Direct Digital Holdings, Inc. 10-Q

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, 2022. 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, 2022. 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; ● 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; 26 Table of Contents ● 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; ● 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, 2022. 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™” or, “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 LGBTQIA+ 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. 27 Table of Contents 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. 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 231 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 as 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 three months ended March 31, 2023. In addition, we cultivate client relationships through our pipeline of managed and moderate/self-serve clients that conduct campaigns through our platform. 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 ongoing developments: ● 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 28 Table of Contents begin utilizing digital advertising on an accelerated pace. We believe this market is rapidly expanding, and that small-to-mid-sized advertisers will continue to increase their digital spend. Seasonality In general, the advertising industry experiences seasonal trends that affect the vast majority of participants in the digital marketing ecosystem. Our buy-side advertising revenue is weighted to DMOs and historically, marketing spend is higher in the second and third quarters of our fiscal year with the increase in marketing spend taking place over the summer months. As a result, the fourth and first quarters tend to reflect lower activity levels and lower revenue. We generally expect these seasonality trends to continue and our ability to effectively manage our resources in anticipation of these trends may affect our operating results. 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 153,000 advertisers per month in the three months ended March 31, 2023, an increase of 121% over the 69,000 advertisers per month in the three months ended March 31, 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 provide 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 (“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 the advertising industry, inventory quality is assessed in terms of invalid traffic (“IVT”) which can be impacted by fraud such as “fake eyeballs” generated by automated technologies set up to artificially inflate impression counts. As a result of our platform design and proactive IVT mitigation efforts, in the three months ended March 31, 2023, we determined that approximately 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; and ongoing campaign and inventory performance review, to ensure inventory quality and brand protection controls are in place. 29 Table of Contents 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. Expanding and managing investments Each impression or transaction occurs in a fraction of a second. Given that most transactions take place in an auction/bidding format, we continue to make investments across the platform to further reduce the processing time. In addition to the robust infrastructure supporting our platform, it is also critical that we align with key industry partners in the digital supply chain. The Colossus SSP is agnostic to any specific demand side platform. We automate workflow processes whenever feasible to drive predictable and value-added outcomes for our customers and increase productivity of our organization. In the first quarter of 2023, we transitioned our server platform to HPE Greenlake, which provides increased capacity, faster response time, and expansion capabilities to align with growth in our business. Managing industry dynamics We operate in the rapidly evolving digital advertising industry. Due to the scale and complexity of the digital advertising ecosystem, direct sales via manual, person-to-person processes are insufficient for delivering a real-time, personalized ad experience, creating the need for programmatic advertising. In turn, advances in programmatic technologies have enabled publishers to auction their ad inventory to more buyers, simultaneously, and in real time through a process referred to as header bidding. Header bidding has also provided advertisers with transparent access to ad impressions. As advertisers keep pace with ongoing changes in the way that consumers view and interact with digital media, we anticipate further innovation and expect that header bidding will be extended into new areas such as OTT/CTV. We believe our focus on publishers and buyers has allowed us to understand their needs and our ongoing innovation has enabled us to quickly adapt to changes in the industry, develop new solutions and do so cost effectively. Our performance depends on our ability to keep pace with industry changes such as header bidding and the evolving needs of our publishers and buyers while continuing our cost efficiency. Seasonality In general, the advertising industry experiences seasonal trends that