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 June 30, 2021
OR
| 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
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |||
| |
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(Address of principal executive offices) |
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(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 | ||
| (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 Yes ☒ No ☐
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). 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 | ☐ | |||
| 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 August 12, 2021, the Registrant had
shares of common stock, $0.001 par value, outstanding.
Table of Contents
Page No. | ||||
| PART I. |
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| Item 1. |
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| 3 | ||||
| 4 | ||||
| 5 | ||||
| 7 | ||||
| 8 | ||||
| Item 2. |
25 | |||
| Item 3. |
36 | |||
| Item 4. |
37 | |||
| PART II. |
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| Item 1. |
39 | |||
| Item 1A. |
39 | |||
| Item 2. |
39 | |||
| Item 3. |
39 | |||
| Item 4. |
39 | |||
| Item 5. |
39 | |||
| Item 6. |
40 | |||
| 41 | ||||
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRAL AD SCIENCE HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND UNIT DATA) |
June 30, 2021 |
December 31, 2020 |
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| ASSETS |
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| Current assets: |
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| Cash and cash equivalents |
$ | $ | ||||||
| Restricted cash |
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| Accounts receivable, net |
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| Unbilled receivables |
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| Prepaid expenses and other current assets |
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| Total current assets |
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| Property and equipment, net |
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| Internal use software, net |
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| Intangible assets, net |
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| Goodwill |
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| Other long-term assets |
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| Total assets |
$ |
$ | ||||||
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| LIABILITIES AND MEMBERS’/STOCKHOLDERS’ EQUITY |
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| Current liabilities: |
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| Accounts payable and accrued expenses |
$ | $ | ||||||
| Due to related party |
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| Capital leases payable |
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| Deferred revenue |
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| Total current liabilities |
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| Accrued rent |
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| Net deferred tax liability |
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| Long-term debt |
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| Total liabilities |
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| Commitments and Contingencies (Note 13) |
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| Members’/Stockholders’ Equity |
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| Units, $ |
— |
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| Preferred Stock, $ |
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| Common Stock, $ |
— | |||||||
| Additional paid-in-capital(1) |
— | |||||||
| Accumulated other comprehensive income |
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| Accumulated deficit(1) |
— | ( |
) | |||||
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| Total members’/stockholders’ equity |
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| Total liabilities and members’/stockholders’ equity |
$ |
$ | ||||||
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(1) |
Balances prior to the Company’s conversion to a Delaware corporation have been reclassified to additional paid-in capital to give effect to the corporate conversion described in Note 1. |
See notes to the unaudited condensed consolidated financial statements.
3
INTEGRAL AD SCIENCE HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) |
2021 |
2020 |
2021 |
2020 |
||||||||||||
| Revenue |
$ | $ | $ | $ | ||||||||||||
| Operating expenses: |
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| Cost of revenue (excluding depreciation and amortization shown below) |
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| Sales and marketing |
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| Technology and development |
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| General and administrative |
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| Depreciation and amortization |
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| Total operating expenses |
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| Operating loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest expense, net |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
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|
|||||||||
| Net loss before benefit from income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Benefit from income taxes |
||||||||||||||||
| |
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|
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|
|
|
|
|||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
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|
|
|
|||||||||
| Net loss per share – basic and diluted (1): |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
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| Basic and diluted weighted average shares outstanding |
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| Other comprehensive income (loss): |
||||||||||||||||
| Foreign currency translation adjustments |
( |
) | ( |
) | ||||||||||||
| |
|
|
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|
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| Total comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| |
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| (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.
4
INTEGRAL AD SCIENCE HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’/ STOCKHOLDERS’ EQUITY
(UNAUDITED)
Three Months Ended June 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, April 1, 2021 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Option exercises |
— | — | — | — | ||||||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Conversion to Delaware corporation (Note 1) |
( |
) |
( |
) | — | |||||||||||||||||||||||||||
| |
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| Balance, June 30, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| |
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Six Months Ended June 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 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
| Repurchase of units |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
| Units vested |
— | |||||||||||||||||||||||||||||||
| Option exercises |
— | |||||||||||||||||||||||||||||||
| Stock-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Foreign currency translation adjustment |
— | — | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
| Net loss |
— | — | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Conversion to Delaware corporation (Note 1) |
( |
) |
( |
) | — | |||||||||||||||||||||||||||
| |
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| Balance, June 30, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| |
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| (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.
5
INTEGRAL AD SCIENCE HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’/STOCKHOLDERS’ EQUITY
(UNAUDITED)
Three Months Ended June 30, 2020
Member’s Interest |
||||||||||||||||||||||||
(IN THOUSANDS, EXCEPT UNITS AND SHARES) |
Units (1) |
Amount |
Additional paid-in capital |
Accumulated other comprehensive income (loss) |
Accumulated deficit |
Total members’/ stockholders’ equity |
||||||||||||||||||
| Balance, April 1, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Foreign currency translation adjustment |
— | — | — | — | ||||||||||||||||||||
| Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Balance, June 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| |
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Six Months Ended June 30, 2020
Member’s Interest |
||||||||||||||||||||||||
(IN THOUSANDS, EXCEPT UNITS AND SHARES) |
Units (1) |
Amount |
Additional paid-in capital |
Accumulated other comprehensive income (loss) |
Accumulated deficit |
Total members’/ stockholders’ equity |
||||||||||||||||||
| Balance, January 1, 2020 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Repurchase of units |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Units vested |
— | — | — | |||||||||||||||||||||
| Foreign currency translation adjustment |
— | — | — | ( |
) | — | ( |
) | ||||||||||||||||
| Net loss |
— | — | — | — | ( |
) | ( |
) | ||||||||||||||||
| Balance, June 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| |
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| (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.
6
INTEGRAL AD SCIENCE HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30, |
||||||||
(IN THOUSANDS) |
2021 |
2020 |
||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities |
||||||||
| Depreciation and amortization |
||||||||
| Stock-based compensation |
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| Deferred tax provision |
|
|
( |
) | |
|
— |
|
| Amortization of debt issuance costs |
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| Allowance for doubtful accounts |
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| Non-cash interest expense |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Decrease in accounts receivable |
||||||||
| Decrease in unbilled receivables |
||||||||
| Increase in prepaid expenses and other current assets |
( |
) | ( |
) | ||||
| Increase in taxes receivable |
( |
) | ||||||
| Increase in other long-term assets |
( |
) | ( |
) | ||||
| Increase in accounts payable and accrued expenses |
||||||||
| Increase (decrease) in due to related party |
( |
) | ||||||
| Increase in accrued rent |
||||||||
| Decrease in deferred revenue |
( |
) | ( |
) | ||||
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| Net cash provided by operating activities |
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| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment |
( |
) | ( |
) | ||||
| Acquisition and development of internal use software |
( |
) | ( |
) | ||||
| |
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| Net cash used in investing activities |
( |
) | ( |
) | ||||
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| Cash flows from financing activities: |
||||||||
| Principal payments on capital lease obligations |
( |
) | ( |
) | ||||
| Cash paid for share repurchases |
( |
) | ( |
) | ||||
| Initial public offering costs paid |
( |
) | ||||||
| Exercise of stock options |
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| Net cash used in financing activities |
( |
) | ( |
) | ||||
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| Net increase in cash, cash equivalents and restricted cash |
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| Effect of exchange rate changes on cash, cash equivalents and restricted cash |
( |
) | ||||||
| Cash, cash equivalents and restricted cash at beginning of period |
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| Cash, cash equivalents, and restricted cash, at end of period |
$ | $ | ||||||
| |
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| Supplemental Disclosures: |
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| Cash paid during the period for: |
||||||||
| Interest |
$ | $ | ||||||
| Taxes |
$ | $ | ||||||
| Non-cash investing and financing activities |
||||||||
| Deferred offering costs accrued, not yet paid |
$ | $ | ||||||
| Assets acquired under capital leases |
$ | $ | ||||||
| Property and equipment acquired included in accounts payable |
$ | $ | ||||||
| Conversion of members’ equity to additional paid-in capital |
$ | $ | ||||||
See notes to the unaudited condensed consolidated financial statements.
7
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 global digital advertising verification company. 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 U.S. in New York, California, Illinois, Washington, Texas and Virginia. Operations outside the U.S. include offices in the U.K., Germany, Italy, Spain, Sweden, Singapore, Australia, France, Japan, Canada, Hong Kong, Brazil, and India.
Corporate conversion and initial public offering
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. All of the outstanding member units were converted into shares of common stock with the same voting rights.
