What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 128 added, 99 removed, 258 unchanged (47% of the section changed)

28 unchanged sentences

● 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;

● as a holding company, we depend on distributions from Direct Digital Holdings, LLC (“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 Direct Digital Management, LLC, the entity indirectly owned by our Chairman and Chief Executive Officer and President, as a result of its ownership of Class A common stock upon an exchange or redemption of its LLC Units;

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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.

(“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 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, and other sectors.

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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 approximately 90% client retention amongst the clients that represent approximately 80% of our revenue on an annual basis during the year ended December 31, 2021 and the three months ended March 31, 2022.

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.

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The buyers on our platform include DSPs, agencies and individual advertisers.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 43,000 advertisers per month in the three months ended March 31, 2021, which increased to an average of approximately 69,000 advertisers per month in the three months ended March 31, 2022.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 54,000 advertisers per month in the six months ended June 30, 2021, which increased to an average of approximately 79,000 advertisers per month in the six months ended June 30, 2022.

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.

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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 the three months ended March 31, 2022, less than 1% of inventory was determined to be invalid, resulting in minimal financial impact to our customers.

As a result of our platform design and proactive IVT mitigation efforts, in the six months ended June 30, 2022, 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;

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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 three months ended March 31, 2022, we processed approximately 570 million bid requests and had connections to 19 DSPs.

For the six months ended June 30, 2022, we processed approximately 1.2 billion bid requests and had connections to 21 DSPs.

Expanding and managing investments

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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.

In the second 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

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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 administrative and operating system subscription costs, insurance, as well as amortization expense related to our intangible assets.

Other (Expense) Income

Operating expenses consist of compensation expenses related to our executive, sales, finance, and administrative personnel (including salaries, commissions, bonuses, stock-based compensation, benefits, and taxes), general and administrative expenses for rent expense, professional fees, independent contractor costs, selling and marketing fees, and administrative and operating system subscription costs, insurance, as well as amortization expense related to our intangible assets.

Other Income (Expense)

Other income.

Other income includes income associated with recovery of receivables and other miscellaneous credit card rebates.

Forgiveness of PPP Loan.

Forgiveness of Paycheck Protection Program Loan.

From time to time, we obtain loans pursuant to the Paycheck Protection Program (“PPP”), administered by the U.S.

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On February 16, 2021, the remaining $10,000 balance of the PPP-1 Loan was forgiven.

In March 2021, DDH LLC received the PPP-2 Loan proceeds of $287,143.

On April 11, 2022, the balance on the PPP-2 Loan was forgiven.

Interest expense.

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Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

Comparison of the Three and Six Months Ended June 30, 2022 and 2021

The following tables set forth our consolidated results of operations for the periods presented.

The period-to-period comparison of results is not necessarily indicative of results for future periods.

For the Three Months Ended March 31,

For the Three Months Ended

For the Six Months Ended

Buy-side advertising

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Operating expenses

Income (loss) from operations

Other (expense) income

Income from operations

Other expense

Income before taxes

Adjusted EBITDA (1)

(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 .”

Our revenues increased from $5.7 million in for the three months ended March 31, 2021 to $11.4 million for the three months ended March 31, 2022, an increase of $5.7 million or 100%.

Buy-side advertising revenue increased $1.0 million, or 21%, while sell-side advertising revenue increased $4.7 million, or 540% over the 2021 first quarter results.

The increase in our sell-side advertising revenue was the result of an increase in the number of customers served, and an increase in the number of publisher connections.

The increase in our buy-side advertising revenue was primarily as a result of higher spending by our current customers as well as the increase in the number of clients served.

We expect continued revenue growth momentum for both segments as we work to innovate our programmatic advertising offerings for the middle market segment, enhance our publisher partner engagement and monetization strategies, and further extend our reach into the underserved and underrepresented publisher communities.

(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 income see “ – Non-GAAP Financial Measures .”

Our revenues increased from $11.2 million for the three months ended June 30, 2021 to $21.3 million for the three months ended June 30, 2022, an increase of $10.1 million or 90%.

Buy-side advertising revenue increased $0.2 million, or 2%, due to new middle market client spending.