affect the vast majority of participants in the digital marketing ecosystem. In our sell-side advertising segment, many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year in order to coincide with increased holiday purchasing. As a result, the first quarter tends to reflect lower activity levels and lower revenue. We generally expect these seasonality trends to continue and our ability to effectively manage our resources in anticipation of these trends may affect our operating results. Components of Our Results of Operations Revenue On the buy-side advertising segment, we generate revenue from clients that enter into agreements with us to provide digital marketing and media services to purchase digital advertising space, data, and other add-on features. On the sell-side advertising segment, we generate revenue from publishing clients by selling their advertising inventory to national and local advertisers. We report revenue on a gross basis inclusive of all supplier costs because we bear the full obligation of any costs to provide our services. We pay suppliers for the cost of digital media, advertising inventory, data and any add-on services or features. Our revenue recognition policies are discussed in more detail under “—Critical Accounting Policies and Estimates.” Cost of revenues Cost of revenues for our buy-side advertising segment consists primarily of digital media fees, third-party platform access fees, and other third-party fees associated with providing services to our customers. For the sell-side advertising segment, we pay publishers a fee, which is typically a percentage of the value of the ad impressions monetized through our platform. Cost of revenues consists 30 Table of Contents 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. 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 is classified as a liability, and the corresponding distributions are recognized as interest expense for the three months ended March 31, 2022. The preferred A and B units were fully redeemed as of March 31, 2022. Contingent loss on early termination of line of credit. In January 2023, we entered into a Loan and Security Agreement (the “Loan Agreement”), by and among Silicon Valley Bank (“SVB”), which provides for a revolving credit facility (the “Credit Facility”). In March 2023, we issued a notice of termination and recognized a loss on the write-off of the deferred financing fees. 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. 31 Table of Contents Results of Operations Comparison of the Three Ended March 31, 2023 and 2022 The following tables set forth our consolidated results of operations for the periods presented. The period-to-period comparison of results is not necessarily indicative of results for future periods. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ ​ ​ ​ March 31, ​ Change ​ ​ ​ ​ 2023 2022 Amount % ​ ​ Revenues ​ ​ ​ ​ ​ ​ ​ ​ Buy-side advertising ​ $ 7,439,666 ​ $ 5,831,041 ​ $ 1,608,625 28 % ​ Sell-side advertising ​ 13,783,244 ​ 5,539,296 ​ 8,243,948 149 % ​ Total Revenues ​ 21,222,910 ​ 11,370,337 ​ 9,852,573 87 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenues ​ ​ ​ ​ ​ Buy-side advertising ​ 2,949,153 ​ 2,069,346 ​ 879,807 43 % ​ Sell-side advertising ​ 11,840,706 ​ 4,520,192 ​ 7,320,514 162 % ​ Total cost of revenues ​ 14,789,859 ​ 6,589,538 ​ 8,200,321 124 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit ​ 6,433,051 ​ 4,780,799 ​ 1,652,252 35 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating expenses ​ 6,574,390 ​ 4,195,928 ​ 2,378,462 57 % ​ Income (loss) from operations ​ (141,339) ​ 584,871 ​ (726,210) (124) % ​ Other expense ​ (1,267,243) ​ (1,256,494) ​ (10,749) (1) % ​ Loss before taxes ​ ​ (1,408,582) ​ ​ (671,623) ​ ​ (736,959) ​ (110) % ​ Tax expense ​ (74,648) ​ — ​ (74,648) nm % ​ Net loss ​ $ (1,333,934) ​ $ (671,623) ​ $ (662,311) (99) % ​ Adjusted EBITDA (1) ​ $ 547,975 ​ $ 1,121,308 ​ $ (573,333) (51) % ​ (1) Adjusted EBITDA is a non-GAAP financial measure. 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 .” nm – not meaningful Revenues Our revenues increased from $11.4 million for the three months ended March 31, 2022 to $21.2 million for the three months ended March 31, 2023, an increase of $9.9 million or 87%. Buy-side advertising revenue increased $1.6 million, or 28%, primarily due to expanded spending from our existing customer base as well as new middle market client spending. Sell-side advertising revenue increased $8.3 million, or 149% over the 2022 three-month results, due to a continued increase in impression inventory, as well as increased publisher engagement across general market 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 $6.6 million for the three months ended March 31, 2022 to $14.8 million for the three months ended March 31, 2023, an increase of $8.2 million, or 124%. Buy-side advertising cost of revenues increased $0.9 million to $2.9 million, or 40% of revenue, for the three months ended March 31, 2023, compared to $2.1 million, or 35% of revenue, for the three months ended March 31, 2022. Sell-side advertising cost of revenues increased $7.3 million, to $11.8 million, or 86% of revenue for the three months ended March 31, 2023, compared to $4.5 million, or 82% of revenue, for the same period in 2022. The increase in costs was primarily due to the related increase in revenue, while the 4% increase as a percentage of revenue was due to the mix and concentration of publishers and the related costs. We expect these higher costs to continue in future fiscal periods. 