On June 29, 2021, the Company priced an initial public offering (“IPO”) of its common stock, which closed on July 2, 2021. In the IPO, the Company issued and sold
shares of common stock at a price per share of
$The Company received aggregate proceeds of
$million from the IPO, net of underwriters’ discounts and commissions, and offering costs. The underwriters were granted a
option to purchase up to an additional
shares of common stock from the Company. On July 28, 2021 the underwriters exercised their option to purchase
shares of common stock and the Company received additional proceeds of
$million, net of underwriters’ discount and
commissions, and offering costs.
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 June 30, 2021, the condensed consolidated statements of operations and comprehensive loss, of cash flows and of members’/stockholders’ equity for the three and six months ended June 30, 2021 and 2020, 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 months and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any future period.
8
The Company’s significant accounting policies are discussed in Note 2 to the consolidated financial statements for the years ended December 31, 2020 and 2019. There have been no significant changes to these policies that have had a material impact on the Company’s condensed consolidated financial statements and related notes for the three and six months ended June 30, 2021. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our final IPO prospectus filed with the Securities and Exchange Commission (“SEC”) on July 1, 2021.
(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.
(c) Use of estimates
The preparation of condensed consolidated 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. Actual results could differ from these estimates. Significant estimates include the allocation of purchase price consideration in the business combination and the related valuation of acquired assets and liabilities, the estimated useful lives of our property and equipment, intangible assets and internal use software, the allowance for doubtful accounts, and goodwill impairment testing; the assumptions used to calculate stock-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.
Beginning in the first quarter of 2020, the
COVID-19
pandemic has negatively impacted, and may continue to negatively impact, the macroeconomic environment in the United States and globally, as well as the Company’s business, financial condition and results of operations. In the quarters subsequent to the second quarter of 2020, the underlying demand for the Company’s services has stabilized. Due to the evolving and uncertain nature of COVID-19,
it is reasonably possible that it could materially impact the Company’s estimates, particularly those noted above that require consideration of forecasted financial information, in the near to medium term. The ultimate impact will depend on numerous evolving factors that the Company may not be able to accurately predict, including the duration of the pandemic, new variants and their effects, vaccination rates, the impact of federal, state, local and foreign governmental actions, consumer behavior in response to the pandemic and other economic and operational conditions the Company may face.(d) 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.
June 30, 2021 |
December 31. 2020 |
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Cash and cash equivalents |
$ | $ | ||||||
Short term restricted cash |
||||||||
Long term restricted cash (held in other long-term assets) |
||||||||
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows |
$ | $ | ||||||
(e) 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.
9
The activity in our allowance for doubtful accounts consists of the following as of:
June 30, 2021 |
June 30, 2020 |
|||||||
| Balance, beginning of period |
$ | |
|
|||||
| Additional provision |
||||||||
| Receivables written off |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Balance, end of period |
$ | |||||||
| |
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|
|
|||||
(f) 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”) and return target options (“Return-Target Options”), which vest upon a realized cash return of the equity investment of Vista Equity Partners, the Company’s equity sponsor and funds controlled by Vista Equity Partners (together, (“Vista”):
Expected term
Expected volatility
Risk-free interest rate
Expected dividend
Fair value
The Company used the following assumptions in valuing its stock-based compensation:
June 30, 2021 |
June 30, 2020 (1) | |||
| Estimated fair value |
$ |
$ | ||
| Expected volatility (%) |
||||
| Expected term (in years) |
||||
| Risk-free interest rate (%) |
||||
| Dividend yield |
(1) |
For issuances prior to the pricing of the IPO, the fair value of the Company’s option grants was estimated at the grant date using the Monte Carlo simulation model and relate to the Return-Target Options only as the Time-Based Options were not within the scope of ASC 718, Compensation - Stock Compensation |
(g) Deferred offering costs
Deferred offering costs are capitalized and consist of fees incurred in connection with our IPO and include legal, accounting, printing, and
other IPO-related costs.
Upon the completion of our IPO, which occurred on July 2, 2021, these deferred costs will be reclassified to members’/stockholders’ equity and recorded against the proceeds from the offering. 10
Deferred offering costs of $6,361 are included within prepaid expenses and other current assets as of June 30, 2021. No such costs were incurred as of December 31, 2020.
