Kubient Inc

NASDAQ:KBNT

Good afternoon, and welcome to Kubient’s Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining us for today’s call are Kubient’s Founder, Chairman, Chief Executive Officer, Chief Strategy Officer and President, Mr. Paul Roberts; and Chief Financial Officer, Josh Weiss. Following their remarks, we will open the call for your questions.

Before we get started, I need to alert you to our Safe Harbor statements under the Securities Litigation Reform Act of 1995. During this call, we will be making forward-looking statements, including statements related to future events or to our future financial performance, and involve known and unknown risks uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, level activity performance or achievements expressed or implied by those forward-looking statements. Listeners should not place undue reliance on forward-looking statements since they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could and likely will materially affect actual results, level of activity, performance or achievements. Any forward-looking statement reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call.

Furthermore, listeners are referred to the documents filed by Kubient, Inc. with the SEC, including our annual report on Form 10-K, which will be filed with the SEC on March 30, 2023, with the understanding that our actual future results may be materially different from what we expect, which include these and certain other important risk factors. We qualify all our forward-looking statements by these cautionary statements. Also note, the forward-looking statements on this call are based on information available to us as of today’s date. Except as required by law, we assume no obligation to publicly update or revise these forward-looking statements for any reason or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Please refer to Kubient’s SEC filings, specifically its registration statement on Form S-1 initially filed on December 12, 2020, for more detailed description of risk factors that may affect the company’s results.

During the call today, management will discuss adjusted EBITDA and non-GAAP financial measure. In the company’s press release and filings with the SEC, both of which are posted on the company’s website, you will find additional disclosures regarding this non-GAAP measure, including a reconciliation of this measure with its comparable GAAP measure. Non-GAAP financial measures are not intended to be considered in isolation from, substitute for or superior to GAAP results. The company encourages you to consider all measures when analyzing its performance.

Now, I would like to turn the call over to Paul Roberts. Sir, please proceed.

Thanks, operator, and thanks to everyone who has joined us today. This past year, we transitioned Kubient from a hyper-growth, cash-burning company aimed at horizontal market capture to an efficient and well-balanced technology-focused organization. From an operational perspective, Kubient continues to provide catered solutions-based services to our customers, and I’m happy to report that despite macroeconomic headwinds, we’ve continued to successfully operate our business while making advancements to our technology, in particular, with KAI 2.0, which is the latest iteration of our proprietary ad fraud identification and prevention technology.

The announcement of KAI 2.0 came on the heels of a landmark achievement by Kubient to receive a patent on our solution in the advertising ecosystem. Receiving this patent positions us strongly in the ad tech and media ecosystem to empower brands, advertisers and publishers to combat fraud and protect their media budget. As we previously noted, this is a rare milestone due to the nature of very few ad tech companies receiving any type of patent approval within this industry.

As it relates to the improvements we made to the KAI platform with our 2.0 rollout, there are a multitude of benefits, which include expanded real-time artificial intelligence analysis with 25 algorithms running in under 10 milliseconds; full support of the much larger scale protocol; extensive supply path optimization to support with ads.txt and supply chain object verification, along with additional data mining capabilities; and last, but not least, our enhanced support for new CTV and audio formats. The continued emphasis on KAI, both as a market differentiator and a tool for our clients, has shown our commitment to investing in Kubient’s technology and focus on bringing AI to the forefront of advertising as a means to drive a cleaner and more transparent digital media ecosystem.

On brand with our remarks on the last earnings call, we want to continue betting on KAI as we are very confident this solution will play an integral part in the broader ad tech industry going forward and adds a prominent layer to our overall value proposition. The flexibility of our technologies has resulted in meeting our customers’ ever-changing needs, which lately has had an emphasis within CTV. KAI 2.0 better helps publishers identify unmonetized advertising inventory in this growing space and allows for immediate and dynamic action to better take advantage of their efforts to reach end customers.

