Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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 ” in our Annual Report on Form 10-K or in other parts of this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the 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 ” in our Annual Report on Form 10-K and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
The forward-looking statements contained in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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;
● 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 Direct Digital Holdings, LLC (“DDH LLC”) to pay our taxes, expenses (including payments under the Tax Receivable Agreement) and dividends;
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● 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; and
● other factors and assumptions discussed under “ Risk Factors ” and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
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 Quarterly Report on Form 10-Q 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 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. 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:
Advertising
Solution
Date
Current %
and
of
Subsidiary
Ownership
Segment
Date of Formation
Acquisition
Direct Digital Holdings, LLC
100
%
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.
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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 annually, 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 our 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 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 six months ended June 30, 2022. 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.
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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.
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 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. 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 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; 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.
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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 six months ended June 30, 2022, we processed approximately 1.2 billion bid requests and had connections to 21 DSPs.
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 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
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
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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, 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 Paycheck Protection Program Loan. From time to time, we obtain loans 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. We received the PPP-1 Loan proceeds of $287,100 on May 8, 2020. 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. Interest expense is mainly related to our debt as further described below in Liquidity and Capital Resources . 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 February 2022, we redeemed the non-participating Class B Preferred Units and recognized a loss on the redemption of $590,689 in connection with the write-off of the fair value associated with the units.
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Results of Operations
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
For the Six Months Ended
June 30,
Change
June 30,
Change
2022
2021
Amount
%
2022
2021
Amount
%
Revenues
Buy-side advertising
$
9,321,267
$
9,113,304
$
207,963
2
%
$
15,152,308
$
13,941,352
$
1,210,956
9
%
Sell-side advertising
11,940,041
2,068,587
9,871,454
477
%
17,479,337
2,934,273
14,545,064
496
%
Total Revenues
21,261,308
11,181,891
10,079,417
90
%
32,631,645
16,875,625
15,756,020
93
%
Cost of revenues
Buy-side advertising
3,154,471
3,351,655
(197,184)
(6)
%
5,223,817
5,306,295
(82,478)
(2)
%
Sell-side advertising
9,771,017
1,655,713
8,115,304
490
%
14,291,209
2,397,406
11,893,803
496
%
Total cost of revenues
12,925,488
5,007,368
7,918,120
158
%
19,515,026
7,703,701
11,811,325
153
%
Gross profit
8,335,820
6,174,523
2,161,297
35
%
13,116,619
9,171,924
3,944,695
43
%
Operating expenses
5,271,673
3,654,512
1,617,161
44
%
9,467,601
6,678,108
2,789,493
42
%
Income from operations
3,064,147
2,520,011
544,136
22
%
3,649,018
2,493,816
1,155,202
46
%
Other expense
(363,108)
(806,651)
443,543
(55)
%
(1,619,602)
(1,589,749)
(29,853)
2
%
Income before taxes
2,701,039
1,713,360
987,679
58
%
2,029,416
904,067
1,125,349
124
%
Tax expense
86,676
54,000
32,676
61
%
86,676
54,000
32,676
61
%
Net income
$
2,614,363
$
1,659,360
$
955,003
58
%
$
1,942,740
$
850,067
$
1,092,673
129
%
Adjusted EBITDA (1)
$
3,568,009
$
3,008,993
$
559,016
18
%
$
4,689,316
$
3,489,911
$
1,199,405
34
%
(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 .”
Revenues
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 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.
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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
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
The following table sets forth the components of operating expenses for the periods presented.
For the Three Months Ended
For the Six Months Ended
June 30,
Change
June 30,
Change
2022
2021
Amount
%
2022
2021
Amount
%
Compensation, tax and benefits
$
3,494,692
$
2,123,783
$
1,370,909
65
%
$
6,049,728
$
3,896,864
$
2,152,864
55
%
General and administrative
1,776,981
1,530,729
246,252
16
%
3,417,873
2,781,244
636,629
23
%
Total operating expenses
$
5,271,673
$
3,654,512
$
1,617,161
44
%
$
9,467,601
$
6,678,108
$
2,789,493
42
%
Compensation, taxes and benefits
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.
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.
General and administrative expenses
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.
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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)
The following table sets forth the components of other income (expense) for the periods presented.
For the Three Months Ended
For the Six Months Ended
June 30,
Change
June 30,
Change
2022
2021
Amount
%
2022
2021
Amount
%
Forgiveness of Paycheck Protection Program loan
$
287,143
$
—
$
287,143
nm
$
287,143
$
10,000
$
277,143
nm
Other income
—
527
(527)
(100)
%
47,982
19,186
28,796
150
%
Loss on redemption of non-participating preferred units
—
—
—
nm
(590,689)
—
(590,689)
nm
Gain from revaluation and settlement of seller notes and earnout liability
—
21,232
(21,232)
(100)
%
—
21,232
(21,232)
(100)
%
Interest expense
(650,251)
(828,410)
178,159
(22)
%
(1,364,038)
(1,640,167)
276,129
(17)
%
Total other expense
$
(363,108)
$
(806,651)
$
443,543
(55)
%
$
(1,619,602)
$
(1,589,749)
$
(29,853)
2
%
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 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, 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
$
4,915,815
$
4,684,431
Working capital
$
2,462,245
$
4,057,243
Availability under Revolving Credit Facility
$
1,892,183
$
1,798,145
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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 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. 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 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 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. The 2020 Term Loan Facility contained a number of financial covenants and customary affirmative covenants. In addition, the 2020 Term Loan Facility included a number of negative covenants, including (subject to certain exceptions) limitations on (among other things): indebtedness, liens, investments, acquisitions, dispositions, and restricted payments. Each of Mark Walker (“Walker”), Chairman of the Board and Chief Executive Officer, and Keith Smith (“Smith”), President, provided limited guarantees of the obligations under the 2020 Term Loan Facility. 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”) 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 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 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. 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. 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. 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
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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). We expect that interest rates applicable to the 2021 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 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 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.
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Consolidated Statement of Cash Flow Data:
For the Six Months Ended June 30,
2022
2021
Net cash provided by operating activities
$
73,514
$
2,647,318
Net cash used in investing activities
—
—
Net cash provided by (used in) financing activities
157,870
(752,718)
Net increase in cash and cash equivalents
$
231,384
$
1,894,600
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 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 Six Months Ended June 30, 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 Holdings, Inc. 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 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
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 and Austin from an unrelated party under non-cancelable operating leases dating through February 2030. 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 $675,000 in 2022,
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$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.
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 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,
2022
2021
2022
2021
Net Income
$
2,614,363
$
1,659,360
$
1,942,740
$
850,067
Add back (deduct):
Amortization of intangible assets
488,455
488,455
976,909
976,909
Interest expense
650,251
828,410
1,364,038
1,640,167
Tax expense
86,676
54,000
86,676
54,000
Stock-based compensation
15,407
—
15,407
—
Forgiveness of PPP loan
(287,143)
—
(287,143)
(10,000)
Gain on seller earnout revaluation
—
(21,232)
—
(21,232)
Loss on early redemption of non-participating preferred units
—
—
590,689
—
Adjusted EBITDA
$
3,568,009
$
3,008,993
$
4,689,316
$
3,489,911
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.
Critical Accounting Policies and Estimates
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.
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Recent Accounting Pronouncements
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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company,” we are not required to provide the information required by this Part I, Item 3.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.