What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-10-15 compared with 2023-04-17 · 422 added, 320 removed, 141 unchanged (84% of the section changed)

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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;

● the restrictions and covenants imposed upon us by our credit facilities;

● the substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing;

● our ability to secure additional financing to meet our capital needs;

● ineligibility to file short-form registration statements on Form S-3, which may impair our ability to raise capital;

● failure to satisfy applicable listing standards of the Nasdaq Capital Market resulting in a potential delisting of our common stock;

● costs, risks and uncertainties related to the restatement of certain prior period financial statements;

● any significant fluctuations caused by our high customer concentration;

● risks related to non-payment by our clients;

● reputational and other harms caused by our failure to detect advertising fraud;

● operational and performance issues with our platform, whether real or perceived, including a failure to respond to technological changes or to upgrade our technology systems;

● any significant inadvertent disclosure or breach of confidential and/or personal information we hold, or of the security of our or our customers’, suppliers’ or other partners’ computer systems;

● any unavailability or non-performance of the non-proprietary technology, software, products and services that we use;

● unfavorable publicity and negative public perception about our industry, particularly concerns regarding data privacy and security relating to our industry’s technology and practices, and any perceived failure to comply with laws and industry self-regulation;

● restrictions on the use of third-party “cookies,” mobile device IDs or other tracking technologies, which could diminish our platform’s effectiveness;

● any inability to compete in our intensely competitive market;

● any significant fluctuations caused by our high customer concentration;

● our limited operating history, which could result in our past results not being indicative of future operating performance;

● any violation of legal and regulatory requirements or any misconduct by our employees, subcontractors, agents or business partners;

● any strain on our resources, diversion of our management’s attention or impact on our ability to attract and retain qualified board members as a result of being a public company;

● as a holding company, we depend on distributions from 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 DDM as a result of its ownership of Class A common stock upon an exchange or redemption of its LLC Units;

● our failure to manage our growth effectively;

● the difficulty in identifying and integrating any future acquisitions or strategic investments;

● any changes or developments in legislative, judicial, regulatory or cultural environments related to information collection, use and processing;

● challenges related to our buy-side clients that are destination marketing organizations and that operate as public/private partnerships;

● any strain on our resources or diversion of our management’s attention as a result of being a public company;

● the intense competition of the digital advertising industry and our ability to effectively compete against current and future competitors;

● 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 any amount of any dividends we may pay to the holders of our common stock;

● the fact that DDH LLC is controlled by DDM, whose interest may differ from those of our public stockholders;

● any failure by us to maintain or implement effective internal controls or to detect fraud;

● other factors and assumptions discussed in this Annual Report on Form 10-K under “ Risk Factors ,” and elsewhere in this Annual Report on Form 10-K.

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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.

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 intended for underserved and less efficient markets on both the sell- and buy-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 Direct Digital Holdings, LLC (“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 and consumer products with particular emphasis on small- and mid-sized businesses transitioning into digital with growing digital media budgets.

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

In late September 2020, DDH LLC acquired Orange142, LLC (“Orange 142”) to further bolster its overall programmatic buy-side advertising platform and to enhance its offerings across multiple industry verticals such as travel, education, healthcare, 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.

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Date of Formation

Direct Digital Holdings, LLC

June 21, 2018

August 26, 2021

Huddled Masses, LLC

November 13, 2012

June 21, 2018

Date of Acquisition

Colossus Media, LLC

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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.

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.

Recent Developments

Silicon Valley Bank Financing

On January 9, 2023, we entered into a Loan and Security Agreement (the “SVB Loan Agreement”), by and among Silicon Valley Bank, as lender, and DDH LLC, the Company, Huddled Masses, Colossus Media and Orange142, as borrowers.

The SVB Loan Agreement provides for a revolving credit facility (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 may increase the aggregate principal amount of the Credit Facility to $7.5 million.

Loans under the Credit Facility mature on September 30, 2024 unless the Credit Facility is otherwise terminated pursuant to the terms of the 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 and is in the process of terminating the SVB Revolving Credit Facility.

Prior to issuing the notice of termination, the Company received consent to terminate the SVB Revolving Credit Facility and a waiver of the terms relating to the SVB Revolving Credit Facility under its Term Loan and Security Agreement, dated as of December 3, 2021, with Lafayette Square Loan Servicing, LLC.

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 following the issuance of this Annual Report on Form 10-K.

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 table below summarizes the financial highlights of our business:

Huddled Masses, LLC

November 13, 2012

June 21, 2018

Direct Digital Holdings, LLC (1)

June 21, 2018

February 15, 2022

(1) DDH owns 100% of the voting interest in Direct Digital Holding, LLC.

As of December 31, 2023, DDH owns 24.2% of the economic interest in Direct Digital Holdings, LLC.

See further discussion of the Up-C structure in Note 6 of our consolidated financial statements.

Colossus Media operates our proprietary sell-side programmatic platform operating under the trademarked banner of Colossus SSP™ (“Colossus SSP”).

Colossus SSP is a stand-alone sell-side platform (“SSP”) intended to deliver targeted advertising to diverse and multicultural audiences, including African Americans, Latin Americans, Asian Americans and LGBTQIA+ customers, as well as general audiences.

Both buy-side advertising businesses, Orange 142 and Huddled Masses, offer technology-enabled advertising solutions and consulting services to clients through demand side platforms (“DSPs”).

Providing both the front-end, buy-side advertising businesses coupled with our proprietary sell-side operations enables us to curate the first through the last mile in the ad tech ecosystem execution process to drive higher results.

Operating segments are components of an enterprise for which separate financial information is available and evaluated regularly by our chief operating decision maker (“CODM”) for purpose of allocating resources and assessing performance.

Our CODM is our Chairman and Chief Executive Officer.

We operate as two reportable segments:

sell-side advertising, which includes the results of Colossus Media, and buy-side advertising, which includes the results of Orange 142 and Huddled Masses.

All our revenues are attributable to the United States.

The table below summarizes the financial highlights of our business (in thousands):

Year Ended December 31,

Operating income

Net income (loss)

(Loss) income from operations

Net (loss) income

Adjusted EBITDA (2)

Net cash provided by operating activities

(1) For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net loss, please see “ – Non-GAAP Financial Measures .”

(2) For a definition of Adjusted EBITDA, a non-GAAP financial measure, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net income, please see “ – Non-GAAP Financial Measures .”

Recent Developments

Nasdaq Rule Noncompliance.

On April 17, 2024, May 21, 2024 and August 21, 2024, we received notices from the Listing Qualifications Department of Nasdaq regarding the Company’s failure to timely file its Annual Report on Form 10-K for the year ended December 31, 2023, its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2024 and its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2024, respectively, with the SEC.

The Company submitted a plan to Nasdaq to regain compliance with respect to the Delinquent Filings, and Nasdaq granted the Company an exception until October 14, 2024 to evidence compliance with the rule requiring filing of our periodic reports.

Neither the notices from Nasdaq nor the Company’s non-compliance with the rule has an immediate effect on the listing or trading of the Company’s securities on Nasdaq, which currently continues to trade on The Nasdaq Capital Market under the symbol “DRCT.” The Company continues to work diligently to complete and file the remaining Delinquent Filings with the SEC and thereby regain compliance with the Rule as soon as practicable.

Relationship with Sell-Side Customer .

On May 10, 2024, the Company was the subject of a defamatory article / blog post which the Company believes was part of a coordinated misinformation campaign.

In connection with this post, one of the Company’s sell-side customers paused its connection to the Company while the allegations were investigated.

This customer reconnected the Company on May 22, 2024 and sell-side volumes have resumed but not yet at the levels experienced prior to the pause in May 2024.

The Company is actively working with its partners to achieve prior volume levels.

On May 14, 2024, the Company filed a lawsuit against the author of the defamatory article and is vigorously pursuing its rights.

The Company cannot make any predictions about the final outcome of this litigation matter or the timing thereof.

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 served the needs of approximately 218 small and mid-sized clients during the fiscal year ended December 31, 2022, consisting of advertising space buyers, including small and mid-sized companies, large advertising holding companies (which may manage several agencies), independent advertising agencies and mid-market advertising service organizations.

We serve a variety of customers across multiple industries including travel/tourism (including destination marketing organizations (“DMOs”)), energy, consumer packaged goods, healthcare, education, financial services (including cryptocurrency technologies) and other industries.