(h) Recently adopted accounting pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU (“ASU effective January 1, 2021, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, , and clarifies certain aspects of the current guidance to promote consistency among reporting entities. Most amendments within ASU
No. 2019-12,
Income
Taxes
(Topic
740):
Simplifying
the
Accounting
for Income Taxes
No. 2019-12”)
Income
Taxes
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 (“ASU
2018-15,
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
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. (
i) Accounting pronouncements not yet adopted
In March 2020, the FASB issued ASU ,” which intends 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 this ASU provide operational expedients and exceptions for applying U. S GAAP to contracts, hedging relationships and other transactions to affected by reference rate reform if certain criteria are met. The amendments in this ASU 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.
2020-04,
“Facilitation of the Effects of Reference Rate Reform on Financial Reporting
In June 2016, the FASB issued ASU No. : 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
2016-13, “
Financial Instruments-Credit Losses (Topic 326)
Measurement of Credit Losses on Financial Instruments,”
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. In February 2016, the FASB issued ASU ”. Under the new guidance, lessees will be required to put most leases on their balance sheets but to recognize expenses in the income statement in a manner similar to current accounting. The guidance 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 will be effective for the Company beginning January 1, 2022, with early adoption permitted. Upon adoption, entities will be 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 , 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 is currently evaluating the potential effect that adopting this guidance will have on its condensed consolidated financial statements.
2016-02,
“Leases (Topic 842)
2018-11,
Leases (Topic 842), Targeted Improvements
11
3. Property and equipment, net
Property and equipment consisted of the following:
Estimated useful life (in years) |
June 30, 2021 |
December 31, 2020 |
||||||||||
Computer and office equipment |
$ | $ | ||||||||||
Computer software |
||||||||||||
Leasehold improvements |
||||||||||||
Furniture |
||||||||||||
Total property and equipment |
||||||||||||
Less: accumulated depreciation |
( |
) | ( |
) | ||||||||
Total property and equipment, net |
$ | $ | ||||||||||
Depreciation expense of property and equipment for the three months ended June 30, 2021 and 2020 was $455 and $816 , respectively. Depreciation expense of property and equipment for the six months ended June 30, 2021 and 2020 was $960 and $1,669 , respectively.
Computer and office equipment under capital leases are as follows:
June 30, 2021 |
December 31, 2020 |
|||||||
Computer and office equipment |
$ | $ | ||||||
Less: Accumulated depreciation |
( |
) | ( |
) | ||||
Total computer and office equipment under capital leases, net |
$ | $ | ||||||
Depreciation expense related to computer and office equipment under capital leases for the three months ended June 30, 2021 and 2020 was $85 and $448 , respectively. Depreciation expense related to computer and office equipment under capital leases for the six months ended June 30, 2021 and 2020 was $221 and $955 , respectively.
4. Internal use software, net
Internal use software consisted of the following:
Estimated useful life (in years) |
June 30, 2021 |
December 31, 2020 |
||||||||||
Internal use software |
$ | $ | ||||||||||
Less: Accumulated amortization |
( |
) | ( |
) | ||||||||
Total internal use software, net |
$ | $ | ||||||||||
Amortization expense for the three months ended June 30, 2021 and 2020 was $2,134 and $1,119 , respectively. Amortization expense for the six months ended June 30, 2021 and 2020 was $3,707 and $2,098 , respectively. During the six months ended June 30, 2021, the Company purchased a digital advertising transparency software for $4,548 . This software further expands the Company’s Total Visibility offering which provides insight into digital media quality and corresponding supply path costs.
12
5. Intangible assets, net
The gross book value, accumulated amortization, net book value and amortization periods of the intangible assets were as follows
June 30, 2021 |
||||||||||||||||||||
Estimated useful life |
Gross book value |
Accumulated amortization |
Net book value |
Weighted average remaining useful life |
||||||||||||||||
Customer relationships |
$ | $ | ( |
) | $ | Ye ars |
||||||||||||||
Developed technology |
( |
) | Years |
|||||||||||||||||
Trademarks |
( |
) | Years |
|||||||||||||||||
Favorable leases |
( |
) | Y ears |
|||||||||||||||||
Total |
$ | $ | ( |
) | $ | |||||||||||||||
December 31, 2020 |
||||||||||||||||||||
Estimated useful life |
Gross book value |
Accumulated amortization |
Net book value |
Weighted average remaining useful life |
||||||||||||||||
Customer relationships |
$ | $ | ( |
) | $ | |||||||||||||||
Developed technology |
( |
) | ||||||||||||||||||
Trademarks |
( |
) | ||||||||||||||||||
Favorable leases |
( |
) | ||||||||||||||||||
Total |
$ | $ | ( |
) | $ | |||||||||||||||
Amortization expense related to intangibles for the three months ended June 30, 2021 and 2020 was $12,013 and $14,493 , respectively. Amortization expense related to intangibles for the six months ended June 30, 2021 and 2020 was $24,332 and $28,972 , respectively.
6. Goodwill
The following table provides a roll forward of the changes in the goodwill balance:
Goodwill as of December 31, 2020 |
$ | |||
Impact of exchange rates |
( |
) | ||
Goodwill as of June 30, 2021 |
$ | |||
13
7. Accounts payable and accrued expenses
Accounts payable and accrued expenses consisted of the following:
June 30, 2021 |
December 31, 2020 |
|||||||
| Accounts payable |
$ |
$ |
||||||
| Accrued payroll |
|
|
|
|
|
|
|
|
| Accrued professional fees |
|
|
|
|
|
|
|
|
| Accrued interest |
||||||||
| Accrued bonuses and commissions |
||||||||
| Accrued revenue sharing |
|
| ||||||
| Taxes payable |
|
|
|
|
|
|
|
|
| Other accrued expenses |
|
|
|
|
|
|
|
|
| |
|
|
|
|||||
| Total accounts payable and accrued expenses |
$ |
$ | ||||||
| |
|
|
|
|||||
8. Long-term debt
Credit Agreement
On July 19, 2018, the Company entered into a credit agreement with various lenders (“Credit Agreement”), providing a term facility in the aggregate principal amount of $325,000 (“Term Loan”) and the ability to draw additional funds through a revolving facility (“Revolving Loan”) of up to $25,000 . The Term Loan and Revolving Loan have a maturity date of July 19, 2024 and July 19, 2023 , respectively.
In addition to interest payable in cash, the Credit Agreement includes Paid in Kind (“PIK”) interest at a rate
of 1.25 % per annum. All PIK interest due is paid by capitalizing such interest and adding such applicable PIK interest to the principal amount of the outstanding Term Loan. The interest rate for the The Company has elected the Eurodollar rate through 2020. The interest rate as of June 30, 2021 was 6.0 %.
cash interest under the
Credit Agreement may be either the (a) Alternate Base Rate, which is equal to the greatest of the base rate in effect, the Federal Funds Rate in effect on such day plus 0.5% and one month adjusted LIBOR plus 1.0%, plus an applicable margin of 5% or for eurodollar borrowings, the (b) Eurodollar rate, which is the adjusted LIBOR plus an applicable margin of 6%.On November 19, 2019, the Company entered into an incremental facility assumption amendment (“Incremental Term Loan”) to the Credit Agreement which increased the aggregate principal amount by $20,000 used to finance the ADmantX S.p.A acquisition, pay fees, costs, and expenses incurred in connection with the agreement, and finance working capital and general corporate purposes. All terms and conditions of the Term Loan remained consistent under the Incremental Term Loan. In connection with7,476 . In connection with Incremental Term Loan, the Company incurred debt issuance costs of $473 . Debt issuance costs related to the Term Loan and Incremental Term Loan were recorded as a deferred charge and direct offset to long-term debt and are amortized into interest expense over the contractual term of the borrowings using the straight-line method. As no amounts were drawn on the Revolving Loan as of June 30, 2021, the debt issuance costs related to this facility were recorded as a deferred financing asset within prepaid expenses and other current assets and are amortized into interest expense over the contractual term of the borrowings using the straight-line method.
the entry into
the Credit Agreement, the Company incurred debt issuance costs of $All of the obligations under the Credit Agreement are guaranteed by the Company and its subsidiaries other than certain excluded subsidiaries. The Credit Agreement contains covenants requiring certain financial information to be submitted monthly, quarterly and annuallyThe Company must maintain a minimum liquidity level, as defined, and comply with a Revenue Leverage Ratio based on the last twelve months (“LTM”) which was required to be 1:50:1.00 or lower for the second quarter of 2021. The benchmark for the Revenue Leverage Ratio decreases through the term of the loan. The Credit Agreement also places restrictions on the incurrence of additional indebtedness, the payment of dividends, sale of assets, and entering into any merger or acqu
.
isition. As of June 30, 2021, the Company was in compliance with all covenants contained in the Credit Agreement.
14
The carrying amount of the Term Loan is as follows:
June 30, 2021 |
December 31, 2020 |
|||||||
| Term Loan |
$ | $ | ||||||
| PIK Interest |
||||||||
| Less: Unamortized debt issuance costs |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total carrying amount of Term Loan |
$ | $ | ||||||
| |
|
|
|
|||||
Amortization expense related to debt issuance costs for the three months ended June 30, 2021 and 2020 was $341 and $341 , respectively. Amortization expense related to debt issuance costs for the six months ended June 30, 2021 and 2020 was $683 and $683 , respectively.
The Company recognized interest expense of $4,825 and $6,231 during the three month periods ended June 30, 2021 and 2020, respectively. The Company recognized interest expense of $11,047 and $13,052 for the six month period ended June 30, 2021 and 2020, respectively.
Future principal payments of long-term debt as of June 30, 2021, without including additional PIK interest, are as follows:
Year Ending |
||||
| 2021 |
$ | |||
| 2022 |
||||
| 2023 |
||||
| 2024 |
||||
| |
|
|||
| $ | ||||
| |
|
|||
9. 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 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 deferred tax asset in future years or unrecognized tax benefits is recognized in the interim period in which the change occurs.
year-to-date
beginning-of-the-year
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 June 30, 2021 and 2020, the Company recorded an income tax benefit of
$respectively, due primarily to pre-tax book losses offset by non-deductible stock-based compensation. The Company’s effective tax rate for the period ending June 30, 2021 was
The Company’s effective tax rate is lower than the statutory rate primarily due to non-deductible stock-based compensation as the Company is now subject to the provisions of IRC 162(m) as a result of becoming a public company on June 30, 2021. For the six months ended June 30, 2021 and 2020, the Company recorded an income tax benefit of
respectively, due primarily to pre-tax book losses. The Company’s effective tax rate for the period ending June 30, 2020 was
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. As of June 30, 2021 the Company does no t have an accrual relating to uncertain tax positions.
15
10. 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 June 30, |
Six Months June Ended 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| North and South America (“Americas”) |
$ | $ | $ | $ | ||||||||||||
| Europe, Middle East and Africa (“EMEA”) |
||||||||||||||||
| Asia and Pacific Rim (“APAC”) |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
For the three months ended June 30, 2021 and 2020, revenue in the United States was $41,840 and $28,035 , respectively. For the six months ended June 30, 2021 and 2020, revenue in the United States was $80,070 and $59,297 , respectively.
The following table summarizes property and equipment, net by geographic area:
June 30, 2021 |
December 31, 2020 |
|||||||
| Property and Equipment, net |
||||||||
| Americas |
$ | $ | ||||||
| EMEA |
||||||||
| APAC |
||||||||
| |
|
|
|
|||||
| Total |
$ | $ | ||||||
| |
|
|
|
|||||
11. Stock-based compensation
Integral Ad Science Holding Corp. 2018 Stock Option Plan
On August 1, 2018, the Company adopted the 2018 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.
Non-Qualified
Stock Option Plan (“2018 Plan”). Under the 2018 Plan, the Company had issued (i) Time-Based Options that vest over 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 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, but instead, compensation cost was recognized when the benefit to the employee was determined to be probable. During the three and six months ended June 30, 2021, the Company recognized stock compensation expense of $3,360
, Compensation -
Stock Compensation
pre-IPO
financial statements of the Company. 16
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 a cumulative total of cash distributions of
$As a result of the modification to the Time-Based Options, the awards became subject to the guidance in ASC 718,
Compensation - Stock Compensation
and the fair value of the awards were determined to be The Company recognized a stock-based compensation expense of
in connection with the IPO for the three and six months ended June 30, 2021, based on the options that were vested at the IPO. As the return multiple associated with the Return-Target Options was also modified, the Company fair valued the Return-Target Options using a Monte Carlo simulation model which resulted in a fair value of
As the Return-Target Options only vest upon a change of control, stock-based compensation expense associated with the Return-Target Options will be recognized when such event is deemed probable. As of June 30, 2021, such event was not deemed probable and therefore,
stock-based compensation expense was recognized relating to the Return-Target Options.
The total number of Time-Based Options and Return Target Options issued under the Amended and Restated 2018 Plan as of June 30, 2021 were 5,469,534 and 2,734,766 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 July 1, 2021, the Company filed a registration statement on Form S-8 and 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. The Company reserved 19,701,877 shares 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.
