Direct Digital Holdings, Inc. 10-K

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our Class A common stock is traded on The Nasdaq Capital Market under the symbol “DRCT,” and our warrants are traded on The Nasdaq Capital Market, under the symbol “DRCTW.” Holders As of March 25, 2022, there was one holder of record of our outstanding Class A common stock. Holders of record are defined as those stockholders whose shares are registered in their names in our stock records and do not include beneficial owners of common stock whose shares are held in the names of banks, brokers, dealers or clearing agencies. Dividend Policy We have never declared or paid any cash dividends on our Class A common stock. We currently anticipate that we will retain all future earnings for the operation of our business and we do not currently intend to pay any cash dividends on our Class A common stock in the foreseeable future. Securities Authorized for Issuance Under Equity Compensation Plans Information about our equity compensation plan is incorporated herein by reference to Item 11 “Equity Compensation” , of Part III of this Annual Report on Form 10-K. Unregistered Sales of Equity Securities None. Use of Proceeds On February 15, 2022, we completed our initial public offering of 2,800,000 units (“Units”), each consisting of (i) one share of our Class A common stock and (ii) one warrant entitling the holder to purchase one share of our Class A Common Stock at an exercise price of $5.50 per share. The offering of the Units was registered under the Securities Act pursuant to our Registration Statement on Form S-1 (File No. 333-261059), which was declared effective by the SEC on February 10, 2022. The Benchmark Company and Roth Capital Partners were joint book-running managers for the offering. The warrants became immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The shares of Class A Common Stock and warrants may be transferred separately immediately upon issuance. The underwriters in our initial public offering were granted a 45-day option to purchase up to an additional 420,000 shares and/or warrants, or any combination thereof, to cover over-allotments, which they initially exercised, in part, electing to purchase warrants to purchase an additional 420,000 shares of Class A Common Stock. In connection with our initial public offering, we issued to the underwriters offering a unit purchase option to purchase (i) an additional 140,000 Units at a per Unit exercise price of $6.60, which was equal to 120% of the public offering price per Unit sold in the initial public offering, and (ii) warrants to purchase 21,000 shares of Class A Common Stock at a per warrant exercise price of $0.012, which was equal to 120% of the public offering price per warrant sold in the offering. The Units were sold at a price of $5.50 per Unit, and the net proceeds from the offering were approximately $12.4 million, after deducting underwriting discounts and commissions and offering expenses of approximately $2.0 million payable by us. DDH LLC used the proceeds, together with pre-existing cash and cash equivalents, to purchase all of the LLC Units held by USDM for an aggregate purchase price of approximately $14.0 million, of which $10.3 million was paid on the closing date of the initial public offering, and we intend to use the remainder for working capital and general corporate purposes, including potential future acquisition of, or investment in, technologies or businesses that complement our business. We intend to pay the remainder of the purchase price to USDM during the first half of 2022. We have no present commitments or agreements to enter into any such acquisitions or make any such investments. Pending these uses, we may invest the net proceeds from the initial public offering in short-term, investment-grade, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government. None of the expenses associated with the initial public offering were paid to directors, officers, persons owning 10% or more of any class of equity securities, or to our affiliates. The offering commenced on February 10, 2022 and did not terminate until the sale of all of the units offered. Issuer Purchases of Equity Securities None. ITEM 6. [Reserved.] 39 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “ Risk Factors ” or in other parts of this Annual Report on Form 10-K. See “ – Cautionary Note Regarding Forward-Looking Statements ” below. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements within the meaning of federal securities laws and which are subject to certain risks, trends and uncertainties. We use words such as “could,” “would,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar expressions to identify forward-looking statements, but not all forward-looking statements include these words. All of our forward-looking statements involve estimates and uncertainties that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to the information described under the caption “ Risk Factors ” and elsewhere in this Annual Report on Form 10-K. The forward-looking statements contained in this Annual Report on Form 10-K are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this Annual Report on Form 10-K, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance expressed in or implied by the forward-looking statements. We believe these factors include, but are not limited to, the following: • our dependence on the overall demand for advertising, which could be influenced by economic downturns; • any slow-down or unanticipated development in the market for programmatic advertising campaigns; • the effects of health epidemics, such as the ongoing global COVID-19 pandemic; • operational and performance issues with our platform, whether real or perceived, including a failure to respond to technological changes or to upgrade our technology systems; • any significant inadvertent disclosure or breach of confidential and/or personal information we hold, or of the security of our or our customers’, suppliers’ or other partners’ computer systems; • any unavailability or non-performance of the non-proprietary technology, software, products and services that we use; • unfavorable publicity and negative public perception about our industry, particularly concerns regarding data privacy and security relating to our industry’s technology and practices, and any perceived failure to comply with laws and industry self-regulation; • restrictions on the use of third-party “cookies,” mobile device IDs or other tracking technologies, which could diminish our platform’s effectiveness; • any inability to compete in our intensely competitive market; • any significant fluctuations caused by our high customer concentration; • our limited operating history, which could result in our past results not being indicative of future operating performance; • any violation of legal and regulatory requirements or any misconduct by our employees, subcontractors, agents or business partners; 40 • any strain on our resources, diversion of our management’s attention or impact on our ability to attract and retain qualified board members as a result of being a public company; • as a holding company, we depend on distributions from DDH LLC to pay our taxes, expenses (including payments under the Tax Receivable Agreement) and dividends; • DDH LLC may make distributions of cash to us substantially in excess of the amounts we use to make distributions to our stockholders and pay our expenses (including our taxes and payments under the Tax Receivable Agreement), which, to the extent not distributed as dividends on our Class A common stock, would benefit DDM as a result of its ownership of Class A common stock upon an exchange or redemption of its LLC Units; and • other factors and assumptions discussed in this Annual Report on Form 10-K under “ Risk Factors ,” and elsewhere in this Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this Annual Report on Form 10-K to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. New factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them. Further, we