We are focused on increasing the number of customers that use our buy-side advertising businesses for their advertising partner.

Our long-term growth and results of operations will depend on our ability to attract more customers, including DMOs, across multiple geographies.

Expand Sales to Existing Customers

Our customers understand the independent nature of our platform and 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 during the fiscal year ended December 31, 2022.

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;

● Better audience segmentation with more efficient targeting and measurable results.

The resulting shift has enabled a variety of options for advertisers to efficiently target and measure their advertising campaigns across nearly every media channel and device.

These efforts have been led by big- budgeted, large, multi-national corporations incentivized to cast a broad advertising net to support national brands.

Increased Adoption of Digital Advertising by Small-and Mid-Sized Companies

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

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

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

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

Increasing revenue from customers through increased 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 80,000 advertisers per month in 2021, which increased to approximately 114,000 in December 2022.

Our customers (or buyers) include ad exchanges, DSPs, agencies and individual advertisers.

We have broad exposure to the ecosystem of buyers, reaching on average approximately 115,000 advertisers per month in 2023 compared to approximately 114,000 in 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.

To take advantage of this industry shift, we have entered into Supply Path Optimization agreements directly with customers which address acceptable advertisements and data usage.

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.

We also strive to retain existing publishers and add new publishers.

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 including our header bidding management, identity, and audience solutions.

We enter into master service agreements with our publishers which, among other terms, set a fixed rate for content to be sold on Colossus SSP.

Our 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 customers, including large advertisers and agencies.

Monetizing ad impressions for publishers and buyers

We curate advertisers and increase access to publishers with valuable ad impressions.

We focus on monetizing digital impressions by coordinating daily real-time auctions and bids.

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Each time the publisher’s web page loads, an ad request is sent to multiple ad exchanges and, in some cases, to the demand side platform directly from Colossus SSP.

In case of real-time bidding (or RTB) media buys, many DSPs would place bids to the impressions being offered by the publisher during the auction.

The advertiser that bids a higher amount compared to other

advertisers will win the bid and pay the second highest price for the winning impression to serve the ads.

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).

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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 fiscal 2022, less than 1% of inventory was invalid, resulting in minimal financial impact to our customers.

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

Through our platform design and proactive IVT mitigation efforts, we address and minimize IVT on a number of fronts, including sophisticated technology, which detects and avoids IVT on the front end;

direct publisher and inventory relationships, for supply path optimization;

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Our performance is affected by our ability to maintain and grow our access to valuable ad impressions from current publishers as well as through new relationships with publishers.

For the year ended December 31, 2022, we processed approximately 3.4 trillion bid requests.

For the year ended December 31, 2023, we processed approximately 7.9 trillion bid requests, up 134% from 2022 when we processed 3.4 trillion bid requests.

Expanding and managing investments

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We automate workflow processes whenever feasible to drive predictable and value-added outcomes for our customers and increase productivity of our organization.

In the first half of 2023, we expect to transition our server platform to HPE Greenlake, which we expect will provide increased capacity, faster response time, and expansion capabilities to align with growth in our business.

In the first half 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

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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.

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.

In the advertising industry, companies commonly experience seasonal fluctuations in revenue.

For example, 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.

We expect our sell-side revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.

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 234 small and mid-sized clients, 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”)), education, energy, consumer packaged goods, healthcare, 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 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 during the year ended December 31, 2023.

In addition, we cultivate client relationships through our pipeline of managed and moderate 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;

● 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

Campaign efficiencies yielding measurable results and higher advertising ROI 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.

In the advertising industry, companies commonly experience seasonal fluctuations in revenue.

Historically, for our buy-side advertising segment, the second and third quarters of the year reflect our highest levels of advertising activity and the first quarter reflects the lowest level of such activity.

We expect our buy-side revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.

Components of Our Results of Operations

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.

For the sell-side advertising segment, we generate revenue by selling advertising inventory (digital ad units) that we purchase from publishers to advertisers through a process of monetizing ad impressions on our proprietary sell-side programmatic platform operating under the trademarked banner Colossus SSP.

For the buy-side advertising segment, we generate revenue from customers that enter into agreements with us to provide managed advertising campaigns, which include digital marketing and media services to purchase digital advertising space, data and other add-on features.

In connection with our analysis of principal vs agent considerations, we have evaluated the specified goods or services and we considered whether we control the goods or services before they are provided to the customer including the three indicators of control.

Based upon this analysis and our specific facts and circumstances, we concluded that we are a principal for the goods or services sold through both our sell-side advertising segment and our buy-side segment because we control the specified good or service before it is transferred to the customer and we are the primary obligor in the agreement with the publisher (sell-side) or customer (buy-side).

Therefore, we report revenue on a gross basis inclusive of all supplier costs.

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.”

Our revenue recognition policies are discussed in more detail under “Critical Accounting Estimates and Related Policies.”

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.

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

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

Media fees include the publishing and real time bidding costs to secure advertising space.

For the buy-side advertising segment, cost of revenues consists primarily of digital media fees, third-party platform access fees, and other third-party fees associated with providing services to our customers.

Operating expenses

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

In fiscal 2020, we acquired Orange142, and incurred transaction costs primarily consisting of legal fees.

Other (Expense) Income

Operating expenses consist of compensation expenses related to our executive, sales, finance and administrative personnel (including salaries, commissions, stock-based compensation, bonuses, benefits and taxes);

general and administrative expenses (including rent expense, professional fees, independent contractor costs, selling and marketing fees, administrative and operating system subscription costs, insurance, and amortization expense related to our intangible assets);

and other expense (including transactions that are unusual in nature or which are occurring infrequently).

Other expense, net

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 Orange 142, 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 was classified as a liability, and the corresponding distributions were recognized as interest expense for the year ended December 31, 2022.

The preferred A and B units were dully redeemed as of February 2022.

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 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.

Loss on 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 $0.6 million in connection with the write-off of the fair value associated with the units.

Forgiveness of Paycheck Protection Program Loan.

During the fiscal years ended December 31, 2021 and 2020, we obtained loans pursuant to the Paycheck Protection Program (“PPP”), administered by the U.S.

During the fiscal year ended December 31, 2021, we obtained loans pursuant to the Paycheck Protection Program (“PPP”), administered by the U.S.

Small Business Administration (“SBA”).

Forgiveness of PPP loans is recognized as a gain in the period it is granted.

On February 16, 2021, the remaining $10,000 balance of the PPP-1 Loan granted in 2020 was forgiven.

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

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

Interest expense.

Interest expense is mainly related to our debt as further described below in “ - Liquidity and Capital Resources .” In connection with the acquisition of Orange142, we issued mandatorily redeemable non-participating preferred A and B units, and in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity , the value of these units is classified as a liability, and the corresponding distributions are recognized as interest expense.

Loss on early redemption of non-participating preferred units.

In February 2022, we redeemed the non-participating Class B Preferred Units and recognized a loss on the redemption of $590,689 in connection with the write-off of the fair value associated with the units.

Loss on early extinguishment of debt.

In December 2021, we refinanced the 2020 Term Loan Facility (as defined below) and incurred a loss on early extinguishment of debt associated with prepayment penalties, exit fee, and the write-off of the unamortized deferred financing costs.

In March 2021, DDH LLC received the proceeds of $0.3 million.

On April 11, 2022, this balance was forgiven.

Results of Operations

Comparison of the Fiscal Years Ended December 31, 2022 and 2021

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

Comparison of the Years Ended December 31, 2023 and 2022

The following tables set forth our consolidated results of operations for the periods presented (in thousands).

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

Year Ended December 31,

Buy-side advertising

Sell-side advertising

Buy-side advertising

Total revenues

Cost of revenues

Buy-side advertising

Sell-side advertising

Buy-side advertising

Total cost of revenues

Operating expenses

Income from operations

Other expense

Income (loss) before taxes

Net income (loss)

(Loss) income from operations

Other expense, net

(Loss) income before income taxes

Income tax expense

Net (loss) income

Adjusted EBITDA (1)

(1) For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net loss see “ – Non-GAAP Financial Measures .”

Our revenues increased from $38.1 million in 2021 to $89.4 million in 2022, an increase of $51.2 million or 134%.

