UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
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KUBIENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021
INDEX
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Part I. | FINANCIAL INFORMATION | |
Item 1. | Condensed Consolidated Financial Statements (Unaudited) | |
Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020 | 1 | |
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Notes to Unaudited Condensed Consolidated Financial Statements | 7 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |
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Kubient, Inc.
Condensed Consolidated Balance Sheets
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Assets |
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Current Assets: |
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Cash | $ | $ | ||||
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Total Current Assets |
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Intangible assets, net |
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Property and equipment, net |
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Deferred offering costs |
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Total Assets | $ | $ | ||||
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Liabilities and Stockholders' Equity |
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Current Liabilities: |
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Notes payable |
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Total Liabilities |
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Commitments and contingencies (Note 6) |
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Stockholders' Equity: |
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Preferred stock, $ |
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Common stock, $ |
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Total Liabilities and Stockholders' Equity | $ | $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
Kubient, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
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Net Revenues | $ | | $ | $ | | $ | | |||||
Operating Expenses: |
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Loss From Operations |
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Other (Expense) Income: |
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Interest expense |
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Interest expense - related parties |
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Gain on forgiveness of accounts payable - supplier | | — | | | ||||||||
Other income |
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Total Other Income (Expense) |
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Net Loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net Loss Per Share - Basic and Diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted Average Common Shares Outstanding - Basic and Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Kubient, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
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Balance - January 1, 2021 |
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Stock-based compensation: |
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Net loss |
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Balance - March 31, 2021 |
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Shares issued upon exercise of warrants, net of issuance costs [2] |
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Stock-based compensation: |
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Net loss |
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Balance - June 30, 2021 |
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Balance - January 1, 2020 |
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Stock-based compensation: |
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Options |
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Net loss |
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Balance - March 31, 2020 |
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Stock-based compensation: |
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Common stock | | — | | — | | |||||||||
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Forgiveness of accrued expenses by related party | — | — | | — | | |||||||||
Net loss |
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Balance - June 30, 2020 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Kubient, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
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Cash Flows From Operating Activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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Gain on forgiveness of accounts payable - supplier |
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Stock-based compensation: |
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Amortization of debt discount and debt issuance costs |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Accounts payable - suppliers |
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Accounts payable - trade |
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Accrued expenses and other current liabilities | ( | | ||||
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Net Cash Used In Operating Activities |
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Cash Flows From Investing Activities: |
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Purchase of property and equipment |
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Net Cash Used In Investing Activities |
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Cash Flows From Financing Activities: |
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Proceeds from issuance of notes payable - related parties |
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Payment of deferred offering costs | ( | ( | ||||
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Net Cash Provided By Financing Activities |
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Net Increase In Cash |
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Cash - Beginning of the Period |
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Cash - End of the Period | $ | | $ | |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
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Kubient, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(unaudited)
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Supplemental Disclosures of Cash Flow Information: | ||||||
Cash paid during the periods for: |
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Interest | $ | | $ | | ||
Income taxes | $ | | $ | | ||
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Non-cash investing and financing activities: |
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Original issue discount in connection with convertible notes payable | $ | $ | | |||
Original issue discount in connection with convertible notes payable - related party | $ | $ | | |||
Accrual of intangible assets | $ | | $ | |||
Accrual of deferred offering costs | $ | | $ | |||
Forgiveness of related party liability | $ | $ | | |||
Accrual of warrant exercise issuance costs | $ | | $ | | ||
Shares issued as partial consideration for intangible asset | $ | | $ | | ||
Shares of common stock issued in satisfaction of accrued issuable equity | $ | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NOTE 1 – BUSINESS ORGANIZATION, NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES AND BASIS OF PRESENTATION
Organization and Operations
Kubient, Inc. (“Kubient” or the “Company”), a Delaware corporation, was incorporated in May 2017 to solve some of the most significant problems facing the global digital advertising industry.
The Company’s experienced team of marketing and technology veterans has developed the Audience Cloud, a modular, highly scalable, transparent, cloud-based software platform for real-time trading of digital, Programmatic Advertising. The Company’s platform’s open marketplace gives both advertisers (ad space buyers) and Publishers (ad space sellers) the ability to use machine learning in the most critical parts of any Programmatic Advertising inventory auction, while simultaneously and significantly reducing those advertisers and Publishers’ exposure to fraud, specifically in the Pre-bid environment.