The
Company granted an aggregate of rd
or rd
or under the 2021 Plan. The vesting conditions for the options issued under the 2021 Plan were identical to the those described under the Amended and Restated 2018 Plan. Additionally, the Company granted an aggregate of
r
estricted s
tock u
nits (“RSUs”) to its employees valued at $2021 Employee Stock Purchase Plan (“ESPP”)
The Company adopted the ESPP for the primary purpose of incentivi1,489,571 shares of the common stock are reserved for issuance, and the number of shares available for issuance will be increased on January 1 of each calendar year beginning in 2022 and 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 15 % 25,000 no
z
ing employees in future periods. Under the ESPP, 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 can purchase shares through payroll deductions of up to
of their eligible compensation, subject to a maximum of
$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. There are
shares issued under the ESPP plan as of June 30, 2021.
Integral Ad Science Holding Corp. Long-Term Incentive Plan
In 2018
, the Company adopted the Long-Term Incentive Plan (“LTIP”). Under the LTIP, certain employees of the Company and its subsidiaries were granted long-term target incentive cash awards which will be payable subject to continued employment, upon the sale of the Company, or, sale to a third party of at least 50 % of the Vista’s equity interest, provided if such sale of equity interests is through a public offering (whether initial or secondary), it would require the transfer of an aggregate of at least 75 % of Vista’s equity interest and the achievement of a total equity return multiple of 3.0 or greater.
17
The total amount of long-term incentive cash awards as of June 30, 2021 and December 31, 2020 was $12,235 and $10,560 , respectively. As the multiple is tied to an equity return multiple, any compensation charge associated with these awards is considered equity-based compensation in accordance with U.S. GAAP. Since the liquidity events described above are contingent and generally not considered probable until the event occurs, no 10 % premium to the current value of the award and will vest 50 % each year and become fully vested after two years of service.
was
at a LTIP grants aggregating $12,661 were converted into 706,526 RSUs and $475 in long-term incentive cash awards remains outstanding under the Amended and Restated LTIP.
Stock Option activity for the three months ended June 30, 2021 is as follows:
Time-Based Options
Stock options |
Weighted average exercise price |
Weighted average remaining contractual life (years) |
Aggregate intrinsic value |
|||||||||||||
Outstanding at April 1, 2021 |
$ | — | ||||||||||||||
Granted |
— | |||||||||||||||
Canceled or forfeited |
( |
) | — | — | ||||||||||||
Exercised |
( |
) | — | — | ||||||||||||
Outstanding at June 30, 2021 |
$ | $ | ||||||||||||||
Vested and expected to vest at June 30, 2021 |
$ | |||||||||||||||
Exercisable as of June 30, 2021 |
$ | $ | ||||||||||||||
Return-Target Options
Stock options |
Weighted average exercise price |
Weighted average remaining contractual life (years) |
Aggregate intrinsic value |
|||||||||||||
Outstanding at April 1, 2021 |
$ | — | ||||||||||||||
Granted |
— | |||||||||||||||
Canceled or forfeited |
( |
) | — | — | ||||||||||||
Exercised |
— | — | ||||||||||||||
Outstanding at June 30, 2021 |
$ | $ | ||||||||||||||
Vested and expected to vest at June 30, 2021 |
$ | |||||||||||||||
Exercisable as of June 30, 2021 |
||||||||||||||||
18
Stock Option activity for the six months ended June 30, 2021 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, 2021 |
$ | — | ||||||||||||||
Granted |
— | |||||||||||||||
Canceled or forfeited |
( |
) | — | — | ||||||||||||
Exercised |
( |
) | — | — | ||||||||||||
Outstanding at June 30, 2021 |
$ | $ | ||||||||||||||
Vested and expected to vest at June 30, 2021 |
$ | |||||||||||||||
Exercisable as of June 30, 2021 |
$ | $ | ||||||||||||||
Return-Target Options
Stock options |
Weighted average exercise price |
Weighted average remaining contractual life (years) |
Aggregate intrinsic value |
|||||||||||||
Outstanding at January 1, 2021 |
$ | — | ||||||||||||||
Granted |
— | |||||||||||||||
Canceled or forfeited |
( |
) | — | — | ||||||||||||
Exercised |
— | — | ||||||||||||||
Outstanding at June 30, 2021 |
$ | $ | ||||||||||||||
Vested and expected to vest at June 30, 2021 |
$ | |||||||||||||||
Exercisable as of June 30, 2021 |
||||||||||||||||