32 Table of Contents Gross profit Gross profit also increased in the three months ended March 31, 2023 to $6.4 million, or 30% of revenue, compared to $4.8 million, or 42% of revenue, for the three months ended March 31, 2022, an increase of $1.7 million or 35%. The change in margin for the three months ended March 31, 2023 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 $0.7 million for the three months ended March 31, 2023 as compared to the same period in the prior year, primarily due higher revenue. Sell-side advertising gross profit increased $0.9 million for the three months ended March 31, 2023 as compared to prior year, primarily due to the increase in revenue. Operating expenses The following table sets forth the components of operating expenses for the periods presented. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended ​ ​ ​ ​ ​ ​ ​ March 31, ​ Change ​ ​ ​ ​ 2023 2022 Amount % ​ ​ Compensation, tax and benefits ​ $ 3,634,296 ​ $ 2,555,036 ​ $ 1,079,260 ​ 42 % ​ General and administrative ​ ​ 2,940,094 ​ 1,640,892 ​ 1,299,202 79 % ​ Total operating expenses ​ $ 6,574,390 ​ $ 4,195,928 ​ $ 2,378,462 57 % ​ ​ Compensation, taxes and benefits Compensation, taxes and benefits increased from $2.6 million for the three months ended March 31, 2022 to $3.6 million in for the three months ended March 31, 2023, an increase of $1.1 million, or 42%. The increase is due to headcount additions primarily in our operations area to support our growth as well as in our shared services to support our public company infrastructure and bonus expense. 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 and March 20, 2023, our board of directors granted stock options and restricted stock units (“RSUs”) to certain of our employees and non-employee directors. The stock options and RSUs granted did not have a material impact to compensation, taxes and benefits expense for the three months ended March 31, 2023. 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 $1.6 million for the three months ended March 31, 2022 to $2.9 million for the three months ended March 31, 2023. G&A expenses as a percentage of revenue was 14% for the three months ended March 31, 2023 and 2022. The increase in G&A costs during the three months ended March 31, 2023 was primarily due to costs associated with our transition to and operation as a public company as of February 2022. During the three months ended March 31, 2023, we incurred higher travel expenses, investor and public relations costs, insurance, as well as professional fees. We also completed the transition of our servers for Colossus Media to HPE Greenlake and incurred higher consulting and transition costs for this one-time project. 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. 33 Table of Contents Other income (expense) The following table sets forth the components of other income (expense) for the periods presented. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ Change ​ ​ ​ ​ 2023 2022 Amount % ​ Other income ​ $ 49,828 $ 47,982 $ 1,846 4 % ​ Contingent loss on early termination of line of credit ​ ​ (299,770) ​ — ​ (299,770) nm % ​ Loss on early redemption of non-participating preferred units ​ ​ — ​ (590,689) ​ 590,689 (100) % ​ Interest expense ​ ​ (1,017,301) ​ (713,787) ​ (303,514) 43 % ​ Total other expense ​ $ (1,267,243) ​ $ (1,256,494) ​ $ (10,749) 1 % ​ ​ Other expense for the three months ended March 31, 2023 primarily consists of $1.0 million of interest expense and $0.3 million related to contingent loss on early termination of the line of credit with Silicon Valley Bank. Other expense for the three months ended March 31, 2022 is comprised of $0.6 million associated with the loss on the early redemption of DDH LLC’s previously outstanding Class B Preferred Units and approximately $0.7 million of interest expense. Interest expense Interest expense increased for the three months ended March 31, 2023 to $1.0 million compared to $0.7 million for the three months ended March 31, 2022. The increase in interest expense in the three months period is due to the additional $4.0 million in borrowings under the Term Loan Amendment in July 2022, as well as higher interest rates. 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 March 31, 2023 and December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2023 December 31, 2022 ​ Cash and cash equivalents ​ $ 6,718,559 ​ $ 4,047,453 ​ Working capital ​ $ 4,835,726 ​ $ 5,712,680 ​ ​ We anticipate funding our operations for the next twelve months using available cash and cash flow generated from operations. As of March 31, 2023 and December 31, 2022, we had cash and cash equivalents of approximately $6.7 million and $4.0 million, respectively. We are working with lenders to potentially enter into a new line of credit, and expect to finalize an agreement in the second quarter of 2023, but there can be no assurance that we will close on such new facility in that timeframe, 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. 