By becoming a one stop shop for advertisers and publishers, providing them with the technology to deliver meaningful messages to their target audience, all in one place, on a single platform that is computationally efficient, transparent, and as safely fraud-free as possible, the Company believes that its platform (and the application of its machine learning algorithms) leads to increased publisher revenue, lower advertiser cost, reduced latency and increased economic transparency during the advertising auction process.
Furthermore, the Company believes that its technology allows advertisers to reach entire audiences rather than buying single impressions from disparate sources. The Company calls this approach Audience-Based Marketing. Combining this approach with its proprietary solutions for fraud prevention and the reduction of latency in auctions, the Company is confident that it is poised to alter the status quo as the next generation of the industry’s advertising inventory auction infrastructure.
Risks and Uncertainties
In March 2020, the World Health Organization declared COVID-19, a novel strain of coronavirus, a pandemic. During 2020 and continuing into 2021, the global economy has been, and continues to be, affected by COVID-19. While we continue to see signs of economic recovery as certain governments began to gradually ease restrictions, provide economic stimulus and vaccine distribution accelerated, the rate of recovery on a global basis has been affected by resurgence of the virus or its variants in certain jurisdictions causing reinstatement of restrictions in certain jurisdictions. Starting in 2020 and continuing into 2021, the Company has taken proactive measures to protect the health and safety of our employees and customers by closing our offices, requiring employees to work from home and suspending travel, in-person meetings and visits with our customers. We continue to monitor the effectiveness of these measures in light of the daily evolution of the COVID-19 pandemic, including the spread of the Delta variant, in order to ensure the health and safety of our employees remains our top priority. For example, while we recently developed a plan to return to our offices in September of 2021, the impact of the Delta variant may result in employees continuing to work from home for the duration of 2021 and beyond.
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We will modify our return to office plans, as needed, to ensure the safety of our employees and to ensure that appropriate safety and cleanliness protocols are followed. We experienced improvement in our financial results and noticed an increase in customers’ advertising budgets beyond pre-pandemic levels in the latter half of the fiscal year 2020 and into the first and second quarter of 2021. The Company observed a corresponding increase in its advertising impression Volumes during the same period. In addition, the Company has observed advertising impression Volumes in the beginning of the fourth quarter of 2020 that have actually exceeded pre-pandemic levels. However, there can be no assurances that the Company’s advertising impression Volumes and profit margins will stay above pre-pandemic levels for the remainder of fiscal 2021 and beyond if new resurgence of the virus or its variants in certain jurisdictions. More specifically, the impact of the Delta variant cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against the Delta variant and the response by governmental bodies and regulators. We continue to closely monitor the evolving effects of the COVID-19 pandemic on our business and implementing plans to take appropriate actions to adapt to changing circumstances arising from the pandemic. While we expect the COVID-19 pandemic will continue to have an adverse effect on our revenues and earnings in 2021, we do expect a recovery throughout the year. We expect to continue to make significant capital investments in the business. However, we continue to monitor the effects of COVID-19 and will adjust our future level of capital investments accordingly.
Furthermore, the COVID-19 pandemic could have a long-term impact on the Company’s customers well into 2021, which would reduce their demand for Company services and products. The extent to which COVID-19 or any other health epidemic may impact the Company’s results beyond 2021 will depend on future developments that could be outside the Company’s control, and which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the overall economic impact of the COVID-19 pandemic. Accordingly, COVID-19 could continue to have a material adverse effect on the Company’s business, results of operations, financial condition and prospects during 2021 and beyond. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed consolidated financial statements of the Company as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the operating results for the full year ending December 31, 2021 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures as of December 31, 2020 and 2019 and for the years then ended which are included the Annual Report filed on Form 10-K on March 30, 2021.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the significant accounting policies included in the audited consolidated financial statements as of December 31, 2020 and 2019 and for the years then ended, which were included the Annual Report filed on Form 10-K on March 30, 2021, except as disclosed in this note.
Revenue Recognition
The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). The Company determines revenue recognition through the following steps:
● | Identification of a contract with a customer; |
● | Identification of the performance obligations in the contract; |
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● | Determination of the transaction price; |
● | Allocation of the transaction price to the performance obligations in the contract; and |
● | Recognition of revenue when or as the performance obligations are satisfied. |
The Company maintains a contract with each customer and supplier, which specify the terms of the relationship and potential access to the Company’s platform. The Company provides a service to its customers (the buy-side ad networks who work for advertisers) by connecting advertisers and publishers. For this service, the Company earns a percentage of the amount that is paid by the advertiser, who wants to run a digital advertising campaign, which, in some cases, is reduced by the amount paid to the publisher, who wants to sell its ad space to the advertiser.
