What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-15 · 113 added, 97 removed, 289 unchanged (42% of the section changed)

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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.

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.

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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 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.

(“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™” or, “Huddled Masses”) a buy-side marketing platform, and Colossus Media LLC (“Colossus Media”) a sell-side marketing platform.

The subsidiaries of Direct Digital Holdings, Inc.

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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.

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.

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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 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.

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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 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.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 54,000 advertisers per month in the nine months ended September 30, 2021, which increased to an average of approximately 95,000 advertisers per month in the nine months ended September 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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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 MediaMath’s quarterly survey, Colossus Media has consistently ranked in the top 10 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;

As a result of our platform design and proactive IVT mitigation efforts, in the nine months ended September 30, 2022, we determined that less than 1% of inventory was invalid, resulting in minimal financial impact to our customers.

We address IVT on a number of fronts, including sophisticated technology, which detects and avoids IVT on the front end;

direct publisher and inventory relationships, for supply path optimization;

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

For the nine months ended September 30, 2022, we processed approximately 2.6 trillion bid requests and had connections to approximately 19 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 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.

In the first quarter of 2023, 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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Cost of revenues for our buy-side advertising segment consists primarily of digital media fees, third-party platform access fees, and other third-party fees associated with providing services to our customers.

For the sell-side advertising segment, we pay publishers a

fee, which is typically a percentage of the value of the ad impressions monetized through our platform.

For the sell-side advertising segment, we pay publishers a fee, which is typically a percentage of the value of the ad impressions monetized through our platform.

Cost of revenues consists primarily of publisher media fees and data center co-location costs.

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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.

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.

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Results of Operations

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

Comparison of the Three and Nine Months Ended September 30, 2022 and 2021

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

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Buy-side advertising

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Income before taxes

Net income (loss)

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 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.

Our revenues increased from $8.4 million for the three months ended September 30, 2021 to $26.0 million for the three months ended September 30, 2022, an increase of $17.6 million or 211%.

Buy-side advertising revenue increased $1.1 million, or 18%, primarily due to expanded spending from our existing customer base as well as new middle market client spending.

Sell-side advertising revenue increased $16.6 million, or 710% over the 2021 three-month results, due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, an increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities.

For the three months ended September 30, 2022, the Company processed approximately 125 billion average monthly impressions through its sell-side advertising segment, an increase of 248% from the prior year.

Our revenues increased from $25.2 million in for the nine months ended September 30, 2021 to $58.6 million for the nine months ended September 30, 2022, an increase of $33.4 million, or 132%.

Buy-side advertising revenue increased $2.3 million, or 12%, primarily due to expanded spending from our existing customer base as well as new middle market client spending.

Sell-side advertising revenue increased $31.1 million, or 591% over the 2021 nine-month results due to continued revenue growth momentum from enhanced publisher partner engagement and monetization strategies, an increase in impression inventory, as well as the extension of our reach into the underserved and underrepresented publisher communities.

For the nine months ended September 30, 2022, the Company processed approximately 104 billion average monthly impressions, through its sell-side advertising segment, an increase of 165% from the prior year.

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.

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.

Along with the increase in revenues across both segments, we correspondingly experienced an increase in cost of revenues from $4.1 million for the three months ended September 30, 2021 to $18.5 million for the three months ended September 30, 2022, an increase of $14.4 million or 349%.

Buy-side advertising cost of revenues increased $0.3 million to $2.5 million, or 35% of revenue, for the three months ended September 30, 2022 due to the increase in revenue partially offset by lower media costs, compared to $2.2 million or 36% of revenue for the three months ended September 30, 2021.

Sell-side advertising cost of revenues increased $14.1 million, to $16.0 million, or 85% of revenue for the three months ended September 30, 2022, compared to $2.0 million, or 84% of revenue, for the same period in 2021.

Cost of revenues increased from $11.8 million for the nine months ended September 30, 2021 to $38.0 million for the nine months ended September 30, 2022, an increase of $26.2 million, or 222%.

Buy-side advertising cost of revenues increased $0.2 million to $7.7 million, or 35% of revenue for the nine months ended September 30, 2022, compared to $7.5 million, or 37% of revenue for the nine months ended September 30, 2021.