Sell-side advertising revenue increased $9.9 million, or 477% over the 2021 three-month results due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities.

Our revenues increased from $16.9 million in for the six months ended June 30, 2021 to $32.6 million for the six months ended June 30, 2022, an increase of $15.7 million or 93%.

Buy-side advertising revenue increased $1.2 million, or 9%, primarily driven by new middle market client spending.

Sell-side advertising revenue increased $14.5 million, or 496% over the 2021 six-month results due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities.

Cost of Revenues

Along with the increase in gross sales across both platforms, we correspondingly experienced an increase in cost of revenues from $2.7 million for the three months ended March 31, 2021 to $6.6 million for the three months ended March 31, 2022, an increase of $3.9 million or 144%.

Buy-side advertising cost of revenues increased $0.1 million to $2.1 million or 35% of revenue for the three months ended March 31, 2022 compared to $2.0 million or 40% of revenue for the three months ended March 31, 2021.

Sell-side advertising cost of revenues increased $3.8 million, to $4.5 million, or 82% of revenue for the three months ended March 31, 2022, compared to $0.7 million, or 86% of revenue, for the same period in 2021.

Our sell-side cost of media is approximately 80% and our lower cost of media revenue for the first quarter of 2022 was due to economies of scale from the higher revenue we generated during this period.

Gross profit also increased in the three months ended March 31, 2022 to $4.8 million, or 42% of revenue, compared to $3.0 million, or 53% of revenue, for the three months ended March 31, 2021, an increase of $1.8 million or 60% compared to the quarter ended

March 31, 2021.

The lower margin for the three months ended March 31, 2022 is attributable to the mix in revenue between our business segments.

Buy-side advertising gross profit increased $0.9 million, primarily due to a lower cost of revenue.

Sell-side advertising gross profit increased $0.9 million over the first quarter of 2021, primarily as a result of the increase in revenue and related economies of scale as discussed above.

Along with the increase in revenues across both segments, we correspondingly experienced an increase in cost of revenues from $5.0 million for the three months ended June 30, 2021 to $12.9 million for the three months ended June 30, 2022, an increase of $7.9 million or 158%.

Buy-side advertising cost of revenues decreased $0.2 million to $3.2 million or 34% of revenue for the three months ended June 30, 2022 due to lower media costs, compared to $3.4 million or 37% of revenue for the three months ended June 30, 2021.

Sell-side advertising cost of revenues increased $8.1 million, to $9.8 million, or 82% of revenue for the three months ended June 30, 2022, compared to $1.7 million, or 80% of revenue, for the same period in 2021.

Cost of revenues increased from $7.7 million for the six months ended June 30, 2021 to $19.5 million for the six months ended June 30, 2022, an increase of $11.8 million or 153%.

Buy-side advertising cost of revenues decreased $0.1 million to $5.2 million or 34% of revenue for the six months ended June 30, 2022, compared to $5.3 million or 38% of revenue for the six months ended June 30, 2021.

The decrease in the buy-side of cost of revenues is mostly due to a decrease in the cost of digital media in the six months ended June 30, 2022.

Sell-side advertising cost of revenues increased $11.9 million, to $14.3 million, or 82% of revenue for the six months ended June 30, 2022, compared to $2.4 million, or 82% of revenue, for the same period in 2021.

Gross profit also increased in the three months ended June 30, 2022 to $8.3 million, or 39% of revenue, compared to $6.2 million, or 55% of revenue, for the three months ended June 30, 2021, an increase of $2.2 million or 35%.

Gross profit also increased in the six months ended June 30, 2022 to $13.1 million, or 40% of revenue, compared to $9.2 million, or 54% of revenue, for the six months ended June 30, 2021, an increase of $3.9 million or 43%.

The change in margin for the three and six months ended June 30, 2022 is attributable to the mix in revenue between our business segments.

Buy-side advertising gross profit increased $0.4 million and $1.3 million for three and six months ended June 30, 2022, respectively, as compared to prior the same periods in the prior year.

This increase is primarily due to a lower cost of media advertising, as well as higher revenue.

Sell-side advertising gross profit increased $1.8 million and $2.7 million for the three and six months ended June 30, 2022, respectively, as compared to prior year.