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. On December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Servicing, LLC (“Lafayette Square”), as administrative agent, and the various lenders thereto. The term loan under the 2021 Credit Facility provides for a term loan in the principal amount of up to $32.0 million, consisting of a $22.0 million closing date term loan and an up to $10.0 million delayed draw term loan (the “Delayed Draw Loan”). The loans under the 2021 Credit Facility bear interest at a rate per annum equal to LIBOR plus the applicable margin minus any applicable impact discount. The applicable margin under the 2021 Credit Facility as amended by the Term Loan Amendment (as defined below) is determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 7.00% per annum if the consolidated total net leverage ratio is less than 1.00 to 1.00 and up to 10.00% per annum if the consolidated total net leverage ratio is greater than 3.50 to 1.00. The applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum based upon DDH LLC’s 34 Table of Contents participation in each of 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 and property of DDH LLC and its subsidiaries and are guaranteed by the subsidiaries of DDH LLC and include a secured 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. 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, costs, charges 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 Second Amendment to Redemption Agreement 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 Second Amendment to Redemption Agreement, 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 Term Loan Amendment, proceeds of the Delayed Draw Loan were used to repay in full the outstanding balance and related expenses of the Original Redemption Agreement, as well as other transaction costs. On January 9, 2023, we entered into the SVB Loan Agreement with Silicon Valley Bank. The SVB Loan Agreement provided for the SVB Revolving Credit Facility in the original principal amount of $5 million, subject to a borrowing base determined based on eligible accounts, and up to an additional $2.5 million incremental revolving facility subject to the lender’s consent, which would increase the aggregate principal amount of the SVB Revolving Credit Facility to $7.5 million. Loans under the SVB Revolving Credit Facility were to mature on September 30, 2024, unless the SVB Revolving Credit Facility was otherwise terminated pursuant to the terms of the SVB Loan Agreement. ​ Borrowings under the SVB Revolving Credit Facility were to bear interest at a floating rate per annum equal to the greater of (i) 6.25% and (ii) the prime rate plus the prime rate margin; provided, that during the periods when the borrowers have maintained liquidity (as described below) of at least $7,500,000 during the immediately preceding three-month period of time (the “Streamline Period”), the outstanding principal amounts of any advances were to accrue interest at a floating rate per annum equal to the greater of (a) 5.75% and (b) the prime rate plus the prime rate margin. For purposes of the SVB Loan Agreement, the prime rate was determined by reference to the “prime rate” as published in The Wall Street Journal or any successor publication thereto, and the prime rate margin will be 1.50%; provided, that during a Streamline Period, the prime rate margin will be 1.00%. ​ At our option, the Company could at any time have prepaid the outstanding principal balance of the SVB Revolving Credit Facility in whole or in part, without penalty or premium. Interest on the principal amount of borrowings under the SVB Revolving Credit Facility was payable in arrears on a monthly basis on the last calendar day of each month, on the date of any prepayment of the SVB Revolving Credit Facility and on the maturity date. ​ The Company was required to maintain compliance at all times with a liquidity covenant requiring us to maintain liquidity of not less than $5 million, where liquidity is defined as the sum of the borrowers’ unrestricted cash and cash equivalents held at Silicon 35 Table of Contents Valley Bank plus availability under the SVB Revolving Credit Facility. The SVB Revolving Credit Facility was secured by all or substantially all of the borrowers’ personal property and assets (subject to the limitations expressly set forth in the SVB Loan Agreement). ​ On March 10, 2023, the California Department of Financial Protection and Innovation closed SVB and appointed the Federal Deposit Insurance Corporation as receiver. As the Company had not yet drawn any amounts under the SVB Revolving Credit Facility, on March 13, 2023 the Company issued a notice of termination of the SVB Loan Agreement. Prior to issuing the notice of termination, the Company received a consent to terminate the SVB Revolving Credit Facility and a waiver of the terms relating to the SVB Revolving Credit Facility under the 2021 Credit Facility with Lafayette Square. Termination of the facility with Silicon Valley Bank became effective April 20, 2023. The Company did not hold material cash deposits