The increase in the buy-side of cost of revenues is due to the increase in revenues partially offset by a decrease in the cost of digital media in the nine months ended September 30, 2022.

Sell-side advertising cost of revenues increased $26.0 million, to $30.3 million, or 84% of revenue for the nine months ended September 30, 2022, compared to $4.3 million, or 83% of revenue, for the same period in 2021.

Gross profit also increased in the three months ended September 30, 2022 to $7.5 million, or 29% of revenue, compared to $4.2 million, or 49% of revenue, for the three months ended September 30, 2021, an increase of $3.2 million or 76%.

Gross profit also increased in the nine months ended September 30, 2022 to $20.6 million, or 35% of revenue, compared to $13.4 million, or 53% of revenue, for the nine months ended September 30, 2021, an increase of $7.2 million or 53%.

The change in margin for the three and nine months ended September 30, 2022 is attributable to the mix in revenue between our business segments, as our sell-side segment, whose revenues grew as a percentage of our overall revenue, has a lower gross margin than our buy-side segment.

Buy-side advertising gross profit increased $0.8 million and $2.1 million for three and nine months ended September 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.

Sell-side advertising gross profit increased $2.5 million and $5.1 million for the three and nine months ended September 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.

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Compensation, tax and benefits

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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.

Compensation, taxes and benefits increased from $2.2 million for the three months ended September 30, 2021 to $3.8 million in for the three months ended September 30, 2022, an increase of $1.6 million, or 72%.

The increase is due to a one-time severance charge of $0.5 million, as well as headcount additions primarily in our operations area to support our growth, and higher commission expense and bonus expense, partially offset by lower consulting expenses as a result of these consultants being converted to full-time employees.

Compensation, taxes and benefits increased from $6.1 million for the nine months ended September 30, 2021 to $9.9 million in for the nine months ended September 30, 2022, an increase of $3.8 million, or 61%.

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.

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.

General and administrative (“G&A”) expenses also increased from $1.4 million for the three months ended September 30, 2021 to $1.8 million for the three months ended September 30, 2022.

G&A expenses as a percentage of revenue was 7% for the three months ended September 30, 2022, compared to 17% for the three months ended September 30, 2021.

G&A expenses increased from $4.2 million for the nine months ended September 30, 2021 to $5.2 million for the nine months ended September 30, 2022.

G&A expenses as a percentage of revenue was 9% for the nine months ended September 30, 2022, compared to 17% for the nine months ended September 30, 2021.

The increase in G&A costs during the three and nine months ended September 30, 2022 was primarily due to costs associated with our transition to and operation as a public company.

During the three and nine months ended September 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.

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

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

Other income (expense)

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

Forgiveness of Paycheck Protection Program loan

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Total other expense

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.

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Other expense for the three months ended September 30, 2022 primarily consists of $0.9 million of interest expense.

Other expense for the three months ended September 30, 2021 is comprised of approximately $0.8 million of interest expense.

Other expense for the nine months ended September 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 $2.3 million of interest expense, partially offset by $0.3 forgiveness of the PPP loan and other income.

Other expense for the nine months ended September 30, 2021 is comprised of approximately $2.4 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.

Interest expense increased for the three months ended September 30, 2022 to $0.9 million compared to $0.8 million for the three months ended September 30, 2021.

The increase in interest expense in the three months period is due to the additional borrowings under

the Term Loan Amendment in July 2022.

Interest expense decreased for the nine months ended September 30, 2022 to $2.3 million compared to $2.4 million for the nine months ended September 30, 2021.

The decrease in year over year 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.

This was partially offset by higher interest on the additional borrowings on the Term Loan in 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

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

September 30, 2022

December 31, 2021

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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 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.

We anticipate funding our operations for the next twelve months using available cash, cash flow generated from operations, and proceeds from our public offering in 2022.

As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents of approximately $7.0 million and $4.7 million, respectively, and as of December 31, 2021 we had $1.8 million available under our Revolving Credit Facility.

