What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-11 compared with 2023-05-15 · 130 added, 102 removed, 248 unchanged (48% of the section changed)

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

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.

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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 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.

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Only recently have small and mid-sized businesses begun to leverage the power of digital media in meaningful ways, as emerging technologies have enabled advertising across multiple channels in a highly localized nature.

Campaign efficiencies yielding measurable results and higher advertising ROI, as well as the needs necessitated by the COVID-19 pandemic, have prompted these companies to

begin utilizing digital advertising on an accelerated pace.

Campaign efficiencies yielding measurable results and higher advertising ROI, as well as the needs necessitated by the COVID-19 pandemic, have prompted these companies to begin utilizing digital advertising on an accelerated pace.

We believe this market is rapidly expanding, and that small-to-mid-sized advertisers will continue to increase their digital spend.

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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.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 136,000 advertisers per month in the six months ended June 30, 2023, an increase of 72% over the 79,000 advertisers per month in the six months ended June 30, 2022.

As spending on programmatic advertising increasingly becomes a larger share of the overall ad spend, advertisers and agencies are seeking greater control of their digital advertising supply chains.

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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.

We have broad exposure to the ecosystem of buyers, which has generally 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.

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In the advertising industry, inventory quality is assessed in terms of invalid traffic (“IVT”) which can be impacted by fraud such as “fake eyeballs” generated by automated technologies set up to artificially inflate impression counts.

As a result of our platform design and proactive IVT mitigation efforts, in the three months ended March 31, 2023, we determined that approximately 1% of inventory was invalid, resulting in minimal financial impact to our customers.

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

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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 is classified as a liability, and the corresponding distributions are recognized as interest expense for the three months ended March 31, 2022.

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 the value of these units was classified as a liability, and the corresponding distributions were recognized as interest expense for the six months ended June 30, 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 January 2023, we entered into a Loan and Security Agreement (the “Loan Agreement”), by and among Silicon Valley Bank (“SVB”), which provided 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.

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Results of Operations

Comparison of the Three Ended March 31, 2023 and 2022

Comparison of the Three and Six Months Ended June 30, 2023 and 2022

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

Buy-side advertising

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Operating expenses

Income (loss) from operations

Income from operations

Other expense

Loss before taxes

Income (loss) before taxes

Tax expense (benefit)

Net income (loss)

Adjusted EBITDA (1)

(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 .”

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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%.

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 (loss) see “ – Non-GAAP Financial Measures .”

Our revenues increased from $21.3 million for the three months ended June 30, 2022 to $35.4 million for the three months ended June 30, 2023, an increase of $14.1 million or 67%.

Buy-side advertising revenue increased $2.5 million, or 27%, primarily due to expanded spending from our existing customer base as well as new middle market client spending.

Sell-side advertising revenue increased $11.7 million, or 98% 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.

Our revenues increased from $32.6 million for the six months ended June 30, 2022 to $56.6 million for the six months ended June 30, 2023, an increase of $24.0 million or 74%.

Buy-side advertising revenue increased $4.1 million, or 27%, primarily due to expanded spending from our existing customer base as well as new middle market client spending.

Sell-side advertising revenue increased $19.9 million, or 114% over the 2022 six-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.

Along with the increase in revenues across both segments, we correspondingly experienced an increase in cost of revenues from $12.9 million for the three months ended June 30, 2022 to $25.3 million for the three months ended June 30, 2023, an increase of

$12.4 million, or 96%.

Buy-side advertising cost of revenues increased $1.4 million to $4.6 million, or 39% of revenue, for the three months ended June 30, 2023, compared to $3.2 million, or 34% of revenue, for the three months ended June 30, 2022.

Sell-side advertising cost of revenues increased $11.0 million, to $20.7 million, or 88% of revenue for the three months ended June 30, 2023, compared to $9.8 million, or 82% of revenue, for the same period in 2022.

The increase in sell-side advertising costs was primarily due to the related increase in revenue, while the 6% increase as a percentage of revenue was due to an increase in fixed costs of approximately $0.6 million related to an increase in server capacity to support the growth as well as the mix and concentration of publishers and the related costs.

Cost of revenues increased from $19.5 million for the six months ended June 30, 2022 to $40.1 million for the six months ended June 30, 2023, an increase of $20.6 million, or 106%.

Buy-side advertising cost of revenues increased $2.3 million to $7.5 million, or 39% of revenue, for the six months ended June 30, 2023, compared to $5.2 million, or 34% of revenue, for the six months ended June 30, 2022.

Sell-side advertising cost of revenues increased $18.3 million, to $32.6 million, or 87% of revenue for the six months ended June 30, 2023, compared to $14.3 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 5% increase as a percentage of revenue was due to an increase in fixed costs of approximately $0.6 million related to an increase in server capacity to support the growth as well as the mix and concentration of publishers and the related costs.