This increase primarily is a result of the increase in revenue since the gross margins are relatively flat period over period.

Operating Expenses

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For the Three Months Ended

Compensation, taxes, and benefits

For the Six Months Ended

Compensation, tax and benefits

General and administrative

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Compensation, taxes and benefits

Compensation, taxes and benefits increased from $1.8 million for the three months ended March 31, 2021 to $2.6 million in for the three months ended March 31, 2022, an increase of $0.8 million, or 44%.

The increase was primarily due to higher commissions, the transition of professional fee expenses being converted to full time employees’ wages, salaries and benefits, and hiring of additional personnel to support our growth.

Compensation, taxes and benefits increased from $2.1 million for the three months ended June 30, 2021 to $3.5 million in for the three months ended June 30, 2022, an increase of $1.4 million, or 65%.

The increase is due to headcount additions primarily in our operations area to support our growth, as well as higher commission expense associated with higher revenues, and the transition of consulting expenses being converted to full-time employees.

Compensation, taxes and benefits increased from $3.9 million for the six months ended June 30, 2021 to $6.0 million in for the six months ended June 30, 2022, an increase of $2.1 million, or 55%.

The increase was primarily due to hiring of additional personnel to support our growth, higher commissions associated with higher revenues, as well as the transition of consulting expenses being converted to full-time employees.

General and administrative expenses

General and administrative (“G&A”) expenses also increased from $1.3 million for the three months ended March 31, 2021 to $1.6 million for the three months ended March 31, 2022, primarily due to costs associated with our transition to and operation as a public company.

For the three months ended March 31, 2021, G&A expenses as a percentage of revenue was 14% for the three months ended March 31, 2022 compared to 22% for the three months ended March 31, 2021.

During the first quarter of 2022, we invested in systems, increased insurance, additional software fees, and incurred additional professional fee expenses.

We expect to continue 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.

General and administrative (“G&A”) expenses also increased from $1.5 million for the three months ended June 30, 2021 to $1.8 million for the three months ended June 30, 2022.

G&A expenses as a percentage of revenue was 8% for the three months ended June 30, 2022, compared to 14% for the three months ended June 30, 2021.

G&A expenses increased from $2.8 million for the six months ended June 30, 2021 to $3.4 million for the six months ended June 30, 2022.

G&A expenses as a percentage of revenue was 10% for the six months ended June 30, 2022, compared to 16% for the six months ended June 30, 2021.

The increase in G&A costs was primarily due to costs associated with our transition to and operation as a public company.

During the three and six months ended June 30, 2022, we invested in systems, increased insurance, incurred additional software fees, and professional fees.

We expect to continue to invest in and incur additional expenses associated with our transition to operating as a public company, including increased professional fees, investment in automation, and compliance costs associated with developing the requisite infrastructure required for internal controls.

In connection with our IPO, the Company adopted the 2022 Omnibus Incentive Plan (“2022 Omnibus Plan”) to facilitate the grant of equity awards to our employees, consultants and non-employee directors.

On June 10, 2022, our board of directors granted stock options and restricted stock units (“RSUs”) to our employees and non-employee director.

The stock options and RSUs granted did not have a material impact to G&A expense for the three and six months ended, June 30, 2022.

Other income (expense)

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For the Three Months Ended

Forgiveness of Paycheck Protection

Loss on early redemption of non-

participating preferred units

For the Six Months Ended

Forgiveness of Paycheck Protection Program loan

Loss on redemption of non-participating preferred units

Gain from revaluation and settlement of seller notes and earnout liability

Interest expense

Total other expense

Other expense for the three months ended March 31, 2022 primarily consists of $0.6 million associated with the loss on the early redemption of DDH LLC’s previously outstanding Class B Preferred Units and $0.7 million of interest expense partially offset by other income.

Other expense for the three months ended March 31, 2021 is comprised of approximately $0.8 million of interest expense partially offset by other income and the forgiveness of the PPP loan.

Other expense for the three months ended June 30, 2022 primarily consists of $0.7 million of interest expense, partially offset by forgiveness of the PPP loan.

