The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q for the quarter ended
March 31, 2022, and (2) the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2021, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission(the "SEC"), on February 24, 2022. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "believe," "may," "potentially," "will," "estimate," "continue," "anticipate," "intend," "could," "should," "would," "project," "plan," "predict," "expect," "seek" and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors", set forth in Part II, Item 1A of this Form 10-Q. Except as required by law, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements Overview We are a leading provider of digital marketing solutions for search, social, and eCommerce advertising channels, offered as a unified software-as-a-service, or SaaS, advertising management platform for performance-driven advertisers and agencies. Our platform is an analytics, workflow and optimization solution for marketing professionals, enabling them to maximize the performance of their digital advertising spend. We market and sell our solutions to advertisers directly and through leading advertising agencies, and our customers collectively manage billions of dollars in advertising spend on our platform globally across a wide range of industries. We believe this makes us one of the largest providers of independent advertising cloud solutions. Our software solution is designed to help our customers:
measure the effectiveness of their advertising campaigns with our proprietary reporting and analytics capabilities;
manage and execute campaigns through our intuitive user interface and underlying technology that streamlines and automates key functions, such as advertisement creation and bidding, across multiple publishers and channels; and
Optimize campaigns across multiple publishers and channels based on market and company data to achieve desired revenue using our predictive bid management technology.
Our current product lineup consists of MarinOne and our two legacy products, Marin Search and Marin Social. We have migrated all of our customers to use MarinOne as their primary experience when logging in. We will continue to allow access to Marin Search through at least mid-Q3 2022 to ensure a smooth transition for our customers.
MarinOne. Our next-generation solution brings search, social and eCommerce advertising into a single-platform that helps advertisers maximize a customer journey that spans
Tik Tok, Apple Search Ads, Instacart, Criteoand YouTube.
Marine Research. Our original solution for large advertisers and agencies. Marin Search is designed to provide search advertisers with the power, scale, and flexibility to manage large-scale advertising campaigns.
Social sailor. Helps advertisers manage their ad spend on Facebook, Instagram, and Twitter at scale.
Advertisers use our platform to create, target and convert precise audiences based on recent buying signals from users' search, social and eCommerce interactions. Our platform is integrated with leading publishers such as Amazon, Apple, Baidu, Bing,
Criteo, Facebook, Google, Instacart, Instagram, Pinterest, Tik Tok, Twitter, Yahoo!, Yahoo! Japan and Yandex. Additionally, we have integrations with dozens of leading web analytics and advertisement-serving solutions and key enterprise applications, enabling our customers to more accurately measure the return on investment of their marketing programs. Our software platform serves as an integration point for advertising performance, sales and revenue data, allowing advertisers to connect the dots between advertising spend and revenue outcomes. Through an intuitive interface, we enable our customers to simultaneously run large-scale digital advertising campaigns across multiple publishers and channels, making it easy for marketers to create, publish, modify and optimize campaigns. 19 -------------------------------------------------------------------------------- Our predictive bid management and optimization technology also allows advertisers to forecast outcomes and optimize campaigns across multiple publishers and channels to achieve their business goals. Our optimization technology can help advertisers increase advertisement spend on those campaigns, publishers and channels that are performing well while reducing investment in those that are not. This category of solutions, which we refer to as cross-channel bid and campaign optimization, helps businesses intelligently and efficiently measure, manage, and optimize their digital advertising spend to achieve desired business results. The ongoing COVID-19 pandemic has had and may continue to have an adverse impact on many of our customers and their businesses and their spending on digital advertising and has had an adverse impact on our recent results of operations and may continue to affect our future results of operations. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including containment of COVID-19, the availability, deployment and efficacy of vaccines, impact on our customers and our sales cycles, and impact on our employees, all of which are uncertain and cannot be predicted. At this time, the extent to which the COVID-19 pandemic may impact our financial condition or results of operations is uncertain. Since mid-March 2020, some of our customers have reduced the amount of digital advertising spend that they manage using our product which has had an adverse effect on our results of operations and some of our customers have requested extended payment terms, reduced fees or fee waivers, early contract terminations and other forms of contract relief. Also, since mid-March 2020most of our employees have not been able to work from our offices and have been working from home, which could cause some disruptions or delays in our business activities, including our product development efforts. Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") passed by the United States Congressand signed by the President, we were eligible for a refundable employee retention credit subject to certain criteria. We recognized a $0.5 millionemployee retention credit during the three months ended March 31, 2021which was recorded in cost of revenues and operating expenses.