cannot assess the impact of each currently known or new factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Overview Direct Digital Holdings, Inc. and its subsidiaries (collectively the “Company,” “DDH,” “we,” “us” and “our”), headquartered in Houston, Texas, is an end-to-end, full-service programmatic advertising platform primarily focused on providing advertising technology, data-driven campaign optimization and other solutions to underserved and less efficient markets on both the buy- and sell-side of the digital advertising ecosystem. Direct Digital Holdings, Inc. (“Holdings”) is the holding company that, since the completion of our initial public offering on February 15, 2022 owns certain common units, and serves as the manager, of Direct Digital Holdings, LLC (“DDH LLC”), which operates the business formed in 2018 through the acquisition of Huddled Masses LLC (“Huddled Masses”) a buy- side marketing platform, and Colossus Media LLC (“Colossus Media”) a sell-side marketing platform. On September 30, 2020, DDH LLC acquired Orange142, LLC (“Orange142”) to further bolster its overall programmatic buy-side advertising platform and enhance its offerings across multiple industry verticals such as travel, healthcare, education, financial services, consumer products, etc. with particular emphasis on small- and mid-sized businesses transitioning into digital with growing digital media budgets. The subsidiaries of Direct Digital Holdings, Inc. are as follows: Subsidiary Current % Ownership Advertising Solution and Segment Date of Formation Date of Acquisition Direct Digital Holdings, LLC 19.7 % N/A June 21, 2018 August 26, 2021 Huddled Masses, LLC 100 % Buy-side November 13, 2012 June 21, 2018 Colossus Media, LLC 100 % Sell-side September 8, 2017 June 21, 2018 Orange142, LLC 100 % Buy-side March 6, 2013 September 30, 2020 Both buy-side advertising businesses, Huddled Masses and Orange142, offer technology-enabled advertising solutions and consulting services to clients through multiple leading demand side platforms (“DSPs”). Colossus Media is our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP™ (“Colossus SSP”). Colossus SSP is a stand-alone tech-enabled, data- driven sell-side platform (“SSP”) that helps deliver targeted advertising to diverse and multicultural audiences, including African Americans, Latin Americans, Asian Americans and LGBTQ+ customers, as well as other specific audiences. Providing both the front-end, buy-side advertising businesses coupled with our proprietary sell-side business, enables us to curate the first through the last mile in the ad tech ecosystem execution process to drive higher results. Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assessing performance. Our chief operating decision maker is our Chairman and Chief Executive Officer. We view our business as two reportable segments, buy-side advertising, which includes the results of Huddled Masses and Orange142, and sell-side advertising, which includes the results of Colossus Media. 41 Recent Developments Completion of Initial Public Offering As previously reported, on February 15, 2022, we completed our initial public offering of 2,800,000 Units, each consisting of (i) one share of our Class A common stock and (ii) one warrant entitling the holder to purchase one share of our Class A Common Stock at an exercise price of $5.50 per share. The warrants became immediately exercisable upon issuance and are exercisable for a period of five years after the issuance date. The shares of Class A Common Stock and warrants may be transferred separately immediately upon issuance. The underwriters in our initial public offering were granted a 45-day option to purchase up to an additional 420,000 shares and/or warrants, or any combination thereof, to cover over-allotments, which they initially exercised, in part, electing to purchase warrants to purchase an additional 420,000 shares of Class A Common Stock. In connection with our initial public offering, we issued to the underwriters of the offering a unit purchase option to purchase (i) an additional 140,000 Units at a per Unit exercise price of $6.60, which was equal to 120% of the public offering price per Unit sold in the initial public offering, and (ii) warrants to purchase 21,000 shares of Class A Common Stock at a per warrant exercise price of $0.012, which was equal to 120% of the public offering price per warrant sold in the offering. The Units were sold at a price of $5.50 per Unit, and the net proceeds from the offering were approximately $12.4 million, after deducting underwriting discounts and commissions and offering expenses payable by us. DDH LLC used the proceeds, together with pre-existing cash and cash equivalents, to purchase all of the LLC Units held by USDM for an aggregate purchase price of approximately $14.0 million, of which $10.3 million was paid on the closing date of the initial public offering, and we intend to use the remainder for working capital and general corporate purposes, including potential future acquisition of, or investment in, technologies or businesses that complement our business. We intend to pay the remainder of the purchase price to USDM during the first half of 2022. COVID-19 Industry Impact The onset of the COVID-19 pandemic caused a material reduction in advertising spending across all channels. Advertising spending is estimated to have decreased 30-50% during the height of the lockdown with ad budgets reduced due to economic shock (e.g., lodging, restaurants) and the cancellation of major events (e.g., concerts, Olympics). The linear TV segment was among the hardest hit as small- and medium sized business owners cut back on local broadcast and cable advertising, cable networks couldn’t air live sports and the production of content ground to a halt. Cord cutting, the practice of ending a cable or satellite television service, is also expected to remain elevated. Research conducted by The Trade Desk estimated that approximately 27% of U.S. households would end their cable TV subscription by the end of 2021, roughly nine times the rate of cord cutting over the last few years. The connected television (“CTV”) and advertisement-based video on demand (“AVOD”) channels, which include televisions with integrated internet and ad-based streaming services, held up the best during the pandemic, but these channels remain less than 3% of total TV advertising spend. Overall, the industry is seeing an accelerated shift of advertisement spending from the traditional linear television channel to digital channels such as CTV and AVOD. See “ Risk Factors ” for further discussion of the adverse impacts of the COVID-19 pandemic on our business. Although we have been impacted by these industry-wide effects, we cannot reasonably estimate the specific impact that Covid-19 had on our results of operations. The table below summarizes the financial highlights of our business: Year Ended December 31, 2021 2020 Revenue $ 38,136,862 $ 12,477,519 Operating income (loss) $ 4,384,600 $ (844,564 ) Net loss $ (1,507,097 ) $ (908,190 ) Adjusted EBITDA (1) $ 6,357,603 $ 613,073 Net cash provided by (used in) operating activities $ 3,751,151 $ (574,527 ) (1) For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net loss, please see “ – Non-GAAP Financial Measures .” 42 Key Factors Affecting Our Performance We believe our growth and financial performance are dependent on many factors, including those described below. Buy-side advertising business New Customer Acquisitions On the buy-side of our business, our customers consist of purchasers of programmatic advertising inventory (ad space) looking to place their advertisements. We serve the needs of approximately 200 small and mid-sized clients for the fiscal year ended December 31, 2021, consisting of advertising space buyers, including small and mid-sized companies, large advertising holding companies (which may manage several agencies), independent advertising agencies and mid-market advertising service organizations. We serve a variety of customers across multiple industries including travel/tourism (including destination marketing organizations (“DMOs”)), energy, consumer packaged goods, healthcare, education, financial services (including cryptocurrency technologies) and other industries. We are focused on increasing the number of customers that use our buy-side advertising businesses for their advertising partner. Our long-term growth and results of operations will depend on our ability to attract more customers, including DMOs, across multiple geographies. Expand Sales to Existing Customers Our customers understand the independent nature of our platform and relentless focus on driving results based on return on investment (“ROI”). Our value proposition is complete alignment across our entire digital supply platform beginning with the first dollar in and last dollar out. We are technology, DSP and media agnostic, and we believe our clients trust us to provide the best opportunity for success of their brands and businesses. As a result, our clients have been loyal, with over 90% client retention amongst the clients that represent approximately 80% of our revenue during the fiscal year ended December 31, 2021. In addition, we cultivate client relationships through our pipeline of managed and moderate/self-serve clients that conduct campaigns through our platform that eventually grow into managed service clients, which has resulted in their increased use of our platform over time. As our clients expand their usage of our technology platform, they often transition to our managed services delivery model, which in turn drives higher profitability for us, as well as increased client loyalty. The managed services delivery model allows us to combine our technology with a highly personalized offering to strategically design and manage advertising campaigns. Shift to Digital Advertising Media has increasingly become more digital as a result of three key items: • Advances in technology with more sophisticated digital content delivery across multiple platforms; • Changes in consumer behavior, including spending longer portions of the day using mobile and other devices; and • Better audience segmentation with more efficient targeting and measurable results. The resulting shift has enabled a variety of options for advertisers to efficiently target and measure their advertising campaigns across nearly every media channel and device. These efforts have been led by big- budgeted, large, multi-national corporations incentivized to cast a broad advertising net to support national brands. Increased Adoption of Digital Advertising by Small-and Mid-Sized Companies Only recently have small and mid-sized businesses begun to leverage the power of digital media in meaningful ways, as emerging technologies have enabled advertising across multiple channels in a highly localized nature. Campaign efficiencies yielding measurable results and higher advertising ROI, as well as the needs necessitated by the COVID-19 pandemic, have prompted these companies to begin utilizing digital advertising on an accelerated pace. We believe this market is rapidly expanding, and that small-to-mid-sized advertisers will continue to increase their digital spend. Seasonality In general, the advertising industry experiences seasonal trends that affect the vast majority of participants in the digital marketing ecosystem. Our buy-side advertising revenue is weighted to DMOs and historically, marketing spend is higher in the second and third quarters of our fiscal year with the increase in marketing spend taking place over the summer months. As a result, the fourth and first quarters tend to reflect lower activity levels and lower revenue. We generally expect these seasonality trends to continue and our ability to effectively manage our resources in anticipation of these trends may affect our operating results. 43 Sell-side advertising business Increasing revenue from publishers and advertising spend from buyers Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP. The buyers on our platform include DSPs, agencies and individual advertisers. We have broad exposure to the ecosystem of buyers, reaching on average approximately 15,400 advertisers per month in 2020, which increased to approximately 80,000 in December 2021. As spending on programmatic advertising increasingly becomes a larger share of the overall ad spend, advertisers and agencies are seeking greater control of their digital advertising supply chains. To take advantage of this industry shift, we have entered into Supply Path Optimization agreements directly with buyers. As part of these agreements, we are providing advertisers and agencies with benefits ranging from custom data and workflow integrations, product features, volume-based business terms, and visibility into campaign performance data and methodology. As a result of these direct relationships, our existing advertisers and agencies are incentivized to allocate an increasing percentage of their advertising budgets to our platform. We have broad exposure to the ecosystem of buyers, which has consistently increased since the formation of Colossus Media in September 2017. Our growing sales team seeks to increase our business with the addition of new and existing publishers as well as by increasing our universe of buyers. In addition, establishing multiple header bidding integrations by leveraging our technology capabilities allows us to maximize our access to publishers’ ad formats, devices and various properties that a publisher may own. We may also up-sell additional products to publisher customers including our header bidding management, identity, and audience solutions. Our business strategy on the sell-side advertising business represents growth potential, and we believe we are well positioned to be able to bring underserved multicultural publishers into the advertising ecosystem, thereby increasing our value proposition across all clients, including our large clients. Monetizing ad impressions for publishers and buyers We focus on monetizing digital impressions by coordinating daily real-time auctions and bids. The publisher makes its ad inventory available on Colossus SSP and invites advertisers to bid based on the user’s data received. Each time the publisher’s web page loads, an ad request is sent to multiple ad exchanges and, in some cases, to the demand side platform directly from Colossus SSP. In case of real-time bidding (or RTB) media buys, many DSPs would place bids to the impressions being offered by the publisher during the auction. The advertiser that bids a higher amount compared to other advertisers will win the bid and pay the second highest price for the winning impression to serve the ads. We continuously review our available inventory from existing publishers across every format (mobile, desktop, digital video, OTT, CTV, and rich media). The factors we consider when determining which impressions we process include transparency, viewability, and whether or not the impression is human sourced. By consistently applying these criteria, we believe the ad impressions we process will be valuable and marketable to advertisers. Enhancing ad inventory quality In January 2022, Colossus Media was ranked by MediaMath as 5 th among the industry’s approximately 80 supply- side companies in terms of key quality measures such as transparency, fraud detection, and accountability. In the advertising industry, inventory quality is assessed in terms of invalid traffic (“IVT”) which can be impacted by fraud such as “fake eyeballs” generated by automated technologies set up to artificially inflate impression counts. As a result of our platform design and proactive IVT mitigation efforts, in fiscal 2021, less than 1% of inventory was determined to be invalid, resulting in minimal financial impact to our customers. We address IVT on a number of fronts, including sophisticated technology, which detects and avoids invalid traffic on the front end; direct publisher and inventory relationships, for supply path optimization; and ongoing campaign and inventory performance review, to