Other expense for the three months ended June 30, 2021 is comprised of approximately $0.8 million of interest expense partially offset by other income.

Other expense for the six months ended June 30, 2022 primarily consists of $0.6 million associated with the loss on the early redemption of DDH LLC’s previously outstanding Class B Preferred Units and $1.4 million of interest expense, partially offset by other income.

Other expense for the six months ended June 30, 2021 is comprised of approximately $1.6 million of interest expense partially offset by other income and the forgiveness of the PPP loan.

Interest expense

Interest expense decreased for the three months ended March 31, 2022 to $0.7 million compared to $0.8 million for the three months ended March 31, 2021.

Interest expense decreased for the three months ended June 30, 2022 to $0.7 million compared to $0.8 million for the three months ended June 30, 2021.

Interest expense decreased for the six months ended June 30, 2022 to $1.4 million compared to $1.6 million for the six months ended June 30, 2021.

The decrease in interest expense was the result of the refinancing of our debt to a lower interest rate, as well as the redemption of DDH LLC’s Class A Preferred Units in December 2021 and DDH LLC’s Class B Preferred Units in February 2022.

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 March 31, 2022 and December 31, 2021:

March 31, 2022

The following table summarizes our cash and cash equivalents, working capital, and availability under our Revolving Credit Facility (as defined below) on June 30, 2022 and December 31, 2021:

June 30, 2022

December 31, 2021

Cash and cash equivalents

Working capital (deficiency)

Working capital

Availability under Revolving Credit Facility

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 March 31, 2022 and December 31, 2021, we had cash and cash equivalents of approximately $4.4 million and $4.7 million, respectively, and $1.5 million and $1.8 million available under our Revolving Credit Facility, respectively.

Based on our projections of growth in revenue and cash generated from operations in the coming year, 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 Quarterly Report on Form 10-Q.

As of June 30, 2022 and December 31, 2021, we had cash and cash equivalents of approximately $4.9 million and $4.7 million, respectively, and $1.9 million and $1.8 million available under our Revolving Credit Facility, respectively.

Based on our expectations of continued growth in revenue and cash generated from operations in the coming year, 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 Quarterly Report on Form 10-Q.

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.

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Our ability to do so will be subject to future economic, financial, business and other factors, many of which are beyond our control.

In conjunction with the acquisition of Orange142 on September 30, 2020, DDH LLC and each of its subsidiaries as co-borrowers entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak in the amount of $12.825 million, maturing on September 15, 2023.

In conjunction with the acquisition of Orange142 on September 30, 2020, DDH LLC and each of its subsidiaries as co-borrowers entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak Credit Partners, LP in the amount of $12.825 million, maturing on September 15, 2023.

Interest in year one was 15%, of which 12% was payable monthly and 3% was paid-in-kind (“PIK”).

All accrued but unpaid interest under the 2020 Term Loan Facility was payable in monthly installments on each interest payment date, and we were 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.

The remaining principal balance, and all accrued but unpaid interest were to be due on the maturity date.

The remaining principal balance, and all accrued but unpaid interest was to be due on the maturity date.

The obligations under the 2020 Term Loan Facility were secured by first-priority liens on all or substantially all assets of DDH LLC and its subsidiaries.

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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 and used the proceeds to repay and terminate the 2020 Term Loan Facility.

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”) and used the proceeds to repay and terminate the 2020 Term Loan Facility.

Also in conjunction with the acquisition of Orange142 on September 30, 2020, DDH LLC and each of its subsidiaries as co-borrowers entered into the Revolving Credit Facility that provides for a revolving credit facility with East West Bank in the amount of $4.5 million with an initial availability of $1.0 million.

On December 17, 2021, we amended the Revolving Credit Facility, which increased the availability to $5.0 million with an initial availability of $2.5 million.

The loans under the Revolving Credit Facility bear interest at the LIBOR rate plus 3.5% per annum, and at March 31, 2022 and December 31, 2021, the rate was 7.6% and 7.0%, respectively, with a 0.50% per annum unused line fee.

The loans under the Revolving Credit Facility bear interest at the LIBOR rate plus 3.5% per annum, and at June 30, 2022 and December 31, 2021, the rate was 7.6% and 7.0%, respectively, with a 0.50% unused line fee.