or securities at Silicon Valley Bank and as of the date of this report, has not experienced any adverse impact to its liquidity or to its current and projected business operations, financial condition or results of operations. Additionally, based on the Company’s expectations of its cash flow from operations and the available cash held by the Company, the Company believes that it will have sufficient cash resources to finance its operations and service any debt obligations for at least the next twelve months. However, uncertainty remains over liquidity concerns in the financial services industry, and our business, our business partners, or industry as a whole may be adversely impacted in ways that we cannot predict at this time. ​ Consolidated Statement of Cash Flow Data: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended March 31, ​ ​ 2023 2022 ​ Net cash provided by (used in) operating activities ​ $ 3,162,969 ​ $ (852,317) ​ Net cash used in investing activities ​ (48,212) ​ — ​ Net cash provided by (used in) financing activities ​ (443,651) ​ 574,686 ​ Net increase (decrease) in cash and cash equivalents ​ $ 2,671,106 ​ $ (277,631) ​ ​ 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. 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 Three Months Ended March 31, 2023 and 2022 Cash flows from operating activities increased from $0.9 million used in operating activities for the three months ended March 31, 2022 to $3.2 million provided by operating activities for the three months ended March 31, 2023. The period-over-period increase of $4.0 million was primarily due to a $7.2 million increase for changes in accounts receivable and a $1.3 million increase for changes in deferred revenue related to the increase in revenue and timing of payments received. This is partially offset by the $0.7 million higher net loss, $3.0 million decrease related to changes in accounts payable and $0.6 million decrease related to the loss on redemption of non-participating preferred units in the prior year. Cash Flows from Investing Activities For the Three Months Ended March 31, 2023 and 2022 During the three months ended March 31, 2023, the Company acquired property, equipment and software for $48,212. Cash Flows Used in Financing Activities For the Three Months Ended March 31, 2023 and 2022 Our financing activities consist primarily of payments under our notes payable, 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 36 Table of Contents 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 three months ended March 31, 2023, net cash used in financing activities was higher by $1.0 million, from $0.6 million provided by financing activities for the three months ended March 31, 2022 to $0.4 million used in financing activities for the three months ended March 31, 2023. During the three months ended March 31, 2023, we made payments on the Revolving Credit Facility of $0.2 million, made payments of $0.2 million in deferred financing costs and had litigation settlement payments of $0.1 million. During the three months ended March 31, 2022, we received net proceeds of $11.3 million related to our issuance of Class A common stock and used a portion of the proceeds to redeem the common units and Preferred B units held by USDM Holdings, Inc. for approximately $10.2 million. Also, during the three months ended March 32, 2022, we paid $0.2 million related to the Revolving Credit Facility, 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 $0.2 million. 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 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 $121,831 in 2023, $110,215 in 2024, $156,077 in 2025, $159,755 in 2026, $163,474 in 2027 and $413,729 thereafter. We anticipate that the future minimum payments related to our current indebtedness over the next five years will be $491,250 in 2023, $1.3 million in 2024, $1.3 million in 2025, $22.4 million in 2026, $3,337 in 2027 and $142,975 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. 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 contingent loss on early termination of line of credit, 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 March 31, ​ ​ 2023 2022 ​ Net loss ​ $ (1,333,934) ​ $ (671,623) ​ Add back (deduct): ​ ​ ​ Amortization of intangible assets ​ 488,455 ​ 488,455 ​ Depreciation and amortization of property and equipment ​ ​ 56,493 ​ ​ — ​ Interest expense ​ 1,017,301 ​ 713,787 ​ Contingent loss on early termination of line of credit ​ ​ 299,770 ​ ​ ​ ​ Tax benefit ​ ​ (74,648) ​ ​ — ​ Stock-based compensation ​ ​ 94,538 ​ ​ — ​ Loss on early redemption of non-participating preferred units ​ — ​ 590,689 ​ Adjusted EBITDA ​ $ 547,975 ​ $ 1,121,308 ​ ​ 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, stock-based compensation, and certain one-time items such as acquisition transaction costs and gains from settlements or loan 37 Table of Contents 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 March 31, 2023, 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, 2022. Recent Accounting Pronouncements See Note 2 to our consolidated financial statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted. ​ 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.