Components of operating results
We generate revenues principally from subscription contracts under which we provide advertisers with access to our search, social and eCommerce advertising management platform, either directly or through the advertiser's relationship with an agency with whom we have a contract. Our subscription contracts are generally one year or less in length. Under subscription contracts with most of our direct advertisers and some independent agencies, we generally charge fees based on the amount of advertising spend that these customers manage through our platform or a contractual minimum monthly platform fee, whichever is greater. Certain of these customers are charged only a fixed monthly platform fee. Most of our subscription contracts with our network agency customers do not include a committed minimum monthly platform fee, and we charge fees based upon the amount of advertising spend that these customers manage through our platform. Due to the nature of the platform and the services performed under the subscription agreements, revenues are typically recognized in the amount billable to the advertiser. Our long-term strategic agreements have historically included multiple-year terms and are invoiced quarterly. Our largest agreement, with
September 2021with an effective date of October 1, 2021(the "New September 30, 2024. Under this New the United States. Advertisers from outside of the United Statesrepresented 23% and 24% of total revenues for the three months ended March 31, 2022and 2021, respectively. The New March 31, 2022. The original March 31, 2021. Refer to our Annual Report on Form 10-K for the fiscal year 2021 for details of the original
Refer to Note 2 of the accompanying condensed consolidated financial statements for further discussion of our revenue recognition considerations.
Cost of revenues primarily includes personnel costs, consisting of salaries, benefits, bonuses and stock-based compensation expense for employees associated with our cloud infrastructure and global services for implementation and ongoing customer service. Other costs of revenues include fees paid to contractors who supplement our support and data center personnel, expenses related to third-party data centers, 20 -------------------------------------------------------------------------------- depreciation of data center equipment, amortization of internally developed software and allocated overhead. Incremental cost of revenues associated with our long-term strategic agreements, including our largest agreement with Google, are generally not significant.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, including salaries, benefits, stock-based compensation expense and bonuses, as well as sales commissions and other costs including travel and entertainment, marketing and promotional events, lead generation activities, public relations, marketing activities, professional fees and allocated overhead. All of these costs are expensed as incurred, except sales commissions and the related payroll taxes, which are capitalized and amortized over the expected period of benefit in accordance with the relevant authoritative accounting guidance. Our commission plans provide that commission payments to our sales representatives are paid based on the key components of the applicable customer contract, including the minimum or fixed monthly platform fee during the initial contract term.
Research and development
Research and development expenses consist primarily of personnel costs for our product development and engineering employees and executives, including salaries, benefits, stock-based compensation expense and bonuses. Also included are non-personnel costs such as professional fees payable to third-party development resources, and allocated overhead.
Our research and development efforts are focused on improving our software architecture, adding new features and functionality to our platform, and improving the efficiency with which we provide these services to our customers, including development by MarinOne.
General and administrative
General and administrative expenses consist primarily of personnel costs, including salaries, benefits, stock-based compensation expense and bonuses for our administrative, legal, human resources, finance and accounting employees and executives. Also included are non-personnel costs, such as audit fees, tax services and legal fees, as well as professional fees, insurance and other corporate expenses, including allocated overhead. Results of Operations The following table is a summary of our unaudited condensed consolidated statements of operations for the specified periods and results of operations as a percentage of our revenues for those periods. The period-to-period comparisons of results are not necessarily indicative of results for future periods. Percentage of revenues figures are rounded and therefore may not subtotal exactly. Three Months Ended March 31, 2022 2021 % of % of Amount Revenues Amount Revenues (dollars in thousands) Revenues, net $ 5,161 100 % $ 6,308 100 % Cost of revenues 3,328 64 3,241 51 Gross profit 1,833 36 3,067 49 Operating expenses Sales and marketing 1,787 35 1,246 20 Research and development 2,917 57 2,399 38 General and administrative 2,469 48 1,869 30 Total operating expenses 7,173 139 5,514 87 Loss from operations (5,340) (103) (2,447) (39) Other income, net 3,402 66 327 5 Loss before income taxes (1,938) (38) (2,120) (34) Income tax provision 61 1 92 1 Net loss $ (1,999) (39) % $ (2,212) (35) % Adjusted EBITDA Adjusted EBITDA is a financial measure not calculated in accordance with generally accepted accounting principles in
the United States("GAAP"). We define Adjusted EBITDA as net loss, adjusted for stock-based compensation expense, depreciation, the amortization of internally developed software, intangible assets, the capitalization of internally developed software, the impairment of goodwill and long-lived assets, interest expense, net, the benefit from or provision for income taxes, CARES Act employee retention credits, other income or expenses, net and the non-recurring costs or gains associated with acquisitions, divestitures and restructurings, and certain professional fees that we have incurred in responding to third-party subpoenas that we have received related to governmental investigations of
Adjusted EBITDA should not be considered an alternative to net loss, operating loss or any other measure of financial performance calculated and presented in accordance with GAAP. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. Investors are encouraged to evaluate these adjustments and why we believe them to be appropriate.