We expect that interest rates applicable to the Revolving Credit Facility will be modified upon the implementation of a LIBOR replacement rate that will apply to our current and future borrowings.

The maturity date of the Revolving Credit Facility is September 30, 2022.

The Revolving Credit Facility is secured by senior liens on all or substantially all of the assets of DDH LLC and its subsidiaries, including a priority lien on the trade accounts receivable of DDH LLC and its subsidiariesand guaranteed by Holdings.

The Revolving Credit Facility includes financial covenants, including that the Company

maintains (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, and beginning with the fiscal quarter ended December 31, 2021, a minimum fixed charge coverage ratio of not less than 1.50 to 1.00 as of the end of each fiscal quarter, (ii) a maximum total net leverage ratio of 3.75 to 1.00 for the fiscal quarters ending December 31, 2021 and thereafter and (iii) a minimum liquidity amount, plus revolving credit availability of at least $1.3 million at all times for the period of December 31, 2021 to June 29, 2022 and $1.4 million thereafter.

As of March 31, 2022, the Company was compliant with all of its financial covenants under the Revolving Credit Facility.

As of each of March 31, 2022 and December 31, 2021, the Revolving Credit Facility had borrowings outstanding in the amount of $0.4 million, and $1.5 million of unused capacity.

The Revolving Credit Facility is secured by the trade accounts receivable of DDH LLC and guaranteed by Holdings.

The Revolving Credit Facility includes financial covenants, including that the Company have (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 2.50 to 1.00 for the fiscal quarters ending December 31, 2021 and June 30, 2022, and 2.25 to 1.00 for the fiscal quarters ending thereafter and (iii) a minimum liquidity amount of at least $1.3 million for the period of December 31, 2021 to June 29, 2022 and $1.4 million thereafter.

As of each of June 30, 2022 and December 31, 2021, the Revolving Credit Facility had borrowings outstanding in the amount of $0.4 million, and $1.9 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.

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Some of these assurances are posted to comply with federal, state or other government agencies’ statutes and regulations.

DDH LLC was in compliance with all of its financial covenants under the Revolving Credit Facility and the 2020 Term Loan Facility as of March 31, 2022 and December 31, 2021.

DDH LLC was in compliance with all of its financial covenants under the Revolving Credit Facility and the 2020 Term Loan Facility as of June 30, 2022 and December 31, 2021.

On December 3, 2021, DDH LLC entered into the 2021 Credit Facility with Lafayette Square, as administrative agent, and the various lenders thereto.

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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 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).

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The maturity date of the 2021 Credit Facility is December 3, 2026.

The obligations under the 2021 Credit Facility are secured by senior liens on all or substantially all assets of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC.

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 lenders under the Revolving Credit Facility have 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 lenders under the 2021 Credit Facility have 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.

On July 26, 2022, the Company repaid the $400,000 that was outstanding pursuant to the Revolving Credit Facility and terminated the Revolving Credit Facility as of such date.

On July 28, 2022, the Company entered into the Term Loan Amendment with DDH LLC, Colossus Media, Huddled Masses, Orange142, USDM, LLC, Lafayette Square, and the Lenders party thereto, pursuant to which the Company was joined as a guarantor of the obligations under the 2021 Credit Facility.

Pursuant to the Term Loan Amendment, DDH LLC will indemnify the Company from and against any claims, losses, expenses and other liabilities incurred by the Company arising from the Company’s guarantor obligations under the 2021 Credit Facility and related term loan documents.

Additionally, under the Term Loan Amendment, DDH LLC borrowed $4,260,000 under the Delayed Draw Loan.

The Delayed Draw Loan is required to be repaid in quarterly installments payable on the last day of each fiscal quarter in an amount equal to (i) commencing with the fiscal quarter ending December 31, 2022 through and including the fiscal quarter ending December 31, 2023, $26,250, and (ii) commencing March 31, 2024 and continuing on the last day of each fiscal quarter thereafter, $52,500, with a final installment due December 3, 2026 in an amount equal to the remaining entire principal balance thereof.