On July 26, 2022 we repaid the outstanding balance of $400,000 plus accrued interest and terminated the Revolving Credit Facility as of such date.

We are working with a lender on a line of credit, and expect to finalize the agreement in the fourth quarter of 2022, but there can be no assurance that we will close on such new facility in a timely basis, or at all.

Based on our expectations of continued growth in revenue and cash generated from operations in the coming year and the available cash held by us, 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.

We are also seeking to secure a new source of revolving indebtedness, but there can be no assurance that we will close on such new facility in a timely basis, or at all.

Any equity or debt financings, if available at all, may be on terms which are not favorable to us.

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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.

The loans under the Revolving Credit Facility bore interest at the LIBOR rate plus 3.5% per annum, and at September 30, 2022 and December 31, 2021, the rate was 0.0% and 7.0%, respectively, with a 0.50% unused line fee.

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

The Revolving Credit Facility was 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 September 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 September 30, 2022 and December 31, 2021, the Revolving Credit Facility had borrowings outstanding in the amount of $0.0 million, and $1.9 million of unused capacity.

The Revolving Credit Facility contained 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.

DDH LLC was in compliance with all of its financial covenants under the Revolving Credit Facility and the 2020 Term Loan Facility as of December 31, 2021, and such financial covenants were no longer binding on the Company as of September 30, 2022.

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 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 contains 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.

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.

On July 28, 2022, the Company entered into the Second Amendment and Joinder to Term Loan and Security Agreement (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.

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Consolidated Statement of Cash Flow Data:

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net cash used in financing activities

Net increase in cash and cash equivalents

Cash Flows from Operating Activities

Cash Flows Provided by 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.

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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

For the Nine Months Ended September 30, 2022 and 2021

Cash flows from operating activities increased from $3.2 million provided by operating activities for the nine months ended September 30, 2021 to $3.4 million used in operating activities for the nine months ended September 30, 2022.

The period-over-period increase of $0.2 million was primarily due to a $2.1 million increase in net income and $10.0 million increase related to changes in accounts payable and $1.6 million increase related to changes in accrued liabilities, partially offset by $(13.5) million increase in accounts receivable related to the increase in revenue billings.

Cash Flows Used in Financing Activities

For the Nine Months Ended September 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.

During the nine months ended September 30, 2022, net cash used in financing activities decreased by $1.1 million, from $(2.2) million used in financing activities for the nine months ended September 30, 2021 to $(1.1) million used in financing activities for the nine months ended September 30, 2022.

During the nine months ended September 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 $14.2 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.

We also borrowed $4.3 million under the Delayed Draw Loan during the nine months ended September 20, 2022.

Also, during the nine months ended September 30, 2022, we paid $0.4 million related to the Revolving Credit Facility, paid our quarterly debt obligation on the 2021 Credit Facility of $0.4 million, paid additional deferred financing costs related to 2021 Credit Facility and the Revolving Credit Facility amended in late 2021 of $0.5 million, and members of DDH LLC received tax distributions of $0.9 million.

During the nine months ended September 30, 2021, we paid our scheduled debt obligation on the 2020 Term Loan Facility for $(1.2) million, received $0.3 million from the Paycheck Protection Program loan, and paid $(0.4) million on seller notes and earnouts as well as $(0.9) 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.

Our principal contractual obligations expected to give rise to material cash requirements consist of non-cancelable leases for our various facilities 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 $39,394 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,

$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 anticipate that the future minimum payments related to our current indebtedness over the next five years will be $163,750 in 2022, $655,000 in 2023, $1.3 million in 2024, $1.3 million in 2025, $1.3 million in 2026 and $21.2 million thereafter, assuming we do not refinance our indebtedness or enter

into a new revolving credit facility.

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 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.

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, loss on early redemption of non-participating preferred units, and stock-based compensation, (“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,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

Net Income (Loss) [1]

Add back (deduct):

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Adjusted EBITDA

__________________

[1] During the three months ended September 30, 2022, we recorded a one-time severance charge of approximately $502,000.

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;

● 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, stock-based compensation, 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;

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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 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.

There have been no significant changes in our critical accounting policies and estimates during the three months ended September 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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis