in common stock repurchases, $4.7 million in deferred offering costs, payments for debt issuance costs of $2.3 million and $0.3 million in principal payment on our capital leases.

Contractual Obligations and Commitments

Our principal commitments consist of obligations under operating leases for office space, our purchase commitments related to hosting and data services and repayments of long-term debt. We lease office space under operating leases, which expire on various dates through March 2027 and the total non-cancelable payments under these leases were $28.7 million as of September 30, 2022. Total non-cancelable purchase commitments related to hosting services as of September 30, 2022 were $110.5 million for periods through 2026. The New Revolver matures in 2026.

Indemnification Agreements

In the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify customers, including, but not limited to, losses arising out of the breach of such agreements, services to be provided by us or from intellectual property infringement claims made by third parties. In addition, in connection with the completion of this offering we intend to enter into indemnification agreements with our directors and certain officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. No demands have been made upon us to provide indemnification under such agreements and there are no claims that we are aware of that could have a material effect on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

JOBS Act

We qualify as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

The JOBS Act also permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt-in” to this extended transition period for complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that comply with such new or revised accounting standards on a non-delayed basis.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting estimates described in “Note 2—Basis of presentation and summary of significant accounting policies” to our consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2021.

Recent Accounting Pronouncements

For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2 to our condensed consolidated financial statements: “Basis of presentation and summary of significant accounting policies—Accounting pronouncements not yet adopted” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.

Foreign Currency Exchange Risk

The functional currencies of our foreign subsidiaries are the respective local currencies. Most of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the U.S., U.K., France, Germany, Italy, Singapore, Australia, France, Japan, and India. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments. During the nine months ended September 30, 2022, the U.S. dollar has significantly strengthened against the Euro, and the British pound sterling, resulting in a $3.6 million foreign exchange loss, net. The U.S. dollar may continue to strengthen against these foreign currencies if the Federal Reserve further raises the federal funds rate, which may result in downstream impacts to global exchange rates and further adverse impacts to our reported results. During the nine months ended September 30, 2022, a hypothetical 10% increase of the exchange rate between the U.S. Dollar and foreign currencies applicable to our business, with the U.S. Dollar strengthening, would have resulted in a negative impact on net income of approximately $5.0 million.

Interest Rate Risk

Our primary market risk exposure is changing eurodollar-based interest rates. Interest rate risk is highly sensitive due to many factors, including E.U. and U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. The New Revolver carries interest at an applicable margin, for U.S. dollar loans equal to the greater of (a) the rate last quoted by The Wall Street Journal as the “prime rate” in the U.S., (b) the Federal Funds Rate in effect on such day plus 0.5%, or the Adjusted LIBOR (subject to a floor of 0.0%) for a one month interest period on such day multiplied by the Statutory Reserve Rate. For eurodollar borrowings, the New Revolver carries interest at an applicable margin equal to applicable RFR or the applicable Term RFR, plus (i) the Applicable Rate (as defined in the New Credit Agreement) for base rate loans range from 0.75% to 1.50% per annum, (ii) for LIBO Rate (as defined in the New Credit Agreement) loans range from 1.75% to 2.50% per annum, (iii) for RFR Loans denominated in sterling range from 1.7826% to 2.5326%, and (iv) for RFR Loans denominated in euro range from 1.7965% to 2.5456%, in each case, based on the Senior Secured Net Leverage Ratio (as defined in the New Credit Agreement).

The Federal Reserve may further raise the federal funds rate, which may result in downstream impacts to global exchange rates and further adverse impacts to our reported results. At September 30, 2022, we had total outstanding debt of

$235.0 million under our New Revolver. Rising interest rates have also resulted in an increase in our interest rate to 4.6% at September 30, 2022 compared to 3.1% at June 30, 2022. Based on these amounts outstanding, a 100-basis point increase or decrease in market interest rates over a twelve-month period would result in a change to interest expense of $2.4 million or a benefit of $2.4 million, respectively.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and interim principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of September 30, 2022.

Our Chief Executive Officer and interim principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2022 due to the material weaknesses in our internal control over financial reporting described below.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

We previously identified material weaknesses in our internal control over financial reporting that continue to exist. We did not design policies to maintain evidence of the operation of key control procedures, nor were monitoring controls evidenced at a sufficient level to provide the appropriate oversight of activities related to our internal control over financial reporting. Additionally, we did not design and maintain controls to ensure (i) appropriate segregation of duties in the operation of manual controls and (ii) account reconciliations, journal entries, and balance sheet and income statement fluctuation analyses were reviewed at the appropriate level of precision. In addition, the Company did not design and maintain effective controls over information technology, or IT, general controls for information systems that are relevant to the preparation of the consolidated financial statements. Specifically, we did not design and maintain (i) program change management controls for financial systems to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately, (ii) user access controls to ensure appropriate segregation of duties and that adequately restrict user and privileged access to financial applications, programs, and data to appropriate personnel, (iii) computer operations to ensure that critical batch jobs are monitored, privileges are appropriately granted, and data backups are authorized and monitored, and (iv) testing and approval controls for program development to ensure that new software development is aligned with business and IT requirements for financially relevant IT systems.

Management’s Remediation Efforts

We continue to implement measures to remediate the identified material weaknesses. The measures include (i) formalizing the Company’s accounting policies with respect to maintaining evidence in the operation of control procedures, (ii) improving our control framework to include both the appropriate segregation of duties and definition around the appropriate levels of precision for controls, including account reconciliations, journal entries, and balance sheet and income statement fluctuation analyses, and (iii) designing and documenting the execution of IT general controls for systems and applications impacting internal control over financial reporting, specifically related to user access, change management, computer operations, and program development controls.

While we are performing remediation activities to strengthen our controls, the material weaknesses will not be considered remediated until management completes the design and implementation of the measures described above and the controls operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. We will continue to monitor the effectiveness of our remediation measures in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures, and we will make any changes to the remediation plan and take such other actions that we deem appropriate given the circumstances.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Because of its inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we have been and may be involved in various legal proceedings and claims arising in our ordinary course of business. At this time, neither we nor any of our subsidiaries is a party to, and none of our respective property is the subject of, any legal proceeding that, if determined adversely to us, would have a material adverse effect on us.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth our purchases of our common stock made during the quarter ended September 30, 2022:


Period	Total Number of Shares Purchased(1)	Average Price Paid per Share(1)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 through July 31	—	$	—	—	—
August 1 through August 31	—	$	—	—	—
September 1 through September 30	3,080,061	$	7.68	—	—
Total	3,080,061	$	7.68	—	—

(1) Consists of shares of our common stock purchased in a single open market transaction.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On November 10, 2022, the Company announced that its board of directors (“Board”) appointed Tania Secor as Chief Financial Officer of the Company, effective December 5, 2022.

Most recently, Ms. Secor, age 50, served as Global Chief Financial Officer of R/GA and Reprise, Interpublic Group of Companies, Inc.’s (NYSE: IPG) digital innovation and digital media agencies, respectively, since July 2018. Prior to that, Ms. Secor served as Senior Vice President, Finance of Medidata Solutions from August 2015 to September 2016. Ms. Secor also served as Chief Financial Officer of Dataminr, Inc. from November 2013 to June 2015 and Chief Financial Officer of Gerson Lehrman Group from December 2011 to November 2013. Additionally, Ms. Secor served on the Advisory Board of Rocketrip, Inc. from April 2017 to September 2020. Ms. Secor holds an M.B.A. from Columbia Business School and a B.A. from Columbia College.

In connection with Ms. Secor’s appointment as Chief Financial Officer, the Company and Ms. Secor entered into an employment agreement, dated September 11, 2022 (as amended on October 21, 2022, the “Employment Agreement”), which will become effective on December 5, 2022. Pursuant to the terms of the Employment Agreement, Ms. Secor will receive an annual salary of $500,000; be eligible for an annual bonus, with a target opportunity of 100% of her base salary, based on achievement of performance goals established by the Board, and, beginning in 2023, be eligible for an annual equity grant with an aggregate target value equal to $3,000,000, calculated in the ordinary manner of the Company. Ms. Secor will also receive a signing bonus of $500,000, which will be paid in February 2023 (the “Signing Bonus”), provided that Ms. Secor has not resigned without Good Reason or been terminated by the Company for Cause (each as defined in the Employment Agreement). In addition, the Signing Bonus will be subject to repayment in the event that Ms. Secor resigns without Good Reason within one year of the start date provided in the Employment Agreement. Pursuant to the Employment Agreement, Ms. Secor will receive an equity grant with an aggregate value of $4,000,000 to be awarded as follows: (i) 50% as RSUs and (ii) 50% as MSUs (the “Equity Grant”). The Equity Grant will vest over a four year period, with 25% vesting on the first anniversary of the grant date, and the balance in 12 equal installments of 6.25% each quarter, with the amount of shares earned upon vesting of the MSUs subject to performance vesting conditions, and in each case, subject to Ms. Secor’s continued employment through the applicable vesting date. In the event that a Change in Control (as defined in the the Company’s 2021 Omnibus Incentive Plan) occurs within 12 months of Ms. Secor’s start date, the first 25% of the Equity Grant scheduled to vest on the first anniversary of the grant date will become vested immediately upon such Change in Control. Ms. Secor will also be eligible to participate in the Company’s employee benefit plans available to its employees, subject to the terms of those plans. The Employment Agreement provides that upon a termination of Ms. Secor’s employment by the Company without Cause or by Ms. Secor for Good Reason not in connection with a Change in Control, subject to Ms. Secor’s execution of a fully effective release of claims in favor of the Company and continued compliance with applicable restrictive covenants, Ms. Secor will receive (i) base salary continuation payments, (ii) subject to Ms. Secor’s election and continued eligibility, payment or reimbursement of a portion of continuation coverage premiums under the Company’s group health plans pursuant to COBRA, in each case of (i) and (ii), for 12 months following such termination date, and (iii) at the sole discretion of the Board, a pro-rated portion of any bonus that may have been awarded to Ms. Secor during the fiscal year in which such termination occurs at the same performance payout as the pool for other senior executives, but not greater than 100%. The Employment Agreement includes customary confidentiality, non-compete and non-solicitation provisions.

There are no family relationships between Ms. Secor and any director or executive officer of the Company, and the Company is not aware of any transactions with Ms. Secor that are reportable pursuant to Item 404(a) of Regulation S-K.

The foregoing description of the Employment Agreement is qualified in its entirety by reference to the full text of the Employment Agreement and Amendment No. 1 thereto, which are filed herewith as Exhibits 10.1 and 10.2 and incorporated by reference herein in their entirety.

In addition, on November 8, 2022, the Board delegated the responsibilities of principal financial officer of the Company to Mr. Anil Sukumaran on an interim basis, until Ms. Secor joins the Company on December 5, 2022. Mr. Sukumaran, age 42, has been the Company’s Chief Accounting Officer since January 2021. He joined the Company from Newmark Knight Frank, where he was the Chief Accounting Officer from July 2019 through January 2021. Prior to that, Mr. Sukumaran worked with Roivant Sciences in various positions from October 2017 to July 2019.

ITEM 6. EXHIBITS

The following is a list of all exhibits filed or furnished as part of this report:


Exhibit Number						Description

3.1						Certificate of Incorporation of Integral Ad Science Holding Corp., dated June 29, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on July 2, 2021).

3.2						Bylaws of Integral Ad Science Holding Corp., dated June 29, 2021 (incorporated by reference to the Company’s Exhibit 3.2 to the Company’s Form 8-K filed on July 2, 2021).

10.1						Employment Agreement dated as of September 11, 2022, by and between Integral Ad Science, Inc. and Tania Secor

10.2						Amendment No. 1 to Employment Agreement, dated as of October 21, 2022, by and between Integral Ad Science, Inc. and Tania Secor

31.1						Certification of the Chief Executive Officer pursuant to Exchange Act Rules Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.2						Certification of the interim principal financial officer pursuant to Exchange Act Rules Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1**						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, filed herewith.

32.2**						Certification of the interim principal financial officer pursuant to 18 U.S.C. Section 1350, filed herewith.

101.INS						Inline XBRL Instance Document

101.SCH						Inline XBRL Taxonomy Extension Schema Document

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)


**			The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Integral Ad Science Holding Corp. (Registrant)

Date: November 10, 2022	By:	/s/ Anil Sukumaran
		Anil Sukumaran
		Chief Accounting Officer (Interim Principal Financial Officer and Principal Accounting Officer)

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Integral Ad Science Holding (IAS) 10-Q2022 Q3 Quarterly report

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