After giving effect to the Delayed Draw Loan on the effective date of the Term Loan Amendment, no additional delayed draw loans will be available under the 2021 Credit Facility.

On July 28, 2022, DDH LLC entered into the Redemption Agreement Amendment with USDM Holdings, Inc.

that amends the previously disclosed Redemption Agreement by and between DDH LLC and USDM Holdings, Inc., dated as of November 14, 2021 (the “Original Redemption Agreement”), as amended by the Amendment to Redemption Agreement dated as of February 15, 2022.

The Redemption Agreement Amendment, among other things, amends the remainder of the principal and interest for the Common Units Redemption Price (as defined in the Original Redemption Agreement) to be $3,998,635.

Pursuant to the terms of the Redemption Agreement Amendment, proceeds of the Delayed Draw Loan were used to repay the outstanding balance and related expenses of the Original Redemption Agreement, as well as other transaction costs.

Consolidated Statement of Cash Flow Data:

For the Three Months Ended March 31,

Net cash (used in) provided by operating activities

For the Six Months Ended June 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net (decrease) increase in cash and cash equivalents

Net increase in cash and cash equivalents

Cash Flows from Operating Activities

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In addition, we expect seasonality to impact cash flows from operating activities on a quarterly basis.

For the Three Months Ended March 31, 2022 and 2021

Cash flows from operating activities decreased from $3.6 million provided by operating activities for the three months ended March 31, 2021 to $(0.9) million used in operating activities for the three months ended March 31, 2022.

The period-over-period decrease of $(4.5) million was primarily due to $(3.9) decrease in the timing of the cash receipts and revenue recognition for our deferred revenue activity, $(1.4) million decrease in accounts receivable related to the timing of collection payments, partially offset by $0.2 million increase related to changes in other operating assets and liabilities as well as the $0.6 million effect of the non-cash loss on the early redemption of the Class B non-participating preferred units.

For the Six Months Ended June 30, 2022 and 2021

Cash flows from operating activities decreased from $2.6 million provided by operating activities for the six months ended June 30, 2021 to $0.1 million provided by operating activities for the six months ended June 30, 2022.

The period-over-period decrease of $(2.5) million was primarily due to $(6.8) million increase in accounts receivable related to the increase in revenue billings and the timing of collection payments and $(1.0) million in the timing of the cash receipts and revenue recognition for our deferred revenue activity, partially offset by $1.1 million increase in net income, as well as $3.5 million increase related to changes in accounts payable and accrued liabilities and the $0.6 million effect of the non-cash loss on the early redemption of the Class B non-participating preferred units.

Cash Flows Provided by Financing Activities

For the Three Months Ended March 31, 2022 and 2021

Our financing activities consist primarily of proceeds and payments under our notes payable and line of credit, proceeds from government loans, distributions to DDH LLC members, and during 2022, net proceeds from our IPO as well as the redemption payments for DDH LLC’s common units and Class B Units held by USDM.

For the Six Months Ended June 30, 2022 and 2021

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 three months ended March 31, 2022, net cash provided by financing activities increased by $0.7 million, from $(0.1) million used in financing activities for the three months ended March 31, 2021 to $0.6 million for the three months ended March 31, 2022.

During the three months ended March 31, 2022, we received net proceeds of $11.3 million related to our issuance of Class A common units and used a portion of the proceeds to redeem the common units and Preferred B units held by USDM for approximately $10.3 million.

Also during the three month ended March 31, 2022, we paid our quarterly debt obligation on the 2021 Credit Facility of $0.1 million, incurred additional deferred financing costs related to 2021 Credit Facility and the Revolving Credit Facility amended in late 2021 of $0.2 million, and members of DDH LLC received tax distributions of $0.1 million.

During the three months ended March 31, 2021, we paid our scheduled debt obligation on the 2020 Term Loan Facility for $0.1 million.

During the six months ended June 30, 2022, net cash provided by financing activities increased by $0.9 million, from $(0.8) million used in financing activities for the six months ended June 30, 2021 to $0.2 million provided by financing activities for the six months ended June 30, 2022.