The transaction price is determined based on the consideration to which it expects to be entitled, including the impact of any implicit price concessions over the course of the contract. The Company’s performance obligation is to facilitate the publication of advertisements. The performance obligation is satisfied at the point in time that the ad is placed. Subsequent to a bid being won, the associated fees are generally not subject to refund or adjustment. Historically, any refunds and adjustments have not been material. The revenue recognized is the amount the Company is responsible to collect from the customer related to the placement of an ad (the “Gross Billing”), less the amount the Company remits to the supplier for the ad space (the “Supplier Cost”), if any. The determination of whether the Company is the principal or agent, and hence whether to report revenue on a gross basis equal to the Gross Billing or on a net basis for the difference between the Gross Billing and Supplier Cost, requires judgment. The Company acts as an agent in arranging via its platform for the specified good (the ad space) to be purchased by the advertiser, as it does not control the goods or services being transferred to the end customer, it does not take responsibility for the quality or acceptability of the ad space, it does not bear inventory risk, nor does it have discretion in establishing price of the ad space. As a result, the Company recognizes revenue on a net basis for the difference between the Gross Billing and the Supplier Cost. During the three and six months ended June 30, 2021 and 2020, no revenue was recognized from performance obligations satisfied (or partially satisfied) in previous periods.
The Company invoices customers on a monthly basis for the amount of Gross Billings in the relevant period. Invoice payment terms, negotiated on a customer-by- customer basis, are typically between
During the six months ended June 30, 2020, the Company recognized revenue in connection with contracts to scan a customers’ first-party anonymized data with Kubient Artificial Intelligence (“KAI”). Upon completion of the scan, the Company delivered a report to the customer, which is the point in time the Company satisfied the performance obligation. The Company acts as the principal for these contracts, as it is primarily responsible for fulfilling the promise to provide the services and has discretion in establishing the price of service. As a result, the Company recognizes revenue on a gross basis. During the three and six months ended June 30, 2020, the Company recognized aggregate revenue of $
As of June 30, 2021 and December 31, 2020, the Company did not have any contract assets from contracts with customers. As of June 30, 2021 and December 31, 2020, the Company had $
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Intangible Assets
Intangible assets are comprised of costs to acquire a customer list as well as costs to acquire and develop computer software, including (i) the costs to acquire third-party data which is used to improve the Company’s artificial intelligence platform for client use as well as (ii) the costs to acquire third-party software as well as the related source code. The intangible assets have estimated useful lives of
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares of options, warrants and convertible notes, if not anti-dilutive.
The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:
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[1] Includes shares underlying warrants that are exercisable into an aggregate of (i)
[2] Excludes shares issuable upon conversion of the Senior and Junior Notes, which were not convertible as of June 30, 2020 and whose conversion price was not known as of such date. Subsequent to June 30, 2020, an aggregate of
Reclassifications
Certain prior period income statement amounts have been reclassified to conform to the Company’s fiscal 2021 presentation. These reclassifications have no impact on the Company’s previously reported net loss.
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Recent Accounting Pronouncements
On May 3, 2021, the Financial Accounting Standards Board (the "FASB") issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. The Company is evaluating the impact of this new standard on the company’s financial statements and disclosures.
NOTE 3 – INTANGIBLE ASSETS
On June 15, 2021, pursuant to an asset purchase agreement dated June 4, 2021, the Company closed on the acquisition of a customer list (the “Customer List”) and other assets of Advisio Solutions, LLC (“Advisio”) for consideration consisting of: (i) $
Intangible assets consist of the following:
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Intangible assets, net | $ | | $ | |
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NOTE 4 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
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Accrued payroll taxes |
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Other |
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Total accrued expenses and other current liabilities | $ | | $ | |
NOTE 5 – STOCKHOLDERS’ EQUITY
Stock-Based Compensation
During the three months ended June 30, 2021 and 2020, the Company recognized aggregate stock-based compensation expense of $
Common Stock
See Note 3 – Intangible Assets for details regarding the issuance of common stock as partial consideration for the acquisition of intangible assets.
See Note 6 – Commitments and Contingencies – Employment Agreements for details regarding the grant of a bonus that is payable in common stock of the Company.
During the three months ended March 31, 2021, the Company issued an aggregate of
During the three months ended June 30, 2021, the Company issued an aggregate of
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Stock Options
During the six months ended June 30, 2021, the holder of an option under the 2017 Plan to purchase
Stock Warrants
During the three months ended March 31, 2021, warrants to purchase an aggregate of
During the three months ended June 30, 2021, warrants to purchase an aggregate of
A summary of the warrant activity during the six months ended June 30, 2021 is presented below:
|
|
|
|
|
| Weighted |
|
| ||
| Weighted | Average | ||||||||
| Average | Remaining | ||||||||
| Number of | Exercise | Life | Intrinsic | ||||||
| Warrants | Price | In Years | Value | ||||||
Outstanding, January 1, 2021 |
| | $ | |
|
|
|
| ||
Issued |
| |
| |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Expired |
| — |
| — |
|
|
|
| ||
Outstanding, June 30, 2021 [1] |
| | $ | |
| $ | | |||
|
|
|
|
|
|
|
| |||
Exercisable, June 30, 2021 |
| | $ | |
| $ | |
[1] Excludes five-year warrants to purchase
The following table presents information related to stock warrants as of June 30, 2021:
Warrants Outstanding | Warrants Exercisable | ||||||
Weighted | |||||||
Outstanding | Average | Exercisable | |||||
Exercise | Number of | Remaining Life | Number of | ||||
Price |
| Warrants |
| In Years |
| Warrants | |
$ | |
|
|
| |||
$ | |
|
|
| |||
$ | |
|
|
| |||
$ | | ||||||
$ | | | |||||
| |
|
| |
13
NOTE 6 – COMMITMENTS AND CONTINGENCIES
From time to time, the Company is a defendant or plaintiff in various legal actions that arise in the normal course of business. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Outstanding Litigation
In March 2019, the Company entered into a binding letter of intent (“LOI”) to acquire substantially all of the assets of Aureus Holdings, LLC d/b/a Lo70s (“Lo70s”). In connection with the LOI, the Company paid a good faith deposit to Lo70s of $
Settlements
On October 6, 2017, the Company entered into a Master Service Agreement for Buyers and Sellers, and an “Engage Buyer Addendum”, with Engage BDR, LLC whereby the Company could gain access to the Engage BDR, LLC proprietary trading technology platform in order to both offer and purchase inventory for the placement of ads. On August 31, 2018, Engage BDR, LLC filed suit against the Company (Engage BDR, LLC v. Kubient, Inc., Los Angeles County Superior Court Case No. SC129764) setting forth claims of breach of contract, unjust enrichment, quantum meruit, accounts stated, and breach of implied covenant of good faith and fair dealing. On November 14, 2018, Engage BDR, LLC obtained a summary default judgment against the Company for $
14
Obligations Arising from Employment Agreements
On April 9, 2021, the Company entered into an at-will employment agreement with its new Chief Product Officer, Mr. Leon Zemel, that provides for an annual base salary of $
On June 4, 2021 (the “Effective Date”), the Company entered into
15
NOTE 7 – CONCENTRATIONS
Customer Concentrations
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s net revenues for the following periods:
| For the Three Months Ended |
| For the Six Months Ended |
| |||||
June 30, | June 30, |
| |||||||
Customer |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
Customer A |
| | % | | % | % | | % | |
Customer B | N/A | N/A | N/A | | % | ||||
Customer C | | % | N/A | N/A | | % | |||
Total |
| | % | | % | % | | % |
From time to time, certain customers generate negative net revenues that resulted from Supplier Costs that exceeded the Gross Billings. As a result, the Company’s concentrations on net revenues may result in total percentages that exceed 100%.
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s gross accounts receivable as of:
|
| June 30, |
| December 31, |
|
Customer | 2021 | 2020 |
| ||
Customer A |
| | % | | % |
Total |
| | % | | % |
A reduction in sales from or loss of these customers would have a material adverse effect on the Company’s results of operations and financial condition.
Supplier Concentrations
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s Supplier Costs for the following periods:
| For the Three Months Ended |
| For the Six Months Ended |
| |||||
June 30, | June 30, |
| |||||||
Supplier |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
Supplier A |
| N/A | | % | N/A | | % | ||
Supplier B |
| * | | % | | % | | % | |
Supplier D |
| * | | % | * | | % | ||
Supplier E | | % | N/A | | % | N/A | |||
Supplier F | * | N/A | | % | N/A | ||||
Total |
| | % | | % | | % | | % |
* Less than 10%.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, the impact of COVID-19 on our business, operations, and the markets and communities in which we, our clients, and partners operate, results of operations, revenues, operating expenses, and capital expenditures, sales and marketing initiatives and competition. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “suggests,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.