ensure inventory quality and brand protection controls are in place. Growing access to valuable ad impressions Our recent growth has been driven by a variety of factors including increased access to mobile web (display and video) and mobile app (display and video) impressions and desktop video impressions. Our performance is affected by our ability to maintain and grow our access to valuable ad impressions from current publishers as well as through new relationships with publishers. For the year ended December 31, 2020, we processed approximately 4.0 trillion bid requests and had 22 DSPs. 44 Expanding and managing investments Each impression or transaction occurs in a fraction of a second. Given that most transactions take place in an auction/bidding format, we continue to make investments across the platform to further reduce the processing time. In addition to the robust infrastructure supporting our platform, it is also critical that we align with key industry partners in the digital supply chain. The Colossus SSP is agnostic to any specific demand side platform. We automate workflow processes whenever feasible to drive predictable and value-added outcomes for our customers and increase productivity of our organization. In the first half of 2022, we expect to transition our server platform to HPE Greenlake, which we expect will provide increased capacity, faster response time, and expansion capabilities to align with growth in our business. Managing industry dynamics We operate in the rapidly evolving digital advertising industry. Due to the scale and complexity of the digital advertising ecosystem, direct sales via manual, person-to-person processes are insufficient for delivering a real-time, personalized ad experience, creating the need for programmatic advertising. In turn, advances in programmatic technologies have enabled publishers to auction their ad inventory to more buyers, simultaneously, and in real time through a process referred to as header bidding. Header bidding has also provided advertisers with transparent access to ad impressions. As advertisers keep pace with ongoing changes in the way that consumers view and interact with digital media we anticipate further innovation and expect that header bidding will be extended into new areas such as OTT/CTV. We believe our focus on publishers and buyers has allowed us to understand their needs and our ongoing innovation has enabled us to quickly adapt to changes in the industry, develop new solutions and do so cost effectively. Our performance depends on our ability to keep pace with industry changes such as header bidding and the evolving needs of our publishers and buyers while continuing our cost efficiency. Seasonality In general, the advertising industry experiences seasonal trends that affect the vast majority of participants in the digital marketing ecosystem. In our sell-side advertising segment, many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year in order to coincide with increased holiday purchasing. As a result, the first quarter tends to reflect lower activity levels and lower revenue. We generally expect these seasonality trends to continue and our ability to effectively manage our resources in anticipation of these trends may affect our operating results. Components of Our Results of Operations Revenue On the buy-side advertising segment, we generate revenue from clients that enter into agreements with us to provide digital marketing and media services to purchase digital advertising space, data, and other add-on features. On the sell-side advertising segment, we generate revenue from publishing clients by selling their advertising inventory to national and local advertisers. We report revenue on a gross basis inclusive of all supplier costs because we bear the full obligation of any costs to provide our services. We pay suppliers for the cost of digital media, advertising inventory, data and any add-on services or features. Our revenue recognition policies are discussed in more detail under “Critical Accounting Policies and Estimates.” Cost of Revenues Cost of revenues for our buy-side advertising segment consists primarily of digital media fees, third-party platform access fees, and other third-party fees associated with providing services to our customers. For the sell-side advertising segment, we pay publishers a fee, which is typically a percentage of the value of the ad impressions monetized through our platform. Cost of revenues consists primarily of publisher media fees and data center co-location costs. Media fees include the publishing and real time bidding costs to secure advertising space. Operating Expenses Operating expenses consist of compensation expenses related to our executive, sales, finance, and administrative personnel (including salaries, commissions, bonuses, benefits and taxes), general and administrative expenses for rent expense, professional fees, independent contractor costs, selling and marketing fees, and operating system subscription costs, as well as amortization expense related to our intangible assets. In fiscal 2020, we acquired Orange142, and incurred transaction costs primarily consisting of legal fees. 45 Other (Expense) Income Other income. Other income includes income associated with recovery of receivables and other miscellaneous credit card rebates. Forgiveness of PPP Loan. In 2020 and 2021, we applied and were approved for a loan pursuant to the Paycheck Protection Program (“PPP”), administered by the U.S. Small Business Administration (“SBA”). Forgiveness of PPP loans is recognized as a gain in the period it is granted. A majority of our PPP loans received in 2020 were forgiven as of November 30, 2020. The PPP loans were entered into by DDH LLC and there are no PPP loans held by our subsidiaries. Gain from revaluation and settlement of notes and earnout liability. When Huddled Masses and Colossus Media were acquired, we entered into seller notes (“Seller Notes”) and seller earnout agreements (“Seller Earnouts”) with the former selling shareholders (“Former Shareholders”). During fiscal 2020, we entered into a settlement agreement (“Settlement Agreement”) with the Former Shareholders, and as a result, recorded a net gain at the time of the agreement, as well as in the year ended December 31, 2021 when the Seller Notes and Seller Earnouts were paid in full. Interest Expense. Interest expense is mainly related to our debt that was entered into by DDH LLC, which carries a variable interest rate. In connection with the acquisition of Orange142, we issued mandatorily redeemable non-participating preferred A and B units, and in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity , the value of these units are classified as a liability, and the corresponding distributions are recognized as interest expense. Loss on early redemption of non-participating preferred units. In December 2021, we redeemed the non-participating Class A Preferred Units and recognized a loss on the redemption of $41,622 in connection with the write-off of the fair value associated with the units. Loss on early extinguishment of debt. In December 2021, we refinanced the 2020 Term Loan Facility (as defined below) and incurred a loss on early extinguishment of debt associated with prepayment penalties, exit fee, and the write-off of the unamortized deferred financing costs. Results of Operations Comparison of the Fiscal Years Ended December 31, 2021 and 2020 The following tables set forth our consolidated results of operations for the periods presented. As noted above, we acquired Orange142 on September 30, 2020, and accordingly, only three months of Orange142’s results are included in our financial results for the fiscal year ended December 31, 2020. The period-to-period comparison of results is not necessarily indicative of results for future periods. Year Ended December 31, Change 2021 2020 Amount Pcnt Revenues Buy-side advertising $ 26,127,787 $ 9,656,165 $ 16,471,622 171 % Sell-side advertising 12,009,075 2,821,354 9,187,721 326 % Total revenues 38,136,862 12,477,519 25,659,343 206 % Cost of revenues Buy-side advertising 9,927,295 4,864,234 5,063,061 104 % Sell-side advertising 9,780,442 2,440,975 7,339,467 301 % Total cost of revenues 19,707,737 7,305,209 12,402,528 170 % Gross Profit 18,429,125 5,172,310 13,256,815 256 % Operating Expenses 14,044,525 6,016,874 8,027,651 133 % Income (loss) from operations 4,384,600 (844,564 ) 5,229,164 619 % Other (expense) income (5,828,171 ) (51,502 ) (5,776,669 ) nm % Tax expense (63,526 ) (12,124 ) (51,402 ) (424 )% Net loss $ (1,507,097 ) $ (908,190 ) $ (598,907 ) (66 )% Adjusted EBITDA (1) $ 6,357,603 $ 613,073 $ 5,744,530 937 % (1) For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net loss see “ – Non-GAAP Financial Measures .” 