Buy-side advertising revenue increased $3.2 million or 12%, while sell-side advertising revenue increased $46.7 million, or 389% over fiscal year 2021.

The increase in our buy-side advertising revenue was due to both expanded spending from our existing customer base as well as new middle market client spending.

The increase in our sell-side advertising revenue was primarily due to a continued increase in impression inventory, as well as increased publisher engagement across general market and underrepresented publisher communities.

For the year ended December 31, 2022, the Company processed approximately 111 billion average monthly impressions through its sell-side advertising segment, an increase of 57% from the prior year.

We expect continued organic growth in both our buy-side and sell-side advertising segments over the next twelve months, with our sell-side advertising segment expected to report a higher percentage of our consolidated revenue.

(1) For a definition of Adjusted EBITDA, a non-GAAP financial measure, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net income see “ – Non-GAAP Financial Measures .”

Our revenues of $157.1 million in 2023 increased by $67.8 million, or 76%, from $89.4 million in 2022.

Sell-side advertising revenue increased $62.4 million, or 104%, while buy-side revenue increased $5.3 million, or 18%, over fiscal year 2022.

The increase in our sell-side advertising revenue was primarily due to a continued increase in impression inventory, as well as increased publisher engagement across both general market and underrepresented publisher communities.

This was partially offset by a short-pay notice we received from a customer, resulting in a reduction of our 2023 revenue to the reported amount of $157 million.

The Company has not been provided with information as to the reason for the short pay, and therefore has disputed it.

In conjunction with the short pay, the Company recorded a charge of $8.8 million for payments made to a few publishers, primarily because of the Company’s inability to charge back the publishers for the short pay given the lack of information and related documentation supporting such transaction.

We do not expect these amounts to recur in any material fashion, although there is no assurance that customers will not take such action in the future.

The Company sold approximately 4.2 billion average monthly impressions over the year ended December 31, 2023, an increase of 272% from the prior period.

For the year ended December 31, 2023, the Company processed approximately 326 billion average monthly impressions through its sell-side advertising segment, an increase of 193% from the prior period.

The increase in our buy-side advertising revenue was due to expanded spending from our existing customer base.

Cost of Revenues

Along with the increase in gross sales across both platforms, we correspondingly experienced an increase in cost of revenues from $19.7 million in 2021 to $60.0 million in 2022, an increase of $40.3 million or 205%.

Buy- side advertising

cost of revenues increased $0.5 million, to $10.4 million, or 36% of revenue for the year ended December 31, 2022, compared to $9.9 million, or 38% of revenue, for the same period in 2021.

The increase in costs were primarily due to the related increase in revenue, while the 2% decrease as a percentage of revenue was due to lower cost of media and related fees.

Consistent with the increase in gross sales across both platforms, cost of revenues of $119.5 million in 2023 increased by $59.5 million, or 99% from $60.0 million in 2022.

Sell-side advertising cost of revenues increased $56.1 million, to $105.7 million, or 86% of revenue for the year ended December 31, 2023, compared to $49.6 million, or 83% of revenue, for the same period in 2022.

The increase in costs was primarily due to the related increase in revenue, while the 3% increase as a percentage of revenue was due to the mix and concentration of publishers and the related costs.

The increase in costs was primarily due to the related increase in revenue, while the 3% increase as a percentage of revenue was due to an increase in fixed costs of approximately $1.6 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 year ended December 31, 2022 to $29.3 million, or 33% of revenue, compared to $18.4 million, or 48% of revenue, for the year ended December 31, 2021, an increase of $10.9 million or 59%.

As a percent of revenue, the gross margin decreased 16% due to the higher concentration of revenues from the sell-side advertising segment which carries a lower margin.

Buy-side advertising gross profit increased $2.7 million, primarily due to lower media costs and related fees as well as increased revenue.

Sell-side advertising gross profit increased $8.1 million over 2021, primarily due to the increase in revenue over the prior year.

Buy-side advertising cost of revenues increased $3.4 million, to $13.8 million, or 40% of revenue for the year ended December 31, 2023, compared to $10.4 million, or 36% of revenue, for the same period in 2022.

Gross profit was $37.6 million in 2023, or 24% of revenue, compared to $29.3 million, or 33% of revenue, in 2022, reflecting an increase of $8.3 million or 28%.

The change in margin for the year ended December 31, 2023 is attributable to the mix in revenue between our business segments as our faster-growing sell-side segment has higher cost of revenues compared to our buy-side segment, as well as the additional fixed costs related to an increase in server capacity.

Sell-side advertising gross profit increased $6.3 million for the year ended December 31, 2023 as compared to prior year, primarily due to the increase in revenue.

Sell-side advertising gross margin was 14% and 17% for the years ended December 31, 2023 and 2022, respectively.

Sell-side gross margin in 2023 was negatively impacted by additional fixed costs of approximately $1.6 million incurred in the year ended December 31, 2023, related to an increase in server capacity to support our growth.

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

Buy-side advertising gross profit increased $2.0 million for the year ended December 31, 2023, as compared to the same period in the prior year, primarily due to the increase in revenue.

Buy-side advertising gross margin was 60% and 64% for the years ended December 31, 2023 and 2022, respectively.

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.

Operating Expenses

The following table sets forth the components of operating expenses for the periods presented.

The following table sets forth the components of operating expenses for the periods presented (in thousands):

Year Ended December 31,

Compensation, tax and benefits

Compensation, taxes and benefits

General and administrative

Other expense

Total operating expenses

nm – not meaningful

Compensation, taxes and benefits

Compensation, taxes and benefits increased from $8.5 million in 2021 to $14.1 million in 2022, an increase of $5.6 million, or 66%.

The increase is due to a one-time severance charge of $0.6 million, as well as headcount additions primarily in our operations area to support our growth, and higher commission expense and bonus expense, partially offset by lower consulting expenses as a result of these consultants being converted to full-time employees.

General and administrative (“G&A”) expenses increased from $5.5 million in 2021 to $7.2 million in 2022.

G&A expenses as a percentage of revenue was 8% for 2022, compared to 14% for 2021.

The increase in G&A costs during 2022 was primarily due to costs associated with our transition to and operation as a public company.

During the year ended December 31, 2022, we invested in systems, increased insurance, incurred additional software fees, and professional fees.

Compensation, taxes and benefits of $17.7 million, increased by $3.6 million in 2023, or 26%, from $14.1 million in 2022.

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 initial public offering, 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, 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 $2.2 million for the year ended December 31, 2023, including $1.4 million accrued but not

yet granted stock-based compensation associated with the 2023 bonus program.

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

General and administrative (“G&A”) expenses of $13.2 million in 2023 increased from $7.2 million in 2022.

G&A expenses as a percentage of revenue was 8% for both 2023 and 2022.

The increase in G&A costs during the year ended December 31, 2023 was primarily due to costs associated with our transition to and operation as a public company beginning in February 2022.

During the year ended December 31, 2023, we incurred higher professional fees, sales and marketing expenses and travel expenses.

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.

This project contributed to $0.3 million of the increase in G&A costs during the year ended December 31, 2023.

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

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

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

The stock options and RSUs granted did not have a material impact to G&A expense for the year ended December 31, 2022.

Other expense

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

The Company received a short pay notice from a sell-side customer in 2024 resulting in reduction of our 2023 revenue to the reported amount of $157 million.

In conjunction with the short pay, the Company recorded a charge of $8.8 million for payments made to a few publishers.

The Company has not been provided with information as to the reason for the short pay, and therefore has disputed the short pay.

We do not expect these amounts to recur in any material fashion, although there is no assurance that customers will not take such action in the future.

Other Expense, Net

The following table sets forth the components of other expense, net for the periods presented (in thousands):

Year Ended December 31,

Forgiveness of Paycheck Protection Program loan

Loss on redemption of non-participating preferred units

Gain from revaluation and settlement of seller notes and earnout liability

Loss on early extinguishment of debt

Interest expense

Total other expense

Loss on early termination of line of credit

Revaluation of tax receivable agreement liability

Loss on redemption of non-participating preferred units

Forgiveness of Paycheck Protection Program loan

Total other expense, net

nm – not meaningful

Other expense in 2022 primarily consists of $0.6 million associated with the loss on the early redemption of DDH LLC’s previously outstanding Class B Preferred Units and $3.2 million of interest expense, partially offset by $0.3 forgiveness of the PPP loan and other income.