As we’ve previously shared, our client-facing dashboard helps publishers by providing insights into inventory health, increasing the efficiency of ad monetization efforts for greater revenue acquisition. The 20% plus average increase in revenue from our customers using this new dashboard has remained consistent over the previous quarter. Kubient remains mindful and dedicated to providing efficient and quickly implemented high-quality solutions for customers as we recognize the impact of the macroeconomic environment playing a significant role on both the buyer and seller of digital advertisement.

That said, quantities of spend on advertising initiatives continue to be a recurring topic of discussion internally for companies as we’re seeing some Tier 2 and Tier 3 players in the space begin to slightly retract. We’ve kept our eye close to the market as liquidity and capital constraint concerns have temporarily affected certain market players. Our goal at this time is to focus on controlling the controllables by offering our robust offerings to better serve current and future customers throughout their ad spend and buying journey.

With these advancements and measures in mind, our continued focus on behalf of shareholders and the management team has been a strategic and aggressive initiative in the space of M&A. In parallel with executing our core business, we continue to search for ways to be opportunistic to ultimately gain scale. As we have shared on prior calls, we’re actively deploying our inorganic growth strategy of exploring strategic and transformative ideas as well as commercial opportunities with companies in our space.

With a multitude of macroeconomic variables, market timing for M&A is very arduous for most candidates at this time in this environment, especially those publicly listed. That said, while we have had some meaningful discussions, we’re not at a point to share any definitive news at this time. Again, our comprehensive supply side platform with the direct publisher integrations coupled with our recently patented and upgraded KAI 2.0 has uniquely primed Kubient to be in a prominent position for M&A. Companies view us not only as a growth driver for existing opportunities, but as a differentiator and key transition piece as the advertising market evolves to the next stage of ad tech development.

Our conversations at this time focus first on the portfolio of solutions and services, and second, on the standalone health of our business. With the optimization measures taken during the latter half of 2022, our team operates in an efficient state with low burn relative to the quality of our offering and capacity to serve the buyers and publishers in our marketplace. With a healthy balance sheet holding approximately $14.7 million in cash as of the end of Q4 2022, we are primed in this market filled with uncertainty to add immediate value to an enterprise within the ad tech space.

With that, I’ll hand this call over to Josh, who will provide additional color on the quarter from a financial perspective. Josh?

Thanks, Paul, and good afternoon, everyone. Thanks for joining our call. Before jumping into our results, I wanted to make a note regarding our exposure at the Silicon Valley Bank. As I’m sure most of you on this call know, on March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation was appointed as receiver. Though we had some initial exposures here, on March 17, 2023, we moved the majority of our funds on deposit at SVB to other banks with the intention to move the remainder of our funds on deposit at SVB once we have transitioned all accounting and payroll functions connected to our account at SVB to account at other banks, such as our depository account at Bulge-bracket banks like JPMorgan Chase.

While we do not anticipate any losses, liquidity issues or capital resource constraints arising as a result of the winding down of our account at SVB, we are closely watching the overall impact this may have on our collaborators, employees, suppliers and/or vendors, and it could be negatively impacted by the closure of SVB and other macroeconomic and geopolitical events.

Now to our financial results for the full year ended December 31, 2022. Net revenues for the full year of 2022 were approximately $2.4 million compared to approximately $2.7 million in the same period last year. The decrease in net revenue was primarily associated with the decrease of net revenues associated with the major customer as compared to the 2021 period, partially offset by revenues generated in the 2022 period related to customer contracts acquired in connection with our acquisition of MediaCrossing in November 2021.

Technology expenses increased to approximately $3.2 million from approximately $3.1 million in the same period last year. The increase was primarily attributable to initial increases in headcount costs in early 2022, stock-based compensation expenses, cloud hosting expenses, which were partially offset by decreases in technology, programming fees, amortization expenses, consulting fees, software subscription and travel and entertainment expenses.

General and administrative expenses increased to approximately $6.6 million compared to approximately $6.1 million in the same period last year. The increase was primarily attributable to increases in legal and professional fees, stock-based compensation expense, rent expense, board fees, dues and membership fees, state income tax expenses, travel and entertainment expenses, software subscriptions, which were partially offset by decreases in recruiting fees, consulting fees, insurance expense, office-related expenses and headcount costs.

GAAP net loss attributable to common shareholders was approximately $13.6 million or $0.95 loss per basic and diluted share compared to a net loss of approximately $10.3 million or $0.75 loss per basic and diluted share in the same period last year.

Adjusted EBITDA loss, a non-GAAP measure, was approximately $12.9 million or $0.90 per basic and diluted share for the full year ended December 31, 2022, compared to an adjusted EBITDA loss of approximately $9.2 million or $0.67 per basic and diluted share in the same period last year.

As of December 31, 2022, we continue to have a strong cash balance of approximately $14.7 million. Given the current economic situation we’re in, cash is a valuable asset to have in this time of soaring interest rates. We intend to leverage our cash to continue executing our organic strategy while making ourselves that much more appealing to M&A candidates.

That concludes my financial summary. For a more detailed analysis, please reference our Form 10-K, which we plan to file this week.

I will now turn the call back over to Paul. Paul?

Thanks, Josh. We appreciate your continued support and investment in Kubient along with this journey. Stay tuned for updates on our latest endeavors as we continue optimizing our existing suite of services and aggressively pursue opportunities in the M&A market. Through the efforts of our team pulled together through 2022, Kubient is well positioned to take advantage of strategic partnerships on the organic and inorganic growth front.

Now, I’ll turn it over to the operator for Q&A.

Thank you. [Operator Instructions] Our first question is coming from Jack Vander Aarde with Maxim Group. You may proceed.

Okay. Great. I appreciate the quarterly update, guys and thanks for taking my questions. Paul, let me start with one, maybe a congrats. It’s been a long time in the making because we have been [ph] receiving the official KAI patent and then along with the recent developments release of the KAI 2.0. That’s a big announcement. I know you touched on some of your – some comments in your prepared remarks, but just how does this actually change the narrative in terms of the business momentum that we’ll see in the financial statements, maybe on the top line? Are we at a place where you think you’ll see some incremental growth in this in the near term that’s meaningful and will show up in the income statement? Or are we – are you still – just I guess, where are you in the overall launch strategy and commercialization of it? Thanks.

No problem, and thanks for joining, Jack, and again, thanks for the congratulations. It’s been very interesting, number one, receiving the patent, but number two, getting that news out there because what it’s done is, number one, obviously, gotten us some interest from parties who want to use the KAI technology as a – on a commercial aspect, but it’s also gotten us a lot of attention from other companies in the ecosystem who start to bring up the M&A conversation, because they think that this type of a technology can really give them a key differentiator in the marketplace versus what’s already out there.

If you’ll note, in our industry, it’s very, very rare to actually be issued a patent, especially around fraud and identity. So the fact that we have that, we believe it’s a very defensible patent. We think it really is going to change the way that brands and publishers view fraud and view optimization. So while we would love this to really impact the top-line over the next few quarters, what it’s done in the near term is really begin conversations that we probably wouldn’t have been in when you start to talk about strategic – our inorganic growth strategy around the M&A topic.

Excellent. I appreciate the color, and that’s actually a nice segue to my next question. So, I appreciate your opening comments on the M&A environment. I understand there’s – you guys remain very active in exploring a wide array of opportunities. And as you point out as well, you have a very strong net cash position of over $14 million, very low cash burn rate. So just maybe outside of potential M&A, are there any other areas you’re looking to deploy that cash or invest into to drive the organic business? Just anything you’re thinking about. Thanks.

Yes. I think just with some of Josh’s prepared remarks around the current environment; cash is very, very hard right now. We speak to a lot of people who are out there trying to actively raise both on the public and private side, and what we’re hearing is pretty horrible, to be transparent. It’s not good news. You are seeing some cash deployed in much later stage companies, but those Series A, Series B type companies, they’re having a very hard time having some of the traditional partners invest. So, we’ve taken a very, very strategic step to conserve capital, and we’re looking at areas where we could actually continue to reduce our burn, because we feel that the conversations we’ve had and some of the conversations we believe we will have on the M&A side, the cash will be such a critical part of the discussion because it’s so hard out there right now to raise money.

Makes sense. Got you. Understood. Well, it’s better to have cash now than to have to go out and get it. So that’s an incremental positive in my view. So, I appreciate that. And maybe just one more for me on – in general. Obviously, we’re a very – you name it that we’re in a tough macro environment for a multitude of reasons, Josh touched on the Silicon Valley Bank fallout as well. But just in terms of the advertising market overall in the first half of 2023 and then kind of as you look into back half 2023, 2024. Just what are your – just some thoughts on that are directly applicable to what Kubient’s going after? How is that market environment is playing out relative to where you were maybe a few months ago? Thanks.

I think what you’re seeing is a lot more sharpening of the pencil on the CMO side of the world where any money that they are deploying throughout the remainder of this year, they want to be able to stand up at the end of the year to their Board and their CEO and explain that they got a very strong return. So, I think the days of let’s test new environments, let’s test new things might be little harder. I think where KAI really benefits is because we have a technology that can show with data, here’s what we actually saved you. Here is if you went out and spend $10 million this quarter on media, we were able to get this money back into your budget by helping you not buy the fraud or by helping you optimize your campaign.

So our conversations are typically lead with, yes, it is very important not to show at the box, but let’s look at this more realistic application. Maybe you’re spending $1 million a day on media, and we could put $100,000 of that back into your pocket. That’s meaningful savings that you’re going to be able to report at the end of the quarter or end of the year to your Board, let them know that you did take cost-cutting measures by using a technology partner like Kubient.

Fantastic. It makes a lot of sense. I think that’s all the questions I have. I’ll hop back in the queue. I appreciate the update.

Great. Thanks, Jack.

Thank you. Our next question is coming from Ben Jen with 1435 Capital. You may proceed.

Hi Paul, thanks for the quarterly update. Thanks for the update in terms of – and congratulations on your patent for KAI. Just some questions regarding the M&A requirement for ad tech. Do you see more acquisitions happening in the near future? Is this something that Kubient can focus on or lean more towards throughout 2023?

Hey Ben, thanks for joining the call, and obviously, the question as well. So what we’re really hearing out there is that there’s going to be more consolidation this year. I’ve seen this happen once or twice in my career when you see a contraction of cash that’s being invested. A lot of companies over the last few years have been spending money and raising capital purely for growth, not really paying attention to hitting that positive revenue number.

So you’re going to see some very large-scale companies that need some sort of support, whether that be a company like a Kubient with a public vehicle with KAI as a product differentiator. And also, as I mentioned earlier to Jack, having that cash on hand, it really helps a lot of companies somewhat weather the storm and get through the year through their strategy planning. So, I think you have seen a big shift, and I like to believe that we’re very well positioned with unique technology that can help a company differentiate. The public vehicle, obviously, you get the upside. I think we’re trading at a very depressed level with cash on hand and also the ability to go out and raise more capital in the future to help scale up. So the world has changed and the old saying, Ben, if you wait around long enough, it will change again. But I think right now, we’re very well positioned to help or be a part of a partnership with a much larger company on the M&A side.

Got it. Thanks for the response and I’ll go back in the queue.

Thank you. At this time, this concludes the company’s question-and-answer session. If your question was not taken, you may contact Kubient’s Investor Relations team at kubient@gatewayir.com.

I’d now like to turn the call back over to Mr. Roberts for his closing remarks.

Thank you, operator, and I’d just like to thank everyone for joining us today on our Q4 and full year 2022 earnings call. I specially want to take a moment to just thank all of our employees, our partners, our investors, and customers for their continued support. We appreciate everyone’s interest in Kubient and look forward to updating you on our next call. Operator?

Thank you for joining us today for Kubient’s fourth quarter and 2022 earnings conference call. You may now disconnect.