46 Revenues Our revenues increased from $12.5 million in 2020 to $38.1 million in 2021, an increase of $25.6 million or 206%. Buy-side advertising revenue increased $16.4 million or 171%, while sell-side advertising revenue increased $9.2 million, or 326% over fiscal year 2020. The increase in our sell-side advertising revenue was the result of an overall increase in advertising spend by our customers, and an increase in the number of publisher connections. The increase in our buy-side advertising revenue was primarily as a result of the acquisition of Orange142, which contributed $15.8 million of the increase, as Orange142’s revenues only were included in the last three months of our results of operations during fiscal year 2020. The remaining buy-side advertising revenues increased by $0.7 million year over year, largely due to the increase in the number of clients served. Cost of Revenues Along with the increase in gross sales across both platforms, we correspondingly experienced an increase in cost of revenues from $7.3 million in 2020 to $19.7 million in 2021, an increase of $12.4 million or 170%. Buy- side advertising cost of revenues increased $5.1 million, primarily due to the acquisition of Orange142, which contributed $5.0 million of the increase. The remaining buy-side advertising cost of revenues increased $0.1 million from the prior year. Sell-side advertising cost of revenues increased $7.3 million, to $9.8 million, or 81% of revenue for the year ended December 31, 2021, compared to $2.4 million, or 86% of revenue, for the same period in 2020. Our sell-side cost of media is approximately 80% and our lower cost of revenue in 2021 was due to economies of scale from the higher revenue we generated during this period. Gross Profit Gross profit also increased in the year ended December 31, 2021 to $18.4 million, or 48% of revenue, compared to $5.2 million, or 41% of revenue, for the year ended December 31, 2020, an increase of $13.2 million or 256%. Buy-side advertising gross profit increased $11.4 million, primarily due to the acquisition of Orange142. The remaining buyside advertising gross profit increased $0.6 million over the prior year. Sell-side advertising gross profit increased $1.8 million over 2020, primarily as a result of the increase in revenue as discussed above. Operating Expenses The following table sets forth the components of operating expenses for the periods presented. Year Ended December 31, Change 2021 2020 Amount Pcnt Compensation, taxes and benefits $ 8,519,418 $ 3,334,060 $ 5,185,358 156 % General and administrative 5,525,107 1,848,407 3,676,700 199 % Acquisition transaction costs - 834,407 (834,407 ) (100 )% Total operating expenses $ 14,044,525 $ 6,016,874 $ 8,027,651 133 % Compensation, taxes and benefits Compensation, taxes and benefits increased from $3.3 million in 2020 to $8.5 million in 2021, an increase of $5.2 million, or 156%. The increase was primarily due to $4.0 million of additional compensation and benefits paid to employees added in connection with the acquisition of Orange142, as well as an increase of $1.2 million attributable to higher commissions and hiring of additional personnel to support our growth. General and administrative expenses General and administrative (“G&A”) expenses also increased from 2020 to 2021, primarily due to the acquisition of Orange142 and the $2.0 million and $0.5 million of amortization expense recorded in connection with the intangible assets identified in the valuation of the transaction for the year ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2020, our G&A costs were $1.9 million, compared to $5.5 million during the year ended December 31, 2021, an increase of $3.7 million or 199%. For the year ended December 31, 2021, G&A expenses as a percentage of revenue was 14.5% compared to 14.8% for the year ended December 31, 2020. During 2021, we invested in systems and infrastructure and incurred additional consulting expenses. 47 We expect to invest in corporate infrastructure and incur additional expenses associated with our transition to and operation as a public company, including increased compensation associated with additional headcount to support our sales initiatives, legal and accounting costs, higher insurance premiums, and compliance costs associated with developing the requisite infrastructure required for internal controls. As a result, we expect G&A expenses to increase in absolute dollars in future periods. Acquisition transaction costs During the year ended December 31, 2020, the Company incurred $0.8 million in acquisition transaction costs related to the acquisition of Orange142. These expenses primarily related to legal fees and closing costs and did not recur in 2021. Other expense The following table sets forth the components of other income (expense) for the periods presented. Year Ended December 31, Change 2021 2020 Amount Pcnt Other income $ 19,185 $ 134,776 $ (115,591 ) (86 )% Forgiveness of Paycheck Protection Program loan 10,000 277,100 (267,100 ) (96 )% Gain from revaluation and settlement of seller notes and earnout liability 31,443 401,677 (370,234 ) (92 )% Loss on early redemption of non- participating preferred units (41,622 ) - (41,622 ) (100 )% Loss on early extinguishment of debt (2,663,148 ) - (2,663,148 ) (100 )% Interest expense (3,184,029 ) (865,055 ) (2,318,974 ) (268 )% Total other expense $ (5,828,171 ) $ (51,502 ) $ (5,776,669 ) nm % Other expense for the year ended December 31, 2021 is primarily comprised of approximately $2.7 million associated with the early extinguishment of the Silverpeak Term Loan Facility and $3.2 million of interest expense. Other expense for the year ended December 31, 2020 is comprised of approximately $0.1 million in other income as a result of recovery of a receivable, $0.3 million for forgiveness of the PPP loans, a $0.4 million gain as a result of the Settlement Agreement with the Former Shareholders of Huddled Masses and Colossus Media for the Seller Earnouts and Seller Notes, and $0.9 million of interest expense. Interest Expense Interest expense increased in 2021 to $3.2 million compared to $0.9 million for the year ended December 31, 2020. The increase in interest expense was the result of the full year of financing activities related to the Orange142 acquisition and the related variable interest expense on the debt incurred and the preferred units issued. Liquidity and Capital Resources The following table summarizes our cash and cash equivalents, working capital (deficiency), and availability under our Revolving Credit Facility (as defined below) on December 31, 2021 and 2020: As Of December 31, 2021 2020 Cash and cash equivalents $ 4,684,431 $ 1,611,998 Working capital (deficiency) $ 4,057,243 $ (117,778 ) Availability under Revolving Credit Facility $ 1,798,145 $ 592,949 48 We anticipate funding our operations for the next twelve months using available cash, cash flow generated from operations, proceeds from our public offering in 2022, and availability under the revolving credit facility provided under our credit agreement, as amended, entered into on September 30, 2020, with East West Bank in the amount of $2,500,000 (the “Revolving Credit Facility”). As of December 31, 2021 and 2020, we had cash and cash equivalents of approximately $4.7 million and $1.6 million, respectively, and $1.8 million and $0.6 million available under our Revolving Credit Facility, respectively. Based on projections of growth in revenue and operating results in the coming year, as well as approximately $3.7 million of proceeds from the completion of our initial public offering in February 2022, after deducting underwriting discounts and commissions, offering expenses payable by us and the payment of $10.3 million to purchase all of the LLC Units held by USDM, the available cash held by us and availability under our Revolving Credit Facility, we believe that we will have sufficient cash resources to finance our operations and service any maturing debt for at least the next twelve months following the issuance of this Annual Report on Form 10-K. To fund our operations and service our debt thereafter, depending on our growth and results of operations, we may have to raise additional capital through the issuance of additional equity and/or debt, which could have the effect of diluting our stockholders. Any equity or debt financings, if available at all, may be on terms which are not favorable to us. As our debt or credit facilities become due, we will need to repay, extend or replace such indebtedness. Our ability to do so will be subject to future economic, financial, business and other factors, many of which are beyond our control. In September 2020, DDH LLC and each of its subsidiaries as co-borrowers entered into the Revolving Credit Facility and a loan and security agreement that provides for a term loan in the principal amount of $12.825 million (the “2020 Term Loan Facility”). The loans under the Revolving Credit Facility bear interest at the LIBOR rate plus 3.5% per annum, and on each of December 31, 2021 and 2020, the rate was 7.0% and 6.75%, respectively, with a 0.5% unused line fee. The maturity date of the Revolving Credit Facility is September 30, 2022. The term loan under the 2020 Term Loan Facility bore interest at 15.0% per annum; provided, that from September 2020 through the payment date in September 2021, DDH LLC was required to pay cash interest at the rate of 12.0% per annum and would owe an additional 3.0% per annum which amount would be deferred and added to the outstanding principal balance of the term loan on each payment date thereafter. All accrued but unpaid interest under the Revolving Credit Facility is payable in monthly installments on each interest payment date until the maturity date when the outstanding principal balance, together with all accrued but unpaid interest, will be due. All accrued but unpaid interest under the 2020 Term Loan Facility was payable in monthly installments on each interest payment date, and DDH LLC was required to repay the outstanding principal balance on January 15 and July 15 of each calendar year in an amount equal to 37.5% of excess cash flow over the preceding six calendar months until the term loan was paid in full. In January 2021, we made a repayment of $1.2 million with respect to the period ending December 31, 2020. The maturity date of the 2020 Term Loan Facility was September 15, 2023; however, on December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Servicing, LLC (“Lafayette Square”), as administrative agent, and the various lenders thereto. The term loan under the 2021 Credit Facility provides for a term loan in the principal amount of up to $32.0 million, consisting of a $22.0 million closing date term loan and an up to $10.0 million delayed draw term loan. The loans under the 2021 Credit Facility bear interest at LIBOR plus the applicable margin minus any applicable impact discount. The applicable margin under the 2021 Credit Facility is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 6.50% per annum if the consolidated total net leverage ratio is less than 2.00 to 1.00 and up to 9.00% per annum if the consolidated total net leverage ratio is greater than 4.00 to 1.00. The applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum to the extent that DDH LLC adopts certain services intended to improve overall employee satisfaction and retention plus an additional discount of 0.05% per annum to the extent that DDH LLC maintains a B Corp certification by Standards Analysts at the non-profit B Lab (or a successor certification or administrator). The maturity date of the 2021 Credit Facility is December 3, 2026. The obligations under the 2021 Credit Facility are secured by senior, first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC and include a pledge and guarantee by the Company. The 2021 Credit Facility is subject to an intercreditor agreement pursuant to which the Revolving Credit Facility has a priority lien on the trade accounts receivable of DDH LLC and its subsidiaries that constitute eligible accounts under the Revolving Credit Facility and related proceeds, and the 2021 Credit Facility has a priority lien on all other collateral. In connection with the entry into the 2021 Credit Facility, we paid off in full and terminated the 2020 Term Loan Facility. The Revolving Credit Facility is secured by the trade accounts receivable of the Company and guaranteed by Holdings. The Revolving Credit Facility includes financial covenants, including (i) a minimum fixed charge coverage ratio of not less than 1.25 to 1.00 as of the end of each fiscal quarter, commencing with the fiscal quarter ending September 30, 2020, (ii) a maximum total net leverage ratio of 3.00 to 1.00 for the fiscal quarters ending December 31, 2020 and March 31, 2021, 2.75 to 1.00 for the fiscal quarters ending June 30, 2021 and September 30, 2021, 2.50 to 1.00 for the fiscal quarters ending December 31, 2021 and March 31, 2022, and 2.25 to 1.00 for the fiscal quarters ending thereafter and (iii) a minimum liquidity amount of at least $1.0 million for the period of September 30, 2020 to June 29, 2021, $1.1 million for the period of June 30, 2021 to December 30, 2021, $1.3 million for the period of December 31, 2021 to June 29, 2022 and $1.4 million thereafter. DDH LLC was in compliance with all of its financial covenants under the Revolving Credit Facility and the 2020 Term Loan Facility as of December 31, 2021 and 2020. 49 On December 17, 2021, the Company amended the Revolving Credit Facility, which increased the availability to $5,000,000 with an initial availability of $2,500,000. As of December 31, 2021, the Revolving Credit Facility had borrowings outstanding in the amount of $0.4 million, leaving $1.8 million of unused capacity. The Revolving Credit Facility and the 2021 Credit Facility contain customary events of default, including with respect to a failure to make payments when due, cross-default and cross-judgment default and certain bankruptcy and insolvency events. From time to time, we are required to post financial assurances to satisfy contractual and other requirements generated in the normal course of business. Some of these assurances are posted to comply with federal, state or other government agencies’ statutes and regulations. Consolidated Statement of Cash Flow Data: Year Ended December 31, 2021 2020 Net cash provided by (used in) operating activities $ 3,751,151 $ (574,527 ) Net cash used in investing activities - (10,985,849 ) Net cash (used in) provided by financing activities (678,718 ) 12,290,082 Net increase in cash and cash equivalents $ 3,072,433 $ 729,706 Cash Flows from Operating Activities Our cash flows from operating activities are primarily influenced by growth in our operations, increases or decreases in collections from our customers and related payments to our buyers and suppliers of advertising media and data. Cash flows from operating activities have been affected by changes in our working capital, particularly changes in accounts receivable, accounts payable and accrued liabilities. The timing of cash receipts from customers and payments to suppliers can significantly impact our cash flows from operating activities. We typically pay suppliers in advance of collections from our customers, but our collection and payment cycles can vary from period to period. In addition, we expect seasonality to impact cash flows from operating activities on a quarterly basis. For the Years Ended December 31, 2021 and 2020 Cash flows from operating activities increased from $(0.6) million used in operating activities for the year ended December31, 2020 to $3.8 million provided by operating activities for the year ended December 31, 2021. The year-over-year increase of $4.4 million was due to the higher adjustments of intangible asset amortization, deferred financing costs amortization and loss on early extinguishment of debt, partially offset by changes in operating assets and liabilities. During the year ended December 31, 2021, cash provided by operating activities of $3.8 million resulted primarily from net loss of $(1.5) million, noncash add back adjustments to net income of $0.4 million for amortization of deferred financing costs, $2.0 million for amortization of intangible assets, $2.7 million for the loss on the early extinguishment of debt and $0.3 million of paid-in-kind interest. Working capital changes of $(0.1) million were primarily driven by a $(3.3) million increase in accounts receivable, a $(1.0) million increase in prepaid expenses, a decrease in accrued liabilities of $(0.3) million, partially offset by increases in accounts payable of $3.4 million and deferred revenue of $1.0 million. During the year ended December 31, 2020, cash used in operating activities of $0.6 million resulted primarily from net loss of $0.9 million, noncash add back adjustments to net income of $0.1 million for amortization of deferred financing costs, $0.5 million for amortization of intangible assets and $0.1 million of paid-in-kind interest, partially offset by the deduction of a $0.3 million gain from the forgiveness of the PPP loans as well as $0.4 million for a gain on the revaluation and settlement of the Seller Earnout liability. Working capital changes of $0.3 million were primarily driven by a $0.7 million decrease in accounts receivable, an increase in accrued liabilities of $0.5 million and related party payables of $0.1 million, partially offset by decreases in accounts payable of $(0.5) million and deferred revenue of $(0.4) million. Cash Flows from Investing Activities Effective September 30, 2020, DDH LLC acquired 100% of the equity interests of Orange142 valued at $26.2 million. The acquisition was funded by issuance of member common units, mandatorily redeemable preferred units, the issuance of a facility term note, and amounts borrowed under our Revolving Credit Facility. The acquisition of Orange142 was recorded by allocating the total purchase consideration to the fair value of the net tangible assets acquired, including goodwill and intangible assets in accordance with ASC 805. The purchase consideration exceeded the fair value of the net assets resulting in goodwill of $4.1 million and intangible assets of $18.0 million. 50 Intangible assets consist of $13.0 million of 10-year amortizable customer relationships, $3.5 million of 10- year amortizable trademarks and tradename, and $1.5 million of 5-year amortizable non-complete agreements. Cash paid to sellers $ 12,000,000 Member units issued 4,294,041 Mandatorily redeemable units 9,913,940 Total purchase consideration $ 26,207,981 The following table summarizes the allocations of the purchase consideration to the fair value of the net assets: Fair value of assets acquired: Cash and cash equivalents $ 1,014,151 Accounts receivable 4,590,945 Prepaid expenses and other current assets 148,717 Other assets 9,618 Intangible assets 18,033,850 Goodwill 4,095,700 Total assets acquired 27,892,981 Fair values of liabilities assumed: Accounts payable $ 683,521 Accrued liabilities 244,165 Deferred revenue 757,314 Total liabilities assumed 1,685,000 Total fair value of net assets $ 26,207,981 Cash Flows Provided by Financing Activities For the Years Ended December 31, 2021 and 2020 Our financing activities consists primarily of proceeds and payments under our notes payable and line of credit, as well as proceeds from government loans and distributions to DDH LLC members. Net cash provided by financing activities has been and will be used to finance our operations, including our investment in people and infrastructure, to support our growth. During the year ended December 31, 2021, net cash provided by financing activities decreased by $13.0 million, from $12.3 million for the year ended December 31, 2020 to $(0.7) million for the year ended December 31, 2021. During the year ended December 31, 2021, we received proceeds of $22.0 million under the 2021 Credit Facility with Lafayette Square, incurred $2.2 million of deferred financing fees, paid $15.7 million to extinguish the 2020 Term Loan Facility, and redeemed $3.5 million of non-participating Preferred A Units. We also paid $0.4 million to the Former Shareholder for amounts due under their Seller Notes and Seller Earnouts and received proceeds from the government for the PPP loans of $0.3 million. Members of DDH LLC received tax distributions of $1.2 million. During the year ended December 31, 2020, net cash provided by financing activities of $12.3 million resulted primarily from the $12.8 million of proceeds of the 2020 Term Loan Facility in conjunction with the acquisition of Orange142, partially offset by $0.6 million paid for deferred financing costs in the transaction. We also paid off our line of credit with First Citizens Bank and entered into the Revolving Credit Facility with East West Bank. Borrowings under the Revolving Credit Facility totaled $1.1 million, and payments totaled $1.4 million. We also incurred $0.1 million in deferred financing fees associated with the Revolving Credit Facility. During the year ended December 31, 2020, we also received proceeds from the government for the PPP loans of $0.3 million as well as $0.2 million from the economic disaster recovery loan program. Members of DDH LLC received distributions of $0.1 million and repaid $0.4 million from advances. As a result of a litigation settlement with the Former Shareholders of Huddled Masses and Colossus, we paid $0.2 million and $18,000 to the Former Shareholders for amounts due under their Seller Notes and Seller Earnouts, respectively. 51 Contractual Obligations and Future Cash Requirements Our principal contractual obligations expected to give rise to material cash requirements consist of non-cancelable leases for our various facilities, the Revolving Credit Facility and the 2021 Credit Facility. We lease furniture and office space in Houston, Austin and Colorado Springs, CO from an unrelated party under non-cancelable operating leases dating through December 2023. These leases will require minimum payments of $121,651 in 2022 and $90,138 in 2023. We anticipate that the future minimum payments related to our current indebtedness over the next five years will be approximately $1.2 million in 2022, and $1.1 million in each of 2023, 2024, 2025 and 2026, with $17.2 million coming due in the years following, assuming we do not refinance our indebtedness. We believe our cash on hand in addition to our cash generated by operations will be sufficient to cover these obligations as well as the future cash requirements of being a public company. Non-GAAP Financial Measures In addition to our results determined in accordance with U.S. generally accepted accounting principles (“GAAP”), including, in particular operating income, net cash provided by operating activities, and net income, we believe that earnings before interest, taxes, depreciation and amortization, as adjusted for acquisition transaction costs, forgiveness of Paycheck Protection Program loans, gain from revaluation and settlement of seller notes and earnout liability, loss on early extinguishment of debt, and loss on early redemption of non-participating preferred units (“Adjusted EBITDA”), a non-GAAP measure, is useful in evaluating our operating performance. The most directly comparable GAAP measure to Adjusted EBITDA is net loss. The following table presents a reconciliation of Adjusted EBITDA to net loss for each of the periods presented: Year Ended December 31, 2021 2020 Net loss $ (1,507,097 ) $ (908,190 ) Add back (deduct): Amortization of intangible assets 1,953,818 488,454 Acquisition transaction costs - 834,407 Interest expense 3,184,029 865,055 Loss on early extinguishment of debt 2,663,148 - Tax expense 63,526 12,124 Forgiveness of Paycheck Protection Program loan (10,000 ) (277,100 ) Gain from revaluation and settlement of seller notes and earnout liability (31,443 ) (401,677 ) Loss on early redemption of non-participating preferred units 41,622 - Adjusted EBITDA $ 6,357,603 $ 613,073 In addition to operating income and net income, we use Adjusted EBITDA as a measure of operational efficiency. We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons: • Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, provision for income taxes, and certain one-time items such as acquisition transaction costs and gains from settlements or loan forgiveness that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired; • Our management uses Adjusted EBITDA in conjunction with GAAP financial measures for planning purposes, including the preparation of our annual operating budget, as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance; and • Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Our use of this non-GAAP financial measure has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. 52 Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from these estimates and assumptions. We believe estimates and assumptions associated with the evaluation of revenue recognition criteria, including the determination of revenue reporting as net versus gross in our revenue arrangements, as well as our determination of the fair value of goodwill and intangible assets, have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. Revenue recognition We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”), as of January 1, 2019, for all contracts not completed as of the date of adoption, which had no impact on our financial position or results of operations using the modified retrospective method. We recognize revenue using the following five steps: • Identification of a contract(s) with a customer; • Identification of the performance obligation(s) in the contract; • Determination of the transaction price; • Allocation of the transaction price to the performance obligation(s) in the contract; and, • Recognition of revenue when, or as, the performance obligation(s) are satisfied. Our revenue is recognized primarily using inputs from third-party data, and to a lesser extent management estimates. We believe our estimates are not a significant element in our revenue recognition process. Our revenues are derived primarily from two sources: buy-side advertising and sell-side advertising. Buy-side advertising We purchase media based on the budget established by our customers with a focus on leveraging data services, customer branding, real-time market analysis and micro-location advertising. We offer our platform on a fully managed and a moderate/self-serve basis, revenue from which is recognized over time using the output method when the performance obligation is fulfilled. An “impression” is delivered when an advertisement appears on pages viewed by users. The performance obligation is satisfied over time as the volume of impressions are delivered up to the contractual maximum for fully managed revenue and the delivery of media inventory for self-serve revenue. Many customers run several different campaigns throughout the year to capitalize on different seasons, special events and other happenings at their respective regions and localities. We provide digital advertising and media buying capabilities with a focus on generating measurable digital and financial life for our customers. Revenue arrangements are evidenced by a fully executed insertion order (“IO”). Generally, IOs specify the number and type of advertising impressions to be delivered over a specified time at an agreed upon price and performance objectives for an ad campaign. Performance objectives are generally a measure of targeting, as defined by the parties in advance, such as number of ads displayed, consumer clicks on ads or consumer actions (which may include qualified leads, registrations, downloads, inquiries or purchases). These payment models are commonly referred to as CPM (cost per impression), CPC (cost per click) and CPA (cost per action). The majority of our contracts are flat-rate, fee-based contracts. In instances where we contract with third-party advertising agencies on behalf of their advertiser clients, a determination is made to recognize revenue on a gross or net basis based on an assessment of whether we are acting as the principal or an agent in the transaction. We are acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis, as we have control and are responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing billing and collection activities for our self-serve proprietary platform. 53 Sell-side advertising We partner with publishers to sell advertising inventory to our existing buy-side clients, as well as our own Colossus Media-curated clients and the open markets (collectively referred to as “buyers”) seeking to access the general market as well as unique multi-cultural audiences. We generate revenue from the delivery of targeted digital media solutions, enabling advertisers to connect intelligently with their audiences across online display, video, social and mobile mediums using our proprietary programmatic SSP. We refer to our publishers, app developers and channel partners collectively as our publishers. We generate revenue through the monetization of publisher ad impressions on our platform. Our platform allows publishers to sell, in real time, ad impressions to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats. We recognize revenue when an ad is delivered in response to a winning bid request from ad buyers. We are acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis as we have control and are responsible for fulfilling the advertisement delivery, establishing the selling prices and the delivery of the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for our self-serve proprietary platform. We maintain agreements with each DSP in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically 30 to 90 days) and access to its platform. In an effort to reduce the risk of nonpayment, we have insurance with a third-party carrier for our accounts receivable. Goodwill Under the purchase method of accounting pursuant to ASC 805, goodwill is calculated as the excess of purchase price over the fair value of the net tangible and identifiable intangible assets acquired. In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management, strategy and primary user base. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative goodwill impairment analysis is performed which is referred to as “Step 1.” Depending upon the results of that measurement, the recorded goodwill may be written down, and impairment expense is recorded in the consolidated statements of operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit. Goodwill is reviewed annually and tested for impairment upon the occurrence of a triggering event. For the years ended December 31, 2021 and 2020, we did not recognize any goodwill impairment losses. Intangible assets, net Our intangible assets consist of customer relationships, trademarks and non-compete agreements. Our intangible assets are recorded at fair value at the time of their acquisition and are stated within our consolidated balance sheets net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives or using an accelerated method. Amortization is recorded as depreciation and amortization under operating expenses within our consolidated statements of operations and comprehensive loss. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. As of December 31, 2021, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable. Recent Accounting Pronouncements See Note 2 to our consolidated financial statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.