Other expense for 2021 is comprised of approximately $3.1 million of interest expense and $2.7 million associated with the loss on early extinguishment of the SilverPeak Term Loan Facility, partially offset by other income and the forgiveness of the PPP loan.

Interest Expense

Interest expense remained flat in 2022 at $3.2 million compared to 2021.

The higher debt balance and deferred financing fees in 2022 drove higher interest expense, which was offset by the lower dividend interest expense on the preferred units redeemed during the IPO.

Other expense, net for the year ended December 31, 2023 primarily consists of $4.4 million of interest expense and $0.3 million related to the loss on early termination of the line of credit with SVB, partially offset by the non-cash revaluation of the tax receivable agreement liability and other income.

Other expense, net for the year ended December 31, 2022 is comprised of $3.2 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 forgiveness of the PPP loan and other income.

Interest expense increased for the year ended December 31, 2023 to $4.4 million, compared to $3.2 million for the year ended December 31, 2022.

The increase in interest expense in the period is due to additional net borrowings of $5.8 million in 2023 under the Company’s credit facilities, 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 December 31, 2022 and 2021:

Going Concern

As discussed in Note 9 of our consolidated financial statements, on May 10, 2024, the Company was the subject of a defamatory article / blog post which the Company believes was part of a coordinated misinformation campaign.

In connection with this post, one of the Company’s sell-side customers paused its connection to the Company for a couple of weeks in May 2024, which reduced sell-side sales volumes.

As of the date of this report, sell-side volumes related to this customer have resumed but not yet at the levels experienced prior to the pause in May 2024 which has created significant disruption in the Company’s sell-side business.

The Company is actively working with its partners to achieve prior volume levels.

However, there can be no assurance that the Company will be able to achieve prior volume levels with its partners or on the timing of achieving such volume levels.

Additionally, the Company (1) incurred a net loss of $6.8 million in 2023 primarily related to payments made to a few publishers of $8.8 million associated with a disputed short payment from a customer, (2) reported an accumulated deficit of $2.5 million as of December 31, 2023, (3) reported cash and cash equivalents of $5.1 million as of December 31, 2023, (4) has borrowed $3.0 million and $9.7 million as of December 31, 2023 and the date of this report, respectively, under the Credit Agreement which matures in July 2025, (5) was notified on April 17, 2024 that the Company’s auditor had resigned and (6) was unable to timely file its 2023 annual report and quarterly reports for the first two quarters of 2024.

The delay in filing the Company’s annual and quarterly reports disrupted existing capital-raising efforts and created additional audit, legal and other expenses.

These factors raise substantial doubt about the Company’s ability to continue as a going concern over the next twelve months.

The Company anticipates sources of liquidity to include cash on hand and cash flow from operations and has taken several actions to address liquidity concerns.

These actions include (1) a plan to reduce expenses through a staff reduction, a pause on hiring and cost savings measures that were executed on July 1, 2024, (2) working with lenders to provide temporary relief from debt covenants (see Note 3 – Long-Term Debt to the Company’s audited financial statements) while rebuilding sell-side volumes, (3) raising capital through arrangements with various providers, and (4) regaining compliance with respect to delinquent SEC filings which will allow the Company to access the capital markets as well as other financing sources.

There can be no assurance that the Company’s actions will be successful or that additional financing will be available when needed or on acceptable terms.

Sources of Liquidity

The following table summarizes our cash and cash equivalents, working capital, and availability under our Credit Agreement (as defined below) on December 31, 2023 and 2022 (in thousands):

Cash and cash equivalents

Working capital

Availability under Revolving Credit Facility

We anticipate funding our operations for the next twelve months using available cash, cash flow generated from operations and availability under the revolving credit facility.

On January 9, 2023 the Company entered into a $5.0 million revolving credit facility agreement with Silicon Valley Bank, and on March 13, 2023, following Silicon Valley Bank’s closure and entry into receivership, the Company issued a notice of termination of the credit facility.

(See Note 15 – Subsequent Events in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K).

As of December 31, 2022 and 2021, we had cash and cash equivalents of approximately $4.0 million and $4.7 million, respectively, and as of December 31, 2022 and 2021 we had $0 and $1.8 million, respectively, available under our Revolving Credit Facility with East West Bank (the “Revolving Credit Facility”).

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

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 Annual Report on Form 10-K.

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.

In addition to any of these options, or in lieu thereof, we may also choose to secure a new revolving credit facility once the termination of the SVB Loan Agreement with Silicon Valley Bank is finalized.

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.

Availability under Credit Agreement

To fund our operations and service our debt thereafter and depending on our growth and results of operations, we may raise additional capital through the issuance of additional equity and/or debt, which could have the effect of diluting our stockholders.

Any future equity or debt financings may be on terms which are not favorable to us.

As our credit facilities become due, we will need to repay, extend or replace such indebtedness.

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

In conjunction with the acquisition of Orange142 on September 30, 2020, DDH LLC and each of its subsidiaries as co-borrowers entered into a loan and security agreement (the “2020 Term Loan Facility”) with SilverPeak Credit Partners, LP in the amount of $12.8 million.

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

All accrued but unpaid interest under the 2020 Term Loan Facility was payable in monthly installments on each interest payment date, and we were required to repay a portion of the outstanding principal balance on January 15 and July 15 of each calendar year in an amount equal to 37.5% of excess cash flow over the preceding six calendar months until the term loan was paid in full.

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

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

The 2020 Term Loan Facility contained a number of financial covenants and customary affirmative covenants.

In addition, the 2020 Term Loan Facility included a number of negative covenants, including (subject to certain exceptions) limitations on (among other things):

indebtedness, liens, investments, acquisitions, dispositions, and restricted payments.

Each of Mark Walker, our Chairman of the Board and Chief Executive Officer, and Keith Smith, our President, provided limited guarantees of the obligations under the 2020 Term Loan Facility.

The maturity date of the 2020 Term Loan Facility was September 15, 2023;

however, on December 3, 2021, DDH LLC entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Servicing, LLC (“Lafayette Square”) and used the proceeds to repay and terminate the 2020 Term Loan Facility.

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

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

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

The maturity date of the Revolving Credit Facility was September 30, 2022, however, on July 26, 2022, the Company repaid the $400,000 that was outstanding pursuant to the Revolving Credit Facility and terminated the Revolving Credit Facility as of such date.

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

The Revolving Credit Facility contained customary events of default, including with respect to a failure to make payments when due, cross-default and cross-judgment default and certain bankruptcy and insolvency events.

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

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

The term loan under the 2021 Credit Facility provides for a term loan in the principal amount of up to $32.0 million, consisting of a $22.0 million closing date term loan and an up to $10.0 million delayed draw term loan (the “Delayed Draw Loan”).

The loans under the 2021 Credit Facility bear interest 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 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.

Credit Facilities

Lafayette Square

On December 3, 2021, the Company entered into the Term Loan and Security Agreement (the “2021 Credit Facility”) with Lafayette Square Loan Services, LLC (“Lafayette Square”) as administrative agent, and the various lenders thereto.

The term loan under the 2021 Credit Facility initially provided for a term loan in the principal amount of up to $32.0

million, consisting of a $22.0 million closing date term loan (the “Term Loan”) and an up to $10.0 million delayed draw term loan (the “Delayed Draw Loan”).

The loans under the 2021 Credit Facility originally bore interest at LIBOR plus the applicable margin minus any applicable impact discount.

The applicable margin under the 2021 Credit Facility was determined based on the consolidated total net leverage ratio of the Company and its consolidated subsidiaries, at a rate of 6.50% per annum if the consolidated total net leverage ratio is less than 2.00 to 1.00 and up to 9.00% per annum if the consolidated total net leverage ratio was greater than 4.00 to 1.00.

On June 1, 2023, as originally contemplated under the 2021 Credit Facility, the Company entered into an agreement with Lafayette Square to convert the existing LIBOR based rate to a Term Secured Overnight Financing Rate (“SOFR”) with a credit spread of 0.15% per annum for the interest periods of three months and providing 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 loans under the 2021 Credit Facility bear interest at SOFR plus the applicable credit spread adjustment plus the applicable margin minus any applicable impact discount.

Prior to entering into the Fifth Amendment (as defined below), the applicable margin under the 2021 Credit Facility was based on the consolidated total net leverage ratio of the Company at a rate of 7.00% per annum if the consolidated total net leverage ratio was less than or equal to 1.00 to 1.00 with gradual increases as the ratio increased up to 10.00% per annum if the consolidated total net leverage ratio was greater than 3.50 to 1.00.

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.

In connection with the entry into the 2021 Credit Facility, we paid off in full and terminated the 2020 Term Loan Facility.

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

Pursuant to the Term Loan Amendment, DDH LLC will indemnify the Company from and against any claims, losses, 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.

Since the conclusion of the fiscal year ended December 31, 2022, we entered into the SVB Loan Agreement on January 9, 2023 with Silicon Valley Bank.

The SVB Loan Agreement provides 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 may increase the aggregate principal amount of the SVB Revolving Credit Facility to $7.5 million.

Loans under the SVB Revolving Credit Facility mature on September 30, 2024, unless the SVB Revolving Credit Facility is otherwise terminated pursuant to the terms of the SVB Loan Agreement.

Borrowings under the SVB Revolving Credit Facility 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 will 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 Loan Agreement, the prime rate is 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 may at any time prepay 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 is 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 is 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 is 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).

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

On July 28, 2022, the Company entered into the Second Amendment and Joinder to Term Loan and Security Agreement and received proceeds of $4.3 million borrowed under the Delayed Draw Loan to pay the balance owed on the common unit redemption as well as costs associated with the transaction.

Subsequently, on October 3, 2023, the Company entered into the Fourth Amendment to the 2021 Credit Facility (the “Fourth Amendment”) and received proceeds of $3.6 million borrowed under the Delayed Draw Loan to make payments in connection with the consummation of the 2023 warrant tender offer and fees and expenses incurred as described in Note 4 – Stockholders’ Equity and Stock-Based Compensation in the notes to the consolidated financial statements.

In connection with the Fourth Amendment, the Company agreed it would not be permitted to request any additional funds under the Delayed Draw Loan, and Lafayette Square would not be obligated to fund any such requests.

Quarterly installment payments on the Term Loan and the Delayed Draw Loan, due on the last day of each fiscal quarter, began March 31, 2022 with a final installment due December 3, 2026 for remaining balances outstanding under each loan.

Each quarterly installment payment under the closing date term loan was $137,000 from January 1, 2022 through December 31, 2023, and each installment payment thereafter until maturity is $275,000.

Each quarterly installment payment under the Delayed Draw Loan was 0.625% of the amount of the Delayed Draw Loan through December 31, 2023, and each installment payment thereafter until maturity is 1.25% of the amount of the Delayed Draw Loan.

Under the 2021 Credit Facility, dividends and distributions by DDH LLC to the Company and any shareholders of the Company are permitted so long as (i) no default or event of default is continuing or would occur after giving pro forma effect to such dividends and distributions under the 2021 Credit Facility, (ii) the Company, on a pro forma basis, maintains a consolidated senior net leverage ratio of not greater than 1.5 to 1.0, and (iii) the Company, on a pro forma basis, maintains liquidity of not less than $15,000,000.

The obligations under the 2021 Credit Facility are secured by senior, first-priority liens on all or substantially all assets of the Company.

As of December 31, 2023, the Company owed a balance on the 2021 Credit Facility of $28.6 million.

Additional deferred financing costs of less than $0.1 million and $0.5 million were incurred during the year ended December 31, 2023 and 2022, respectively.

Unamortized deferred financing costs as of December 31, 2023 and 2022 were $1.7 million and $2.1 million, respectively.

Accrued and unpaid interest was $0 as of December 31, 2023 and 2022.

The 2021 Credit Facility contains customary affirmative and negative covenants.

Prior to entering into the Fifth Amendment, the Company was required to maintain a net leverage ratio of no more than 3.50 to 1.00 as of December 31, 2021 and the last day of each fiscal quarter through December 31, 2023, 3.25 to 1.00 as of March 31, 2024 and the last day of each fiscal quarter through March 31, 2025, 3.00 to 1.00 as of June 30, 2025 and September 30, 2025, with incremental tightening of the ratio to 2.50 to 1.00 as of June 30, 2026 and thereafter through maturity.

Prior to entering to the Fifth Amendment, the 2021 Credit Facility also required the Company to maintain 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 December 31, 2023.

With the Fifth Amendment, the Company expects to be in compliance with all amended covenants for at least one year from the balance sheet date in this annual report .

On October 15, 2024, with an effective date of June 30, 2024, the Company and Lafayette Square entered into the Fifth Amendment to the Term Loan and Security Agreement (the “Fifth Amendment”) which among other things, (1) defers quarterly installment payments on the Term Loan and the Delayed Draw Loan for the periods from June 30, 2024 through December 31, 2025, (2) requires that the Company pay a commitment fee of 50 basis points or an amount of $0.1 million to Lafayette Square, (3) allows proceeds from future equity raises by the Company, if any, to cure potential financial covenant noncompliance, (4) provides for one-month and three-month interest periods, (5) replaces the calculation of the consolidated total net leverage ratio with a consolidated total leverage ratio for purposes of calculating the applicable margin and the financial covenant and (6) replaces the financial covenants under the 2021 Credit Facility (effective as of June 30, 2024) with the following:

Minimum TTM* EBITDA ($ in millions)

Minimum Liquidity ($ in millions)

Maximum Consolidated Total Leverage Ratio

Minimum Fixed Charge Coverage Ratio

June 30, 2024

September 30, 2024

December 31, 2024

March 31, 2025

June 30, 2025

September 30, 2025

December 31, 2025

March 31, 2026

June 30, 2026

September 30, 2026

*TTM = Trailing Twelve Months

2023 Revolving Line of Credit - East West Bank

On July 7, 2023, the Company entered into a Credit Agreement (as amended, the “Credit Agreement”), with East West Bank (“EWB”), as lender.

The Credit Agreement provides for a revolving credit facility in the principal amount of up to $10 million, subject to a borrowing base determined based on eligible accounts, and an up to $5 million uncommitted incremental revolving facility.

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

Borrowings under the Credit Agreement bear interest at a rate per annum equal to the one-month Term SOFR rate 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 Credit Agreement in whole or in part, without fee, penalty or premium.

All accrued but unpaid interest on outstanding advances under the Credit Agreement are 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 obligations under the Credit Agreement are secured by all or substantially all of the borrowers’ assets.

Prior to entering into the Third Amendment (as defined below), the Company was 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 no more than 3.50 to 1.00 as of June 30, 2023 and the last day of each fiscal quarter through December 31, 2023, 3.25 to 1.00 as of March 31, 2024 and the last day of each fiscal quarter through March 31, 2025 and 3.00 to 1.00 as of June 30, 2025 and thereafter through maturity;

and (iii) a liquidity covenant requiring the Company to maintain minimum liquid assets at all times (calculated in the manner provided for in the Credit Agreement), 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 Company was in compliance with all the financial covenants under the Credit Agreement as of December 31, 2023.

With the Third Amendment, the Company expects to be in compliance with all amended covenants for at least one year from the balance sheet date in this annual report.

On October 15, 2024, with an effective date of June 30, 2024, the Company and EWB entered into the Third Amendment to the Credit Agreement (the “Third Amendment”) which, among other things, (1) provides that the Company will make prepayments of the outstanding principal balance of the Credit Agreement of $1.0 million upon execution of the Third Amendment, $1.0 million on or before January 15, 2025 and $2.0 million on or before April 15, 2025, (2) requires the Company to file a registration statement with the SEC to establish an equity line of credit offering on or before October 31, 2024 and to use commercially reasonable efforts to cause such registration statement to become effective, (3) requires the net proceeds of a potential equity line of credit to be applied to the outstanding principal balance under the Credit Agreement in an amount that would cause the ratio of the value of eligible accounts to the aggregate amount of revolving credit advances to be not less than 1.00 to 1.00, (4) requires the consent of EWB prior to the ability of the Company to make certain restricted payments, including cash dividends, (5) requires the Company to make additional prepayments in the amount by which the outstanding loans under the Credit Agreement exceed the borrowing base between the calendar months ending November 30, 2024 and April 15, 2025, and (6) replaces the financial covenants under the Credit Agreement, effective as of June 30, 2024, with the following:

Minimum TTM (1) EBITDA ($ in millions)

Minimum Liquid Assets ($ in millions)

Maximum Total Funded Debt to EBITDA Leverage Ratio

Minimum Fixed Charge Coverage Ratio

Revolving Credit Availability (as of each month end)

June 30, 2024

September 30, 2024

December 31, 2024

1.0 to 1.0 (2)

March 31, 2025

1.5 to 1.0 (3)

June 30, 2025

2.0 to 1.0 (4)

(1) TTM = Trailing Twelve Months

(2) Beginning November 30, 2024

(3) Beginning January 31, 2025

(4) Beginning April 15, 2025

The Credit Agreement contains customary representations and warranties and includes affirmative and negative covenants applicable to the borrowers 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, pledges of the Company’s assets to other parties, prepayment of other indebtedness and dividends and other distributions.

The SVB Loan Agreement also includes customary events of default, including, among other things, non-payment defaults, covenant defaults, material inaccuracy of representations and warranties, cross-default to other material indebtedness, certain bankruptcy and insolvency events, certain undischarged judgments, material invalidity of guarantees or grant of security interest, material adverse change, and change of control, 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 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 and is in the process of terminating the SVB Revolving Credit Facility.

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.

Consolidated Statement of Cash Flow Data:

For the Year Ended December 31,

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.

During the year ended December 31, 2023, the Company incurred $0.3 million of deferred financing costs associated with the Credit Agreement.

As of December 31, 2023, there was $3.0 million outstanding under the Credit Agreement.

The collateral securing the obligations under the 2021 Credit Facility and the Credit Agreement is subject to intercreditor agreements between Lafayette Square and EWB.

Historical Cash Flows:

The following table sets forth our cash flows for the years ended December 31, 2023 and 2022 (in thousands):

Year Ended December 31,

Net cash provided by operating activities

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Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Cash Flows from Operating Activities

Our cash flows from operating activities are primarily influenced by growth in our operations, increases or decreases in collections from our customers and related payments to our buyers and suppliers of advertising media and data.

Cash flows from operating activities have been affected by changes in our working capital, particularly changes in accounts receivable, accounts payable and accrued liabilities.

The timing of cash receipts from customers and payments to suppliers can significantly impact our cash flows from operating activities.

We typically pay suppliers in advance of collections from our customers, but our collection and payment cycles can vary from period to period.

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

For the Years Ended December 31, 2022 and 2021

Cash flows from operating activities decreased from $3.8 million provided by operating activities for the year ended December 31, 2021 to $2.1 million provided by operating activities for the year ended December 31, 2022.

The period-over-period decrease of $1.7 million was primarily due to a $15.2 million increase related to changes in accounts receivable and $1.8 million decrease in deferred revenues due to the increase in revenue and timing of collection of payments from customers, as well as a $1.3 million increase in prepaids primarily related to costs associated with becoming public company.

This is partially offset by $5.7 million of higher net income, a $7.5 million increase in accounts payable and a $3.0 million increase for changes in accrued liabilities related to the increase in cost of revenues and timing of payments to vendors.

Cash Flows from Investing Activities

For the Years Ended December 31, 2022 and 2021

During the year ended December 31, 2022, the Company acquired property, equipment and software for $0.7 million of which $19,479 is included in accounts payable as of year-end.

Cash Flows Provided by Financing Activities

For the Years Ended December 31, 2022 and 2021

Our financing activities consist primarily of proceeds and payments under our notes payable and line of credit, proceeds from government loans, distributions to DDH LLC members, and during 2022, net proceeds from our IPO as well as the redemption payments for DDH LLC’s common units and Class B Units held by USDM 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 year ended December 31, 2022, net cash used in financing activities increased by $1.4 million, from $(0.7) million used in financing activities for the year ended December 31, 2021 to $(2.1) million used in financing activities for the year ended December 31, 2022.

During the year ended December 31, 2022, we received net proceeds of $11.2 million related to our issuance of Class A common units and used a portion of the proceeds to redeem the common units and Preferred B units held by USDM Holdings, Inc.

for approximately $14.2 million.

We also borrowed $4.3 million under the Delayed Draw Loan during the year ended December 31, 2022.

Also during the year ended December 31, 2022, we paid $0.4 million related to the Revolving Credit Facility, paid our quarterly debt obligation on the 2021 Credit Facility of $0.6 million, paid additional deferred financing costs related to 2021 Credit Facility and the Revolving Credit Facility amended in late 2021 of $0.5 million, and members of DDH LLC received tax distributions of $1.7 million.

During the year ended December 31, 2021, we received $22.0 million under the 2021 Credit Facility with Lafayette Square, incurred $2.2 million of deferred financing fees, paid $15.7 million to extinguish the 2020 Term Loan Facility, and redeemed $3.5 million of non-participating Preferred A Units.

We also paid $0.4 million to the Former shareholder for amounts due under their Seller Notes and Seller Earnouts and received proceeds from the government for PP loans of $0.3 million.

Members of DDH LLC received tax distributions of $1.2 million.

Net increase (decrease) in cash and cash equivalents

Our cash and cash equivalents at December 31, 2023 were held for working capital and general corporate purposes.

The increase in cash and cash equivalents compared with December 31, 2022, primarily resulted from $2.6 million in cash flows from operating activities partially offset by $0.2 million in cash flows used for investing activities and $1.3 million in cash flows used for financing activities.

Operating Activities

Cash provided by operating activities has typically been generated from net income and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable and accrued expenses, adjusted for certain non-cash and non-operating expense items such as depreciation, amortization, stock-based compensation and deferred income taxes.

In 2023, net cash flows provided by operating activities were $2.6 million and consisted of net loss of $6.8 million, $4.7 million in adjustments for non-cash and non-operating items and $4.7 million of cash inflows from working capital.

Adjustments for non-cash and non-operating items mainly consisted of depreciation and amortization expense of $3.0 million, stock-based compensation expense of $0.7 million and $0.6 million of deferred tax expense.

The $4.7 million increase in cash resulting from changes in working capital primarily consisted of $16.2 million increase in accounts payable partially offset by an $11.3 million increase in accounts receivable.

The increase in accounts receivable and accounts payable is mainly due to growth in the business as well as the $8.8 million non-recurring publisher payment recorded as accounts payable as of December 31, 2023.

In 2022, net cash flows provided by operating activities were $2.1 million and consisted of net income of $4.2 million, $3.3 million in adjustments for noncash and non-operating items and $5.4 million of cash flows used for working capital.

Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of $2.7 million, stock-based compensation expense of $0.2 million, loss on redemption of non-participating preferred units of $0.6 million, partially offset by $0.3 million from forgiveness of PPP loan.

The $5.2 million decrease in cash resulting from changes in working capital primarily consisted of a $18.5 million increase in accounts receivable partially offset by a $2.6 million increase in accrued expenses such as payroll and payroll

related expenses and $11.0 million increase in accounts payable.

The increase in accounts receivable and accounts payable is mainly due to the growth in the business.

Investing Activities

Our investing activities to date have consisted primarily of purchases of software, office furniture and leasehold improvements.

In 2023, net cash flows used in investing activities of $0.2 million were primarily related to development of internal-use software.

In 2022, net cash flows used in investing activities of $0.7 million were primarily related to acquiring the license to the Company’s proprietary Colossus SSP platform (see Note 10 – Property, equipment and software, net).

Financing Activities

In 2023, net cash used in financing activities was $1.3 million mainly resulting from $3.2 million of distributions to holders of LLC Units, $3.5 million paid to acquire and redeem warrants, $0.7 million paid on term loan and $0.6 million deferred financing costs partially offset by $3.0 million net draws on the Credit Agreement and $3.6 million proceeds from 2021 Credit Facility utilized for the warrant redemption.

In 2022, net cash used in financing activities was $2.0 million mainly resulting from:

$1.7 million of distributions to holders of LLC Units, $7.0 million paid to redeem non-participating preferred units, $7.2 million paid to redeem common units, $1.0 million paid on term loan and line of credit partially offset by $11.1 million proceeds from issuance of common stock in the initial public offering and $4.3 million proceeds from the 2021 Credit Facility.

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 $154,490 in 2023, $110,215 in 2024, $156,077 in 2025, $159,755 in 2026, $163,474 in 2027 and $398,102 thereafter.

We anticipate that the future minimum payments related to our current indebtedness over the next five years will be $655,000 in 2023, $1.3 million in 2024, $1.3 million in 2025, $1.3 million in 2026, $1.3 million in 2027, and $19.9 million thereafter, assuming we do not refinance our indebtedness or enter into a new revolving credit facility.

We believe our cash on hand in addition to our cash generated by operations will be sufficient to cover these obligations as well as the future cash requirements of being a public company.

As of December 31, 2023, our principal contractual obligations expected to give rise to material cash requirements consist of the 2021 Credit Facility, the Credit Agreement and non-cancelable leases for our various facilities.

We anticipate that the future minimum payments related to our current indebtedness over the next five years will be $1.5 million in 2024, $4.5 million in 2025, $25.7 million in 2026, less than $0.1 million in 2027, less than $0.1 million in 2028, and $0.1 million thereafter, assuming we do not refinance our indebtedness, enter into a new revolving credit facility or make any further draws under the revolving facility.

The leases will require minimum payments of $0.2 million in 2024, $0.2 million in 2025, $0.2 million in 2026, $0.2 million in 2027, $0.2 million in 2028 and $0.2 million thereafter.

As of December 31, 2023, we had cash and cash equivalents of $5.1 million.

Based on projections of revenue and operating results in the coming year, the available cash held by the Company and the amounts the Company may borrow under the Credit Agreement, the Company believes that it will have sufficient cash resources to finance its operations and service any maturing debt obligations for at least the next twelve months following the issuance of these financial statements.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S.

generally accepted accounting principles (“GAAP”), including, in particular operating income, net cash provided by operating activities, and net income, we believe that earnings before interest, taxes, depreciation and amortization, as adjusted for acquisition transaction costs, forgiveness of Paycheck Protection Program loans, gain from revaluation and settlement of seller notes and earnout liability, loss on early extinguishment of debt, 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 (loss).

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

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 revaluation of tax receivable agreement liability, loss on early termination of line of credit, forgiveness of PPP loan, loss on 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 (in thousands):

Year Ended December 31,

Net Income (Loss) [1]

Net (loss) income [1]

Add back (deduct):

Amortization of intangible assets

Depreciation and amortization of property and equipment

Interest expense

Loss on early extinguishment of debt

Amortization of intangible assets

Stock-based compensation

Forgiveness of PPP loan

Gain on seller earnout revaluation

Loss on early redemption of non-participating preferred units

Stock-based compensation accrued but not yet granted

Depreciation and amortization of property, equipment and software

Loss on early termination of line of credit

Income tax expense

Revaluation of tax receivable agreement liability

Forgiveness of Paycheck Protection Program loan

Loss on redemption of non-participating preferred units

Adjusted EBITDA

__________________

[1] During the year ended December 31, 2022, we recorded a one-time severance charge of approximately $654,205.

[1] During the years ended December 31, 2023 and 2022, we recorded one-time severance charges of approximately $0.3 million and $0.7 million, respectively.

During the year ended December 31, 2023, we recorded a charge in the amount of $8.8 million for payments made in 2024 to a few publishers for which the related sell-side revenue for 2023 was short paid by a sell-side customer.

See further discussion in Note 9 – Commitments and Contingencies in the Notes to Consolidated Financial Statements.

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

We believe that this non-GAAP financial measure is useful to investors for period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:

● Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, provision for income taxes, and certain one-time items such as acquisition transaction costs and gains from settlements or loan forgiveness that can vary substantially from company to company depending upon their financing, capital structures and the method by which assets were acquired;

● Adjusted EBITDA is widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation and amortization, interest expense, provision for income taxes, stock-based compensation, revaluation of tax receivable agreement liability, and certain one-time items such as acquisition transaction costs, losses from early termination or redemption of credit agreements or preferred units 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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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

We prepare our consolidated financial statements in accordance with GAAP.

The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses.

We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate.

Actual results could materially differ from these estimates and assumptions.

We believe estimates and assumptions associated with the evaluation of revenue recognition criteria, including the determination of revenue reporting as net versus gross in our revenue arrangements, as well as our determination of the fair value of goodwill and intangible assets, have the greatest potential impact on our consolidated financial statements.

Therefore, we consider these to be our critical accounting policies and estimates.

Critical Accounting Estimates and Related Policies

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

Actual results could differ from these estimates.

The Company bases its estimates on past experiences, market conditions, and other

assumptions that the Company believes are reasonable under the circumstances, and the Company evaluates these estimates on an ongoing basis.

The Company uses estimates to determine many reported amounts, including but not limited to gross vs net assessment in revenue recognition, recoverability of goodwill and long-lived assets, useful lives used in amortization of intangibles, income taxes and valuation allowances, stock-based compensation and fair values of assets and liabilities acquired in business combinations.

Revenue recognition

We adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“Topic 606”), as of January 1, 2019, for all contracts not completed as of the date of adoption, which had no impact on our financial position or results of operations using the modified retrospective method.

We recognize revenue using the following five steps:

● Identification of a contract(s) with a customer;

The Company recognizes revenue using the following five steps:

1) identification of a contract with a customer;

2) identification of the performance obligation(s) in the contract;

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4) allocation of the transaction price to the performance obligation(s) in the contract;

● Recognition of revenue when, or as, the performance obligation(s) are satisfied.

Our revenue is recognized primarily using inputs from third-party data, and to a lesser extent management estimates.

We believe our estimates are not a significant element in our revenue recognition process.

Our revenues are derived primarily from two sources:

buy-side advertising and sell-side advertising.

and 5) recognition of revenue when, or as, the performance obligation(s) are satisfied.

The Company’s revenues are derived primarily from two sources:

sell-side advertising and buy-side advertising.

Thus, the Company disaggregates the revenue earned into these two segments.

For additional segment disclosures, refer to Note 7 of our consolidated financial statements.

The Company maintains agreements with its customers in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically 30 to 90 days) and access to its platform.

For the sell-side advertising segment, the Company generates revenue by selling advertising inventory (digital ad units) that the Company purchases from publishers to advertisers through a process of monetizing ad impressions on the Company’s proprietary sell-side programmatic platform operating under the trademarked banner Colossus SSP.

For the buy-side advertising segment, the Company generates revenue from customers that enter into agreements with the Company to provide managed advertising campaigns, which include digital marketing and media services to purchase digital advertising space, data and other add-on features.

In connection with the Company’s analysis of principal vs agent considerations, the Company has evaluated the specified goods or services and considered whether the Company controls the goods or services before they are provided to the customer, including the three indicators of control.

Based upon this analysis and the Company’s specific facts and circumstances, the Company concluded that it is a principal for the goods or services sold through both the Company’s sell-side advertising segment and buy-side segment because the Company controls the specified good or service before it is transferred to the customer and the Company is the primary obligor in the agreement with customers.

Therefore, the Company reports revenue on a gross basis inclusive of all supplier costs and pays suppliers for the cost of digital media, advertising inventory, data and any add-on services or features.

Sell-side advertising

The Company partners with publishers to sell advertising inventory to the Company’s Colossus Media-curated clients and the open markets (collectively referred to as “buyers”) seeking to access the general market as well as unique multi-cultural audiences.

The Company generates revenue from the delivery of targeted digital media solutions, enabling advertisers to connect intelligently with their audiences across online display, video, social and mobile mediums using its proprietary programmatic SSP.

The Company refers to its publishers, app developers, and channel partners collectively as its “publishers”.

The Company generates revenue through the monetization of publisher ad impressions on its platform.

The Company’s platform allows the Company to sell, in real time, ad impressions from publishers to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats.

The Company recognizes revenue at a point in time when an ad is delivered or displayed in response to a winning bid request from ad buyers.

Buy-side advertising

We purchase media based on the budget established by our customers with a focus on leveraging data services, customer branding, real-time market analysis and micro-location advertising.

We offer our platform on a fully managed and a moderate/self-serve basis, revenue from which is recognized over time using the output method when the performance obligation is fulfilled.

The Company purchases media based on the budget established by its customers with a focus on leveraging data services, customer branding, real-time market analysis and micro-location advertising.

The Company offers its services on a fully managed basis, which is recognized over time using the output method when the performance obligation is fulfilled.

An “impression” is delivered when an advertisement appears on pages viewed by users.