We expect these higher costs to continue in future fiscal periods.

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.

Gross profit also increased in the three months ended June 30, 2023 to $10.1 million, or 28% of revenue, compared to $8.3 million, or 39% of revenue, for the three months ended June 30, 2022, an increase of $1.7 million or 21%.

Gross profit increased in the six months ended June 30, 2023 to $16.5 million, or 29% of revenue, compared to $13.1 million, or 40% of revenue, for the six months ended June 30, 2022, an increase of $3.4 million or 26%.

The change in margin for the three and six months ended June 30, 2023 is attributable to the mix in revenue between our business segments as well as the additional fixed costs related to an increase in server capacity.

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 $1.0 million and $1.8 million for the three and six months ended June 30, 2023, respectively, as compared to the same period in the prior year, primarily due to higher revenue.

Buy-side advertising gross margin was 61% for the three and six months ended June 30, 2023 compared to gross margin of 66% for the three and six months ended June 30, 2022.

Buy-side gross margin decreased in 2023 to a level the Company believes is sustainable reflecting strategic efforts by the Company to ensure customer retention and increase revenue per customer.

Sell-side advertising gross profit increased $0.7 million and $1.6 million for the three and six months ended June 30, 2023, respectively, as compared to prior year, primarily due to the increase in revenue.

Sell-side advertising gross margin was 12% and 13% for the three and six months ended June 30, 2023 compared to gross margin of 18% for the three and six months ended June 30, 2022.

Sell-side gross margin in 2023 was negatively impacted by additional fixed costs of approximately $0.6 million incurred in the three months ended June 30, 2023 related to an increase in server capacity to support our growth.

About half of these incremental costs are expected to continue each quarter through March 2024.

Operating expenses

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For the Three Months Ended

For the Six Months Ended

Compensation, tax and benefits

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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.

Compensation, taxes and benefits increased from $3.5 million for the three months ended June 30, 2022 to $4.6 million in for the three months ended June 30, 2023, an increase of $1.1 million, or 30%.

The increase is due to headcount additions primarily in shared services to support our public company infrastructure and growth as well as $0.3 million for severance.

Compensation, taxes and benefits increased from $6.0 million for the six months ended June 30, 2022 to $8.2 million in for the six months ended June 30, 2023, an increase of $2.1 million, or 35%.

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, bonus expense and severance of $0.3 million.

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.

On June 10, 2022, March 20, 2023 and June 10, 2023, our board of directors granted stock options and restricted stock units (“RSUs”) to certain of our employees and non-employee directors.

The increase in compensation, taxes and benefits expense related to stock options and RSUs granted was $0.2 million and $0.3 million for the three and six months ended June 30, 2023, respectively.

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.

General and administrative (“G&A”) expenses increased from $1.8 million for the three months ended June 30, 2022 to $3.3 million for the three months ended June 30, 2023.

G&A expenses as a percentage of revenue was 9% and 8%, respectively, for the three months ended June 30, 2023 and 2022.

The increase in G&A costs during the three months ended June 30, 2023 was primarily due to costs associated with supporting our growth and ongoing marketing initiatives.

During the three months ended June 30, 2023, we incurred higher professional fees, sales and marketing expenses including investor and public relations costs and travel expenses.

We expect to continue to invest in and incur additional expenses as we grow, including increased professional fees, investment in automation, and compliance costs associated with developing the requisite infrastructure required for internal controls.

G&A expenses increased from $3.4 million for the six months ended June 30, 2022 to $6.2 million for the six months ended June 30, 2023.

G&A expenses as a percentage of revenue was 11% and 10%, respectively, for the six months ended June 30, 2023 and 2022.

The increase in G&A costs during the six months ended June 30, 2023 was primarily due to costs associated with our transition to and operation as a public company as of February 2022.

During the six months ended June 30, 2023, we incurred higher professional fees, sales and marketing expenses including investor and public relations costs, travel expenses and insurance.

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.

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The following table sets forth the components of other income (expense) for the periods presented.

For the Three Months Ended

For the Six Months Ended

Interest expense

Contingent loss on early termination of line of credit

Loss on early redemption of non-participating preferred units

Interest expense

Forgiveness of Paycheck Protection Program loan

Total other expense

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.

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Other expense for the three months ended June 30, 2023 primarily consists of $1.0 million of interest expense.

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

Other expense for the six months ended June 30, 2023 primarily consists of $2.0 million of interest expense and $0.3 million related to the contingent loss on early termination of the line of credit with SVB.

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

Interest expense increased for the three months ended June 30, 2023 to $1.0 million compared to $0.7 million for the three months ended June 30, 2022.

Interest expense increased for the six months ended June 30, 2023 to $2.0 million compared to $1.4 million for the six months ended June 30, 2022.

The increase in interest expense in the three and six months period is due to an additional $4.3 million in borrowings in July 2022 under the 2021 Credit Facility, as amended by the Term Loan Amendment, 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

The following table summarizes our cash and cash equivalents, working capital, and availability under our Revolving Credit Facility (as defined below) on June 30, 2023 and December 31, 2022:

June 30, 2023

December 31, 2022

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Working capital

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.

We anticipate funding our operations for the next twelve months using available cash and cash flow generated from operations and borrowings under the 2023 Credit Facility, as defined below.

As of June 30, 2023 and December 31, 2022, we had cash and cash equivalents of approximately $5.7 million and $4.0 million, respectively.

On July 7, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”), by and among East West Bank (“EWB”), as lender, and the Company and its subsidiaries, as borrowers.

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 the amounts we may borrow under the Credit Agreement executed in July 2023, 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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Our ability to do so will be subject to future economic, financial, business and other factors, many of which are beyond our control.

Credit Agreement entered into on July 7, 2023

On July 7, 2023, the Company entered into the Credit Agreement which provides for a revolving 2023 Credit Facility (the “2023 Credit Facility”) in the original principal amount of up to $5 million, subject to a borrowing base determined based on eligible accounts, and an up to $5 million uncommitted incremental revolving facility.

Loans under the 2023 Credit Facility mature on July 7, 2025 (the “Maturity Date”), unless the 2023 Credit Facility is otherwise terminated pursuant to the terms of the Credit Agreement.

Borrowings under the 2023 Credit Facility bear interest at a rate per annum equal to the one-month Term Secured Overnight Financing Rate, as administered by the CME Group Benchmark Administration Limited (“CBA”) (or a successor administrator of the secured overnight financing rate) and displayed by Bloomberg LP (or any successor thereto, or replacement thereof, as approved by EWB) and as determined by EWB on the first day of the applicable interest period, plus 0.10% (10 basis points), plus 3.00% per annum (the “Loan Rate”);

provided, that, in no event shall the Loan Rate be less than 0.50% of the Loan Rate effective as of the date of the Credit Agreement nor more than the maximum rate of interest allowed under applicable law.

Upon an event of default under the Credit Agreement, the outstanding principal amounts of any advances will accrue interest at a rate per annum equal to the Loan Rate plus five percent (5%), but in no event in excess of the maximum rate of interest allowed under applicable law.

At the Company’s option, the Company may at any time prepay the outstanding principal balance of the 2023 Credit Facility in whole or in part, without fee, penalty or premium.

All accrued but unpaid interest on outstanding advances under the Credit Agreement is payable in monthly installments on the last day of each monthly interest period until the Maturity Date when the then-outstanding principal balance of the advances and all accrued but unpaid interest thereon becomes due and payable.

The Company and the other borrowers are required to maintain compliance at all times with the following financial covenants on a consolidated basis:

(i) a fixed charge coverage ratio of not less than 1.25 to 1.0, beginning with the fiscal quarter ended on June 30, 2023 and at the end of each fiscal quarter thereafter;

(ii) a total funded debt-to-EBITDA ratio of 3.50 to 1.00 as of the last day of each fiscal quarter from June 30, 2023 through December 31, 2023, 3.25 to 1.00 as of the last day of each fiscal quarter from March 31, 2024 through March 31, 2025 and 3.00 to 1.00 as of the last day of each fiscal quarter from June 30, 2025 and thereafter;

and (iii) a liquidity covenant requiring the Company and the other borrowers to maintain minimum liquid assets at all times (calculated using unencumbered cash and cash equivalents and marketable securities), in one or more accounts held with EWB plus Revolving Credit Availability in the amount of $1,000,000.

Revolving Credit Availability is defined as an amount such that the ratio of the value of eligible accounts to the aggregate amount of all outstanding advances under the credit agreement at such time is not less than 2.0 to 1.0.

The obligations under the 2023 Credit Facility are secured by all or substantially all of the borrowers’ assets.

The Credit Agreement contains customary representations and warranties and includes affirmative and negative covenants applicable to the borrowers thereto and their respective subsidiaries.

The affirmative covenants include, among others, covenants requiring the Company to maintain its legal existence and governmental compliance, deliver certain financial reports and maintain insurance coverage.

The negative covenants include, among others, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness and dividends and other distributions.

The Credit Agreement also includes customary events of default, including, among other things, non-payment defaults, covenant defaults, inaccuracy of representations and warranties, defaults under any of the loan documents, certain cross-defaults to other indebtedness, certain bankruptcy and insolvency events, invalidity of guarantees or grant of security interest, certain ERISA-related transactions and events, certain orders of forfeiture, change of control, certain undischarged attachments, sequestrations, or similar proceedings, and certain undischarged or non-stayed judgments, in certain cases subject to certain thresholds and grace periods.

The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement of the Company or other borrowers.

Credit Facilities as of June 30, 2023

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.

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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

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 applicable impact discount under the 2021 Credit Facility is a discount of 0.05% per annum based upon DDH LLC’s 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).

On June 1, 2023, the Company entered into an agreement with Lafayette Square to convert the existing LIBOR-based rate to a Term SOFR Rate with a credit spread of 0.15% per annum for the interest periods of three months and provides for a credit spread adjustment of 0.10%, 0.15% or 0.25% per annum for interest periods of one month, three months or six months, respectively.

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.

On July 28, 2022, the Company entered into the Second Amendment and Joinder to Term Loan and Security Agreement (the “Term Loan Amendment”) and received proceeds of $4,260,000 borrowed under the Delayed Draw Loan to pay the balance owed on the common unit redemption as well as costs associated with the transaction.

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.

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

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.

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.

As of June 30, 2023, the Company owed a balance on the 2021 Credit Facility of $25,356,250.

The 2021 Credit Facility contains affirmative and negative covenants that, among other things, require the Company to maintain a net leverage ratio of no more than 3.50 to 1.00 as of the last day of each fiscal quarter through December 31, 2023, as adjusted thereafter, and a fixed charge coverage ratio of not less than 1.50 to 1.00 as of the last day of each fiscal quarter, as well as restrictions on the ability to incur indebtedness, create certain liens, make certain investments, make certain dividends and other types of distributions, and enter into or undertake certain mergers, consolidations, acquisitions and sales of certain assets and subsidiaries.

The Company was in compliance with all the financial covenants under the 2021 Credit Facility as of June 30, 2023.

Consolidated Statement of Cash Flow Data:

For the Three Months Ended March 31,

Net cash provided by (used in) operating activities

For the Six Months Ended June 30,

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash Flows Provided by Operating Activities

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

For the Three Months Ended March 31, 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.

For the Six Months Ended June 30, 2023 and 2022

Cash flows from operating activities increased from $0.1 million for the six months ended June 30, 2022 to $3.2 million for the six months ended June 30, 2023.

The period-over-period increase in cash from operations of $3.1 million was primarily due to a $3.7 million increase for changes in accounts receivable, a $2.3 million increase related to changes in accounts payable, and a $1.3 million increase for changes in deferred revenue related to the increase in revenue and timing of payments received and made.

This is partially offset by a $2.1 million decrease in net income and a $1.4 million decrease related to changes in accrued liabilities.

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

Holdings, Inc.

For the Six Months Ended June 30, 2023 and 2022

During the six months ended June 30, 2023, the Company acquired property, equipment and software for $136,979.

Cash Flows Provided by (Used in) Financing Activities

For the Six Months Ended June 30, 2023 and 2022

Our financing activities consist primarily of distributions to DDH LLC members, payments under our notes payable, 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 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.

During the six months ended June 30, 2023, net cash used in financing activities increased by $1.6 million, from $0.2 million provided by financing activities for the six months ended June 30, 2022 to $1.4 million used in financing activities for the six months ended June 30, 2023.

During the six months ended June 30, 2023, we made distributions to members of $0.8 million, payments on the Revolving Credit Facility of $0.3 million, and payments of $0.2 million in deferred financing costs.

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

for approximately $10.3 million.

Also, during the 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.

Also, during the six months ended June 30, 2022, we made payments of $0.3 million on the 2021 Credit Facility, distributions to members of $0.3 million and payments of $0.2 million in deferred financing costs.

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.

As of June 30, 2023, 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 $74,502 in 2023, $110,215 in 2024, $156,077 in 2025, $159,755 in 2026, $163,474 in 2027 and $366,830 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 anticipate that the future minimum payments related to our current indebtedness over the next five years will be $327,500 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.

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 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.

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, stock-based compensation and forgiveness of PPP loan (“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,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

Net income (loss)

Add back (deduct):

Interest expense

Stock-based compensation

Amortization of intangible assets

Depreciation and amortization of property and equipment

Interest expense

Contingent loss on early termination of line of credit

Stock-based compensation

Tax expense (benefit)

Forgiveness of PPP loan

Loss on early redemption of non-participating preferred units

Adjusted EBITDA

In addition to operating income and net income, we use Adjusted EBITDA as a measure of operational efficiency.

In addition to operating income and net income (loss), 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:

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 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.

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 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 (the “Annual Report”).

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