We believe Adjusted EBITDA is useful for investors to assess our operating performance for the following reasons:
Adjusted EBITDA is widely used by investors and securities analysts to measure a company's operating performance without regard to items such as stock-based compensation expense, depreciation and amortization, capitalized software development costs, interest expense, net, benefit from or provision for income taxes, other income or expenses, net and costs or gains associated with acquisitions, divestitures and restructurings, that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;
Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our Board of Directors concerning our financial performance; and
Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. We understand that although Adjusted EBITDA is widely used by investors and securities analysts in their evaluations of companies, it has limitations as an analytical tool, and investors should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:
Depreciation and amortization are non-cash charges, and depreciated or depreciated assets will often need to be replaced in the future; however, Adjusted EBITDA does not reflect any cash requirement for these replacements;
Adjusted EBITDA does not reflect changes in or cash requirements for our working capital requirements or contractual commitments;
Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expenses; and
Other companies may calculate Adjusted EBITDA differently from us, which limits its usefulness as a comparative measure.
The following table provides a reconciliation of net loss, the most comparable GAAP measure, to Adjusted EBITDA for each of the periods indicated:
Three Months Ended March 31, 2022 2021 (in thousands) Net loss
$ (1,999 ) $ (2,212 )Depreciation 179 240 Amortization of internally developed software 542
Provision for income taxes 61
Stock-based compensation expense 857
Capitalization of internally developed software (512 ) (434 ) CARES Act employee retention credit - (539 ) Restructuring related expenses 53
Other income, net (3,402 ) (327 ) Third-party subpoena-related expenses 72 - Adjusted EBITDA
$ (4,149 ) $ (2,291 )
Comparison of the Three Months Ended
March 31, 2022and 2021
Revenues, net Three Months Ended March 31, Change 2022 2021 $ % (dollars in thousands) Revenues, net
$ 5,161 $ 6,308 $ (1,147 )(18 ) % 22
-------------------------------------------------------------------------------- Revenues, net, for the three months ended
March 31, 2022decreased $1.1 million, or 18%, as compared to the corresponding period in 2021. The decrease was primarily due to lower revenue under our New $0.5 millionfor the three months ended March 31, 2022, as compared to revenue under our original March 31, 2021. Also, since the end of the three-month period ended March 31, 2021, we experienced ongoing customer turnover that was not fully offset by new customer bookings. Revenues, net from our customers located in the United Statesrepresented 77% and 76% of total revenues, net for the three months ended March 31, 2022and 2021, respectively. Revenues, net from March 31, 2022and 2021, respectively. There were no other customers that accounted for 10% or greater of our revenues, net for the three months ended March 31, 2022and 2021.
Revenue Cost and Gross Margin
Three Months Ended March 31, Change 2022 2021 $ % (dollars in thousands) Cost of revenues
$ 3,328 $ 3,241 $ 873 % Gross profit 1,833 3,067 (1,234 ) (40 ) Gross profit percentage 36 % 49 % Cost of revenues for the three months ended March 31, 2022increased $0.1 million, or 3%, as compared to the corresponding period in 2021. The increase was primarily due to higher personnel costs of $0.3 millionand higher equipment costs of $0.1 millionfor the three months ended March 31, 2022, resulting from an increase in the number of full-time personnel. This was partially offset by a decrease in allocated facilities and information technology costs of $0.1 millionand a decrease in amortization of $0.1 millionfor the three months ended March 31, 2022. We also experienced a decrease of $0.1 millionin hosting costs during the three months ended March 31, 2022, due to a decline in the usage of our hosted platform from the corresponding period in 2022.
We expect the cost of revenue to remain stable in the short term in absolute dollars, as we anticipate savings on colocation expenses, but we may increase staff costs.
Our gross margin decreased to 36% for the three months ended
March 31, 2022, as compared to 49% for the corresponding period in 2021. This was primarily due to the impact of higher personnel costs and lower revenue under the New $ 1,787 $ 1,246 $ 54143 % Percent of revenues, net 35 % 20 % Sales and marketing expenses for the three months ended March 31, 2022increased $0.5 million, or 43%, as compared to the corresponding period in 2021. This was primarily due to an increase in global sales support and marketing headcount, contributing to a net increase for the three months ended March 31, 2022of $0.4 millionin personnel-related costs and a net increase for the three months ended March 31, 2022of $0.2 millionin marketing expense due to investments in advertising.
We expect sales and marketing expenses to remain stable in the near term in absolute dollars as we continue with our currently planned investments.
Research and Development Three Months Ended March 31, Change 2022 2021 $ % (dollars in thousands) Research and development
$ 2,917 $ 2,399 $ 51822 % Percent of revenues, net 57 % 38 % 23
-------------------------------------------------------------------------------- Research and development expenses for the three months ended
March 31, 2022increased $0.5 million, or 22%, as compared to the corresponding period in 2021. The increase was primarily due to higher personnel costs of $0.7 millionfor the three months ended March 31, 2022, resulting from an increase in the number of full-time research and development personnel and engineering team. The increase was partially offset by lower facilities and information technology costs of $0.2 millionfor the three months ended March 31, 2022.
We expect research and development spending to remain stable or increase slightly in the near term as we increase investment in research and development.
General and Administrative Three Months Ended March 31, Change 2022 2021 $ % (dollars in thousands) General and administrative
$ 2,469 $ 1,869 $ 60032 % Percent of revenues, net 48 % 30 % General and administrative expenses for the three months ended March 31, 2022were 32% higher than the corresponding 2021 period. This was primarily due to higher personnel costs of $0.5 million, which consisted mostly of higher stock-based compensation costs of $0.3 million. In addition, there were $0.1 millionin professional fees that we have incurred in responding to third-party subpoenas that we have received related to governmental investigations of
We expect our general and administrative expenses to remain stable or increase slightly in the near term in absolute dollars.
Other Income, Net Three Months Ended March 31, Change 2022 2021 $ % (dollars in thousands) Other income, net $ 3,402
$ 327 $ 3,075940 % Other income, net, primarily consists of sublease income as well as foreign currency transaction gains and losses and interest income and expense. For the three months ended March 31, 2022we recognized a gain of $3.1 milliondue to PPP loan forgiveness. For the three months ended March 31, 2022and 2021, we earned sublease income of $0.3 millionand $0.3 million, respectively. Foreign currency transaction gains and losses and interest income and expense were not material for the three months ended March 31, 2022and 2021. Income Tax Provision Three Months Ended March 31, Change 2022 2021 $ % (dollars in thousands) Income tax provision $ 61 $ 92 $ (31 )(34 ) % 24
-------------------------------------------------------------------------------- The income tax provision for the three months ended
March 31, 2022was primarily due to a partial release of foreign uncertain tax positions, benefits of foreign returns filed, valuation allowances in the United Statesand taxable income generated by our foreign wholly owned subsidiaries. Liquidity and Capital Resources Since our incorporation in March 2006, we have relied primarily on sales of our capital stock to fund our operating activities. From incorporation until our initial public offering ("IPO") we raised $105.7 million, net of related issuance costs, in funding through private placements of our preferred stock. In March and April 2013, we raised net proceeds of $109.3 millionin our IPO. From March 2019through March 2021, we raised total net proceeds of $12.3 millionfrom an at-the-market offering program administered by JMP Securitiesand in 2020 we received proceeds of $3.3 millionfrom a loan through the Paycheck Protection Program. From time to time, we have also utilized equipment lines and entered into finance lease arrangements to fund capital purchases. As of March 31, 2022, our principal source of liquidity was our unrestricted cash and cash equivalents of $41.5 million. Our primary operating cash requirements include the payment of compensation and related expenses, as well as costs for our facilities and information technology infrastructure.
We maintain a
We maintain cash balances in our foreign subsidiaries. As of
March 31, 2022, we had $41.5 millionof unrestricted cash and cash equivalents in aggregate, of which $0.8 millionwas held by our foreign subsidiaries. On December 22, 2017, the United Statesenacted the Tax Cuts and Jobs Act, or the TCJA, which instituted fundamental changes to the taxation of multinational corporations. Among these changes is a mandatory one-time transition tax on the deemed repatriation of the accumulated earnings of certain of our foreign subsidiaries, and a tax on earnings of foreign subsidiaries in excess of a specified return on the subsidiaries' tangible assets, known as the Global Intangible Low-Taxed Income, or GILTI. We completed our analysis of the accounting for the transition tax in the fourth quarter of 2018 and there was no tax due as a result of significant accumulated losses in our foreign subsidiaries. We also determined that no GILTI inclusion would be required in 2020 as our foreign subsidiaries have accumulated significant losses. If funds held by our foreign subsidiaries were needed for our U.S.operations, we would be required to accrue U.S.tax liabilities associated with the repatriation of these funds. However, given the amount of our net operating loss carryovers in the United States, such repatriation will most likely not result in material U.S.cash tax payments within the next year. Additionally, we do not believe that foreign withholding taxes associated with repatriating these funds would be material. On March 14, 2019, we filed a shelf registration statement on Form S-3 with the SEC, which was declared effective by the SECon May 10, 2019, under which we could offer our common stock, preferred stock, debt securities, warrants, subscription rights and units having an aggregate offering price of up to $50.0 million. As part of the shelf registration statement, we entered into an equity distribution agreement with JMP Securities LLCunder which we could offer and sell shares of our common stock having an aggregate offering price of up to $13.0 millionthrough an at-the-market offering program administered by JMP Securities. We were not required to sell any of our stock under this program. JMP Securitieswas entitled to compensation of up to 5.0% of the gross proceeds from sales of our common stock pursuant to the equity distribution agreement. We intend to use the net proceeds from the sale of securities under the equity distribution agreement primarily for working capital and general corporate purposes. For the year ended December 31, 2020, we sold 2.7 million shares of our common stock under this equity distribution agreement, and received proceeds of $7.5 million, net of offering costs of $0.5 million, at a weighted average sales price of $2.92per share. During February 2021we sold an additional 1.2 million shares of our common stock under this equity distribution agreement and received proceeds of $3.0 million, net of offering costs of $0.2 million, at a weighted average sales price of $2.68per share. There are currently no additional amounts available to be sold under this equity distribution agreement. On July 15, 2021, we entered into a new equity distribution agreement with JMP Securitiesunder which we could sell shares of our common stock up to an aggregate gross sales price of $40.0 millionthrough a new at-the-market securities offering program. In July 2021, we sold 4.3 million shares of our common stock under this July 2021equity distribution agreement and received proceeds of $38.8 million, net of offering costs of $1.2 million, at a weighted average sales price of $9.27per share, which exhausted all securities available for sale under this July 2021equity distribution agreement. In May 2020, we entered into a loan agreement with a lender for the loan in an aggregate principal amount of $3.3 million(the "Loan") pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We received the Loan proceeds on May 12, 2020. An aggregate principal amount of $3.1 millionof the Loan was forgiven in January 2022and we repaid the remaining outstanding balance of $0.2 millionin February 2022. See Note 4 to the accompanying consolidated financial statements for further discussion of this loan. On August 3, 2021, we filed a new shelf registration statement on Form S-3 with the SEC, which was declared effective by the SECon August 19, 2021and provides that we may offer our common stock, preferred stock, debt securities, warrants, subscription rights and units having an aggregate offering price of up to $100.0 million. As part of this new 2021 registration statement, we entered into a third equity distribution agreement with JMP Securitiesand established a new $50.0 million"at-the-market" securities offering facility, pursuant to which we may be able to issue and sell shares of our common stock. We have not yet sold any shares under this August 2021equity distribution 25
agreement and no assurances can be provided as to if or when me may be able to sell any shares or the terms of any such sales. In accordance with the
SEC'sInstruction I.B.6 of Registration Statement on Form S-3, we adjusted the maximum aggregate market value of the securities that may be sold pursuant to this current "at-the-market" securities offering facility from $50.0 millionto approximately $22.8 millionbased on our estimated market capitalization on the date we filed our Annual Report on Form 10-K for the year ended December 31, 2021until such time when we are eligible to conduct such offering in accordance with Instruction I.B.1 of the Registration Statement on Form S-3. We have incurred significant losses in each fiscal year since our incorporation in 2006, and we expect to continue to incur losses and negative cash flows in the future.
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