The performance obligation is satisfied over time as the volume of impressions are delivered up to the contractual maximum for fully managed revenue and the delivery of media inventory for self-serve revenue.

Many customers run several different campaigns throughout the year to capitalize on different seasons, special events and other happenings at their respective regions and localities.

We provide digital advertising and media buying capabilities with a focus on generating measurable digital and financial life for our customers.

Revenue arrangements are evidenced by a fully executed insertion order (“IO”).

The performance obligation is satisfied over time as the volume of impressions are delivered up to the contractual maximum.

Many customers run several different campaigns throughout the year to capitalize on different seasons, special events and other

happenings at their respective regions and localities.

The Company provides digital advertising and media buying capabilities with a focus on generating measurable digital and financial life for its customers.

Revenue arrangements are evidenced by a fully executed insertion order (“IO”) and/or a master service agreement (“MSA”) covering a combination of marketing tactics.

Generally, IOs specify the number and type of advertising impressions to be delivered over a specified time at an agreed upon price and performance objectives for an ad campaign.

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These payment models are commonly referred to as CPM (cost per impression), CPC (cost per click) and CPA (cost per action).

The majority of our contracts are flat-rate, fee-based contracts.

In instances where we contract with third-party advertising agencies on behalf of their advertiser clients, a determination is made to recognize revenue on a gross or net basis based on an assessment of whether we are acting as the principal or an agent in the transaction.

We are acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis, as we have control and are responsible for fulfilling the advertisement delivery, establishing the selling prices and delivering the advertisements for fully managed revenue and providing updates and performing billing and collection activities for our self-serve proprietary platform.

Sell-side advertising

We partner with publishers to sell advertising inventory to our existing buy-side clients, as well as our own Colossus Media-curated clients and the open markets (collectively referred to as “buyers”) seeking to access the general market as well as unique multi-cultural audiences.

We generate revenue from the delivery of targeted digital media solutions, enabling advertisers to connect intelligently with their audiences across online display, video, social and mobile mediums using our proprietary programmatic SSP.

We refer to our publishers, app developers and channel partners collectively as our publishers.

We generate revenue through the monetization of publisher ad impressions on our platform.

Our platform allows publishers to sell, in real time, ad impressions to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats.

We recognize revenue when an ad is delivered in response to a winning bid request from ad buyers.

We are acting as the principal in these arrangements and therefore revenue earned and costs incurred are recognized on a gross basis as we have control and are responsible for fulfilling the advertisement delivery, establishing the selling prices and the delivery of the advertisements for fully managed revenue and providing updates and performing all billing and collection activities for our self-serve proprietary platform.

We maintain agreements with each DSP in the form of written service agreements, which set out the terms of the relationship, including payment terms (typically 30 to 90 days) and access to its platform.

In an effort to reduce the risk of nonpayment, we have insurance with a third-party carrier for our accounts receivable.

Under the purchase method of accounting pursuant to ASC 805, goodwill is calculated as the excess of purchase price over the fair value of the net tangible and identifiable intangible assets acquired.

In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value.

The majority of the Company’s contracts are flat-rate, fee-based contracts.

Cash payments received prior to the Company’s delivery of its services are recorded to deferred revenue until the performance obligation is satisfied.

The Company recorded deferred revenue (contract liabilities) to account for billings in excess of revenue recognized, primarily related to contractual minimums billed in advance and customer prepayment, of $0.4 million and $0.5 million as of December 31, 2023 and 2022, respectively.

Revenue recognized during 2023 and 2022 from amounts included within the deferred revenue balances at the beginning of each respective period amounted to $0.5 million and $1.3 million, respectively.

ASC 606 provides various optional practical expedients.

The Company elected the use of the practical expedient relating to the disclosure of remaining performance obligations within a contract and will not disclose remaining performance obligations for contracts with an original expected duration of one year or less.

Goodwill is assessed for impairment at least annually (as of December 31) starting with a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value.

This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management, strategy and primary user base.

If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative goodwill impairment analysis is performed which is referred to as “Step 1.” Depending upon the results of that measurement, the recorded goodwill may be written down, and impairment expense is recorded in the consolidated statements of operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit.

If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative goodwill impairment analysis is performed.

Depending upon the results of the quantitative measurement, the recorded goodwill may be written down and an impairment expense is recorded in the consolidated statements of operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit.

Goodwill is reviewed annually and tested for impairment upon the occurrence of a triggering event.

For the years ended December 31, 2022 and 2021, we did not recognize any goodwill impairment losses.

The Company determined that there was no impairment of goodwill during the years ended December 31, 2023 and 2022.

Intangible assets, net

Our intangible assets consist of customer relationships, trademarks and non-compete agreements.

Our intangible assets are recorded at fair value at the time of their acquisition and are stated within our consolidated balance sheets net of accumulated amortization.

Intangible assets are amortized on a straight-line basis over their estimated useful lives or using an accelerated method.

Amortization is recorded as depreciation and amortization under operating expenses within our consolidated statements of operations and comprehensive loss.

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

As of December 31, 2022, there were no events or changes in circumstances to indicate that the carrying amount of the assets may not be recoverable.

Intangible assets consist of customer relationships, trademarks and non-compete agreements.

Intangible assets are recorded at fair value at the time of their acquisition and are stated within the consolidated balance sheets net of accumulated amortization.

Intangible assets are amortized on a straight-line basis over their estimated useful lives and recorded as amortization expense within general and administrative expenses in the consolidated statements of operations.

The Company’s intangible assets are being amortized over their estimated useful lives, using the straight-line method with non-compete agreements over 5 years and other intangibles over 10 years.

Impairment of long-lived assets

The Company evaluates the recoverability of long-lived assets, including property, equipment and software costs and intangible assets if facts or circumstances indicate that any of those assets might be impaired.

ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows to determine if a write-down to fair value is necessary.

No impairment loss was recognized during the years ended December 31, 2023 and 2022.

Stock-based compensation

Stock-based compensation cost for options and restricted stock units (“RSU”) awarded to employees and directors is measured at the grant date based on the calculated fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).

Contingently issued awards with a requisite service period that precedes the grant date are measured and recognized at the start of the requisite service period and remeasured each reporting period until the grant date.

The Company estimates the fair value of RSU’s based on the closing price of the Company’s common stock on the date of the grant.

The Company estimates the fair value of stock options using the Black-Scholes valuation model.

Key input assumptions used to estimate the fair value of stock options include the fair value of the Company’s common stock, as well as assumptions regarding the expected common stock price volatility over the term of the stock options, the expected term of the stock options, risk-free interest rates and the expected dividend yield.

Given the Company’s short history as a public company, the expected volatility is determined based on the trading history of several unrelated public companies within the industry that the Company considers to be comparable and the expected term is determined based on a combination of terms of the stock options and peer data.

The risk-free interest rate is derived using the U.S.

Treasury yield curve in effect at date of grant.

Other assumptions are based on historical experience and activity.

The Company considers an estimated forfeiture rate for stock options based on historical experience and the anticipated forfeiture rates during the future contract life.

In February 2022, concurrent with its organizational transactions, the Company entered into a tax receivable agreement (“Tax Receivable Agreement” or “TRA”) with DDH LLC and Direct Digital Management, LLC (“DDM”).

The TRA provides for certain income (loss) allocations between the Company and DDH LLC under the agreement.

DDH LLC is a limited liability company, is treated as a partnership for federal income tax purposes and generally is not subject to any entity-level U.S.

federal income tax and certain state and local income taxes.

Any taxable income or loss generated by the Company is allocated to holders of LLC units (“LLC Units”) in accordance with the Second Amended and Restated Limited Liability Company Agreement (“LLC Agreement”), and distributions to the owners of LLC Units in an amount sufficient to fund their tax obligations.

The Company is subject to U.S.

federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss under the LLC Agreement.

Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), the Company expects to obtain an increase in its share of the tax basis in the net assets of DDH, LLC when LLC Units are redeemed or exchanged by the members of DDH, LLC.

The Company made an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC interest occurred.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The establishment of a valuation allowance requires significant judgment and is impacted by various estimates.

Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.

See Note 2 to our consolidated financial statements for accounting pronouncements recently adopted and accounting pronouncements not yet adopted.

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-K

Item 7. Management’s Discussion and Analysis