During the six months ended June 30, 2022, we received net proceeds of $11.2 million related to our issuance of Class A common units and used a portion of the proceeds to redeem the common units and Preferred B units held by USDM Holdings, Inc.

for approximately $10.3 million.

Also, during the six months ended June 30, 2022, we paid our quarterly debt obligation on the 2021 Credit Facility of $0.3 million, paid additional deferred financing costs related to 2021 Credit Facility and the Revolving Credit Facility amended in late 2021 of $0.2 million, and members of DDH LLC received tax distributions of $0.3 million.

During the six months ended June 30, 2021, we paid our scheduled debt obligation on the 2020 Term Loan Facility for $(0.1) million, received $0.3 million from the Paycheck Protection Program loan, and paid $(0.3) million on seller notes and earnouts as well as $(0.7) million to the members for tax distributions.

Contractual Obligations and Future Cash Requirements

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These leases will require minimum payments of $82,388 in 2022, $154,490 in 2023, $110,215 in 2024, $156,077 in 2025, $159,755 in 2026 and $530,324 thereafter.

We anticipate that the future minimum payments related to our current indebtedness over the next five years will be approximately $1.1

million in each of 2022, 2023, 2024, 2025 and 2026, with $17.2 million coming due in the years following, assuming we do not refinance our indebtedness.

We anticipate that the future minimum payments related to our current indebtedness over the next five years will be $675,000 in 2022,

$550,000 in 2023, $1.1 million in 2024, $1.1 million in 2025, $1.1 million in 2026 and $17.7 million thereafter, 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.

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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:

For the Three Months Ended March 31,

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 PPP 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 income.

The following table presents a reconciliation of Adjusted EBITDA to net income for each of the periods presented:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Add back (deduct):

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Interest expense

Forgiveness of Paycheck Protection Program loan

Stock-based compensation

Forgiveness of PPP loan

Gain on seller earnout revaluation

Loss on early redemption of non-participating preferred units

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Critical Accounting Policies and Estimates

There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2022, as compared to the critical accounting policies and estimates referred in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

There have been no significant changes in our critical accounting policies and estimates during the three months ended June 30, 2022, as compared to the critical accounting policies and estimates referred in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, “Leases (Topic 842)”.

The new lease guidance supersedes Topic 840.

The core principle of the guidance is that entities should recognize the assets and liabilities that arise from leases.

Topic 840 does not apply to leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained.

In July 2018, the FASB issued ASU No.

2018-11, “Leases (Topic 842):

Targeted Improvements”, which provides entities with an alternative modified transition method to elect not to recast the comparative periods presented when adopting Topic 842.

The Company adopted Topic 842 as of January 1, 2019, using the alternative modified transition method, for which, comparative periods, including the disclosures related to those periods, are not restated.

In addition, the Company elected practical expedients provided by the new standard whereby, the Company has elected to not reassess its prior conclusions about lease identification, lease classification, and initial direct costs and to retain off-balance sheet treatment of short-term leases (i.e., 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise).

Refer to “Note 10 - Commitments and Contingencies” to our consolidated financial statements included in Item 1.

of this Quarterly Report on Form 10-Q for additional information.

In March 2020, the FASB issued ASU No.

Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This update provides temporary optional expedients and exceptions to U.S.

GAAP on contract modifications, hedging relationships, and other transactions affected by reference rate reform to ease entities’ financial reporting burdens as the market transitions from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates.

The guidance was effective upon issuance and may be applied prospectively to contract modifications made, hedging relationships entered into, and other transactions affected by reference rate reform, evaluated on or before December 31, 2022, beginning during the reporting period in which the guidance has been elected.

Management is currently evaluating the impact of this update, but does not expect this update to have a material impact on the Company’s financial statements.

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”).

ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's Consolidated Financial Statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the transition away from reference rates expected to be discontinued to alternative reference rates.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope, to expand the scope of this guidance to include derivatives.

The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022.

Management is currently evaluating the impact of this update but does not expect it to have a material impact on the Company’s financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers.

This ASU should be applied prospectively to acquisitions occurring on or after the effective date of December 15, 2022, and early adoption is permitted.

This update is not expected to have a material impact on the Company’s financial statements.

Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis